Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond sound bites and headlines and looks deeper into
Speaker 1: their processes, challenges and philosophies and security selection. I'm David Cohne,
Speaker 1: I lead mutual fund and active research at Bloomberg Intelligence.
Speaker 1: Today my co host is Laurent Dulier, senior equity strategist
Speaker 1: at Bloomberg Intelligence. Laurent, thank you for joining me today.
Speaker 2: Thanks for inviting me, so I wanted.
Speaker 1: To ask you about your note today. In Europe, the
Speaker 1: healthcare sector has underperformed the rest of the market since
Speaker 1: the summer and its valuation has come back below its
Speaker 1: long term average. What do you think the market is
Speaker 1: concerned about and what could reverse that trend?
Speaker 2: Yeah, I think there are two main reason for this.
Speaker 2: The first one is definitely the uncertainty surrounding the health
Speaker 2: policies of the Trump administration. The President elect during his
Speaker 2: campaign not commented that drugmakers have engaged in deception, misinformation
Speaker 2: and disinformation. So I think it suggests that potentially is
Speaker 2: going to take a tough stance against some pharmaceutical companies,
Speaker 2: and the ones that I wrow is the most are
Speaker 2: definitely the European ones, because many European companies or pharmer
Speaker 2: companies have a very large export to the US market.
Speaker 2: And the second reason I think for the underperformance of
Speaker 2: the sector is that we had a mixed newsflow on
Speaker 2: farmer companies over the past few months. First, we're seeing
Speaker 2: increasing competition in the anti obesity drug market and we
Speaker 2: have in Europe a champion with novel Artisk, but the
Speaker 2: company had some supply issues and it lost market share
Speaker 2: to Helivily LII in the US, and I think it
Speaker 2: has a negative impact on its valuation. But also during
Speaker 2: the quarterly reporting season in October, we had mixed newsflow
Speaker 2: from nov Artists and Glaxo Smiths clin regarding their twenty
Speaker 2: twenty five outlooks. So I think it added a bit
Speaker 2: more clouds on the prospect of this sector in Europe.
Speaker 2: To your question about what could reverse the trend, I
Speaker 2: think at this stage regarding the health policy in the US,
Speaker 2: there is a lot of speculation about what Donald Trump
Speaker 2: will do or not, so I think here we need
Speaker 2: to wait and see what are going to be his
Speaker 2: initial measures and see how drastic he is going to
Speaker 2: be regarding the competition in the anti obosited drug market.
Speaker 2: Our industry analysts in Europe do believe that the injectable
Speaker 2: drugs of Helilyli and Novo Nordisk will remain the dominant
Speaker 2: solution over the coming years up towards the end of
Speaker 2: vis decades. So potentially the competitive threat may not be
Speaker 2: as big as expected. So I think when the market
Speaker 2: realize that those two companies potentially are going to remain
Speaker 2: the dominant players, market may be less negative on those two.
Speaker 1: Great. Well, let's bring in our guests who may have
Speaker 1: thought on his own about this. I'd like to welcome
Speaker 1: Colin McQueen, who is vice president TI Price Group Interior
Speaker 1: Price International Limited and a portfolio manager in the equity division,
Speaker 1: including the International Value Equity fund ticker TRIGX. Colin, thanks
Speaker 1: for joining us, Hi.
Speaker 3: Thanks very much, good to be here.
Speaker 2: Maybe I will start the conversation by a question on
Speaker 2: value companies, because in Europe often value companies are seeing
Speaker 2: as being cheap for fundamental reasons, and I would like
Speaker 2: to know as a value investors, what is your secret
Speaker 2: source in a sense to avoid investing in those value
Speaker 2: trap because there are usually the one which it's severally
Speaker 2: as a performance of.
Speaker 3: A fund thank you, Ron. I think there's a couple
Speaker 3: of aspects to that that are worth touching on in
Speaker 3: terms of sort of I guess the stocks being perceived
Speaker 3: as value traps. Values really just coming off probably one
Speaker 3: of its worst periods in history, the decade after the GFC.
Speaker 3: You have to go back to the nineteen thirties to
Speaker 3: find a worse period for value, So, you know, in
Speaker 3: that sense, I think the market has become very skeptical
Speaker 3: about valuation as a driver of out performance. I do
Speaker 3: think though, that some of the headwinds that are faced
Speaker 3: value companies in that period are abating, if not even
Speaker 3: potentially reversing. And we've seen, perhaps kind of the other
Speaker 3: side of the pandemic and the Ukraine War, some changes
Speaker 3: in terms of outlook that I think kind of level
Speaker 3: the playing field a little bit. More specifically, those for
Speaker 3: me would be the change in interest rates. You know,
Speaker 3: we've had a decade of very negative interest rates continuously falling,
Speaker 3: ending with I guess a third of the world's bond
Speaker 3: markets negative yielding at one stage negative interest rates, particularly
Speaker 3: in Europe. That's negative for value companies, both technically in
Speaker 3: terms of the discount rate movement, but also it's been
Speaker 3: a massive headwind for financial companies, which tend to be
Speaker 3: overrepresented in the value universe, and really I guess banks
Speaker 3: particularly just don't work at negative interest rates. So the
Speaker 3: reset we've seen in interest rates has been a material positive,
Speaker 3: particularly I would say for European banks. I mean, on
Speaker 3: our estimates, we've sort of moved the average ROWE from
Speaker 3: about eight to twelve, which is a very material change.
