WEBVTT - JPMorgan’s Agranoff on Differentiated Perspective 0:00:10.680 --> 0:00:13.880 Welcome to Inside Active, a podcast about active managers that 0:00:13.960 --> 0:00:16.840 goes beyond sound bites and headlines and looks deeper into 0:00:16.840 --> 0:00:22.120 their processes, challenges and philosophies and security selection. I'm David Cohne, 0:00:22.160 --> 0:00:25.280 I lead Mutual fun and Active Research at Bloomberg Intelligence. 0:00:25.680 --> 0:00:29.120 Today my co host is Gina Martin Adams, chief equity 0:00:29.160 --> 0:00:32.800 strategist at Bloomberg Intelligence. Gina, thank you for joining me. 0:00:33.240 --> 0:00:34.400 Thank you for having me David. 0:00:34.880 --> 0:00:37.879 So, before we bring today's guest in, I wanted to 0:00:37.920 --> 0:00:42.640 ask you. You held your US Equity Outlook breakfast last 0:00:42.680 --> 0:00:45.920 week you talked about a perfect storm happening. Can you 0:00:45.960 --> 0:00:47.600 tell us about this perfect storm? 0:00:47.800 --> 0:00:51.559 Yeah? So, the perfect storm is really a combination of 0:00:51.760 --> 0:00:58.040 seasonals with a fundamental rotation with some economic surprises. Unfortunately, 0:00:58.040 --> 0:01:01.040 coming into the third quarter was pretty clear that we 0:01:01.040 --> 0:01:04.760 were due for some rotation as fundamental earnings growth desceleration 0:01:05.640 --> 0:01:09.080 in some of the tech and AI themes really take 0:01:09.160 --> 0:01:10.800 some of the wind out of the sales of the market. 0:01:10.880 --> 0:01:15.120 But some other fundamental improvements in early cyclicals and other 0:01:15.200 --> 0:01:17.160 industries make up for some of that loss. But that 0:01:17.280 --> 0:01:19.480 rotation can be pretty tough for the market at large. 0:01:19.480 --> 0:01:22.560 When tech was such a big portion of especially the 0:01:22.640 --> 0:01:25.479 US market, but also global equity performance over the course 0:01:25.480 --> 0:01:28.319 of the year. At the same time, you have very 0:01:28.360 --> 0:01:31.920 traditionally poor performance that emerges in the third quarter. September 0:01:32.000 --> 0:01:35.080 is the worst month of the year historically, so you've 0:01:35.080 --> 0:01:37.600 got the technicals that are working against the market. And 0:01:37.640 --> 0:01:41.040 then thirdly, some pretty big surprises on the economic front, 0:01:41.040 --> 0:01:43.880 in particular with respect to policy. Coming into July. You know, 0:01:43.920 --> 0:01:46.399 the bond market was somewhat complacent with respect to where 0:01:46.400 --> 0:01:48.880 we were heading for FED policy, and now all of 0:01:48.920 --> 0:01:50.960 a sudden, we're expecting one hundred and fifty bases points 0:01:50.960 --> 0:01:53.480 of cuts over the next twelve months. So those three 0:01:53.520 --> 0:01:55.760 factors have created a little bit of volatility in the 0:01:55.800 --> 0:01:58.480 equity market, to say the least. And I'm really excited 0:01:58.480 --> 0:02:00.440 to speak to our guest about those well. 0:02:00.480 --> 0:02:03.160 It sounds like a lot going on, and so with that, 0:02:03.280 --> 0:02:06.800 I'd like to welcome Felise Agronov to the podcast. Falise 0:02:06.880 --> 0:02:10.320 is a portfolio manager at JP Morgan Asset Management. She's 0:02:10.360 --> 0:02:13.880 co PM on the JP Morgan Active Growth ETF, which 0:02:13.919 --> 0:02:17.000 as a ticker of jg R ROW, and lead manager 0:02:17.000 --> 0:02:19.320 on the JP Morgan Growth Advantage Fund. Which has a 0:02:19.360 --> 0:02:23.400 ticker VHIAX Falise. Thank you so much for joining. 0:02:23.160 --> 0:02:24.520 Us, Thank you so much for having me. 0:02:24.680 --> 0:02:26.639 So before we dig in, i'd love to hear how 0:02:26.680 --> 0:02:28.480 you got your start in the investment business. 0:02:28.639 --> 0:02:32.119 Yeah, so it's a long story, but I was born 0:02:32.160 --> 0:02:35.080 and raised a JP Morgan. I'm just kidding, but I 0:02:35.160 --> 0:02:37.959 started at JP Morgan twenty years ago. When I first 0:02:38.000 --> 0:02:40.680 started at JP Morgan, I started as a research associate 0:02:41.280 --> 0:02:44.400 of covering cyclical sectors on our core research team. I 0:02:44.480 --> 0:02:47.760 joined the Growth team eighteen years ago and I started 0:02:47.760 --> 0:02:50.720 as a research analyst covering a variety of different sectors. 