WEBVTT - Osterweis’ Wong on Forward-Looking Quality: Inside Active 0:00:13.160 --> 0:00:16.200 Welcome to Inside Active, a podcast about active managers that 0:00:16.239 --> 0:00:20.160 goes beyond soundbites and headlines and looks deeper into their processes, 0:00:20.440 --> 0:00:24.279 challenges and philosophies and security selection. I'm David Cohne, i 0:00:24.360 --> 0:00:27.800 lead mutual fund and active research at Bloomberg Intelligence. Today 0:00:27.920 --> 0:00:30.720 my co host is Michael casper Us, small cap and 0:00:30.760 --> 0:00:34.840 sector strategist at Bloomberg Intelligence. Mike, thanks for joining me today. 0:00:35.080 --> 0:00:35.760 Thank you, David. 0:00:36.080 --> 0:00:38.280 So you wrote an interesting note last week on the 0:00:38.360 --> 0:00:42.000 connection between small cap stocks and M and A. So 0:00:42.040 --> 0:00:45.559 how to merge his and acquisitions affect Russell two thousand performance? 0:00:45.960 --> 0:00:48.760 Yeah, Well, first a recap of what happened in twenty 0:00:48.760 --> 0:00:50.800 twenty four, and it was the weakest year we had 0:00:50.840 --> 0:00:53.960 on record going back to about two thousand, with the 0:00:54.000 --> 0:00:56.600 last quarter of twenty twenty four being particularly bad, just 0:00:56.720 --> 0:00:59.120 two deals worth a paltry four point four billion in 0:00:59.160 --> 0:01:01.440 the fourth quarter, But that caped a year where there 0:01:01.440 --> 0:01:03.560 was only about fifty two deals that was worse than 0:01:03.600 --> 0:01:07.360 two thousand and eight sixty one deals and making it 0:01:07.400 --> 0:01:10.039 the worst going back to two thousand. Now you might 0:01:10.120 --> 0:01:12.840 be wondering where did that dip come from. It was 0:01:12.880 --> 0:01:15.600 definitely in financials, they made up just nine point three 0:01:15.680 --> 0:01:19.760 percent of last year's fifty four deals. Typically they average 0:01:19.800 --> 0:01:24.200 around eighteen point three percent or so of deals annually 0:01:24.280 --> 0:01:27.720 going back to again two thousand, So really the big 0:01:27.720 --> 0:01:31.600 departure was in financials only. Energy, though saw more deals 0:01:31.600 --> 0:01:35.840 than its pre pandemic and X Great Financial Crisis average. 0:01:36.120 --> 0:01:38.119 But why does this really matter for small cap stocks? 0:01:38.120 --> 0:01:41.320 At the end of the day, small cap performance and 0:01:41.440 --> 0:01:43.320 the amount of M and A, so the amount of 0:01:43.360 --> 0:01:46.479 targets in the small cap index are pretty closely linked. 0:01:46.520 --> 0:01:48.280 So if you look at calendar year performance of the 0:01:48.320 --> 0:01:52.040 rest of two thousand and deal count and value in 0:01:52.080 --> 0:01:55.600 the correlation between the two Russell two thousand annual performance, 0:01:55.680 --> 0:02:01.040 calendar year performance is point five two correlated with count 0:02:01.160 --> 0:02:03.800 and it's point four correlated to deal value. So a 0:02:03.840 --> 0:02:07.760 pretty significant positive correlation there. Obviously is takeouts to accumulate. 0:02:07.920 --> 0:02:10.200 It drives a premium for some of these small cap 0:02:10.240 --> 0:02:13.640 stocks in some of these sectors. And one of the 0:02:13.639 --> 0:02:17.480 cool things just before I give up on this, one 0:02:17.480 --> 0:02:18.800 of the cool things we did that I want to 0:02:18.800 --> 0:02:22.880 mention is that we tried to look for commonality across 0:02:23.280 --> 0:02:25.760 these takeout targets in the Russell two thousand, going back 0:02:25.800 --> 0:02:29.400 to again two thousand or two thousand and one, and 0:02:29.480 --> 0:02:33.000 what we found the commonality amongst them was most of 0:02:33.040 --> 0:02:36.079 them had positive EBADA for the year prior to the 0:02:36.120 --> 0:02:38.560 deal's announcement. Over sixty percent of all those deals going 0:02:38.600 --> 0:02:42.320 back to two thousand had positive EBADA seventy two percent 0:02:42.400 --> 0:02:45.480 or so. We're cheaper than the index median ev to 0:02:45.520 --> 0:02:49.600 EBADA and about seventy percent had lower net debt to ebadas, 0:02:49.600 --> 0:02:52.560 a lower leverage leverage than the median stock in the 0:02:52.639 --> 0:02:55.000 Russell two thousand. So we did a nice little takeover 0:02:55.080 --> 0:02:58.440 target screen looking at companies in the Russell two thousand today. 