Speaker 3: The second thing I think is we're getting a broadening
Speaker 3: of some of the sources of growth in the economy.
Speaker 3: We spent a lot of period after the GFC with
Speaker 3: really a lot of growth being driven by the build
Speaker 3: out of Internet platforms, driven by companies with intangible assets.
Speaker 3: We've seen a very sort of concentrated pattern of demand growth.
Speaker 3: Looking the other side of the pandemic, I think we're
Speaker 3: seeing a broadening to that, and particularly in the industrial area.
Speaker 3: So we're seeing a big wave of expenditure from on
Speaker 3: energy transition and obviously the build out of aidentity data
Speaker 3: centers is turbo charging that materially. We're also seeing quite
Speaker 3: a change in terms of where supply chains are built. Both,
Speaker 3: I guess, from a geopolitical perspective, sort of near suring
Speaker 3: or friendshuring. But also I think as we saw in
Speaker 3: the pandemic problems at places with extended supply chains, we've
Speaker 3: seen places where infrastructure just didn't work as well as
Speaker 3: we might have hoped when it was stress tested. So
Speaker 3: we're seeing quite a broadening of the areas of expenditure,
Speaker 3: not to mention also at least the reversal of the
Speaker 3: Defense Peace divid end. So I think the outlook for
Speaker 3: growth and demand for a lot of companies making kind
Speaker 3: of tangible goods capital equipment has improved, and that obviously
Speaker 3: drags through a lot of materials demand with that. So
Speaker 3: we've seen an aggregate if we look at sort of
Speaker 3: international value companies as a cohort, earning's growth in the
Speaker 3: decade after the GFC was a pretty miserable zero point
Speaker 3: five percent per annum, which compared to about eight percent
Speaker 3: of the S and P five hundred on our numbers,
Speaker 3: so a massive gap. It's not surprising potentially that these
Speaker 3: companies didn't really perform very well. If we take that
Speaker 3: from the start of the pandemic, we've seen growth accelerate
Speaker 3: up to about four just over four percent per annum
Speaker 3: with the US again remaining at eight. So we're not
Speaker 3: delivering the growth in international value stocks of the S
Speaker 3: and P five hundred yet, but the gap has materially closed,
Speaker 3: whilst at the same time the valuation dispersion has widened
Speaker 3: yet further. It's now, you know, versus the US, the
Speaker 3: widest it's been on history. So I think there's a
Speaker 3: there's an opportunity in terms of value stocks Internationally, we're
Speaker 3: seeing improving prospects, a better outlook, and yet the valuations
Speaker 3: remain very much in the doldrums. You'd asked also specifically
Speaker 3: on how how I think about sort of avoiding value
Speaker 3: traps in the portfolio reading that out, and really there's
Speaker 3: kind of two aspects to that for me. One is
Speaker 3: maybe as well, we'll sort of get into a little
Speaker 3: bit later. For me, a lot of what we're trying
Speaker 3: to achieve in the portfolio is to buy undervalued free
Speaker 3: cash flow generation from companies. So we want to buy
Speaker 3: good companies when they're out of favor, trading cheaply and
Speaker 3: when we can. Basically, we think of the underlying value
Speaker 3: of the business as driven by its free cash generation.
Speaker 3: So if we're having free cash generative companies, if we're
Speaker 3: early in buying them. Assuming we're right on the free
Speaker 3: cash generation, the opportunity will tend to get bigger rather
Speaker 3: than smaller over time. So that's probably I guess the
Speaker 3: primary sort of defense point. The second one is whenever
Speaker 3: we buy initiate positions in companies, we kind of do
Speaker 3: a downside valuation exercise to ask ourselves what is this
Speaker 3: business worth if we're wrong? And ideally we're looking for
Speaker 3: situations where we don't have a lot of absolute downside.
Speaker 3: You can't always always get that happy combo. But again,
Speaker 3: I'm sort of equally pleased where our research has done
Speaker 3: its job on the value protection side. So we may
Speaker 3: miss a bit of opportunity costs, but we don't lose
Speaker 3: money on a stock.
Speaker 1: That's great. Why don't we take a step back back,
Speaker 1: and you know, I'd love to hear about how you
Speaker 1: got your start and investing.
