WEBVTT - Orbis’ Forster on Importance of Intrinsic Value 0:00:12.440 --> 0:00:15.560 Welcome to Inside Active, a podcast about active managers that 0:00:15.640 --> 0:00:18.759 goes beyond sound bites and headlines and looks deeper into 0:00:18.800 --> 0:00:24.160 their processes, challenges and philosophies and security selection. I'm David Cohne, 0:00:24.160 --> 0:00:27.160 I lead mutual fund and active research at Bloomberg Intelligence. 0:00:27.680 --> 0:00:32.560 Today my co host is Laurent Julie, senior equity strategist 0:00:32.560 --> 0:00:35.400 at Bloomberg Intelligence. Laurent, thank you for joining. 0:00:35.200 --> 0:00:36.919 Me today We come. 0:00:38.240 --> 0:00:42.040 So you wrote an interesting note last week about Japanese 0:00:42.120 --> 0:00:45.839 EPs growth during the third quarter. You know, I'd love 0:00:45.880 --> 0:00:48.680 to see how these companies performed in terms of EPs 0:00:48.720 --> 0:00:51.280 growth and you know, maybe some positive surprises. 0:00:53.200 --> 0:00:55.880 So in fact, we did a quite deep dive into 0:00:55.960 --> 0:01:00.920 the September quarter results of Japanese companies and as you mention, 0:01:01.080 --> 0:01:04.480 I mean the results came out better than expected. As 0:01:04.560 --> 0:01:07.960 a quarterly year of your growth was around twenty six 0:01:08.000 --> 0:01:12.800 percent compared to seventeen percent initially expected. But I think 0:01:12.840 --> 0:01:16.000 the key point is that the breadth of positive surprise 0:01:16.440 --> 0:01:20.720 has been quite narrow. Out of eleven sectors, only Free 0:01:20.800 --> 0:01:28.080 delivered positive surprise. There are technology, financial, sorry, healthcare and materials, 0:01:28.280 --> 0:01:33.000 and also soft Bank Group also did blowout market expectations. 0:01:33.520 --> 0:01:36.920 In fact, if you exclude those three sectors and soft bank, 0:01:37.360 --> 0:01:40.120 in fact, the Japanese results would have been much lower 0:01:40.160 --> 0:01:43.720 than expected. In addition, if you look at the full 0:01:43.800 --> 0:01:47.360 year guidance which has been provided by the companies for 0:01:47.480 --> 0:01:50.800 the moment, there are still seven percent below the market 0:01:50.880 --> 0:01:55.760 consensus and they were revised only one percent during the 0:01:55.880 --> 0:01:59.600 reporting season. So that's quite disappointing, and I think it 0:01:59.880 --> 0:02:02.800 was not enough to get the market excited. And the 0:02:02.880 --> 0:02:05.320 last point that I would like to make is that 0:02:05.400 --> 0:02:09.160 I think now investors focus shifted back to the macro 0:02:09.600 --> 0:02:13.440 and especially what the BOJ will do at its next meeting, 0:02:13.480 --> 0:02:16.760 which is towards the end of December. For the moment, 0:02:16.840 --> 0:02:19.920 the probability of a twenty five basis point rise is 0:02:19.960 --> 0:02:25.400 about sixty percent because later inflation data are still above 0:02:25.440 --> 0:02:28.639 two percent, and also the currency, as we can a 0:02:28.720 --> 0:02:31.080 little bit compared to the month of July. So I 0:02:31.120 --> 0:02:36.120 think market expect the BOJ to provide support to the currency. 0:02:36.880 --> 0:02:37.520 And that's it. 0:02:38.680 --> 0:02:41.760 Well, that's great, and speaking of international stocks, i'd like 0:02:41.840 --> 0:02:45.560 to welcome our guests. Graham Forster, a portfolio manager of 0:02:45.600 --> 0:02:49.560 the International Equity Strategy and Global Equity strategy at Orbist 0:02:49.639 --> 0:02:52.560 Investment Management. Graham, thank you for joining us today. 0:02:52.919 --> 0:02:56.079 It's great to be here. Thank you for the kind invite. 