WEBVTT - Ben Inker on Value and Asset Allocation (Podcast) 0:00:02.200 --> 0:00:06.800 This is Master's in Business with Barry Ridholts on Bloomberg Radio. 0:00:07.240 --> 0:00:10.039 This week on the podcast, I have an extra special guest. 0:00:10.400 --> 0:00:12.880 His name is Ben Inker, and he is the head 0:00:12.880 --> 0:00:17.920 of asset allocation at famed hedge fund GMO, located up 0:00:17.920 --> 0:00:22.920 in Boston. They manage about sixty billion dollars. Inker is 0:00:23.400 --> 0:00:26.720 Jeremy Grantham's right hand man, and we had a fascinating 0:00:26.920 --> 0:00:32.960 and nuanced conversation about all things value related. I was 0:00:33.520 --> 0:00:39.440 especially intrigued about his take on why we are measuring 0:00:39.680 --> 0:00:45.520 intangibles from companies and whether that's intellectual property or various 0:00:45.640 --> 0:00:50.800 other assets they hold that make them less capital intensive 0:00:50.960 --> 0:00:56.000 and therefore potentially more valuable. Was intriguing. They they've done 0:00:56.040 --> 0:01:00.960 some fascinating research that really is very interesting. He explains 0:01:01.080 --> 0:01:04.959 how and why value has underperformed what he thinks is 0:01:04.959 --> 0:01:07.600 going to happen going forward. We go over a handful 0:01:07.640 --> 0:01:10.920 of different sectors of the economy of the world and 0:01:10.920 --> 0:01:14.720 and talk about specific stocks. If you are at all 0:01:14.880 --> 0:01:19.880 interested in either value or asset allocation or anything along 0:01:19.920 --> 0:01:24.200 those those um lines, you'll find this to be an 0:01:24.240 --> 0:01:28.720 absolutely fascinating conversation. So, with no further ado, my sit 0:01:28.800 --> 0:01:34.480 down with GMOs. Ben Inker VI is Masters in Business 0:01:34.720 --> 0:01:38.920 with Barry Ridholtz on Boomberg Radio. My special guest this 0:01:39.000 --> 0:01:43.720 week is Ben Inker. He is GMO's head of asset allocation. 0:01:44.400 --> 0:01:49.360 During the dot com implosion, the GMO aggressive long short strategy, 0:01:49.840 --> 0:01:54.320 which was long undervalued stocks and short overvalued stocks, achieved 0:01:54.360 --> 0:01:58.440 an eighty percent cumulative net return for clients. The firm 0:01:58.520 --> 0:02:02.800 is led by Jeremy Grantham, currently manages about sixty billion dollars. 0:02:03.320 --> 0:02:07.160 Then Incher, Welcome to Bloomberg. Well, thanks very much for 0:02:07.240 --> 0:02:10.160 having me. Very so, your current role is head of 0:02:10.240 --> 0:02:15.079 GMO's asset allocation team. How did you arrive at that position? 0:02:15.120 --> 0:02:18.079 Tell us a little bit about your career path. Well, 0:02:18.120 --> 0:02:21.440 I have been at GMO for the entirety of my 0:02:21.480 --> 0:02:27.600 professional career. I joined GMO in I was hired as 0:02:27.960 --> 0:02:34.960 a research analysts working for Jeremy Grantham. Um And since 0:02:35.280 --> 0:02:40.799 Jeremy was the person who was kind of most focused 0:02:41.000 --> 0:02:45.520 on top down acid allocation stuff at GMO, well, I 0:02:45.520 --> 0:02:48.040 did a lot of different kinds of research over the 0:02:48.080 --> 0:02:51.000 first you know, eight or ten years of my career. 0:02:51.960 --> 0:02:55.720 I was the person who had done the most work 0:02:55.760 --> 0:03:01.239 on AFID allocation as our business in Athidelic Asian grew. 0:03:01.840 --> 0:03:05.120 I was, you know, his assistant portfolio manager, and then 0:03:05.120 --> 0:03:08.480 the portfolio manager, and then over time the head of 0:03:08.480 --> 0:03:13.680 the team. That's the short form. Interesting, So you started 0:03:13.840 --> 0:03:18.480 early nineties, which was quite an interesting decade to cut 0:03:18.520 --> 0:03:22.560 your teeth on. How did your early experiences during that 0:03:22.680 --> 0:03:27.280 era shape your views of the market? Yeah, so, I 0:03:27.320 --> 0:03:35.720 mean I came at a time when kind of the 0:03:35.720 --> 0:03:41.800 forces of let's say, mean reversion had shown themselves to 0:03:41.960 --> 0:03:45.360 be powerful. We've seen in the eighties, you know, when 