Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond sound bites and headlines and looks deeper into
Speaker 1: their processes, challenges and philosophies in security selection. I'm David Cohne,
Speaker 1: I lead mutual fund and active research at Bloomberg Intelligence.
Speaker 1: Today my co host is Laurent Duier, senior equity strategist
Speaker 1: at Bloomberg Intelligence. Laurent, thank you for joining me today.
Speaker 2: Thanks for having me.
Speaker 3: So.
Speaker 1: You recently published a note on your outlook for Eurozone stocks.
Speaker 1: Can you give our listeners a little bit of an
Speaker 1: overview of you know, of that outlook.
Speaker 4: Yeah. I think the outlook is going to be for
Speaker 4: all the time, and it's a second half because it
Speaker 4: relies mainly on the earnings rebound, which is predicated on
Speaker 4: lowery C be right, and also the fiscal stimulus coming
Speaker 4: from Germany. So far, European companies have been able to
Speaker 4: overcome the higher tariffs from the US through cost savings
Speaker 4: and reorganization of their supply chain. But I think we
Speaker 4: need to see stronger top line growth for earning growth
Speaker 4: to reaccelerate. The fifteen percent tariff agreement recently announced is
Speaker 4: bring some clarity so it's a positive, but it remains
Speaker 4: headwind on volume growth, so European companies will have to
Speaker 4: work hard to deliver the double digit earning growth which
Speaker 4: is expected by the consensus for next year and very quickly.
Speaker 4: If we look at valuation, European equities are treading on
Speaker 4: fifteen point five times forward earnings, so we see limited
Speaker 4: room for further multiple expansion except potentially for financial and
Speaker 4: industrials and positive earning supprise. So at this stage we
Speaker 4: think investors need to be more seduct giving European equities great.
Speaker 1: Well, I'd love to hear what our guest thinks about
Speaker 1: your zone stocks, so I think it would be a
Speaker 1: great time to welcome our guests, Nate Vlardi to the podcast.
Speaker 1: Nate is a partner of Chtaqua Capital Management and a
Speaker 1: portfolio management or a portfolio manager on their strategies, including
Speaker 1: the Beard Shautaqua International Growth Fund, which has a ticker
Speaker 1: of cc WIX. Nate, thank you for joining us today.
Speaker 3: Thank you David and Laurent. It's great to be here.
Speaker 1: So we'd like to get your thoughts on you know,
Speaker 1: Laurent just was talking about the outlook for your zone.
Speaker 1: Are you seeing something similar.
Speaker 5: Yes, I mean, particularly as Laurent said, in the European
Speaker 5: banks which have been you know, extremely strong performers, you
Speaker 5: know a year to date and perhaps you know over
Speaker 5: the last twelve months on you know, widening spreads, lending
Speaker 5: spreads and improving credit conditions in general in Europe.
Speaker 1: Why don't we take a step back, because I'm sure
Speaker 1: our listeners would love to hear what a typical day
Speaker 1: is like for you.
Speaker 5: We have a daily research meeting at ten o'clock and
Speaker 5: I spend most of my morning from the market open
Speaker 5: just to try to do all the maintenance research to
Speaker 5: get rid of it ready for that meeting. And you know,
Speaker 5: after that the day is free to focus on researching
Speaker 5: new stocks, doing client servicing. But when my son asked
Speaker 5: me what I do all day, it's primarily just reading stuff,
Speaker 5: just trying to stay on top of everything and reading
Speaker 5: as much as I can to try to find the
Speaker 5: edge out there in what we do.
Speaker 3: Great.
Speaker 1: So if we zero in on the international growth strategy,
Speaker 1: what is the process behind that in terms of how
Speaker 1: do companies make their way to the portfolio?
Speaker 5: It starts with, you know, our investment philosophy and drives
Speaker 5: our process and an investment philosophy should answer two questions.
Speaker 5: You know, the first is what a market inefficiency are
Speaker 5: you trying to exploit? And the second is what's your
Speaker 5: investment criteria? What are you looking for? And from our perspective,
Speaker 5: you know, we're trying to exploit time arbitrage and we're
Speaker 5: not the first manager to try to do that, but
Speaker 5: we believe, you know, our edge is that our people,
Speaker 5: investment process are parent and bared, and our place here
Speaker 5: in Boulder actually enable us to be long term as
Speaker 5: opposed to just.
