WEBVTT - Chautauqua’s Velarde on Exploiting Time Arbitrage 0:00:13.960 --> 0:00:17.319 Welcome to Inside Active, a podcast about active managers that 0:00:17.360 --> 0:00:20.400 goes beyond sound bites and headlines and looks deeper into 0:00:20.440 --> 0:00:25.800 their processes, challenges and philosophies in security selection. I'm David Cohne, 0:00:25.840 --> 0:00:28.840 I lead mutual fund and active research at Bloomberg Intelligence. 0:00:29.040 --> 0:00:32.879 Today my co host is Laurent Duier, senior equity strategist 0:00:32.920 --> 0:00:35.840 at Bloomberg Intelligence. Laurent, thank you for joining me today. 0:00:36.440 --> 0:00:37.440 Thanks for having me. 0:00:38.080 --> 0:00:38.159 So. 0:00:38.280 --> 0:00:42.279 You recently published a note on your outlook for Eurozone stocks. 0:00:42.920 --> 0:00:45.080 Can you give our listeners a little bit of an 0:00:45.080 --> 0:00:48.239 overview of you know, of that outlook. 0:00:48.840 --> 0:00:51.440 Yeah. I think the outlook is going to be for 0:00:51.440 --> 0:00:54.120 all the time, and it's a second half because it 0:00:54.240 --> 0:00:57.600 relies mainly on the earnings rebound, which is predicated on 0:00:57.720 --> 0:01:01.600 lowery C be right, and also the fiscal stimulus coming 0:01:01.640 --> 0:01:05.720 from Germany. So far, European companies have been able to 0:01:05.800 --> 0:01:09.800 overcome the higher tariffs from the US through cost savings 0:01:09.800 --> 0:01:13.360 and reorganization of their supply chain. But I think we 0:01:13.440 --> 0:01:17.160 need to see stronger top line growth for earning growth 0:01:17.720 --> 0:01:23.280 to reaccelerate. The fifteen percent tariff agreement recently announced is 0:01:24.200 --> 0:01:28.160 bring some clarity so it's a positive, but it remains 0:01:28.400 --> 0:01:32.000 headwind on volume growth, so European companies will have to 0:01:32.080 --> 0:01:35.880 work hard to deliver the double digit earning growth which 0:01:35.920 --> 0:01:40.640 is expected by the consensus for next year and very quickly. 0:01:40.720 --> 0:01:44.280 If we look at valuation, European equities are treading on 0:01:44.400 --> 0:01:48.160 fifteen point five times forward earnings, so we see limited 0:01:48.240 --> 0:01:53.920 room for further multiple expansion except potentially for financial and 0:01:54.040 --> 0:01:58.400 industrials and positive earning supprise. So at this stage we 0:01:58.480 --> 0:02:02.720 think investors need to be more seduct giving European equities great. 0:02:03.200 --> 0:02:05.200 Well, I'd love to hear what our guest thinks about 0:02:05.240 --> 0:02:07.520 your zone stocks, so I think it would be a 0:02:07.520 --> 0:02:11.200 great time to welcome our guests, Nate Vlardi to the podcast. 0:02:11.440 --> 0:02:15.200 Nate is a partner of Chtaqua Capital Management and a 0:02:15.240 --> 0:02:19.640 portfolio management or a portfolio manager on their strategies, including 0:02:19.680 --> 0:02:22.840 the Beard Shautaqua International Growth Fund, which has a ticker 0:02:22.880 --> 0:02:26.639 of cc WIX. Nate, thank you for joining us today. 0:02:27.560 --> 0:02:29.840 Thank you David and Laurent. It's great to be here. 0:02:30.280 --> 0:02:32.679 So we'd like to get your thoughts on you know, 0:02:32.760 --> 0:02:35.200 Laurent just was talking about the outlook for your zone. 0:02:35.320 --> 0:02:36.600 Are you seeing something similar. 0:02:37.400 --> 0:02:41.040 Yes, I mean, particularly as Laurent said, in the European 0:02:41.120 --> 0:02:46.040 banks which have been you know, extremely strong performers, you 0:02:46.080 --> 0:02:48.880 know a year to date and perhaps you know over 0:02:48.919 --> 0:02:54.080 the last twelve months on you know, widening spreads, lending 0:02:54.120 --> 0:02:57.600 spreads and improving credit conditions in general in Europe. 