Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond sound bites and headlines and looks deeper into
Speaker 1: their processes, challenges and philosophies and security selection. I'm David Cohne,
Speaker 1: I lead mutual fund and active research at Bloomberg Intelligence.
Speaker 1: Today my co host is Laurent Julie, senior equity strategist
Speaker 1: at Bloomberg Intelligence. Laurent, thank you for joining.
Speaker 2: Me today We come.
Speaker 1: So you wrote an interesting note last week about Japanese
Speaker 1: EPs growth during the third quarter. You know, I'd love
Speaker 1: to see how these companies performed in terms of EPs
Speaker 1: growth and you know, maybe some positive surprises.
Speaker 2: So in fact, we did a quite deep dive into
Speaker 2: the September quarter results of Japanese companies and as you mention,
Speaker 2: I mean the results came out better than expected. As
Speaker 2: a quarterly year of your growth was around twenty six
Speaker 2: percent compared to seventeen percent initially expected. But I think
Speaker 2: the key point is that the breadth of positive surprise
Speaker 2: has been quite narrow. Out of eleven sectors, only Free
Speaker 2: delivered positive surprise. There are technology, financial, sorry, healthcare and materials,
Speaker 2: and also soft Bank Group also did blowout market expectations.
Speaker 2: In fact, if you exclude those three sectors and soft bank,
Speaker 2: in fact, the Japanese results would have been much lower
Speaker 2: than expected. In addition, if you look at the full
Speaker 2: year guidance which has been provided by the companies for
Speaker 2: the moment, there are still seven percent below the market
Speaker 2: consensus and they were revised only one percent during the
Speaker 2: reporting season. So that's quite disappointing, and I think it
Speaker 2: was not enough to get the market excited. And the
Speaker 2: last point that I would like to make is that
Speaker 2: I think now investors focus shifted back to the macro
Speaker 2: and especially what the BOJ will do at its next meeting,
Speaker 2: which is towards the end of December. For the moment,
Speaker 2: the probability of a twenty five basis point rise is
Speaker 2: about sixty percent because later inflation data are still above
Speaker 2: two percent, and also the currency, as we can a
Speaker 2: little bit compared to the month of July. So I
Speaker 2: think market expect the BOJ to provide support to the currency.
Speaker 2: And that's it.
Speaker 1: Well, that's great, and speaking of international stocks, i'd like
Speaker 1: to welcome our guests. Graham Forster, a portfolio manager of
Speaker 1: the International Equity Strategy and Global Equity strategy at Orbist
Speaker 1: Investment Management. Graham, thank you for joining us today.
Speaker 3: It's great to be here. Thank you for the kind invite.
Speaker 1: Well, before we kind of jump into your background, i'd
Speaker 1: love to hear your thoughts on you know what Laurent
Speaker 1: was just you know, mentioning you know, you know what
Speaker 1: kind of occurred during the third quarter in terms of
Speaker 1: Japanese EPs.
Speaker 3: So I think there's interesting things happening in Japan. We
Speaker 3: tend not to look at a quarter by a quarter basis,
Speaker 3: but you know, in terms of what's happening on the
Speaker 3: longer term, longer term trends. But I think some of
Speaker 3: the things that Lauren said rhymed the financials. I think
Speaker 3: we were quite large in the financials for some time.
Speaker 3: That's come down quite a lot because they're trading, you know,
Speaker 3: that sort of more normalized multiples. But I think I
Speaker 3: think there could be much more in terms of positive
Speaker 3: surprises coming out of that sector, because if you think
Speaker 3: about what they've been through for twenty years in terms
Speaker 3: of their altitude training, from having such low rates for
Speaker 3: so long and building up the muscle to survive and
Speaker 3: not quite thrive, but at least survived through that period
Speaker 3: and wrote tad more into sort of feed driven businesses.
Speaker 3: I think if you start to see rates move off,
Speaker 3: you know, off zero and and and higher from here,
Speaker 3: which I think is more likely to happen than not,
Speaker 3: you'll see a lot more positive surprise on their interest
Speaker 3: margins and people expect just because it's been so low
Speaker 3: for so long. And also they're doing you know, a
Speaker 3: lot in terms of capital efficiency and unwinding all of
Speaker 3: their cross shareholdings and and that's releasing capital. I think
Speaker 3: they're in a nice phase. It's just that you know
Speaker 3: that the prices are reflecting some of that positivity.
Speaker 1: So I'd like to take a step back and kind
Speaker 1: of I know our audience would love to hear how
Speaker 1: you became a portfolio manager.
Speaker 3: That's going way back, so I I mean I I
Speaker 3: was studying applied mathematics at Cambridge University in the UK,
Speaker 3: and I could have gone down that route. There's a
Speaker 3: lot of lots to be said for academia, but I
Speaker 3: you know, the short story is that I started getting
Speaker 3: interested in decision making under uncertainty, and that involved an
Speaker 3: interest in investing and an interest in games which had
Speaker 3: that characteristic like you know, you think think poker, and
Speaker 3: you know, that's that's what kind of led me into
Speaker 3: the investment industry. I find I found it interesting from
Speaker 3: the perspective of everyone suited to something. Right, your character
Speaker 3: and you know, your aptitude is typically suited to doing
Speaker 3: something in the world. You know, that's how we've evolved
Speaker 3: as humans. We all have some role to play, and
Speaker 3: mine was I found I had an aptitude for decision
Speaker 3: making in the situations where there's a lot of uncertainty.
