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 Comb,
Speaker 1: I lead mutual fund and active research at Bloomberg Intelligence.
Speaker 1: Today my coast is Lauren Duier, a senior equity strategist
Speaker 1: at Bloomberg Intelligence. Laurent, thanks for joining me today.
Speaker 2: Thanks for having me.
Speaker 1: So, Lauren. Following the first quarter earning season, you know,
Speaker 1: what does the earnings outlook look like in regions like
Speaker 1: Europe and Japan using signs that fundamentals are improving.
Speaker 2: Yeah, results in Europe and Japan in the short quarter
Speaker 2: were better than expected, and if you look at the
Speaker 2: outlook for the remaining of the year, it's up compared
Speaker 2: to what we thought it would be about a few
Speaker 2: months ago. Consensus for both region is now looking for
Speaker 2: double digit turning growth. However, we have to be a
Speaker 2: little bit more cautious because most of the upgrades we
Speaker 2: have seen over the past few weeks are mainly concentrated
Speaker 2: in technology as well as in energy because of higher
Speaker 2: hold price. So, and also when you listen to the
Speaker 2: management comments, so far they are seeing a limited impact
Speaker 2: from higher energy price or supplied disruption, so I would
Speaker 2: say at this point it is quite encouraging in terms
Speaker 2: of earning the outlook. However, one of the caveat is
Speaker 2: that if we look at the PMI data which were
Speaker 2: released today both in Japan and in Europe, it seems
Speaker 2: that companies have been able to pass through higher price,
Speaker 2: which is good potentially for their profitability, but it could
Speaker 2: create some tension in terms of inflation, and potentially central
Speaker 2: banks may have to increase rate in regent quite aggressively
Speaker 2: if inflation is stick here as we saw in twenty
Speaker 2: two twenty three, so it could have a negative impact
Speaker 2: on equick evaluation.
Speaker 1: That's great framing for our discussion today. Socially giving attention
Speaker 1: has remain focused on the US and joining us today
Speaker 1: to help unpack this international opportunity set are Tom Coots
Speaker 1: and Lawrence Burns, portfolio managers at Bailey Gifford, and some
Speaker 1: advisors on the Vanguard International Growth Fund. Tom, Lawrence, Great
Speaker 1: to have you both with us.
Speaker 3: Great to be with you, Thanks, David, Thank you.
Speaker 1: So Laurent, why don't you get us started for this one?
Speaker 2: Yeah? Okay? So I have a more general question because
Speaker 2: we get many questions as equity strategist about the US exceptionalism.
Speaker 2: So I would like to have your opinion of why
Speaker 2: investors should care about international equities when US equities about
Speaker 2: perform for so long, and the fact also that the
Speaker 2: US is where everything is happening in the AI space.
Speaker 3: Yeah, of course, it's at a great place to start.
Speaker 3: I mean, the US has obviously been a fantastic stock
Speaker 3: market and a great economy for many many years. The entrepreneurship,
Speaker 3: the sheer size the domestic economy, the availability of growth capital,
Speaker 3: and I think above all the willingness to risk failure.
Speaker 3: These are all critical factors. But to me, the main
Speaker 3: reason to invest internationally is the range of opportunities. And
Speaker 3: bear in mind that the Amsterdam Stock Exchange was founded
Speaker 3: in sixteen oh two, so there have been international investment
Speaker 3: opportunities going back a very very long way. Three quarters
Speaker 3: of global GDP is outside the US. There are some
Speaker 3: very rapidly growing markets, but critical for US as bottom
Speaker 3: up stock because there are simply some great companies which
Speaker 3: stand comparison to the best businesses in the US, and
Speaker 3: which in certain industries have by far the dominant players.
Speaker 3: So think luxury goods, think some cosmetics, for example, Loreal
Speaker 3: of great French business. You'll know well, Laura, clearly evs
Speaker 3: and batteries in emerging technologies today, as well as a
Speaker 3: host of hidden champions operating in seemingly niche markets which
Speaker 3: have large growth opportunities. And then we can't talk about
Speaker 3: international without talking about China. So for all the geopolitical
Speaker 3: competition since reform and opening up in the late nineteen seventies,
Speaker 3: China is the one country on Earth I think with
Speaker 3: a similarly vibrant entrepreneurial attitude to the US, at a
Speaker 3: similar scale and at a speed that may, over the
Speaker 3: coming years even exceed that of the US. So there's
Speaker 3: lots of reasons we think to be interested in international markets.
Speaker 1: Great, well, why don't we dig into your investment process
Speaker 1: just to get us started. How would you describe the
Speaker 1: Bailey Gifford investment philosophy? What sits at the heart of it?
Speaker 3: I think at the heart is the fact that Bailey
Speaker 3: Gifford is a private partnership. We go back. We're based
Speaker 3: in Edinburgh in Scotland. We were founded in nineteen oh eight.
Speaker 3: We've got about one hundred and fifty investors. We are
Speaker 3: wholly focused on long investing. Lawrence and I are both partners.
Speaker 3: Our interest is in handing over the firm to the
Speaker 3: next generation in better shape than we received it, and
Speaker 3: that leads us to focus very strongly on client alignment.