0:02:57.919 --> 0:03:00.200 Why don't we take a step back, because I'm sure 0:03:00.240 --> 0:03:02.959 our listeners would love to hear what a typical day 0:03:03.040 --> 0:03:03.760 is like for you. 0:03:03.800 --> 0:03:08.840 We have a daily research meeting at ten o'clock and 0:03:09.639 --> 0:03:13.000 I spend most of my morning from the market open 0:03:13.280 --> 0:03:16.080 just to try to do all the maintenance research to 0:03:16.080 --> 0:03:18.840 get rid of it ready for that meeting. And you know, 0:03:18.919 --> 0:03:23.520 after that the day is free to focus on researching 0:03:23.560 --> 0:03:28.200 new stocks, doing client servicing. But when my son asked 0:03:28.200 --> 0:03:31.240 me what I do all day, it's primarily just reading stuff, 0:03:32.240 --> 0:03:35.000 just trying to stay on top of everything and reading 0:03:35.000 --> 0:03:37.120 as much as I can to try to find the 0:03:37.240 --> 0:03:39.360 edge out there in what we do. 0:03:40.120 --> 0:03:40.360 Great. 0:03:40.680 --> 0:03:43.680 So if we zero in on the international growth strategy, 0:03:43.960 --> 0:03:47.640 what is the process behind that in terms of how 0:03:47.680 --> 0:03:49.600 do companies make their way to the portfolio? 0:03:50.440 --> 0:03:54.720 It starts with, you know, our investment philosophy and drives 0:03:54.760 --> 0:03:59.360 our process and an investment philosophy should answer two questions. 0:04:00.480 --> 0:04:03.960 You know, the first is what a market inefficiency are 0:04:03.960 --> 0:04:06.880 you trying to exploit? And the second is what's your 0:04:06.880 --> 0:04:10.840 investment criteria? What are you looking for? And from our perspective, 0:04:11.200 --> 0:04:14.560 you know, we're trying to exploit time arbitrage and we're 0:04:14.560 --> 0:04:18.320 not the first manager to try to do that, but 0:04:18.560 --> 0:04:21.599 we believe, you know, our edge is that our people, 0:04:22.680 --> 0:04:28.039 investment process are parent and bared, and our place here 0:04:28.080 --> 0:04:31.560 in Boulder actually enable us to be long term as 0:04:31.600 --> 0:04:32.360 opposed to just. 0:04:32.360 --> 0:04:33.240 Aspire to it. 0:04:33.920 --> 0:04:39.279 So our people, you know, we have a focused team 0:04:39.400 --> 0:04:44.440 that's dedicated to deploying an investment process that tries to 0:04:44.480 --> 0:04:47.040 answer the question, you know, what could a company. 0:04:46.680 --> 0:04:48.360 Look like five years from now. 0:04:48.880 --> 0:04:52.320 We're concentrated on the long term fundamentals that drive wealth 0:04:52.360 --> 0:04:56.880 creation rather than on short term issues that drive share 0:04:56.920 --> 0:05:00.520 price volatility. I think it's important to say that about 0:05:00.520 --> 0:05:03.480 our parent. You know, you can't be long term unless 0:05:03.640 --> 0:05:06.839 you know you're the person that writes the check is 0:05:06.880 --> 0:05:11.080 long term and bear it. As a private employee owned 0:05:11.200 --> 0:05:15.640 organization has a long track record of building asset management 0:05:15.680 --> 0:05:19.920 teams over decades, So you know, I can feel confident 0:05:20.360 --> 0:05:23.640 in you know, doing my job, keeping my long term 0:05:23.680 --> 0:05:29.360 perspective without you know, fear of being turfed out because 0:05:29.400 --> 0:05:33.080 of short term performance issues or failing to hit asset 0:05:33.160 --> 0:05:37.080 gathering targets. And you know, an understated advantage I think 0:05:37.080 --> 0:05:39.640 we have just being in Boulder, away from the noise, 0:05:40.440 --> 0:05:44.480 enables us to keep our long term perspective and specifically 0:05:44.520 --> 0:05:47.120 what we're looking for in our companies. 0:05:47.640 --> 0:05:49.200 You know, we're looking for three things. 0:05:49.720 --> 0:05:53.839 Companies exposed to a durable, long term growth trend, you know, 0:05:53.880 --> 0:05:58.440 that possessed competitive advantages that enables them to capture the 0:05:58.480 --> 0:06:02.320 line share the profit pool created by that trend, and 0:06:02.440 --> 0:06:05.600 can be purchased at a reasonable valuation in the context 0:06:05.640 --> 0:06:10.680 of their growth outlook and competitive positioning. So you know 0:06:10.800 --> 0:06:14.080 that in a nutshell is our investment philosophy and process. 