Speaker 3: And you know it if you think about game selection,
Speaker 3: which we think about a lot in the poker world
Speaker 3: and in the investing world as well, I think investing
Speaker 3: as a whole is sensible game selection because what it does,
Speaker 3: given there's so much statisticity and so much noise in
Speaker 3: the business, and the noise to skill ratio is actually
Speaker 3: quite high. It attracts in a lot of in the
Speaker 3: poker world, they call them fish people who who you know,
Speaker 3: play the game but really, you know, really shouldn't be
Speaker 3: playing the game. They don't really have an aptitude for it,
Speaker 3: but they're attracted to it because they can win. They
Speaker 3: can win for you know, two three sessions. In investing,
Speaker 3: you can win for years without having real skill and
Speaker 3: edge and therefore it's a game that anyone feels they
Speaker 3: can play. So you drawing a lot of people and
Speaker 3: if you can do it well that there is sustainable
Speaker 3: edge you can you can develop. So I was attracted,
Speaker 3: you know, for I guess for those two reasons.
Speaker 1: It's great. And so you're at Orbis, you know, can
Speaker 1: you tell us a little bit more about the investment
Speaker 1: philosophy of the firm?
Speaker 3: So Orbis I've been I've been at the firm since
Speaker 3: two thousand and seven. What what I thought? I found
Speaker 3: fascinating when I was thinking about, you know, where in
Speaker 3: the investment world do you go? One thing that struck
Speaker 3: me was what is the enduring What is the enduring
Speaker 3: way to gain edge in investment management? And for me,
Speaker 3: you know, given we are owning pieces of businesses, it's
Speaker 3: obviously assessing the value of what you earn. Right that
Speaker 3: there's there's all these there's a plethora that's of different
Speaker 3: styles that have developed within the investment industry. There's the
Speaker 3: quant sidne and you know, the quality and this growth
Speaker 3: and the value and all these different flavors of investment.
Speaker 3: For me, that there's only really one signal. There's only
Speaker 3: really one signal, and that is understanding that the value
Speaker 3: of a business and trying to buy at a big
Speaker 3: discount to that, and that should be enduring as long
Speaker 3: as as prices move away from intrinsic value. And that's
Speaker 3: really the core of Orbis's philosophy and what drew me
Speaker 3: to the firm. You know, it's interesting from the sense
Speaker 3: I was talking about game selection. Given the industry invests
Speaker 3: attracts a lot of or has the potential to attract
Speaker 3: a lot of people who really don't have sustainable edge,
Speaker 3: you would think that there would be quite a large
Speaker 3: cohort of management firms and people within the industry that
Speaker 3: have very long term superior track records. And as I
Speaker 3: was digging, you know, around in the data back in
Speaker 3: two thousand and six when I was thinking about where
Speaker 3: I should be in this industry, it's really quite hard
Speaker 3: to find examples of sustainable long term excess performance. There
Speaker 3: aren't that many, which is fascinating, and I think there's
Speaker 3: a whole host of reasons for that, but one of
Speaker 3: the ones that stood out was Orbis, and it goes
Speaker 3: right back to nineteen seventy three. So Alan Gray founded
Speaker 3: Alan Gray Limited, nineteen seventy three, and then the sister
Speaker 3: firm was Orbis, which was started in nineteen ninety and
Speaker 3: we run about five or six different concentrated long only
Speaker 3: and hedge strategies and I've generated on average between five
Speaker 3: and ten percent excess return over the various benchmarks. And
Speaker 3: if you think about, you know, what is the power
Speaker 3: what's you know, what gets us to work every day?
Speaker 3: What's the power of that? Well, it's Warren Buffett's sort
Speaker 3: of time compounding. Most of his wealth has generated after
Speaker 3: the retirement age because he stays in the game for
Speaker 3: a long period of time and excess returns. And Alan
Speaker 3: Gray Limited, you know, the original firm assist company to Orbis,
Speaker 3: has been investing for fifty two years. And if you
Speaker 3: just sort of stuck the equity as premium, you just
Speaker 3: got the equity's premium plus the risk free rate for
Speaker 3: fifty years. You know, you're extraordinarily wealthy. If you can
Speaker 3: do eight or nine percent above that, it's just incredible
Speaker 3: the wealth and the way the wealth can compound. So
Speaker 3: that struck me and that was one of the reasons
Speaker 3: I joined. And we've been doing the same thing since.
Speaker 3: So I'm responsible for the International Strategy that started in
Speaker 3: two thousand and nine, which is a four five billion
Speaker 3: strategy outside of the US. And I also I am
Speaker 3: a portfolio manager on the Global strategy, which was one
Speaker 3: of the flagship strategies for August we started in nineteen ninety.
Speaker 1: So how does the process work on the international equity strategy,
Speaker 1: you know, applying that philosophy.
