WEBVTT - A $55 Billion Value Investor's Strategy For Looking Beyond the US 0:00:02.560 --> 0:00:16.280 Bloomberg Audio Studios, Podcasts, radio News. 0:00:17.640 --> 0:00:20.079 Welcome to Merrin Talks Money, the podcast in which people 0:00:20.079 --> 0:00:22.200 who know the markets explain the markets. 0:00:22.239 --> 0:00:24.079 I'm merrin'sums at Web. Now. 0:00:24.120 --> 0:00:26.720 Things aren't quite as they were in the US. The 0:00:26.760 --> 0:00:30.360 spell of exceptionalism is broken, and everyone's looking around the 0:00:30.400 --> 0:00:32.920 little if not the US web does that there is 0:00:33.040 --> 0:00:35.640 value all over the place for those that care to 0:00:35.720 --> 0:00:38.320 look for it, perhaps in Japan, perhaps in Korea, and 0:00:38.320 --> 0:00:41.279 perhaps in Europe, which is picking up the fiscal stimulus 0:00:41.320 --> 0:00:43.920 bat and the US looks to be dropping. So to 0:00:44.000 --> 0:00:46.240 unpack all of this, I am joined by Sarah Catter, 0:00:46.320 --> 0:00:50.120 a chief executive officer of Causeway Capital Management. That's fifty 0:00:50.120 --> 0:00:53.040 five point two billion dollars in assets under management. She 0:00:53.080 --> 0:00:57.040 also serves as a portfolio manager for the firm's fundamental strategies. 0:00:57.240 --> 0:00:59.680 Sarah co found of Causeway Capital Management in two thousand 0:00:59.720 --> 0:01:03.000 and one and has decades of experience managing international and 0:01:03.040 --> 0:01:05.240 global value portfolios. 0:01:05.480 --> 0:01:08.520 Sarah, it is great to have you on. Thank you 0:01:08.520 --> 0:01:09.440 for having me, Maren. 0:01:10.480 --> 0:01:12.039 Now, we've got quite a lot to get through. Things 0:01:12.080 --> 0:01:14.399 seem to change every minute these days. It's hard to 0:01:14.480 --> 0:01:16.880 keep a handle on what's important and what's not important 0:01:16.920 --> 0:01:17.480 and where. 0:01:17.319 --> 0:01:18.480 Things might or might not go. 0:01:18.720 --> 0:01:21.640 So why don't we start by looking at the US 0:01:21.720 --> 0:01:24.480 equity market. John, my colleague here at Blmberg and I. 0:01:24.520 --> 0:01:26.800 We look at this all the time, and we keep going. 0:01:26.840 --> 0:01:32.360 This is absolutely extraordinary. Everything that's happened since the election, 0:01:32.680 --> 0:01:35.840 everything that's happened with the tariff conversations, with the mutterings, 0:01:35.880 --> 0:01:38.960 bet recession, no recession, et cetera, et cetera, all the kaos, 0:01:39.160 --> 0:01:42.440 all the difficulties, the insanely high valuations, what look like 0:01:42.480 --> 0:01:45.600 insanely high valuations to us, and yet in the end 0:01:45.640 --> 0:01:49.320 the market is pretty much backward it was. Does that 0:01:49.400 --> 0:01:51.400 make sense to you, because it doesn't make. 0:01:51.280 --> 0:01:52.280 Sense to us. 0:01:52.920 --> 0:01:55.920 It does make sense, Maren, because there is still quite 0:01:55.920 --> 0:01:57.880 a bit of money looking for a home. If you 0:01:58.000 --> 0:02:02.160 look at the Chicago Fed Conditions Index, something that we 0:02:02.280 --> 0:02:07.080 at Causeway watch, they appear reasonably loose. In other words, 0:02:07.560 --> 0:02:12.760 credit is still reasonably abundant. People have money to put 0:02:12.760 --> 0:02:16.000 to work, an aging population that developed world, they need 0:02:16.040 --> 0:02:19.640 to continue to invest. So none of this surprises me. 0:02:20.240 --> 0:02:23.720 If we did have persistently higher tariffs and there was 0:02:23.760 --> 0:02:27.359 a trade embargoed with China, markets certainly in my view, 0:02:27.400 --> 0:02:30.080 would not have recovered the way they did. 0:02:30.560 --> 0:02:35.720 Okay, so there are circumstances under which this extraordinary performance 0:02:35.720 --> 0:02:38.000 of the US market might come to an end. I mean, 0:02:38.000 --> 0:02:41.639 you tend to be quite valuation orientated, right, That's something 0:02:41.680 --> 0:02:43.440 that you talk about a lot and think about. So 0:02:43.760 --> 0:02:47.160 it must be extraordinary for you to be operating inside 0:02:47.160 --> 0:02:52.200 a market that consistently, consistently destroys any sense of value investing. 