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: the processes, challenges, and philosophies and security selection. I'm David Cohne,
Speaker 1: a lead mutual fund in active research at Bloomberg Intelligence.
Speaker 1: Today my co host is Gina Martin Adams, chief equity
Speaker 1: strategist at Bloomberg Intelligence. Gina, thanks again for joining me
Speaker 1: as my co host.
Speaker 2: Thank you for having me, David, I'm delighted to be here.
Speaker 1: So, in your most recent earnings Tracker, you wrote about
Speaker 1: the case for the four ninety three. Care tell us
Speaker 1: about how the four ninety three have performed in the
Speaker 1: second quarter in which sector saw growth.
Speaker 2: Yeah, so first I probably should define the four ninety three,
Speaker 2: believe it or not. I still get this question, not
Speaker 2: from our guest, who I'm sure as well versed in
Speaker 2: the Big seven versus the four ninety three names in
Speaker 2: the S and P five hundred. But the four ninety
Speaker 2: three is how we characterize the stocks that are not
Speaker 2: the Magnificent seven. It's sort of the rest of the
Speaker 2: S and P. Five hundred. This group has been a
Speaker 2: big laggard in terms of the earnings recovery that emerged
Speaker 2: in twenty twenty three, but suddenly we're starting to see growth.
Speaker 2: So this group was expected in the second quarter to
Speaker 2: post just under five percent growth. They nearly doubled expectations
Speaker 2: at nine point two percent growth by our last count
Speaker 2: last count, so we saw finally some participation beyond the
Speaker 2: Big seven and sort of a narrow subset of earnings
Speaker 2: growers in the S and P five hundred to a
Speaker 2: much broader group, which I view as certainly something we
Speaker 2: can talk about with our guests today, but also a
Speaker 2: general testament to the market broadening that has really helped
Speaker 2: the index power back toward all time highs.
Speaker 1: Okay, Well, in continuing with our conversation on large caps,
Speaker 1: I'd like to welcome Jim Golan, co manager of the
Speaker 1: William Blair Large Cap Growth Fund, to the podcast. Jim,
Speaker 1: thank you for being here.
Speaker 3: Thanks David, and thanks Gina for this opportunity.
Speaker 1: As we start, can you tell us how you got
Speaker 1: your start in investing.
Speaker 4: It really probably started when I was in high school
Speaker 4: fifteen sixteen years ago, fifteen sixteen years old, and you know,
Speaker 4: my father was an attorney. My mother actually handled kind
Speaker 4: of like the stock investing and I really got intrigued
Speaker 4: with that. You know, each of my brothers we had
Speaker 4: a small college fund, and you know, she let me
Speaker 4: kind of, you know, do some things in terms of
Speaker 4: investment ideas. So that really kind of piqued my interest.
Speaker 4: And then I started my career at Kemper Financial Services.
Speaker 4: It was a large investment manager here in Chicago, which
Speaker 4: is no longer it's part of Deutsche Bank now. But
Speaker 4: I started as a junior analyst working for a couple
Speaker 4: senior analysts and also a portfolio manager, and it was
Speaker 4: really a great learning experience in terms of understanding fundamentals companies,
Speaker 4: what drive stocks. I did that for about three half years,
Speaker 4: became a senior analyst covering technology, energy and a variety
Speaker 4: of things. Moved on to City Group for a couple
Speaker 4: of years, and then ended up at William Blair where
Speaker 4: I'm presently employed. I've been here since two thousand started
Speaker 4: out as a tech analyst and became a co manager
Speaker 4: of this strategy in two thousand and five along with
Speaker 4: my technology responsibilities.
Speaker 1: Well, when you talk about you know, the actual large
Speaker 1: cap growth strategies, you know, just if you're looking at
Speaker 1: the website and the web page for the fund. You
Speaker 1: know this talk of structurally advantage companies, what is your
Speaker 1: investment process for finding those?
Speaker 4: William Blair is known as growth managers quality growth managers,
Speaker 4: who were active managers, meaning we have active weights relative
Speaker 4: to benchmark weights and the things that we look for.
Speaker 4: There's a couple of things when we talk about structural advantage.
Speaker 3: First, we look at.