Speaker 3: Well, it's all very intrinsic value, you know, focused what
Speaker 3: we spend almost all our time trying to figure out
Speaker 3: the value of businesses. I think that's the enduring signal
Speaker 3: in all of the noise, So you spend your time
Speaker 3: doing things that really count. I would say there's a
Speaker 3: couple of characteristics of the firm that may be a
Speaker 3: bit differentiated and worth talking about. One is very very
Speaker 3: independent decision making, very independent decision making, and that that
Speaker 3: actually varies across the investment industry. There's this idea of
Speaker 3: wisdom of the crowds, right, You've heard and a lot
Speaker 3: of academic, literal and wisdom of the crowds. Crowds make
Speaker 3: good decisions, do they not. There's a wisdom there. I
Speaker 3: think what that is based on the wisdom of the
Speaker 3: crowds is you imagine your jar of candies, your child sweets,
Speaker 3: and everybody's guessing how many candies are in the jar,
Speaker 3: and the average of all this guess is actually quite good.
Speaker 3: That's the wisdom of the crowds. The key thing with
Speaker 3: you know that that, you know, the success of the
Speaker 3: wisdom of the crowds is independent decision making. Everyone is
Speaker 3: guessing independently of each other, and some people are way off,
Speaker 3: some people are closer, but on average it comes out
Speaker 3: quite good. If you had a circle of people around
Speaker 3: the jar and they're all chatting about how many candies
Speaker 3: are in the jar, and there's a you know, there's
Speaker 3: a few dominant voices in there, and they, you know, they,
Speaker 3: and some people are just referring to their wisdom, and
Speaker 3: if you had then then I think there's been I
Speaker 3: don't know if there's been studies done on this, but
Speaker 3: I suspect that would be a horrible outcome versus the
Speaker 3: very independent decision making. So the market is much like
Speaker 3: the second case. Everyone's standing around the jar and talking
Speaker 3: about it, and that's why you get such big distortions
Speaker 3: in markets. What we try to do internally is be very,
Speaker 3: very independent and deliberate about that as to how we
Speaker 3: make decisions. So the analysis is very independently driven and
Speaker 3: the views are independently driven, and then we have then
Speaker 3: we have a sort of a method to sense check that.
Speaker 3: So that's one kind of thing that runs through the
Speaker 3: firm independent decision making. The second is accountability. Everyone's accountable
Speaker 3: for their independent decisions. I think one of the mistakes
Speaker 3: the industry makes, generally speaking, is you take great stock
Speaker 3: pickers who are exceptional at finding those unique opportunities, and
Speaker 3: you promote them into managing a portfolio, and then those
Speaker 3: key insights that they've had over the years of picking
Speaker 3: one or two stocks a year. You know, Warren Buffett,
Speaker 3: you only swing at the fat pitches. You know, really
Speaker 3: there really is something to that gets diluted by having
Speaker 3: to look at the other forty stocks in the portfolio,
Speaker 3: and then you know, that's where things start to go wrong.
Speaker 3: So what we really try to do is emphasize, you know,
Speaker 3: we value we value one or two stock picks a year.
Speaker 3: So our analysts are focused in these niches around the world,
Speaker 3: and all they want, all they've got to do is
Speaker 3: find one to have one of two great insights, one
Speaker 3: or two ideas and then they build a paper portfolio
Speaker 3: of those best ideas, and then you track that performance
Speaker 3: over time, so you get an idea of you know,
Speaker 3: what people are good at, what people are not so
Speaker 3: good at. You get a great signaling mechanism to the
Speaker 3: portfolio managers as to which share should be in the portfolio.
Speaker 3: So that's you know, the individual accountability around that's really important.
Speaker 3: And the third thing is alignment. You need alignment within
Speaker 3: the firm. We all need to be pulling in the
Speaker 3: same direction. But critically you need alignment with clients because
Speaker 3: another one of the problems with this industry, and there
Speaker 3: are many and I keep listing them, is that the
Speaker 3: actual return that a manager delivers is very rarely what
Speaker 3: the client gets because the client is trading in and
Speaker 3: out of the funds and they're buying at the top
Speaker 3: of the selling at the bottom, and you see it
Speaker 3: over and over again. So but if you can drive
Speaker 3: alignment with your clients to the extent that the dollar
Speaker 3: weighted return of the client experience is the same or
Speaker 3: better than the actual you know, the line on the
Speaker 3: chart that you're showing in terms of the fund return,
Speaker 3: that's absolutely critical. But those are the kind of the key,
Speaker 3: key elements of our structure.
Speaker 1: So if we go back to the intrinsic value, are
Speaker 1: there metrics that help drive that?
Speaker 3: Ultimately, what are you doing when you invest? What is
Speaker 3: your objective? What's your utility function? The utility function has
Speaker 3: to be to make money. I'm afraid that's everyone's utility function.
