WEBVTT - William Blair’s Golan on Quality Growth Companies 0:00:13.720 --> 0:00:16.880 Welcome to Inside Active, a podcast about active managers that 0:00:16.960 --> 0:00:19.640 goes beyond sound bites and headlines and looks deeper into 0:00:19.720 --> 0:00:24.919 the processes, challenges, and philosophies and security selection. I'm David Cohne, 0:00:24.920 --> 0:00:28.160 a lead mutual fund in active research at Bloomberg Intelligence. 0:00:28.400 --> 0:00:31.080 Today my co host is Gina Martin Adams, chief equity 0:00:31.120 --> 0:00:34.559 strategist at Bloomberg Intelligence. Gina, thanks again for joining me 0:00:34.600 --> 0:00:35.360 as my co host. 0:00:35.840 --> 0:00:38.000 Thank you for having me, David, I'm delighted to be here. 0:00:38.120 --> 0:00:41.200 So, in your most recent earnings Tracker, you wrote about 0:00:41.240 --> 0:00:44.320 the case for the four ninety three. Care tell us 0:00:44.360 --> 0:00:46.800 about how the four ninety three have performed in the 0:00:46.840 --> 0:00:49.080 second quarter in which sector saw growth. 0:00:49.560 --> 0:00:52.000 Yeah, so first I probably should define the four ninety three, 0:00:52.040 --> 0:00:54.280 believe it or not. I still get this question, not 0:00:54.400 --> 0:00:56.880 from our guest, who I'm sure as well versed in 0:00:56.960 --> 0:00:59.200 the Big seven versus the four ninety three names in 0:00:59.240 --> 0:01:01.120 the S and P five hundred. But the four ninety 0:01:01.120 --> 0:01:05.160 three is how we characterize the stocks that are not 0:01:05.480 --> 0:01:07.560 the Magnificent seven. It's sort of the rest of the 0:01:07.640 --> 0:01:10.440 S and P. Five hundred. This group has been a 0:01:10.440 --> 0:01:13.360 big laggard in terms of the earnings recovery that emerged 0:01:13.360 --> 0:01:16.200 in twenty twenty three, but suddenly we're starting to see growth. 0:01:16.280 --> 0:01:18.640 So this group was expected in the second quarter to 0:01:18.680 --> 0:01:22.920 post just under five percent growth. They nearly doubled expectations 0:01:23.040 --> 0:01:26.000 at nine point two percent growth by our last count 0:01:26.120 --> 0:01:31.200 last count, so we saw finally some participation beyond the 0:01:31.240 --> 0:01:34.400 Big seven and sort of a narrow subset of earnings 0:01:34.440 --> 0:01:36.480 growers in the S and P five hundred to a 0:01:36.600 --> 0:01:40.480 much broader group, which I view as certainly something we 0:01:40.520 --> 0:01:42.920 can talk about with our guests today, but also a 0:01:43.000 --> 0:01:46.759 general testament to the market broadening that has really helped 0:01:46.760 --> 0:01:50.240 the index power back toward all time highs. 0:01:51.160 --> 0:01:54.640 Okay, Well, in continuing with our conversation on large caps, 0:01:54.680 --> 0:01:57.280 I'd like to welcome Jim Golan, co manager of the 0:01:57.280 --> 0:02:00.480 William Blair Large Cap Growth Fund, to the podcast. Jim, 0:02:00.520 --> 0:02:01.520 thank you for being here. 0:02:01.680 --> 0:02:04.240 Thanks David, and thanks Gina for this opportunity. 0:02:04.360 --> 0:02:06.280 As we start, can you tell us how you got 0:02:06.280 --> 0:02:07.240 your start in investing. 0:02:07.600 --> 0:02:09.919 It really probably started when I was in high school 0:02:09.960 --> 0:02:14.120 fifteen sixteen years ago, fifteen sixteen years old, and you know, 0:02:14.160 --> 0:02:18.119 my father was an attorney. My mother actually handled kind 0:02:18.120 --> 0:02:21.959 of like the stock investing and I really got intrigued 0:02:21.960 --> 0:02:24.520 with that. You know, each of my brothers we had 0:02:24.560 --> 0:02:27.840 a small college fund, and you know, she let me 0:02:27.960 --> 0:02:30.240 kind of, you know, do some things in terms of 0:02:30.680 --> 0:02:33.400 investment ideas. So that really kind of piqued my interest. 0:02:34.120 --> 0:02:38.480 And then I started my career at Kemper Financial Services. 