0:02:57.120 --> 0:02:59.560 Well, before we kind of jump into your background, i'd 0:02:59.560 --> 0:03:02.040 love to hear your thoughts on you know what Laurent 0:03:02.200 --> 0:03:04.640 was just you know, mentioning you know, you know what 0:03:04.760 --> 0:03:07.519 kind of occurred during the third quarter in terms of 0:03:07.600 --> 0:03:08.720 Japanese EPs. 0:03:10.480 --> 0:03:13.240 So I think there's interesting things happening in Japan. We 0:03:13.360 --> 0:03:15.880 tend not to look at a quarter by a quarter basis, 0:03:15.919 --> 0:03:17.639 but you know, in terms of what's happening on the 0:03:18.000 --> 0:03:23.400 longer term, longer term trends. But I think some of 0:03:23.400 --> 0:03:27.720 the things that Lauren said rhymed the financials. I think 0:03:28.040 --> 0:03:30.720 we were quite large in the financials for some time. 0:03:31.440 --> 0:03:34.840 That's come down quite a lot because they're trading, you know, 0:03:34.960 --> 0:03:38.080 that sort of more normalized multiples. But I think I 0:03:38.120 --> 0:03:40.520 think there could be much more in terms of positive 0:03:40.520 --> 0:03:43.480 surprises coming out of that sector, because if you think 0:03:43.520 --> 0:03:46.000 about what they've been through for twenty years in terms 0:03:46.040 --> 0:03:51.000 of their altitude training, from having such low rates for 0:03:51.040 --> 0:03:55.760 so long and building up the muscle to survive and 0:03:55.840 --> 0:03:58.400 not quite thrive, but at least survived through that period 0:03:59.440 --> 0:04:02.080 and wrote tad more into sort of feed driven businesses. 0:04:02.440 --> 0:04:04.560 I think if you start to see rates move off, 0:04:04.920 --> 0:04:08.040 you know, off zero and and and higher from here, 0:04:08.080 --> 0:04:10.400 which I think is more likely to happen than not, 0:04:11.320 --> 0:04:16.120 you'll see a lot more positive surprise on their interest 0:04:16.160 --> 0:04:19.360 margins and people expect just because it's been so low 0:04:19.400 --> 0:04:23.480 for so long. And also they're doing you know, a 0:04:23.520 --> 0:04:26.640 lot in terms of capital efficiency and unwinding all of 0:04:26.680 --> 0:04:30.640 their cross shareholdings and and that's releasing capital. I think 0:04:30.640 --> 0:04:33.800 they're in a nice phase. It's just that you know 0:04:33.839 --> 0:04:36.760 that the prices are reflecting some of that positivity. 0:04:37.040 --> 0:04:39.400 So I'd like to take a step back and kind 0:04:39.440 --> 0:04:41.080 of I know our audience would love to hear how 0:04:41.120 --> 0:04:42.679 you became a portfolio manager. 0:04:43.120 --> 0:04:47.719 That's going way back, so I I mean I I 0:04:47.760 --> 0:04:51.159 was studying applied mathematics at Cambridge University in the UK, 0:04:51.560 --> 0:04:55.440 and I could have gone down that route. There's a 0:04:55.440 --> 0:04:59.640 lot of lots to be said for academia, but I 0:04:59.720 --> 0:05:02.200 you know, the short story is that I started getting 0:05:02.240 --> 0:05:06.600 interested in decision making under uncertainty, and that involved an 0:05:06.600 --> 0:05:10.480 interest in investing and an interest in games which had 0:05:10.520 --> 0:05:16.200 that characteristic like you know, you think think poker, and 0:05:16.720 --> 0:05:19.400 you know, that's that's what kind of led me into 0:05:19.440 --> 0:05:22.200 the investment industry. I find I found it interesting from 0:05:22.200 --> 0:05:25.960 the perspective of everyone suited to something. Right, your character 0:05:26.760 --> 0:05:31.400 and you know, your aptitude is typically suited to doing 0:05:31.480 --> 0:05:34.800 something in the world. You know, that's how we've evolved 0:05:34.800 --> 0:05:37.320 as humans. We all have some role to play, and 0:05:37.480 --> 0:05:41.080 mine was I found I had an aptitude for decision 0:05:41.080 --> 0:05:44.480 making in the situations where there's a lot of uncertainty. 