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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. This is Master's in

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Speaker 1: Business with Barry rid Holds on Bloomberg Radio.

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Speaker 2: This week on the podcast, I have an extra special guest.

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Speaker 2: Heather Brilliant is CEO of Diamond Hill. They are a

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Speaker 2: publicly traded investment manager stock symbol DHIL that have been

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Speaker 2: public since day one since twenty sixteen. Heather comes for

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Speaker 2: with a fascinating background, having previously been in a number

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Speaker 2: of other places, most notably morning Star, and she has

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Speaker 2: a very specific approach to investment management and thinking about

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Speaker 2: stock selection. They do a number of things at Diamond

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Speaker 2: Hill that many other investment shops don't. Not only are

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Speaker 2: they very much aligned with their investors, they regularly close

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Speaker 2: funds when they get too large, when they reach a

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Speaker 2: capacity and run the risk of reducing performance. All of

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Speaker 2: their portfolio managers not only are substantial investors in each

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Speaker 2: of their funds, but they do a disclosure each year

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Speaker 2: that shows each manager by name and how much money

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Speaker 2: they have invested in their own fund. Kind of unique.

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Speaker 2: I wish more mutual funds and ETFs showed that data.

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Speaker 2: I found our conversation about her work and Diamond Hill

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Speaker 2: to be absolutely fascinating. They have a very unique approach.

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Speaker 2: I think you'll find it fascinating. Also, with no further ado,

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Speaker 2: my discussion with Diamond Hills CEO, Heather Brilliant. Heather Brilliant,

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Speaker 2: Welcome to Bloomberg.

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Speaker 1: Thanks for having me Berry.

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Speaker 2: Well, thanks for coming in. So let's start with your background.

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Speaker 2: A bachelor's and economics from Northwestern and then an MBA

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Speaker 2: from University of Chicago. It sounds like the career plan

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Speaker 2: was always financed. Was that the plan?

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Speaker 1: It was not the plan. I actually wanted to be

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Speaker 1: a lawyer, and so I started out as a political

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Speaker 1: science major, and that really came from my experience on

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Speaker 1: the debate team in high school and college. It was

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Speaker 1: a big part of what influenced me. And I realized

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Speaker 1: after undergrad actually that the skills you learned in debate

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Speaker 1: can really be applied to picking stocks, where you really

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Speaker 1: have to understand both sides of the story, but you

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Speaker 1: still have to come down on one side and make

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Speaker 1: a decision. And so I felt like all of those

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Speaker 1: experiences just really led me to love investing.

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Speaker 2: Huh. Really interesting. So what was your first job out

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Speaker 2: of undergraduate?

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Speaker 1: I worked at Bank of America and they had a

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Speaker 1: wonderful corporate Finance training program. So since this was a

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Speaker 1: relatively late decision that I came to, it was great

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Speaker 1: to have those kind of six to eight weeks of

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Speaker 1: training before they set us loose.

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Speaker 2: And what led to the decision to get an MBA

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Speaker 2: at Chicago.

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Speaker 1: Well, actually I had pursued the CFA program first, and

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Speaker 1: I learned about the CFA from colleague of Bank of America,

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Speaker 1: and I got right on it. As soon as I

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Speaker 1: learned about it, I thought this is great and wished

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Speaker 1: i'd even known about it sooner. And then I had

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Speaker 1: a role at one point where they told me to

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Speaker 1: advance to the next level, I needed an MBA and

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Speaker 1: it was an investing role. So I said, why would

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Speaker 1: I need that? I have a CFA and they said, sorry,

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Speaker 1: rules are rules, and I never wanted to be told

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Speaker 1: that again. So I thought, I'll just get an MBA too.

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Speaker 2: And how did you find University of Chicago. There are

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Speaker 2: some legendary professors there, Eugene Farma, Dick Thaylor, just really

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Speaker 2: an incredible line up.

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Speaker 1: There really are, And it was a very rigorous program

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Speaker 1: and I learned so much from classes that I never

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Speaker 1: thought I would find exciting like marketing. You'd think that

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Speaker 1: marketing is pretty straightforward, but it turns out, you know,

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Speaker 1: the University of Chicago figures out how to put a

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Speaker 1: quantitative lens on pretty much everything, and putting a quantitative

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Speaker 1: lens on marketing back then, you know, twenty something years ago,

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Speaker 1: was was pretty innovative, and I just thought it was

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Speaker 1: It was really a neat way to learn about it.

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Speaker 2: Right the old joke, half of our advertising dollars are wasted,

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Speaker 2: we just don't know which. Once you start doing things online,

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Speaker 2: that kind of changes.

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Speaker 1: You really contract that game exactly.

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Speaker 2: So you've held analyst roles and a number of asset managers.

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Speaker 2: You mentioned Bank of A, you were at dry House, Capital,

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Speaker 2: Cockhill Capital, morning Star. Tell us what you learned at

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Speaker 2: such very institutions.

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Speaker 1: I really learned how to appreciate investment philosophies and figure

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Speaker 1: out what my own personal investment philosophy was. My first

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Speaker 1: equity research job was Eddrie House and they're very aggressive

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Speaker 1: growth momentum oriented. But I was on the international team,

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Speaker 1: and so the guy who was running the team at

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Speaker 1: the time had a pretty fundamental approach, really looking for

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Speaker 1: more earnings momentum as opposed to price momentum, and I

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Speaker 1: just realized how he always veered towards higher quality companies,

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Speaker 1: and so I kind of leveraged that when I went

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Speaker 1: to morning Star, because they are very focused on quality,

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Speaker 1: the whole concept of economic modes, but also about buying

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Speaker 1: companies when they're trading at a discount to intrinsic value.

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Speaker 1: And it just seemed so much smarter to me to

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Speaker 1: figure out ways to make sure that you're putting the

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Speaker 1: risk reward in your favor.

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Speaker 2: And you were a morning Star for about fourteen years,

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Speaker 2: tell us what brought you there? What sort of work

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Speaker 2: were you doing?

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Speaker 1: So originally I went there because I liked their equity

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Speaker 1: research philosophy, and most people don't even know they do

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Speaker 1: equity research even to this day.

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Speaker 2: And you think morning Star, you immediately think of the

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Speaker 2: mutual fund Star system.

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Speaker 1: Yeah. Absolutely. But they had a whole team that was

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Speaker 1: growing at the time because of the whole Spitzer settlement,

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Speaker 1: and so they were hiring lots of people to come

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Speaker 1: in and be be equity analysts, and so it was

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Speaker 1: just a great opportunity to get to apply a more

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Speaker 1: fundamental investment philosophy. And from there I really realized that

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Speaker 1: While I loved being an investor or making investment recommendations,

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Speaker 1: I also felt like it wasn't perhaps my true genius,

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Speaker 1: and that I might be more successful in the long

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Speaker 1: run to focus on a leadership direction of my career.

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Speaker 1: And so it was. I was actually only thirty when

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Speaker 1: I got the opportunity to run the equity research team

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Speaker 1: at morning Star. So it was just a really great

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Speaker 1: kind of early career opportunity to try out managing at scale.

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Speaker 2: Huh, very interesting. I specifically recall what I thought at

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Speaker 2: the time was a very bold and brave research report

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Speaker 2: that morning Star put out looking at the history of

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Speaker 2: their Star rating system, and they pointed out, if you

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Speaker 2: only could know one thing about a mutual funds, if

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Speaker 2: you knew nothing but the cost, that would generate a

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Speaker 2: little bit of positive return versus following any other system.

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Speaker 2: And I give them a lot of credit for saying, yeah, yeah,

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Speaker 2: we built our business on the Star system, but hey,

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Speaker 2: in a pinch, just look at what the expense ratios are.

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Speaker 1: It is fascinating how big a discrepancy that creates, because

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Speaker 1: you know, the expense is a sure thing and the

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Speaker 1: expected future returns are very uncertain, And so I think

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Speaker 1: you have to take expense into consideration.

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Speaker 2: So you become CEO of Morning Star. Am I pronouncing

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Speaker 2: this right? Is it Australia or Australia Asia?

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Speaker 1: It was Australasia. But it's important to know that Australasia

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Speaker 1: really means Australia, New Zealand and the Pacific Islands. Oh,

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Speaker 1: it doesn't actually mean all of Asia.

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Speaker 2: I got it. So did you have to relocate were you?

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Speaker 2: Were you working there?

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Speaker 1: I did? Yes, My family and I moved to Sydney, Australia.

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Speaker 2: And what was that like? Sidney looks like it's a blast.

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Speaker 1: I consider Sydney one of the most majestically beautiful cities

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Speaker 1: in the world. It was so wonderful every day we

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Speaker 1: lived there, I felt.

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Speaker 2: Lucky and livable. Right, It's not like Hong Kong or

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Speaker 2: New York or some other cities that can be a

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Speaker 2: little much to take if you're not from there.

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Speaker 1: It's very livable from like a human interaction standpoint, yes,

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Speaker 1: but it is very expensive. So I do think a

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Speaker 1: lot of people struggle, especially you know when you see

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Speaker 1: some cities that have suffered with very high housing costs.

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Speaker 1: Sydney is definitely right up there.

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Speaker 2: Sure, so you're morning Star for a while, you leave

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Speaker 2: for a year and come back. Tell us what brought

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Speaker 2: you back to morning Star.

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Speaker 1: I left because I thought I was being offered my

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Speaker 1: dream job, and so I went to a hedge fund

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Speaker 1: for a year. I learned so much in that year

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Speaker 1: I'll never regret doing it, and it was the only

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Speaker 1: time in my career where I've had responsibilities for recommending

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Speaker 1: shorts as well as lungs. So I think it was

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Speaker 1: very eye opening from a lot of perspectives. But ultimately,

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Speaker 1: I just really felt like the intensity of the role

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Speaker 1: and expectations was not going to be tenable, and I

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Speaker 1: was at the point in my life where I was

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Speaker 1: ready to have a family, and so it just made

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Speaker 1: more sense to stick with the philosophy I believed in,

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Speaker 1: but do it in an environment that I felt like

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Speaker 1: could give me a little bit more opportunity to have balance.

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Speaker 2: And then post morning Star, you end up in the

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Speaker 2: late twenty tens as CEO of First State Investments for

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Speaker 2: the Americas. Tell us a little bit about that role

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Speaker 2: and what you learned being CEO there.

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Speaker 1: Yeah, So, I mean, I love my time in Australia

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Speaker 1: and we were there almost four years and at the

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Speaker 1: end of that time, I really felt like as much

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Speaker 1: as I had learned and experienced at morning Star, it

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Speaker 1: was time to move on. And so I had a

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Speaker 1: lot of contacts in Australia at that point, and one

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Speaker 1: of them was the CEO of what was at the

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Speaker 1: time called Colonial First State Global Asset Management, and so

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Speaker 1: First State Investments was the non Australia part of that business,

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Speaker 1: and so they hired me to basically move to New

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Speaker 1: York and run their business in the Americas, and in

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Speaker 1: the process of doing that, the business, which had been

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Speaker 1: owned by the Commonwealthank of Australia ended up being sold

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Speaker 1: to Mitsubishi UFJ. And so it was a really interesting

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Speaker 1: time to kind of see through that whole process, and

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Speaker 1: it's called First Centier now the business does still exist,

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Speaker 1: but yeah, it was. It was a really interesting couple

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Speaker 1: of years.

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Speaker 2: And if I recall correctly, Mitsubishi Bank during the financial

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Speaker 2: crisis was a financer of a couple of pretty substantial

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Speaker 2: US banks, maybe Morgan Stanley, I don't remember, is that right,

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Speaker 2: And so tell us a little bit about what your

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Speaker 2: experience was like you were there before Mitsubishi brought them.

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Speaker 1: Correct My last day was the day the acquisition closed.

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Speaker 2: Oh, so would you helped facilitate this? What was your

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Speaker 2: role with that acquisition?