Speaker 3: And so it's the cash. The cash that that business
Speaker 3: can generate is the key. And you know, some businesses
Speaker 3: are throwing all of that cash that they generate back
Speaker 3: into the business for growth, but ultimately the reason they're
Speaker 3: doing that is that they can generate cash off a
Speaker 3: bigger base in the future. So if you want to
Speaker 3: just cut through the chase, what is the was the
Speaker 3: core to intrinsic values, the cash that you're going to
Speaker 3: get out of that business over the long term versus
Speaker 3: you know, obviously the price you pay and then and
Speaker 3: so that's the high level, and then you're going down.
Speaker 3: There's lots of layers below that in terms of, you know,
Speaker 3: what are they doing with the cash today, how fast
Speaker 3: are they going to grow, what's the distribution of outcomes
Speaker 3: around that, how uncertain is the.
Speaker 2: You know, just a follow up question on this. Usually
Speaker 2: I don't know, if you screen a large amount of
Speaker 2: companies to try to identify first what could be the
Speaker 2: set of opportunities. I mean, are you using a more
Speaker 2: specific valuation metric, either price to book or EV to
Speaker 2: a BIDA or P And do you related to either
Speaker 2: return on equity or operating margin to better guide you
Speaker 2: towards what could be a good investment opportunity which is
Speaker 2: unfairly valued.
Speaker 3: So all those metrics are critical, all of them. You know,
Speaker 3: the return on capital business generate is absolutely critical to
Speaker 3: the value of that business, the growth rate critical, and
Speaker 3: then what do you pay? So we try to put
Speaker 3: all the pieces together and get a view as to
Speaker 3: what the business is worth holistically. Now, when it comes
Speaker 3: to screening, we have a very dedicated quant group and
Speaker 3: they are doing a lot of good work on which
Speaker 3: areas of the market could market could be dislocated. And
Speaker 3: the way we do that is we run our own
Speaker 3: proprietary internal models. They're effectively fancy dividend discount models, so
Speaker 3: cash flow based models, where we run that on every
Speaker 3: stock in the world, and then we monitor and we see, Okay,
Speaker 3: what's looking more interesting and what's looking less interesting. That's helpful,
Speaker 3: but ultimately there's a lot of noise in it, right
Speaker 3: because the model you know, uses the past, doesn't know
Speaker 3: the future right come in. But you know, on top
Speaker 3: of that, we it's absolutely critical to have a big
Speaker 3: investment team. So we're a forty billion dollar asset manager,
Speaker 3: which isn't that big in today's you know, today's inflating money.
Speaker 3: And and so the size of our vest ten is
Speaker 3: quite large versus the the asset base. But we think
Speaker 3: it's absolutely critical because we're so geared to our performance.
Speaker 3: We're so geared at delivering returns for clients that are
Speaker 3: above the averages that you need to combine both breadth
Speaker 3: and depth. And so we have a big analyst team
Speaker 3: to cover the world, but we also have a lot
Speaker 3: of depth within each area. So when it comes to screening,
Speaker 3: each analyst's just looking at Japanese financials or they're just
Speaker 3: looking at European industrials, they have a small, smaller universe,
Speaker 3: a universe they can manage the universe that they can
Speaker 3: understand what the top twenty company is, what they're worth,
Speaker 3: and then and therefore you are screening that whole universe.
Speaker 3: Screening is important, but it's a little bit less so
Speaker 3: because you know, you have that deep knowledge within each section.
Speaker 2: Coming back towards the Japanese equity market, so, I mean
Speaker 2: a lot of investors think they are definitely structural change
Speaker 2: happening in the economy, but also in terms of corpor
Speaker 2: right governance, where potentially companies management are much more shareholder
Speaker 2: friendly than they used to be. I monitored the position
Speaker 2: of your portfolio, and you were heavily invested in Japanese
Speaker 2: equities at the beginning of the year. You have reduced
Speaker 2: your position, which is quite a wise move because I
Speaker 2: would say since about March April, the Japanese market has
Speaker 2: not done anything spectacular. So do you think, as you
Speaker 2: were mentioning earlier, that potentially the Japanese market, despite all
Speaker 2: these good news, this is already priced in. Or do
Speaker 2: you think that, in fact, all those structural change could
Speaker 2: really carry this market for many years to go.
Speaker 3: I'm more in the latter. Despite the fact that our
Speaker 3: position is reduced, I think we've been investing in Japan
Speaker 3: with great hope and expectation that corporate governance was going
Speaker 3: to improve since about nineteen ninety eight, and every year
Speaker 3: our team go to Japan and they talk to management
Speaker 3: teams and they get the same kind of blank stairs
Speaker 3: when we talk about you know, better capital management ETCA.
Speaker 3: Over the last five years, that's dramatically change. We go
Speaker 3: to Japan and we we're talking the same language, and
Speaker 3: our team, our Japan specialist team. Twice a year, we've
Speaker 3: done a lot of presentations to management and you know,
Speaker 3: the management teams are listening, stuff happening, they're acting, and
Speaker 3: that's a big deal. It's a big deal for market
Speaker 3: market that has become so capital inefficient over such a
Speaker 3: long period of time. So I think it is enduring,
Speaker 3: and I think there is that there's there's a there's
Speaker 3: a momentum to it, just like there was a stagnation
Speaker 3: to the previous you know, the way it was. It's
Speaker 3: a very sort of consensus driven society, so the way
Speaker 3: it was was very sticky. But as soon as it
Speaker 3: starts to change, everyone starts to change together. And that's
Speaker 3: exactly what we're seeing. What the problem is that the
Speaker 3: yen is so cheap now that the the exporters we
Speaker 3: think over earning and so a lot of those companies
Speaker 3: on a normalized earnings basis don't look as interesting to us,
Speaker 3: and they are the big they're the big stocks in
Speaker 3: the market, you know, the the big liquid businesses. So
Speaker 3: the opportunity today in our view sits in the MidCap
Speaker 3: domestic companies that are suffering under this very very weak end.