0:02:52.880 --> 0:02:58.840 Well, that's a that's pretty harsh indictment. We at causeway 0:02:58.880 --> 0:03:02.760 we invest both quantity and fundamentally. In the fundamental side, 0:03:02.800 --> 0:03:06.600 we have much greater emphasis outside the US. They may 0:03:06.639 --> 0:03:09.360 do within the US, but in our global equity portfolios 0:03:09.360 --> 0:03:12.160 where underweight the US market versus the indices. 0:03:12.200 --> 0:03:13.240 And that's from the bottom up. 0:03:13.240 --> 0:03:17.240 That's from finding more non US companies that meet our 0:03:17.320 --> 0:03:20.480 value criteria. I have gone so far with clients, and 0:03:20.520 --> 0:03:25.000 our clients are predominantly institutions, mostly in North America, and 0:03:25.040 --> 0:03:29.519 I say to them, non US, particularly non US developed 0:03:30.080 --> 0:03:35.160 equities are value relative to the US. However, that doesn't 0:03:35.160 --> 0:03:40.800 make them necessarily superior. Underneath that value umbrella, it's really 0:03:40.840 --> 0:03:44.920 important for us to look for companies that are well 0:03:44.960 --> 0:03:49.840 positioned competitively that have financial strength or are moving toward 0:03:50.080 --> 0:03:52.880 much improved balance sheet leverage. 0:03:53.160 --> 0:03:55.160 And they are they. 0:03:55.000 --> 0:03:57.120 Have the ability or soon we'll have the ability to 0:03:57.160 --> 0:04:02.000 return capital to shareholders. I couldn't say this without being 0:04:02.040 --> 0:04:05.880 booed out of the room during the long period of 0:04:06.280 --> 0:04:10.160 zero or negative interest rates post the Global Financial Crisis 0:04:09.800 --> 0:04:14.280 and post COVID. But we're in a normal rate environment 0:04:14.320 --> 0:04:20.600 and that makes value really interesting because these stocks where 0:04:20.839 --> 0:04:24.120 the market is underestimated their earning potential and where there 0:04:24.120 --> 0:04:27.320 can be returns of capital in the form of buybacks 0:04:27.360 --> 0:04:32.400 or dividends, that's extremely valuable. So we're more excited about 0:04:32.400 --> 0:04:35.880 the value part of our business in fundamental research and 0:04:35.880 --> 0:04:38.080 portfolio management than we've ever been. 0:04:38.800 --> 0:04:39.599 Okay, that's interesting. 0:04:39.680 --> 0:04:42.160 Let's just go back a bit and maybe you could explain, 0:04:42.279 --> 0:04:45.039 to explain to our listeners why this is all about 0:04:45.120 --> 0:04:47.600 interest rates. It's something we've talked about a lot on 0:04:48.400 --> 0:04:51.280 the podcast, but I'd love to hear your take on that. 0:04:51.360 --> 0:04:54.760 Why the interest rates that change the environment from growth 0:04:54.800 --> 0:04:55.960 to value being interesting. 0:04:56.680 --> 0:04:59.960 Think about a stock. What is a stock? What's it worth? 0:05:00.279 --> 0:05:03.400 It's worth the present value of all the cash that 0:05:03.480 --> 0:05:07.520 can generate into perpetuity. So that's forever hard to imagine 0:05:07.880 --> 0:05:11.359 discounted to present, and the discount rate on that long 0:05:11.480 --> 0:05:16.120 stream of cash flow when it's near zero, that means 0:05:16.200 --> 0:05:20.000 investors are willing to pay anything for that stream of cash. 0:05:20.120 --> 0:05:24.279 In fact, investors at a zero rate are indifferent between 0:05:24.400 --> 0:05:28.680 cash today or cash tomorrow. That a specuative company that 0:05:28.839 --> 0:05:32.520 is promising huge returns sometime in the future is worth 0:05:32.520 --> 0:05:36.159 taking a gamble on because there's no cost of money. 