0:02:51.040 --> 0:02:53.200 I started at a time when our growth team was 0:02:53.240 --> 0:02:56.120 actually quite small relative to where it is today, and 0:02:56.160 --> 0:02:57.920 so I always wore a lot of hats and had 0:02:57.960 --> 0:03:00.760 a broader interest in the portfolio is of the sectors 0:03:00.760 --> 0:03:02.800 that I covered, and so as a result, I was 0:03:02.880 --> 0:03:06.120 named co portfolio manager ten years ago, first of our 0:03:06.160 --> 0:03:10.520 mid cap growth fund, and eventually that's also translated into 0:03:10.560 --> 0:03:14.160 the Growth Advantage fund that you mentioned as well as Jaygrow. 0:03:14.200 --> 0:03:16.760 As you mentioned as well, I'm also a portfolio manager 0:03:16.800 --> 0:03:19.200 on our equity focused strategy as well. 0:03:19.560 --> 0:03:22.320 Nice, so you know both. You know, I mentioned jaygro 0:03:22.600 --> 0:03:25.040 and you just mentioned it, and you know, so my 0:03:25.080 --> 0:03:29.440 first question really has to do with Active regaining relevance 0:03:29.560 --> 0:03:32.920 right now, especially in etf rappers. So I'd love to 0:03:32.960 --> 0:03:35.760 hear more about Jaygrow and you know the process for 0:03:35.800 --> 0:03:36.160 the fund. 0:03:36.520 --> 0:03:38.760 Yeah, No, happy to do that. And I think it 0:03:38.800 --> 0:03:42.440 is a really really interesting moment in time after leadership 0:03:42.440 --> 0:03:44.920 has been very narrow in the markets is you know 0:03:44.960 --> 0:03:48.640 alluded to earlier, and our growth benchmarks are concentrated as 0:03:48.680 --> 0:03:51.880 I've ever been And essentially, you know what Jaegro is. 0:03:52.280 --> 0:03:56.600 Jagro is an active growth ETF. It's a combination of 0:03:56.640 --> 0:03:59.640 the growth advantage strategy that I manage as well as 0:03:59.640 --> 0:04:03.800 my all Gary Devipoli's large cap growth strategy. We package 0:04:03.840 --> 0:04:08.760 those two long standing strategies with strong historical track records 0:04:08.800 --> 0:04:12.000 together in an active ETF, which we launched over two 0:04:12.080 --> 0:04:14.920 years ago now is fifty to fifty between large cap 0:04:14.960 --> 0:04:17.720 growth and growth advantage, and it's benchmarked against the Russell 0:04:17.839 --> 0:04:21.320 one thousand growth. Essentially, what you get with Jagro is 0:04:21.400 --> 0:04:24.880 you get the best ideas of the entire growth team 0:04:25.720 --> 0:04:29.280 wrapped in an ETF rapper, fully transparent, with a fee 0:04:29.320 --> 0:04:31.919 of forty four basis points, and then I'm happy to 0:04:31.920 --> 0:04:33.720 get into a little bit more into the philosophy and 0:04:33.760 --> 0:04:35.200 the processes. That's helpful as well. 0:04:35.760 --> 0:04:38.120 Great, thank you. I'm curious, Pelise if you could tell 0:04:38.160 --> 0:04:40.839 us a little bit more about your migration through your career. 0:04:40.920 --> 0:04:43.320 I really piqued my interest when you said you started out, 0:04:44.240 --> 0:04:46.880 or at least prior to the last the most recent experience, 0:04:46.880 --> 0:04:49.400 you were in mid caps, and I'm curious about your 0:04:49.480 --> 0:04:52.960 perspective the difference between managing a mid cap fund and 0:04:53.000 --> 0:04:56.120 a large cap fund and how vastly different those experiences 0:04:56.160 --> 0:04:59.320 have been, or maybe some commonalities in the two processes. 0:05:00.240 --> 0:05:02.800 Yeah, no, happy to touch on that. And actually I'm 0:05:02.800 --> 0:05:05.120 still the lead portfolio manager today. I have our mad 0:05:05.160 --> 0:05:09.240 cap growth strategy as well, and essentially what our growth 0:05:09.279 --> 0:05:13.640 advantage strategy is is it is a multicap strategy which 0:05:13.720 --> 0:05:16.680 leverages our best ideas across the market cap spectrum. So 0:05:16.760 --> 0:05:19.040 it includes our best ideas on the large cap side 0:05:19.120 --> 0:05:21.400 as well as our best ideas on the mid cap side. 0:05:21.480 --> 0:05:24.440 And I would say that our philosophy and process is 0:05:24.520 --> 0:05:28.200 actually quite similar between the two, and that might be 0:05:28.200 --> 0:05:30.040 a good good point for me to just talk a 0:05:30.080 --> 0:05:32.640 little bit about our philosophy and process, and then we 0:05:32.640 --> 0:05:35.400 can talk about some of the nuanced differences between made 0:05:35.400 --> 0:05:35.920 and large cap. 0:05:35.920 --> 0:05:38.880 If that works, yeah, please go right ahead. 