0:06:15.200 --> 0:06:19.520 And so you mentioned growth themes. Are there certain secular 0:06:19.520 --> 0:06:21.160 growth themes that you're looking at right now? 0:06:22.240 --> 0:06:25.360 Yeah, I think the growth themes out there, everyone's focused 0:06:25.360 --> 0:06:29.760 primarily on AI, you know, and the growth themes you know, 0:06:29.800 --> 0:06:34.000 most people focus on rising middle class or you know, 0:06:34.400 --> 0:06:38.039 digital transformation. That those themes are well known and well 0:06:38.160 --> 0:06:42.479 established in the marketplace, and we're no different than than 0:06:42.520 --> 0:06:45.640 trying to you know, participate in those themes. I think 0:06:46.240 --> 0:06:49.680 the value add isn't in identifying the theme itself. It's 0:06:49.720 --> 0:06:55.200 actually trying to identify the bottleneck company that's best position 0:06:55.360 --> 0:06:58.400 to extract value from that trend. And and so that's 0:06:58.440 --> 0:07:00.840 where we focus most of our efforts on. 0:07:02.000 --> 0:07:04.960 And are there I guess any characteristics you're looking at, Like, 0:07:05.240 --> 0:07:08.440 is it you know, focused on revenue growth or earnings 0:07:08.440 --> 0:07:11.400 growth or ear any type of metrics. 0:07:11.960 --> 0:07:14.000 Yeah, it starts with revenue growth. 0:07:14.320 --> 0:07:17.400 I mean, we do look at earnings growth and free 0:07:17.400 --> 0:07:21.160 cash flow growth, but sometimes you know, revenue growth tends 0:07:21.160 --> 0:07:23.920 to be the most stable and. 0:07:24.320 --> 0:07:25.320 The most sustainable. 0:07:25.760 --> 0:07:28.400 You know, sometimes when you look at companies that have 0:07:28.520 --> 0:07:32.080 impressive earnings growth that's driven by margin expansion, sometimes at 0:07:32.120 --> 0:07:36.000 margin expansion will eventually hit a ceiling and so it's 0:07:36.040 --> 0:07:39.640 not as sustainable as if we can identify a company 0:07:39.720 --> 0:07:42.320 with a long growth runway where you can see the 0:07:42.360 --> 0:07:47.280 revenues growing at a steady pace and if you get 0:07:47.280 --> 0:07:49.560 margin expansion on top of that, that's a bonus. So 0:07:49.640 --> 0:07:53.840 we tend to focus more on top line growth initially, 0:07:54.440 --> 0:07:57.880 and then you know, if there is an earnings component 0:07:57.960 --> 0:07:59.640 to it through margin expansion. 0:08:00.720 --> 0:08:03.520 I think that's a bonus on top great. 0:08:03.720 --> 0:08:05.960 I know Lawren's got a bunch of questions you wants 0:08:05.960 --> 0:08:07.560 to ask, but I just want to ask quickly. You 0:08:07.560 --> 0:08:11.120 know you mentioned reasonable valuation. How do you determine that? 0:08:12.280 --> 0:08:13.800 Yeah, I mean reasonable. 0:08:14.040 --> 0:08:17.120 I mean we leave you valuation not in terms of, 0:08:17.200 --> 0:08:20.200 you know, what's the right multiple for a particular stock, 0:08:20.400 --> 0:08:23.920 or putting a bunch of numbers into a model and 0:08:24.520 --> 0:08:26.400 get to a price target and see if there's a 0:08:26.440 --> 0:08:30.800 difference between you know, what our valuation is and what 0:08:30.840 --> 0:08:33.760 the stock is trading at. I mean, we think of 0:08:34.160 --> 0:08:38.600 valuation more in terms of trying to separate fundamentals from 0:08:38.640 --> 0:08:42.400 expectations that are embedded in the share price at a 0:08:42.400 --> 0:08:48.040 particular point, and expectations not consensus forecasts and a company's 0:08:48.080 --> 0:08:50.080 ability to beat it in the short term, but more 0:08:50.320 --> 0:08:54.280 over the long term fundamentals you know, over a longer 0:08:54.360 --> 0:08:58.640 term period than say consensus which runs three years out, 0:08:58.800 --> 0:09:01.640 and you know, if they're we look for opportunities where 0:09:01.679 --> 0:09:04.800 there's a gap between you know, our assessment of the 0:09:04.840 --> 0:09:09.599 fundamentals and the expectations embedded in the share price, and 0:09:10.120 --> 0:09:13.760 where we see those opportunities, we act and you know, 0:09:13.960 --> 0:09:17.160 take advantage of those you know, gaps in I think 0:09:17.160 --> 0:09:20.400 people have called it the past, the variant perception between 0:09:20.400 --> 0:09:23.920 ourselves and the market. But from a quantification point of view, 0:09:23.920 --> 0:09:26.920 that's how we think about valuation. 