Speaker 3: Yep, sure, I guess I was relatively lucky. I joined
Speaker 3: the industry in nineteen eighty nine fresh from an economics
Speaker 3: master's degree, which I guess persuaded me to move to
Speaker 3: a career in investment management rather than being an economist
Speaker 3: at that stage, partly as I think driven by I
Speaker 3: started to develop an increasing interest in industries and how
Speaker 3: companies worked, and investment management sort of lets you get
Speaker 3: up close and personal with that. So I was fortunate
Speaker 3: to land a job straight in the industry from university.
Speaker 3: I think also fortunate in that respect that I joined
Speaker 3: a UK based deep value shop at that time, which
Speaker 3: me gave a very good grounding in terms of how
Speaker 3: to look at out of favor companies, what to look
Speaker 3: for in Stockton market didn't like, but also taught the
Speaker 3: emotional discipline around that. I think everyone's a contrarian investor
Speaker 3: on paper, but it's a lot harder to do when
Speaker 3: you're buying aerospace stocks in the middle of COVID. So
Speaker 3: I think, although obviously you adapt processes and methodologies over time,
Speaker 3: I think that sort of core DNA of being comfortable
Speaker 3: with going against the market being uncomfortable has kind of
Speaker 3: stayed with me throughout that piece. I think also I
Speaker 3: was fortunate at that time for somebody who spent an
Speaker 3: entire career in value investing in I started my career,
Speaker 3: or at least the first half of it, in the
Speaker 3: period where value investing worked as it had done traditionally
Speaker 3: in the textbooks. So in fact, almost to the extent
Speaker 3: that you wondered why anybody did anything else, and then
Speaker 3: probably spent the last fifteen years after the GFC getting
Speaker 3: the answer to that question. So I think a lot
Speaker 3: of investors have sort of spent their career really in
Speaker 3: this very unusual market condition we've seen since the GFC.
Speaker 3: So I regard myself as fortunate in having seen both
Speaker 3: sides of the coin there.
Speaker 1: So if we focus into the international Value Equity fund,
Speaker 1: you mentioned what you're looking for in terms of valuations,
Speaker 1: can you expand a little bit of you know, how
Speaker 1: the process works of you know where you start when
Speaker 1: you're selecting positions for the portfolio.
Speaker 3: Yes, absolutely, so Again for me, the aim is, as
Speaker 3: I mentioned, to companies when they're out of favor and
Speaker 3: trading material discounts to their underlying value. That can be sparked.
Speaker 3: It's usually sparked by concerns in some form or another.
Speaker 3: That can be concerns are aut an industry, as I mentioned,
Speaker 3: anything to do with travel in COVID was trading flat
Speaker 3: on its back for a while. It can be to
Speaker 3: do with geographic news and certainly some of the political
Speaker 3: headlines we've been seeing over recent weeks can offer you
Speaker 3: opportunities that at some pretty contrarian investments, or it can
Speaker 3: simply be an individual company having a bump in the
Speaker 3: road in terms of product roadmap or something going wrong.
Speaker 3: So try to focus in on areas of the market
Speaker 3: that are out of favor, that have underperformed, where we're
Speaker 3: seeing sort of negative sentiment emerging, and going to sort
Speaker 3: of kick the tires and understand what drives the future
Speaker 3: free cash flow. So to think about what will drive
Speaker 3: free cash generation over a cycle, to understand the sort
Speaker 3: of product competitiveness, the cost competitiveness, how well that profitability
Speaker 3: then trade fleets into cash flow and looking to be
Speaker 3: disciplined to pay kind of a maximum of eighty five
Speaker 3: cents in the dollar. There's periods where things are much
Speaker 3: much cheaper than that, but you know, again we have
Speaker 3: a sort of strict discipline that we won't pay above
Speaker 3: that level. So that kind of is the bread and
Speaker 3: butter of what we're looking for as a firm. We
Speaker 3: also pay a lot of attention to restructuring potential. Again,
Speaker 3: one of the things you often find without a favor companies,
Speaker 3: often they haven't been performing as well as they might
Speaker 3: have done, so we spend a lot of time thinking
Speaker 3: about how a company can get better, what can be
Speaker 3: changed operationally, whether in some cases we're finding from a
Speaker 3: portfolio perspective there's a good business hiding behind a bad one.