Speaker 4: The industry level, where we want to invest in industries
Speaker 4: that are growing faster than the overall economy over multiple years,
Speaker 4: and those sessify as secular growth, but there's also cyclical growth,
Speaker 4: and these are industries that have secular growth characteristics, but
Speaker 4: there just might be greater variability in terms of the
Speaker 4: industry profit growth. And the classic example there has been
Speaker 4: a semiconductor industry that has secular growth characteristics because of
Speaker 4: the electrification of the global economy, everything requiring more and
Speaker 4: more semiconductor content. But there is variability due to inventory
Speaker 4: cycles capital spending that may have a short term impact
Speaker 4: on the supply and demand dynamics. So we want to
Speaker 4: invest in those secular growth industries. And then we take
Speaker 4: a deeper dive in terms of the company assessment in
Speaker 4: terms of defining those quality growth companies, and we'll look
Speaker 4: at things like the quality of the management team, record success,
Speaker 4: in ability to reinvent themselves really important in the large
Speaker 4: cap space because as companies start to mature, they need
Speaker 4: to find new avenues of growth. And then we'll take
Speaker 4: a deeper dive in terms of the busines. This model
Speaker 4: where we want to invest in companies that have a
Speaker 4: strong competitive amount that allows those companies to earn excess
Speaker 4: returns and profits over multiple years. And some of the
Speaker 4: things that drive that are unique distribution, value added products
Speaker 4: and services. And then this will roll into the financial
Speaker 4: model in MS in terms of having companies that have
Speaker 4: a relatively high degree of recurring revenues versus the average
Speaker 4: company out there, which we believe leads to more predictable earnings,
Speaker 4: predictable revenues, and then free cash flow really important for us.
Speaker 4: We want companies that can throw off a lot of
Speaker 4: free cash. We look at free cash flow margin, returns
Speaker 4: on invested capital. We want companies that have high returns
Speaker 4: on invested capital, but also improving and then great balance
Speaker 4: sheets can fund their growth organically. You know, in times
Speaker 4: when the capital and markets on their a little bit stress.
Speaker 4: Companies that can fund their growth organically generally will have
Speaker 4: a higher premium in the market relative to an average
Speaker 4: company that's relying on the capital markets. So those are
Speaker 4: some of the things that we look for in terms
Speaker 4: of a quality growth company for our portfolio.
Speaker 2: Jim, can you talk to us a little bit about
Speaker 2: how you navigate the macro, how you implement you know,
Speaker 2: the macro in some of your strategies as well. We're
Speaker 2: obviously on the verge of a potential FED shift for example,
Speaker 2: does that impact your process at all? Or a ten
Speaker 2: percent correction like we had in August, Does that, you know,
Speaker 2: change anything in your strategy?
Speaker 4: You know, One, we're long term investors, so we're looking
Speaker 4: at three to five years, and we're bottom up fundamental investors.
Speaker 4: So the macro we think about it doesn't necessarily we
Speaker 4: make dramatic changes because we're relatively low turnover portfolio. I
Speaker 4: think our annualized turnover runs about twenty five thirty percent,
Speaker 4: So we're adding, you know, four or five new ideas
Speaker 4: to the portfolio every year. You know, this is a
Speaker 4: conviction based portfolio, so we'll have thirty to thirty five stocks, again,
Speaker 4: wanting to have an active weight in every investment we make.
Speaker 4: But you know, we do think about the macro because
Speaker 4: it's out there and this is potentially a pretty significant
Speaker 4: change in terms of the FED cutting rates and the
Speaker 4: potential broadening of the market, you know, away from you know,
Speaker 4: the mag seven that you touched on earlier, that you know,
Speaker 4: we're thinking about that in terms of you know, potentially
Speaker 4: a new idea or two that would benefit from that.
Speaker 4: But it doesn't take away from our long term view
Speaker 4: of three to five years because typically when this happens,
Speaker 4: the FED starts cutting rates, the market broadens out, you know,
Speaker 4: smaller cap stocks might be working for a time being
Speaker 4: that usually lasts about six to twelve months, and then
Speaker 4: when the economy kind of normalizes after we get the
Speaker 4: boost from the rate cuts, you know, then things start
Speaker 4: to grow at a more normal growth rate. What should
Speaker 4: benefit the type of companies that we invest in in
Speaker 4: the portfolio?
Speaker 2: Great, So maybe we can talk about some of those
Speaker 2: themes then. I would imagine that AI has been a
Speaker 2: huge theme for you, as it has for all of
Speaker 2: us over the course of the last couple of years.