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Speaker 1: I mean the deal was definitely done in Japan and Australia,

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Speaker 1: not in the US. So I certainly had a lot

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Speaker 1: of interaction with the team from Mitsubishi that was based

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Speaker 1: in New York and kind of helping facilitate some of

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Speaker 1: the transition that would that would be happening. But I

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Speaker 1: had already taken the role with Diamond Hill, and so

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Speaker 1: I helped them, you know, for a little bit of

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Speaker 1: time to kind of navigate through the final aspects of

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Speaker 1: the transition.

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Speaker 2: And I don't recall if this was on the podcast

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Speaker 2: with John Mack or in John Mack's book, but he

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Speaker 2: had nothing but really nice things to say about Mitsubishi.

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Speaker 2: I mean, they helped save Mooyants Stanley. He was certainly

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Speaker 2: appreciative of that, but he seemed to think that there

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Speaker 2: were no nonsense, They looked at the data, they made

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Speaker 2: a fast decision in one way or another. He was

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Speaker 2: pretty pleased with them. I'm assuming you had a similar experience.

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Speaker 1: Yeah, And I'd say one that's so great, And just

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Speaker 1: to overgeneralize about Japanese bank owners is that they tend

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Speaker 1: to be very long term oriented, and so they're making

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Speaker 1: decisions about investing for the future and not just about

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Speaker 1: you know, making quarterly earnings or any kind of short

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Speaker 1: term pressure.

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Speaker 2: So we'll talk about long term investing in a bit.

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Speaker 2: Tell us what brought you from First State Investments to

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Speaker 2: Diamond Hill.

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Speaker 1: Given some of the transitions with First Date, I knew

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Speaker 1: it it was time to maybe consider the next opportunity,

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Speaker 1: and so I had actually interviewed for a couple of

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Speaker 1: things when I got a call from a recruiter about

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Speaker 1: Diamond Hill. I had actually never been to Columbus, Ohio

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Speaker 1: before I went there to interview, and so when the

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Speaker 1: recruiter called me, I said, you know, it sounds really interesting.

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Speaker 1: I feel like the investment philosophy alignment is great. But

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Speaker 1: I've never been to Columbus, so no, And so he said, well, wait, wait,

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Speaker 1: they're coming to New York for the first round of interviews.

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Speaker 1: I think you should just take the meeting. What's the downside?

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Speaker 1: And so I was actually a little skeptical, but the

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Speaker 1: more I researched the company, the more compelled I was.

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Speaker 1: I'm not only is the investment philosophy very aligned with

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Speaker 1: the way I think about investing. But the team is incredible,

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Speaker 1: and even from my first trip to Columbus, I realized

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Speaker 1: what an amazing, liveable city it is, and it's a

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Speaker 1: growing city, which is something not a lot of cities

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Speaker 1: in the US can claim today. And so yeah, it

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Speaker 1: ended up being I think a really good fit.

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Speaker 2: So since you mentioned investing for the long run amongst

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Speaker 2: the Japanese banks on the Diamond Hill Firm website, your

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Speaker 2: tagline is invested in the long run. Shouldn't that be

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Speaker 2: the Norman asset management? Aren't we all supposed to be

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Speaker 2: invested in the long run?

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Speaker 1: I think it absolutely should be the norm, because it

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Speaker 1: is generally what our clients are seeking. And I think

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Speaker 1: there's just so many pressures that cause so many investors

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Speaker 1: to think shorter term, and even investors who claim to

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Speaker 1: be long term are often thinking in one year increments

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Speaker 1: as opposed to the more like five year increments that

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Speaker 1: were trying to think about.

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Speaker 2: So is that the fault of the end investor? Is

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Speaker 2: it the institutions that really look at quarterly results? I

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Speaker 2: know some hedge funds look at monthly or weekly results.

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Speaker 2: That seems to be you know, nothing more than random noise,

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Speaker 2: but they seem to focus on it. Who should we

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Speaker 2: be blaming about this sort of short termism that can

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Speaker 2: be endemic in the investing world.

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Speaker 1: I don't know if we can really blame any one party.

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Speaker 1: I think it's kind of systemic at this point where

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Speaker 1: you have companies reporting earnings on a quarterly basis, so

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Speaker 1: many public companies expected to issue guidance and then meet

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Speaker 1: that guidance or else, you know, essentially, And I think

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Speaker 1: a lot of investors have figured out how to effectively

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Speaker 1: make money for their clients with shorter term time horizons.

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Speaker 1: Otherwise they wouldn't be doing it. And so I think

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Speaker 1: there's enough forces out there that lead to people thinking

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Speaker 1: that they can make money doing it. But I think

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Speaker 1: there's more opportunity to take a longer time horizon or

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Speaker 1: longer term perspective, because then you can really think about,

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Speaker 1: you know, what are the earnings power, what is the

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Speaker 1: long term earnings power of this business? And how can

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Speaker 1: I think about myself as an owner of it in

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Speaker 1: partnership with the management team, as opposed to to thinking

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Speaker 1: about kind of where the stock price is going. Huh.

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Speaker 2: So we kind of joke about the ill equidity premium,

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Speaker 2: but really we should be talking about the long term

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Speaker 2: premium that's being overlooked. Maybe there's a substantial market and

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Speaker 2: efficiency there.

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Speaker 1: I think there is, because you know, while I do

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Speaker 1: think that clients like to invest for longer time periods,

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Speaker 1: they only have so much patience and when you take

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Speaker 1: a really long time prizon, you can have multi year

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Speaker 1: periods of underperformance. And so that's not something that every

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Speaker 1: client is willing to tolerate. And it's also very hard,

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Speaker 1: I think every for all the parties involved to be

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Speaker 1: able to consistently know, you know, is this underperformance because

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Speaker 1: my investment manager is sticking to their philosophy or is

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Speaker 1: it a deeper issue and I should be, you know,

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Speaker 1: running for the hills. And so I think it's really

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Speaker 1: really important to have a consistent philosophy and be able

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Speaker 1: to show over you know, as much time as possible,

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Speaker 1: ideally decades or more, that your ability to focus on

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Speaker 1: a long time horizon really does come back around and

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Speaker 1: generate out performance for your clients in the long term.

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Speaker 2: Really really interesting. So let's talk a little bit about

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Speaker 2: Diamond Hill stock symbol DHIL. What's it like running a

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Speaker 2: public company. They've been public since nineteen ninety six, So.

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Speaker 1: Yes, it has been a public company really since the

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Speaker 1: founding because essentially there was an already public business that

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Speaker 1: the founder of Diamond Hill kind of merged into or

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Speaker 1: used as the beginning of Diamond Hill. So there was

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Speaker 1: never a moment where the company went public. It's really

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Speaker 1: just been a factoid of the whole history of it.

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Speaker 2: It's been publics from day one. Yes, huh. So earlier

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Speaker 2: we were talking about investing for the long haul. What

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Speaker 2: sort of challenges are there when shareholders are looking for

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Speaker 2: a quarterly results that looking for revenues and improvements and profits.

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Speaker 2: How do you get people to focus on the long

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Speaker 2: term when every three months there's a snapshot of here's

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Speaker 2: where we are in the cycle.

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Speaker 1: There's nothing we can do to avoid the fact that

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Speaker 1: we need to publish our results every quarter. But there

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Speaker 1: are actually things that a lot of public companies do

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Speaker 1: that are not a requirement. For example, quarterly earnings calls

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Speaker 1: and guidance, and so those are things that we don't

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Speaker 1: participate in because.

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Speaker 2: No guidance, no quarterly call. Correct, just you release the

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Speaker 2: numbers and let the chips full where they may exactly.

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Speaker 1: And the reason why that's so important is because we

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Speaker 1: don't want to on a quarterly basis be essentially pressured

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Speaker 1: into focus on a shorter time period by people asking

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Speaker 1: questions about a shorter time period. And we do think

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Speaker 1: that the short time periods are noise. And so what

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Speaker 1: we do instead is we hold a shareholder meeting or

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Speaker 1: a management presentation for shareholders once a year, where we do,

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Speaker 1: you know, kind of take a step back and look

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Speaker 1: at the year and review our expectations going forward and

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Speaker 1: really try to lay out the strategy and how we

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Speaker 1: are evolving in this ever changing market.

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Speaker 2: Diamond Hill has always been public from day one. The

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Speaker 2: founder sort of reverse merged the company into an existing

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Speaker 2: public entity. Does that mean the float isn't giant that

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Speaker 2: a lot of the lot of the holdings are held

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Speaker 2: by founders. How much of the stock publicly trades.

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Speaker 1: It's actually pretty pretty big. It's about eighty percent, so

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Speaker 1: it is just under twenty percent owned by management and directors.

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Speaker 1: I think actually, if you go public, there tends to

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Speaker 1: be a more of a concentration in owners holding founder

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Speaker 1: stock exactly. But when the situation is more like using

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Speaker 1: stock to fund the beginning years of the company. I

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Speaker 1: think it ends up leading to a more diverse shareholder okase.

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Speaker 2: And you mentioned founders and managers. What about employees. Do

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Speaker 2: they have the opportunity to participate in an ESOP or

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Speaker 2: anything like that.

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Speaker 1: We have a a very strong commitment to an ownership mentality,

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Speaker 1: and we think that owning a piece of the company

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Speaker 1: is part of that. It's really just a small part

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Speaker 1: of it in the grand scheme of things. It's more

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Speaker 1: about thinking like an owner when we're making every day decisions.

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Speaker 1: But we do reinforce that by providing a grant of

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Speaker 1: shares that vest in five years for every employee when

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Speaker 1: they start, and then we have programs to allow for

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Speaker 1: employees to purchase shares at a discount and also to

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Speaker 1: be able to participate for certain roles in a long

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Speaker 1: term incentive program.

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Speaker 2: You mentioned ownership mentality. As I was clicking around your website,

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Speaker 2: I found a fascinating document that shows each of your

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Speaker 2: portfolio managers by name, the funds they manage and how

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Speaker 2: much of their own dollars are invested in their own

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Speaker 2: managed funds. And very often these are seven figures or

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Speaker 2: more millions of dollars invested in their own funds tell

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Speaker 2: us a little bit about that.

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Speaker 1: I'm so glad you brought that up, because I do

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Speaker 1: think it's a really big differentiator for us. We have

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Speaker 1: really focused on the fact that if we're invested alongside

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Speaker 1: our clients, we're making decisions for them that will be

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Speaker 1: in our best interest and their best interests. So we

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Speaker 1: really think that it creates alignment to have our portfolio

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Speaker 1: managers meaningfully owning shares of the funds that they manage. Now,

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Speaker 1: of course that is completely up to them, but when

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Speaker 1: we're hiring people or promoting people, we really do make

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Speaker 1: sure that it's clear that this is something that we

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Speaker 1: think is a differentiator for us. And I'd say part

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Speaker 1: of it is reinforced by the fact that we do

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Speaker 1: have policies that prohibit our employees from investing in individual

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Speaker 1: securities because we want their time to be devoted to

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Speaker 1: making the right decisions for our clients and they can

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Speaker 1: benefit from that as a client. And so I think

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Speaker 1: that's really just led to a culture where we really

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Speaker 1: all feel like we're there for the benefit of our clients.

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Speaker 2: What's a better advertisement for a mutual fund than the

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Speaker 2: fund manager having millions and millions of dollars invested in

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Speaker 2: that exact fund.

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Speaker 1: Absolutely.

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Speaker 2: So there's another line on your website that kind of

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Speaker 2: quote my attention, our curiosity uncovers unique opportunities. Tell us

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Speaker 2: a little bit about that.

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Speaker 1: So on the equity side in particular, a lot of

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Speaker 1: what we do really is to do very deep fundamental

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Speaker 1: research on companies from a bottom up perspective, and so

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Speaker 1: we're constantly looking for new ideas and opportunities to put

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Speaker 1: in the portfolios. But despite that constant curiosity, our portfolios

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Speaker 1: do not have very high turnover because we are taking

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Speaker 1: such a long term perspective. So we're looking for businesses

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Speaker 1: that are fundamentally mispriced relative to what we think, you know,

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Speaker 1: a normalized earnings environment would result in. And sometimes that's

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Speaker 1: caused by dislocations for the business that we think will reverse.