Speaker 3: Aspire to it.
Speaker 5: So our people, you know, we have a focused team
Speaker 5: that's dedicated to deploying an investment process that tries to
Speaker 5: answer the question, you know, what could a company.
Speaker 3: Look like five years from now.
Speaker 5: We're concentrated on the long term fundamentals that drive wealth
Speaker 5: creation rather than on short term issues that drive share
Speaker 5: price volatility. I think it's important to say that about
Speaker 5: our parent. You know, you can't be long term unless
Speaker 5: you know you're the person that writes the check is
Speaker 5: long term and bear it. As a private employee owned
Speaker 5: organization has a long track record of building asset management
Speaker 5: teams over decades, So you know, I can feel confident
Speaker 5: in you know, doing my job, keeping my long term
Speaker 5: perspective without you know, fear of being turfed out because
Speaker 5: of short term performance issues or failing to hit asset
Speaker 5: gathering targets. And you know, an understated advantage I think
Speaker 5: we have just being in Boulder, away from the noise,
Speaker 5: enables us to keep our long term perspective and specifically
Speaker 5: what we're looking for in our companies.
Speaker 3: You know, we're looking for three things.
Speaker 5: Companies exposed to a durable, long term growth trend, you know,
Speaker 5: that possessed competitive advantages that enables them to capture the
Speaker 5: line share the profit pool created by that trend, and
Speaker 5: can be purchased at a reasonable valuation in the context
Speaker 5: of their growth outlook and competitive positioning. So you know
Speaker 5: that in a nutshell is our investment philosophy and process.
Speaker 1: And so you mentioned growth themes. Are there certain secular
Speaker 1: growth themes that you're looking at right now?
Speaker 5: Yeah, I think the growth themes out there, everyone's focused
Speaker 5: primarily on AI, you know, and the growth themes you know,
Speaker 5: most people focus on rising middle class or you know,
Speaker 5: digital transformation. That those themes are well known and well
Speaker 5: established in the marketplace, and we're no different than than
Speaker 5: trying to you know, participate in those themes. I think
Speaker 5: the value add isn't in identifying the theme itself. It's
Speaker 5: actually trying to identify the bottleneck company that's best position
Speaker 5: to extract value from that trend. And and so that's
Speaker 5: where we focus most of our efforts on.
Speaker 1: And are there I guess any characteristics you're looking at, Like,
Speaker 1: is it you know, focused on revenue growth or earnings
Speaker 1: growth or ear any type of metrics.
Speaker 3: Yeah, it starts with revenue growth.
Speaker 5: I mean, we do look at earnings growth and free
Speaker 5: cash flow growth, but sometimes you know, revenue growth tends
Speaker 5: to be the most stable and.
Speaker 3: The most sustainable.
Speaker 5: You know, sometimes when you look at companies that have
Speaker 5: impressive earnings growth that's driven by margin expansion, sometimes at
Speaker 5: margin expansion will eventually hit a ceiling and so it's
Speaker 5: not as sustainable as if we can identify a company
Speaker 5: with a long growth runway where you can see the
Speaker 5: revenues growing at a steady pace and if you get
Speaker 5: margin expansion on top of that, that's a bonus. So
Speaker 5: we tend to focus more on top line growth initially,
Speaker 5: and then you know, if there is an earnings component
Speaker 5: to it through margin expansion.
Speaker 3: I think that's a bonus on top great.
Speaker 1: I know Lawren's got a bunch of questions you wants
Speaker 1: to ask, but I just want to ask quickly. You
Speaker 1: know you mentioned reasonable valuation. How do you determine that?
Speaker 3: Yeah, I mean reasonable.