0:03:45.400 --> 0:03:49.160 both bonds and stocks got to ludicrously cheap levels that 0:03:49.200 --> 0:03:54.840 they recovered. We had just experienced a pretty extraordinary bubble 0:03:55.200 --> 0:03:58.560 and the bursting of it in Japan uh in the 0:03:58.680 --> 0:04:02.040 late eighties and into the early nineties. So one of 0:04:02.080 --> 0:04:07.120 the things I got early on was this um kind 0:04:07.120 --> 0:04:13.680 of strong understanding and belief that markets can do crazy things, 0:04:14.120 --> 0:04:20.599 but over time they do eventually come back, whether that's 0:04:20.680 --> 0:04:25.359 because they have gotten absurdly cheap or absurdly expensive. You know. 0:04:25.440 --> 0:04:29.200 I then got to participate in the next great bubble, 0:04:29.680 --> 0:04:35.000 which was quite painful for us as investors. But then 0:04:35.240 --> 0:04:40.559 you got to experience just how crazy, uh, the world 0:04:40.600 --> 0:04:45.200 could get. So it was a a fascinating kind of 0:04:45.240 --> 0:04:48.320 crucible to h to grow up in as an investor. 0:04:48.800 --> 0:04:52.200 So you say that was painful, But in the ends, 0:04:52.839 --> 0:04:58.040 ultimately the firm and Grantham's calls ended up being right. 0:04:58.279 --> 0:05:01.560 It was a big money maker to the downside. Does 0:05:01.600 --> 0:05:05.599 that offset the pain? What do we take away from 0:05:05.680 --> 0:05:10.960 when markets go crazy? But ultimately you know, as always 0:05:11.000 --> 0:05:15.000 that sort of excess ends and tears. Yeah, I think 0:05:15.080 --> 0:05:19.920 you know it is. It is truly the case, um 0:05:19.960 --> 0:05:24.440 that Uh. You know, the the market in the short 0:05:24.560 --> 0:05:26.479 term may be a voting machine, but in the long 0:05:26.640 --> 0:05:29.919 term is a weighing machine. Um. And at the end 0:05:30.000 --> 0:05:35.560 of the day, at least four assets that where valuation 0:05:35.960 --> 0:05:39.960 is relevant. Uh. And it is astonishing that we live 0:05:39.960 --> 0:05:43.280 in a world where there are more assets where valuation 0:05:43.400 --> 0:05:46.840 is is not a relevant thing anymore. But for the 0:05:46.920 --> 0:05:53.360 vast majority of financial assets out there where valuation is relevant, um, 0:05:53.560 --> 0:05:57.240 valuation will eventually out. Um. You know, at the end 0:05:57.240 --> 0:05:59.560 of the day, everything is worth the present value of 0:05:59.560 --> 0:06:04.840 the future cash flows. Um. And what we have seen 0:06:04.920 --> 0:06:09.440 time and time again is the market will forget that. Uh. 0:06:09.480 --> 0:06:13.080 And as the market forgets that, it will do some 0:06:14.200 --> 0:06:20.280 sort of objectively silly things. Uh. But in the end, UM, 0:06:20.400 --> 0:06:25.760 those cash flows or the lack of them, is a 0:06:25.800 --> 0:06:32.799 profound discipline to the market, which will pull things back. UM. Now, 0:06:33.040 --> 0:06:35.200 the time frame that they're going to pull them back 0:06:35.279 --> 0:06:40.359 over is uncertain UM. And one of the things you 0:06:40.400 --> 0:06:44.799 know we we lived in in the late nineties events 0:06:45.480 --> 0:06:48.760 is that while in the end the collapse of that 0:06:48.839 --> 0:06:53.880 bubble was positive for us, it was positive for our 0:06:53.920 --> 0:06:55.880 clients because we did manage to make the money for 0:06:56.000 --> 0:07:01.039 it and helped GMO grow as a business. The reality 0:07:01.120 --> 0:07:06.680 is there were a number of other money managers that 0:07:06.920 --> 0:07:09.760 saw what we saw and did some of the things 0:07:09.840 --> 0:07:15.200 we did, and for whatever reason couldn't hold off either 0:07:15.320 --> 0:07:20.200 the firm, the firms themselves folded, or the people who 0:07:20.240 --> 0:07:25.080 were doing the what I call right thing um were 0:07:25.080 --> 0:07:28.960 eventually told by their bosses, we can't stand this pain anymore. 