Speaker 3: And I guess, really where we get the home runs
Speaker 3: in the portfolios where both sides of that kick in,
Speaker 3: where we get the undervalued free cashflow stream and also
Speaker 3: we get the improvement process of the restructuring, adding materially
Speaker 3: to the underlying value of the company. The process of
Speaker 3: doing that really is helped materially by the strength of
Speaker 3: the research platform that I have to draw on. I
Speaker 3: could say, in having been an investment management for thirty
Speaker 3: odd years, I could say, hand on heart, probably the
Speaker 3: tiro price we should this platform is the best resource
Speaker 3: I've had to work with. So we have one hundred
Speaker 3: and seventy research analysts around the world with deep knowledge
Speaker 3: of their companies and industries. So I spend the majority
Speaker 3: of my time working with those guys discussing through what
Speaker 3: a company could look like in the medium term, what
Speaker 3: are the downside risks, and really trying to get to
Speaker 3: the answers where we're getting that combination of an attractive
Speaker 3: reward with relatively minimal downside. I think just two things
Speaker 3: maybe to add on that. In terms of the portfolio side,
Speaker 3: we try to deliberately take quite a wide net to
Speaker 3: the sort of companies we're looking for. I think over
Speaker 3: the course of my career, I've worked at a number
Speaker 3: of different value firms, and we find the value tent
Speaker 3: is actually much broader than it's often labeled to be.
Speaker 3: So you know, at one end, you can have the
Speaker 3: kind of deep value approaches, you know, buying steel companies
Speaker 3: at the on the cycle, the other end of the spectrum,
Speaker 3: we're looking at sort of war On Buffett buying Coca Cola,
Speaker 3: much more sort of high quality compounding companies. We find
Speaker 3: a lot of firms tend to gravitate to one or
Speaker 3: other side of that spectrum. We've kind of developed the
Speaker 3: processes and the tools to operate really across the piece,
Speaker 3: so that gives us a lot of shots on goal.
Speaker 3: It also gives us, from a portfolio perspective, a lot
Speaker 3: of opportunities to improve the risk reward and again that's
Speaker 3: something we've paid quite a lot of attention to. On
Speaker 3: the portfolio side. Again, I've found over the course of
Speaker 3: my career that value investing often and contrarian investing doesn't
Speaker 3: work linearly. You tend to get returns in spurts and cycles.
Speaker 3: So partly from bottom up, but also developed a sort
Speaker 3: of risk dashboard to try and figure out when when
Speaker 3: we want to be taking maximum risk and when we
Speaker 3: want to be keeping a bit more powdered r. I
Speaker 3: kind of think that almost as the similar to the
Speaker 3: process of counting cards at a blackjack table. We want
Speaker 3: to know when the when the playing field is set
Speaker 3: up really for us to make big returns, or when
Speaker 3: we want to be a bit more cautious and wait
Speaker 3: for the better opportunities.
Speaker 1: So you mentioned, you know, finding opportunities during COVID, and
Speaker 1: then also you mentioned a risk model, and so would
Speaker 1: you say the portfolio was kind of a mix of
Speaker 1: both top down and bottom up research.
Speaker 3: It's principally driven by bottom up research. So the starting
Speaker 3: point is kind of really company by company, what are
Speaker 3: the opportunity sets? How undervalued is this business in terms
Speaker 3: of what we think free cash generation can do. We
Speaker 3: incorporate elements I guess of top down primarily as a
Speaker 3: sense check, so you know, we want to understand if
Speaker 3: we're buying a company that has a cyclical strain. Ideally
Speaker 3: we're not buying it at the top of the cycle,
Speaker 3: would rather be buying it at the bottom. So kind
Speaker 3: of some understanding around where we are in terms of
Speaker 3: economic cycles business cycles is helpful, but it's nothing I
Speaker 3: would I wouldn't claim the crystal ball that we add
Speaker 3: a lot of value that way. It's more defensive to
Speaker 3: make sure we're not not kind of making a mistake.
Speaker 3: And similarly, in portfolio terms, we spend a lot of
Speaker 3: time on scenario analysis around the portfolio. So what happens
Speaker 3: if economies start to weaken more than we expected, what
Speaker 3: happens if there's bursts of growth, what happens if the
Speaker 3: dollar actually finally eventually starts to weaken at some stage. Again,
Speaker 3: we want to make sure that we're getting a diversification
Speaker 3: of drivers within the portfolio. So what's really doing the
Speaker 3: heavy lifting is kind of the research insights and basically
Speaker 3: buying that free cash flow at eighty five cents in
Speaker 3: the dollar.
Speaker 1: So you know, in addition to cash flow in and
Speaker 1: some of the other things you mentioned, there are other
Speaker 1: financial characteristics you look at when you're evaluating balance sheets
Speaker 1: and income statements.
Speaker 3: I mean in terms of balance sheets, obviously we're looking
Speaker 3: for also looking at excess assets that are potentially could
Speaker 3: be better deployed. So that kind of is on the
Speaker 3: offense side, what additional value could be unlocked from a
Speaker 3: company's balance sheet. It's fair to say, though, for me,
Speaker 3: when we think talk about balance sheets, the starting point
Speaker 3: is pretty much almost the cash flow statement. I think
Speaker 3: that tells you the most about how a company behaves
Speaker 3: over time. So tracking its cash generation performance is kind
Speaker 3: of a big driver. And clearly if we have companies
Speaker 3: that are self funding and generating free cash flow over time,
Speaker 3: that tends to sort of overshadow the balance sheet condition
Speaker 3: for a lot of periods. It's important though Obviously we're
Speaker 3: going to have companies that we know will draw in
Speaker 3: debt at times, and you want to make sure the
Speaker 3: balance sheet is kind of strong enough to withstand that.