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Speaker 1: Sometimes it's you know, growth potential in the future that

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Speaker 1: we don't think is priced in. But there's always got

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Speaker 1: to be some element of the valuation really being compelling.

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Speaker 1: And I think, you know, if you're really looking at

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Speaker 1: the intrinsic value of a company and estimating the cash

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Speaker 1: flows the business canerate and looking for opportunities where the

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Speaker 1: stocks are mispriced relative to that you have to take

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Speaker 1: a long term perspective.

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Speaker 2: I'm hearing a couple of things that I want to

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Speaker 2: ask some follow up questions. So bottoms up stock selection

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Speaker 2: pretty obvious. It's not that you're doing sector rotation or

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Speaker 2: market timing. You're purchasing specific companies. But then the added

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Speaker 2: layer is you're purchasing them at a discount to intrinsic value.

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Speaker 2: So this sounds a lot like traditional value investing, which

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Speaker 2: has had a rough couple of years. How do you

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Speaker 2: differentiate yourself from traditional value investors?

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Speaker 1: I mean, I think there's a lot of what we

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Speaker 1: do that I would say is not too far from

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Speaker 1: being traditional value investor. I'd say both for Diamond Hill

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Speaker 1: as for a lot of investors. There's kind of an

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Speaker 1: ideal out there where you want to buy a company

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Speaker 1: that has a strong competitive advantage training at a discount

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Speaker 1: to what you think those future cash flows are worth.

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Speaker 1: That is kind of the fundamental perfect investment opportunity for

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Speaker 1: almost any investment philosophy. And I think the difference between

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Speaker 1: you know, a traditional value investor versus you know, we

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Speaker 1: kind of call ourselves intrinsic value investors versus someone who

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Speaker 1: calls themselves. A growth investor is just really, you know,

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Speaker 1: what do you prioritize when you don't have that ideal situation.

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Speaker 1: So for us, you know, we'd still rather buy a

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Speaker 1: higher quality business trading at a small discount than a

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Speaker 1: low quality business trading at a big discount. But fundamentally,

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Speaker 1: I'd say it just it really requires you to understand,

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Speaker 1: you know, what is the competitive position of this business

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Speaker 1: and how predictable are those future cash flows.

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Speaker 2: When I hear competitive position, I immediately think of the

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Speaker 2: morning star mote you described earlier. Tell us how that

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Speaker 2: works into your investing philosophy.

442
00:22:42,680 --> 00:22:44,720
Speaker 1: It was interesting coming to Diamond Hill. I think one

443
00:22:44,720 --> 00:22:49,000
Speaker 1: of the reasons why the portfolio managers were comfortable hiring me,

444
00:22:49,240 --> 00:22:51,639
Speaker 1: as you know, the first external CEO that they had

445
00:22:51,720 --> 00:22:55,480
Speaker 1: ever had, is because I had very widely talked about

446
00:22:55,680 --> 00:23:00,000
Speaker 1: economic modes and investing with an eye on sustainable competitive advantage.

447
00:23:00,359 --> 00:23:02,720
Speaker 1: But even in the book I wrote in twenty fourteen,

448
00:23:02,880 --> 00:23:05,920
Speaker 1: you could see that the focus on competitive advantage can

449
00:23:05,960 --> 00:23:10,280
Speaker 1: never be absolute. You always have to take valuation into consideration.

450
00:23:11,240 --> 00:23:14,080
Speaker 1: I would say in general, we probably put a little

451
00:23:14,119 --> 00:23:17,960
Speaker 1: bit more bias towards valuation as the primary consideration and

452
00:23:18,280 --> 00:23:22,000
Speaker 1: competitive advantage as very important, but maybe second to valuation

453
00:23:22,840 --> 00:23:24,080
Speaker 1: as a primary consideration.

454
00:23:24,560 --> 00:23:29,440
Speaker 2: So valuation, high quality, competitive advantage. Are we leaving out

455
00:23:29,480 --> 00:23:33,639
Speaker 2: any other specifics that are go into the investing stock

456
00:23:33,680 --> 00:23:34,640
Speaker 2: selection process?

457
00:23:35,280 --> 00:23:39,720
Speaker 1: I mean very concentrated portfolios and a long term perspective.

458
00:23:40,200 --> 00:23:43,080
Speaker 2: So I love when I hear concentrated portfolio because I

459
00:23:43,080 --> 00:23:48,200
Speaker 2: immediately think high active share, no closet indexing, exactly. So

460
00:23:48,560 --> 00:23:51,960
Speaker 2: when you say concentrated, how concentrated is concentrated?

461
00:23:52,280 --> 00:23:55,000
Speaker 1: So our large cap strategy has about fifty positions in it.

462
00:23:55,800 --> 00:23:57,440
Speaker 2: That's pretty concentrated, exactly.

463
00:23:57,680 --> 00:24:00,160
Speaker 1: So I think that gives you an example. You know, well,

464
00:24:00,560 --> 00:24:02,320
Speaker 1: small cap is more than that, but it's still less

465
00:24:02,320 --> 00:24:02,800
Speaker 1: than one hundred.

466
00:24:02,920 --> 00:24:06,040
Speaker 2: Small cap is always more than large cap. We're going

467
00:24:06,080 --> 00:24:09,000
Speaker 2: to talk a little bit about small cap later, which

468
00:24:09,000 --> 00:24:11,520
Speaker 2: has been kind of fascinating what's been going on in

469
00:24:11,520 --> 00:24:15,200
Speaker 2: that space lagging for as long as it has. But

470
00:24:15,240 --> 00:24:18,040
Speaker 2: before I get to that, I want to talk about

471
00:24:18,560 --> 00:24:23,199
Speaker 2: not only how you express the philosophy in investments, but

472
00:24:23,320 --> 00:24:26,560
Speaker 2: the different strategies you run in equity and fixed income.

473
00:24:27,359 --> 00:24:31,800
Speaker 2: I know you do separately managed accounts, you do mutual funds,

474
00:24:31,840 --> 00:24:35,400
Speaker 2: and you also do a C explain those choices.

475
00:24:36,000 --> 00:24:40,520
Speaker 1: So essentially, we try to offer our intellectual property to

476
00:24:40,760 --> 00:24:43,639
Speaker 1: our clients in whatever vehicle that they need it to

477
00:24:43,680 --> 00:24:45,840
Speaker 1: be in. You know, we started out kind of focused

478
00:24:45,880 --> 00:24:48,960
Speaker 1: on mutual funds as the vehicle, and we've really diversified

479
00:24:49,000 --> 00:24:51,960
Speaker 1: away from that because of client interest. Clients have asked

480
00:24:52,040 --> 00:24:55,359
Speaker 1: us for separate accounts model delivery CIS and we have

481
00:24:55,400 --> 00:24:59,159
Speaker 1: happily obliged. Now, i'd say the big topic you know

482
00:24:59,200 --> 00:25:02,280
Speaker 1: on the table is e The challenge with ETFs is

483
00:25:02,280 --> 00:25:06,440
Speaker 1: that you cannot constrain capacity, and we believe very strongly

484
00:25:06,600 --> 00:25:09,080
Speaker 1: that in order to make sure that we can always

485
00:25:09,119 --> 00:25:11,200
Speaker 1: deliver for our existing clients, we have to be able

486
00:25:11,240 --> 00:25:13,680
Speaker 1: to constrain to close strategies, to.

487
00:25:13,640 --> 00:25:15,760
Speaker 2: Be able to say no and close a fund down,

488
00:25:15,840 --> 00:25:18,560
Speaker 2: not just fire hose of capital.

489
00:25:18,119 --> 00:25:21,800
Speaker 1: Coming up exactly. And as many very popular ETFs show,

490
00:25:22,560 --> 00:25:25,040
Speaker 1: and as you know, just as fundamentally true, you cannot

491
00:25:25,040 --> 00:25:28,360
Speaker 1: close an ETF today, and so in order to take

492
00:25:28,400 --> 00:25:30,320
Speaker 1: capital in an ETF, we have to figure out some

493
00:25:30,440 --> 00:25:32,639
Speaker 1: kind of solution to that, and we have not figured

494
00:25:32,640 --> 00:25:33,199
Speaker 1: out a solution.

495
00:25:33,840 --> 00:25:37,640
Speaker 2: That's really interesting. So I know you're running about twenty

496
00:25:37,720 --> 00:25:41,040
Speaker 2: nine billion total. How big is the biggest fund where

497
00:25:41,080 --> 00:25:43,880
Speaker 2: you say, okay, we're we're pretty close to capacity here.

498
00:25:44,600 --> 00:25:47,480
Speaker 1: So our large cap strategy was closed to new investors

499
00:25:47,560 --> 00:25:50,200
Speaker 1: until about a year ago. And so over the course

500
00:25:50,240 --> 00:25:55,120
Speaker 1: of history, we've closed for strategies over time. And you know, generally,

501
00:25:55,160 --> 00:25:57,600
Speaker 1: i'd say we take a lot of things into consideration.

502
00:25:58,440 --> 00:26:01,040
Speaker 1: Our clients actually like to be able to put new

503
00:26:01,040 --> 00:26:03,679
Speaker 1: clients of theirs into the same strategies, and so it

504
00:26:03,680 --> 00:26:06,560
Speaker 1: can be very disruptive for client bases for you to

505
00:26:06,640 --> 00:26:09,720
Speaker 1: just abruptly and suddenly close strategies. So it generally is

506
00:26:09,760 --> 00:26:12,520
Speaker 1: something that we plan as we see it coming and

507
00:26:12,600 --> 00:26:15,800
Speaker 1: really try to collaborate with our clients so that we

508
00:26:15,840 --> 00:26:18,800
Speaker 1: can appreciate where it may create a challenge for no reason.

509
00:26:19,520 --> 00:26:22,080
Speaker 1: But in general, yeah, we've closed at times. We've had

510
00:26:22,640 --> 00:26:27,199
Speaker 1: small cap SMID and large cap SMID. Yeah.

511
00:26:27,240 --> 00:26:29,600
Speaker 2: By the way, a little industry jargon. I always laugh

512
00:26:29,640 --> 00:26:32,280
Speaker 2: when I say that. We listen, we laughed since the

513
00:26:32,400 --> 00:26:34,919
Speaker 2: jargon all the time. So small and mid cap, yes,

514
00:26:35,240 --> 00:26:38,640
Speaker 2: So I would imagine the large cap has bigger capacity

515
00:26:39,320 --> 00:26:42,160
Speaker 2: eight ten, twelve billion. Where do you start to run

516
00:26:42,200 --> 00:26:44,959
Speaker 2: into Hey, for fifty stocks, this is as big as

517
00:26:45,000 --> 00:26:45,600
Speaker 2: we want to get.

518
00:26:45,880 --> 00:26:48,200
Speaker 1: Yeah, I mean, we think the capacity for that is

519
00:26:48,240 --> 00:26:49,880
Speaker 1: somewhere around twenty five or thirty billion.

520
00:26:50,000 --> 00:26:52,840
Speaker 2: Oh so you haven't really run into issues with that yet.

521
00:26:52,920 --> 00:26:56,200
Speaker 1: Yeah, I mean I would say that's for the strategy overall.

522
00:26:56,840 --> 00:26:59,040
Speaker 1: You know, So it partially depends on how much is

523
00:26:59,040 --> 00:27:02,080
Speaker 1: in the fund versus in you know, other areas.

524
00:27:02,119 --> 00:27:04,600
Speaker 2: But in a small cap or a SMID you can

525
00:27:04,680 --> 00:27:09,119
Speaker 2: say to your investing partners, hey, we're getting to the

526
00:27:09,160 --> 00:27:13,600
Speaker 2: point where we're just about capacity constrained. Don't be surprised

527
00:27:13,600 --> 00:27:16,160
Speaker 2: if this closes next quarter, next year. How far out

528
00:27:16,200 --> 00:27:17,680
Speaker 2: do you plan it?

529
00:27:17,800 --> 00:27:20,560
Speaker 1: I mean generally, if it's flows related, it's easier to plan.