Speaker 2: How how do you see AI where it is in
Speaker 2: its stages? If you could give me sort of are
Speaker 2: we in the third innings of the implementation of AI
Speaker 2: or are we just in the first innings? And then
Speaker 2: what are some of the other themes that you're looking
Speaker 2: at as you're looking at this sort of broadening in
Speaker 2: terms of market performance. What are other themes that are
Speaker 2: popping onto your radar right now?
Speaker 4: Yeah, so with AI, obviously that's the topic dejure for
Speaker 4: the past couple of years. You know, I think it's
Speaker 4: still relatively early. This is really the fifth paradigm shift
Speaker 4: that we've seen in technology since the nineteen sixties. You know,
Speaker 4: we started out with mainframe computers, shifted the PCs, networking,
Speaker 4: then the internet, mobility. Software as a service was the
Speaker 4: next paradigm shift in the two thousand and seven time frame, and.
Speaker 3: Now it's AI.
Speaker 4: And these paradigm shifts do take some time. I know,
Speaker 4: the market is all about immediate gratification. And you know,
Speaker 4: if a company is you know, views as an AI
Speaker 4: winner and then you know they miss quarters, everyone says, well,
Speaker 4: they're an AI loser now, And you know, I just
Speaker 4: go back to the Internet and the tech bubble and
Speaker 4: everyone declared, you know, the Internet dead in two thousand
Speaker 4: and you take a look back twenty years or so later,
Speaker 4: how much disruption the Internet has caused, whether it's in
Speaker 4: terms of you know, radio, print advertising, now television with
Speaker 4: streaming services, all driven by the Internet. You think about
Speaker 4: brick and mortar retailers with e commerce, I think if
Speaker 4: you went back to two thousand, people would not have
Speaker 4: expected the amount of disruption has has occurred in brick
Speaker 4: and mortar retailers. And so this usually will take, you know,
Speaker 4: before it really start seeing the fact, you know, the
Speaker 4: effects of paradigm shift five or ten years. So we're
Speaker 4: still very early. We're in the infrastructure build out phase
Speaker 4: right now. Companies are trying to figure out how to
Speaker 4: utilize this. But I think when you look out five
Speaker 4: or ten years, this will have a pretty dramatic impact
Speaker 4: on society, the economy, capital markets. But we're still very
Speaker 4: very early in the process, and so it's really hard
Speaker 4: to say, like who's actually going to be the winner,
Speaker 4: because when you think about the Internet back in two thousand,
Speaker 4: the companies that ended up dominating, a couple of those
Speaker 4: companies weren't even in the public market set, and you
Speaker 4: had Amazon out there that was still really early in
Speaker 4: terms of just basically selling books and you think what
Speaker 4: they did with in terms of e commerce, Amazon web
Speaker 4: services advertising. No one expected that in two thousand. So
Speaker 4: still very early in the process. We're in the infrastructure
Speaker 4: build out phase and that will last several more years
Speaker 4: and then the applications will develop from this. So, as
Speaker 4: I said, still very early, but I think it's going
Speaker 4: to be pretty dramatic in terms of AI, and I
Speaker 4: think ultimately what will end up happening with AI. Thing
Speaker 4: that everyone is chasing, the Holy grayl is called, you know,
Speaker 4: general artificial intelligence, our artificial intelligence, and that is really
Speaker 4: the reasoning part, you know, where it's actually taking over
Speaker 4: what humans can do, and you kind of think about
Speaker 4: like the Terminator of the movie back in eighty four
Speaker 4: with Skynet. Hopefully it doesn't turn out that way, but
Speaker 4: that is what everyone is chasing, is general artificial intelligence,
Speaker 4: and that would be really a kind of a game
Speaker 4: changer in terms of the economy and the markets overall.
Speaker 2: Can I jump in really quick there with one follow
Speaker 2: up question, because one of the things that we're struggling
Speaker 2: to find is sort of how companies outside of the
Speaker 2: tech space are going to implement AI and if they're
Speaker 2: actually starting to embark upon kind of an AI CAPEX
Speaker 2: spending plan because we're you know, we follow the Census
Speaker 2: Bureaus data just like I think everybody else does on
Speaker 2: what industries are announcing that they're actually starting to look
Speaker 2: into a implementation of AI. And it really has been
Speaker 2: quite concentrated so far and just financials and real estate
Speaker 2: for the most part outside of tech. Have you seen
Speaker 2: anything that we're not seeing? Are you observing some companies
Speaker 2: in other industries that are implementing AI technology more or
Speaker 2: where you see some real growth prospects here?