0:07:29.560 --> 0:07:31.520 Either you change what you are doing, or we are 0:07:31.560 --> 0:07:35.040 going to change the person in charge of uh of 0:07:35.120 --> 0:07:39.080 your area. UM. So yeah, if you have a long 0:07:39.200 --> 0:07:42.560 enough time horizon, you can rely on the market eventually 0:07:42.600 --> 0:07:46.520 becoming sane again. But I don't think anybody should pull 0:07:46.560 --> 0:07:53.760 themselves into thinking taking those bets is easy or is 0:07:54.160 --> 0:07:58.480 guaranteed to work out well for the people who do them. 0:07:58.720 --> 0:08:03.720 So that raises the question here we are It's markets 0:08:03.760 --> 0:08:08.560 have had a fantastic recovery from choose your time frame, 0:08:08.960 --> 0:08:13.040 the lows in OH nine, the breakout in the crash, 0:08:13.080 --> 0:08:18.040 and recovery in Where are we in the market cycle? 0:08:18.080 --> 0:08:22.800 There's obviously a lot of valuation questions, a ton of fraud, 0:08:23.480 --> 0:08:27.800 but also a ton of of fiscal stimulus and very 0:08:27.920 --> 0:08:31.200 very high monetary stimulus. Where are we in the cycle? 0:08:32.240 --> 0:08:36.400 It's it is a more difficult question than I'd love 0:08:36.440 --> 0:08:39.880 for it to be. I think the evidence of the 0:08:39.920 --> 0:08:45.800 fraud is everywhere around us. Um. We are seeing stuff. 0:08:46.240 --> 0:08:48.760 Every bit is crazy and in some ways even more 0:08:48.840 --> 0:08:52.160 inexplicable than some of the stuff we saw in the 0:08:52.200 --> 0:08:57.080 Internet bubble. Um. But if one thinks back to the 0:08:57.120 --> 0:09:02.240 Internet bubble, right, we had all time high valuations for 0:09:02.320 --> 0:09:08.520 the S and P five coexisting with real interest rates 0:09:08.559 --> 0:09:12.200 of four right the inflation index bonds in the US 0:09:12.280 --> 0:09:17.520 the tips yielded over four UM. So the alternative to 0:09:17.760 --> 0:09:22.360 investing inequities that had never traded at such high valuations 0:09:22.880 --> 0:09:28.520 UM was low risk assets that offered really good perspective 0:09:28.520 --> 0:09:33.840 returns today, that is absolutely not the case. We know 0:09:34.520 --> 0:09:37.920 low risk assets, whether it has been engineered by central 0:09:37.960 --> 0:09:42.800 banks or whether it is a more natural um outgrowth 0:09:43.240 --> 0:09:47.360 of the economy, low risk assets are offering extraordinarily low 0:09:47.400 --> 0:09:51.480 returns UM. And what I wish I knew the answer 0:09:51.559 --> 0:09:59.920 to was whether those incredibly low rates are sustainable h 0:10:00.120 --> 0:10:05.040 or not. UM. If they're sustainable, then the difference between 0:10:05.040 --> 0:10:09.880 now and two thousand is that the general level of 0:10:10.400 --> 0:10:17.720 risky assets from a valuation perspective probably makes sense. UM. 0:10:17.840 --> 0:10:22.559 The extraordinary gap between kind of the secular growth names 0:10:22.640 --> 0:10:26.760 versus value names still doesn't make sense. Even if you 0:10:26.800 --> 0:10:29.600 believe that you know the S and P S valuation 0:10:29.880 --> 0:10:34.120 or h M s c I world valuation is sustainable, 0:10:34.679 --> 0:10:40.280 that gap doesn't make sense UM. But it may be 0:10:40.480 --> 0:10:47.560 that the overall market on average makes sense if if 0:10:47.800 --> 0:10:55.320 inflation is truly permanently gone as a meaningful risk in 0:10:55.360 --> 0:10:59.280 the developed world. UM. I don't know the answer to that, 0:11:00.120 --> 0:11:02.520 but I will say one of the things I have 0:11:02.679 --> 0:11:06.880 been surprised by, on average over the last twenty years 0:11:07.120 --> 0:11:10.400 is that even in those times where you would have 0:11:10.480 --> 0:11:19.439 expected inflation to be UM accelerating, it's been pretty tame um. 0:11:19.600 --> 0:11:22.920 So I don't know whether the market has to fall 0:11:23.040 --> 0:11:26.600 from here. I do think even if the market level 0:11:27.160 --> 0:11:31.000 makes sense, we've got a speculative bubble going on, and 0:11:31.040 --> 0:11:35.640 that speculative bubble will have to break. But whether the 0:11:35.679 --> 0:11:38.600 breaking of that speculative bubble is associated with, you know, 0:11:38.640 --> 0:11:45.240 the market falling by as it did in two thousands, 0:11:46.040 --> 0:11:50.440 or whether it's going to be driven by a strong 0:11:50.600 --> 0:11:56.880 outperformance by value stocks which are simply not priced to 0:11:57.000 --> 0:12:04.120 deliver the low return and that are sustainable, if low 0:12:04.240 --> 0:12:07.520 risk assets are going to permanently lose your money after inflation. 