Speaker 5: I mean we leave you valuation not in terms of,
Speaker 5: you know, what's the right multiple for a particular stock,
Speaker 5: or putting a bunch of numbers into a model and
Speaker 5: get to a price target and see if there's a
Speaker 5: difference between you know, what our valuation is and what
Speaker 5: the stock is trading at. I mean, we think of
Speaker 5: valuation more in terms of trying to separate fundamentals from
Speaker 5: expectations that are embedded in the share price at a
Speaker 5: particular point, and expectations not consensus forecasts and a company's
Speaker 5: ability to beat it in the short term, but more
Speaker 5: over the long term fundamentals you know, over a longer
Speaker 5: term period than say consensus which runs three years out,
Speaker 5: and you know, if they're we look for opportunities where
Speaker 5: there's a gap between you know, our assessment of the
Speaker 5: fundamentals and the expectations embedded in the share price, and
Speaker 5: where we see those opportunities, we act and you know,
Speaker 5: take advantage of those you know, gaps in I think
Speaker 5: people have called it the past, the variant perception between
Speaker 5: ourselves and the market. But from a quantification point of view,
Speaker 5: that's how we think about valuation.
Speaker 4: So Nate, I would like to investigate a little bit
Speaker 4: more about some of those investment opportunities, especially first in Europe.
Speaker 4: In which sectors or which investment theme do you think
Speaker 4: could be interesting in Europe, especially where you think valuation
Speaker 4: are at the reason reasonable price.
Speaker 5: You know, in Europe, I mean, we have tended to
Speaker 5: focus on companies in the medical pharmaceutical space and also
Speaker 5: in the commercial aerospace industry and then pharmaceuticals. We like
Speaker 5: the long term prospects of Novo Nordisk despite all of
Speaker 5: the issues that you see playing in the near term
Speaker 5: share price. We think it's misunderstood from a you know,
Speaker 5: particularly from a growth outlook perspective, given the markets just
Speaker 5: tends to think of weight loss drugs as a winner
Speaker 5: take all market. But yet Novo Nordisk has in the
Speaker 5: market is more than big enough to support multiple players,
Speaker 5: and the market tends to be focused on what is
Speaker 5: happening in the US, where we believe Novo Nordisk has
Speaker 5: very large competitive advantages in distribution, particularly outside the US.
Speaker 3: It's not just about the drug. You need to be
Speaker 3: able to market.
Speaker 5: It, distribute it and manufacture it at scale. And in
Speaker 5: those aspects Novo we still have strong advantages.
Speaker 2: In Europe.
Speaker 4: As you mentioned, I'm in defense spending has been really
Speaker 4: the hottest team a theme as in the beginning of
Speaker 4: the year.
Speaker 2: Do you have any specific view on that.
Speaker 4: Some of the companies have rallied very strongly, but it
Speaker 4: seems that the addressable market are going to increase fit
Speaker 4: significantly over the next three to five years. So do
Speaker 4: you think it could still be an opportunity or most
Speaker 4: of the grossest price team.
Speaker 3: It's a good question.
Speaker 5: I mean, even within our holding in Saffron, they're twenty
Speaker 5: percent of the revenues are defense related, and in particular
Speaker 5: they called out their exposure to the defense, electronics and
Speaker 5: space portion of their business, which they expect to double
Speaker 5: over the next five years, so very strong growth outlook.
Speaker 5: We don't have exposure to the pure play European defense companies,
Speaker 5: so I'm hesitant to call out any specific companies, but
Speaker 5: I guess at a very high level, I think I.
Speaker 3: Can point you to two things.
Speaker 5: One is, you know, over history, your US defense the
Speaker 5: big US defense prime contractors have traded at significant premiums
Speaker 5: to European defense players.
Speaker 3: That has completely reversed.
Speaker 5: In fact, the historical premium, even at the peaks, now
Speaker 5: lies with the European companies. And then also you know,
Speaker 5: from a just you know, simple valuation, playing around with
Speaker 5: the valuations. If if you look at the market caps
Speaker 5: of some of the big European companies, they're you know,
Speaker 5: you know, slightly below or equal to that of their
Speaker 5: US counterparts. But yet the you know, US defense contractors
Speaker 5: revenue base is much larger, So there's a lot of
Speaker 5: you know, in terms of your comment about there's a
Speaker 5: lot of growth being factored in, you know, that seems
Speaker 5: to be the case, just in terms of simple you know,
Speaker 5: EVA revenues or market cap, the revenue type of comparisons.