Speaker 3: We stand or fall by how good a job we
Speaker 3: do for our clients ultimately, and then the investment philosophy, David,
Speaker 3: to your point, stems from that. So it's about long
Speaker 3: term structure. It's about patience and boldness and curiosity as
Speaker 3: we look for the outlier companies, which academic research shows
Speaker 3: are the ones that really drive long term returns. So
Speaker 3: then if you go down to our portfolios, we're long
Speaker 3: term owners, typically five to ten year holding period. We
Speaker 3: have highly active portfolios, very different from the benchmark, and
Speaker 3: we're willing to be different. To me, investment is as
Speaker 3: much behavioral as it is Analytical imagination matters as much
Speaker 3: as the ability to craft a nice neat DCF.
Speaker 1: Well, can you walk us through your process actually looks
Speaker 1: like on a day to day basis, you know, when
Speaker 1: you're researching a new company.
Speaker 3: Yeah, maybe Lawrence wants to take that one.
Speaker 4: Sure, I mean, I think the most important part of
Speaker 4: a day to day process trying to understand companies understand
Speaker 4: the world actually isn't what happens in our office in Edinburgh.
Speaker 4: It's about those one hundred and fifty investors going out
Speaker 4: into the world, immersing themselves in different ecosystems, whether that's Brazil,
Speaker 4: whether that's China, whether that's Southeast Asia, and talking frankly,
Speaker 4: to as many people as possible, talking to the leaders
Speaker 4: of businesses that we're interested in, talking to their competitors,
Speaker 4: talking to their suppliers, talking to government officials and regulators,
Speaker 4: and trying to build up a picture that is rich
Speaker 4: and diversified of inputs. And when you take a step back,
Speaker 4: what that getting out on the world is really trying
Speaker 4: to do is, firstly, it's trying to leverage more insight
Speaker 4: than we as a firm and our own can produce,
Speaker 4: leveraging the inside of others. And then it's also trying
Speaker 4: to get inputs into the process that are genuinely differentiated
Speaker 4: in proprietary that can't be found for a search on
Speaker 4: AI or on Google. You know, those conversations, the access
Speaker 4: that you can get from management to tas, from companies
Speaker 4: both public and private, and then bring all of that
Speaker 4: back to wedding bro those one hundred and fifty investors,
Speaker 4: where you share that information, you discuss what you found,
Speaker 4: and you try and triangulate across it. And then that's
Speaker 4: the process that eventually leads to sitting down and riding
Speaker 4: up an investment report in the company and thinking, at
Speaker 4: a very basic level, what does this industry, what does
Speaker 4: this company look like in five to ten years time,
Speaker 4: and how does that differ from the current market valuation.
Speaker 1: So what are you looking for to distinguish companies with
Speaker 1: you say, truly durable growth versus those kind of just
Speaker 1: benefiting from shorter term cycles. You know, what are you prioritizing.
Speaker 4: I think you're looking for if you take a real
Speaker 4: step back, it's looking for companies that are a solution
Speaker 4: to a big problem. Looking for companies that create value
Speaker 4: for their customers, for businesses, and for society. That's the
Speaker 4: first part of it. Then I think you move on
Speaker 4: to the second part, which is as they grow, does
Speaker 4: this business get better? Does it benefit from increasing scale,
Speaker 4: does it benefit from network effects from high switching costs?
Speaker 4: Because again, the entire process has to be not a
Speaker 4: static analysis of what a company's like now, but what
Speaker 4: it might look like in five years time, And it's
Speaker 4: trying to think through what the unit economics look like
Speaker 4: and whether that growth is sustainable. And I think it's
Speaker 4: then trying to triangulate it against some of the industry experts,
Speaker 4: some of these academics, trying to probe where we might
Speaker 4: be wrong or might be right about that at growth theory.
Speaker 4: But I think the other thing you framed it is
Speaker 4: long term, sort of durable growth and hype. I think
Speaker 4: as a growth investor, you have to sometimes embrace the
Speaker 4: fact that some opportunities may turn out not the way
Speaker 4: that you thought they were going to be, that there
Speaker 4: may have been a bit of hype, but that it's
Speaker 4: worth it if you can get a good hit rate,
Speaker 4: and for the ones that work out, those small number
Speaker 4: of big winners that Tom talked about earlier, I will
Speaker 4: read what makes up the real returns for clients in
Speaker 4: the long run.
Speaker 3: I just add on that if I made David that
Speaker 3: I think the best growth businesses often have some hype.
Speaker 3: They burst through it, they more than justify it. And
Speaker 3: it's you've got to be bold, you've got to be creative,
Speaker 3: you've got to be willing to risk looking foolish and
Speaker 3: being wrong to hold on something even though in people
Speaker 3: are telling you yet but this is obviously over hype.
Speaker 3: This has obviously gone too far. We see that time
Speaker 3: and time again. Companies really able to burst through that
Speaker 3: hype if they are truly exceptional.
Speaker 1: So when you're kind of looking at a company's you know,
Speaker 1: sustainable competitive advantage, and you know, I know you talk
Speaker 1: about network effects, and you know, if we think of
Speaker 1: other things like technology, brand, culture, how do you avoid
Speaker 1: overestimating any of those things?