530
00:27:20,600 --> 00:27:23,040
Speaker 1: If it's market related, it's harder, because you know, if

531
00:27:23,080 --> 00:27:25,080
Speaker 1: all of a sudden, small caps make it come back,

532
00:27:25,320 --> 00:27:26,639
Speaker 1: you know, when you didn't think you were anywhere to

533
00:27:26,680 --> 00:27:29,760
Speaker 1: close to closing, it can come up more quickly. With

534
00:27:29,880 --> 00:27:32,880
Speaker 1: large cap I'd say it also depends on how low

535
00:27:32,960 --> 00:27:35,600
Speaker 1: you go in terms of market cap, right, how small

536
00:27:35,600 --> 00:27:37,480
Speaker 1: a company will you put into a strategy that is

537
00:27:37,720 --> 00:27:40,760
Speaker 1: considered large cap. So for us, i'd say that is

538
00:27:40,760 --> 00:27:43,560
Speaker 1: a big swing factor that constantly get gets debated, And

539
00:27:43,560 --> 00:27:45,000
Speaker 1: what we always try to do is look at the

540
00:27:45,040 --> 00:27:49,320
Speaker 1: actual history where we actually invested clients capital, because that

541
00:27:49,520 --> 00:27:51,760
Speaker 1: is what has created our track record and that we

542
00:27:51,840 --> 00:27:53,719
Speaker 1: need that in order for it to be you know,

543
00:27:53,880 --> 00:27:54,840
Speaker 1: repeatable in the future.

544
00:27:54,920 --> 00:27:57,720
Speaker 2: Huh, that's really interesting. So what do you use as

545
00:27:57,760 --> 00:28:00,560
Speaker 2: a benchmark for the large cap fund? Is it just

546
00:28:00,640 --> 00:28:03,000
Speaker 2: the SMP five hundred or something a little broader.

547
00:28:03,680 --> 00:28:06,800
Speaker 1: We use the Rustle at one thousand, so much broader.

548
00:28:06,880 --> 00:28:08,719
Speaker 2: Yeah, I was going to say, if you want to

549
00:28:08,880 --> 00:28:12,200
Speaker 2: just arbitrarily draw a line in the sand the top

550
00:28:12,359 --> 00:28:16,400
Speaker 2: half of the SMP five hundred, I would imagine those

551
00:28:16,400 --> 00:28:19,119
Speaker 2: two hundred and fifty stocks can be considered large cap,

552
00:28:19,560 --> 00:28:23,159
Speaker 2: or like, what's the line in the sand above ten billion,

553
00:28:23,240 --> 00:28:26,560
Speaker 2: above twenty five billion? It's hard to even judge when

554
00:28:26,600 --> 00:28:29,800
Speaker 2: we have so many companies that are trillion dollar market

555
00:28:29,880 --> 00:28:30,720
Speaker 2: caps these days.

556
00:28:30,840 --> 00:28:33,880
Speaker 1: Well, that actually brings up a really interesting point in time,

557
00:28:33,960 --> 00:28:36,920
Speaker 1: I'd say, with our markets being so driven by such

558
00:28:36,920 --> 00:28:39,480
Speaker 1: a small number of stocks, and we generally think that

559
00:28:39,520 --> 00:28:41,720
Speaker 1: creates opportunity not only in the large cap space, but

560
00:28:41,800 --> 00:28:45,840
Speaker 1: really across the cap spectrum. But you know, even in

561
00:28:45,880 --> 00:28:48,360
Speaker 1: the first half of twenty twenty four, more than sixty

562
00:28:48,360 --> 00:28:51,200
Speaker 1: percent of the return came from six companies, And so

563
00:28:51,520 --> 00:28:53,440
Speaker 1: I do think we're getting to the point where what

564
00:28:53,480 --> 00:28:56,040
Speaker 1: you see going on under the surface is so different

565
00:28:56,120 --> 00:28:58,680
Speaker 1: from what the overall you know, quote unquote market return

566
00:28:58,720 --> 00:28:59,680
Speaker 1: looks like these days.

567
00:28:59,760 --> 00:29:02,440
Speaker 2: You know, I'm so glad you said that. Every time

568
00:29:02,840 --> 00:29:06,000
Speaker 2: I have a discussion about passive or indexing with people

569
00:29:06,760 --> 00:29:11,680
Speaker 2: who are convinced that's gonna destroy the structure of the market,

570
00:29:11,960 --> 00:29:16,480
Speaker 2: my answer is always, wouldn't that create more inefficiencies elsewhere

571
00:29:16,480 --> 00:29:19,560
Speaker 2: in the market if all these flows are blindly going

572
00:29:19,600 --> 00:29:22,920
Speaker 2: into passive And there's certainly a reason for that, but

573
00:29:23,600 --> 00:29:28,080
Speaker 2: tell us about how that leads to inefficiencies that savvy

574
00:29:28,080 --> 00:29:29,720
Speaker 2: investors can take advantage of.

575
00:29:30,200 --> 00:29:33,600
Speaker 1: Yeah, I think you can see this particularly in smaller

576
00:29:33,600 --> 00:29:36,400
Speaker 1: cab companies right now, where you know, as you alluded

577
00:29:36,440 --> 00:29:39,480
Speaker 1: to earlier, the Russell two thousand versus the Russell one

578
00:29:39,480 --> 00:29:43,400
Speaker 1: thousand has basically underperformed by ninety five percent from the

579
00:29:43,480 --> 00:29:45,080
Speaker 1: end of twenty sixteen until now.

580
00:29:45,200 --> 00:29:46,640
Speaker 2: That's amazing, it's stunning.

581
00:29:46,800 --> 00:29:50,040
Speaker 1: And you know, it's true that smaller cab companies are

582
00:29:50,440 --> 00:29:53,520
Speaker 1: much more challenging because you know, forty ish percent of

583
00:29:53,520 --> 00:29:56,480
Speaker 1: small cap companies don't make a profit, and so there are.

584
00:29:56,480 --> 00:29:58,719
Speaker 2: I think where it's seven percent of large of the

585
00:29:58,760 --> 00:30:01,920
Speaker 2: s and P five hundred is not profitable, which is

586
00:30:02,000 --> 00:30:04,680
Speaker 2: a fraction of what it was in the late nineties.

587
00:30:05,160 --> 00:30:08,280
Speaker 2: Much more of the big caps weren't profitable. Today they're

588
00:30:08,280 --> 00:30:11,560
Speaker 2: all money machines. The small caps really are kind of

589
00:30:11,840 --> 00:30:12,920
Speaker 2: struggling against that.

590
00:30:13,360 --> 00:30:17,360
Speaker 1: And the interesting thing is that small cap active managers

591
00:30:17,400 --> 00:30:20,240
Speaker 1: have outperformed for out of three out of the last

592
00:30:20,240 --> 00:30:23,760
Speaker 1: four years. But in small cap about sixty percent of

593
00:30:23,800 --> 00:30:27,080
Speaker 1: assets are invested passively. It's actually only fifty percent in

594
00:30:27,160 --> 00:30:30,360
Speaker 1: large cap. So it's kind of surprising that investors are

595
00:30:30,400 --> 00:30:34,520
Speaker 1: relying on passive strategies in a category where active management

596
00:30:34,600 --> 00:30:35,520
Speaker 1: makes a huge difference.

597
00:30:35,880 --> 00:30:39,840
Speaker 2: So let me make sure I'm hearing that correctly. Sixty

598
00:30:39,920 --> 00:30:44,560
Speaker 2: percent of small cap is indexed versus fifty percent in

599
00:30:44,720 --> 00:30:48,440
Speaker 2: large cap, and more small cap managers are beating their

600
00:30:48,440 --> 00:30:52,240
Speaker 2: benchmark than large cap managers? Am I getting that right exactly?

601
00:30:52,360 --> 00:30:54,600
Speaker 2: So that kind of goes back to, hey, the more

602
00:30:54,640 --> 00:30:58,120
Speaker 2: indexing there is, the more opportunities there are for inefficiencies

603
00:30:58,120 --> 00:30:58,920
Speaker 2: to be discovered.

604
00:30:59,320 --> 00:31:03,000
Speaker 1: Yes, but let's say that one element of reality I

605
00:31:03,000 --> 00:31:05,360
Speaker 1: think that has for managers who are focused on smaller

606
00:31:05,360 --> 00:31:09,320
Speaker 1: cap companies is that you can't buy an undervalued company

607
00:31:09,320 --> 00:31:12,560
Speaker 1: in small cap necessarily and assume that it's going to

608
00:31:12,920 --> 00:31:17,120
Speaker 1: appreciate because of valuation, because we don't know when or

609
00:31:17,160 --> 00:31:19,719
Speaker 1: what will cause the market to rerate small cap. And

610
00:31:19,760 --> 00:31:22,000
Speaker 1: so you know, this has been going on for you know,

611
00:31:22,120 --> 00:31:24,320
Speaker 1: basically a decade or more depending on how you look

612
00:31:24,320 --> 00:31:27,080
Speaker 1: at the data. So I think given that, what we

613
00:31:27,160 --> 00:31:31,320
Speaker 1: see is our analysts and portfolio managers increasingly focusing on

614
00:31:31,760 --> 00:31:36,080
Speaker 1: investing in small caps that are high quality businesses generating

615
00:31:36,200 --> 00:31:39,240
Speaker 1: cash flow, returning that cash flow to shareholders, where essentially

616
00:31:39,240 --> 00:31:41,560
Speaker 1: the cash return is going to get you what you

617
00:31:41,680 --> 00:31:43,880
Speaker 1: need as an investor, and you don't need the valuation

618
00:31:43,960 --> 00:31:46,520
Speaker 1: to rerate. If it does, it'll be bonus.

619
00:31:46,360 --> 00:31:49,480
Speaker 2: That's dividends and buybacks in terms of you know, David

620
00:31:49,480 --> 00:31:53,479
Speaker 2: Einhorn said something very similar when people were saying the

621
00:31:53,480 --> 00:31:56,920
Speaker 2: market structure was broken by passive and I know he's

622
00:31:56,960 --> 00:32:00,280
Speaker 2: in that camp. He said, it made us re think

623
00:32:00,280 --> 00:32:04,880
Speaker 2: our approach to valuation and if merely buying inexpensive stocks

624
00:32:05,720 --> 00:32:07,760
Speaker 2: wasn't going to get you the performance you need, well,

625
00:32:07,800 --> 00:32:09,720
Speaker 2: then you had to find the stocks that were doing

626
00:32:09,760 --> 00:32:13,600
Speaker 2: something to raise their evaluation themselves. Mostly through return of

627
00:32:13,640 --> 00:32:14,920
Speaker 2: capital to investors.

628
00:32:15,040 --> 00:32:17,479
Speaker 1: Yeah, that was a great episode. I think Einhornhet had

629
00:32:17,720 --> 00:32:20,280
Speaker 1: a lot of really good points that I think we're.

630
00:32:19,960 --> 00:32:22,680
Speaker 2: So you agree with him. It's hey, we like these

631
00:32:22,720 --> 00:32:26,560
Speaker 2: stocks that are actually participating and there are opportunities being

632
00:32:26,600 --> 00:32:30,240
Speaker 2: created by the rise of passive. So let me ask

633
00:32:30,280 --> 00:32:34,480
Speaker 2: one other question about the rise of indexing. It has

634
00:32:34,840 --> 00:32:39,480
Speaker 2: helped to contribute to fees coming down across the industry.

635
00:32:39,960 --> 00:32:42,200
Speaker 2: You're a public company, how do you deal with those

636
00:32:42,240 --> 00:32:46,760
Speaker 2: fee pressures that seem to be endemic throughout all of investing.