0:05:45.279 --> 0:05:50.279 And you know it if you think about game selection, 0:05:50.400 --> 0:05:52.799 which we think about a lot in the poker world 0:05:52.800 --> 0:05:56.000 and in the investing world as well, I think investing 0:05:56.040 --> 0:05:59.680 as a whole is sensible game selection because what it does, 0:05:59.720 --> 0:06:02.800 given there's so much statisticity and so much noise in 0:06:02.839 --> 0:06:05.159 the business, and the noise to skill ratio is actually 0:06:05.200 --> 0:06:07.640 quite high. It attracts in a lot of in the 0:06:07.640 --> 0:06:11.120 poker world, they call them fish people who who you know, 0:06:11.320 --> 0:06:13.880 play the game but really, you know, really shouldn't be 0:06:13.880 --> 0:06:16.000 playing the game. They don't really have an aptitude for it, 0:06:16.800 --> 0:06:19.280 but they're attracted to it because they can win. They 0:06:19.279 --> 0:06:22.440 can win for you know, two three sessions. In investing, 0:06:22.480 --> 0:06:26.200 you can win for years without having real skill and 0:06:26.400 --> 0:06:29.479 edge and therefore it's a game that anyone feels they 0:06:29.520 --> 0:06:32.920 can play. So you drawing a lot of people and 0:06:33.000 --> 0:06:35.440 if you can do it well that there is sustainable 0:06:36.240 --> 0:06:38.680 edge you can you can develop. So I was attracted, 0:06:39.040 --> 0:06:40.800 you know, for I guess for those two reasons. 0:06:41.480 --> 0:06:45.360 It's great. And so you're at Orbis, you know, can 0:06:45.400 --> 0:06:47.200 you tell us a little bit more about the investment 0:06:47.240 --> 0:06:48.320 philosophy of the firm? 0:06:50.080 --> 0:06:53.880 So Orbis I've been I've been at the firm since 0:06:53.920 --> 0:06:57.400 two thousand and seven. What what I thought? I found 0:06:57.400 --> 0:06:59.839 fascinating when I was thinking about, you know, where in 0:06:59.839 --> 0:07:02.559 the investment world do you go? One thing that struck 0:07:02.600 --> 0:07:05.880 me was what is the enduring What is the enduring 0:07:05.920 --> 0:07:09.920 way to gain edge in investment management? And for me, 0:07:10.240 --> 0:07:12.520 you know, given we are owning pieces of businesses, it's 0:07:12.520 --> 0:07:16.680 obviously assessing the value of what you earn. Right that 0:07:16.680 --> 0:07:20.760 there's there's all these there's a plethora that's of different 0:07:20.760 --> 0:07:24.600 styles that have developed within the investment industry. There's the 0:07:24.680 --> 0:07:27.200 quant sidne and you know, the quality and this growth 0:07:27.200 --> 0:07:30.360 and the value and all these different flavors of investment. 0:07:30.400 --> 0:07:34.720 For me, that there's only really one signal. There's only 0:07:34.800 --> 0:07:38.200 really one signal, and that is understanding that the value 0:07:38.240 --> 0:07:40.040 of a business and trying to buy at a big 0:07:40.040 --> 0:07:43.160 discount to that, and that should be enduring as long 0:07:43.200 --> 0:07:47.120 as as prices move away from intrinsic value. And that's 0:07:47.160 --> 0:07:51.200 really the core of Orbis's philosophy and what drew me 0:07:51.360 --> 0:07:54.960 to the firm. You know, it's interesting from the sense 0:07:55.200 --> 0:07:59.400 I was talking about game selection. Given the industry invests 0:08:00.040 --> 0:08:02.960 attracts a lot of or has the potential to attract 0:08:02.960 --> 0:08:05.200 a lot of people who really don't have sustainable edge, 0:08:05.600 --> 0:08:07.559 you would think that there would be quite a large 0:08:07.560 --> 0:08:10.760 cohort of management firms and people within the industry that 0:08:10.880 --> 0:08:14.640 have very long term superior track records. And as I 0:08:14.720 --> 0:08:17.920 was digging, you know, around in the data back in 0:08:17.920 --> 0:08:19.920 two thousand and six when I was thinking about where 0:08:19.960 --> 0:08:23.080 I should be in this industry, it's really quite hard 0:08:23.120 --> 0:08:31.280 to find examples of sustainable long term excess performance. There 0:08:31.280 --> 0:08:34.160 aren't that many, which is fascinating, and I think there's 0:08:34.160 --> 0:08:36.720 a whole host of reasons for that, but one of 0:08:36.760 --> 0:08:40.959 the ones that stood out was Orbis, and it goes 0:08:41.040 --> 0:08:44.120 right back to nineteen seventy three. So Alan Gray founded 0:08:44.480 --> 0:08:48.240 Alan Gray Limited, nineteen seventy three, and then the sister 0:08:48.320 --> 0:08:52.000 firm was Orbis, which was started in nineteen ninety and 0:08:52.040 --> 0:08:56.040 we run about five or six different concentrated long only 0:08:56.320 --> 0:09:00.240 and hedge strategies and I've generated on average between five 