Speaker 3: Yeah, it again, it's still early.
Speaker 4: What we're seeing now are enterprise is testing and trialing AI.
Speaker 4: And the most notable area is Microsoft has the Copilot product. Again,
Speaker 4: a firm like mine, we're out there testing it. A
Speaker 4: small group's just testing it to get a sense of
Speaker 4: how it can help in terms of automating and generally
Speaker 4: what we're hearing is just in terms of improved productivity
Speaker 4: with like a Microsoft Copilot, you're seeing improvements of like
Speaker 4: twenty twenty five percent in terms of a worker's productivity, So.
Speaker 3: That would be an example.
Speaker 4: But companies are out there basically trying to understand how
Speaker 4: it could impact them. That's why say it's still pretty early.
Speaker 4: You will see it in terms of like probably customer
Speaker 4: service with chatbots. Again we're in a test and trial phase.
Speaker 4: But again it's.
Speaker 3: Still very very early.
Speaker 4: But you know, the market's basically expecting stuff to happen today,
Speaker 4: and it won't happen today. I think you'll start to
Speaker 4: see stuff next year, en rolling into twenty twenty six,
Speaker 4: where we start to see some new applications that people
Speaker 4: can use. And then also having said that, there's a
Speaker 4: lot of stuff happening in Silicon Valley in terms of
Speaker 4: new startups and companies we have not.
Speaker 3: Heard of yet, but in three or four years potentially.
Speaker 4: Could be like the next company that you know came about,
Speaker 4: you know, after the Internet back in like two thousand
Speaker 4: and four, two thousand and five. Those companies will probably
Speaker 4: be the game changers in terms of creating new applications
Speaker 4: that people can utilize in the enterprise space, but also
Speaker 4: rumor is utilizing in terms of using it on their
Speaker 4: smartphone or their PCs. So still very very early, but
Speaker 4: don't give up hope yet.
Speaker 2: Okay, fair enough, I'm sure there will be many fits
Speaker 2: and starts in the process as well. But what an
Speaker 2: interesting long term theme to follow, right, maybe talk to
Speaker 2: us a little bit about those other themes that you're
Speaker 2: looking at outside of AI. You know, we've observed, for instance,
Speaker 2: that the healthcare sector is starting to show some signs
Speaker 2: of life globally, financials are popping with this field curve
Speaker 2: sort of movement and the prospects for easier policy emerging.
Speaker 2: From your perspective when you're looking for long term secular
Speaker 2: trends or either of these sectors, or are there any
Speaker 2: other sectors or themes that are really sort of hitting
Speaker 2: your radar right now?
Speaker 4: Yeah, I think one of the big areas will be
Speaker 4: just with rates, assuming the Fed does follow through with
Speaker 4: rate cuts starting in September and continuing you know over the.
Speaker 3: Next year or so.
Speaker 4: A lower rate environment will benefit a lot of folks,
Speaker 4: especially rate sensitive, So talk about the banks, they would
Speaker 4: be a beneficiary of that. But you know, you think
Speaker 4: about like the consumer side with lower rates, potentially on
Speaker 4: the housing side, housing's really been has had a struggle
Speaker 4: for the past couple of years as rates have risen,
Speaker 4: and part of that was just due to the fact
Speaker 4: that during COVID with rates basically at zero, everyone refinance
Speaker 4: at incredibly low rates.
Speaker 3: I think the.
Speaker 4: Average rate right now for a home out there is
Speaker 4: probably about three point seven three point eight percent on
Speaker 4: the thirty year mortgage. So everyone did a really good
Speaker 4: job of refinancing during that timeframe, so it makes it
Speaker 4: really hard to move when you have such a low rate.
Speaker 4: So as rates start to come down a bit, that
Speaker 4: may stimulate the housing market in terms of people wanting
Speaker 4: to move, wanting a new house. They may still have
Speaker 4: to pay up for a rate, but nothing like the
Speaker 4: seven to seven and a half percent that we've seen
Speaker 4: over the course of this year. So that will be
Speaker 4: an area I think that will be pretty interesting over
Speaker 4: the course of the next couple of years, assuming the
Speaker 4: FED follows through in terms.
Speaker 3: Of the rate cuts.
Speaker 4: So that's that's a pretty exciting area in my opinion.