0:12:08.080 --> 0:12:11.000 I just don't have the perfect answer. So you write 0:12:11.240 --> 0:12:16.480 very thoughtful quarterly or so letters that that I enjoy, 0:12:16.640 --> 0:12:20.160 And I don't recall if this was December's quarter or 0:12:20.280 --> 0:12:23.720 October quarter, but a couple of quarters ago you had 0:12:23.760 --> 0:12:27.319 explained as some of the tech stocks keep rallying, as 0:12:27.320 --> 0:12:30.640 some of the valuations continue to stretch, no one could 0:12:30.640 --> 0:12:34.880 really guess where this ends. But the most likely ends 0:12:35.000 --> 0:12:38.040 will be when the FED starts to tighten and raise rates. 0:12:38.520 --> 0:12:41.480 First of I am I oversimplifying that or is that 0:12:41.920 --> 0:12:44.679 more or less right? And do you still hold that 0:12:44.800 --> 0:12:49.800 sort of belief? You know it is not. It won't 0:12:49.840 --> 0:12:52.400 surprise you at all to hear that. The most common 0:12:52.480 --> 0:12:55.560 question I am getting from the clients these days is 0:12:55.880 --> 0:12:58.040 what's the catalyst? What's going to be the trigger for 0:12:58.080 --> 0:13:02.400 the turn here? Um? So one thing we have absolutely 0:13:02.440 --> 0:13:09.040 done is gone back and looked at the profound turning 0:13:09.080 --> 0:13:12.520 points and markets and tried to see, Okay, well, what 0:13:12.559 --> 0:13:15.360 was the catalyst in two thousand? What was the catalysts 0:13:15.480 --> 0:13:20.520 in Japan? What was the catalyst in the US? Sometimes 0:13:20.520 --> 0:13:24.720 there is a catalyst, but a surprising amount of the time, 0:13:25.600 --> 0:13:31.800 even in retrospect, there doesn't seem to be one. Right. 0:13:31.920 --> 0:13:37.000 The catalyst for the cracking of the Internet bubble in 0:13:37.080 --> 0:13:42.360 two thousand, I don't know. I mean, I was certainly there, 0:13:42.480 --> 0:13:47.200 I was staring at the market, um, But even twenty 0:13:47.240 --> 0:13:49.280 years later, I can't tell you exactly what it was. 0:13:49.840 --> 0:13:52.640 Let me flow the theory at you on that, because 0:13:52.760 --> 0:13:56.520 I was also there and watching the I l X 0:13:56.559 --> 0:13:59.719 and the Bloomberg terminal all the time. And I have 0:13:59.800 --> 0:14:03.760 a very vivid recollection of the first or second week 0:14:03.800 --> 0:14:07.520 of March two thousand and remember we had that giant 0:14:07.760 --> 0:14:11.280 y two K concern and there was a ton of 0:14:11.280 --> 0:14:16.160 of hardware purchased in anticipation of that, and you very quickly. 0:14:16.280 --> 0:14:19.320 I don't remember if it was Dell that had a 0:14:19.440 --> 0:14:24.000 terrible quarter pre announced or Intel. It might it might 0:14:24.000 --> 0:14:27.920 have been Dell, like the first week of March. I 0:14:27.960 --> 0:14:31.160 think there was their window to announce that their previous 0:14:31.200 --> 0:14:33.960 guidance was gonna be wrong. So it could have been 0:14:33.960 --> 0:14:36.720 like March eighth, two thousand. It's funny how all these 0:14:36.760 --> 0:14:40.880 things have been happening around March oh eight and and 0:14:41.040 --> 0:14:44.160 uh uh was the oh nine was the bottom and 0:14:44.280 --> 0:14:46.920 oh eight was to March two thousand was the top, 0:14:46.960 --> 0:14:50.760 and then again the bottom in But is that the 0:14:50.880 --> 0:14:55.120 sort of thing that is a credible precipitent or is 0:14:55.160 --> 0:15:00.680 it really just the reveal and the collapse would happen otherwise, 0:15:01.640 --> 0:15:06.800 you know, I don't know. Certainly. The basic thing the 0:15:06.840 --> 0:15:13.400 market was getting wrong in two thousand, um was this 0:15:13.600 --> 0:15:21.400 belief in incredibly strong continued growth in corporate profits. Um. 0:15:21.440 --> 0:15:23.880 If you look at what people were