637
00:32:47,480 --> 00:32:49,239
Speaker 1: I mean from the beginning, we really try to take

638
00:32:49,280 --> 00:32:52,760
Speaker 1: a very thoughtful approach to setting our fees, and you know,

639
00:32:52,800 --> 00:32:54,440
Speaker 1: we really try to think about, you know, what do

640
00:32:54,480 --> 00:32:56,680
Speaker 1: we believe the excess return is that we can generate

641
00:32:56,720 --> 00:32:59,840
Speaker 1: over the long run, and how can we charge a

642
00:33:00,240 --> 00:33:01,960
Speaker 1: price for that so that we can make sure we

643
00:33:02,000 --> 00:33:05,040
Speaker 1: can pay the you know, investment talent that we need

644
00:33:05,080 --> 00:33:08,320
Speaker 1: in order to generate those returns, but also make sure

645
00:33:08,360 --> 00:33:10,880
Speaker 1: that the shareholders of the firm are getting you know,

646
00:33:10,920 --> 00:33:13,560
Speaker 1: paid back for the capital they provide, and ultimately that

647
00:33:13,600 --> 00:33:16,520
Speaker 1: the clients are getting a return after fees that makes

648
00:33:16,520 --> 00:33:18,800
Speaker 1: sense for them. And so that kind of third to third.

649
00:33:18,840 --> 00:33:22,440
Speaker 1: A third mentality has led us to to set fees

650
00:33:22,480 --> 00:33:24,760
Speaker 1: at a place that you know generally do not exceed

651
00:33:24,920 --> 00:33:28,240
Speaker 1: the median of kind of morning star categories for fees,

652
00:33:28,640 --> 00:33:31,320
Speaker 1: and we look at that too, because we really want

653
00:33:31,360 --> 00:33:33,760
Speaker 1: to make sure that we are not charging more than

654
00:33:34,200 --> 00:33:36,920
Speaker 1: we think is the value we can generate fair enough.

655
00:33:37,640 --> 00:33:41,840
Speaker 2: So we were talking earlier about small caps. They've been

656
00:33:41,960 --> 00:33:45,440
Speaker 2: lagging not just since the pandemic but pretty much the

657
00:33:45,480 --> 00:33:48,560
Speaker 2: past decade. What do you think the reason for that is?

658
00:33:48,560 --> 00:33:51,640
Speaker 2: Is it access to capital or into national markets? What's

659
00:33:51,680 --> 00:33:53,960
Speaker 2: been holding small caps back?

660
00:33:55,080 --> 00:33:57,200
Speaker 1: I actually think there's a couple of things, but the

661
00:33:57,200 --> 00:34:01,880
Speaker 1: biggest is that small caps have not done so poorly

662
00:34:02,080 --> 00:34:04,840
Speaker 1: as much as large caps have just done so excellently.

663
00:34:05,160 --> 00:34:08,640
Speaker 1: And so I think that's partially these five stocks really

664
00:34:08,719 --> 00:34:11,480
Speaker 1: driving the market that we're really seeing come to a

665
00:34:11,480 --> 00:34:13,279
Speaker 1: head this year, but really has been going on for

666
00:34:13,320 --> 00:34:16,000
Speaker 1: the last several years, and we've seen concentration in the

667
00:34:16,120 --> 00:34:18,960
Speaker 1: large cap side of the market among those five companies

668
00:34:19,120 --> 00:34:23,120
Speaker 1: getting greater and greater over that time period. So it's

669
00:34:23,200 --> 00:34:26,360
Speaker 1: just very hard for any kind of diversified portfolio to

670
00:34:26,440 --> 00:34:28,759
Speaker 1: keep up with that. And you can see that in

671
00:34:28,920 --> 00:34:32,160
Speaker 1: a diversified large cap portfolio and any kind of actively

672
00:34:32,160 --> 00:34:35,279
Speaker 1: managed large cap portfolio relative to indexes. And you can

673
00:34:35,320 --> 00:34:37,080
Speaker 1: certainly see it in small caps as well.

674
00:34:37,280 --> 00:34:40,200
Speaker 2: Right. I have a friend who's a trader who says, hey,

675
00:34:40,239 --> 00:34:45,479
Speaker 2: you can't eat relative performance, right exactly. So we talked

676
00:34:45,480 --> 00:34:48,600
Speaker 2: a little bit earlier about profitability. Ninety three percent of

677
00:34:48,640 --> 00:34:51,759
Speaker 2: big caps are profitable, but only a little more than

678
00:34:51,840 --> 00:34:55,839
Speaker 2: half of small cap stocks are profitable. How important are

679
00:34:56,000 --> 00:35:01,080
Speaker 2: earnings to the small cap sector as a driver of returns.

680
00:35:02,200 --> 00:35:04,839
Speaker 1: I mean, I think quarterly earnings probably should be less

681
00:35:04,840 --> 00:35:07,120
Speaker 1: of a driver for small caps because you know, you

682
00:35:07,200 --> 00:35:09,120
Speaker 1: have to take a long term perspective and really think

683
00:35:09,120 --> 00:35:12,520
Speaker 1: about when they might become profitable. And I think also

684
00:35:12,600 --> 00:35:15,759
Speaker 1: small caps tend to have more issues with debt, so

685
00:35:15,840 --> 00:35:18,600
Speaker 1: it's really important for small cap investors to be very

686
00:35:18,600 --> 00:35:21,520
Speaker 1: aware of the leverage that the companies are carrying, and

687
00:35:22,440 --> 00:35:24,880
Speaker 1: I think in this environment too, to really understand the

688
00:35:24,920 --> 00:35:28,440
Speaker 1: interest rate that that leverage carries and the potential interest

689
00:35:28,520 --> 00:35:31,560
Speaker 1: rate that they may face when needing to refinance that debt.

690
00:35:31,760 --> 00:35:35,200
Speaker 2: And it seemed like the large cap in megacap stocks

691
00:35:35,200 --> 00:35:39,680
Speaker 2: did a great job in refinancing before the pandemic, small

692
00:35:39,719 --> 00:35:43,400
Speaker 2: caps did not have access to the same amounts of

693
00:35:43,440 --> 00:35:46,120
Speaker 2: capital at the same price as How big of a

694
00:35:46,160 --> 00:35:46,839
Speaker 2: factor is that.

695
00:35:47,160 --> 00:35:49,480
Speaker 1: I think it's a huge factor. And you know, and

696
00:35:49,920 --> 00:35:53,240
Speaker 1: you also see less leverage, you know, certainly as a

697
00:35:53,280 --> 00:35:56,160
Speaker 1: proportion of cash flows when you're looking at large caps

698
00:35:56,239 --> 00:35:59,000
Speaker 1: versus small caps, so they're more levered and they did

699
00:35:59,000 --> 00:36:01,800
Speaker 1: not have the same access to benefit from all that

700
00:36:01,880 --> 00:36:03,280
Speaker 1: cheap capital when it was available.

701
00:36:03,520 --> 00:36:06,080
Speaker 2: Diamond Hill is known mostly as a stock shop, as

702
00:36:06,120 --> 00:36:10,560
Speaker 2: an equity shop bottoms up stock selection, but you also

703
00:36:11,320 --> 00:36:13,759
Speaker 2: do fixed income and bonds. Tell us a little bit

704
00:36:13,760 --> 00:36:16,120
Speaker 2: about the fixed income side of the work.

705
00:36:16,520 --> 00:36:19,320
Speaker 1: Yeah, so about four billion of our assets under management

706
00:36:19,360 --> 00:36:23,720
Speaker 1: are in fixed income strategies today and that's really grown

707
00:36:23,760 --> 00:36:26,319
Speaker 1: over the last couple of years because we brought in

708
00:36:26,400 --> 00:36:29,399
Speaker 1: a team in twenty sixteen have been building a track

709
00:36:29,480 --> 00:36:34,000
Speaker 1: record since then, primarily in two strategies, core and short

710
00:36:34,080 --> 00:36:37,480
Speaker 1: duration securitized, and in both of those strategies are I

711
00:36:37,480 --> 00:36:39,920
Speaker 1: would say our biggest point of differentiation is our focus

712
00:36:39,960 --> 00:36:43,680
Speaker 1: on securitized assets, which kind of gives us the opportunity

713
00:36:43,920 --> 00:36:46,520
Speaker 1: to be able to make investments in areas that I

714
00:36:46,520 --> 00:36:50,600
Speaker 1: think other bond managers either don't know as deeply or

715
00:36:50,880 --> 00:36:53,000
Speaker 1: are more focused on macro trends where we take a

716
00:36:53,040 --> 00:36:56,359
Speaker 1: bottom up approach there too. So it's really given us,

717
00:36:56,440 --> 00:37:01,160
Speaker 1: I think, the opportunity to shine in market where it's

718
00:37:01,200 --> 00:37:03,319
Speaker 1: been harder and harder to outperform and fixed income and

719
00:37:03,360 --> 00:37:06,160
Speaker 1: so creating that long track record. Then as we saw

720
00:37:06,200 --> 00:37:09,799
Speaker 1: the environment change and the interest rate regime change, we've

721
00:37:09,800 --> 00:37:12,480
Speaker 1: really been able to benefit from that and deliver for clients.

722
00:37:12,719 --> 00:37:16,000
Speaker 2: And when I think of securitized assets, we typically think

723
00:37:16,040 --> 00:37:19,360
Speaker 2: of mortgages and things like that. What sort of securitized

724
00:37:19,400 --> 00:37:21,319
Speaker 2: assets so you guys playing with.

725
00:37:21,400 --> 00:37:24,719
Speaker 1: Yeah, certainly mortgages is on the list. I'd also say

726
00:37:24,760 --> 00:37:27,960
Speaker 1: asset backed securities, which can include things like you know,

727
00:37:28,000 --> 00:37:31,040
Speaker 1: credit card receivables or car loans or things like that

728
00:37:31,040 --> 00:37:34,759
Speaker 1: that I think are more consumer oriented. And so that's

729
00:37:34,800 --> 00:37:37,480
Speaker 1: an area where there's been a lot of concern as

730
00:37:37,800 --> 00:37:41,120
Speaker 1: concern about recession, you know, ebbs and flows. You definitely

731
00:37:41,120 --> 00:37:43,879
Speaker 1: see people's concern about asset back securities move in line

732
00:37:43,920 --> 00:37:44,120
Speaker 1: with that.

733
00:37:44,560 --> 00:37:48,000
Speaker 2: Yeah, the recession concerns seem to have been a perennial

734
00:37:48,080 --> 00:37:52,640
Speaker 2: miss since the last recession, since the COVID recession, right,

735
00:37:52,880 --> 00:37:57,080
Speaker 2: which was a hot minute, and then all people were

736
00:37:57,120 --> 00:38:00,600
Speaker 2: doing was expecting recession in twenty one, in twenty two,

737
00:38:00,680 --> 00:38:03,719
Speaker 2: and even during the downturn in the market in twenty two.

738
00:38:04,120 --> 00:38:05,959
Speaker 2: This is it, this is what's going to finally cause

739
00:38:05,960 --> 00:38:09,360
Speaker 2: a recession and then a giant snap back in twenty three.

740
00:38:09,640 --> 00:38:13,560
Speaker 2: I know, you guys are bottoms up stock pickers. How

741
00:38:13,640 --> 00:38:18,480
Speaker 2: impactful is all that macro noise on your process?

742
00:38:19,239 --> 00:38:21,920
Speaker 1: I mean, I'd say it actually creates more opportunity than anything,

743
00:38:21,960 --> 00:38:24,520
Speaker 1: because when the market starts really worrying about a recession,

744
00:38:24,840 --> 00:38:29,040
Speaker 1: then it generally undervalues companies that are more cyclical and

745
00:38:29,160 --> 00:38:32,239
Speaker 1: in terms of their long term cash flow generating abilities.

746
00:38:32,600 --> 00:38:35,480
Speaker 1: And when the market's not at all worried about a recession,

747
00:38:35,600 --> 00:38:39,440
Speaker 1: then you can generally find opportunities in more defensive areas

748
00:38:39,440 --> 00:38:41,759
Speaker 1: of the market. And so we do try to kind

749
00:38:41,760 --> 00:38:45,360
Speaker 1: of keep in mind where we think the economic outlook

750
00:38:45,400 --> 00:38:48,279
Speaker 1: could be causing a different short term perspective than a

751
00:38:48,360 --> 00:38:49,960
Speaker 1: longer term perspective.