0:09:27.400 --> 0:09:30.040 So Nate, I would like to investigate a little bit 0:09:30.080 --> 0:09:35.320 more about some of those investment opportunities, especially first in Europe. 0:09:36.640 --> 0:09:39.480 In which sectors or which investment theme do you think 0:09:39.559 --> 0:09:44.360 could be interesting in Europe, especially where you think valuation 0:09:44.600 --> 0:09:47.600 are at the reason reasonable price. 0:09:47.679 --> 0:09:50.920 You know, in Europe, I mean, we have tended to 0:09:50.960 --> 0:09:56.880 focus on companies in the medical pharmaceutical space and also 0:09:57.240 --> 0:10:03.200 in the commercial aerospace industry and then pharmaceuticals. We like 0:10:03.320 --> 0:10:07.920 the long term prospects of Novo Nordisk despite all of 0:10:08.120 --> 0:10:11.640 the issues that you see playing in the near term 0:10:11.679 --> 0:10:16.160 share price. We think it's misunderstood from a you know, 0:10:16.200 --> 0:10:20.600 particularly from a growth outlook perspective, given the markets just 0:10:21.760 --> 0:10:24.600 tends to think of weight loss drugs as a winner 0:10:24.640 --> 0:10:28.320 take all market. But yet Novo Nordisk has in the 0:10:28.360 --> 0:10:31.360 market is more than big enough to support multiple players, 0:10:31.960 --> 0:10:34.280 and the market tends to be focused on what is 0:10:34.320 --> 0:10:38.120 happening in the US, where we believe Novo Nordisk has 0:10:38.480 --> 0:10:45.200 very large competitive advantages in distribution, particularly outside the US. 0:10:45.240 --> 0:10:47.080 It's not just about the drug. You need to be 0:10:47.160 --> 0:10:48.199 able to market. 0:10:47.920 --> 0:10:53.920 It, distribute it and manufacture it at scale. And in 0:10:53.960 --> 0:10:59.000 those aspects Novo we still have strong advantages. 0:10:59.320 --> 0:10:59.920 In Europe. 0:11:00.280 --> 0:11:04.040 As you mentioned, I'm in defense spending has been really 0:11:04.120 --> 0:11:07.720 the hottest team a theme as in the beginning of 0:11:07.760 --> 0:11:08.080 the year. 0:11:08.120 --> 0:11:10.199 Do you have any specific view on that. 0:11:11.160 --> 0:11:14.360 Some of the companies have rallied very strongly, but it 0:11:14.440 --> 0:11:18.280 seems that the addressable market are going to increase fit 0:11:18.400 --> 0:11:22.080 significantly over the next three to five years. So do 0:11:22.160 --> 0:11:25.000 you think it could still be an opportunity or most 0:11:25.040 --> 0:11:28.240 of the grossest price team. 0:11:28.440 --> 0:11:29.320 It's a good question. 0:11:29.440 --> 0:11:32.720 I mean, even within our holding in Saffron, they're twenty 0:11:32.760 --> 0:11:37.280 percent of the revenues are defense related, and in particular 0:11:37.440 --> 0:11:42.000 they called out their exposure to the defense, electronics and 0:11:42.080 --> 0:11:45.800 space portion of their business, which they expect to double 0:11:46.280 --> 0:11:49.120 over the next five years, so very strong growth outlook. 0:11:49.760 --> 0:11:55.559 We don't have exposure to the pure play European defense companies, 0:11:55.559 --> 0:11:59.360 so I'm hesitant to call out any specific companies, but 0:11:59.400 --> 0:12:02.079 I guess at a very high level, I think I. 0:12:02.000 --> 0:12:03.440 Can point you to two things. 0:12:03.880 --> 0:12:10.200 One is, you know, over history, your US defense the 0:12:10.200 --> 0:12:15.559 big US defense prime contractors have traded at significant premiums 0:12:15.640 --> 0:12:17.960 to European defense players. 0:12:18.640 --> 0:12:20.120 That has completely reversed. 