0:02:59.400 --> 0:03:02.560 That's great. So if we are talking about small caps, 0:03:02.560 --> 0:03:04.400 I think it's a great time to welcome our guest. 0:03:04.800 --> 0:03:07.640 I'd like to welcome Brian Wong to the podcast. Brian 0:03:07.720 --> 0:03:11.120 is vice president and small cap growth portfolio manager at 0:03:11.160 --> 0:03:17.560 Ostrowis and a manager for the Austrowis Opportunity Fund ticker OSTGX. Brian, 0:03:17.600 --> 0:03:18.720 thanks for joining us today. 0:03:18.919 --> 0:03:19.600 Thanks for having me. 0:03:19.680 --> 0:03:22.360 David, So I'd like to begin by asking you how 0:03:22.400 --> 0:03:24.079 you got your start in the investment business. 0:03:24.120 --> 0:03:26.200 Sure, well, I went to college at Yale. I was 0:03:26.200 --> 0:03:29.880 a political science major, so a great great training for investments, 0:03:29.919 --> 0:03:33.360 of course, and really what I was focused on studying 0:03:33.360 --> 0:03:36.880 in college was the Grand Strategy of Countries. So I 0:03:36.880 --> 0:03:40.360 wrote my senior essay on the Grand Strategy of Dung Dungshaoping, 0:03:40.440 --> 0:03:44.840 who's really China sort of modern leader following Mount Malzaedong 0:03:45.000 --> 0:03:48.480 really opened up the economy there, but still preserved capitalism 0:03:48.520 --> 0:03:53.880 with Chinese characteristics. And when I was graduating from college, 0:03:53.920 --> 0:03:56.520 I got a great opportunity to join a long short 0:03:56.520 --> 0:04:00.920 hedge fund run by Yale history major Dan, who really 0:04:00.960 --> 0:04:04.360 saw how my skill set might translate, and so the 0:04:04.360 --> 0:04:08.160 first book he gave me was Competitive Strategy by Michael Porter. 0:04:09.360 --> 0:04:12.480 So really I went from studying the Grand strategy of 0:04:12.480 --> 0:04:16.920 countries and leaders to companies. That was just a tremendous 0:04:16.920 --> 0:04:20.480 opportunity to learn the craft of investing. The senior analyst 0:04:20.520 --> 0:04:22.359 that the firm was a fellow by the name of 0:04:22.440 --> 0:04:25.120 Sal Khon, who went on to found the con Academy. 0:04:25.600 --> 0:04:28.160 And so I remember just sitting with Sal after work 0:04:28.320 --> 0:04:32.000 many days, seeing him watch him record these videos of 0:04:32.120 --> 0:04:35.640 him tutoring his cousin in math, and really sort of 0:04:35.839 --> 0:04:38.839 grew to appreciate the power of technology, obviously leveraging a 0:04:38.880 --> 0:04:42.159 new model of distribution YouTube to reach a much broader 0:04:42.200 --> 0:04:45.440 audience of millions of people. And the idea of using 0:04:45.440 --> 0:04:49.240 technology as this efficiency driver. You can record something once, 0:04:49.320 --> 0:04:53.159 but obviously the content is forever. And then additionally, I 0:04:53.160 --> 0:04:56.240 think just this idea of scaling by creating value for others. 0:04:56.960 --> 0:04:59.840 You know, dominant companies don't start out that way. Every 0:05:00.160 --> 0:05:04.159 entrepreneur has humble, humble beginnings. UH an idea. You know, 0:05:04.240 --> 0:05:05.559 it requires very hard work. 0:05:06.400 --> 0:05:08.960 So that was a neat experience to see very early 0:05:09.000 --> 0:05:09.719 on in my career. 0:05:10.320 --> 0:05:12.560 And so when Sal left to start kN Academy and 0:05:12.560 --> 0:05:16.200 and Dan retired, I joined the Packard Foundation, which is 0:05:16.200 --> 0:05:19.600 now run by Kim Sargent, a disciple formerly of the 0:05:19.680 --> 0:05:22.960 Yale Endowment, and and there I learned the value of 0:05:23.000 --> 0:05:26.719 long term investing uh and and for the past decade 0:05:26.720 --> 0:05:31.000 I've been at Osterweiss applying sort of what I've learned 0:05:31.040 --> 0:05:33.960 through those three to two former stages of my career. 