0:05:39.080 --> 0:05:42.200 Okay, that's great. And so essentially what we're looking for 0:05:42.680 --> 0:05:46.640 is we look for high quality growth companies, and from 0:05:46.680 --> 0:05:50.680 our standpoint, from a quality perspective, we're focused on companies 0:05:50.720 --> 0:05:54.280 with strong and sustainable competitive advantages. We do a ton 0:05:54.320 --> 0:05:57.600 of due diligence on a company's competitive mode. We also 0:05:57.600 --> 0:06:00.479 look for companies with best in class management teams, and 0:06:00.520 --> 0:06:03.760 then we look for growth companies with strong financial characteristics. 0:06:04.040 --> 0:06:06.680 In growth, you don't necessarily need to be maximizing your 0:06:06.839 --> 0:06:10.080 margins and free cashow today, but you ultimately need to 0:06:10.120 --> 0:06:14.280 have a really attractive financial model. And then we combine 0:06:14.320 --> 0:06:17.360 the quality side of our philosophy with growth, where we're 0:06:17.400 --> 0:06:21.640 looking for large, underappreciated growth opportunities where we can get 0:06:21.640 --> 0:06:25.680 a differentiated perspective. And that differentiated perspective is key, and 0:06:25.680 --> 0:06:28.279 we should talk more about it because we believe the 0:06:28.320 --> 0:06:31.520 real money way to make money and growth companies is 0:06:31.560 --> 0:06:33.920 to have a very different view on a company's longer 0:06:34.000 --> 0:06:37.600 term earnings power relative to other market participants, and that 0:06:37.640 --> 0:06:39.960 tends to be where we really really win, and we 0:06:40.040 --> 0:06:42.760 do that through deep due diligence. At chap and Morgan, 0:06:42.800 --> 0:06:46.120 we have incredible access to management teams, and we go 0:06:46.160 --> 0:06:49.120 and we visit companies on site on a regular basis. 0:06:49.120 --> 0:06:52.120 For example, within technology, twice a year we're out in 0:06:52.160 --> 0:06:55.200 Silicon Valley meeting with both public and private companies. But 0:06:55.240 --> 0:06:57.880 we also take our research a step further. We are 0:06:58.120 --> 0:07:02.479 our industry analysts have decades of experience covering their sectors 0:07:03.040 --> 0:07:07.080 and they're out there speaking with industry contacts, customers, competitors, suppliers, 0:07:07.400 --> 0:07:11.800 attending trade shows, and that really guides our differentiated perspective 0:07:12.160 --> 0:07:15.440 on these large growth opportunities. And we generally feel that 0:07:15.520 --> 0:07:20.480 the market often underappreciation rewards both the magnitude and duration 0:07:20.600 --> 0:07:23.760 of high quality growth companies. And then as it relates 0:07:23.840 --> 0:07:26.520 just to the difference between mid and large caps, we're 0:07:26.560 --> 0:07:28.400 in a world where we love to get a differentiated 0:07:28.440 --> 0:07:31.680 perspective and we like to find companies as early as possible. 0:07:31.720 --> 0:07:34.400 And so what I would say is sometimes the markets 0:07:34.720 --> 0:07:37.440 tend to be less efficient as you go down the 0:07:37.440 --> 0:07:40.280 market cap spectrum, and so there's even more of a 0:07:40.360 --> 0:07:42.880 chance of being able to get a very very different 0:07:42.920 --> 0:07:46.640 perspective relative to other market participants to the deep due 0:07:46.680 --> 0:07:49.320 diligence that we do. So I think that that's been 0:07:49.320 --> 0:07:51.160 a really important part of our process. And one of 0:07:51.160 --> 0:07:53.520 the things that we love to do in growth Advantage 0:07:53.520 --> 0:07:56.000 in j GROW is we like to own companies really 0:07:56.040 --> 0:07:59.120 really early from when they're a MidCap company and then 0:07:59.200 --> 0:08:01.480 own them so they become much larger companies. And there's 0:08:01.520 --> 0:08:05.120 many examples within the portfolios of companies like this that 0:08:05.160 --> 0:08:08.720 we've owned when there were smaller medcap companies and then 0:08:08.800 --> 0:08:09.800 became much larger. 