Speaker 5: I guess the last thing I would add also is,
Speaker 5: you know, US defense companies tend to be good at
Speaker 5: executing at scale in terms of the size of the contracts,
Speaker 5: and you know, if European companies defense companies get similar
Speaker 5: sized contracts, I would say the jury is still out
Speaker 5: on their ability to turn that potential revenue opportunity into profits,
Speaker 5: similar to US companies. So those were you know, just
Speaker 5: some general comments on defense, you know, as we look at.
Speaker 4: It, I mean, moving further east, I mean, if we
Speaker 4: look at Asia xtrapen, I mean, which checkters or country
Speaker 4: do you think looks the most promising And maybe a
Speaker 4: more specific question on China. Last year there were a
Speaker 4: lot of questions if China was going to see a
Speaker 4: rebounding gross and if it was becoming an investible what
Speaker 4: are I mean also your views on the China growth opportunities,
Speaker 4: but overall in Asia example, and where do you think
Speaker 4: the growth opportunities are.
Speaker 5: Yeah, we're a lot we're bottoms up investors, so you know,
Speaker 5: at the end of the day, we're investing in companies,
Speaker 5: not countries. So in some respects our views on the
Speaker 5: country as irrelevant as long as the franchise that we're buying,
Speaker 5: you know, meets our requirements of you know, having strong growth,
Speaker 5: a strong growth outlook, and competitive advantages to turn that
Speaker 5: growth into into value. And you know, in terms of
Speaker 5: you know, Asia, you know, we have tended to find
Speaker 5: our financials exposure you know in Asia, you know, relative
Speaker 5: to Europe, in Europe, we feel European bank as a
Speaker 5: as a group are relatively you know low system loan
Speaker 5: growth UH and relatively undifferentiated, whereas in Asia we have
Speaker 5: found you know, system loan growth being in the high
Speaker 5: single digits UH. And the companies that we've tended to
Speaker 5: focus on our companies that are advantaged in some specialized
Speaker 5: niche you know, like a bank Rocky Yacht in Indonesia,
Speaker 5: which is a specialist UH and dominates the microfinance industry
Speaker 5: in Indonesia.
Speaker 3: You know.
Speaker 5: Our other holding in Southeast Asia, you know, is uh
Speaker 5: C Limited, which you know will benefit from increased penetration
Speaker 5: of e commerce UH and it has it has a
Speaker 5: strong business model. It's been able to fend off increasing
Speaker 5: Chinese competition, you know. And speaking of China, I mean
Speaker 5: we are invested in China, and our exposure there has
Speaker 5: been focused on you know, domes, stick plays and also
Speaker 5: in the healthcare space. You know, those are two areas
Speaker 5: where the Chinese government seems to be focused on the
Speaker 5: long term one in terms of trying to reorient their
Speaker 5: economy to more consumption based and also healthcare delivery or
Speaker 5: improving healthcare delivery is a priority for the government.
Speaker 3: So it has been a.
Speaker 5: Controversial area from an from an investment point of view,
Speaker 5: but you know, you need to be able to you know,
Speaker 5: the risks. From our view, we're being more than compensated
Speaker 5: for the risks of investing in China by sort of
Speaker 5: the by both the valuations and also the quality of
Speaker 5: companies that we are finding there. And you know that
Speaker 5: explains our you know, market weight to China, which is
Speaker 5: actually somewhat of an outlier amongst some active managers, you.
Speaker 1: Know, if we're talking about China, I just wanted to
Speaker 1: ask about tariffs just a little bit. You know, you
Speaker 1: mentioned your process is you know, long term in nature,
Speaker 1: but has it been affected at all by tariffs? You know,
Speaker 1: whether it's just you know, the assumptions you're making about
Speaker 1: the individual companies, is that kind of like made a
Speaker 1: big change and things, you know in general.
Speaker 5: I mean, are the way we're framing tariffs is that
Speaker 5: it's a growth shock to the global economy. I mean,
Speaker 5: I think the emerging consensus view is that tariffs will
Speaker 5: ultimately be stagflationary in the to the US economy, you know,
Speaker 5: want and increases the probability of recession, and you will
Speaker 5: probably put upward pressure on prices, and you know, from
Speaker 5: a growth you know, as a US is a significant
Speaker 5: net contributor to global growth. I mean that ultimately is
Speaker 5: going to result in you know, lower, lower go global growth,
Speaker 5: so hence the the growth shock.