752
00:38:50,239 --> 00:38:53,960
Speaker 2: So twenty twenty two must have been A friend from

753
00:38:54,040 --> 00:38:57,239
Speaker 2: the military always describes that as a target rich environment.

754
00:38:57,760 --> 00:39:00,439
Speaker 2: What were you guys doing in twenty twenty two when

755
00:39:00,840 --> 00:39:03,280
Speaker 2: the SMP was down about twenty percent and the Nasdaq

756
00:39:03,400 --> 00:39:04,560
Speaker 2: was down about thirty percent.

757
00:39:05,200 --> 00:39:08,160
Speaker 1: Yeah, I mean, I think those are good examples, but

758
00:39:08,239 --> 00:39:12,760
Speaker 1: I actually think the environment is better right now because really, yes,

759
00:39:12,840 --> 00:39:16,000
Speaker 1: because we're in a situation where while the market is up,

760
00:39:16,120 --> 00:39:19,279
Speaker 1: you know, double digits for this year, that's really a

761
00:39:19,920 --> 00:39:23,120
Speaker 1: kind of high level perspective that really obscures what's going

762
00:39:23,120 --> 00:39:26,200
Speaker 1: on under the surface, where there's a tremendous amount of volatility.

763
00:39:26,239 --> 00:39:30,279
Speaker 1: We're seeing the performance of individual companies vary widely and

764
00:39:30,680 --> 00:39:33,720
Speaker 1: is not at all representative of that high level market return.

765
00:39:34,160 --> 00:39:37,279
Speaker 1: And so it's kind of like the Iceberg analogy, right.

766
00:39:37,320 --> 00:39:40,520
Speaker 1: It looks tiny from the surface, but when you dig underneath,

767
00:39:40,520 --> 00:39:43,879
Speaker 1: there's actually a lot more noise going on, and that

768
00:39:44,160 --> 00:39:46,680
Speaker 1: really leads to a lot of idiosyncratic risk, which is

769
00:39:46,719 --> 00:39:48,879
Speaker 1: what we look for. We want companies that are going

770
00:39:48,920 --> 00:39:52,719
Speaker 1: to sell off when they miss their earnings or you know,

771
00:39:52,719 --> 00:39:55,840
Speaker 1: create opportunities because of short term focus that can be

772
00:39:55,920 --> 00:39:57,480
Speaker 1: overlooked for a long term investor.

773
00:39:57,600 --> 00:40:00,200
Speaker 2: And we're recording this in July, so let's put some

774
00:40:00,920 --> 00:40:04,080
Speaker 2: numbers out there. The first half of the year of

775
00:40:04,160 --> 00:40:07,280
Speaker 2: twenty twenty four SMB five hundred up I think fifteen

776
00:40:07,320 --> 00:40:11,440
Speaker 2: point three percent, but the average stock in the S

777
00:40:11,480 --> 00:40:13,720
Speaker 2: and B five hundred was only up about six percent

778
00:40:13,760 --> 00:40:16,560
Speaker 2: and change for the first half of the year. And

779
00:40:16,600 --> 00:40:18,880
Speaker 2: I want to say, the average stock in the second

780
00:40:18,920 --> 00:40:21,960
Speaker 2: quarter in the SMP was slightly negative. That's right down,

781
00:40:22,080 --> 00:40:24,320
Speaker 2: down one point three percent something along those lines.

782
00:40:24,440 --> 00:40:24,680
Speaker 1: Yep.

783
00:40:25,560 --> 00:40:29,239
Speaker 2: So really that seems to really show you what a

784
00:40:29,360 --> 00:40:34,000
Speaker 2: wide dispersion we have in performance. How does that play

785
00:40:34,000 --> 00:40:36,160
Speaker 2: into your bottoms up stock picking?

786
00:40:36,719 --> 00:40:39,120
Speaker 1: I mean, I think it creates opportunity because we see

787
00:40:39,480 --> 00:40:43,719
Speaker 1: companies getting sold off that are really great fundamental businesses

788
00:40:44,120 --> 00:40:46,560
Speaker 1: but you know, perhaps are going through a tough time

789
00:40:46,760 --> 00:40:49,840
Speaker 1: or miss earnings for whatever reason. On the flip side,

790
00:40:49,960 --> 00:40:52,400
Speaker 1: you see companies that you know, we really believe in

791
00:40:52,480 --> 00:40:54,959
Speaker 1: and fundamentally in the long term, that we may already own,

792
00:40:55,360 --> 00:40:59,120
Speaker 1: also selling off, or companies like the ones leading the

793
00:40:59,160 --> 00:41:03,320
Speaker 1: market that have been doing so well. And the interesting

794
00:41:03,360 --> 00:41:05,799
Speaker 1: thing I think about those top five companies is that

795
00:41:06,239 --> 00:41:09,719
Speaker 1: they're actually very fundamentally strong. Now, it's not like we're

796
00:41:09,760 --> 00:41:13,919
Speaker 1: seeing companies that are so ridiculously overvalued. They are much

797
00:41:13,920 --> 00:41:17,239
Speaker 1: more highly valued than the market on average, but that's

798
00:41:17,280 --> 00:41:21,200
Speaker 1: partially driven by earnings revisions and people, you know, realizing

799
00:41:21,320 --> 00:41:23,680
Speaker 1: more and more how much cash flow those businesses can generate.

800
00:41:24,080 --> 00:41:26,240
Speaker 1: I think what it's teeing up for is a future

801
00:41:26,320 --> 00:41:30,960
Speaker 1: environment where anything that causes some instability for those extra

802
00:41:31,040 --> 00:41:33,880
Speaker 1: large tech companies that are driving the market will really

803
00:41:33,920 --> 00:41:36,799
Speaker 1: create a very different, high level environment for the market

804
00:41:36,920 --> 00:41:39,080
Speaker 1: that will create opportunities for people who are really focused

805
00:41:39,080 --> 00:41:40,040
Speaker 1: on bottom up investing.

806
00:41:40,280 --> 00:41:43,160
Speaker 2: I'm glad you brought up that these aren't like just

807
00:41:43,200 --> 00:41:46,879
Speaker 2: ephemeral ideas like we saw in the dot com era.

808
00:41:47,320 --> 00:41:51,360
Speaker 2: I think the numbers on the Magnificent Seven collectively they

809
00:41:51,440 --> 00:41:54,319
Speaker 2: do about two trillion dollars in revenue and about three

810
00:41:54,400 --> 00:41:59,520
Speaker 2: hundred billion dollars in profits. Those are giant numbers, kind

811
00:41:59,520 --> 00:42:02,480
Speaker 2: of hard to argue there's a bubble amongst them. Hey,

812
00:42:02,520 --> 00:42:05,600
Speaker 2: there's some speculation and there's a little bit of over enthusiasm,

813
00:42:06,000 --> 00:42:09,920
Speaker 2: but these are really very very well run. We'll manage

814
00:42:10,000 --> 00:42:12,800
Speaker 2: companies that have become money printing machines.

815
00:42:13,040 --> 00:42:15,840
Speaker 1: Yes, I mean, I think that is true. There's still

816
00:42:16,840 --> 00:42:20,000
Speaker 1: a valuation consideration to be applied, and I think you

817
00:42:20,000 --> 00:42:23,080
Speaker 1: could argue that they're not meaningfully overvalued right now, but

818
00:42:23,120 --> 00:42:25,600
Speaker 1: it really all comes down to the future growth expectations

819
00:42:25,600 --> 00:42:28,239
Speaker 1: and their ability to keep on delivering like this. And

820
00:42:28,320 --> 00:42:31,640
Speaker 1: so you know, if for whatever reason, you know, regulation

821
00:42:32,080 --> 00:42:35,160
Speaker 1: or some change in the environment caused that to slow down,

822
00:42:35,520 --> 00:42:38,239
Speaker 1: then then it's a lot harder to justify these valuations.

823
00:42:38,640 --> 00:42:41,239
Speaker 2: I was clicking around the website looking at some of

824
00:42:41,280 --> 00:42:44,040
Speaker 2: the white papers you guys put out on a regular basis.

825
00:42:44,400 --> 00:42:48,160
Speaker 2: Let's talk about one or two of those, uncovering opportunities

826
00:42:48,160 --> 00:42:52,239
Speaker 2: in commercial real estate, the power of location. Let's talk

827
00:42:52,280 --> 00:42:57,840
Speaker 2: about stepping into a dangerous area. I think the for

828
00:42:58,000 --> 00:43:02,439
Speaker 2: office space anyway per square foot nationally has fallen from

829
00:43:02,440 --> 00:43:05,160
Speaker 2: about three point fifty to one ninety nine. Tell us

830
00:43:05,160 --> 00:43:07,720
Speaker 2: a little bit about opportunities in commercial real estate.

831
00:43:08,160 --> 00:43:11,720
Speaker 1: I think commercial real estate, as our bond managers would say,

832
00:43:11,960 --> 00:43:14,960
Speaker 1: is you know, clearly an area where the baby gets

833
00:43:15,000 --> 00:43:17,480
Speaker 1: thrown out with the bathwater. And so if you focus

834
00:43:17,520 --> 00:43:20,839
Speaker 1: on super high quality opportunities, then I think you can

835
00:43:20,920 --> 00:43:25,200
Speaker 1: really find, you know, misprice securities essentially, because everybody is

836
00:43:25,200 --> 00:43:27,960
Speaker 1: so worried about commercial real estate, and that worry is

837
00:43:28,000 --> 00:43:30,080
Speaker 1: not without reason. To your point, it's.

838
00:43:30,080 --> 00:43:32,560
Speaker 2: Particularly an office space, but there's a lot more to

839
00:43:32,600 --> 00:43:34,480
Speaker 2: commercial real estate than just office space.

840
00:43:34,680 --> 00:43:38,640
Speaker 1: Absolutely, But I think in you know, very high quality office.

841
00:43:38,680 --> 00:43:42,600
Speaker 1: They're finding opportunities as well, and so it's partially I

842
00:43:42,600 --> 00:43:47,160
Speaker 1: think a matter of looking for where investor expectations get

843
00:43:47,239 --> 00:43:50,400
Speaker 1: so lumped together with the overall category, and the bottom

844
00:43:50,440 --> 00:43:54,040
Speaker 1: up perspective can show actually there are individual buildings or

845
00:43:54,080 --> 00:43:57,279
Speaker 1: opportunities in commercial real estate that can provide opportunity.

846
00:43:57,560 --> 00:44:01,360
Speaker 2: What about geographies? Diamond Hill is low in the United States,

847
00:44:01,840 --> 00:44:04,759
Speaker 2: but it seems that your experience has been all over

848
00:44:04,840 --> 00:44:08,080
Speaker 2: Australia and Asia. Japan has had a great year. We're

849
00:44:08,080 --> 00:44:12,360
Speaker 2: starting to see signs emerging market is doing better. Europe

850
00:44:12,520 --> 00:44:15,480
Speaker 2: the perennial laggard, even Europe is starting to show signs

851
00:44:15,480 --> 00:44:17,879
Speaker 2: of coming alive. How do you look at the rest

852
00:44:17,960 --> 00:44:19,719
Speaker 2: of the globe. What are your constraints?