0:02:38.560 --> 0:02:42.280 It was a large investment manager here in Chicago, which 0:02:42.320 --> 0:02:44.280 is no longer it's part of Deutsche Bank now. But 0:02:44.320 --> 0:02:48.080 I started as a junior analyst working for a couple 0:02:48.160 --> 0:02:52.000 senior analysts and also a portfolio manager, and it was 0:02:52.120 --> 0:02:56.160 really a great learning experience in terms of understanding fundamentals companies, 0:02:57.120 --> 0:03:00.640 what drive stocks. I did that for about three half years, 0:03:00.680 --> 0:03:04.520 became a senior analyst covering technology, energy and a variety 0:03:04.520 --> 0:03:07.720 of things. Moved on to City Group for a couple 0:03:07.760 --> 0:03:10.680 of years, and then ended up at William Blair where 0:03:10.720 --> 0:03:14.320 I'm presently employed. I've been here since two thousand started 0:03:14.320 --> 0:03:16.959 out as a tech analyst and became a co manager 0:03:17.000 --> 0:03:20.160 of this strategy in two thousand and five along with 0:03:20.200 --> 0:03:21.919 my technology responsibilities. 0:03:23.280 --> 0:03:25.640 Well, when you talk about you know, the actual large 0:03:25.639 --> 0:03:28.840 cap growth strategies, you know, just if you're looking at 0:03:28.840 --> 0:03:31.400 the website and the web page for the fund. You 0:03:31.440 --> 0:03:34.680 know this talk of structurally advantage companies, what is your 0:03:34.720 --> 0:03:36.720 investment process for finding those? 0:03:37.240 --> 0:03:41.120 William Blair is known as growth managers quality growth managers, 0:03:41.120 --> 0:03:44.720 who were active managers, meaning we have active weights relative 0:03:44.760 --> 0:03:48.240 to benchmark weights and the things that we look for. 0:03:48.360 --> 0:03:50.960 There's a couple of things when we talk about structural advantage. 0:03:51.000 --> 0:03:51.880 First, we look at. 0:03:51.760 --> 0:03:55.240 The industry level, where we want to invest in industries 0:03:55.280 --> 0:03:58.840 that are growing faster than the overall economy over multiple years, 0:03:59.120 --> 0:04:03.720 and those sessify as secular growth, but there's also cyclical growth, 0:04:03.760 --> 0:04:07.360 and these are industries that have secular growth characteristics, but 0:04:07.440 --> 0:04:09.760 there just might be greater variability in terms of the 0:04:09.800 --> 0:04:13.120 industry profit growth. And the classic example there has been 0:04:13.120 --> 0:04:17.839 a semiconductor industry that has secular growth characteristics because of 0:04:17.880 --> 0:04:22.479 the electrification of the global economy, everything requiring more and 0:04:22.520 --> 0:04:27.000 more semiconductor content. But there is variability due to inventory 0:04:27.040 --> 0:04:30.000 cycles capital spending that may have a short term impact 0:04:30.360 --> 0:04:33.680 on the supply and demand dynamics. So we want to 0:04:33.720 --> 0:04:36.920 invest in those secular growth industries. And then we take 0:04:36.960 --> 0:04:40.720 a deeper dive in terms of the company assessment in 0:04:40.800 --> 0:04:43.840 terms of defining those quality growth companies, and we'll look 0:04:43.880 --> 0:04:48.480 at things like the quality of the management team, record success, 0:04:48.600 --> 0:04:52.640 in ability to reinvent themselves really important in the large 0:04:52.680 --> 0:04:55.720 cap space because as companies start to mature, they need 0:04:55.760 --> 0:04:58.520 to find new avenues of growth. And then we'll take 0:04:58.560 --> 0:05:00.640 a deeper dive in terms of the busines. This model 0:05:00.720 --> 0:05:02.719 where we want to invest in companies that have a 0:05:02.760 --> 0:05:06.599 strong competitive amount that allows those companies to earn excess 0:05:06.640 --> 0:05:09.880 returns and profits over multiple years. And some of the 0:05:09.880 --> 0:05:14.000 things that drive that are unique distribution, value added products 0:05:14.040 --> 0:05:17.680 and services. And then this will roll into the financial 0:05:17.720 --> 0:05:20.240 model in MS in terms of having companies that have 0:05:20.279 --> 0:05:23.640 a relatively high degree of recurring revenues versus the average 0:05:23.680 --> 0:05:27.520 company out