Speaker 3: And you know.
Speaker 5: We we actually think, you know, what we try to
Speaker 5: do is, you know, find companies that have characteristics that
Speaker 5: enable them to do better in most future states of
Speaker 5: the world. And I guess what that means is, you know,
Speaker 5: we're just looking for companies that can pull more levers
Speaker 5: to grow even in tough environments. And we expect our
Speaker 5: companies because they're advantaged because they're conservatively financed, to emerge
Speaker 5: on the other side of tariffs, stronger relative to their competition,
Speaker 5: and particularly in their ability to pass through any tariff
Speaker 5: impacts because their products, you know, they have a pricing
Speaker 5: power and their products are mission critical in many respects.
Speaker 1: Okay, you know, I also do want to ask about
Speaker 1: the portfolio. You've got a pretty high conviction portfolio. How
Speaker 1: do you wait positions?
Speaker 3: Yeah, it's a very good question.
Speaker 5: You know, I've been around portfolio teams that where the
Speaker 5: conversation starts, you know, when we talk about waitings you know,
Speaker 5: all the default position is if something's working, you know,
Speaker 5: don't don't mess with it, or you know, I or
Speaker 5: the conversation starts, I feel.
Speaker 3: Like, you know, this is the right time for company X.
Speaker 5: I think we take a more disciplined approach to how
Speaker 5: we approach waitings and it's something that we call our
Speaker 5: VR process internally, and that stands for you know, revenue growth,
Speaker 5: valuation and return on investor capital. And the way that
Speaker 5: it works is we force rank our companies based on
Speaker 5: revenue growth, forward looking valuation metric and return on investor
Speaker 5: capital as those are the quantitative proxies for the three
Speaker 5: things that we require in our companies, growth, attractive price,
Speaker 5: and competitive advantage. And you can imagine what moves companies
Speaker 5: up and down those rankings in the short term or
Speaker 5: changes in valuation or share price. And you know, I
Speaker 5: don't want to give the impression that we're mechanically rebalancing
Speaker 5: our portfolio to uh, you know, a quantitative tool, because
Speaker 5: we're not the value out of the r VR, you know,
Speaker 5: first of all, is to highlight disconnects between you know,
Speaker 5: a company's actual weight in the portfolio and it's our
Speaker 5: you know, it's quantitative ranking, and there are probably good
Speaker 5: reasons for that disconnect to exist. But if we can't
Speaker 5: resolve that disconnect, you know, we'll take profits in one
Speaker 5: area and redeploy proceeds to to better risk reward opportunities
Speaker 5: within the portfolio.
Speaker 3: And you know, the other value out of the r VR.
Speaker 5: For us is just to have a objective starting point
Speaker 5: to start that discussion about how do we orient the
Speaker 5: portfolio to best capture you know, risk award.
Speaker 3: Opportunities based on what we're seeing in the market.
Speaker 5: I think overall, i'd make the comment that, you know,
Speaker 5: our long term objective is to have the thirty best
Speaker 5: international businesses in our portfolio at all times, but over
Speaker 5: shorter term periods you can imagine, you know, our challenge
Speaker 5: is to ensure that our companies are held at the
Speaker 5: right weights to best balance risk award and by having
Speaker 5: a discipline framework around you know, waitings is I think
Speaker 5: a part of our process that helps differentiates us and
Speaker 5: has enabled us to both you know, drive returns and
Speaker 5: up markets and protect on the downside in tougher markets.
Speaker 4: A related question, as a startpicker, do you think that
Speaker 4: market concentrate is becoming an issue for international liquities, and
Speaker 4: if it is the case, I mean, how do you
Speaker 4: manage your portfolio in order to outperform the market which
Speaker 4: is just driven by a few names.
Speaker 5: Yeah, it's a it's an interesting question, and it reminds
Speaker 5: me of of if you'd allow me to tell a
Speaker 5: little story. I have a good friend of mine that manages,
Speaker 5: or he used to manage a US large.
Speaker 3: Cap growth portfolio.
Speaker 5: And you know, I called him one day after seeing
Speaker 5: his numbers and called to congratulate him on what wonderful
Speaker 5: numbers that he put up, and he basically told me thanks,
Speaker 5: but no thanks. You know, it doesn't mean anything when
Speaker 5: your top deacyle and the benchmark is right behind you.