saying. Sure, there 0:15:23.960 --> 0:15:29.040 was the Dow six thousand argument that was basically saying 0:15:29.160 --> 0:15:32.280 there should be no equity risk treamum. But if you 0:15:32.400 --> 0:15:36.280 look at what analysts were saying and how analysts were 0:15:36.320 --> 0:15:42.560 assuming decent returns going forward was you know, expected earnings 0:15:42.600 --> 0:15:47.400 growth had never really been higher, so they were expecting 0:15:47.440 --> 0:15:52.480 something like annualized earnings growth. Now they always overpredict earnings growth, 0:15:52.520 --> 0:16:00.400 but that was some of the highest levels ever. Um. 0:16:00.400 --> 0:16:05.080 You know, the the reality of what was going on. 0:16:07.240 --> 0:16:13.880 The funny thing is, in March we had this extraordinary 0:16:14.040 --> 0:16:16.600 day and I'm sure you remember it as vividly as 0:16:16.640 --> 0:16:22.160 I do, where the market in the morning collapsed like 0:16:22.680 --> 0:16:26.360 twelve or four uh, and then in the afternoon made 0:16:26.360 --> 0:16:30.280 this extraordinary recovery to wind up down I don't know 0:16:30.360 --> 0:16:33.840 one or two um. And it was this kind of 0:16:34.000 --> 0:16:39.520 intra day volatility that hadn't been seen well more or 0:16:39.600 --> 0:16:46.760 less ever, um. And that was maybe kind of a 0:16:46.800 --> 0:16:49.520 shot across the bow. If if you look at what 0:16:49.800 --> 0:16:57.680 happened um across two thousand, you know, the first group 0:16:57.760 --> 0:17:04.240 to really crack was the pure internet startups uh. And 0:17:04.320 --> 0:17:07.760 then a little bit later in my memory this was 0:17:07.880 --> 0:17:14.480 really late spring, early summer, was the hardware names uh, 0:17:14.560 --> 0:17:20.639 you know, including Dell. UH. Software guys held out farther 0:17:20.840 --> 0:17:27.960 until the fall um UM. But then they cracked UM. 0:17:28.040 --> 0:17:35.840 And maybe it was as simple as disappointing earning UM, 0:17:35.960 --> 0:17:39.320 but it wasn't obvious at the time that it was 0:17:40.000 --> 0:17:43.440 disappointing earnings numbers, And I certainly don't remember a change 0:17:43.640 --> 0:17:50.920 in the you know, the general tenor of market commentary 0:17:51.640 --> 0:17:59.960 UM as being around this sudden realization that that earnings 0:18:00.000 --> 0:18:03.640 weren't going to be there. Quite interesting. So let's talk 0:18:03.680 --> 0:18:06.960 a little bit about the forecasts that you guys make 0:18:07.000 --> 0:18:10.639 on a regular basis, the seven year forecasts. What are 0:18:10.640 --> 0:18:15.800 the primary inputs into that seven year forecast that let 0:18:15.880 --> 0:18:20.240 you conclude US stocks are likely to deliver negative real 0:18:20.320 --> 0:18:25.800 returns over the next seven years. The basic underlying idea 0:18:25.960 --> 0:18:29.280 behind the forecast UH that goes back to when we 0:18:29.520 --> 0:18:36.320 started publishing them in the mid nineties, is that the market, 0:18:36.680 --> 0:18:43.360 it spends very little time looking normal UM, but UM 0:18:43.359 --> 0:18:48.840 over time goes through normal reasonably often. So in principle, 0:18:48.920 --> 0:18:51.560 what we're really saying is, look, we don't know exactly 0:18:51.560 --> 0:18:53.840 what the future is going to hold, but let's assume 0:18:53.880 --> 0:18:57.439 that it's some uncertain point in the future we'll call 0:18:57.520 --> 0:19:00.439 it seven years from now. Everything looks normal, So the 0:19:00.480 --> 0:19:04.159 p of the market looks normal, profitability looks normal UM, 0:19:04.200 --> 0:19:06.639 and the return we're going to get between now and 0:19:06.720 --> 0:19:10.600 then is going to be driven by whatever earnings growth 0:19:10.800 --> 0:19:14.400 will occur, whatever income we're going to get from that asset, 0:19:15.000 --> 0:19:19.120 and then either a gain or a loss associated with 0:19:20.440 --> 0:19:25.560 these reverting to normal and profitability reverting to normal. Now, 0:19:26.080 --> 0:19:30.199 one thing that has changed about the forecast um is 0:19:30.520 --> 0:19:34.440 we do now have two different