there, which we believe leads to more predictable earnings, 0:05:27.560 --> 0:05:32.320 predictable revenues, and then free cash flow really important for us. 0:05:32.400 --> 0:05:34.160 We want companies that can throw off a lot of 0:05:34.200 --> 0:05:37.880 free cash. We look at free cash flow margin, returns 0:05:37.880 --> 0:05:42.679 on invested capital. We want companies that have high returns 0:05:42.680 --> 0:05:46.040 on invested capital, but also improving and then great balance 0:05:46.040 --> 0:05:50.360 sheets can fund their growth organically. You know, in times 0:05:50.360 --> 0:05:53.239 when the capital and markets on their a little bit stress. 0:05:54.200 --> 0:05:57.880 Companies that can fund their growth organically generally will have 0:05:57.960 --> 0:06:01.320 a higher premium in the market relative to an average 0:06:01.320 --> 0:06:04.160 company that's relying on the capital markets. So those are 0:06:04.160 --> 0:06:06.599 some of the things that we look for in terms 0:06:06.640 --> 0:06:11.000 of a quality growth company for our portfolio. 0:06:12.520 --> 0:06:14.159 Jim, can you talk to us a little bit about 0:06:14.160 --> 0:06:17.359 how you navigate the macro, how you implement you know, 0:06:17.400 --> 0:06:19.920 the macro in some of your strategies as well. We're 0:06:19.920 --> 0:06:23.800 obviously on the verge of a potential FED shift for example, 0:06:23.960 --> 0:06:27.680 does that impact your process at all? Or a ten 0:06:27.720 --> 0:06:30.839 percent correction like we had in August, Does that, you know, 0:06:31.000 --> 0:06:32.599 change anything in your strategy? 0:06:33.240 --> 0:06:36.559 You know, One, we're long term investors, so we're looking 0:06:36.560 --> 0:06:40.760 at three to five years, and we're bottom up fundamental investors. 0:06:41.640 --> 0:06:45.080 So the macro we think about it doesn't necessarily we 0:06:45.160 --> 0:06:49.800 make dramatic changes because we're relatively low turnover portfolio. I 0:06:49.800 --> 0:06:54.440 think our annualized turnover runs about twenty five thirty percent, 0:06:54.520 --> 0:06:56.360 So we're adding, you know, four or five new ideas 0:06:56.400 --> 0:06:58.640 to the portfolio every year. You know, this is a 0:06:58.640 --> 0:07:02.839 conviction based portfolio, so we'll have thirty to thirty five stocks, again, 0:07:03.160 --> 0:07:06.720 wanting to have an active weight in every investment we make. 0:07:07.800 --> 0:07:09.560 But you know, we do think about the macro because 0:07:09.600 --> 0:07:12.160 it's out there and this is potentially a pretty significant 0:07:12.200 --> 0:07:15.000 change in terms of the FED cutting rates and the 0:07:15.040 --> 0:07:18.520 potential broadening of the market, you know, away from you know, 0:07:18.560 --> 0:07:22.040 the mag seven that you touched on earlier, that you know, 0:07:22.320 --> 0:07:25.240 we're thinking about that in terms of you know, potentially 0:07:25.280 --> 0:07:27.960 a new idea or two that would benefit from that. 0:07:28.480 --> 0:07:30.800 But it doesn't take away from our long term view 0:07:30.800 --> 0:07:33.200 of three to five years because typically when this happens, 0:07:33.360 --> 0:07:37.280 the FED starts cutting rates, the market broadens out, you know, 0:07:37.400 --> 0:07:40.400 smaller cap stocks might be working for a time being 0:07:40.840 --> 0:07:43.560 that usually lasts about six to twelve months, and then 0:07:43.560 --> 0:07:46.120 when the economy kind of normalizes after we get the 0:07:46.160 --> 0:07:48.760 boost from the rate cuts, you know, then things start 0:07:48.760 --> 0:07:51.480 to grow at a more normal growth rate. What should 0:07:51.480 --> 0:07:53.920 benefit the type of companies that we invest in in 0:07:53.920 --> 0:07:54.640 the portfolio? 0:07:56.080 --> 0:07:58.160 Great, So maybe we can talk about some of those 0:07:58.200 --> 0:08:00.280 themes then. I would imagine that AI has been a 0:08:00.320 --> 0:08:02.680 huge theme for you, as it has for all of 0:08:02.760 --> 0:08:04.840 us over the course of the last couple of years. 