0:05:34.120 --> 0:05:38.919 First the idea of strategy and competitive advantage, second the 0:05:38.960 --> 0:05:42.000 long term focus, and third this idea of you know, 0:05:42.040 --> 0:05:45.440 how how do these companies start out from from something 0:05:45.480 --> 0:05:48.560 small and scale to become something very significant. So I'm 0:05:48.640 --> 0:05:50.720 very I'm very fascinated by that, and that's what I've 0:05:50.720 --> 0:05:52.560 been applying for the past decade. 0:05:53.000 --> 0:05:55.560 So let's let's kind of dig into the opportunity fund. 0:05:56.400 --> 0:05:58.880 You know, it sounds like you started getting into the philosophy, 0:05:59.400 --> 0:06:02.479 you know, behind the fund strategy. Can you, I guess, 0:06:02.520 --> 0:06:05.760 give us a little bit more about that philosophy that 0:06:05.800 --> 0:06:07.839 you're using, I guess for the investment process of this. 0:06:08.000 --> 0:06:10.120 Yeah, I guess just to take a step back even 0:06:10.120 --> 0:06:11.920 before we kind of talk about the philosophy. I mean, 0:06:12.080 --> 0:06:14.279 why being sort of small caps at all? I think 0:06:14.320 --> 0:06:18.560 it has to do with this, you know, defining characteristic 0:06:18.600 --> 0:06:22.480 of capitalism, right, which is this this what makes America exceptional? 0:06:22.560 --> 0:06:22.680 Right? 0:06:22.680 --> 0:06:25.520 It's innovation and sort of this process of creative destruction 0:06:26.240 --> 0:06:29.839 whereby smaller companies and entrepreneurs come up with newer, more 0:06:29.839 --> 0:06:32.839 innovative ways of doing things, they offer superior value to 0:06:32.880 --> 0:06:35.719 customers and improve lives. So I think, you know, I 0:06:35.839 --> 0:06:39.440 very much believe in that fundamental process. And then if 0:06:39.480 --> 0:06:42.760 we kind of move to active management, right, we firmly 0:06:42.800 --> 0:06:45.760 believe there's there's a value of active in small cap 0:06:46.200 --> 0:06:49.160 And you start with the idea that small cap is inefficient. 0:06:49.920 --> 0:06:53.520 You have a universe of emerging companies with limited analyst coverage. 0:06:54.040 --> 0:06:56.760 So it's certainly an area where active management can add value. 0:06:57.040 --> 0:06:59.680 I think Morgan Stanley did a great study where they 0:06:59.720 --> 0:07:03.840 found the cumulative media and alpha by active managers and 0:07:03.920 --> 0:07:08.200 small cap was nearly sixty percent over the past thirty years. It's, 0:07:08.880 --> 0:07:11.240 you know, very different versus sort of mid MidCap and 0:07:11.320 --> 0:07:15.680 large cap. And then third, similar to private markets, the 0:07:15.960 --> 0:07:18.320 best managers and I'm really talking about sort of the 0:07:18.320 --> 0:07:21.920 top quartile, the top descl can add tremendous value. And 0:07:21.960 --> 0:07:24.880 that's similar to kind of like an institutional investor looking 0:07:24.880 --> 0:07:27.600 at private equity or venture capital. You don't want to 0:07:27.600 --> 0:07:29.760 be in sort of venture capital just for the sake 0:07:29.800 --> 0:07:31.680 of being in venture capital. You really want to be 0:07:31.680 --> 0:07:34.640 in a top quartile type manager. And so those those 0:07:34.680 --> 0:07:38.280 are the things we believe. And if you then layer 0:07:38.360 --> 0:07:41.000 into kind of our strategy, you know, we think we 0:07:41.080 --> 0:07:44.520 have a few key advantages. First, all we do is 0:07:44.520 --> 0:07:48.520 small cap, at least my team of four, we focus 0:07:48.600 --> 0:07:51.840 on this emerging company universe. We happen to be located 0:07:51.840 --> 0:07:55.320 in San Francisco, which obviously gives us a backdoor seat 0:07:55.360 --> 0:07:57.280 to a lot of the innovation, particularly in the tech, 0:07:57.400 --> 0:08:02.200 technology and healthcare sector. Second, our team experience. Again I 0:08:02.280 --> 0:08:05.560 mentioned the four of us as industry specific sector analysts. 