853
00:44:20,400 --> 00:44:23,160
Speaker 1: So we have an international equity team that really focuses

854
00:44:23,160 --> 00:44:26,560
Speaker 1: on looking for opportunities outside the US, and they travel

855
00:44:26,600 --> 00:44:29,439
Speaker 1: the world meeting with management teams and you know, really

856
00:44:29,520 --> 00:44:32,880
Speaker 1: uncovering the death that you can't get just by you know,

857
00:44:33,120 --> 00:44:36,400
Speaker 1: staying in the US looking at the data. They do

858
00:44:36,480 --> 00:44:39,080
Speaker 1: obviously spend a lot of time doing that, but I'd

859
00:44:39,120 --> 00:44:43,440
Speaker 1: say that's really led to a focus on areas that

860
00:44:43,640 --> 00:44:46,719
Speaker 1: are more bottom up oriented. So you know, just like

861
00:44:46,760 --> 00:44:49,760
Speaker 1: on the US side, we're really looking for individual companies

862
00:44:49,760 --> 00:44:52,880
Speaker 1: that lead to opportunity. But you do occasionally find areas

863
00:44:52,920 --> 00:44:55,000
Speaker 1: of the globe where you know you either want to

864
00:44:55,040 --> 00:44:57,400
Speaker 1: avoid it wholeheartedly, even if there might be a company

865
00:44:57,440 --> 00:45:01,480
Speaker 1: that looks interesting, or where there's a lot of undervalued

866
00:45:01,520 --> 00:45:04,520
Speaker 1: businesses that we can invest in. And I do think

867
00:45:04,560 --> 00:45:09,719
Speaker 1: that among technology, which is, you know, a very international industry,

868
00:45:09,920 --> 00:45:14,520
Speaker 1: very global industry, there are some opportunities there because when

869
00:45:14,520 --> 00:45:18,640
Speaker 1: you look at names like TSMC and Samsung that are

870
00:45:19,000 --> 00:45:23,520
Speaker 1: really fundamentally great businesses even before AI caused things to

871
00:45:23,560 --> 00:45:26,400
Speaker 1: go crazy. I think that's just an area where our

872
00:45:26,400 --> 00:45:28,160
Speaker 1: team's finding a lot of opportunity.

873
00:45:28,760 --> 00:45:34,080
Speaker 2: What about strategic capacity management? How does that improve client outcomes?

874
00:45:35,200 --> 00:45:37,680
Speaker 1: So essentially that kind of goes back to what we

875
00:45:37,680 --> 00:45:40,400
Speaker 1: were talking about before, where it's really important to consider

876
00:45:40,440 --> 00:45:43,319
Speaker 1: the capacity of strategies that we manage so that we

877
00:45:43,400 --> 00:45:47,520
Speaker 1: can put our existing clients interests first. And so when

878
00:45:47,520 --> 00:45:50,000
Speaker 1: we look at how much we think we can manage

879
00:45:50,040 --> 00:45:52,600
Speaker 1: in a strategy, we try to take into consideration what

880
00:45:52,640 --> 00:45:56,239
Speaker 1: the investor experience will be. And you know, if you're

881
00:45:56,280 --> 00:45:59,600
Speaker 1: looking at small cap for example, I think it's easy

882
00:45:59,600 --> 00:46:02,799
Speaker 1: for people to understand this where you know, we can

883
00:46:02,880 --> 00:46:05,759
Speaker 1: clearly see that small cap managers that take on too

884
00:46:05,800 --> 00:46:08,520
Speaker 1: many assets tend to have a much harder time uperforming

885
00:46:08,520 --> 00:46:11,319
Speaker 1: the market over the long run. So we just explicitly

886
00:46:11,360 --> 00:46:13,919
Speaker 1: say we think we can manage about you know, two

887
00:46:14,000 --> 00:46:16,319
Speaker 1: two and a half billion dollars in small cap and

888
00:46:16,360 --> 00:46:17,960
Speaker 1: when we get to that point, then we're not going

889
00:46:18,000 --> 00:46:20,520
Speaker 1: to take new clients because it's really important for us

890
00:46:20,719 --> 00:46:23,280
Speaker 1: that the client experience is more important than our ability

891
00:46:23,320 --> 00:46:25,640
Speaker 1: to generate more revenue by bringing on more assets.

892
00:46:25,840 --> 00:46:28,239
Speaker 2: And what about long short. You have a fund that

893
00:46:28,320 --> 00:46:30,359
Speaker 2: runs long short, tell us a little bit about that.

894
00:46:31,800 --> 00:46:35,040
Speaker 2: What's the thinking When I hear bottoms up stock picking?

895
00:46:35,600 --> 00:46:39,839
Speaker 2: I no longer think about short selling. But obviously if

896
00:46:39,880 --> 00:46:44,120
Speaker 2: you identify something that is mispriced to the downside, perhaps

897
00:46:44,120 --> 00:46:47,200
Speaker 2: you can also identify things mispriced to the upside.

898
00:46:47,400 --> 00:46:51,239
Speaker 1: Yeah, that's basically the philosophical approach that we've taken. And

899
00:46:51,440 --> 00:46:54,160
Speaker 1: I'd say there's a few people on our team, one

900
00:46:54,200 --> 00:46:57,319
Speaker 1: of the portfolio managers on that strategy, and a couple

901
00:46:57,320 --> 00:46:59,640
Speaker 1: of analysts who have really developed expertise thinking about the

902
00:46:59,640 --> 00:47:04,640
Speaker 1: shorts and so, but fundamentally it really is about valuation. Now.

903
00:47:04,680 --> 00:47:07,800
Speaker 1: It's harder, obviously when you're trying to short an overvalued

904
00:47:07,800 --> 00:47:10,439
Speaker 1: company than buying an undervalued one, because you can only

905
00:47:10,480 --> 00:47:14,000
Speaker 1: wait so long if the stock's running against you. But

906
00:47:14,320 --> 00:47:17,440
Speaker 1: we've just really developed an approach I think that takes

907
00:47:17,760 --> 00:47:20,200
Speaker 1: a little bit more of a diversified approach on the

908
00:47:20,200 --> 00:47:22,560
Speaker 1: short side and gives a little bit more room to

909
00:47:22,840 --> 00:47:25,800
Speaker 1: situations that might might not unfold as quickly as you hope.

910
00:47:25,880 --> 00:47:28,880
Speaker 2: Are these one thirty thirty funds or are they market

911
00:47:28,920 --> 00:47:30,600
Speaker 2: neutral funds? How do you structure them?

912
00:47:31,080 --> 00:47:34,759
Speaker 1: They are essentially sixty percent that long. So that's been

913
00:47:35,000 --> 00:47:38,160
Speaker 1: our focus historically and really what our clients have asked

914
00:47:38,200 --> 00:47:40,319
Speaker 1: of us. But it is an area that I think

915
00:47:40,440 --> 00:47:44,120
Speaker 1: could be ripe for innovation because it is easier to

916
00:47:44,160 --> 00:47:46,920
Speaker 1: think about, you know, market neutral strategy in an environment

917
00:47:46,960 --> 00:47:50,439
Speaker 1: where interest rates are positive than it is when they're zero,

918
00:47:50,719 --> 00:47:52,680
Speaker 1: and so I think, you know, not to say you

919
00:47:52,680 --> 00:47:54,239
Speaker 1: couldn't do it when they're zero, but I just think

920
00:47:54,239 --> 00:47:56,120
Speaker 1: it's a lot harder to make the math work.

921
00:47:56,480 --> 00:47:58,720
Speaker 2: Tina made it very difficult to be on the short

922
00:47:58,800 --> 00:48:02,359
Speaker 2: side when was no alternative to equities. Was pretty much

923
00:48:02,360 --> 00:48:05,160
Speaker 2: the only place, only place you could go, but today

924
00:48:05,280 --> 00:48:08,040
Speaker 2: with rates over five percent, I think the last time

925
00:48:08,080 --> 00:48:10,600
Speaker 2: I looked at the money market fund it was about

926
00:48:10,640 --> 00:48:14,480
Speaker 2: five and a quarter somewhere around then. I know you

927
00:48:14,600 --> 00:48:19,880
Speaker 2: when we were talking about fixed income, you mentioned securitized assets.

928
00:48:19,960 --> 00:48:23,360
Speaker 2: What about other forms of private credit? It's been probably

929
00:48:23,360 --> 00:48:25,960
Speaker 2: the hottest area in the market over the past few years.

930
00:48:26,239 --> 00:48:28,120
Speaker 1: Yeah. I mean, whenever there's an area of the market

931
00:48:28,160 --> 00:48:31,520
Speaker 1: that is hot, I would say my first instinct is

932
00:48:31,600 --> 00:48:35,480
Speaker 1: don't go there. And private credit, I think, I think

933
00:48:35,480 --> 00:48:37,600
Speaker 1: there are a lot of reasons why private credit has

934
00:48:37,640 --> 00:48:40,560
Speaker 1: done so well. But you know, and I do think

935
00:48:40,600 --> 00:48:42,520
Speaker 1: the line is a little blurry in fixed income, and

936
00:48:42,560 --> 00:48:46,480
Speaker 1: sometimes people call things private credit that are arguably in

937
00:48:46,560 --> 00:48:49,279
Speaker 1: scope for some things that we might take a look at.

938
00:48:49,480 --> 00:48:52,200
Speaker 1: But we do not have private credit strategies, and we

939
00:48:52,280 --> 00:48:55,359
Speaker 1: do not intend to, because you know, we've really been

940
00:48:55,360 --> 00:48:57,920
Speaker 1: focused on the areas of fixed income where we can

941
00:48:57,960 --> 00:49:00,960
Speaker 1: identify dislocation, and so that's really what we feel like

942
00:49:01,000 --> 00:49:04,040
Speaker 1: we can do in that core and short ration securitized strategies.

943
00:49:04,239 --> 00:49:06,960
Speaker 2: I only have you for a few minutes more. Let's

944
00:49:07,080 --> 00:49:10,000
Speaker 2: jump to our favorite questions that we ask all of

945
00:49:10,040 --> 00:49:14,200
Speaker 2: our guests, starting with what's been keeping you entertained these days?

946
00:49:14,480 --> 00:49:16,200
Speaker 2: What are you watching or listening to?

947
00:49:17,160 --> 00:49:20,759
Speaker 1: So one show I've really enjoyed is The Bear. I

948
00:49:20,800 --> 00:49:22,680
Speaker 1: haven't watched the third season yet, but.

949
00:49:22,480 --> 00:49:25,160
Speaker 2: We're about halfway through it and it's really interesting.

950
00:49:25,280 --> 00:49:27,319
Speaker 1: Okay, good. I just think it's a great show. First

951
00:49:27,320 --> 00:49:29,480
Speaker 1: of all, I'm from Chicago, and so I love the

952
00:49:29,560 --> 00:49:34,640
Speaker 1: Chicago connection and constant visuals from my favorite city. And

953
00:49:34,960 --> 00:49:38,279
Speaker 1: then I just think their character development is unbelievable. So

954
00:49:38,480 --> 00:49:39,839
Speaker 1: it's been I've really enjoyed it.

955
00:49:40,080 --> 00:49:45,360
Speaker 2: Well, not just Bear and Sydney, but watching Richie develop

956
00:49:45,400 --> 00:49:49,160
Speaker 2: into from a caricature to a person has really really

957
00:49:49,200 --> 00:49:53,200
Speaker 2: been fascinating, culminating with the Forks episode, I think with

958
00:49:53,280 --> 00:49:57,600
Speaker 2: season two really was very amazing. Let's talk about your

959
00:49:57,640 --> 00:49:59,960
Speaker 2: mentors who helped shape your career.

960
00:50:00,840 --> 00:50:03,000
Speaker 1: So I was very fortunate early on in my career

961
00:50:03,040 --> 00:50:06,360
Speaker 1: to have a couple of kind of managers and leaders

962
00:50:06,400 --> 00:50:09,920
Speaker 1: that really helped set the stage for a productive future career.

963
00:50:10,280 --> 00:50:12,200
Speaker 1: Even at Bank of America. While I didn't end up

964
00:50:12,200 --> 00:50:15,000
Speaker 1: staying there a tremendously long time, I had the most

965
00:50:15,000 --> 00:50:19,759
Speaker 1: incredible first manager, and he really helped me see that

966
00:50:19,840 --> 00:50:22,680
Speaker 1: there were lots of different areas in finance and investing

967
00:50:22,719 --> 00:50:25,960
Speaker 1: to go into and that he'd be supportive regardless, and

968
00:50:26,000 --> 00:50:28,120
Speaker 1: I actually still keep in touch with him to this day.