Speaker 3: So if you can find MidCap Japanese businesses where you know,
Speaker 3: you have this nice corporate governance story we like, for example,
Speaker 3: the drug stores in Japan, where there's this kind of
Speaker 3: the more interesting things going on on the consolidation side,
Speaker 3: and and you know, and and on a couple of
Speaker 3: management side. If you can find those businesses, domestic businesses,
Speaker 3: they're cheap, and you have the yen upside as well,
Speaker 3: because you know, they they're true yen assets, so you
Speaker 3: can get that, you know, the uplift from the end,
Speaker 3: which we think will eventually appreciate just because it's it's
Speaker 3: so undervalued at this point. That's where the opportunity is.
Speaker 3: The trouble is you have to access the liquidity and
Speaker 3: you know, so you have to buy baskets for these companies.
Speaker 3: It's just a bit more tricky for a very sort
Speaker 3: of focus bottom up investor.
Speaker 2: In terms of implementation. Yeah, so now maybe a bit
Speaker 2: a bit more macro questions have been given that all
Speaker 2: the market focuses around the potential tariff policies of Donald Trump.
Speaker 2: I mean, I don't know if you. I know you
Speaker 2: are more bottom up rather than top down. But do
Speaker 2: you think that there are international markets which may be
Speaker 2: better positions than others and that you would favor investing
Speaker 2: given that some of them could be definitely at risk
Speaker 2: of those trade policies are coming from the US.
Speaker 3: I think it's difficult to invest on that basis. On
Speaker 3: the one hand, Trump is quite a predictable character, and
Speaker 3: he's been saying the same thing since he was twenty
Speaker 3: two years old. You know what he thinks by now,
Speaker 3: but you don't know exactly how he's going to implement
Speaker 3: and you don't know to what degree each let's say
Speaker 3: tariff that is put on that will be put on,
Speaker 3: You don't know you know how enduring they'll be. And
Speaker 3: in terms of the intrinsic value of a business, you know,
Speaker 3: that's ten years of free cash flow, it's not six
Speaker 3: months based on a tariff policy. And the other thing
Speaker 3: we know about Trump is he's quite a transactional person.
Speaker 3: And so you know, if you can get a good
Speaker 3: deal from a country or extract something that he feels, okay,
Speaker 3: the USA has gained in this transaction, the tariffs, you know,
Speaker 3: might be fleeting on whichever country they're dealing with, So
Speaker 3: it is just a difficult environment. From that perspective, I
Speaker 3: think what one thing you can say is we are
Speaker 3: on a trend now. It looks like a very clear
Speaker 3: trend towards a much more protectionist world and a breakdown
Speaker 3: of the global world order of as we've known it
Speaker 3: for the last thirty forty years. And that you know,
Speaker 3: you can see that in the USA, but you can
Speaker 3: also see it all the way across Europe as well
Speaker 3: and in various other countries. I think it's a little
Speaker 3: bit of a function of an aging population. As we age,
Speaker 3: you know, just very very simplistically, we've become more conservative
Speaker 3: and adverse to change, and you know, I think that's
Speaker 3: we're seeing that playing out in politics all around the world.
Speaker 3: And so I worry about Europe in terms of the
Speaker 3: potential for the the EU too. I don't want to
Speaker 3: say break up. There's a protect there. There's in terms
Speaker 3: of people becoming more nationalistic. I think they'll be more
Speaker 3: global conflict just because the global world order has been
Speaker 3: in place for so long and when you have a
Speaker 3: very strong, you know, huge power that the US has been,
Speaker 3: it just kept everything, you know, it kept everything quiet
Speaker 3: as soon as you start as soon as that starts
Speaker 3: breaking down. In a period where individual countries have not
Speaker 3: built up their defense capability because it's just atrophied over
Speaker 3: the last twenty thirty years, I think that you're going
Speaker 3: to see a lot of friction across borders as well.
Speaker 3: So those will be the macro things I would be
Speaker 3: concerned about in terms of the new policies of the
Speaker 3: US administration. The biggest thing I worry about is the
Speaker 3: you know, the efficiency drive from from elon Musk and
Speaker 3: because that that could be game changing if they can
Speaker 3: execute on on on getting their their their fists in order,
Speaker 3: because that's that looks like an inevitable freight train for
Speaker 3: a long time in terms of the deteriorating fiscal position
Speaker 3: in the US. So it'll be interesting to observe how
Speaker 3: that evolves.
Speaker 2: Okay, Now a question which is more about process, which
Speaker 2: is your selling discipline? I mean, which is I think
Speaker 2: is very relevant when you have a value based investment strategy.