0:08:05.520 --> 0:08:07.520 How how do you see AI where it is in 0:08:07.600 --> 0:08:09.440 its stages? If you could give me sort of are 0:08:09.440 --> 0:08:11.920 we in the third innings of the implementation of AI 0:08:12.480 --> 0:08:15.120 or are we just in the first innings? And then 0:08:15.280 --> 0:08:17.000 what are some of the other themes that you're looking 0:08:17.040 --> 0:08:19.440 at as you're looking at this sort of broadening in 0:08:19.520 --> 0:08:22.040 terms of market performance. What are other themes that are 0:08:22.040 --> 0:08:23.480 popping onto your radar right now? 0:08:24.200 --> 0:08:27.280 Yeah, so with AI, obviously that's the topic dejure for 0:08:27.320 --> 0:08:29.880 the past couple of years. You know, I think it's 0:08:29.920 --> 0:08:34.520 still relatively early. This is really the fifth paradigm shift 0:08:34.520 --> 0:08:38.640 that we've seen in technology since the nineteen sixties. You know, 0:08:38.679 --> 0:08:43.439 we started out with mainframe computers, shifted the PCs, networking, 0:08:43.640 --> 0:08:47.400 then the internet, mobility. Software as a service was the 0:08:47.400 --> 0:08:50.679 next paradigm shift in the two thousand and seven time frame, and. 0:08:50.679 --> 0:08:51.440 Now it's AI. 0:08:52.240 --> 0:08:56.200 And these paradigm shifts do take some time. I know, 0:08:56.280 --> 0:09:00.400 the market is all about immediate gratification. And you know, 0:09:00.640 --> 0:09:03.480 if a company is you know, views as an AI 0:09:03.559 --> 0:09:06.240 winner and then you know they miss quarters, everyone says, well, 0:09:06.240 --> 0:09:09.480 they're an AI loser now, And you know, I just 0:09:09.520 --> 0:09:12.440 go back to the Internet and the tech bubble and 0:09:12.640 --> 0:09:16.240 everyone declared, you know, the Internet dead in two thousand 0:09:16.840 --> 0:09:19.480 and you take a look back twenty years or so later, 0:09:20.080 --> 0:09:23.480 how much disruption the Internet has caused, whether it's in 0:09:23.600 --> 0:09:28.000 terms of you know, radio, print advertising, now television with 0:09:28.440 --> 0:09:31.880 streaming services, all driven by the Internet. You think about 0:09:31.920 --> 0:09:34.640 brick and mortar retailers with e commerce, I think if 0:09:34.640 --> 0:09:37.160 you went back to two thousand, people would not have 0:09:37.280 --> 0:09:41.000 expected the amount of disruption has has occurred in brick 0:09:41.040 --> 0:09:44.480 and mortar retailers. And so this usually will take, you know, 0:09:44.600 --> 0:09:46.600 before it really start seeing the fact, you know, the 0:09:46.679 --> 0:09:50.439 effects of paradigm shift five or ten years. So we're 0:09:50.480 --> 0:09:53.560 still very early. We're in the infrastructure build out phase 0:09:53.640 --> 0:09:57.240 right now. Companies are trying to figure out how to 0:09:57.400 --> 0:10:00.160 utilize this. But I think when you look out five 0:10:00.240 --> 0:10:04.079 or ten years, this will have a pretty dramatic impact 0:10:05.200 --> 0:10:09.920 on society, the economy, capital markets. But we're still very 0:10:10.080 --> 0:10:13.880 very early in the process, and so it's really hard 0:10:13.880 --> 0:10:16.160 to say, like who's actually going to be the winner, 0:10:16.440 --> 0:10:19.080 because when you think about the Internet back in two thousand, 0:10:19.400 --> 0:10:22.080 the companies that ended up dominating, a couple of those 0:10:22.080 --> 0:10:25.400 companies weren't even in the public market set, and you 0:10:25.480 --> 0:10:28.400 had Amazon out there that was still really early in 0:10:28.480 --> 0:10:31.440 terms of just basically selling books and you think what 0:10:31.520 --> 0:10:34.760 they did with in terms of e commerce, Amazon web 0:10:34.840 --> 0:10:39.240 services advertising. No one expected that in two thousand. So 0:10:39.480 --> 0:10:42.320 still very early in the process. We're in the infrastructure 0:10:42.360 --> 0:10:46.200 build out phase and that will last several more years 0:10:46.440 --> 0:10:49.760 and then the applications