0:05:36.640 --> 0:05:41.120 When rates rise, especially real interest rates are firmly positive, 0:05:41.960 --> 0:05:46.200 then there is a significant cost of money. In other words, 0:05:46.240 --> 0:05:49.440 you could put your money in a government deposit, you 0:05:49.480 --> 0:05:52.760 could be in a money market fund. You could get 0:05:52.800 --> 0:05:58.039 a risk free rate that is just above inflation, so 0:05:58.160 --> 0:06:01.560 even after tax, maybe you're above even, but your money's 0:06:01.600 --> 0:06:05.880 not shrinking. Or you could own equities, and in our 0:06:05.960 --> 0:06:10.720 view that that higher discount rate means there is there 0:06:10.720 --> 0:06:13.520 are only certain valuation multiples that make sense. And if 0:06:13.560 --> 0:06:16.400 the and if the valuation multiples like a price to 0:06:16.440 --> 0:06:19.160 earnings multiple or price to cash flow, if it gets 0:06:19.200 --> 0:06:23.640 too high, you have overpaid, and so you paid too 0:06:23.760 --> 0:06:26.640 much for that stream of cash, and therefore you're very 0:06:26.760 --> 0:06:28.400 unlikely to get your money back. 0:06:29.279 --> 0:06:31.120 Okay, so if you live at it like that, an 0:06:31.120 --> 0:06:39.120 overload of the American market is overvalued. Yeah, expense to 0:06:39.200 --> 0:06:42.480 the market that you wouldn't necessarily want to invest in. Yes, 0:06:42.600 --> 0:06:44.880 there are there are expensive parts of the US market, 0:06:44.960 --> 0:06:49.560 and there are more growth stocks, there's more technology exposure, 0:06:49.720 --> 0:06:52.000 much more from a sector basis in the US than 0:06:52.040 --> 0:06:54.440 outside the US, to the tune of like two and 0:06:54.440 --> 0:06:57.320 a half times. Okay, So when you take the idea 0:06:57.320 --> 0:06:59.640 to your clients that maybe it is time to move 0:06:59.680 --> 0:07:02.440 a significant amounts of money out of the US into 0:07:02.560 --> 0:07:04.719 more value orientated markets. 0:07:04.400 --> 0:07:05.120 What's the reaction. 0:07:05.240 --> 0:07:08.000 You're getting a different reaction to now than you might 0:07:08.040 --> 0:07:10.120 have gone three four years ago, two years ago, one 0:07:10.200 --> 0:07:10.720 year ago. 0:07:11.280 --> 0:07:13.360 We are getting a different reaction. A part of that 0:07:13.480 --> 0:07:17.240 is the spell is broken. The long period of dollar 0:07:17.680 --> 0:07:22.760 ascendency has turned. The US dollars lost some of its strength, 0:07:23.720 --> 0:07:26.880 so investors aren't as concerned they'll be this constant if 0:07:26.880 --> 0:07:31.080 they're dollar based currency headwind. They're looking for a tailwind now. 0:07:31.960 --> 0:07:35.760 But also they recognize they need to be diversified. This 0:07:35.800 --> 0:07:38.840 is a watchword of investing, whether it be for individuals 0:07:38.920 --> 0:07:43.040 or institutions. And becoming over index to the US market 0:07:43.080 --> 0:07:46.480 having too large an exposure just due to the letting 0:07:46.560 --> 0:07:51.040 it ride having maybe not rebalanced back to the anacid 0:07:51.080 --> 0:07:56.480 allocation that includes non US equities. I think they're nervous 0:07:56.520 --> 0:08:00.160 about that now and investors are attempting now to get 0:08:00.240 --> 0:08:03.400 more non US So it's not a stampede, but we 0:08:03.560 --> 0:08:04.840 definitely see this trend. 0:08:05.840 --> 0:08:08.400 It's interesting, this idea, this bell is broken, isn't it 0:08:08.640 --> 0:08:12.200 That even though the US marketer is really still performing 0:08:12.360 --> 0:08:15.840 remarkably well, there is a sense that it's no longer 0:08:15.920 --> 0:08:19.200 in absolutely longer given. It's no longer entirely reasonable to 0:08:19.240 --> 0:08:21.440 have the majority of your money tied up in the US. 0:08:21.480 --> 0:08:24.560 I mean, we've been looking at the passive investors and 0:08:24.920 --> 0:08:27.720 retail investors all around the world are just buying into 0:08:27.760 --> 0:08:31.000 global index funds, or even worse, just US index funds, 0:08:31.040 --> 0:08:34.240 and even if they're in global, they'll have six seventy 0:08:34.280 --> 0:08:36.760 percent of their money in one market. And it's hard 0:08:36.760 --> 0:08:39.640 for people to turn from saying that that isn't really 0:08:39.720 --> 0:08:42.319 the type of diversification that we've meant historically. 