0:08:06.320 --> 0:08:10.400 Third and absolute valuation discipline, which I'm sure we'll get 0:08:10.440 --> 0:08:12.800 into later, but every name has to have at least 0:08:12.800 --> 0:08:15.000 one hundred percent upside at the time of our purchase 0:08:15.520 --> 0:08:17.720 over a five year time horizon. We use no more 0:08:17.720 --> 0:08:20.440 than a thirty times pee multiple and our five year 0:08:20.840 --> 0:08:25.320 model estimates. And then finally, fourth, a high conviction portfolio. 0:08:25.440 --> 0:08:29.000 So on average we have about forty names in our portfolios, 0:08:29.040 --> 0:08:32.480 so fairly concentrated. And so what that gives us is 0:08:33.280 --> 0:08:36.840 this portfolio of innovation and growth, but it's also tethered 0:08:36.880 --> 0:08:40.520 to reality and valuations, and we think that's the secret 0:08:40.559 --> 0:08:44.040 sauce to full cycle returns and the alpha that we've 0:08:44.040 --> 0:08:45.400 been able to generate over time. 0:08:46.000 --> 0:08:49.520 So I know quality is an aspect that you're looking for. 0:08:49.640 --> 0:08:53.360 Is there anything that you would you define quality as? 0:08:53.440 --> 0:08:54.760 Any specific characteristics? 0:08:54.880 --> 0:08:58.080 Yeah, I think I think traditional managers would certainly look 0:08:58.080 --> 0:09:02.520 on you know, wide modes, high an uninvested capital, that 0:09:02.640 --> 0:09:04.920 sort of thing. And I think quality has a number 0:09:04.960 --> 0:09:08.400 of different dimensions. As you said, you know, we like 0:09:08.559 --> 0:09:11.080 high return on invested capital businesses just as much as 0:09:11.120 --> 0:09:15.880 everyone else. But I think sometimes the opportunity in this 0:09:15.920 --> 0:09:18.960 emerging company universe is to have a more forward definition 0:09:19.240 --> 0:09:21.560 of quality and sort of, you know it s Gretzky said, 0:09:21.600 --> 0:09:24.080 skating to where the puck is going to be. So 0:09:24.120 --> 0:09:27.120 we're much more forward looking than sort of backward looking. 0:09:27.240 --> 0:09:29.840 So in addition to kind of the playbook of being 0:09:29.840 --> 0:09:32.679 able to buy high return on invested capital businesses when 0:09:32.679 --> 0:09:36.000 they sell off, you know, we want to kind of 0:09:36.120 --> 0:09:39.360 be diving into the mystery of the emerging company universe 0:09:39.360 --> 0:09:43.560 and think about these future, forward looking quality metrics, and so, 0:09:45.040 --> 0:09:48.760 you know, certainly we care about competitive advantage, but I 0:09:48.800 --> 0:09:51.720 think frequently there's an innovation component which we're looking for. 0:09:52.360 --> 0:09:56.280 There's a strong margin expansion component, so we're often focused 0:09:56.320 --> 0:09:59.800 on incremental margin as opposed to just kind of current margin. 0:10:00.520 --> 0:10:03.640 And then we're focused a lot on management, obviously, and 0:10:03.720 --> 0:10:06.520 trying to invest with these entrepreneurial management teams that set 0:10:06.559 --> 0:10:09.560 ambitious objectives but also have a clear plan and track 0:10:09.600 --> 0:10:12.760 record upon which they can execute towards those objectives. 0:10:14.559 --> 0:10:18.560 And you mentioned PES as one of the metrics that 0:10:18.600 --> 0:10:22.000 you use. How do you feel about equity valuations broadly 0:10:22.080 --> 0:10:24.240 and are there any other metrics that you like to 0:10:24.320 --> 0:10:25.920 use for valuing stocks. 0:10:27.320 --> 0:10:32.520 Yeah, our primary valuation metric is long term earnings power, 0:10:32.679 --> 0:10:34.959 and so we have a process we call it this 0:10:35.400 --> 0:10:39.040 anchor point, where we're focused on intrinsic value five years out. 0:10:39.120 --> 0:10:42.080 So we're oftentimes looking, we're trying to understand the unit 0:10:42.120 --> 0:10:44.520 economics of these companies. Everything we do is focused on 0:10:44.600 --> 0:10:48.160 fundamental bottoms up research, and so if you break down 0:10:48.200 --> 0:10:51.000 revenue of any company, right, there's often a volume component 0:10:51.040 --> 0:10:53.400 and a price component. A