will develop from this. So, as 0:10:49.800 --> 0:10:51.600 I said, still very early, but I think it's going 0:10:51.640 --> 0:10:54.880 to be pretty dramatic in terms of AI, and I 0:10:54.880 --> 0:10:57.840 think ultimately what will end up happening with AI. Thing 0:10:57.960 --> 0:11:01.720 that everyone is chasing, the Holy grayl is called, you know, 0:11:01.960 --> 0:11:06.440 general artificial intelligence, our artificial intelligence, and that is really 0:11:06.480 --> 0:11:10.120 the reasoning part, you know, where it's actually taking over 0:11:10.160 --> 0:11:12.720 what humans can do, and you kind of think about 0:11:12.760 --> 0:11:14.760 like the Terminator of the movie back in eighty four 0:11:14.880 --> 0:11:18.240 with Skynet. Hopefully it doesn't turn out that way, but 0:11:18.840 --> 0:11:22.400 that is what everyone is chasing, is general artificial intelligence, 0:11:22.679 --> 0:11:24.720 and that would be really a kind of a game 0:11:24.840 --> 0:11:28.120 changer in terms of the economy and the markets overall. 0:11:28.360 --> 0:11:30.640 Can I jump in really quick there with one follow 0:11:30.720 --> 0:11:33.640 up question, because one of the things that we're struggling 0:11:33.640 --> 0:11:38.960 to find is sort of how companies outside of the 0:11:39.120 --> 0:11:43.240 tech space are going to implement AI and if they're 0:11:43.280 --> 0:11:46.600 actually starting to embark upon kind of an AI CAPEX 0:11:47.800 --> 0:11:50.440 spending plan because we're you know, we follow the Census 0:11:50.440 --> 0:11:53.079 Bureaus data just like I think everybody else does on 0:11:53.480 --> 0:11:56.240 what industries are announcing that they're actually starting to look 0:11:56.240 --> 0:11:59.080 into a implementation of AI. And it really has been 0:11:59.160 --> 0:12:04.280 quite concentrated so far and just financials and real estate 0:12:05.120 --> 0:12:07.679 for the most part outside of tech. Have you seen 0:12:07.800 --> 0:12:11.280 anything that we're not seeing? Are you observing some companies 0:12:11.280 --> 0:12:16.720 in other industries that are implementing AI technology more or 0:12:16.720 --> 0:12:18.920 where you see some real growth prospects here? 0:12:19.360 --> 0:12:20.880 Yeah, it again, it's still early. 0:12:20.960 --> 0:12:25.080 What we're seeing now are enterprise is testing and trialing AI. 0:12:25.960 --> 0:12:32.199 And the most notable area is Microsoft has the Copilot product. Again, 0:12:32.360 --> 0:12:34.920 a firm like mine, we're out there testing it. A 0:12:34.960 --> 0:12:37.040 small group's just testing it to get a sense of 0:12:37.520 --> 0:12:40.480 how it can help in terms of automating and generally 0:12:40.520 --> 0:12:43.839 what we're hearing is just in terms of improved productivity 0:12:43.840 --> 0:12:47.480 with like a Microsoft Copilot, you're seeing improvements of like 0:12:47.520 --> 0:12:53.200 twenty twenty five percent in terms of a worker's productivity, So. 0:12:53.080 --> 0:12:54.199 That would be an example. 0:12:54.880 --> 0:12:58.400 But companies are out there basically trying to understand how 0:12:58.400 --> 0:13:01.720 it could impact them. That's why say it's still pretty early. 0:13:02.520 --> 0:13:05.200 You will see it in terms of like probably customer 0:13:05.280 --> 0:13:10.480 service with chatbots. Again we're in a test and trial phase. 0:13:11.000 --> 0:13:12.080 But again it's. 0:13:11.760 --> 0:13:12.920 Still very very early. 0:13:14.200 --> 0:13:17.680 But you know, the market's basically expecting stuff to happen today, 0:13:18.160 --> 0:13:21.160 and it won't happen today. I think you'll start to 0:13:21.200 --> 0:13:24.760 see stuff next year, en rolling into twenty twenty six, 0:13:24.800 --> 0:13:30.360 where we start to see some new applications that people 0:13:30.360 --> 0:13:33.080 can use. And then also having said that, there's a 0:13:33.080 --> 0:13:35.640 lot of stuff happening in Silicon Valley in terms of 0:13:35.679 --> 0:13:38.719 new startups and companies we have not. 0:13:38.760 --> 0:13:43.200 Heard of yet, but in three or four years potentially. 