Speaker 1: Well, I do want to move on to actually risk
Speaker 1: and talking about managing risk with you know, the overall
Speaker 1: market and also you know risk with managing a concentrated portfolio.
Speaker 1: I believe there are you know, just over thirty stocks
Speaker 1: in the fund as of right now, and so just
Speaker 1: I'd like to hear your thoughts on that.
Speaker 3: Yeah, great question, David.
Speaker 4: You know, we put a lot of thought into risk
Speaker 4: just because it is a conviction based portfolio, fewer names
Speaker 4: that you might typically see from an average large gap manager.
Speaker 4: And there's a couple of ways, a few ways we
Speaker 4: actually manage that. One just our focus on quality. You know,
Speaker 4: we're not buying unprofitable companies. We focus on free cash flow,
Speaker 4: really established leaders out there. The second thing we do
Speaker 4: in terms of construction is we want to run a
Speaker 4: diversified portfolio, meaning that we're going to be sector and
Speaker 4: market cap neutral over time, so we're not going to
Speaker 4: have a huge overweight to any sector in particular. And
Speaker 4: with that, our expectation is that stock selection and to
Speaker 4: a lesser extent, industry selection will be the primary driver
Speaker 4: of alpha over time. And then we're pretty thoughtful about
Speaker 4: active weights. So this again active weights relative to the
Speaker 4: benchmark weight, and we generally keep our active weights about
Speaker 4: a couple hundred basis points or so above the benchmark weight.
Speaker 3: So if a stock is five percent.
Speaker 4: In the index and we want to own that company,
Speaker 4: it might be a seven percent weight in the portfolio.
Speaker 4: It won't be like ten or twelve. And so by
Speaker 4: doing that, we think we managed the risk in a
Speaker 4: much better fashion. And you look at some of the
Speaker 4: characteristics such as tracking error, it's actually below average relative
Speaker 4: to a large cap manager who has more holdings. Standard
Speaker 4: deviations pretty close to the market. Our beta again is
Speaker 4: close to the market, maybe a little bit less. We
Speaker 4: don't manage the specific numbers. It's really a result of
Speaker 4: our bottom up process. But these risk construction tools that
Speaker 4: we have in place, we think provides a smoother ride
Speaker 4: for our clients.
Speaker 3: Again, over time, are.
Speaker 2: There ever instances in time, say like twenty twenty two,
Speaker 2: when we had this huge inflation spike, a big value
Speaker 2: rip relative to growth. Are there ever instances where you
Speaker 2: migrate the portfolio more defensively because there's so much distress,
Speaker 2: or do you tend to ride through those adding to
Speaker 2: your conviction positions. Maybe talk through those periods of intense
Speaker 2: volatility and how you navigate those situations from a risk perspective.
Speaker 4: Yeah, yeah, Gina, I would say during those times, unless
Speaker 4: there is something that we think has structurally changed out there,
Speaker 4: we're typically not doing a lot.
Speaker 3: I will say that we did early that year.
Speaker 4: In twenty twenty two, trim back some of our semiconductor holdings,
Speaker 4: but because those tend to be a little bit more
Speaker 4: volatile and we are underweight semicductors, but we generally will
Speaker 4: ride out the periods because we view them more as
Speaker 4: a short term issue. And if you look back then
Speaker 4: during the twenty twenty two period, it was really again
Speaker 4: about the FED raising rates. Secular growth was under some
Speaker 4: pressure because those tend to be longer duration assets, and
Speaker 4: people were shifting into shorter duration assets such as biopharma
Speaker 4: or tobacco, and we just don't view those as really
Speaker 4: interesting growth companies on a three to five year basis,
Speaker 4: So we're sensitive about portfolio turnover, and so we didn't
Speaker 4: do a lot of dramatic changes in the portfolio. And
Speaker 4: then you kind of look forward six months later, as
Speaker 4: the market said, well, the worst is getting pretty close
Speaker 4: to being done in terms of the FED hiking.
Speaker 3: Even though the FED continued.
Speaker 4: That the valuations of some of these secular growth stocks
Speaker 4: started to look more interesting. So at that point in time,
Speaker 4: we were actually kind of leaning into some of our
Speaker 4: long term favorites that had pulled back. I will point
Speaker 4: out that back in like twenty twenty one, during the
Speaker 4: second half of that year, as the markets started to
Speaker 4: get wind that the FED was going to start raising
Speaker 4: rates earlier than what people are expecting. We did see
Speaker 4: the really long duration assets. Those companies that had no earnings,
Speaker 4: it was just all based on revenue growth really get
Speaker 4: you know, got slammed during that second half of the year.