company can sell a certain 0:10:53.400 --> 0:10:56.600 amount of widgets and charge a certain price per widget, 0:10:57.679 --> 0:11:00.320 and then you layer on the incremental margins. I've on 0:11:00.640 --> 0:11:02.880 the earnings per share target and so upon which we 0:11:02.880 --> 0:11:05.120 applied no more than a thirty times p multiple to 0:11:05.160 --> 0:11:08.240 those five year estimates, and every company to enter the 0:11:08.280 --> 0:11:10.559 portfolio has to have at least one hundred percent upset 0:11:10.600 --> 0:11:14.360 on those on those metrics. So that is the primary 0:11:14.880 --> 0:11:17.600 valuation metric we use. We do look at other relative 0:11:17.679 --> 0:11:22.080 valuation metrics, you know EVD sales, EVD, EBITDA, things like that, 0:11:22.200 --> 0:11:25.560 but the primary metric is really the five year earnings 0:11:25.600 --> 0:11:28.960 power and the intrinsic value of these companies. 0:11:31.720 --> 0:11:33.520 I wanted to do a follow up on you know, 0:11:33.559 --> 0:11:36.560 you were talking about management teams just a few moments ago. 0:11:37.679 --> 0:11:39.680 You know, what are the exact qualities? I know you 0:11:39.760 --> 0:11:43.000 mentioned you know, having ambition and you know having you know, 0:11:43.080 --> 0:11:45.920 good products. Are there any other I guess qualities you 0:11:45.920 --> 0:11:47.360 look for in management teams? 0:11:47.600 --> 0:11:47.840 Yeah? 0:11:48.200 --> 0:11:51.160 Management, I mean it is there's kind of the science 0:11:51.200 --> 0:11:53.400 of investing, and I guess there's the art, right, and 0:11:53.480 --> 0:11:55.760 I think management is much more of an art than 0:11:55.800 --> 0:11:59.120 than a science, uh to to say there's one way 0:11:59.120 --> 0:12:02.760 of managing a companyany Obviously, every company can be very different. 0:12:03.120 --> 0:12:06.920 But I think the best entrepreneurs do tech. If you 0:12:06.920 --> 0:12:09.439 look at just the Magnificent seven for incentra right, I mean, 0:12:09.800 --> 0:12:12.640 the most successful companies were all sort of founder led. 0:12:13.280 --> 0:12:16.720 These these folks who are driven to change the world 0:12:17.600 --> 0:12:20.040 and and and and have been able to scale the 0:12:20.080 --> 0:12:23.040 company's in remarkable ways. I don't I don't think every 0:12:23.559 --> 0:12:27.200 founder has the capability to scale to those levels, obviously, 0:12:27.640 --> 0:12:29.960 but those are the most successful outcomes. But we do, 0:12:30.080 --> 0:12:33.040 we do analyze culture of companies, uh, you know, even 0:12:33.040 --> 0:12:36.000 glassdoor reviews, things like that. We certainly like to take 0:12:36.000 --> 0:12:38.640 advantage of our location, again being in the B area, 0:12:38.760 --> 0:12:43.720 being able to access private companies, venture capitalists, competitors, suppliers, 0:12:44.240 --> 0:12:48.400 kind of the traditional Fisher scuttle butt work, and and 0:12:48.440 --> 0:12:51.240 then ultimately I think somebody once told me the best 0:12:51.240 --> 0:12:55.040 managers do set low expectations. 0:12:54.280 --> 0:12:55.839 And constantly sort of surpass them. 0:12:55.920 --> 0:12:59.120 Right, Not not to say that they're unambitious expectations, but 0:12:59.160 --> 0:13:02.560 if you can consistently kind of outperform relative to the 0:13:02.600 --> 0:13:05.319 expectations you set, that's a very good thing. 0:13:07.360 --> 0:13:10.760 Are there any sectors you currently find particularly compelling? And 0:13:11.440 --> 0:13:13.240 one of the things I've focused on in twenty twenty 0:13:13.240 --> 0:13:15.440 five is the sector rotation that kind of moved away 0:13:15.440 --> 0:13:17.679 from tech, especially in large caps. Do you think that 0:13:17.720 --> 0:13:19.840 could last in twenty twenty five? 0:13:20.600 --> 0:13:21.400 I am hopeful. 0:13:21.600 --> 0:13:24.120 I personally spend a lot of time in the technology sector. 