0:13:42.840 --> 0:13:47.200 Could be like the next company that you know came about, 0:13:47.440 --> 0:13:49.520 you know, after the Internet back in like two thousand 0:13:49.520 --> 0:13:52.400 and four, two thousand and five. Those companies will probably 0:13:52.480 --> 0:13:56.120 be the game changers in terms of creating new applications 0:13:56.120 --> 0:13:59.439 that people can utilize in the enterprise space, but also 0:14:00.040 --> 0:14:02.800 rumor is utilizing in terms of using it on their 0:14:02.840 --> 0:14:06.160 smartphone or their PCs. So still very very early, but 0:14:07.640 --> 0:14:08.640 don't give up hope yet. 0:14:09.160 --> 0:14:12.280 Okay, fair enough, I'm sure there will be many fits 0:14:12.280 --> 0:14:14.959 and starts in the process as well. But what an 0:14:14.960 --> 0:14:18.079 interesting long term theme to follow, right, maybe talk to 0:14:18.160 --> 0:14:19.840 us a little bit about those other themes that you're 0:14:19.880 --> 0:14:23.160 looking at outside of AI. You know, we've observed, for instance, 0:14:23.240 --> 0:14:25.760 that the healthcare sector is starting to show some signs 0:14:25.760 --> 0:14:29.280 of life globally, financials are popping with this field curve 0:14:30.040 --> 0:14:33.400 sort of movement and the prospects for easier policy emerging. 0:14:33.880 --> 0:14:36.920 From your perspective when you're looking for long term secular 0:14:37.000 --> 0:14:39.360 trends or either of these sectors, or are there any 0:14:39.400 --> 0:14:42.280 other sectors or themes that are really sort of hitting 0:14:42.280 --> 0:14:43.160 your radar right now? 0:14:43.880 --> 0:14:45.680 Yeah, I think one of the big areas will be 0:14:46.000 --> 0:14:49.120 just with rates, assuming the Fed does follow through with 0:14:49.360 --> 0:14:53.480 rate cuts starting in September and continuing you know over the. 0:14:53.440 --> 0:14:54.600 Next year or so. 0:14:55.440 --> 0:14:58.360 A lower rate environment will benefit a lot of folks, 0:14:58.400 --> 0:15:01.360 especially rate sensitive, So talk about the banks, they would 0:15:01.400 --> 0:15:03.800 be a beneficiary of that. But you know, you think 0:15:03.840 --> 0:15:07.280 about like the consumer side with lower rates, potentially on 0:15:07.360 --> 0:15:11.640 the housing side, housing's really been has had a struggle 0:15:11.680 --> 0:15:15.000 for the past couple of years as rates have risen, 0:15:15.040 --> 0:15:16.720 and part of that was just due to the fact 0:15:16.800 --> 0:15:21.240 that during COVID with rates basically at zero, everyone refinance 0:15:21.320 --> 0:15:22.640 at incredibly low rates. 0:15:22.640 --> 0:15:23.160 I think the. 0:15:24.120 --> 0:15:26.840 Average rate right now for a home out there is 0:15:26.880 --> 0:15:29.240 probably about three point seven three point eight percent on 0:15:29.240 --> 0:15:31.760 the thirty year mortgage. So everyone did a really good 0:15:31.840 --> 0:15:35.080 job of refinancing during that timeframe, so it makes it 0:15:35.120 --> 0:15:37.360 really hard to move when you have such a low rate. 0:15:37.800 --> 0:15:40.400 So as rates start to come down a bit, that 0:15:40.480 --> 0:15:43.920 may stimulate the housing market in terms of people wanting 0:15:43.960 --> 0:15:46.880 to move, wanting a new house. They may still have 0:15:47.000 --> 0:15:49.360 to pay up for a rate, but nothing like the 0:15:49.400 --> 0:15:51.280 seven to seven and a half percent that we've seen 0:15:51.320 --> 0:15:53.800 over the course of this year. So that will be 0:15:53.840 --> 0:15:56.680 an area I think that will be pretty interesting over 0:15:56.720 --> 0:15:58.880 the course of the next couple of years, assuming the 0:15:58.920 --> 0:16:01.040 FED follows through in terms. 0:16:00.880 --> 0:16:01.720 Of the rate cuts. 0:16:02.200 --> 0:16:05.480 So that's that's a pretty exciting area in my opinion. 0:16:07.520 --> 0:16:10.440 Well, I do want to move on to actually risk 0:16:10.560 --> 0:16:14.120 and talking about managing risk with you know, the overall 0:16:14.200 --> 0:16:18.960 market and also you know risk with managing a concentrated portfolio. 