0:08:42.960 --> 0:08:48.280 And there are catalysts for Europe in particular that we 0:08:48.440 --> 0:08:51.079 haven't seen in a long time. And some of this 0:08:51.160 --> 0:08:56.000 is a byproduct of the political, diplomatic and terror related 0:08:56.040 --> 0:08:59.600 stresses put on Europe, but needing to spend on defense 0:08:59.640 --> 0:09:03.800 several percentage points more in terms of GDP. That's hundreds 0:09:03.840 --> 0:09:09.480 of billions of euros of additional spending infrastructure. Having a 0:09:09.600 --> 0:09:14.680 need now urgently for a harmonized EU capital market. All 0:09:14.720 --> 0:09:18.160 of this speaks to the potential for Europe to become 0:09:18.760 --> 0:09:22.280 a more attractive place for capital and even if it 0:09:22.320 --> 0:09:25.400 isn't all realized, just some of it at the margin 0:09:25.400 --> 0:09:29.720 that will help close that valuation gap, not close it completely, 0:09:29.760 --> 0:09:34.000 but just narrow it from this extremely expensive US market 0:09:34.080 --> 0:09:38.160 versus rest of world, in particular Europe in the UK. 0:09:39.240 --> 0:09:41.120 Yeah, so a big part of this is really about 0:09:41.160 --> 0:09:44.480 the fiscal shift. So if in the US stimulus has 0:09:44.480 --> 0:09:47.760 really reached something a limited at this point and that's 0:09:47.960 --> 0:09:52.160 much discussed, whereas in Europe the space for fiscal stimulus 0:09:52.160 --> 0:09:55.280 and that's going to drive this coming together evaluations. 0:09:55.480 --> 0:09:57.720 Yeah, fiscal rope in the US. 0:09:57.720 --> 0:10:01.280 My colleagues and I Cosway looked at to breakdown of 0:10:01.400 --> 0:10:06.240 what created such a massive performance increase premium US versus 0:10:06.600 --> 0:10:10.000 Let's just take Europe over the last decade and yes, 0:10:10.280 --> 0:10:13.720 much greater sales growth in the US was a large contributor, 0:10:14.080 --> 0:10:18.360 but the second largest contributor was multiple appreciation. In other words, 0:10:18.640 --> 0:10:21.600 multiples just rose in the US. And we think a 0:10:21.640 --> 0:10:24.680 good part of this is a function of a lot 0:10:24.760 --> 0:10:29.640 of fiscal stimulus, and that stimulus now has to be 0:10:29.720 --> 0:10:33.640 curtailed because of the US bond market is going to 0:10:33.679 --> 0:10:38.000 constrain the politician's ability to keep spending with abandon. 0:10:38.120 --> 0:10:40.960 And let's stick with America for a moment. Do you 0:10:41.160 --> 0:10:45.680 see that the new tariff regime, Not that we're entirely 0:10:45.760 --> 0:10:47.560 sure exactly what it's going to be after this little 0:10:47.559 --> 0:10:49.319 truth in ninety days, but we still don't know what 0:10:49.440 --> 0:10:52.640 we are obviously, But do you see any sense that 0:10:52.400 --> 0:10:55.760 that might end up being good for parts of US business? 0:10:55.800 --> 0:10:59.400 That we may see this manufacturing renaissance which may change 0:10:59.440 --> 0:11:01.440 the way the enemy works and hence the way the 0:11:01.480 --> 0:11:02.440 market can be valued. 0:11:02.840 --> 0:11:06.120 From a causeway research perspective, we think it's unlikely. At 0:11:06.120 --> 0:11:09.600 the margin, maybe more auto manufacturing, because that's one area 0:11:09.640 --> 0:11:16.040 where President Trump is very keen to ensure there's more onshoring, 0:11:17.720 --> 0:11:23.479 but there are low end products from just about everything 0:11:23.559 --> 0:11:32.720 in the electronics components, consumer goods. Think about toys, for example, textiles, 0:11:32.760 --> 0:11:37.960 they don't belong in a US manufacturing context unless fully automated. 0:11:37.960 --> 0:11:40.840 And who's going to pay that upfront bill for those 0:11:41.280 --> 0:11:47.719 automated factories? The returns don't make sense for companies, and 0:11:47.880 --> 0:11:50.559 without some sort of bizarre government subsidy, we think it's 0:11:50.640 --> 0:11:54.400 very unlikely. So those maybe some of that will move 0:11:54.440 --> 0:11:57.240 out of China, as it already has, but it will 0:11:57.280 --> 0:12:01.360 go to friendly countries and they will and it won't 0:12:01.440 --> 0:12:05.080 be on you in US soil. We just can't see 0:12:05.080 --> 0:12:08.240 a mannerfacturing renaissance. What we'd like to see is an 0:12:08.360 --> 0:12:11.200 education renaissance, but that hasn't been mentioned yet. 0:12:11.480 --> 0:12:14.280 All right, well, let's have a look then at Europe. 