Speaker 3: So we look at probably relatively conventional metrics around net
Speaker 3: debt to ebit are clusters of debro financing, etc. I
Speaker 3: think the other thing we've found probably over recent years,
Speaker 3: it's important in sort of understanding finances also to think
Speaker 3: about preemption rights, and we found that's actually added quite
Speaker 3: a lot of value particularly during COVID in companies like
Speaker 3: Rolls Royce or Outstorm, where you know, the long short
Speaker 3: community often likes to cluster around companies that they think
Speaker 3: are going to need a refinancing. If you're running a
Speaker 3: lawn short portfolio, that's a win you You can tend
Speaker 3: to close the short relatively well. It has led to
Speaker 3: some cases, however, where the kind of total enterprise value
Speaker 3: of the company gets really mispriced and we're we can
Speaker 3: have confidence that we can participate as shareholders in that refinancing.
Speaker 3: We've been willing to be proactive and buy ahead of
Speaker 3: unexpected rights issues from companies, and again those have turned
Speaker 3: out to be home runs for the portfolio in many cases.
Speaker 2: Looking at value opportunities on a geographic basis, I would
Speaker 2: like to have your view on Japan because many investors
Speaker 2: things that the country is undergoing structural shift with a
Speaker 2: move from deflation to reflation. Corporate governance is being much
Speaker 2: more shareholder friendly than it used to be in the past.
Speaker 2: So market has done quite well over the past two
Speaker 2: to three years. Where do you think we are in
Speaker 2: this cycle.
Speaker 3: Yes, certainly the market has done well, and I think
Speaker 3: also within Japan, the sort of value cohort of stocks
Speaker 3: have done well as we've seen some of those changes unlocking.
Speaker 3: I think all of those things are happening. So we
Speaker 3: are seeing restructuring in Japan. We're seeing an accelerating release
Speaker 3: of cross shareholdings. We're seeing companies being a bit more
Speaker 3: deliberate about capital allocation, a bit more shareholder return driven
Speaker 3: in some of those policies. Having said that, I think,
Speaker 3: as you said, the market has become more consensual about
Speaker 3: these things. There was a lot of debate around that
Speaker 3: a couple of years ago. It now seems to be
Speaker 3: very much received wisdom. So we're finding you have to
Speaker 3: pick your spots a bit more carefully in Japan now.
Speaker 3: So we're looking for opportunities, I guess actively for restructuring.
Speaker 3: It's one of the sort of tenets of the portfolio,
Speaker 3: but we're perhaps finding we're rotating a little bit away
Speaker 3: from some of the industrial and export sectors. And again
Speaker 3: some of those companies, things like Katachu held in the
Speaker 3: portfolio for ten years, it's been a great restructuring story.
Speaker 3: But we're seeing, I guess, a a consensus around restructuring
Speaker 3: for some of these companies. But also there's been quite
Speaker 3: a benefit from the weekend for a lot of exporters,
Speaker 3: which again we don't want to sort of bake in
Speaker 3: as permanent. And we're also seeing perhaps quite a change
Speaker 3: in terms of the competitive levels for some Japanese companies
Speaker 3: versus Chinese competitors, and certainly where where China has been
Speaker 3: a big end market, we're seeing quite an increase in
Speaker 3: sort of domestic competition, so rotating a little bit away
Speaker 3: from some of the export industries, and we've been finding
Speaker 3: more opportunities on the domestic side. Companies like seven to
Speaker 3: eleven have been a big additions to the portfolio this year.
Speaker 3: This is like Cow where we're seeing prices rise for
Speaker 3: the first time in twenty odd years. And we're also
Speaker 3: finding we're moving a little bit down the capitalization spectrum,
Speaker 3: so more opportunity in the mid cap and Japan, but
Speaker 3: netnet for fund has now moved underweight Japan. In contrast,
Speaker 3: we've probably been adding over the last eighteen months or
Speaker 3: so to positions in Korea quite heavily. I think it
Speaker 3: feels to me like Korea is at an earlier stage
Speaker 3: to Japan in terms of its value up program. But
Speaker 3: there's a certainly we're finding from companies a drive to
Speaker 3: sort of better define capital allocation. We probably need some
Speaker 3: tax changes more to see asset release. But again there's
Speaker 3: a sort of relatively lowly valued set of companies that
Speaker 3: start to be starting to change. So Korea is an
Speaker 3: area of spending increasing time. Obviously, the political events of
Speaker 3: the last few days don't help the case in the
Speaker 3: short run.
Speaker 2: There coming back very quickly. On Japan. Do you think
Speaker 2: that if the boj increase rates over the next twelve
Speaker 2: to eighteen months, does it create a good opportunity for
Speaker 2: Japanese financials.