0:09:00.280 --> 0:09:05.280 and ten percent excess return over the various benchmarks. And 0:09:05.320 --> 0:09:07.000 if you think about, you know, what is the power 0:09:07.480 --> 0:09:09.719 what's you know, what gets us to work every day? 0:09:09.720 --> 0:09:11.839 What's the power of that? Well, it's Warren Buffett's sort 0:09:11.840 --> 0:09:16.080 of time compounding. Most of his wealth has generated after 0:09:16.080 --> 0:09:18.600 the retirement age because he stays in the game for 0:09:18.600 --> 0:09:22.319 a long period of time and excess returns. And Alan 0:09:22.320 --> 0:09:26.720 Gray Limited, you know, the original firm assist company to Orbis, 0:09:26.800 --> 0:09:29.599 has been investing for fifty two years. And if you 0:09:29.720 --> 0:09:32.400 just sort of stuck the equity as premium, you just 0:09:32.440 --> 0:09:35.200 got the equity's premium plus the risk free rate for 0:09:35.240 --> 0:09:40.040 fifty years. You know, you're extraordinarily wealthy. If you can 0:09:40.080 --> 0:09:43.239 do eight or nine percent above that, it's just incredible 0:09:43.280 --> 0:09:46.440 the wealth and the way the wealth can compound. So 0:09:46.480 --> 0:09:50.120 that struck me and that was one of the reasons 0:09:50.120 --> 0:09:52.000 I joined. And we've been doing the same thing since. 0:09:52.000 --> 0:09:55.240 So I'm responsible for the International Strategy that started in 0:09:55.240 --> 0:09:58.960 two thousand and nine, which is a four five billion 0:09:59.000 --> 0:10:01.960 strategy outside of the US. And I also I am 0:10:01.960 --> 0:10:04.240 a portfolio manager on the Global strategy, which was one 0:10:04.240 --> 0:10:08.040 of the flagship strategies for August we started in nineteen ninety. 0:10:09.200 --> 0:10:12.280 So how does the process work on the international equity strategy, 0:10:12.559 --> 0:10:14.079 you know, applying that philosophy. 0:10:15.080 --> 0:10:22.160 Well, it's all very intrinsic value, you know, focused what 0:10:22.280 --> 0:10:24.800 we spend almost all our time trying to figure out 0:10:24.800 --> 0:10:27.720 the value of businesses. I think that's the enduring signal 0:10:27.800 --> 0:10:30.000 in all of the noise, So you spend your time 0:10:30.080 --> 0:10:33.480 doing things that really count. I would say there's a 0:10:33.520 --> 0:10:37.240 couple of characteristics of the firm that may be a 0:10:37.240 --> 0:10:41.760 bit differentiated and worth talking about. One is very very 0:10:41.760 --> 0:10:45.760 independent decision making, very independent decision making, and that that 0:10:45.880 --> 0:10:50.040 actually varies across the investment industry. There's this idea of 0:10:51.040 --> 0:10:53.600 wisdom of the crowds, right, You've heard and a lot 0:10:53.600 --> 0:10:56.280 of academic, literal and wisdom of the crowds. Crowds make 0:10:56.320 --> 0:10:59.080 good decisions, do they not. There's a wisdom there. I 0:10:59.080 --> 0:11:02.800 think what that is based on the wisdom of the 0:11:02.840 --> 0:11:07.840 crowds is you imagine your jar of candies, your child sweets, 0:11:07.840 --> 0:11:10.600 and everybody's guessing how many candies are in the jar, 0:11:11.800 --> 0:11:14.520 and the average of all this guess is actually quite good. 0:11:14.559 --> 0:11:18.880 That's the wisdom of the crowds. The key thing with 0:11:19.440 --> 0:11:22.199 you know that that, you know, the success of the 0:11:22.240 --> 0:11:25.240 wisdom of the crowds is independent decision making. Everyone is 0:11:25.320 --> 0:11:29.480 guessing independently of each other, and some people are way off, 0:11:29.760 --> 0:11:31.760 some people are closer, but on average it comes out 0:11:31.840 --> 0:11:33.760 quite good. If you had a circle of people around 0:11:33.760 --> 0:11:37.600 the jar and they're all chatting about how many candies 0:11:37.640 --> 0:11:39.880 are in the jar, and there's a you know, there's 0:11:39.920 --> 0:11:42.120 a few dominant voices in there, and they, you know, they, 0:11:42.600 --> 0:11:45.000 and some people are just referring to their wisdom, and 0:11:45.840 --> 0:11:48.000 if you had then then I think