Speaker 2: I mean, when do you decide to exceed a position?
Speaker 2: Is it just because you think it's just fairly valued,
Speaker 2: you were right, and so you take your gain or
Speaker 2: I know that some people tend to run with their winners.
Speaker 2: And also when sometimes I mean there's especially in Europe
Speaker 2: for example, there are a lot of investment case which
Speaker 2: are value traps. Sometimes some are our value traps, others
Speaker 2: are not. So some companies initially may lose or your
Speaker 2: investment may lose money, but you may be right over
Speaker 2: the medium to long term. So also how do you
Speaker 2: react to when one of your investments is not turning
Speaker 2: out right? I mean, how often do you reconsider what
Speaker 2: do you do to make sure that you are on
Speaker 2: the right track or that potentially it could be a
Speaker 2: value trap and it's better to sell with a ten
Speaker 2: or fifteen percent loss rather than a fifty percent one.
Speaker 2: So how do you approach those both goals of on
Speaker 2: the on the positive and negative side.
Speaker 3: So that I mean, there's all great questions. I mean,
Speaker 3: the very glib, high level answer is, as you would expect,
Speaker 3: price versus intrinsic value is key. So if you know,
Speaker 3: you realize you're intrinsic value, then then the position will
Speaker 3: But there's a second element of that is that the
Speaker 3: market environment might be such that there's a lot of
Speaker 3: things that traded a big discount. You know, if you
Speaker 3: look at twenty twenty one, very you knowaningful discounts in
Speaker 3: certain areas of the market, in which case we might
Speaker 3: sail before something gets to intrinsic value because we can
Speaker 3: buy something else at a much deeper discount. So that's
Speaker 3: the very high level answer. Now your your point is
Speaker 3: much more kind of in the weeds and intricate in
Speaker 3: the sense that what if you're wrong, what you know?
Speaker 3: How do you what if you're intrinsic value is wrong?
Speaker 3: And so we I think that we're very conscious of
Speaker 3: the biggest trap you can get caught in this business
Speaker 3: is getting dogmatic on a position and what you think
Speaker 3: of business is worth and you keep doubling, and you
Speaker 3: keep doubling, you keep things deteriorating things, and that's, you know,
Speaker 3: such a big trap. So what we we have a
Speaker 3: few things in place for that. One is we review
Speaker 3: positions if they've been in the portfolio and they've not worked,
Speaker 3: or they've been in a long time and they've not
Speaker 3: really done very much, or something's changed in the thesis.
Speaker 3: We have set points. We review But the bigger and
Speaker 3: most interesting piece is probably to talk about our decision
Speaker 3: analytics team. I talked about individual accountability running through the firm,
Speaker 3: and we've obsessed about collecting data on every person's decisions
Speaker 3: right back to sort of the early nineties, and we
Speaker 3: got this big database of everyone's decision making over time,
Speaker 3: and we have a specific team called the decision Analytics team,
Speaker 3: and they take all that data and they pick it
Speaker 3: apart and they figure out what it is you're doing wrong,
Speaker 3: and what it is you're doing very well, and how
Speaker 3: you can improve and how you can change. And we
Speaker 3: look at things common to the firm, to the funds,
Speaker 3: you look at things that are very specific to individuals,
Speaker 3: and we try and tailor that analysis. And one of
Speaker 3: this the elements is you know, selling decisions or you know,
Speaker 3: getting stuck in. So one of the common comments are
Speaker 3: common bias. You you you're sitting in a position and
Speaker 3: a losing position, and you're just not doing anything. It's
Speaker 3: almost like you're frozen. And then we do see that
Speaker 3: across certain individuals in the firm, and the data can
Speaker 3: pull that out and just hold it up to you
Speaker 3: and say, you know, based on what you currently hold
Speaker 3: these stocks fit that pattern, and you get you'll get
Speaker 3: a nut, they'll call you up. But you also get
Speaker 3: sort of digital nudges within your platform, within through email
Speaker 3: saying I have a think about this. You know, maybe
Speaker 3: you should be doing this so x or y, maybe
Speaker 3: you should be reviewing it.
Speaker 2: You know.
Speaker 3: Really what it's a one good way is start from scratch.
Speaker 3: If you're going to start from scratch today, where do
Speaker 3: you own this or not?
Speaker 2: You know?
Speaker 3: I know, we know you own it? Would you own
Speaker 3: it if you're just building a portfolio? So a little
Speaker 3: mental exercises like that helps simple stuff. But that's been
Speaker 3: really helpful to have the objective data driven team come
Speaker 3: in and and help us to understand, you know, what
Speaker 3: we could do better in that regard.
Speaker 2: I mean, one of my last questions is your often
Speaker 2: has done tremendously wells on the short and medium and
Speaker 2: long term as well. I mean, what do you think
Speaker 2: of all the market has missed on all these market
Speaker 2: opportunities that you have been able to identify. Do you
Speaker 2: think it was really the work on the valuation that
Speaker 2: you are better at really estimating what is an interesting
Speaker 2: value of a company? Or do you think because market
Speaker 2: is paying too much attention to the noise, or so
Speaker 2: it's I think what was a very good comment about
Speaker 2: Portfralio manager sometime coming from being an industry analyst with
Speaker 2: very great expertise on a limited set of stocks, but
Speaker 2: then when you have to manage a much bigger set
Speaker 2: it becomes a much bigger challenge. Or what do you
Speaker 2: think is really behind your the result of your success.