Speaker 3: Or not it does. I guess some of that good
Speaker 3: news is already baked into the share prices. I mean,
Speaker 3: we've seen Japanese financials move from half book value to
Speaker 3: one time's book value, so that's starting to put a
Speaker 3: normalization of return on equity on the table. Obviously, the
Speaker 3: Japanese banks are extremely long of deposits, so we would
Speaker 3: anticipate that they keep a good benefit from from rate rises.
Speaker 3: I think it's fair to say there are rate rises
Speaker 3: already baked into the share price, so it's not an
Speaker 3: area we've been chasing, and we can see continued benefits.
Speaker 3: But yeah, again there's a portion of that in the
Speaker 3: share prices already. Conversely, the other side, actually, we've been
Speaker 3: taking the opportunity to add a bit more to real
Speaker 3: estate holdings in Japan which have been dragged down by
Speaker 3: that sort of movement in the BOJ rates. So it's
Speaker 3: kind of interesting that you can buy basically companies like
Speaker 3: Mitsubishi Estate that are sitting on some of the absolutely
Speaker 3: top quality prime real estate in Tokyo at half net
Speaker 3: asset value and with a management team that's starting to think,
Speaker 3: I think more holistically around its capital allocation and portfolio management.
Speaker 2: To come back on your comment in Japan moving toward
Speaker 2: a smaller gap, is it also something that you would do,
Speaker 2: for example, in Europe because European media and small gap
Speaker 2: are on the perform large gap quite significantly in twenty
Speaker 2: twenty four, So do you think they could present good
Speaker 2: value opportunities for your fund.
Speaker 3: Yes, I certainly find we've been moving that way. Again,
Speaker 3: it's more bottom up driven than some sort of realisas
Speaker 3: to say we need to buy smaller MidCap companies in Europe,
Speaker 3: but they have been lagging. You know, we're seeing relative
Speaker 3: valuations come down, So yeah, we're starting to see opportunities
Speaker 3: of a number of areas. We've found clusters in the
Speaker 3: UK that have been really interesting. Again, I suppose we
Speaker 3: think of some companies that sit in sort of mid
Speaker 3: cap space but are market leaders in their area. Companies
Speaker 3: like Pearson that have been underperforming for a number of
Speaker 3: years as the sort of the higher education textbook market
Speaker 3: has weakened. But you know, you know, we're seeing the
Speaker 3: other parts of the business pick up the pick up
Speaker 3: the slack and start to generate good growth. So we're
Speaker 3: seeing a number in the UK. It's fair to say
Speaker 3: we're seeing a number of industrials again. Businesses like Diamler
Speaker 3: Truck in Germany look really interesting, you know, market leading
Speaker 3: truck business in North America and in Europe, having spun
Speaker 3: off out of Diimler, it's trading at under half the
Speaker 3: valuation in terms of what we're paying for sales compared
Speaker 3: to Volvo, and around a third of pack are So
Speaker 3: we think there's a lot of potential for Dimeler or
Speaker 3: restructure to returns on the profitability over time. So we're
Speaker 3: finding a number of opportunities springing up in Europe bottom up.
Speaker 3: I think somewhat unusually we're finding them also in financial areas,
Speaker 3: both across some of the banks, so in BCP and
Speaker 3: Portugal has been a great holding for us, but also
Speaker 3: in areas like George which has to get overlooked by
Speaker 3: sort of small MidCap investors. You know, in Holland, we've
Speaker 3: seen five leading insurers consolid eight down to three. There's
Speaker 3: a lot of cost cutting potential there over time, potentially
Speaker 3: better pricing, and yet we're sort of we're paying eight
Speaker 3: and a half times earnings and getting seven and a
Speaker 3: half dividend yield out of some of those companies. With
Speaker 3: that that good cost cutting runway still to come.
Speaker 2: Moving another gear, I mean underlyzing your fund. It seems
Speaker 2: that you have a large position meansions of pharmaceutical and
Speaker 2: l scare space, which is usually seen more as gross
Speaker 2: than value. So do you think for you investing in
Speaker 2: lscare is more finding quality cuponders at a reasonable price.
Speaker 2: And if it is the case in which pace would
Speaker 2: you look at equipment, pharma more service providers? Which one
Speaker 2: would you favor?
Speaker 3: I guess we're finding opportunities in both. As you say,
Speaker 3: I think healthcare is one of those sectors that's traditionally
Speaker 3: been thought of as growth rather than value. If we
Speaker 3: kind of go back to the Ben Graham textbooks, I
Speaker 3: mean they're traditionally written really around companies that are based
Speaker 3: around tangible assets, hard capital. But increasingly in the economy
Speaker 3: more growth, a bigger proportion of the economy is being
Speaker 3: driven by companies that are based around intellectual property, intellectual capital,
Speaker 3: and obviously healthcare sits in that zone. I think the
Speaker 3: sort of the tools you need to look at that
Speaker 3: can vary a little bit, they can be quite different.