scenarios that we are 0:19:34.520 --> 0:19:39.679 explicitly using. One of them is kind of the traditional 0:19:39.720 --> 0:19:44.320 one that we started choosing in, which is that fair 0:19:44.440 --> 0:19:48.760 value is the long term normal, so the stock market 0:19:48.800 --> 0:19:53.159 should be trading around sixteen times normalized earnings, bond yields 0:19:53.160 --> 0:19:58.480 will be somewhere between two percent and three percent above inflation, uh, 0:19:58.640 --> 0:20:05.159 kind of the old aisle assumption of where equilibrium is. 0:20:06.200 --> 0:20:10.520 More recent years, we've built in another scenario, which we 0:20:10.600 --> 0:20:14.920 also consider to be a reasonable one. It's predicated on 0:20:16.080 --> 0:20:21.000 the idea that interest rates have permanently from those levels. 0:20:21.720 --> 0:20:25.840 We used to call that scenario hell um. We now 0:20:25.920 --> 0:20:28.720 call it partial mean reversion. We stopped calling it hell 0:20:29.200 --> 0:20:31.520 maybe because we were offending some people, but mostly because 0:20:31.520 --> 0:20:35.520 we were confusing them because our forecasts in hell are 0:20:35.600 --> 0:20:41.840 generally better than our forecasts otherwise, because the allowable valuation 0:20:42.440 --> 0:20:45.800 in a world where interest rates have permanently fallen is higher. 0:20:46.200 --> 0:20:49.760 So for any given level of the market, if equilibrium 0:20:49.840 --> 0:20:55.879 valuation is higher, the return will be higher UM. Now Today, 0:20:55.920 --> 0:21:02.560 particularly for the US, even in that low interest rate environment, 0:21:03.320 --> 0:21:09.280 today's valuations were stocked in the US really look too high. 0:21:09.560 --> 0:21:13.280 In the rest of the world, that's less true. Uh. 0:21:13.320 --> 0:21:16.760 And if interest rates are truly permanently low, you know, 0:21:16.840 --> 0:21:21.280 the emerging market in general are probably trading at a 0:21:21.359 --> 0:21:24.679 very reasonable valuations. But in the US, even if we 0:21:24.760 --> 0:21:28.159 make that adjustment, we come to the conclusion that the 0:21:28.840 --> 0:21:33.560 that the market is overvalued um. And that's I would 0:21:33.600 --> 0:21:37.240 say the last couple of years we have generally said 0:21:37.280 --> 0:21:41.960 that is more true for large gaps than small caps UM. 0:21:42.040 --> 0:21:47.320 But among the extraordinary things that happened, despite an environment 0:21:47.440 --> 0:21:53.040 that was unquestionably worse for smaller cap companies, the Russell 0:21:53.080 --> 0:21:56.560 two thousands outperformed. And so at this point we think 0:21:57.080 --> 0:21:59.600 even even the small caps in the US are are 0:22:00.119 --> 0:22:05.119 likely to be a significant haven. And then our performance 0:22:05.200 --> 0:22:07.320 really came in the last few months of the year, 0:22:07.400 --> 0:22:11.320 didn't it. Yeah, And in the trigger in terms of 0:22:11.320 --> 0:22:14.600 the catalyst of performance, the obvious catalyst on that performance 0:22:15.040 --> 0:22:19.760 was the vaccine news and that vaccine news was unquestionably 0:22:19.800 --> 0:22:25.280 wonderful news for humanity and wonderful news on a perspective 0:22:25.320 --> 0:22:30.560 basis for the global economy. Um. But wow, it was 0:22:30.680 --> 0:22:36.480 an awfully big move in these stocks, particularly given that 0:22:37.640 --> 0:22:40.879 they weren't all that cheap to begin with. So it 0:22:41.960 --> 0:22:46.400 was a move that directionally made sense, but from our perspective, 0:22:46.520 --> 0:22:54.000 the scale of the move was just inexplicably large. So 0:22:54.080 --> 0:22:58.480 you mentioned emerging markets which have been cheap for quite 0:22:58.520 --> 0:23:02.600 a while. What are your what's on developed x US? 0:23:02.760 --> 0:23:05.880 Is the rest of the developed world as pricey as 0:23:05.960 --> 0:23:10.639 US equities? Uh? No, The valuations are lower in the 0:23:10.680 --> 0:23:14.240 rest of the world. Now, some of that is driven 0:23:14.400 --> 0:23:19.000 by the fact that UM I T is a smaller 0:23:19.080 --> 0:23:24.680 piece of the