Speaker 3: I think a part of it is, you know so
Speaker 3: that latter, well, let me hit that first. It's difficult.
Speaker 3: The industry is so difficult because you could have the
Speaker 3: most skilled person looking at Japanese financials and you could
Speaker 3: reward them incredibly well for a wonderful job they're doing.
Speaker 3: And because that is the secret source having people do that,
Speaker 3: that's the secret source of any manager having that expertise
Speaker 3: and someone with an incredible judgment finding those few ideas
Speaker 3: a year. But we're all people. We've got to manage people,
Speaker 3: and people have career aspirations and they don't want to
Speaker 3: be looking at one sector for thirty years, and so
Speaker 3: you have to manage that balance. But what we think
Speaker 3: we've done quite well is sort of is emphasized internally
Speaker 3: and externally just how critical that is, that is the
Speaker 3: engine of our success. Having key people with the stock
Speaker 3: pickers across our different team. That's number one. Number two,
Speaker 3: I think sometimes the market goes absolutely bonkers, right, We've
Speaker 3: seen the period like it's the people standing around the
Speaker 3: candy jar and convincing one or two people convincing everybody
Speaker 3: else that there's only ten candies in the jar when
Speaker 3: there's a thousand or whatever. It's just they get so
Speaker 3: inefficiencies get so out of whack at certain periods. And
Speaker 3: we saw that of course in the late eighties, we
Speaker 3: saw it in the mid seventies, we've seen in the
Speaker 3: late nineties. In twenty twenty one was the biggest we've
Speaker 3: ever seen. We've got data on this. You can see
Speaker 3: the dislocations were absolutely immense. So having a portfolio that's
Speaker 3: able to move capital efficiently and effectively to those most
Speaker 3: dislocated areas in a really kind of dispassionate way, I
Speaker 3: think about it as you know, the market could be
Speaker 3: a surface, and if the surface is completely flat and perfect,
Speaker 3: it's efficient. But you know, often these big crevices emerge
Speaker 3: and they're the inefficiencies and big undervaluations, and the portfolio
Speaker 3: has to be like water. It has to just flow
Speaker 3: into the crevices with no friction. And so we've been
Speaker 3: quite good at that getting the portfolio the right areas.
Speaker 3: And then it's at other times normal times, it's just
Speaker 3: it's just the being very, very disciplined and mechanical about
Speaker 3: what we're doing and finding those sort of rare inefficiencies
Speaker 3: which comes from the specialists and comes from having the
Speaker 3: right people.
Speaker 1: Now you had mentioned your decision analytics team, and so
Speaker 1: kind of brought up in my mind. Do you have
Speaker 1: a you know, as part of the process, a risk
Speaker 1: management aspect of you know, trying to limit risk for
Speaker 1: the portfolio. Is that part of it in terms of
Speaker 1: decision making?
Speaker 3: Yes, So I would say there's three things that go
Speaker 3: into a position. Size one would be discount to intrinsic value,
Speaker 3: the big one, right, Two would be the distribution of
Speaker 3: outcomes around an intrinsic value. You know, some some some
Speaker 3: companies you have very high confidence in how the future
Speaker 3: is going to look as high as you possibly can
Speaker 3: have in a sort of uncertain world, and other companies
Speaker 3: you've got a massive range of outcomes. Massive you are,
Speaker 3: and that gives you an intrinsic value range. It's huge,
Speaker 3: and you know, if the price is at the bottom
Speaker 3: of that, that's great, but you might not put a
Speaker 3: big position behind it because just the distribution of outcomes
Speaker 3: are so wide. And the third is, which is to
Speaker 3: your point, correlations in the polio. So what we don't want,
Speaker 3: which quite often happens in markets, is inefficiencies will gather
Speaker 3: all in one area. We don't want to just put
Speaker 3: all our capital in that one area, even if we're
Speaker 3: very confident. So we have a risk team which is
Speaker 3: sort of four or five people, and they analyze the market,
Speaker 3: they analyze the portfolio, and they look for correlations which
Speaker 3: are obvious, you know, the kind of sector and commodity
Speaker 3: and interest rates sort of stuff, but also ones that
Speaker 3: aren't obvious, because those are the ones that bite you.
Speaker 3: If we're building and we're using some AI in that
Speaker 3: in terms of trying to identify I mean, when we
Speaker 3: think about AI is really I'm really talking about large
Speaker 3: language models because AI has been around for a long time,
Speaker 3: but specifically the innovation now is applying that to language
Speaker 3: and so you can apply that in your business to
Speaker 3: you know, what what what things that aren't captured in
Speaker 3: your typical quant model. Can you find in ten k's
Speaker 3: and your reports you know that are common to these
Speaker 3: different companies that you hold, and then bring that to
Speaker 3: a risk model for example. So those are the sorts
Speaker 3: of things they.