0:16:19.000 --> 0:16:22.080 I believe there are you know, just over thirty stocks 0:16:22.080 --> 0:16:24.360 in the fund as of right now, and so just 0:16:24.400 --> 0:16:25.680 I'd like to hear your thoughts on that. 0:16:26.840 --> 0:16:28.240 Yeah, great question, David. 0:16:29.120 --> 0:16:31.080 You know, we put a lot of thought into risk 0:16:31.320 --> 0:16:35.000 just because it is a conviction based portfolio, fewer names 0:16:35.040 --> 0:16:38.760 that you might typically see from an average large gap manager. 0:16:39.240 --> 0:16:40.920 And there's a couple of ways, a few ways we 0:16:40.960 --> 0:16:44.760 actually manage that. One just our focus on quality. You know, 0:16:44.840 --> 0:16:49.320 we're not buying unprofitable companies. We focus on free cash flow, 0:16:49.440 --> 0:16:53.320 really established leaders out there. The second thing we do 0:16:53.400 --> 0:16:56.440 in terms of construction is we want to run a 0:16:56.480 --> 0:17:01.320 diversified portfolio, meaning that we're going to be sector and 0:17:01.440 --> 0:17:03.760 market cap neutral over time, so we're not going to 0:17:03.800 --> 0:17:07.639 have a huge overweight to any sector in particular. And 0:17:07.800 --> 0:17:11.119 with that, our expectation is that stock selection and to 0:17:11.200 --> 0:17:14.480 a lesser extent, industry selection will be the primary driver 0:17:14.600 --> 0:17:18.240 of alpha over time. And then we're pretty thoughtful about 0:17:18.280 --> 0:17:21.280 active weights. So this again active weights relative to the 0:17:21.280 --> 0:17:24.720 benchmark weight, and we generally keep our active weights about 0:17:24.760 --> 0:17:27.680 a couple hundred basis points or so above the benchmark weight. 0:17:27.800 --> 0:17:29.640 So if a stock is five percent. 0:17:30.280 --> 0:17:32.520 In the index and we want to own that company, 0:17:32.800 --> 0:17:35.200 it might be a seven percent weight in the portfolio. 0:17:35.400 --> 0:17:37.720 It won't be like ten or twelve. And so by 0:17:37.760 --> 0:17:40.080 doing that, we think we managed the risk in a 0:17:40.160 --> 0:17:42.760 much better fashion. And you look at some of the 0:17:42.840 --> 0:17:46.800 characteristics such as tracking error, it's actually below average relative 0:17:46.840 --> 0:17:50.160 to a large cap manager who has more holdings. Standard 0:17:50.160 --> 0:17:53.439 deviations pretty close to the market. Our beta again is 0:17:53.520 --> 0:17:55.359 close to the market, maybe a little bit less. We 0:17:55.400 --> 0:17:58.359 don't manage the specific numbers. It's really a result of 0:17:58.359 --> 0:18:02.280 our bottom up process. But these risk construction tools that 0:18:02.320 --> 0:18:05.400 we have in place, we think provides a smoother ride 0:18:05.400 --> 0:18:06.320 for our clients. 0:18:06.440 --> 0:18:08.120 Again, over time, are. 0:18:08.040 --> 0:18:11.160 There ever instances in time, say like twenty twenty two, 0:18:11.440 --> 0:18:16.280 when we had this huge inflation spike, a big value 0:18:16.359 --> 0:18:19.440 rip relative to growth. Are there ever instances where you 0:18:19.560 --> 0:18:23.639 migrate the portfolio more defensively because there's so much distress, 0:18:24.600 --> 0:18:27.560 or do you tend to ride through those adding to 0:18:27.600 --> 0:18:30.840 your conviction positions. Maybe talk through those periods of intense 0:18:30.920 --> 0:18:34.560 volatility and how you navigate those situations from a risk perspective. 