0:12:20.160 --> 0:12:24.400 In fact, the historical premium, even at the peaks, now 0:12:24.480 --> 0:12:29.040 lies with the European companies. And then also you know, 0:12:29.160 --> 0:12:33.760 from a just you know, simple valuation, playing around with 0:12:33.800 --> 0:12:36.720 the valuations. If if you look at the market caps 0:12:36.840 --> 0:12:39.960 of some of the big European companies, they're you know, 0:12:40.480 --> 0:12:43.680 you know, slightly below or equal to that of their 0:12:43.840 --> 0:12:48.400 US counterparts. But yet the you know, US defense contractors 0:12:48.520 --> 0:12:53.160 revenue base is much larger, So there's a lot of 0:12:53.200 --> 0:12:55.520 you know, in terms of your comment about there's a 0:12:55.520 --> 0:12:59.640 lot of growth being factored in, you know, that seems 0:12:59.679 --> 0:13:02.560 to be the case, just in terms of simple you know, 0:13:02.840 --> 0:13:07.040 EVA revenues or market cap, the revenue type of comparisons. 0:13:07.679 --> 0:13:10.480 I guess the last thing I would add also is, 0:13:10.640 --> 0:13:14.040 you know, US defense companies tend to be good at 0:13:14.200 --> 0:13:18.199 executing at scale in terms of the size of the contracts, 0:13:18.360 --> 0:13:22.920 and you know, if European companies defense companies get similar 0:13:22.960 --> 0:13:26.120 sized contracts, I would say the jury is still out 0:13:26.400 --> 0:13:32.640 on their ability to turn that potential revenue opportunity into profits, 0:13:32.679 --> 0:13:37.160 similar to US companies. So those were you know, just 0:13:37.200 --> 0:13:42.160 some general comments on defense, you know, as we look at. 0:13:42.120 --> 0:13:44.760 It, I mean, moving further east, I mean, if we 0:13:44.800 --> 0:13:49.000 look at Asia xtrapen, I mean, which checkters or country 0:13:49.040 --> 0:13:52.160 do you think looks the most promising And maybe a 0:13:52.240 --> 0:13:55.240 more specific question on China. Last year there were a 0:13:55.240 --> 0:13:58.120 lot of questions if China was going to see a 0:13:58.200 --> 0:14:02.880 rebounding gross and if it was becoming an investible what 0:14:03.040 --> 0:14:07.440 are I mean also your views on the China growth opportunities, 0:14:07.840 --> 0:14:10.840 but overall in Asia example, and where do you think 0:14:11.280 --> 0:14:12.960 the growth opportunities are. 0:14:14.120 --> 0:14:18.760 Yeah, we're a lot we're bottoms up investors, so you know, 0:14:19.160 --> 0:14:21.640 at the end of the day, we're investing in companies, 0:14:21.720 --> 0:14:27.440 not countries. So in some respects our views on the 0:14:27.480 --> 0:14:31.080 country as irrelevant as long as the franchise that we're buying, 0:14:32.000 --> 0:14:36.200 you know, meets our requirements of you know, having strong growth, 0:14:37.520 --> 0:14:41.800 a strong growth outlook, and competitive advantages to turn that 0:14:41.880 --> 0:14:48.160 growth into into value. And you know, in terms of 0:14:48.560 --> 0:14:52.320 you know, Asia, you know, we have tended to find 0:14:52.400 --> 0:14:56.600 our financials exposure you know in Asia, you know, relative 0:14:56.680 --> 0:15:00.640 to Europe, in Europe, we feel European bank as a 0:15:00.640 --> 0:15:03.760 as a group are relatively you know low system loan 0:15:03.840 --> 0:15:09.800 growth UH and relatively undifferentiated, whereas in Asia we have 0:15:09.880 --> 0:15:12.680 found you know, system loan growth being in the high 0:15:12.680 --> 0:15:16.600 single digits UH. And the companies that we've tended to 0:15:16.680 --> 0:15:22.600 focus on our companies that are advantaged in some specialized 0:15:22.680 --> 0:15:26.120 niche you know, like a bank Rocky Yacht in Indonesia, 0:15:26.160 --> 0:15:30.960 which is a specialist UH and dominates the microfinance industry 0:15:31.200 --> 0:15:32.840 in Indonesia. 