0:08:10.280 --> 0:08:13.400 Do you find yourself in today's climate, just because of 0:08:13.480 --> 0:08:17.640 concentration and because of the AI phenomenon, spending much more 0:08:17.640 --> 0:08:19.560 time in the biggest of the big caps relative to 0:08:19.560 --> 0:08:20.520 the smaller caps. 0:08:21.040 --> 0:08:23.840 Yeah. So the reality is that since our benchmarks as 0:08:23.840 --> 0:08:27.400 concentrats has ever been, it's become extraordinarily important to have 0:08:27.440 --> 0:08:30.200 the right view on all the largest cap companies, and 0:08:30.280 --> 0:08:34.200 so relative to history, the larger cap companies are definitely 0:08:34.200 --> 0:08:37.920 taking more mind share, they're definitely taking a larger percentage 0:08:37.960 --> 0:08:42.040 of the portfolio. However, we are active managers, so we're 0:08:42.080 --> 0:08:44.760 not afraid to be different than the benchmark. In fact, 0:08:44.760 --> 0:08:46.640 as you look at it today. If you look at Jagro, 0:08:47.280 --> 0:08:51.080 we're over a thousand basis points underweight the Magnificent seven. 0:08:51.800 --> 0:08:54.760 And so we actually think that, you know, after leadership 0:08:54.760 --> 0:08:58.000 has been extraordinarily narrow, our view is that what we're 0:08:58.040 --> 0:09:00.000 going to see is we're going to see leadership broad now. 0:09:00.160 --> 0:09:03.440 We're going to see more differentiation between companies, whether it's 0:09:03.480 --> 0:09:06.199 the largest cap companies or across the market cap spectrum. 0:09:06.280 --> 0:09:09.160 And to us, that's providing a really attractive opportunity for 0:09:09.240 --> 0:09:10.200 us as stock pickers. 0:09:11.120 --> 0:09:14.160 And then last question, then I'll let David possibly have 0:09:14.240 --> 0:09:17.599 a word in edgewise here. I'm curious because one of 0:09:17.600 --> 0:09:20.040 the complaints I hear oftentimes from investors is that there 0:09:20.080 --> 0:09:22.360 just are a dearth of opportunities in small and mid caps, 0:09:22.360 --> 0:09:26.240 in particular because there's been very little issuance, especially into 0:09:26.280 --> 0:09:29.200 the small cap index, but very little activity in the 0:09:29.200 --> 0:09:31.319 mid cap index. Are seeing, you know, companies go from 0:09:31.320 --> 0:09:34.920 small directly into large and large directly into small. Talk 0:09:34.960 --> 0:09:37.560 to us about some of the opportunities that you've engaged in, 0:09:37.679 --> 0:09:40.000 or maybe some of the ideas that you're generating that 0:09:40.000 --> 0:09:41.840 are more mid cap and focus right now. 0:09:43.000 --> 0:09:45.439 Yeah, No, it's a really really good question. One of 0:09:45.480 --> 0:09:47.400 the things that I would say is is that you 0:09:47.600 --> 0:09:51.000 lack of IPOs has definitely impacted small caps. And so 0:09:51.040 --> 0:09:52.920 you may have noticed when I talked about opportunities we're 0:09:52.920 --> 0:09:55.280 finding down the market cap spectrum, they tend to be 0:09:55.320 --> 0:09:58.760 more mid caps today rather than small caps, as the 0:09:58.880 --> 0:10:01.679 quality of the company and small cap is low, I 0:10:01.679 --> 0:10:05.439 would say relative to history. However, I think that there 0:10:05.480 --> 0:10:09.160 are a lot of interesting companies that have graduated into 0:10:09.200 --> 0:10:12.280 the MidCap universe that are really, really interesting. One of 0:10:12.280 --> 0:10:15.360 the things that we love about MidCap companies is that 0:10:15.559 --> 0:10:18.400 by the time they graduate, they tend to be of 0:10:18.440 --> 0:10:20.959 a certain quality to make their way out of small cap, 0:10:20.960 --> 0:10:23.000 because many companies never make their way out a small 0:10:23.000 --> 0:10:25.439 cap and often they could have the ingredients to become 0:10:25.880 --> 