Speaker 5: And it was because the mag seven was driving most
Speaker 5: of the benchmark performance. I think, fortunately for international investors,
Speaker 5: we're nowhere near that level of concentration. If you count,
Speaker 5: if you consider the US to be concentrated, I think
Speaker 5: top ten names in the S and P five hundred
Speaker 5: are almost at forty percent of the index by weight,
Speaker 5: whereas if you look at the Aqui Xus index, which
Speaker 5: is what we're benchmark too, it's only at eleven. So
Speaker 5: you know, from that perspective, we're comforted in the sense
Speaker 5: that there's still a lot of scope for stock pickers
Speaker 5: to add value without having to resort to closet indexing
Speaker 5: the top ten positions in the benchmark.
Speaker 4: Okay, I would like to bounce on one of your
Speaker 4: earlier comments about European l scale, where pharmaceutical names like
Speaker 4: Novo Nordisk or sogsk Astrasenika are trading on very low multiples.
Speaker 4: I mean, given the underperformance of those names, how do
Speaker 4: you manage I would say, position which are losing money
Speaker 4: in your portfolio? Often keeping your losers could be a
Speaker 4: major source of under performance. So how do you assess
Speaker 4: losing market positions and how do you decide to add
Speaker 4: up to your existing position compared to say, no, we
Speaker 4: made a bad choice and so we exceed the position.
Speaker 2: How do you manage to be stread up?
Speaker 5: Yeah, I you know, selling is a lot harder than buying.
Speaker 5: I think you know that is that is definitely true,
Speaker 5: especially when humans are involved, because there's a lot of
Speaker 5: emotion built up in there, and you know, for us,
Speaker 5: you know, it's an all hands on deck approach whenever
Speaker 5: we do have an underperformer, and the way that we
Speaker 5: monitor that one is if a company has a very
Speaker 5: sudden draw down, it automatically goes into review, or if
Speaker 5: it shows up consistently in the underperformers or detractors lists
Speaker 5: for several months or quarters, it goes into an automatic
Speaker 5: review for us, you know, and you when I say
Speaker 5: all hands on deck, I mean myself and my two
Speaker 5: other Code portfolio managers, Hi ching Lee and Jesse Flores
Speaker 5: get together and we try.
Speaker 3: To re underwrite the position.
Speaker 5: And you know, we try to separate is it a
Speaker 5: cyclical factor or is it a secular factor? And you know,
Speaker 5: the cyclical factors hopefully, if we've done our job right,
Speaker 5: we've anticipated all companies go through cycles.
Speaker 3: And you know, if the if the.
Speaker 5: Fundamentals are peaking, we would have been trimming and vice versa.
Speaker 5: The harder part is determining, you know, is it a
Speaker 5: secular issue? And you know, the easiest person to lie
Speaker 5: to is yourself. So one of the things that we
Speaker 5: implement here is that we keep a thesis book. So
Speaker 5: it's a basically a one pager on every company that
Speaker 5: we own that you know, basically reminds us what are
Speaker 5: the reasons that we buy it? And the and the
Speaker 5: the biggest destructive thing in portfolio management is to allow
Speaker 5: thesis drift. And so when we refer to this document,
Speaker 5: you know, if any one of those tenants of the
Speaker 5: reasons why we sold it, you know no longer is true,
Speaker 5: it's you know, we take.
Speaker 3: Action decisively and usually it's sold.
Speaker 5: So but it's you know, the hard part is really
Speaker 5: trying to separate is it temporary or is it structural?
Speaker 5: But I think the thesis having you know, writing down
Speaker 5: your investment thesis and trying to stay true to it
Speaker 5: and not making excuses for it for a particular company,
Speaker 5: be relatively unemotional and move on because you know, our
Speaker 5: investable universe is you know, theoretically five thousand stocks.
Speaker 3: We have a portfolio of thirty.
Speaker 5: So every position in the portfolio is there, you know,
Speaker 5: at you know, at our discretion, and if it no
Speaker 5: longer fits uh, and we can find a better one,
Speaker 5: we'll do so.