0:15:34.040 --> 0:15:34.240 You know. 0:15:34.280 --> 0:15:38.520 Our other holding in Southeast Asia, you know, is uh 0:15:38.760 --> 0:15:42.760 C Limited, which you know will benefit from increased penetration 0:15:42.880 --> 0:15:45.560 of e commerce UH and it has it has a 0:15:45.600 --> 0:15:49.000 strong business model. It's been able to fend off increasing 0:15:49.920 --> 0:15:53.360 Chinese competition, you know. And speaking of China, I mean 0:15:53.400 --> 0:15:57.520 we are invested in China, and our exposure there has 0:15:57.560 --> 0:16:01.760 been focused on you know, domes, stick plays and also 0:16:01.800 --> 0:16:06.000 in the healthcare space. You know, those are two areas 0:16:06.760 --> 0:16:09.160 where the Chinese government seems to be focused on the 0:16:09.200 --> 0:16:13.400 long term one in terms of trying to reorient their 0:16:13.480 --> 0:16:18.400 economy to more consumption based and also healthcare delivery or 0:16:18.440 --> 0:16:24.040 improving healthcare delivery is a priority for the government. 0:16:24.120 --> 0:16:26.200 So it has been a. 0:16:26.160 --> 0:16:31.240 Controversial area from an from an investment point of view, 0:16:31.720 --> 0:16:34.600 but you know, you need to be able to you know, 0:16:35.160 --> 0:16:38.640 the risks. From our view, we're being more than compensated 0:16:40.160 --> 0:16:43.320 for the risks of investing in China by sort of 0:16:43.360 --> 0:16:46.520 the by both the valuations and also the quality of 0:16:46.760 --> 0:16:50.680 companies that we are finding there. And you know that 0:16:50.840 --> 0:16:54.760 explains our you know, market weight to China, which is 0:16:54.800 --> 0:17:00.320 actually somewhat of an outlier amongst some active managers, you. 0:17:00.320 --> 0:17:02.680 Know, if we're talking about China, I just wanted to 0:17:02.720 --> 0:17:05.399 ask about tariffs just a little bit. You know, you 0:17:05.440 --> 0:17:08.479 mentioned your process is you know, long term in nature, 0:17:08.560 --> 0:17:11.439 but has it been affected at all by tariffs? You know, 0:17:11.480 --> 0:17:14.119 whether it's just you know, the assumptions you're making about 0:17:14.119 --> 0:17:16.800 the individual companies, is that kind of like made a 0:17:16.800 --> 0:17:19.680 big change and things, you know in general. 0:17:19.480 --> 0:17:22.840 I mean, are the way we're framing tariffs is that 0:17:22.880 --> 0:17:26.400 it's a growth shock to the global economy. I mean, 0:17:26.480 --> 0:17:31.640 I think the emerging consensus view is that tariffs will 0:17:31.720 --> 0:17:37.679 ultimately be stagflationary in the to the US economy, you know, 0:17:38.040 --> 0:17:41.760 want and increases the probability of recession, and you will 0:17:41.800 --> 0:17:45.680 probably put upward pressure on prices, and you know, from 0:17:45.680 --> 0:17:48.720 a growth you know, as a US is a significant 0:17:48.760 --> 0:17:51.679 net contributor to global growth. I mean that ultimately is 0:17:51.680 --> 0:17:55.760 going to result in you know, lower, lower go global growth, 0:17:55.840 --> 0:17:58.000 so hence the the growth shock. 0:17:58.080 --> 0:17:59.840 And you know. 0:18:00.119 --> 0:18:04.639 We we actually think, you know, what we try to 0:18:04.680 --> 0:18:09.359 do is, you know, find companies that have characteristics that 0:18:09.480 --> 0:18:13.679 enable them to do better in most future states of 0:18:13.760 --> 0:18:16.800 the world. And I guess what that means is, you know, 0:18:16.880 --> 0:18:19.760 we're just looking for companies that can pull more levers 0:18:20.520 --> 0:18:24.600 to grow even in tough environments. And we expect our 0:18:24.680 --> 0:18:30.400 companies because they're advantaged because they're conservatively financed, to emerge 0:18:30.440 --> 0:18:34.480 on the other side of tariffs, stronger relative to their competition, 0:18:35.160 --> 0:18:40.480 and particularly in their ability to pass through any tariff 0:18:40.520 --> 0:18:44.040 impacts because their products, you know, they have a pricing 0:18:44.119 --> 0:18:49.040 power and their products are mission critical in many respects. 