Speaker 3: The patterns of cash flow over time tend to be
Speaker 3: less economically sensitive. It's more around understanding the portfolio drivers
Speaker 3: and getting into the weeds on the individual stocks. So
Speaker 3: again we look through a lens of free cash generation.
Speaker 3: In an ideal world, we're finding companies that have a
Speaker 3: good runway of a number of years of predictable free
Speaker 3: cash generation with all the optionality for future pipeline research development,
Speaker 3: essentially for nothing. I think it's fair to say we're
Speaker 3: seeing some opportunities like that today on the pharmaceutical side
Speaker 3: against sort of companies like Sanafee. We sit with an
Speaker 3: eight and a half free cash flow yield, no patent
Speaker 3: expieres or no material ones until the early twenty thirties.
Speaker 3: That's a sort of relatively cash flow stream, and again
Speaker 3: we're not winning anything for research. Similar equations around some
Speaker 3: companies like AstraZeneca not quite as cheap as Santa Fee,
Speaker 3: but the pipeline is much stronger, the business is much
Speaker 3: more diversified, So I think some of those we just
Speaker 3: see good value in terms of what we're paying for
Speaker 3: cash generation, you know, in terms of the equipment side.
Speaker 3: Phillips has been quite a big holding for the portfolio,
Speaker 3: where again they've had their trails over the respiratory products,
Speaker 3: but underlying it, we have a company with good market
Speaker 3: positions that that again we're paying pretty reasonable valuations for,
Speaker 3: So we kind of think of it as a good
Speaker 3: hunting ground. In a portfolio sense, we're probably tilting a
Speaker 3: little bit towards overweight cyclical companies. We're finding more opportunities there,
Speaker 3: so we're leaning a little bit more into something like
Speaker 3: healthcare that has that that sort of count balance in
Speaker 3: terms of the portfolio shape. I think it's fair to
Speaker 3: say also it's an area of the market that I
Speaker 3: guess I approach a TIRO price with quite a good
Speaker 3: degree of confidence. We have kind of twelve dedicated healthcare analysts.
Speaker 3: So I have the luxury as a portfolio manager of
Speaker 3: going through the company's portfolios with people that really understand
Speaker 3: the science and the competing drugs and products. So I
Speaker 3: think it's an area where we do excel in from
Speaker 3: a research perspective.
Speaker 1: So we've talked about what you're looking for companies, But
Speaker 1: what would trigger a cell do you? I mean, do
Speaker 1: you look at target prices or is it more of
Speaker 1: you know, the fundamentals of a company changing.
Speaker 3: We do look at I guess target prices. I mean
Speaker 3: we throw to its sort of intrinsic value. So what
Speaker 3: as a company, what do we think the free cash
Speaker 3: generation is worth? And so sort of fair value for
Speaker 3: us would be when the free cash generation and delivers
Speaker 3: you effectively a nine percent IR, we'll kind of consider
Speaker 3: a neutral price. If we've reached that level, we'll reassess
Speaker 3: the investment case. Obviously, if we're growing over time, if
Speaker 3: we're seeing restructuring, there's usually a sort of upt trajectory
Speaker 3: to the numbers, So we don't want to throw the
Speaker 3: baby out with the bath water. But if we don't
Speaker 3: see a case to revise the intrinsic value estimate, then
Speaker 3: the stock gets sold. We refer to those as the
Speaker 3: good levers internally, and they tend to be about sixty
Speaker 3: percent of the sales from the fund. The other side
Speaker 3: of that, the bad levers are obviously ones where we've
Speaker 3: had to come to the painful refibation that what we
Speaker 3: were looking to happen in terms of cash generation, restructuring
Speaker 3: or change just isn't developing as we would like it. Hopefully,
Speaker 3: again our downside analysis gives us some protection, but again
Speaker 3: those are the time for ones to decide, but it
Speaker 3: tends to be about forty percent of stocks just have
Speaker 3: to go back to the original thesis and say what
Speaker 3: we're looking for isn't happening and we should move on.
Speaker 3: The other thing I guess I would add up to
Speaker 3: that is we have a lot of emphasis on restructuring
Speaker 3: in the portfolio, and I guess I've found over the
Speaker 3: course of my career, when you get big companies that
Speaker 3: haven't been as well managed as they might have been,
Speaker 3: the process of improvement can tend to be a multi
Speaker 3: year process. So again, where we're seeing companies sort of
Speaker 3: changing their spots in terms of catal alacation, changes to portfolio,
Speaker 3: new management really improving things. We'll want to give them
Speaker 3: a good sort of space to run. We don't want
Speaker 3: to be too hasty in moving out of that I
Speaker 3: tended to find. You know, with companies like Rolls Royce
Speaker 3: with Atacia mentioned where you end up after sort of
Speaker 3: five years of earning the stock, it can very frequently
Speaker 3: be much better in terms of company performance than you
Speaker 3: ever might have jumped along the way. So we give
Speaker 3: those sort of stocks the room to run within the portfolio.