0:12:14.320 --> 0:12:16.400 And in one of the pieces that you wrote recently, 0:12:16.440 --> 0:12:20.240 you've got a great shot which shows the extent of 0:12:20.440 --> 0:12:24.000 Germany's fiscal boost and it shows that if it works 0:12:24.000 --> 0:12:26.040 out as expected at the moment, it would be a 0:12:26.080 --> 0:12:28.760 bigger physical booth than the Marshall Plan, a bigger physical 0:12:28.800 --> 0:12:30.640 boots than the reunification of Germany, etc. 0:12:30.880 --> 0:12:32.840 I mean as significantly bigger. 0:12:32.760 --> 0:12:35.400 Actually, And on your chart you've got that fairly clearly 0:12:35.480 --> 0:12:41.319 divided between infrastructure and defense. So if you were investing 0:12:41.360 --> 0:12:43.839 into Europe, you are slee Are those the sectors that 0:12:43.880 --> 0:12:44.640 you're looking at. 0:12:45.040 --> 0:12:48.240 Most of the European listed defense stocks started moving last 0:12:48.320 --> 0:12:51.559 year and they've had a significant run, so the market's 0:12:51.600 --> 0:12:56.559 already gotten there. But the defense spending leads to a 0:12:56.640 --> 0:13:01.480 whole ecosystem of stimulus in Europe. And one of the 0:13:01.559 --> 0:13:04.920 companies that we like very much is in green transportation. 0:13:05.080 --> 0:13:09.680 It's Alstam. They're the France listed world's largest manufacturer of 0:13:10.320 --> 0:13:13.760 rail a rail equipment and signaling. They make the bulk 0:13:13.800 --> 0:13:16.679 of their profits from services, in other words, servicing and 0:13:16.720 --> 0:13:20.880 maintaining and upgrading these rail systems, whether they be rails 0:13:21.000 --> 0:13:25.920 or subways or subway cars. And this is a company 0:13:25.960 --> 0:13:29.800 that governments around the world and as well as in Europe, 0:13:30.360 --> 0:13:35.280 recognizing more urbanization, will be spending on improving public transport, 0:13:35.720 --> 0:13:40.480 long term contracts, very long term customers, well positioned. They 0:13:40.520 --> 0:13:44.120 made some unfortunate acquisitions in the past which created some 0:13:44.320 --> 0:13:48.520 contracts that were mispriced, and they management team has been upgraded. 0:13:49.080 --> 0:13:51.360 This is just the sort of stock we like. At Causeway, 0:13:51.480 --> 0:13:57.280 where investors had lost interests they thought the business wouldn't 0:13:57.840 --> 0:14:03.559 do well, particularly given inflation and the cost of their contracts, 0:14:04.040 --> 0:14:08.080 but we saw a management team capable of creating an 0:14:08.120 --> 0:14:12.280 earnings turnaround and thus more cashful for shareholders. And it's 0:14:12.400 --> 0:14:15.120 a it's a stock very emblematic of what I think 0:14:15.120 --> 0:14:18.320 of as sort of the new Europe, where efficiency is 0:14:18.320 --> 0:14:22.920 the watchword, corporate managements know they need to deliver for shareholders. 0:14:23.200 --> 0:14:26.960 And then that's all very synergistic with ensuring the prosperity 0:14:27.000 --> 0:14:28.080 of Europe and beyond. 0:14:29.000 --> 0:14:32.000 Yeah, and when we look at at infrastructure, I was 0:14:32.040 --> 0:14:34.240 at a defense conference last week and a lot of 0:14:34.240 --> 0:14:38.040 the discussion was around how infrastructure is effectively defense to 0:14:38.080 --> 0:14:40.200 a degree, and that if you don't have a national 0:14:40.240 --> 0:14:43.600 grid that works, you kind of stuffed before you even begin, right, 0:14:43.680 --> 0:14:46.640 if you can't keep the electricity on in Fain and 0:14:46.920 --> 0:14:51.040 Buttugal and France, then deciding from a pretty lousy base. 0:14:51.440 --> 0:14:53.920 There's this blur between what is defense and what is 0:14:53.920 --> 0:14:56.600 infrastructures that we would expect an awful lot of money 0:14:56.680 --> 0:14:59.040 to go into, for example, electricity grids. 