0:18:49.680 --> 0:18:51.280 Okay, you know, I also do want to ask about 0:18:51.280 --> 0:18:54.880 the portfolio. You've got a pretty high conviction portfolio. How 0:18:54.920 --> 0:18:56.119 do you wait positions? 0:18:56.640 --> 0:18:57.879 Yeah, it's a very good question. 0:18:58.400 --> 0:19:01.840 You know, I've been around portfolio teams that where the 0:19:01.880 --> 0:19:06.560 conversation starts, you know, when we talk about waitings you know, 0:19:07.080 --> 0:19:11.200 all the default position is if something's working, you know, 0:19:11.800 --> 0:19:15.679 don't don't mess with it, or you know, I or 0:19:15.760 --> 0:19:18.280 the conversation starts, I feel. 0:19:17.880 --> 0:19:20.560 Like, you know, this is the right time for company X. 0:19:21.200 --> 0:19:24.080 I think we take a more disciplined approach to how 0:19:24.119 --> 0:19:28.240 we approach waitings and it's something that we call our 0:19:28.400 --> 0:19:33.800 VR process internally, and that stands for you know, revenue growth, 0:19:34.440 --> 0:19:38.639 valuation and return on investor capital. And the way that 0:19:38.760 --> 0:19:42.560 it works is we force rank our companies based on 0:19:42.680 --> 0:19:47.720 revenue growth, forward looking valuation metric and return on investor 0:19:47.800 --> 0:19:51.840 capital as those are the quantitative proxies for the three 0:19:51.920 --> 0:19:56.479 things that we require in our companies, growth, attractive price, 0:19:56.640 --> 0:20:01.280 and competitive advantage. And you can imagine what moves companies 0:20:01.400 --> 0:20:04.200 up and down those rankings in the short term or 0:20:04.680 --> 0:20:08.760 changes in valuation or share price. And you know, I 0:20:08.760 --> 0:20:12.320 don't want to give the impression that we're mechanically rebalancing 0:20:12.359 --> 0:20:17.040 our portfolio to uh, you know, a quantitative tool, because 0:20:17.200 --> 0:20:21.439 we're not the value out of the r VR, you know, 0:20:21.560 --> 0:20:25.840 first of all, is to highlight disconnects between you know, 0:20:25.880 --> 0:20:29.920 a company's actual weight in the portfolio and it's our 0:20:30.119 --> 0:20:33.480 you know, it's quantitative ranking, and there are probably good 0:20:33.520 --> 0:20:36.960 reasons for that disconnect to exist. But if we can't 0:20:37.280 --> 0:20:42.080 resolve that disconnect, you know, we'll take profits in one 0:20:42.119 --> 0:20:47.240 area and redeploy proceeds to to better risk reward opportunities 0:20:47.960 --> 0:20:49.200 within the portfolio. 0:20:49.840 --> 0:20:53.200 And you know, the other value out of the r VR. 0:20:53.040 --> 0:20:56.320 For us is just to have a objective starting point 0:20:56.359 --> 0:21:01.359 to start that discussion about how do we orient the 0:21:01.440 --> 0:21:06.720 portfolio to best capture you know, risk award. 0:21:06.880 --> 0:21:10.359 Opportunities based on what we're seeing in the market. 0:21:11.200 --> 0:21:14.280 I think overall, i'd make the comment that, you know, 0:21:14.320 --> 0:21:18.640 our long term objective is to have the thirty best 0:21:18.760 --> 0:21:22.760 international businesses in our portfolio at all times, but over 0:21:22.840 --> 0:21:27.240 shorter term periods you can imagine, you know, our challenge 0:21:27.240 --> 0:21:30.320 is to ensure that our companies are held at the 0:21:30.400 --> 0:21:34.960 right weights to best balance risk award and by having 0:21:34.960 --> 0:21:40.480 a discipline framework around you know, waitings is I think 0:21:40.760 --> 0:21:43.760 a part of our process that helps differentiates us and 0:21:44.320 --> 0:21:47.639 has enabled us to both you know, drive returns and 0:21:47.760 --> 0:21:53.600 up markets and protect on the downside in tougher markets. 0:21:55.280 --> 0:21:58.919 A related question, as a startpicker, do you think that 0:21:59.040 --> 0:22:04.080 market concentrate is becoming an issue for international liquities, and 0:22:04.200 --> 0:22:06.320 if it is the case, I mean, how do you 0:22:06.400 --> 0:22:10.600 manage your portfolio in order to outperform the market which 0:22:10.640 --> 0:22:12.880 is just driven by a few names. 