Speaker 4: You know, Fortunately, again just based on our investment process,
Speaker 4: we didn't know in those companies. So we actually held
Speaker 4: up relatively well during that time frame. But during the
Speaker 4: first half of twenty twenty two we struggled a bit
Speaker 4: just because of some of our favorite secular growth stocks
Speaker 4: that had earnings and free cash flow just got revalued
Speaker 4: because of the rise and rates, and subsequently those stocks
Speaker 4: have rebounded.
Speaker 3: You know since then.
Speaker 4: So staying true to our course, yeah, really big.
Speaker 2: Difference for us, and and well stated, I think, you know,
Speaker 2: on that same line of thinking, we've been in such
Speaker 2: a long period in which growth stocks have really led
Speaker 2: returns on the market. You've got to go back to
Speaker 2: kind of pre financial crisis to think about a period
Speaker 2: of time in which value is even really in vogue
Speaker 2: for a reasonable amount of time in and up market.
Speaker 2: How would you change your approach at all if we
Speaker 2: went back to a say, two thousand and four to
Speaker 2: two thousand and seven styleble market, where value is a
Speaker 2: leadership section segment of the market and growth is not
Speaker 2: in the lead. Would that change your perspective or your
Speaker 2: process at all or would you stick with kind of
Speaker 2: the core values of your process as they exist today.
Speaker 4: Yeah, no, I would say we would stick to our
Speaker 4: you know, definitely would stick to our core values. The
Speaker 4: advantage we do have is when I talk about these
Speaker 4: cyclical growth stocks, if we can build a case that
Speaker 4: a company over a three or five year period is
Speaker 4: going to experience you know, pretty good profit growth, it
Speaker 4: would it would you know, behoove us to take a
Speaker 4: look at those companies. So when I talk about interest rates,
Speaker 4: census stocks like the housing area, if we're going to
Speaker 4: be going through a three to five year uh improvement
Speaker 4: in terms of profitability in certain companies, yeah, absolutely we
Speaker 4: would take a look at that. And that's the beauty
Speaker 4: of how we think about things, you know, the secular
Speaker 4: growth and the cyclical growth that gives us the flexibility
Speaker 4: to pivot a bit in terms of the portfolio. I
Speaker 4: should point out that, you know, the I think the
Speaker 4: interesting thing in terms of why growth has done so
Speaker 4: well since the Great Financial Crisis is generally we've been
Speaker 4: in the low growth type environment you know, the feedsmen
Speaker 4: out there, you know, driving lower rates. But when you
Speaker 4: look at real GDP growth since the Great Financial Crisis,
Speaker 4: it's been about one and a half percent, you know,
Speaker 4: you compare that to pre Great Financial Crisis it was
Speaker 4: closer to two and a half three percent. So if
Speaker 4: you can build a case, you know, looking out over
Speaker 4: the next five years, that real GDP is going to
Speaker 4: accelerate to like, you know, two and a half three percent,
Speaker 4: then yeah, that would create an opportunity for cyclical growth stocks.
Speaker 4: Again we can we can invest in those companies. It
Speaker 4: will also be a good for like the small cap
Speaker 4: environment because those companies just have been under pressure because
Speaker 4: of low growth, low economic growth, and so if the
Speaker 4: economy starts to accelerate a rising tideless all boats, it'd
Speaker 4: be really good for the market in terms of broadening.
Speaker 1: You talk about, you know, looking at three to five years,
Speaker 1: and so that kind of brings up another question I had,
Speaker 1: And you know, I know the portfolio aims for low turnover.
Speaker 1: Is there like an average holding period or is it
Speaker 1: basically you know, you're just holding it until it hits
Speaker 1: a certain valuation, or.
Speaker 4: We hold until we think the fundamentals are changing. So
Speaker 4: this is a dynamic process. We're always every day is
Speaker 4: like a new three to five year period and we
Speaker 4: ask ourselves, has there been a change in the industry
Speaker 4: in terms of the growth fundamentals and has there been
Speaker 4: a change in the company all whether because of valuation
Speaker 4: or change in management or change in strategy. But you know,
Speaker 4: our average holding period is probably four years, and we've
Speaker 4: had stole that we've had in the portfolio now for
Speaker 4: fifteen years. You know, I've been a co manager of
Speaker 4: a strategy since two thousand and five, and so we've
Speaker 4: had stocks for fifteen years. But the averageably four and
Speaker 4: now with like the cycical growth stocks, you know, time
Speaker 4: horizon might be shorter, it might be three years, and
Speaker 4: so we might don't own one of those stocks for
Speaker 4: two or three years, so it might be a little
Speaker 4: bit higher turnover there just because of the cycicality of
Speaker 4: the industry.