0:14:59.040 --> 0:15:00.760 Oh yes, across Europe, oh. 0:15:00.760 --> 0:15:03.440 Oh, very definitely already has and will continue to do so, 0:15:03.520 --> 0:15:06.120 and rate bases will reflect that. But one area you 0:15:06.160 --> 0:15:08.920 haven't mentioned that it's also very I think is very 0:15:08.960 --> 0:15:14.560 interesting is how will in an aging population that boost 0:15:14.640 --> 0:15:18.840 in manufacturing and all the stimulus, how will it translate 0:15:18.960 --> 0:15:25.280 into output? And that's through automation. And although there are 0:15:25.520 --> 0:15:29.320 interesting there are very well placed automation companies like parts 0:15:29.320 --> 0:15:34.080 of Zeman's in Europe. The ones that are the most 0:15:34.160 --> 0:15:37.360 undervalued and we think the greatest upside are actually in Japan, 0:15:38.080 --> 0:15:43.520 companies like Panic in robotics or SMC in pneumatic equipment. 0:15:43.920 --> 0:15:47.000 This is very I can see how people would be 0:15:47.000 --> 0:15:49.160 board stiff listening to this, but this these are the 0:15:49.200 --> 0:15:54.840 building blocks of manufacturing and of and of ensuring that 0:15:55.040 --> 0:15:59.280 for example, the automotive industry or electronics industry, whatever it 0:15:59.360 --> 0:16:03.280 is that where Europe or the US needs to onshore 0:16:03.360 --> 0:16:08.640 for national security reasons that automation is essential for productivity. 0:16:09.400 --> 0:16:10.240 It's interesting, isn't it. 0:16:10.560 --> 0:16:14.320 There's a big divergence between the levels of robotics in 0:16:14.360 --> 0:16:17.520 different economies. I mean, the UK were absolutely useless. We 0:16:17.560 --> 0:16:20.840 have one of the lowest ratios of robotics to workers 0:16:20.840 --> 0:16:24.240 of any developed countries. But some European countries are much 0:16:24.280 --> 0:16:25.080 better at than we are. 0:16:25.800 --> 0:16:28.080 But the UK will likely catch up and the AI 0:16:28.280 --> 0:16:35.240 enabled robotics will transform how products are manufactured and for 0:16:35.280 --> 0:16:39.360 the better. That should ensure that we can, even with 0:16:40.280 --> 0:16:46.280 a limited labor force, create the output necessary for GDP growth. 0:16:47.240 --> 0:16:50.120 So Japan is already responding to this demographic crisis that 0:16:50.160 --> 0:16:52.840 we're seeing across the cross the rest of the Western world, 0:16:52.880 --> 0:16:56.080 and they've done that to a large degree with much 0:16:56.120 --> 0:16:58.280 more in the way of robotics, automation, etc. Than we 0:16:58.360 --> 0:17:00.480 use elsewhere. And that's been relatively sex that's full in 0:17:00.520 --> 0:17:03.560 the GDP ahead in particular hasn't follen or come off 0:17:03.560 --> 0:17:04.800 in the way that many expected. 0:17:05.119 --> 0:17:06.520 So we have an example to follow. 0:17:06.640 --> 0:17:11.040 Yes, yes, their demographic situation is more dire than that 0:17:11.160 --> 0:17:14.479 of just about anywhere else, but I would agree with that, 0:17:15.240 --> 0:17:17.840 and that technology is homegrown for them. 0:17:18.000 --> 0:17:18.720 All the good. 0:17:18.680 --> 0:17:21.280 Robotics companies outside Japan that you're interested in. 0:17:21.600 --> 0:17:24.840 There are good ones that values are really in Japan. 0:17:24.920 --> 0:17:27.000 And this has part lead to do with the fact 0:17:27.040 --> 0:17:31.800 that the end had been extremely the en it's been 0:17:31.920 --> 0:17:35.120 very volatile and now settling around one hundred and forty 0:17:35.119 --> 0:17:38.280 five yen to the dollar. I think that investors are 0:17:38.320 --> 0:17:42.040 concerned that the end may con might go on another 0:17:42.080 --> 0:17:45.600 bout of appreciation which would be somewhat detrimental for these companies. 0:17:46.080 --> 0:17:48.680 They do slightly better in a weaker yen environment. 