0:13:24.160 --> 0:13:26.560 But you're absolutely correct that when you look at the 0:13:26.640 --> 0:13:29.880 drivers of the s and P five hundred, obviously they're 0:13:29.960 --> 0:13:34.200 very much concentrated in the magnificent seven or eight. One 0:13:34.240 --> 0:13:37.040 of the interesting things about the small cap universes, to 0:13:37.080 --> 0:13:39.120 some extent, we've seen that broadening. So if you look 0:13:39.120 --> 0:13:41.840 at the drivers of the returns in the small cap space. 0:13:42.400 --> 0:13:46.000 It is not solely technology, and certainly for our strategy, 0:13:46.040 --> 0:13:49.680 we've seen great performance in consumer and healthcare and in 0:13:49.679 --> 0:13:52.079 industrials and other sectors. So I think we're already starting 0:13:52.080 --> 0:13:54.520 to see some of that broadening. We haven't seen it 0:13:54.760 --> 0:13:57.160 to the extent in the S and P. Five hundred, 0:13:57.720 --> 0:14:00.160 but I think some of that will depend on, obviously, 0:14:00.200 --> 0:14:05.000 whether technology can maintain its leadership, particularly in AI, and 0:14:05.040 --> 0:14:08.880 whether some of these other sectors can broaden out. Certainly 0:14:09.240 --> 0:14:13.000 with the new administration, that that that there is some 0:14:13.040 --> 0:14:15.240 reason to be supportive of the overall economy. 0:14:16.240 --> 0:14:19.040 Yeah, and it's it's good that you bring up the 0:14:19.080 --> 0:14:19.840 new administration. 0:14:20.080 --> 0:14:20.240 Uh. 0:14:20.400 --> 0:14:23.080 Do you think that any of the election results changed 0:14:23.080 --> 0:14:24.360 any of your investment theses? 0:14:26.440 --> 0:14:27.480 Yeah, yes, and no. 0:14:27.600 --> 0:14:30.320 I mean I think we are much more focused on 0:14:30.400 --> 0:14:35.040 these secular growth themes of technology, healthcare. Uh, you know, 0:14:35.160 --> 0:14:39.000 just just more innovation throughout the economy. Consumer businesses have 0:14:39.280 --> 0:14:42.080 are offering, you know, always offering better value to customers. 0:14:42.120 --> 0:14:45.880 New companies like sweet greens and restaurants along healthier living 0:14:45.920 --> 0:14:49.120 trends or elf and beauty and cosmetics offering sort of 0:14:50.560 --> 0:14:53.600 you know, value at at a good price point. And 0:14:53.680 --> 0:14:56.920 so those those don't tend to be correlated as much, 0:14:57.240 --> 0:15:00.520 uh with sort of administration changes, where you might have 0:15:00.560 --> 0:15:03.640 more cyclical factors of you know, industrials being more in 0:15:03.760 --> 0:15:06.600 or out of favor. But I do think on the margin, 0:15:06.640 --> 0:15:10.880 obviously we're paying attention to tariffs, we're paying attention to 0:15:10.920 --> 0:15:14.480 the drive towards government efficiency. But I think the most 0:15:14.600 --> 0:15:18.320 positive factor with the administration is there does seem to 0:15:18.320 --> 0:15:21.120 be a renewed focus on innovation and technology in general. 0:15:21.560 --> 0:15:23.800 So obviously you have JD. Vance who is formerly a 0:15:23.880 --> 0:15:27.120 venture capitalist. There's reasons to think he might be better 0:15:27.160 --> 0:15:30.200 for little tech as opposed to just big tech, which 0:15:30.200 --> 0:15:33.080 would benefit the small cap space as well as venture capital. 0:15:34.120 --> 0:15:36.240 And you have Elon and and other folks are who 0:15:36.280 --> 0:15:38.880 are driving efficiency and innovation, which I think is good 0:15:38.960 --> 0:15:41.000 good for America and good good for a small cap. 0:15:42.640 --> 0:15:45.080 And I've been really focused on rates, and obviously the 0:15:45.200 --> 0:15:48.200 rate pictures increasingly more up in the air as we 0:15:48.200 --> 0:15:50.240 get into twenty twenty five, but I've been really focused 0:15:50.280 --> 0:15:53.280 on rates as a catalyst for small cap stucks to 0:15:53.360 --> 0:15:54.560 kind of inherrow the gap with the S and P 0:15:54.640 --> 0:15:57.000 five hundred, What do you think the catalysts are for 0:15:57.560 --> 0:15:59.960 you know, maybe a small cap resurgence this year. 0:16:01.960 --> 0:16:02.600 Yeah, I think. 