0:10:29.560 much much larger companies over time. And so I'm happy 0:10:29.600 --> 0:10:32.040 to give you a few examples. I mean, one great 0:10:32.040 --> 0:10:34.400 example of a company that we have owned in our 0:10:34.440 --> 0:10:37.920 MidCap strategy for a long while and we now also 0:10:38.040 --> 0:10:42.240 own in Jagrow, would be paloout On Networks. Palleout On 0:10:42.360 --> 0:10:48.439 Networks is a leader in cybersecurity hardware and software. They 0:10:48.480 --> 0:10:52.280 have a really really strong competitive position and they're consolidating 0:10:52.360 --> 0:10:57.800 market share within cybersecurity as security becomes a really really 0:10:57.880 --> 0:11:00.440 high priority part of the tech budget, even if I'm 0:11:00.440 --> 0:11:02.360 sure you're going to talk about generative AI, but when 0:11:02.360 --> 0:11:05.320 you think about the risks around generative AI and moving 0:11:05.440 --> 0:11:09.320 data into large language models, the cybersecurity risks have never 0:11:09.400 --> 0:11:14.280 been higher. And so as a result, we're seeing companies 0:11:14.400 --> 0:11:18.640 prioritize within their tech budget spending on cybersecurity, and a 0:11:18.679 --> 0:11:22.240 company like Palato is able to consolidate market share as 0:11:22.280 --> 0:11:24.320 big companies like JP Morgan, we don't want to deal 0:11:24.360 --> 0:11:27.760 with multiple vendors. Instead, we want to consolidate or spend 0:11:28.559 --> 0:11:31.080 with less and less vendors. And so a company like 0:11:31.120 --> 0:11:33.640 Palota Networks that's gone for being a much smaller company 0:11:33.880 --> 0:11:36.360 to being a much larger company as the importance of 0:11:36.840 --> 0:11:41.240 the platform has really helped them perform and execute well 0:11:41.280 --> 0:11:41.800 in the market. 0:11:42.480 --> 0:11:44.920 I actually have a follow up question to you. Know, 0:11:44.960 --> 0:11:49.520 you mentioned J grow leverages large cap growth and growth advantage. Yeah, 0:11:49.760 --> 0:11:51.880 I guess what is the process? Is it just kind 0:11:51.880 --> 0:11:56.320 of taking different securities from each portfolio or is there 0:11:57.040 --> 0:11:58.880 you know, kind of a process of how that works. 0:11:59.480 --> 0:12:02.959 Yeah, No, I'm glad you asked that question. And so 0:12:03.080 --> 0:12:05.640 the way it works is it is just a combination 0:12:05.760 --> 0:12:09.600 of straight combination of large kept growth strategy that's existed 0:12:09.600 --> 0:12:12.000 for a long time as well as a growth advantage strategy. 0:12:12.280 --> 0:12:16.960 And so we're not doing anything different in the Jagro vehicle. Essentially, 0:12:17.240 --> 0:12:19.199 what we're doing is we're just taking half of one 0:12:19.200 --> 0:12:22.400 portfolio and half of another portfolio and putting them together 0:12:22.440 --> 0:12:24.800 into this vehicle. And so if the name is a 0:12:24.880 --> 0:12:28.600 high conviction name both in growth advantage and large kept growth, 0:12:28.720 --> 0:12:32.720 then it becomes one of the biggest bets within ja grow. 0:12:32.920 --> 0:12:36.240 So a good example of that would be Regeneron, for example, 0:12:36.280 --> 0:12:39.880 within healthcare, is a very large bet within jagrow. If 0:12:39.880 --> 0:12:42.280 it's a smaller bet and just one of the strategies, 0:12:42.320 --> 0:12:45.680 and it ends up being a really small bet within Jagrow. 0:12:46.200 --> 0:12:48.400 And so that's why I mentioned that it really represents 0:12:48.440 --> 0:12:51.600 the best highest conviction thinking of the entire growth platform 0:12:51.640 --> 0:12:52.400 at JPMorgan. 