0:17:49.840 --> 0:17:53.359 Do you have other investments in Japan with terrib qing one, 0:17:54.000 --> 0:17:56.199 we're always talking about what amazing value it isn't and 0:17:56.320 --> 0:17:58.080 coblitely being mildly disappointed by it. 0:17:58.720 --> 0:18:02.040 Amongst us c of what i'd call maybe mediocre corporate 0:18:02.080 --> 0:18:06.840 governance type companies, there are some extraordinary world champions companies 0:18:06.920 --> 0:18:12.639 like Murata in multi layer ceramic capacitors. They are the 0:18:12.680 --> 0:18:15.240 best in the business, just the way SMC is the 0:18:15.280 --> 0:18:18.159 best in pneumatic equipment. Imagine being number one across your 0:18:18.200 --> 0:18:23.679 different industry verticals and marauder trades is if it's just 0:18:23.800 --> 0:18:27.520 it's a cyclical aticyclical low so low in price to 0:18:27.560 --> 0:18:31.840 book terms, low and uh in prospective pe multiple terms, 0:18:32.280 --> 0:18:36.080 because investors haven't seen the kind of smartphone sales for example, 0:18:36.160 --> 0:18:39.640 that would that would propel this stock forward. But what 0:18:39.680 --> 0:18:41.840 we do know is that edge devices are coming, and 0:18:41.920 --> 0:18:44.240 that our device is whether it be p seeds or 0:18:44.280 --> 0:18:49.080 smartphones or any other type of device than wearables well 0:18:49.400 --> 0:18:52.920 glasses for example, they'll be AI enabled. This is all 0:18:53.160 --> 0:18:57.360 inevitable and the key for US at causeway is, find 0:18:57.880 --> 0:19:02.280 these great companies when they're at sickle lows, be prepared 0:19:02.320 --> 0:19:06.879 to own them for several quarters while the market digests 0:19:07.000 --> 0:19:12.600 the disappointing news, and then then have a large position 0:19:12.800 --> 0:19:14.399 when the cycle turns upward. 0:19:14.840 --> 0:19:18.240 Do you have any interest in the UK market? Do 0:19:18.280 --> 0:19:22.360 you find you're talking about finding innovative companies, interesting companies, 0:19:22.440 --> 0:19:25.200 best in class companies When you look at the UK 0:19:25.400 --> 0:19:26.919 you can definitely find. 0:19:26.800 --> 0:19:30.280 Value here, yes, But can you find that kind of. 0:19:30.280 --> 0:19:34.360 Value companies in the throes of operational restructuring? We can 0:19:34.359 --> 0:19:38.480 find that, and I consider that to be derivative innovation 0:19:38.600 --> 0:19:44.199 because it requires tremendous discipline, requires management being able to 0:19:44.280 --> 0:19:46.639 extract something from the business that no one else has 0:19:46.640 --> 0:19:49.639 done before. And the best example I can give is 0:19:49.720 --> 0:19:54.760 the UK aerospace company Rolls Royce at near death in 0:19:54.880 --> 0:19:59.360 early twenty twenty during covid is wide body aircraft engines 0:19:59.400 --> 0:20:03.600 that they manufacture. Planes were grounded, no flying hours or 0:20:03.680 --> 0:20:07.240 little to know. The cash flow went into the red 0:20:07.359 --> 0:20:10.080 and the company had to do an enormous rights issue. 0:20:10.240 --> 0:20:14.520 It looked very bleak, but a CEO upgrade. 0:20:14.119 --> 0:20:18.800 And a transformation of that business into this world class 0:20:19.720 --> 0:20:24.400 company that's in a duopoly with ge and what we've 0:20:24.400 --> 0:20:27.439 seen out of that is cash flow generation galore. And 0:20:27.520 --> 0:20:31.720 that's a testament to the governance to the chairwoman need 0:20:31.760 --> 0:20:34.040 a freu and a determination to get the right person 0:20:34.080 --> 0:20:37.199 in the top job. We like to see that, and 0:20:37.240 --> 0:20:38.840 when we see it, we are backing it. 0:20:39.359 --> 0:20:41.920 Are you still backing if you still invested in real road? Yes, 0:20:42.119 --> 0:20:42.480 we are. 0:20:42.880 --> 0:20:46.199 How often does a value investor, which we are in 0:20:46.240 --> 0:20:50.160 our global equity portfolio, how often do we get access 0:20:50.200 --> 0:20:53.600 to a duopoly? What does it mean to be in 0:20:53.359 --> 0:20:55.960 in a monopolist or a duopolist. It means you have 0:20:56.320 --> 0:21:00.919 either none or one competitor, and that translates into pricing power. 