Speaker 2: Look at, maybe in terms of sectors. Coming back to
Speaker 2: investment strategy and some of your earlier comments about the
Speaker 2: generation of cash and how potentially is the market value it.
Speaker 2: Do you have any preference when investing in sectors? I mean,
Speaker 2: do you think that there are sectors which are definitely
Speaker 2: high grows, very high return on capital employed because there
Speaker 2: are some really mootes within those sectors which favor I
Speaker 2: mean the returns. So do you have any preference or
Speaker 2: are you very agnostic about Okay, I'm looking everywhere because
Speaker 2: all investment opportunities can happen in any sector.
Speaker 3: So very much the latter I mean preferences are dangerous
Speaker 3: in my opinion. Okay, you end up biasing yourself towards
Speaker 3: certain aspect, and I think that can color or what
Speaker 3: should be a holistic view of intrinsic value of a business.
Speaker 3: And you know, the decision analytics team help us a
Speaker 3: little bit with that in terms of our own individual
Speaker 3: preferences and biases. Now, it is true that certain people
Speaker 3: are better at certain things. So you can always think
Speaker 3: of like someone who is more oriented towards growth companies,
Speaker 3: as you know, if they're doing it well, they are
Speaker 3: genuinely better at being a futurist trying to look around
Speaker 3: the corner, really thinking deeply about what the future is
Speaker 3: going to look like. And there are other people that
Speaker 3: an'swer good at that, and so that's okay, that's okay
Speaker 3: to have a preference one way or the other because
Speaker 3: it's around what you are good at, what your superpower is,
Speaker 3: and we try to structure the firm to allow people
Speaker 3: to leverage their superpower as much as possible, but holistically
Speaker 3: across everybody in the firm. We should not be pushed
Speaker 3: one way or the other towards certain types of companies.
Speaker 3: It should be should be driven by what you know,
Speaker 3: holistically what a business is worth. And so that's you
Speaker 3: know how I would think about it.
Speaker 1: Okay, great, So we just have one more question for
Speaker 1: you before we let you go. More of a I
Speaker 1: guess reflective question. You know, I know you mentioned Warren
Speaker 1: Buffett at the beginning of this, you know, as a
Speaker 1: good investor. I was just curious if you had, you know,
Speaker 1: any there are any investors at the start of your
Speaker 1: career you wanted to emulate.
Speaker 3: So in the start of my career, you know, you
Speaker 3: go and you read everything you can. That's what I
Speaker 3: don't think I've read an investment book for ten years,
Speaker 3: but I read them all early and I felt like
Speaker 3: I gathered as much as I could possibly get from
Speaker 3: the different people. And you know what what did strike
Speaker 3: me was people all had different ways of going about it.
Speaker 3: You know, Warren Buffett was very different to Peter Lynch,
Speaker 3: very different to George Soros and and I love that
Speaker 3: right because you know you can you can try to
Speaker 3: pick bits from each of them and each thing works
Speaker 3: better at different times and different market environments. The one
Speaker 3: person I would would highlight who is won't be well known,
Speaker 3: but he started at Fidelity in the in the sixties
Speaker 3: with with I think with Jerry's is it Jerry side?
Speaker 3: Is that the guy's name and Peter Lynch and all
Speaker 3: of that cohort so with a very very strong group
Speaker 3: and Fidelity in the sixties was Alan Gray who was
Speaker 3: the founder of the Orbits. And Alan Gray and the
Speaker 3: reason I would choose him because he was exceptional, absolutely exceptional,
Speaker 3: and he was so under the radar because he was very,
Speaker 3: very private about everything he did, to the point where
Speaker 3: he believed that if he talked publicly about things, positions,
Speaker 3: or whatever, it would impact his decision making and there
Speaker 3: for impact client returns. He was so obsessed with, you know,
Speaker 3: generating the best return he possibly could four clients that
Speaker 3: he would almost his privacy came as a result of that.
Speaker 3: He would be very you know, wouldn't He didn't like
Speaker 3: the active way of going investing. But he was exceptional
Speaker 3: and I got to work with him directly here for
Speaker 3: quite a few years before he died, and he was
Speaker 3: right up to the end. He was passionate about stock picking, obsessive.
Speaker 3: It was just in his blood. And he was so
Speaker 3: flexible in the way he invested. It was bottom up, intrinsic,
Speaker 3: value driven, but he could go anywhere deep deep value,
Speaker 3: high high growth. He could. You know, he would sometimes
Speaker 3: come into my office and show me all of these charts.
Speaker 3: He was a chartist technician, you know, he was a
Speaker 3: macro guy. He could do currencies. It was just his
Speaker 3: mind was absolutely phenomenal. And I learned, you know, in
Speaker 3: a men to amount from him Oh.
Speaker 1: That's great. This is a great discussion. Graham, thank you
Speaker 1: again for joining us.
Speaker 3: Thank you that much fun.
Speaker 1: And Laurent, thank you for serving as my co host today.
Speaker 1: All welcome until our next episode. This is David Cohne
Speaker 1: with Inside Active
Speaker 2: M