0:16:03.520 --> 0:16:06.200 I think a stabilization in rates is really the key. 0:16:06.280 --> 0:16:10.680 We've never wanted to make explicit bets on rate cuts 0:16:10.720 --> 0:16:13.800 and things like that, although we understand the market does 0:16:13.840 --> 0:16:16.400 that for us and and may have gotten a little 0:16:16.400 --> 0:16:19.520 bit ahead of itself maybe let's say six six months ago, 0:16:19.600 --> 0:16:22.520 But now I think the general consensus will see maybe 0:16:22.560 --> 0:16:27.840 one or zero rate cuts. Again, I think putting putting 0:16:28.440 --> 0:16:31.400 sort of the past five years in context. You know, 0:16:31.560 --> 0:16:33.760 rates on the ten year went from close to zero, 0:16:33.920 --> 0:16:36.480 maybe fifty basis points to four and a half percent, 0:16:37.280 --> 0:16:40.520 and so that was a big headwind for small caps. 0:16:40.520 --> 0:16:42.600 And now I think there's a debate of you know, 0:16:42.640 --> 0:16:45.040 do rates stick down a bit or take up a bit? Again, 0:16:45.240 --> 0:16:47.280 putting putting this all in the context of the past 0:16:47.280 --> 0:16:49.960 five years, I think the most important takeaway is we're 0:16:50.000 --> 0:16:53.000 not nobody's expecting a four or five hundred basis point 0:16:53.040 --> 0:16:55.680 increase in rates, right. We seem to be entering a 0:16:55.680 --> 0:16:59.840 more stabilized period of interest rates broadly, and I think 0:17:00.280 --> 0:17:03.560 along combined with the strong economy, that's going to be 0:17:03.600 --> 0:17:05.960 a very positive thing for small caps. 0:17:06.440 --> 0:17:08.320 And since I talked about it at the beginning of 0:17:08.320 --> 0:17:10.440 the segment, What do you see as the outlook for 0:17:10.560 --> 0:17:13.240 IPO and M and A D see a comeback after 0:17:13.280 --> 0:17:15.600 this really week two year stretch that we've had. 0:17:16.840 --> 0:17:21.239 Certainly so, I think we're already starting to see it. 0:17:21.240 --> 0:17:25.040 We've seen a trickle of technology IPOs, but you're correct 0:17:25.040 --> 0:17:28.440 that following a ro us twenty twenty and twenty twenty one, 0:17:28.520 --> 0:17:32.400 twenty two, twenty three, and twenty four were fairly meager. 0:17:33.160 --> 0:17:34.840 That window is beginning to lift. 0:17:35.040 --> 0:17:39.399 I follow the private technology ecosystem very closely. Supposedly there 0:17:39.400 --> 0:17:43.280 are fifteen hundred private unicorns with valuations of a billion 0:17:43.359 --> 0:17:48.119 or higher, and I think there's been a strike by 0:17:48.160 --> 0:17:53.560 the private markets to really underwrite the lower valuations that 0:17:53.600 --> 0:17:59.120 are necessary in some cases to take those companies public. Obviously, 0:17:59.119 --> 0:18:01.199 many of these companies were funded during a period of 0:18:01.440 --> 0:18:03.600 very low interest rates, and so there's been a disparity 0:18:03.640 --> 0:18:06.960 in terms of private versus public market valuations. I think 0:18:07.040 --> 0:18:13.159 certainly the lower regulatory environment going forward, the certainty of 0:18:13.200 --> 0:18:17.320 the new administration will be positive catalysts for that, and 0:18:17.359 --> 0:18:20.679 I think that's necessary. I think there's been this trend 0:18:20.720 --> 0:18:25.080 of companies staying private for longer. I'm not sure that's 0:18:25.080 --> 0:18:25.679 such such. 0:18:25.560 --> 0:18:26.040 A good thing. 0:18:26.320 --> 0:18:28.440 Uh, And I think I think we'll want to see 0:18:28.880 --> 0:18:31.879 smaller companies come come come public sooner. 0:18:35.080 --> 0:18:38.760 You had mentioned you know the portfolio is pretty concentrated. 0:18:39.440 --> 0:18:43.919 Do you have any I guess things in place to 0:18:44.000 --> 0:18:45.200 manage portfolio risk? 0:18:47.000 --> 0:18:47.680 Yes, I think. 