there's been I 0:11:48.000 --> 0:11:49.600 don't know if there's been studies done on this, but 0:11:49.679 --> 0:11:52.200 I suspect that would be a horrible outcome versus the 0:11:52.280 --> 0:11:54.920 very independent decision making. So the market is much like 0:11:54.960 --> 0:11:57.680 the second case. Everyone's standing around the jar and talking 0:11:57.760 --> 0:12:00.800 about it, and that's why you get such big distortions 0:12:00.800 --> 0:12:03.679 in markets. What we try to do internally is be very, 0:12:03.760 --> 0:12:05.960 very independent and deliberate about that as to how we 0:12:06.000 --> 0:12:10.840 make decisions. So the analysis is very independently driven and 0:12:11.160 --> 0:12:14.559 the views are independently driven, and then we have then 0:12:14.600 --> 0:12:16.960 we have a sort of a method to sense check that. 0:12:17.080 --> 0:12:19.400 So that's one kind of thing that runs through the 0:12:19.400 --> 0:12:25.040 firm independent decision making. The second is accountability. Everyone's accountable 0:12:25.080 --> 0:12:28.439 for their independent decisions. I think one of the mistakes 0:12:28.480 --> 0:12:32.400 the industry makes, generally speaking, is you take great stock 0:12:32.440 --> 0:12:37.440 pickers who are exceptional at finding those unique opportunities, and 0:12:37.720 --> 0:12:40.960 you promote them into managing a portfolio, and then those 0:12:41.120 --> 0:12:44.079 key insights that they've had over the years of picking 0:12:44.120 --> 0:12:46.160 one or two stocks a year. You know, Warren Buffett, 0:12:46.200 --> 0:12:48.080 you only swing at the fat pitches. You know, really 0:12:48.080 --> 0:12:51.120 there really is something to that gets diluted by having 0:12:51.120 --> 0:12:53.480 to look at the other forty stocks in the portfolio, 0:12:53.960 --> 0:12:56.160 and then you know, that's where things start to go wrong. 0:12:56.440 --> 0:12:59.800 So what we really try to do is emphasize, you know, 0:13:00.280 --> 0:13:03.600 we value we value one or two stock picks a year. 0:13:04.120 --> 0:13:06.840 So our analysts are focused in these niches around the world, 0:13:07.600 --> 0:13:09.320 and all they want, all they've got to do is 0:13:09.320 --> 0:13:11.520 find one to have one of two great insights, one 0:13:11.559 --> 0:13:14.079 or two ideas and then they build a paper portfolio 0:13:14.080 --> 0:13:16.320 of those best ideas, and then you track that performance 0:13:16.360 --> 0:13:18.640 over time, so you get an idea of you know, 0:13:18.720 --> 0:13:20.720 what people are good at, what people are not so 0:13:20.760 --> 0:13:23.160 good at. You get a great signaling mechanism to the 0:13:23.160 --> 0:13:26.520 portfolio managers as to which share should be in the portfolio. 0:13:26.679 --> 0:13:30.480 So that's you know, the individual accountability around that's really important. 0:13:30.720 --> 0:13:33.360 And the third thing is alignment. You need alignment within 0:13:33.400 --> 0:13:35.959 the firm. We all need to be pulling in the 0:13:36.000 --> 0:13:39.600 same direction. But critically you need alignment with clients because 0:13:39.640 --> 0:13:41.719 another one of the problems with this industry, and there 0:13:41.720 --> 0:13:44.920 are many and I keep listing them, is that the 0:13:45.000 --> 0:13:48.040 actual return that a manager delivers is very rarely what 0:13:48.080 --> 0:13:51.040 the client gets because the client is trading in and 0:13:51.040 --> 0:13:52.959 out of the funds and they're buying at the top 0:13:53.000 --> 0:13:54.480 of the selling at the bottom, and you see it 0:13:54.520 --> 0:13:56.640 over and over again. So but if you can drive 0:13:56.640 --> 0:13:58.840 alignment with your clients to the extent that the dollar 0:13:59.280 --> 0:14:02.960 weighted return of the client experience is the same or 0:14:03.000 --> 0:14:06.439 better than the actual you know, the line on the 0:14:06.520 --> 0:14:08.600 chart that you're showing in terms of the fund return, 0:14:08.920 --> 0:14:11.199 that's absolutely critical. But those are the kind of the key, 0:14:11.480 --> 0:14:13.240 key elements of our structure. 