Speaker 3: But if you find a good secular.
Speaker 4: Grower, you can hold it for multiple years as the company,
Speaker 4: you know, really executes on the strategy and the growth
Speaker 4: of the industry really helps in terms of driving the profits.
Speaker 2: Jim, I want to pivot a little bit and talk
Speaker 2: about the rise of passive investing. You know, we've dedicated
Speaker 2: this podcast specifically to active investors, as you know, the
Speaker 2: undercovered universe of investment strategies. How do you look at
Speaker 2: passive investing? In our view is there's tons of myths
Speaker 2: in the market. You know, passive has had this inordinate
Speaker 2: impact on valuations presumably, and lots of different sort of
Speaker 2: narratives rising through the market. But how do you view
Speaker 2: the rise of passive with from your perspective as an
Speaker 2: active manager?
Speaker 4: Yeah, so, I mean passive is easy to do for
Speaker 4: a lot of people. You know, people will argue the
Speaker 4: market's efficient. You know, when you see large cap companies
Speaker 4: moving plus or minus twenty percent based on earnings, you
Speaker 4: could argue, is the market really efficient? So not all
Speaker 4: the informations out there, but you know, we've just seen
Speaker 4: fun flows go there for for multiple years. You know.
Speaker 4: The issue I think today was with passive is just
Speaker 4: and this ties into the concentration issue. Just the increasing
Speaker 4: concentration that we have seen in indexes and people thinking
Speaker 4: that while they own a diversified portfolio, you know, we
Speaker 4: measure ourselves against the Russell one thousand growth index, and
Speaker 4: they're what we have seen in the last five years.
Speaker 4: So if you go back five years ago the top
Speaker 4: ten names in the Russell one thousand growth, we're about
Speaker 4: forty percent of the index. Today, that's about sixty three
Speaker 4: percent top ten names. That means six hundred and twenty
Speaker 4: other names represent the other thirty seven percent. So when
Speaker 4: investors think I'm buying a passive fund, I'm getting a
Speaker 4: diversified portfolio, you're really not. And a lot of these
Speaker 4: index fund ets are starting to run into some diversification rules,
Speaker 4: and you know, you see these big index providers like
Speaker 4: Russell and SMP starting to take feedback from managers in
Speaker 4: terms of potentially reconstructing these indexes to lower the weights
Speaker 4: in some of these big names. So that's to be continued,
Speaker 4: but kind of interesting. But you know the benefit of
Speaker 4: an active manager is as the market broadens out, you
Speaker 4: can be investing in other stocks besides these big names.
Speaker 4: And you look at like our fund, you know, we
Speaker 4: own five of the top ten names. You know, we're
Speaker 4: using those proceeds and investing elsewhere in the market. So
Speaker 4: you could argue that as the market broadens out, that
Speaker 4: should be good for active managers relative to just you know,
Speaker 4: owning a passive index.
Speaker 3: And then the other factor you have to consider.
Speaker 4: If you're just going passive is you know, these these
Speaker 4: indexes aren't DC plans and what have you. The folks
Speaker 4: running these plans do have a fiduciary responsibility, and we're
Speaker 4: getting a lot more questions from them in terms of
Speaker 4: do we really have a diversified portfolio if we have
Speaker 4: you know, an index that has the top ten names
Speaker 4: owning you know, sixty three percent of that index. And
Speaker 4: so we're getting a lot more questions in terms of
Speaker 4: how they can manage that risk. And you know, I
Speaker 4: think active is a way one of the ways you
Speaker 4: can go in terms of getting a broader participation in
Speaker 4: the market. Again, assuming the market starts continues to start
Speaker 4: to broaden out.
Speaker 1: Well, I used to like to ask our guests, you know,
Speaker 1: some reflective questions or even questions on you know, something
Speaker 1: out of investment. And so I was just curious, what
Speaker 1: are actually you know what this relates to investing too,
Speaker 1: So I'll ask you that what are your favorite investment books?
Speaker 3: Oh, I have a lot.