0:12:54.040 --> 0:12:56.720 So I actually have one more question on process. In 0:12:56.760 --> 0:12:59.719 the perspectus for the fund, it does mention that this, 0:13:00.520 --> 0:13:03.600 you know, an ESG component involved, and I guess my 0:13:03.679 --> 0:13:05.920 question is, you know, what is the process for that? 0:13:06.320 --> 0:13:08.680 Yeah, And so we've you know, We've had a long 0:13:08.679 --> 0:13:12.840 standing process around ESG where we fill out I'M a 0:13:12.880 --> 0:13:16.480 proprietary questionnaire that focuses on what we believe are the 0:13:16.559 --> 0:13:20.760 key es and G issues, and every analyst fills that 0:13:20.880 --> 0:13:23.840 out with the companies that they cover, and when we're 0:13:23.840 --> 0:13:27.840 incorporating a company into the portfolio, we think about the 0:13:28.160 --> 0:13:32.400 ESG risks. Now, we don't focus specifically on ESG as 0:13:32.440 --> 0:13:34.360 the only risk, but we look at one of the 0:13:34.360 --> 0:13:36.360 many risk factors that we look at when we're thinking 0:13:36.360 --> 0:13:37.480 about position sizing. 0:13:37.920 --> 0:13:40.120 Speaking of risks, I would be remiss if I didn't 0:13:40.160 --> 0:13:42.480 mention the macro risk that we talked about at the beginning. 0:13:42.600 --> 0:13:44.720 Maybe you could talk to us a little bit about 0:13:44.760 --> 0:13:48.640 how you navigate through these pretty big shifts, especially in 0:13:48.679 --> 0:13:51.840 monetary policy. I think it's pretty clear that the market's 0:13:51.840 --> 0:13:54.280 really struggled a little bit with this idea that suddenly 0:13:54.320 --> 0:13:56.000 the FED is going to ease and potentially ease a 0:13:56.040 --> 0:13:58.440 little bit more than anybody had anticipated. At the same time, 0:13:58.440 --> 0:14:02.040 the BOJ is hiking tech and growth stocks seem to 0:14:02.080 --> 0:14:05.000 be at the sort of center of that risk right now. 0:14:05.600 --> 0:14:07.559 How does that play into your process if at all? 0:14:08.640 --> 0:14:10.680 Yeah, No, it's a good question. And I think risk 0:14:10.800 --> 0:14:14.120 is a really important question to explore for us because 0:14:14.120 --> 0:14:15.880 we do have a keen focus on risk management. So 0:14:15.960 --> 0:14:18.600 I want to explore that more broadly but directly related 0:14:18.600 --> 0:14:21.320 to your question around macro risks. And we very much 0:14:21.400 --> 0:14:25.760 are bottoms up stock pickers. However, we're very aware of 0:14:25.800 --> 0:14:28.680 the market environment that we participate in as well as 0:14:28.760 --> 0:14:32.880 many of the macro drivers and what we're not. As 0:14:32.960 --> 0:14:36.400 much as we are high quality growth investors, we're not 0:14:36.520 --> 0:14:39.080 growth at any price. And so the key for us 0:14:39.520 --> 0:14:43.320 is when we're able to find a very differentiated perspective 0:14:44.160 --> 0:14:47.480 relative to the market. And so, for example, there are 0:14:47.480 --> 0:14:51.440 points in time, say in twenty twenty in twenty twenty one, 0:14:51.640 --> 0:14:53.840 which is a very different period than we're in today, 0:14:54.160 --> 0:14:56.840 when interest rates were very very low, we were coming 0:14:56.840 --> 0:14:59.720 out of COVID, where what we saw was is that 0:15:00.400 --> 0:15:02.680 many of the highest growth parts of our universe, such 0:15:02.720 --> 0:15:07.440 as technology, they were very very extreme valuations relative to history. 0:15:07.720 --> 0:15:10.080 And even though many of the same software companies had 0:15:10.160 --> 0:15:14.800 driven very substantial performance for us for many years. We 0:15:14.840 --> 0:15:17.960 really pride ourselves in being really really objective and focusing 0:15:17.960 --> 0:15:20.240 on where we can get a differentiated perspective and what 0:15:20.240 --> 0:15:22.120 we were finding was that we didn't have as great 0:15:22.160 --> 0:15:24.480 of a differentiated perspective on many of those tech companies 0:15:24.480 --> 0:15:27.520 at that moment in time, given the valuation starting point. 0:15:27.680 --> 0:15:30.160 And so at that moment, we pivoted based on the 0:15:30.160 --> 0:15:33.160 bottoms up riscrew boards that we were seeing, and we 0:15:33.200 --> 0:15:37.440 actually went very very underweight technology. At one point, we 0:15:37.480 --> 0:15:40.880 were about one thousand basis points underweight technology relative to 0:15:40.920 --> 0:15:43.280 a high weighting in the benchmark. I give you that 0:15:43.320 --> 0:15:45.600 background just to show that we're willing to come pivot 0:15:45.600 --> 0:15:48.440 based on the environment that we're in, and we really 0:15:48.480 --> 0:15:51.120 do let the bottoms up riscrew boards that we're finding 0:15:51.240 --> 0:15:55.200 guide it. But it's actually interesting to note. I did 0:15:55.280 --> 0:15:58.360 mention that we are very very underweight the Magnificent seven 0:15:59.000 --> 0:16:01.840 today based on what we're seeing from a risk reward 0:16:01.880 --> 0:16:05.000 standpoint and how differentiated our views are. But when you 0:16:05.040 --> 0:16:09.000 look at technology as a whole, we're also very very underweight. 