0:14:13.960 --> 0:14:16.000 So if we go back to the intrinsic value, are 0:14:16.040 --> 0:14:17.439 there metrics that help drive that? 0:14:18.000 --> 0:14:22.400 Ultimately, what are you doing when you invest? What is 0:14:22.440 --> 0:14:26.320 your objective? What's your utility function? The utility function has 0:14:26.400 --> 0:14:30.840 to be to make money. I'm afraid that's everyone's utility function. 0:14:32.440 --> 0:14:35.280 And so it's the cash. The cash that that business 0:14:35.320 --> 0:14:39.920 can generate is the key. And you know, some businesses 0:14:40.320 --> 0:14:42.480 are throwing all of that cash that they generate back 0:14:42.480 --> 0:14:45.560 into the business for growth, but ultimately the reason they're 0:14:45.560 --> 0:14:47.480 doing that is that they can generate cash off a 0:14:47.520 --> 0:14:50.320 bigger base in the future. So if you want to 0:14:50.320 --> 0:14:52.520 just cut through the chase, what is the was the 0:14:52.520 --> 0:14:54.600 core to intrinsic values, the cash that you're going to 0:14:54.600 --> 0:14:56.840 get out of that business over the long term versus 0:14:57.280 --> 0:15:00.040 you know, obviously the price you pay and then and 0:15:00.400 --> 0:15:02.120 so that's the high level, and then you're going down. 0:15:02.160 --> 0:15:04.960 There's lots of layers below that in terms of, you know, 0:15:05.280 --> 0:15:07.240 what are they doing with the cash today, how fast 0:15:07.240 --> 0:15:09.640 are they going to grow, what's the distribution of outcomes 0:15:09.680 --> 0:15:11.440 around that, how uncertain is the. 0:15:12.600 --> 0:15:15.320 You know, just a follow up question on this. Usually 0:15:15.640 --> 0:15:18.040 I don't know, if you screen a large amount of 0:15:18.120 --> 0:15:21.000 companies to try to identify first what could be the 0:15:21.040 --> 0:15:24.520 set of opportunities. I mean, are you using a more 0:15:24.560 --> 0:15:29.520 specific valuation metric, either price to book or EV to 0:15:29.640 --> 0:15:32.760 a BIDA or P And do you related to either 0:15:32.960 --> 0:15:39.120 return on equity or operating margin to better guide you 0:15:39.240 --> 0:15:43.560 towards what could be a good investment opportunity which is 0:15:43.680 --> 0:15:44.720 unfairly valued. 0:15:46.360 --> 0:15:49.480 So all those metrics are critical, all of them. You know, 0:15:49.520 --> 0:15:52.920 the return on capital business generate is absolutely critical to 0:15:53.040 --> 0:15:57.440 the value of that business, the growth rate critical, and 0:15:57.520 --> 0:16:01.880 then what do you pay? So we try to put 0:16:01.920 --> 0:16:04.360 all the pieces together and get a view as to 0:16:04.400 --> 0:16:07.480 what the business is worth holistically. Now, when it comes 0:16:07.480 --> 0:16:13.240 to screening, we have a very dedicated quant group and 0:16:13.400 --> 0:16:15.320 they are doing a lot of good work on which 0:16:15.360 --> 0:16:18.200 areas of the market could market could be dislocated. And 0:16:18.240 --> 0:16:19.640 the way we do that is we run our own 0:16:19.680 --> 0:16:24.560 proprietary internal models. They're effectively fancy dividend discount models, so 0:16:24.720 --> 0:16:27.920 cash flow based models, where we run that on every 0:16:27.920 --> 0:16:30.320 stock in the world, and then we monitor and we see, Okay, 0:16:30.320 --> 0:16:33.880 what's looking more interesting and what's looking less interesting. That's helpful, 0:16:34.640 --> 0:16:37.000 but ultimately there's a lot of noise in it, right 0:16:37.080 --> 0:16:40.680 because the model you know, uses the past, doesn't know 0:16:40.720 --> 0:16:45.760 the future right come in. But you know, on top 0:16:45.800 --> 0:16:49.080 of that, we it's absolutely critical to have a big 0:16:49.080 --> 0:16:52.920 investment team. So we're a forty billion dollar asset manager, 0:16:52.920 --> 0:16:56.760 which isn't that big in today's you know, today's inflating money. 0:16:58.120 --> 0:17:01.240 And and so the size of our vest ten is 0:17:01.280 --> 0:17:05.280 quite large versus the the asset base. But we think 0:17:05.280 --> 0:17:08.040 it's absolutely critical because we're so geared to our performance. 