0:18:47.760 --> 0:18:51.000 I think when we look at portfolio risk first and foremost, 0:18:51.040 --> 0:18:54.119 we are we are looking at the the risk of 0:18:54.440 --> 0:18:59.600 losing capital as opposed to to solely volatility. Although you know, 0:19:00.440 --> 0:19:03.440 you can screen our portfolio on sharp ratios and downside 0:19:03.440 --> 0:19:07.840 capture ratios and we happen to look pretty attractive on 0:19:07.920 --> 0:19:09.639 those metrics. I think part of that is due to 0:19:09.680 --> 0:19:16.399 our absolute valuation discipline and our general each company has 0:19:16.400 --> 0:19:18.439 to have at least one hundred percent upside. Again, at 0:19:18.440 --> 0:19:20.040 the time of purchase, we use no more than a 0:19:20.040 --> 0:19:24.840 thirty times pe on those price starting's estimates, and then 0:19:24.880 --> 0:19:27.800 we're generally trimming when the upside falls to fifty percent 0:19:28.760 --> 0:19:31.760 or lower. As opposed to a pure buy and hold manager, 0:19:32.000 --> 0:19:34.800 We're not willing to hold an exceptional company at an 0:19:34.840 --> 0:19:37.760 infinite price, and so we're quite disciplined about that. The 0:19:37.800 --> 0:19:40.560 best companies that stay in the portfolio over multiple years 0:19:40.640 --> 0:19:43.240 have to continuously prove themselves in terms of the upside. 0:19:43.720 --> 0:19:46.360 Otherwise we'll trim and sell the lesser companies as they 0:19:46.400 --> 0:19:50.120 become more fully valued. So our best defense is really 0:19:50.200 --> 0:19:53.879 our knowledge I think of the individual portfolio companies. We 0:19:53.920 --> 0:19:56.200 certainly want to know the key drivers of these companies 0:19:56.680 --> 0:19:59.720 as well or better than anyone else to mitigate the 0:19:59.720 --> 0:20:03.200 constant intration. Though again, we have a five percent max 0:20:03.280 --> 0:20:06.000 position limit, so we're not going to hold companies above 0:20:06.000 --> 0:20:08.320 a five percent weight because we recognize there can be 0:20:08.920 --> 0:20:13.280 additional volatility and risk associated with that. But really it 0:20:13.359 --> 0:20:16.320 is it is our knowledge of these companies and our 0:20:16.359 --> 0:20:17.879 absolute valuation discipline. 0:20:18.080 --> 0:20:20.639 I had one follow up question to that. You mentioned 0:20:20.680 --> 0:20:24.120 trimming companies, and so I'm curious, are there any other 0:20:25.160 --> 0:20:27.919 things you look at? You know, I guess we trigger 0:20:27.960 --> 0:20:31.200 selling the portfolio, not just you know, trimming a company gets. 0:20:31.320 --> 0:20:35.040 Yeah, we sell for one of three reasons, typically one 0:20:35.240 --> 0:20:40.919 the position becomes fully valued, to upgrade to better opportunities, 0:20:41.160 --> 0:20:46.119 or three. I mentioned this anchor points concept we have 0:20:46.280 --> 0:20:49.200 whereby we're really looking out five years into the future 0:20:49.560 --> 0:20:53.000 and trying to anchor it to these estimates of intrinsic. 0:20:52.520 --> 0:20:55.040 Value if those. 0:20:56.359 --> 0:20:59.240 If those companies are failing to meet those objectives over time, 0:20:59.440 --> 0:21:01.760 which does and that's a third reason we sell. 0:21:02.640 --> 0:21:05.720 So I've been following fundamentals for for small caps for 0:21:05.720 --> 0:21:08.240 for some time, and it looks like consensus is very 0:21:08.280 --> 0:21:11.160 weak for the fourth quarter earning season. Are there any 0:21:11.200 --> 0:21:13.840 macro factors you're you're watching that might help turn the 0:21:13.840 --> 0:21:15.120 tide on fundamentals? 0:21:15.680 --> 0:21:18.360 I think interest rates and valuations would be the main 0:21:18.400 --> 0:21:21.879 thing we're focused on, in addition to just company earnings. 0:21:22.560 --> 0:21:25.840 I think, you know, the biggest debate in the market 0:21:25.920 --> 0:21:29.720 right now is technology and AI. I was just at 0:21:30.119 --> 0:21:34.600 a conference the other week, and so I think the 0:21:34.640 --> 0:21:39.040 biggest question in the market right now is you know, 0:21:40.240 --> 0:21:43.000 perhaps AI probably has the most promise of any technology 0:21:43.040 --> 0:21:46.880 we've seen right because it's it's tam unconstrained in terms 0:21:46.880 --> 0:21:49.399 of being able to address labor, labor and services, not 0:21:49.480 --> 0:21:53.920