0:16:09.520 --> 0:16:13.640 We're over eight hundred basis points underweight technology relative to 0:16:13.680 --> 0:16:17.680 a very very concentrated benchmark, and so we are seeing, 0:16:17.760 --> 0:16:21.200 you know, some increased risks, I would say, and on 0:16:21.240 --> 0:16:24.480 the margin, I think we're looking for more portfolio balance 0:16:24.600 --> 0:16:28.920 relative to a very very concentrated benchmark that includes, you know, 0:16:29.040 --> 0:16:31.880 investing in a variety of different sectors. We've gone increasingly 0:16:31.920 --> 0:16:35.400 overweight healthcare, for example, which is a more defensive sector 0:16:35.440 --> 0:16:38.680 and provides more portfolio balance. But then we've also found 0:16:38.720 --> 0:16:41.360 interesting opportunities in sectors such as financials that have been 0:16:41.400 --> 0:16:43.800 out of favor for a long time, while you know, 0:16:43.880 --> 0:16:45.800 areas like tech have been in vogue. And so we're 0:16:45.800 --> 0:16:49.680 definitely very much focused on portfolio balance and we don't 0:16:49.680 --> 0:16:51.760 want to let you know, the macro environment you know, 0:16:51.800 --> 0:16:54.280 overall drive the portfolio. We really want to let our 0:16:54.320 --> 0:16:55.440 focus on stockpicking. 0:16:55.480 --> 0:16:58.000 Shine, Can you dig in a little bit to that 0:16:58.160 --> 0:17:01.200 underweight on the mag seven and talk to us about 0:17:01.200 --> 0:17:07.520 the case for why is it partially evaluations? Mostly evaluations? 0:17:07.800 --> 0:17:10.120 Is it you know, the growth cycle and just other 0:17:10.160 --> 0:17:13.560 opportunities emerging sort of what's the case that you're making 0:17:13.680 --> 0:17:19.399 or that helped you make the decision process beyond portfolio considerations. 0:17:20.040 --> 0:17:24.359 Yeah, So part of it, I would say is that 0:17:24.440 --> 0:17:26.640 some of the easy money of the Magnificent seven has 0:17:26.680 --> 0:17:28.600 been made. So if you were to back up, you know, 0:17:28.680 --> 0:17:31.120 I mentioned I talked about how we were very underweight 0:17:31.240 --> 0:17:34.800 technology heading into twenty twenty two and the growth draw 0:17:34.840 --> 0:17:38.960 down there. But if you actually, you know, continue the story, 0:17:39.000 --> 0:17:41.360 what you'll see is at the end of twenty twenty two, 0:17:41.760 --> 0:17:45.720 in early twenty twenty three, we actually added back very 0:17:45.760 --> 0:17:49.240 significantly to technology, and that started with many of the 0:17:49.320 --> 0:17:52.760 Magnificent Seven, and we built up in video quite substantially. 0:17:52.800 --> 0:17:56.639 Once again, we went very overweight meta, for example, and 0:17:56.680 --> 0:17:58.840 so we're willing to pivot based on the risk rewards 0:17:58.840 --> 0:18:00.959 that we're seeing at at that moment in time. One 0:18:01.000 --> 0:18:03.520 of the reasons why we led with the Magnificent seven 0:18:03.720 --> 0:18:08.120 when we're adding back tech exposure is because the risk 0:18:08.200 --> 0:18:11.200 rewards were incredibly interesting. The free cash yield that we're 0:18:11.240 --> 0:18:14.560 seeing relative to the growth we're extremely exciting, particularly relative 0:18:14.600 --> 0:18:18.919 to more defensive sectors such as consumer staples. As we 0:18:18.960 --> 0:18:23.520 sit here today after a really really strong twenty twenty three, 0:18:24.240 --> 0:18:27.080 in early twenty twenty four, what we see is that 0:18:27.359 --> 0:18:30.800 the risk rewards aren't as compelling as they once were. 0:18:31.359 --> 0:18:33.320 We don't think that this is you know that we're 0:18:33.320 --> 0:18:37.000 seeing valuations that are bubbly in the