0:17:08.080 --> 0:17:10.639 We're so geared at delivering returns for clients that are 0:17:10.680 --> 0:17:14.720 above the averages that you need to combine both breadth 0:17:14.800 --> 0:17:17.880 and depth. And so we have a big analyst team 0:17:17.920 --> 0:17:19.600 to cover the world, but we also have a lot 0:17:19.640 --> 0:17:22.280 of depth within each area. So when it comes to screening, 0:17:22.640 --> 0:17:26.320 each analyst's just looking at Japanese financials or they're just 0:17:26.359 --> 0:17:31.880 looking at European industrials, they have a small, smaller universe, 0:17:32.080 --> 0:17:34.119 a universe they can manage the universe that they can 0:17:34.200 --> 0:17:36.680 understand what the top twenty company is, what they're worth, 0:17:36.720 --> 0:17:39.720 and then and therefore you are screening that whole universe. 0:17:39.720 --> 0:17:42.600 Screening is important, but it's a little bit less so 0:17:42.680 --> 0:17:45.200 because you know, you have that deep knowledge within each section. 0:17:45.560 --> 0:17:49.400 Coming back towards the Japanese equity market, so, I mean 0:17:49.440 --> 0:17:53.040 a lot of investors think they are definitely structural change 0:17:53.400 --> 0:17:56.959 happening in the economy, but also in terms of corpor 0:17:57.000 --> 0:18:02.520 right governance, where potentially companies management are much more shareholder 0:18:02.560 --> 0:18:07.400 friendly than they used to be. I monitored the position 0:18:07.560 --> 0:18:11.160 of your portfolio, and you were heavily invested in Japanese 0:18:11.200 --> 0:18:14.400 equities at the beginning of the year. You have reduced 0:18:15.359 --> 0:18:18.520 your position, which is quite a wise move because I 0:18:18.520 --> 0:18:22.960 would say since about March April, the Japanese market has 0:18:23.080 --> 0:18:27.320 not done anything spectacular. So do you think, as you 0:18:27.359 --> 0:18:32.680 were mentioning earlier, that potentially the Japanese market, despite all 0:18:32.720 --> 0:18:35.600 these good news, this is already priced in. Or do 0:18:35.640 --> 0:18:39.240 you think that, in fact, all those structural change could 0:18:39.280 --> 0:18:41.800 really carry this market for many years to go. 0:18:43.040 --> 0:18:45.679 I'm more in the latter. Despite the fact that our 0:18:45.720 --> 0:18:49.919 position is reduced, I think we've been investing in Japan 0:18:50.800 --> 0:18:53.719 with great hope and expectation that corporate governance was going 0:18:53.760 --> 0:18:58.920 to improve since about nineteen ninety eight, and every year 0:18:59.040 --> 0:19:01.160 our team go to Japan and they talk to management 0:19:01.160 --> 0:19:03.520 teams and they get the same kind of blank stairs 0:19:03.560 --> 0:19:07.040 when we talk about you know, better capital management ETCA. 0:19:07.840 --> 0:19:10.800 Over the last five years, that's dramatically change. We go 0:19:11.000 --> 0:19:15.360 to Japan and we we're talking the same language, and 0:19:15.480 --> 0:19:22.760 our team, our Japan specialist team. Twice a year, we've 0:19:22.760 --> 0:19:25.679 done a lot of presentations to management and you know, 0:19:26.000 --> 0:19:30.320 the management teams are listening, stuff happening, they're acting, and 0:19:30.440 --> 0:19:32.200 that's a big deal. It's a big deal for market 0:19:32.400 --> 0:19:35.480 market that has become so capital inefficient over such a 0:19:35.480 --> 0:19:38.000 long period of time. So I think it is enduring, 0:19:38.240 --> 0:19:42.320 and I think there is that there's there's a there's 0:19:42.320 --> 0:19:45.840 a momentum to it, just like there was a stagnation 0:19:45.960 --> 0:19:49.560 to the previous you know, the way it was. It's 0:19:49.560 --> 0:19:53.080 a very sort of consensus driven society, so the way 0:19:53.119 --> 0:19:54.720 it was was very sticky. But as soon as it 0:19:54.760 --> 0:19:58.160 starts to change, everyone starts to change together. And that's 0:19:58.200 --> 0:20:02.919 exactly what we're