0:21:01.880 --> 0:21:05.160 Being able to go back to your customers and say 0:21:05.200 --> 0:21:09.160 we're raising price and have no pushback at all. Rare 0:21:09.840 --> 0:21:11.640 and in this environment. 0:21:11.800 --> 0:21:12.520 We like that. 0:21:12.640 --> 0:21:15.879 We like to see and that's why I mentioned Alstam 0:21:15.920 --> 0:21:19.480 for example, being excellent at what they do in rail 0:21:19.560 --> 0:21:22.840 cars and rail signaling gives them that pricing power and 0:21:22.880 --> 0:21:27.160 having very few competitors, but roles having just one major competitor, 0:21:27.200 --> 0:21:30.440 and wide body aircraft engines they're in a they're in 0:21:30.480 --> 0:21:31.359 the catbird seat. 0:21:32.119 --> 0:21:34.440 If you look at things like that, But you're also 0:21:35.000 --> 0:21:39.560 a valuation driven What is the signal for you, even 0:21:39.600 --> 0:21:43.320 with an amazing company like that, to say, Okay, you're 0:21:43.440 --> 0:21:45.919 producing vast and masive cash, you're a dua believe you 0:21:45.920 --> 0:21:49.520 have pricing power. We love that, but now you're too expensive. 0:21:49.880 --> 0:21:50.720 Where are your parameter? 0:21:51.480 --> 0:21:55.560 So we work on a risk adjusted return basis, and 0:21:55.600 --> 0:21:58.000 what that means is that for every stock that we 0:21:58.119 --> 0:22:03.600 consider for our global Portfoliolo, we Causeway portfolio managers and 0:22:03.720 --> 0:22:10.720 analysts and they're about twenty seven of us. We determine 0:22:10.720 --> 0:22:13.399 the two year price target for the stock, where should 0:22:13.400 --> 0:22:16.280 that stock trade two years from now based on the 0:22:16.480 --> 0:22:20.480 as we discussed its earnings in cash flow, and then 0:22:20.520 --> 0:22:24.800 we risk adjust that So using our quantitative multi factor 0:22:24.880 --> 0:22:29.440 risk model, which sounds very complicated and isn't, we're determining 0:22:29.480 --> 0:22:33.560 the incremental or additional amount of volatility that stock will 0:22:33.560 --> 0:22:36.840 add to our existing portfolio if we actually bought more 0:22:36.880 --> 0:22:41.159 of it. And some stocks add to risks we already have, 0:22:42.280 --> 0:22:45.159 so they are very high risk and therefore on a 0:22:45.280 --> 0:22:49.239 risk adjusted return basis, the risk will will make them 0:22:49.359 --> 0:22:52.320 less attractive. And then there are other stocks that may 0:22:52.359 --> 0:22:56.159 have very high returns but have very modest amounts of 0:22:56.200 --> 0:22:59.480 additional risk that they pose to the portfolio, and they 0:22:59.520 --> 0:23:03.560 will look very attractive. So we rank all these stocks. 0:23:03.600 --> 0:23:07.439 We rank about one hundred and fifty stocks globally, the 0:23:07.480 --> 0:23:12.080 ones we're most interested in on risk adjusted return, and 0:23:12.400 --> 0:23:17.760 the highest ranking stocks the top fifty are typically well 0:23:17.840 --> 0:23:21.840 represented in the portfolio, and the higher they rank, the 0:23:21.880 --> 0:23:24.920 more we generally own. And as they do well, as 0:23:24.960 --> 0:23:29.040 the price of the stock rises, unless we're raising our 0:23:29.080 --> 0:23:34.160 to year price target, that means the prospective return is diminishing. 0:23:34.240 --> 0:23:36.800 So the stock is descending, it's falling in that ranking, 0:23:37.320 --> 0:23:41.280 and as it does, I'm finally answering your question, that's 0:23:41.400 --> 0:23:45.399 when we sell, or would trim the stock at least, 0:23:45.440 --> 0:23:49.120 if not sell out completely, and then reinvest the proceeds 0:23:49.200 --> 0:23:52.520 those sell proceeds back into you guessed it, the highest 0:23:52.560 --> 0:23:57.439 ranking stocks. This discipline process ensures there are no politics 0:23:57.440 --> 0:24:02.959 in our approach. There's no seniority, there's no committee myopia. 0:24:03.359 --> 0:24:06.440 It's all about what the stock can deliver risk adjusted 0:24:06.520 --> 0:24:08.199