Speaker 4: I mean the one book and I don't know if
Speaker 4: it's investment, it's more of economic history. The one book
Speaker 4: that really has resonated with me over time.
Speaker 3: Is a book called The Lords of Finance.
Speaker 4: I think it was written around two thousand and nine,
Speaker 4: twenty ten, and I've always been a bit of a
Speaker 4: history buff and just trying to understand what happened with
Speaker 4: a great depression, and this book is really centered on
Speaker 4: the four central bankers us ET, Federal Reserve Bank of England, Germany,
Speaker 4: and France and the things they did and didn't do
Speaker 4: that really made the Great Depression into the Great Depression.
Speaker 4: You know, you go to school and the lesson was
Speaker 4: always stock mart market speculation, the market crash, and then
Speaker 4: we had a Great Depression. And it's a little bit
Speaker 4: more nuanced and complex than that, and so if you
Speaker 4: have some intellectual curiosity, it's really a great book in
Speaker 4: terms of just explaining the mistakes people made. You know,
Speaker 4: after World War One, we went on the gold standard again,
Speaker 4: which really limited the flexibility of central banks to address
Speaker 4: the issues out there, and you know, you look at
Speaker 4: the Great Financial Crisis and that was kind of less
Speaker 4: than the central bankers learn was you really need a
Speaker 4: proactive FED and that's what we saw, and we saw
Speaker 4: it last year with the Silicon Valley Bank failure where
Speaker 4: the FED stepped up and guaranteed the deposits to avoid
Speaker 4: a bank run. And you know, the Federal Reserve didn't
Speaker 4: do that in the nineteen thirties and banks collapsed, and
Speaker 4: the stock market crash, which was an element of it all,
Speaker 4: ultimately led to just like horrific in terms of unemployment,
Speaker 4: the misery out there, and then ultimately World War Two.
Speaker 4: So I think that's really a great book for anyone
Speaker 4: who's interested in history to read.
Speaker 3: Lords of Finance.
Speaker 2: I love that. Actually I want to pipe in with
Speaker 2: that because to your point, Jim, I think my observation
Speaker 2: is that markets are still adjusting to the fact that
Speaker 2: the FED and the monetary bodies are much faster at
Speaker 2: recognizing and responding to this. I mean, my observation of
Speaker 2: the Silicon Silicon Valley crisis is the FED did step in,
Speaker 2: the Treasury stepped in, the monetary authorities of the world
Speaker 2: did such a good job of navigating that the markets
Speaker 2: were caught off guard by how quick they did. Months later,
Speaker 2: people were still telling me, oh, this is going to
Speaker 2: be an implosion because we're now behaviorally sort of conditioned
Speaker 2: to expect not to react, and they are reacting so
Speaker 2: it's fascinating when you bring that up. That's the first
Speaker 2: thing that came to mind.
Speaker 3: Yeah.
Speaker 4: Actually, you know, I guess Ben Bernaki was reading this
Speaker 4: book during this whole thing.
Speaker 3: I took it boom.
Speaker 4: It's like, we have to do stuff, we have to
Speaker 4: be proactive, and that that's the difference, you know today
Speaker 4: versus back in nineteen thirty when everything was falling apart.
Speaker 4: The central banks just set idly by, and it's just
Speaker 4: they're super aggressive now.
Speaker 3: And you know, that's that's why.
Speaker 4: You know, when you look at think about the market today,
Speaker 4: you know, with the FED funds rate at five in
Speaker 4: the quarter, there's a FED put back out there. Yeah,
Speaker 4: if anything really bad happens with the economy, the Fed
Speaker 4: and cut rates, you know, the quantitative easing still on
Speaker 4: the table. So that's what gives the market. I think
Speaker 4: gives the market confidence over the next couple of years,
Speaker 4: is that the Fed foot FED put is back and
Speaker 4: the Fed will be aggressive if need be.
Speaker 2: Yep.
Speaker 3: So a great book to read.
Speaker 1: Well, this is a great discussion. I wanted to thank
Speaker 1: you Jim for coming on Inside Active. It was great
Speaker 1: having you.
Speaker 4: Thanks David, and thanks Gina. Great questions A lot of
Speaker 4: fun and good luck ahead.
Speaker 1: Thank you, Tina, wanted to thank you as well.
Speaker 2: For being my host, my pleasure. Thank you David.
Speaker 1: As always until next week. This is David Cone with
Speaker 1: Inside Active