Speaker 2: One follow up question during one of the remarks, you
Speaker 2: said that potentially Korea is a good investment opportunity on
Speaker 2: the value side. Do you have any strong views on
Speaker 2: China because his market has been i would say left
Speaker 2: four dead in terms of valuation and market trends, or
Speaker 2: any other market potentially in emerging market which could look
Speaker 2: as interesting for you.
Speaker 3: Yeah. I think the portfolio strategy is primarily developed market strategy,
Speaker 3: so we're sort of benchmark to develop markets outside the US,
Speaker 3: so we have scope to buy emerging markets, and there's
Speaker 3: currently about eight percent of the portfolio in emerging markets.
Speaker 3: So we do that in an off benchmark sense where
Speaker 3: we see opportunity. Again, the research platform kind of covers
Speaker 3: a lot of those areas in good depth. We tend
Speaker 3: to say probably about half of the exposures within the
Speaker 3: portfolio would be in areas like Korea or Taiwan, where
Speaker 3: you know, we're kind of on a spectrum between emerging
Speaker 3: and developed. So you know, often we could regard the
Speaker 3: competitiveness of a Samsung Electronics or something as being equivalent
Speaker 3: to owning it's its peers in the in the developed markets.
Speaker 3: Outside of that, it tends to be more opportunistic approach,
Speaker 3: so looking for really materially undervalued companies or where where
Speaker 3: sentiment has become very negative. China obviously keeps coming up
Speaker 3: on the radar. It's probably fair to say for a
Speaker 3: contrarian investor, China has kept tapping us on the shoulder
Speaker 3: several times over the last few years. We do have
Speaker 3: some exposure there. I think it's it's pretty cheap, a
Speaker 3: lot of cheap stocks, But principally, I guess we've kind
Speaker 3: of taken China exposure through multinationals. So when we've seen
Speaker 3: kind of panic sell offs in China and Hong Kong,
Speaker 3: we've been added quite a bit. To say, Aias we
Speaker 3: have probably one of the highest quality stocks in its
Speaker 3: sector in terms of insurance exposure, and a big runway
Speaker 3: of underpenetration for insurance markets really across Asia. Around half
Speaker 3: the portfolio exposed to China, so we've been doing it
Speaker 3: quite heavily, perhaps through multinationals, but we do have some
Speaker 3: China exposure in the portfolio. I think it's cheap enough
Speaker 3: that you want to have some exposure. I wouldn't be
Speaker 3: in the camp to say just avoid China at all costs.
Speaker 1: So I've one question before we let you go. It's
Speaker 1: actually a more reflective question. What advice would you give
Speaker 1: your younger self just starting in the industry.
Speaker 3: I think, reflecting on that, I would the advice I
Speaker 3: would would give to someone starting today is to think
Speaker 3: about how you manage your relationship with deusflow actually in
Speaker 3: financial markets, and certainly you know, for over the period
Speaker 3: of my career, the amount of daily newsflow, opinion pieces,
Speaker 3: facts that are sort of dropped into our desks every
Speaker 3: day via email, via services like Bloomberg Financial Television, it
Speaker 3: can be quite overwhelming. You know, there's there's usually three
Speaker 3: different explanations for why the market is going up, down,
Speaker 3: or sideways on any given day. A lot of effort
Speaker 3: to explaining short term share price movements. So I guess
Speaker 3: I would would advise people to try and sort of
Speaker 3: disconnect it a little bit from that that sort of
Speaker 3: pose of information and just try to think about what
Speaker 3: that makes a company valuable over time, So kind of
Speaker 3: what drives the product growth, what drives the cost competitiveness,
Speaker 3: the capital allocation, Those things I guess tend to change
Speaker 3: more slowly out of time. I think you can get
Speaker 3: more of an edge actually sort of being prepared to
Speaker 3: dig into the weeds and think about what is a
Speaker 3: company worth If I, you know, metaphorically put the chess
Speaker 3: to get in a drawer for five years. I think
Speaker 3: that's a sort of much better way to be approaching investment.
Speaker 3: And I would encourage people to sort of try and
Speaker 3: just step back from the noise flower and think about
Speaker 3: what matters on a longer term basis.
Speaker 1: That's great advice. Well, thank you Colin for joining us today.
Speaker 3: Great, thank you, it's been a pleasure. Thank you for
Speaker 3: having me and Lauren.
Speaker 1: Thank you for serving as my co host.
Speaker 2: I thank you.
Speaker 1: Until our next episode. This is David Cohn with Inside Active.
Speaker 3: The two Stars of the Old Town has as