0:22:13.880 --> 0:22:17.600 Yeah, it's a it's an interesting question, and it reminds 0:22:17.640 --> 0:22:20.399 me of of if you'd allow me to tell a 0:22:20.400 --> 0:22:23.200 little story. I have a good friend of mine that manages, 0:22:23.680 --> 0:22:26.800 or he used to manage a US large. 0:22:26.560 --> 0:22:28.960 Cap growth portfolio. 0:22:28.920 --> 0:22:31.399 And you know, I called him one day after seeing 0:22:31.440 --> 0:22:34.720 his numbers and called to congratulate him on what wonderful 0:22:34.800 --> 0:22:38.520 numbers that he put up, and he basically told me thanks, 0:22:38.560 --> 0:22:41.720 but no thanks. You know, it doesn't mean anything when 0:22:41.720 --> 0:22:45.480 your top deacyle and the benchmark is right behind you. 0:22:45.960 --> 0:22:49.440 And it was because the mag seven was driving most 0:22:49.440 --> 0:22:53.800 of the benchmark performance. I think, fortunately for international investors, 0:22:53.840 --> 0:22:58.480 we're nowhere near that level of concentration. If you count, 0:22:58.800 --> 0:23:01.960 if you consider the US to be concentrated, I think 0:23:02.200 --> 0:23:05.200 top ten names in the S and P five hundred 0:23:05.400 --> 0:23:08.960 are almost at forty percent of the index by weight, 0:23:09.720 --> 0:23:13.800 whereas if you look at the Aqui Xus index, which 0:23:13.840 --> 0:23:17.199 is what we're benchmark too, it's only at eleven. So 0:23:18.840 --> 0:23:21.879 you know, from that perspective, we're comforted in the sense 0:23:21.920 --> 0:23:25.160 that there's still a lot of scope for stock pickers 0:23:25.200 --> 0:23:29.480 to add value without having to resort to closet indexing 0:23:29.640 --> 0:23:32.240 the top ten positions in the benchmark. 0:23:33.040 --> 0:23:36.280 Okay, I would like to bounce on one of your 0:23:36.320 --> 0:23:41.879 earlier comments about European l scale, where pharmaceutical names like 0:23:42.200 --> 0:23:49.680 Novo Nordisk or sogsk Astrasenika are trading on very low multiples. 0:23:50.119 --> 0:23:53.960 I mean, given the underperformance of those names, how do 0:23:54.040 --> 0:23:57.640 you manage I would say, position which are losing money 0:23:58.760 --> 0:24:03.080 in your portfolio? Often keeping your losers could be a 0:24:03.200 --> 0:24:07.040 major source of under performance. So how do you assess 0:24:07.640 --> 0:24:12.680 losing market positions and how do you decide to add 0:24:12.760 --> 0:24:16.600 up to your existing position compared to say, no, we 0:24:16.720 --> 0:24:19.960 made a bad choice and so we exceed the position. 0:24:20.119 --> 0:24:21.679 How do you manage to be stread up? 0:24:22.640 --> 0:24:25.879 Yeah, I you know, selling is a lot harder than buying. 0:24:26.119 --> 0:24:28.960 I think you know that is that is definitely true, 0:24:29.520 --> 0:24:32.080 especially when humans are involved, because there's a lot of 0:24:32.119 --> 0:24:36.960 emotion built up in there, and you know, for us, 0:24:37.080 --> 0:24:40.240 you know, it's an all hands on deck approach whenever 0:24:40.320 --> 0:24:43.680 we do have an underperformer, and the way that we 0:24:43.760 --> 0:24:46.360 monitor that one is if a company has a very 0:24:46.400 --> 0:24:50.480 sudden draw down, it automatically goes into review, or if 0:24:50.480 --> 0:24:55.639 it shows up consistently in the underperformers or detractors lists 0:24:55.960 --> 0:24:59.359 for several months or quarters, it goes into an automatic 0:24:59.440 --> 0:25:03.320 review for us, you know, and you when I say 0:25:03.320 --> 0:25:06.520 all hands on deck, I mean myself and my two 0:25:06.560 --> 0:25:12.320 other Code portfolio managers, Hi ching Lee and Jesse Flores 0:25:12.480 --> 0:25:14.440 get together and we try. 0:25:14.240 --> 0:25:15.800 To re underwrite the position. 0:25:17.280 --> 0:25:19.679 And you know, we try to separate is it a 0:25:19.720 --> 0:25:24.359 cyclical factor or is it a secular factor? And you know, 0:25:24.400 --> 0:25:27.040