rest of the world. UM industrial set 0:23:24.760 --> 0:23:29.040 and information technology firms do probably deserve to trade at 0:23:29.080 --> 0:23:32.640 higher valuations than kind of more traditional love But even 0:23:32.640 --> 0:23:36.960 when you adjust for that, UM, we do see a 0:23:37.000 --> 0:23:40.320 big gap between what a company would trade at in 0:23:40.359 --> 0:23:44.040 the US and what that company would trade at if 0:23:44.080 --> 0:23:46.919 it were somewhere else in the world. UM. So we 0:23:47.080 --> 0:23:51.919 see the non US developed markets looking cheaper than the US. 0:23:52.800 --> 0:23:58.560 UM we don't see them looking by any means dirt cheap. 0:23:58.680 --> 0:24:02.919 The place that I think is most intriguing today in 0:24:02.920 --> 0:24:08.480 the developed world UH is actually Japan UM, where the 0:24:08.560 --> 0:24:14.680 valuations are reasonably low UM. And it is a place 0:24:14.920 --> 0:24:22.720 where it is easy to imagine that profitability can improve 0:24:23.160 --> 0:24:27.680 in a sustainable way UM because if you look at 0:24:28.040 --> 0:24:30.800 you know, the return on capital in Japan, it's been 0:24:31.720 --> 0:24:33.919 lower than that of the rest of the world for 0:24:33.960 --> 0:24:37.720 the last forty years. And in principle, there is nothing 0:24:37.760 --> 0:24:41.600 that stopped these companies from doing some of the same 0:24:41.640 --> 0:24:44.040 things that companies in the rest of the world have 0:24:44.160 --> 0:24:49.440 done UM and being able to really improve that UH. 0:24:49.440 --> 0:24:51.840 And so you know, the simple math is if you 0:24:51.960 --> 0:24:56.119 have two stock markets trading at the same pe and 0:24:56.320 --> 0:24:59.920 one of them has significant scope for earnings growth real 0:25:00.119 --> 0:25:03.680 to the other, well that that one is cheaper UM. 0:25:03.840 --> 0:25:09.439 So within the rest of the developed world, UM, we 0:25:09.560 --> 0:25:14.480 are intrigued by Japan today because of the potential for 0:25:15.359 --> 0:25:19.920 kind of significant earnings and profitability growth over the next 0:25:19.960 --> 0:25:26.560 five or ten years UM. But for really cheap markets um. 0:25:27.000 --> 0:25:30.960 UH we think you can find more in the emerging 0:25:31.000 --> 0:25:34.080 world than in the developed world today. Let me stay 0:25:34.119 --> 0:25:39.000 with Japan for a few moments. Historically, not big stock 0:25:39.040 --> 0:25:43.879 by backs, at least not compared to the US, And 0:25:44.320 --> 0:25:47.560 there's always a little bit of currency risk of dollar 0:25:47.720 --> 0:25:51.800 versus yen. How do you incorporate the currency risk into 0:25:51.840 --> 0:25:56.520 your thesis? I mean, there's always currency risk whenever you're 0:25:56.520 --> 0:26:00.560 buying an asset that's denominated in another currency. We find 0:26:00.640 --> 0:26:03.879 is in the longer run, UH, that risk tends to 0:26:03.920 --> 0:26:07.560 dissipate because let's imagine you buy Japanese stocks and the 0:26:07.640 --> 0:26:11.760 yen really fall, so you're taking this this loss in 0:26:11.800 --> 0:26:16.200 the nearer term. The good news once that has happened 0:26:16.440 --> 0:26:20.880 is Japanese companies are now going to be really competitive 0:26:21.280 --> 0:26:24.080 relative to their global peers because of what's happened to 0:26:24.119 --> 0:26:27.199 the end um. So what we what we tend to 0:26:27.240 --> 0:26:32.479 find is as your time horizon lengthens, uh, the extra 0:26:32.640 --> 0:26:37.520 risk associated with the currency tends to fall away. Because 0:26:37.880 --> 0:26:42.920 countries that experience a fall in their currency normally experience 0:26:43.520 --> 0:26:46.960 better than average earning scrowth, and companies that experience a 0:26:47.119 --> 0:26:52.560 rise in their currency experience subpar earning scrow. So it 0:26:52.640 --> 0:26:55.120 kind of comes out in the wash. And that's more 0:26:55.240 --> 0:26:57.800 strongly true in the developed world than it is in 0:26:57.840 --> 0:27:02.080 the emerging world, because the emerging world sometimes you know, 0:27:02.160 --> 0:27:07.080 a following currency can turn into a currency crisis, which 0:27:07.160 --> 0:27:10.800 is more problematic for for the companies. But in the 0:27:10.840 --> 0:27:17.159 developed world, I don't get that worried about UM the currencies. 