seeing. What the problem is that the 0:20:03.000 --> 0:20:09.439 yen is so cheap now that the the exporters we 0:20:09.480 --> 0:20:14.680 think over earning and so a lot of those companies 0:20:14.680 --> 0:20:18.160 on a normalized earnings basis don't look as interesting to us, 0:20:18.560 --> 0:20:20.840 and they are the big they're the big stocks in 0:20:20.880 --> 0:20:24.959 the market, you know, the the big liquid businesses. So 0:20:25.000 --> 0:20:28.119 the opportunity today in our view sits in the MidCap 0:20:28.240 --> 0:20:32.199 domestic companies that are suffering under this very very weak end. 0:20:33.080 --> 0:20:35.720 So if you can find MidCap Japanese businesses where you know, 0:20:35.760 --> 0:20:38.159 you have this nice corporate governance story we like, for example, 0:20:38.160 --> 0:20:40.359 the drug stores in Japan, where there's this kind of 0:20:40.640 --> 0:20:45.000 the more interesting things going on on the consolidation side, 0:20:45.640 --> 0:20:47.159 and and you know, and and on a couple of 0:20:47.240 --> 0:20:52.240 management side. If you can find those businesses, domestic businesses, 0:20:53.160 --> 0:20:56.479 they're cheap, and you have the yen upside as well, 0:20:56.480 --> 0:21:00.560 because you know, they they're true yen assets, so you 0:21:00.600 --> 0:21:02.679 can get that, you know, the uplift from the end, 0:21:02.720 --> 0:21:07.120 which we think will eventually appreciate just because it's it's 0:21:07.119 --> 0:21:10.520 so undervalued at this point. That's where the opportunity is. 0:21:10.680 --> 0:21:13.440 The trouble is you have to access the liquidity and 0:21:15.240 --> 0:21:17.320 you know, so you have to buy baskets for these companies. 0:21:18.960 --> 0:21:21.240 It's just a bit more tricky for a very sort 0:21:21.240 --> 0:21:23.120 of focus bottom up investor. 0:21:23.400 --> 0:21:29.040 In terms of implementation. Yeah, so now maybe a bit 0:21:29.240 --> 0:21:32.160 a bit more macro questions have been given that all 0:21:32.240 --> 0:21:37.960 the market focuses around the potential tariff policies of Donald Trump. 0:21:38.520 --> 0:21:41.000 I mean, I don't know if you. I know you 0:21:41.080 --> 0:21:43.639 are more bottom up rather than top down. But do 0:21:43.720 --> 0:21:47.520 you think that there are international markets which may be 0:21:47.520 --> 0:21:52.080 better positions than others and that you would favor investing 0:21:52.240 --> 0:21:55.680 given that some of them could be definitely at risk 0:21:56.000 --> 0:21:59.800 of those trade policies are coming from the US. 0:22:02.400 --> 0:22:07.320 I think it's difficult to invest on that basis. On 0:22:07.359 --> 0:22:13.199 the one hand, Trump is quite a predictable character, and 0:22:13.280 --> 0:22:15.280 he's been saying the same thing since he was twenty 0:22:15.280 --> 0:22:20.680 two years old. You know what he thinks by now, 0:22:20.840 --> 0:22:22.720 but you don't know exactly how he's going to implement 0:22:24.080 --> 0:22:30.520 and you don't know to what degree each let's say 0:22:30.560 --> 0:22:32.920 tariff that is put on that will be put on, 0:22:33.920 --> 0:22:36.760 You don't know you know how enduring they'll be. And 0:22:36.800 --> 0:22:39.119 in terms of the intrinsic value of a business, you know, 0:22:39.160 --> 0:22:42.200 that's ten years of free cash flow, it's not six 0:22:42.280 --> 0:22:46.800 months based on a tariff policy. And the other thing 0:22:46.840 --> 0:22:49.959 we know about Trump is he's quite a transactional person. 0:22:50.880 --> 0:22:53.200 And so you know, if you can get a good 0:22:53.240 --> 0:22:57.760 deal from a country or extract something that he feels, okay, 0:22:57.840 --> 0:23:02.639 the USA has gained in this transaction, the tariffs, you know, 0:23:02.720 --> 0:23:05.840 might be fleeting on whichever country they're dealing with, So 0:23:05.880 --> 0:23:09.679 it is just a difficult environment. From that perspective, I 0:23:09.680 --> 0:23:13.639 think what one thing you can say is we are 0:23:13.680 --> 0:23:16.720 on a trend now. It looks like a very clear 0:23:16.760 --> 0:23:20.600