969
00:50:29,000 --> 00:50:32,080
Speaker 1: And then even at Dreehouse, I had a great manager

970
00:50:32,120 --> 00:50:34,960
Speaker 1: and the international portfolio manager at the time, and he

971
00:50:35,040 --> 00:50:38,080
Speaker 1: really taught me about the kind of fundamental aspects that

972
00:50:38,280 --> 00:50:43,160
Speaker 1: all investing holds, even more momentum oriented investing. But he

973
00:50:43,560 --> 00:50:45,400
Speaker 1: also was someone I've turned to in the past to

974
00:50:45,719 --> 00:50:48,480
Speaker 1: ask deep career questions and kind of figure out where

975
00:50:48,520 --> 00:50:49,080
Speaker 1: to go next.

976
00:50:49,680 --> 00:50:52,200
Speaker 2: So let's talk about books, and I have to mention

977
00:50:52,400 --> 00:50:55,920
Speaker 2: your book, Why Motes Matter, tell us a little bit

978
00:50:55,960 --> 00:50:59,520
Speaker 2: about that, and then we'll jump into what you're reading currently.

979
00:51:00,200 --> 00:51:03,439
Speaker 1: So Why Modes Matter was really an encapsulation of thinking

980
00:51:03,520 --> 00:51:07,839
Speaker 1: about competitive advantage and valuation and making investment decisions, and

981
00:51:08,360 --> 00:51:11,719
Speaker 1: that does encapsulate morning Stars investment philosophy, and certainly they

982
00:51:11,840 --> 00:51:14,799
Speaker 1: commissioned the book or funded it, I would say, but

983
00:51:15,480 --> 00:51:17,920
Speaker 1: it was a really great experience too because we were

984
00:51:17,960 --> 00:51:20,279
Speaker 1: able to get a lot of the equity research team

985
00:51:20,600 --> 00:51:23,480
Speaker 1: involved in writing it. So you'll see different chapters authored

986
00:51:23,520 --> 00:51:25,879
Speaker 1: by multiple people, which I think was just a really

987
00:51:25,960 --> 00:51:28,120
Speaker 1: great way to highlight some of the ways that you

988
00:51:28,160 --> 00:51:31,920
Speaker 1: can apply competitive advantage thinking to different industries.

989
00:51:31,880 --> 00:51:34,560
Speaker 2: And tell us about what you're reading now and what

990
00:51:34,600 --> 00:51:35,920
Speaker 2: are some of your favorite books.

991
00:51:36,520 --> 00:51:38,839
Speaker 1: So I just started Shipwar. I don't know if you've

992
00:51:38,880 --> 00:51:39,960
Speaker 1: read that, but I have it.

993
00:51:39,960 --> 00:51:41,960
Speaker 2: It's in my queue. I haven't started it yet, but

994
00:51:42,400 --> 00:51:43,799
Speaker 2: everybody seems to love it.

995
00:51:43,800 --> 00:51:46,279
Speaker 1: It's fascinating, and I think the thing that's so great

996
00:51:46,280 --> 00:51:49,400
Speaker 1: about it is there's just so much around the topic

997
00:51:49,520 --> 00:51:53,640
Speaker 1: of semiconductors and Silicon Valley and AI and like really

998
00:51:53,680 --> 00:51:57,520
Speaker 1: just understanding the fundamental underpinnings of how the industry got

999
00:51:57,560 --> 00:52:00,800
Speaker 1: started and where the power lies and why TSMC is

1000
00:52:00,840 --> 00:52:03,799
Speaker 1: such a critically important company to the whole world. I

1001
00:52:03,840 --> 00:52:06,120
Speaker 1: think everyone should read it, And I also like it

1002
00:52:06,160 --> 00:52:09,080
Speaker 1: because it kind of falls into my favorite category of

1003
00:52:09,760 --> 00:52:13,400
Speaker 1: nonfiction written like a novel or you know sometimes that

1004
00:52:13,480 --> 00:52:16,839
Speaker 1: dabbles into a historical fiction. There's I don't know if

1005
00:52:16,880 --> 00:52:19,279
Speaker 1: you've read The Devil in the White City. That's a

1006
00:52:19,320 --> 00:52:21,840
Speaker 1: great book that's really about kind of Chicago during the

1007
00:52:21,840 --> 00:52:22,399
Speaker 1: World's Fair.

1008
00:52:22,880 --> 00:52:26,720
Speaker 2: Larsen, Yeah, Eric Larson, Yeah, I have a whole stack

1009
00:52:26,800 --> 00:52:30,400
Speaker 2: of his stuff. Everything he writes is so fascinating and

1010
00:52:30,480 --> 00:52:33,200
Speaker 2: dense and absolutely reads like a novel.

1011
00:52:33,360 --> 00:52:35,480
Speaker 1: Yeah. I read something else, I can't remember the name

1012
00:52:35,520 --> 00:52:38,880
Speaker 1: of it, about the evolution of Edison and Tesla and

1013
00:52:38,920 --> 00:52:41,840
Speaker 1: Westinghouse right around the turn of the century. That I

1014
00:52:41,840 --> 00:52:45,080
Speaker 1: think is another fascinating example of this category where you

1015
00:52:45,120 --> 00:52:47,880
Speaker 1: know you're learning about real events and people, but in

1016
00:52:47,880 --> 00:52:49,640
Speaker 1: a way that feels like you're reading a novel. So

1017
00:52:49,800 --> 00:52:51,319
Speaker 1: I think there's a lot of great examples like.

1018
00:52:51,280 --> 00:52:55,439
Speaker 2: That, really really interesting. Our final two questions, what sort

1019
00:52:55,480 --> 00:52:59,040
Speaker 2: of advice would you give a recent college graduate interested

1020
00:52:59,120 --> 00:53:02,360
Speaker 2: in a career either investment management or finance.

1021
00:53:03,239 --> 00:53:07,200
Speaker 1: I'd say two things. First, seek experiences that will help

1022
00:53:07,280 --> 00:53:09,200
Speaker 1: you get the role that you think you want in

1023
00:53:09,239 --> 00:53:12,560
Speaker 1: the long term. And that one is really I think

1024
00:53:12,560 --> 00:53:15,480
Speaker 1: about not only getting experiences from your job and what

1025
00:53:15,480 --> 00:53:18,640
Speaker 1: you're doing day to day, but also, you know, looking

1026
00:53:18,680 --> 00:53:21,560
Speaker 1: for opportunities to you know, let's say you're an equity analyst,

1027
00:53:21,560 --> 00:53:23,399
Speaker 1: but you want to move into a leadership role. You

1028
00:53:23,440 --> 00:53:26,960
Speaker 1: can try to volunteer in organizations or serve on the

1029
00:53:26,960 --> 00:53:30,200
Speaker 1: board of a nonprofit that can help develop leadership skills,

1030
00:53:30,200 --> 00:53:31,920
Speaker 1: even though your day to day job much may be

1031
00:53:32,080 --> 00:53:36,080
Speaker 1: much more you know, investment oriented, for example. And another

1032
00:53:36,120 --> 00:53:38,160
Speaker 1: thing i'd always I always tell people who ask me

1033
00:53:38,200 --> 00:53:41,239
Speaker 1: this question, is it's so important to put your hand

1034
00:53:41,320 --> 00:53:43,680
Speaker 1: up and make sure that your manager knows how you

1035
00:53:43,680 --> 00:53:47,040
Speaker 1: want your career to evolve, because people, I think, assume

1036
00:53:47,120 --> 00:53:49,439
Speaker 1: that they're going to get tapped for their next role,

1037
00:53:49,760 --> 00:53:51,759
Speaker 1: and I just don't think it generally works that way.

1038
00:53:51,760 --> 00:53:54,400
Speaker 1: I think if you can be proactive and saying I

1039
00:53:54,440 --> 00:53:56,240
Speaker 1: would love to be an analyst on a different sector,

1040
00:53:56,480 --> 00:53:59,279
Speaker 1: or I'd love to be a portfolio manager someday or

1041
00:53:59,280 --> 00:54:01,920
Speaker 1: whatever it is that you aspire to, then you can

1042
00:54:01,960 --> 00:54:03,799
Speaker 1: work with your manager on making sure you have kind

1043
00:54:03,840 --> 00:54:06,000
Speaker 1: of a long term plan for developing the right skills

1044
00:54:06,200 --> 00:54:08,640
Speaker 1: instead of just being disappointed when you don't get the job.

1045
00:54:09,280 --> 00:54:11,680
Speaker 2: And our final question, what do you know about the

1046
00:54:11,719 --> 00:54:14,840
Speaker 2: world of investing today you wish you knew thirty or

1047
00:54:14,880 --> 00:54:15,600
Speaker 2: so years ago.

1048
00:54:16,160 --> 00:54:18,640
Speaker 1: I would say that trends last longer than you think

1049
00:54:18,680 --> 00:54:22,600
Speaker 1: they possibly could. And so I mean you could see

1050
00:54:22,600 --> 00:54:26,040
Speaker 1: that right now in the small cap versus large cap

1051
00:54:26,080 --> 00:54:29,200
Speaker 1: performance that we talked about. You could certainly see it

1052
00:54:29,280 --> 00:54:33,360
Speaker 1: even at the end of the dot com days. You know,

1053
00:54:33,400 --> 00:54:35,360
Speaker 1: you could see it even in like the two thousand

1054
00:54:35,360 --> 00:54:38,120
Speaker 1: and six two thousand and seven period where so many

1055
00:54:38,239 --> 00:54:41,600
Speaker 1: investors felt like they knew housing was going to collapse,

1056
00:54:41,680 --> 00:54:44,879
Speaker 1: but nobody could actually hold on to their positions long enough,

1057
00:54:44,920 --> 00:54:47,960
Speaker 1: except for very few to end up, you know, making

1058
00:54:48,000 --> 00:54:50,000
Speaker 1: that a positive trade. So I just think there's so

1059
00:54:50,120 --> 00:54:53,600
Speaker 1: many examples where trends go on so much longer than

1060
00:54:53,640 --> 00:54:55,600
Speaker 1: you think, So you need to make sure to take

1061
00:54:55,600 --> 00:54:58,080
Speaker 1: that into consideration in your future careers.

1062
00:54:58,600 --> 00:55:01,120
Speaker 2: Thank you, Heather for being so generous with your time.

1063
00:55:01,280 --> 00:55:04,919
Speaker 2: We have been speaking with Heather Brilliant, CEO of Diamond Hill.

1064
00:55:05,760 --> 00:55:08,520
Speaker 2: If you enjoy this conversation, well check out any of

1065
00:55:08,560 --> 00:55:12,120
Speaker 2: the five hundred previous discussions we've had over the past

1066
00:55:12,200 --> 00:55:17,400
Speaker 2: ten years. You can find those at iTunes, Spotify, YouTube, Bloomberg,

1067
00:55:17,560 --> 00:55:21,439
Speaker 2: wherever you find your favorite podcasts. Check out my new

1068
00:55:21,520 --> 00:55:26,719
Speaker 2: podcast At the Money, short conversations with experts about topics

1069
00:55:26,719 --> 00:55:30,480
Speaker 2: that affect you and your money, earning it, spending it,

1070
00:55:30,520 --> 00:55:33,920
Speaker 2: and most importantly investing it At the Money, in the

1071
00:55:33,960 --> 00:55:38,200
Speaker 2: Master's and Business feed, or wherever you find your favorite podcasts.

1072
00:55:38,640 --> 00:55:40,360
Speaker 2: I would be remiss if I do not think the

1073
00:55:40,400 --> 00:55:44,480
Speaker 2: cracked team that helps us put these conversations together each week.

1074
00:55:44,760 --> 00:55:48,200
Speaker 2: Steve Gonzalez is my audio engineer. A tick of Valbront

1075
00:55:48,320 --> 00:55:52,280
Speaker 2: is my project manager. Anna Luke is my producer. Sean

1076
00:55:52,360 --> 00:55:56,920
Speaker 2: Russo is my researcher. I'm Barry Perchats. You've been listening

1077
00:55:57,000 --> 00:56:01,120
Speaker 2: to Masters and business on Bloomberg Radio.

1078
00:56:01,880 --> 00:56:03,359
Speaker 1: But as think