Magnificent seven, but 0:18:37.040 --> 0:18:40.400 we just think that the valuation starting point is less interesting, 0:18:40.720 --> 0:18:42.679 and so then you know, we get into our process 0:18:42.720 --> 0:18:45.080 of looking at where do we have the most differentiated 0:18:45.160 --> 0:18:48.560 view on the company's future earnings power? And I would 0:18:48.600 --> 0:18:52.199 say that it's to varying degrees. And so Meta is 0:18:52.240 --> 0:18:55.520 one example of a company within the Magnificent seven that 0:18:55.560 --> 0:18:58.400 we still have a very differentiated view on the company's 0:18:58.400 --> 0:19:01.280 long term earnings power, or we have a nice sized pet. 0:19:01.640 --> 0:19:03.440 When we look at many of the others, our view 0:19:03.480 --> 0:19:06.280 is no longer as differentiated. And we think it's really 0:19:06.320 --> 0:19:08.240 important in an environment where we don't have as much 0:19:08.240 --> 0:19:12.920 of a differentiated view to utilize that capital to invest 0:19:12.960 --> 0:19:17.000 in other companies in other sectors where the magnitude of 0:19:17.040 --> 0:19:18.560 our differentiation is hired. 0:19:18.600 --> 0:19:22.879 Today. Great, and I know you mentioned healthcare is an 0:19:22.920 --> 0:19:26.240 area where you've moved to an overweight. What specific themes 0:19:26.240 --> 0:19:28.720 are really interesting to you or is it a somatic 0:19:28.760 --> 0:19:32.240 based sort of overweight. What's driving that healthcare exposure right now? 0:19:32.920 --> 0:19:37.200 Yeah, it's interesting because it's actually quite diversified, and again 0:19:37.240 --> 0:19:40.919 it's just finding great bottoms up opportunities. And so I 0:19:40.960 --> 0:19:43.520 would just unpack that a little bit and talk about, 0:19:43.720 --> 0:19:45.280 you know, a couple of things that are of interest 0:19:45.320 --> 0:19:49.640 to us within healthcare. First, I would start with biotech 0:19:49.680 --> 0:19:53.880 and biopharma. That's a sector within growth. It's been out 0:19:53.880 --> 0:19:57.439 of favor for many, many years, and you know, we 0:19:57.520 --> 0:20:00.639 do think in an environment where interest rates are coming 0:20:00.680 --> 0:20:04.720 down again and there are many really high quality companies 0:20:04.960 --> 0:20:08.560 that have really really interesting catalysts that we're finding many 0:20:08.600 --> 0:20:13.840 more interesting opportunities irrelevant of the macroeconomy. I mentioned Regeneron, 0:20:13.920 --> 0:20:17.160 for example, as being one of our largest positions. Regeneron 0:20:17.240 --> 0:20:19.760 is a great franchise, it trades it an attractive free 0:20:19.800 --> 0:20:22.680 cash yield. But I think what's even more interesting is 0:20:22.720 --> 0:20:26.159 that people underestimate the importance of their pipeline and the 0:20:26.200 --> 0:20:30.160 fact that they're utilizing genetic data in order to improve 0:20:30.240 --> 0:20:32.040 drug discovery. The one of the companies that have been 0:20:32.080 --> 0:20:35.760 doing this the longest, and we think people massively underappreciate 0:20:35.800 --> 0:20:39.879 their pipeline. We're also finding some interesting opportunities in biotech 0:20:40.160 --> 0:20:43.159 down the market cap spectrum as well. As nothing has 0:20:43.160 --> 0:20:45.800 been more out of favor than small and MidCap biotech. 0:20:46.320 --> 0:20:48.840 We're finding a lot of really interesting, high quality companies 0:20:49.040 --> 0:20:51.360 that super attractive risk rewards, where we have a very 0:20:51.400 --> 0:20:57.240 differentiated perspective on their future market opportunity. And then Beyond biotech, 0:20:57.280 --> 0:20:59.440 I would say, you know, another area that we have 0:20:59.480 --> 0:21:03.359 a lot of two would be GLP. Once we do 0:21:03.440 --> 0:21:08.320 think that the market massively underestimates the obesity market, and 0:21:08.359 --> 0:21:11.280 we think that Lily has a really strong competitive advantage 0:21:11.280 --> 0:21:15.119 even versus Novo, then will be a huge winner that people. 0:21:15.200 --> 0:21:17.960 This is a classic example where people think it maybe 0:21:18.119 --> 0:21:20.560