Speaker 1: So I actually got a somewhat related question. You know,
Speaker 1: we talked about the risk return you're comparing the different
Speaker 1: companies as well as you know, cutting losses. Is there
Speaker 1: anything else to drive cell decisions? You know, for instance,
Speaker 1: say you find another company and you know you're starting
Speaker 1: to get above the thirty. You know what would is
Speaker 1: it mainly just the risk return you're looking at if
Speaker 1: you're kind of you know, finding another company you think
Speaker 1: would be a great fit for the portfolio, but you
Speaker 1: still love the thesis of other companies in the portfolio.
Speaker 5: Yeah, and that's actually the biggest barrier to our portfolio,
Speaker 5: to getting into our portfolio, is you know, does you
Speaker 5: know so okay, great idea meets all of our criteria,
Speaker 5: what do we kick out? So you know, you know,
Speaker 5: make the case. You know, this is us talking amongst ourselves.
Speaker 5: Make the case for why this new idea is better
Speaker 5: than the least best company already in the portfolio. And
Speaker 5: you know that's what we try to we I always
Speaker 5: tell our clients or potential clients that, you know, when
Speaker 5: do you sell Schautauqua, when do you sell our fund?
Speaker 5: And it's when we get to you know, we go
Speaker 5: from thirty names in the portfolio to forty, and that
Speaker 5: just means we're diluting ourselves. So there's nothing magical what
Speaker 5: we have about thirty names in the portfolio. But it's
Speaker 5: trying to have that discipline about you know, these are
Speaker 5: our best ideas and if we're going to kick if
Speaker 5: we're going to put something in, it has to be better,
Speaker 5: you know, like I said, than the least best company
Speaker 5: in our portfolio.
Speaker 2: Among those best names.
Speaker 4: I mean, do you have any AI related investment at
Speaker 4: this point in time?
Speaker 2: And where are they?
Speaker 3: Yeah?
Speaker 5: We we, you know, we are AI related investments can
Speaker 5: be boiled down to TSMC and ASML, and you know
Speaker 5: that seems like, wow, that's you know, nice AI play,
Speaker 5: But we've actually owned those two companies for over fifteen
Speaker 5: years in our portfolio. Just that I would say, a
Speaker 5: wildly different weights, but continuously they've been in our portfolio
Speaker 5: because I mean, they are the bottle land I mentioned
Speaker 5: we're looking for bottleneck companies. They're the bottleneck companies, not
Speaker 5: just for AI but pretty much every major technological development
Speaker 5: you know, over the last fifteen years. And you know, ASML,
Speaker 5: I would say, is the quintessential example of a bottleneck
Speaker 5: company because you know, it has a virtual monopoly you know,
Speaker 5: in the equipment that makes semiconductors faster and you know,
Speaker 5: while consume less power. So yes, there would be no
Speaker 5: AI without ASML, but there also wouldn't have been any
Speaker 5: smartphones at the end of the day. And that same
Speaker 5: goes for TSMC. The other you know AI related play
Speaker 5: that we have is are holding in Brookfield Renewable Corp.
Speaker 2: Uh.
Speaker 5: You know, power is increasingly becoming the critical bottleneck for
Speaker 5: growth for data centers, you know, not just in the US,
Speaker 5: but around the world.
Speaker 3: And as a you.
Speaker 5: Know, Brookfield Develops is a large scale operator and developer
Speaker 5: of you know, clean power projects around the world, so
Speaker 5: that ranges from quick to market wind and solar to UH.
Speaker 5: They have strong positions in nuclear, hydro and battery UH
Speaker 5: and so by being able to offer a broad range
Speaker 5: of a technology clean power technologies UH, you know, not
Speaker 5: only at scale, they've been able to you know, count
Speaker 5: amongst their customer base the eight out of the ten
Speaker 5: largest clean power buyers you know in the world are
Speaker 5: their customers. And you know, most recently they've signed long
Speaker 5: term you know, power supply framework agreements with Google and Microsoft.
Speaker 5: So that's a testament to their ability to be the
Speaker 5: partner of choice for hyperscalers in terms of providing their
Speaker 5: clean power generation needs. So they help solve the critical
Speaker 5: bottleneck in the AI space, and you know, have been
Speaker 5: a key part in our portfolio as.
Speaker 4: Well among investors over the past two or three years.