0:18:35.119 --> 0:18:39.680 Yeah, yeah, Gina, I would say during those times, unless 0:18:39.680 --> 0:18:43.920 there is something that we think has structurally changed out there, 0:18:44.040 --> 0:18:46.200 we're typically not doing a lot. 0:18:47.040 --> 0:18:50.760 I will say that we did early that year. 0:18:50.560 --> 0:18:53.720 In twenty twenty two, trim back some of our semiconductor holdings, 0:18:53.720 --> 0:18:55.360 but because those tend to be a little bit more 0:18:55.440 --> 0:18:59.160 volatile and we are underweight semicductors, but we generally will 0:18:59.280 --> 0:19:02.560 ride out the periods because we view them more as 0:19:02.600 --> 0:19:06.600 a short term issue. And if you look back then 0:19:06.720 --> 0:19:09.480 during the twenty twenty two period, it was really again 0:19:09.480 --> 0:19:13.280 about the FED raising rates. Secular growth was under some 0:19:13.440 --> 0:19:16.960 pressure because those tend to be longer duration assets, and 0:19:17.080 --> 0:19:21.760 people were shifting into shorter duration assets such as biopharma 0:19:21.920 --> 0:19:25.160 or tobacco, and we just don't view those as really 0:19:25.240 --> 0:19:28.320 interesting growth companies on a three to five year basis, 0:19:28.920 --> 0:19:34.119 So we're sensitive about portfolio turnover, and so we didn't 0:19:34.119 --> 0:19:36.760 do a lot of dramatic changes in the portfolio. And 0:19:36.800 --> 0:19:39.640 then you kind of look forward six months later, as 0:19:39.680 --> 0:19:42.160 the market said, well, the worst is getting pretty close 0:19:42.200 --> 0:19:43.919 to being done in terms of the FED hiking. 0:19:44.119 --> 0:19:45.959 Even though the FED continued. 0:19:45.960 --> 0:19:48.920 That the valuations of some of these secular growth stocks 0:19:49.280 --> 0:19:52.000 started to look more interesting. So at that point in time, 0:19:52.280 --> 0:19:54.159 we were actually kind of leaning into some of our 0:19:54.200 --> 0:19:57.240 long term favorites that had pulled back. I will point 0:19:57.280 --> 0:19:59.600 out that back in like twenty twenty one, during the 0:19:59.600 --> 0:20:02.480 second half of that year, as the markets started to 0:20:02.480 --> 0:20:05.520 get wind that the FED was going to start raising 0:20:06.080 --> 0:20:09.000 rates earlier than what people are expecting. We did see 0:20:09.040 --> 0:20:12.560 the really long duration assets. Those companies that had no earnings, 0:20:13.040 --> 0:20:16.000 it was just all based on revenue growth really get 0:20:16.480 --> 0:20:18.920 you know, got slammed during that second half of the year. 0:20:19.359 --> 0:20:22.080 You know, Fortunately, again just based on our investment process, 0:20:22.119 --> 0:20:24.400 we didn't know in those companies. So we actually held 0:20:24.480 --> 0:20:27.920 up relatively well during that time frame. But during the 0:20:27.960 --> 0:20:30.280 first half of twenty twenty two we struggled a bit 0:20:30.760 --> 0:20:33.960 just because of some of our favorite secular growth stocks 0:20:33.960 --> 0:20:37.280 that had earnings and free cash flow just got revalued 0:20:37.359 --> 0:20:40.359 because of the rise and rates, and subsequently those stocks 0:20:40.400 --> 0:20:41.600 have rebounded. 0:20:41.160 --> 0:20:41.920 You know since then. 0:20:43.480 --> 0:20:47.200 So staying true to our course, yeah, really big. 0:20:47.080 --> 0:20:51.320 Difference for us, and and well stated, I think, you know, 0:20:51.359 --> 0:20:54.640 on that same line of thinking, we've been in such 0:20:54.680 --> 0:20:57.800 a long period in which growth stocks have really led 0:20:57.840 --> 0:20:59.720 returns on the market. You've got to go back to 0:20:59.800 --> 0:21:02.600 kind of pre financial crisis to think about a period 0:21:02.640 --> 0:21:06.200 of time in which value is even really in vogue 0:21:06.280 --> 0:21:09.880 for a reasonable amount of time in and up market. 0:21:10.920 --> 0:21:13.439 How would you change your approach at all if we 0:21:13.520 --> 0:21:15.600 went back to a say, two thousand and four to 0:21:15.640 --> 0:21:18.480 two thousand and seven styleble market, where value is a 0:21:18.560 --> 0:21:22.280 leadership section segment of the market and growth is not 0:21:22.600 --> 0:21:25.359 in the lead. Would that change your perspective or your 0:21:25.359 --> 0:21:28.520 process at all or would you stick with kind of 0:21:28.560 --> 0:21:30.960 the core values of your process as they exist today. 0:21:31.320 --> 0:21:33.240 Yeah, no, I would say we would stick to our 0:21:33.359 --> 0:21:36.520