0:27:17.200 --> 0:27:19.640 Most of the time. I do get nervous if I'm 0:27:19.640 --> 0:27:23.159 buying into a country where the currency is at a 0:27:23.160 --> 0:27:27.960 given point in time substantially overvalued. UM. That doesn't seem 0:27:28.000 --> 0:27:31.520 to be true of Japan today. UM. You know the 0:27:31.640 --> 0:27:34.280 risk in Japan, I would say the primary risk is 0:27:35.880 --> 0:27:39.840 if they don't get that religion, if they don't start 0:27:39.920 --> 0:27:44.000 paying more money out to shareholders, if they don't do 0:27:44.280 --> 0:27:50.800 some rationalization of their capital structures, they're not going to 0:27:50.880 --> 0:27:57.879 improve UM and the returns will be black. UM. But 0:27:59.080 --> 0:28:03.640 we are seeing the evidence that both at the at 0:28:03.640 --> 0:28:06.800 the macro level, the government is trying to push these 0:28:06.840 --> 0:28:10.400 companies to change, and we're seeing on the ground that 0:28:10.720 --> 0:28:17.119 more and more company management is receptive to hearing about 0:28:17.200 --> 0:28:23.560 this and receptive to making moves in the right direction. Interesting. 0:28:24.000 --> 0:28:27.719 You mentioned emerging markets, and we tend to speak of 0:28:27.760 --> 0:28:33.159 them like they're monolithic block, but they're really very very 0:28:33.160 --> 0:28:38.600 specific countries with different risks and different potential upside. What 0:28:38.720 --> 0:28:41.840 do you see in the emerging market space that is 0:28:42.720 --> 0:28:47.880 especially interesting or something that you're less interested in. Yeah, 0:28:47.920 --> 0:28:51.840 you're You're absolutely right. Emerging markets is not this monolithic saying. 0:28:52.240 --> 0:28:55.840 From my perspective, that's really part of its charm. Um. 0:28:55.920 --> 0:29:01.520 These countries all have very significant risks associated with them, 0:29:01.600 --> 0:29:06.840 but in a lot of cases those risks are very idiosyncratic. 0:29:07.280 --> 0:29:12.480 You know, Turkey has problems, Russia has problems, China has problems. 0:29:12.680 --> 0:29:16.880 They do not have the same problems by any stretch 0:29:16.880 --> 0:29:20.800 of the imagination. Uh. And so the kind of thing 0:29:20.960 --> 0:29:24.600 that could prove to be a real challenge for Turkey 0:29:24.840 --> 0:29:27.640 might actually be something that works out pretty well for 0:29:28.360 --> 0:29:33.560 Russia or Korea or Brazil. So what we find is 0:29:34.280 --> 0:29:37.840 when people think about the risks in emerging they tend 0:29:37.880 --> 0:29:40.520 to focus on, oh my god, what if this really 0:29:40.560 --> 0:29:43.400 bad thing happens in this country. And the good news 0:29:43.480 --> 0:29:46.600 is you can invest across you know, thirty odd different 0:29:46.640 --> 0:29:52.800 countries and the same thing is unlikely to blow through 0:29:52.880 --> 0:29:56.280 all of them. But it is still the case that 0:29:56.360 --> 0:30:02.920 the come countries that wind up really cheap. Um, there's 0:30:02.960 --> 0:30:06.520 almost always a pretty good reason for that. Uh. And 0:30:06.600 --> 0:30:11.800 so the diversification of being able to invest in a 0:30:11.880 --> 0:30:15.600 wide array of them is incredibly important. So for example, 0:30:15.680 --> 0:30:21.480 today Russia is very cheap um and that's not just 0:30:21.640 --> 0:30:25.680 because of the energy stocks. In fact um, you know, 0:30:25.800 --> 0:30:31.280 our Emerging markets team really likes Russia today, but there 0:30:31.040 --> 0:30:35.320 their favorite stocks are not really in the energy space. 0:30:36.000 --> 0:30:40.239 The markets cheap. The markets cheap partially because you know, 0:30:40.400 --> 0:30:47.360 on um Russia is a bit of a you know, 0:30:48.040 --> 0:30:52.080 pariah state at this point, given some of their their misbehavior, 0:30:52.160 --> 0:30:57.280