Speaker 4: One market, as I would say, generated investors' interests, which
Speaker 4: is Japan because people see some structural shift with the
Speaker 4: return of inflation management being much more sholder friendly than
Speaker 4: they used to be in the past. I mean, would
Speaker 4: you share the view and do you think there are
Speaker 4: good growth or investment opportunities in Japan?
Speaker 3: Absolutely? Uh.
Speaker 5: You know, I was fortunate enough to go to Japan
Speaker 5: earlier in the year to you know, visit companies as
Speaker 5: well as attended investor conference and you know the you know,
Speaker 5: based on the attendance and diversity of investor types at
Speaker 5: the conference, I would say the excitement is palpable, you
Speaker 5: know about Japan in terms of the investment opportunity there
Speaker 5: from a you know, from a top down perspective, I mean,
Speaker 5: if you look at Japan, the scope for improvement is
Speaker 5: actually pretty large. You know, the average ROE in Japan
Speaker 5: is somewhere in the eight to nine percent, twelve percent
Speaker 5: in Europe, seventeen in the US. So the value unlock
Speaker 5: opportunity is definitely there. And you know, the the institutions
Speaker 5: in Japan are moving, you know, starting with Prime Minister Abe,
Speaker 5: they've definitely put forward you know, there's been improvements in
Speaker 5: corporate governance and the way that they're approaching shareholders, and.
Speaker 3: You do see that.
Speaker 5: So the market narrative is very positive, you know, and
Speaker 5: from an economic standpoint, we've gone from deflation to reflation
Speaker 5: as well, so you know, lots of positive things to
Speaker 5: look for in Japan. I think the issue for us,
Speaker 5: as more bottoms up investors is translating you know, what
Speaker 5: is a positive top down narrative into actional, actionable bottoms
Speaker 5: up implementation in our portfolio, and you know, where we've
Speaker 5: been able to do that has actually been you know,
Speaker 5: in the factory automation space, specifically in terms of chaos
Speaker 5: sym fanic you know, which play into the you know,
Speaker 5: an overarching theme of deglobalization and reshoring, which given the
Speaker 5: labor cost differentials, would not will not be possible without
Speaker 5: significant investments in automation, where those two companies are the
Speaker 5: clear leader.
Speaker 3: You know.
Speaker 5: We also have benefited in some of our Japanese holdings,
Speaker 5: you know, in terms of activist activity, but as a
Speaker 5: long only investor, that's not our focus. We think of
Speaker 5: sort of the value unlock opportunities from the standpoint of
Speaker 5: increased shareholder returns to be a you know, a free
Speaker 5: embedded option in a lot of our Japanese holdings at
Speaker 5: the moment, just one.
Speaker 4: Follow a question on that. Do you think that company
Speaker 4: disclosure are still lacking in Japanese companies compared to what
Speaker 4: we can see in Europe and in the US, and
Speaker 4: it could be an impediment to make wise investment decisions.
Speaker 5: No, I you know, a lot of Japanese companies report
Speaker 5: on an i FRS basis. Now I think the you know,
Speaker 5: the majority of companies that are reporting on under US
Speaker 5: I mean Japanese gap is very small.
Speaker 3: So from an accounting.
Speaker 5: Perspective, it's it's understandable, you know, again, going to this
Speaker 5: investor conference and perhaps thinking about you know, interactions with
Speaker 5: Japanese companies versus the past.
Speaker 3: You know, they're much more they feel much.
Speaker 5: More open from an investor relations standpoint, and you know,
Speaker 5: perhaps the biggest change, at least from my perspective, is
Speaker 5: the presence of actual English speaking investor relations people, which
Speaker 5: you know, almost never happened in the past. So the
Speaker 5: language barrier, whether intentional or not, you know, was you know,
Speaker 5: was better with Chapan these days.
Speaker 1: Well, this is great. I really enjoyed this. Nate, thank
Speaker 1: you so much for joining us.
Speaker 3: Appreciate your time. Thank you very much for having me
Speaker 3: and Laurent.
Speaker 1: Thank you for joining me as my coach today. Thanks
Speaker 1: and I want to thank you for listening. If you
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Speaker 1: On the Bloomberg Terminal Until our next episode, This is
Speaker 1: David Cone with the Inside Active