Speaker 2: You?
Speaker 3: I think, what you have to do? You can look
Speaker 3: at the financial outputs, of course, the returns, the margins,
Speaker 3: but whereas a the inputs, the sort of things you touched,
Speaker 3: you touched on for me. The best companies don't fear competition.
Speaker 3: The best companies don't exploit their company, their customers in
Speaker 3: any way. They think about coke, nobody forces you to
Speaker 3: buy a coke. People choose it every day out of
Speaker 3: their own free will, and the same for a business
Speaker 3: in our universe ferrari. Nobody forces the twelve thousand people
Speaker 3: a year who buy a Ferrari to do it. So
Speaker 3: companies that have that ability to really command their customers
Speaker 3: attention to solve a problem for them, whether the problem
Speaker 3: may be a lack of ferrari in some cases, So
Speaker 3: how do you avoid overestimating that? To your point, we
Speaker 3: look on a first principle basis, using in analytical frameworks
Speaker 3: like portified forces and that sort of thing. But we
Speaker 3: just observe the behaviors of management teams over years and
Speaker 3: try to judge whether they are doing exactly what they
Speaker 3: said they would do, and judge the outcomes in that way.
Speaker 3: And then if you get that right, then over time
Speaker 3: that clearly comes through in the financial outputs. But we
Speaker 3: are inclined always to trust management that we think are
Speaker 3: exceptional to run their business in the right way as
Speaker 3: long as we as long as we're comfortable in the
Speaker 3: competitive advantage and in the growth opportunity they see before them.
Speaker 4: I think it's also about triangulating the hypothesis that you
Speaker 4: have around competitive edge. And again I think that goes
Speaker 4: back to the getting out in the real world of
Speaker 4: you have to road test your hypothesis. You have to
Speaker 4: road test it thinking about yourself in different environments, in
Speaker 4: different technological developments. Does this still hold? And then you
Speaker 4: have to go around and basically hear every single counter
Speaker 4: to the idea that this company has an edge or
Speaker 4: the idea that this growth opportunity is real. And I
Speaker 4: think it's only when you've done that that you can
Speaker 4: start to have conviction. And that again goes to you
Speaker 4: want to hear from the people that they're disrupting or
Speaker 4: that they're competing with why they won't be able. You
Speaker 4: need to hear the counter each time. And that's been
Speaker 4: an incredibly important part of our process of we can
Speaker 4: have a hypothesis, but we've got to test it with
Speaker 4: the outside world as much as possible before we test
Speaker 4: it with client's capital.
Speaker 1: Okay, JOm, you mentioned management team, so I kind of
Speaker 1: want to just talk for that for a little bit.
Speaker 2: You know.
Speaker 1: So obviously it's a big part of your process, you know,
Speaker 1: judging their ability to execute. How do you build conviction
Speaker 1: and management teams, especially in international markets where you know
Speaker 1: the access and transparency can vary, it's a little different
Speaker 1: than the US.
Speaker 3: Yeah, I think to take the access one first of all.
Speaker 3: That's what where our long term focus helps. Our size
Speaker 3: helps to some extent too. People know that if we're
Speaker 3: going to invest, were typically a sizeable shareholder and we're
Speaker 3: often on the register for many many years. One of
Speaker 3: the companies in the portfolio, Atlas Copco, we held for
Speaker 3: over thirty years. For example Loreal for a similar period
Speaker 3: of time. Our ability to own private companies and invest
Speaker 3: through the capital cycle, if you like, helps as well.
Speaker 3: So on the access side, I think we do have
Speaker 3: pretty good access across international markets. And then in terms
Speaker 3: of the conviction, it's about mental models. It's again the
Speaker 3: point I'm made earlier. Do do management act in the
Speaker 3: way they say they do. I'm a big fan of
Speaker 3: Phil Fisher, who wrote Common Stocks and Noncommon Profits. He
Speaker 3: talks about do the management talk freely when things are
Speaker 3: going well, but clam up when troubles and disappointments occur.
Speaker 3: So you want people who are honest with you, as
Speaker 3: we try to be honest with our clients when things
Speaker 3: are going well and when things are going badly. And
Speaker 3: then I'm a bit of an annual report nerd. I
Speaker 3: think you can learn a huge amount just how management
Speaker 3: presents its business year after year. Do they do it
Speaker 3: in a consistent, concise, this honest, frank way, and then
Speaker 3: do they back that up when you talk to them?
Speaker 3: And do they back that up when you through their actions,
Speaker 3: and then to Lawrence's point, you can always triangonate that
Speaker 3: with other companies in an industry. Who do you most
Speaker 3: admire in the industry, those sort of questions. So it's triangulation,
Speaker 3: it's trust, it's the cumulative mental models of doing this
Speaker 3: over many, many years. And that's the fact that we
Speaker 3: do have pretty good access, i think, to the companies
Speaker 3: we want to talk to.
Speaker 1: So do you want to touch upon valuation just a
Speaker 1: little bit, because you know historically Bailey Gifford willing to
Speaker 1: pay a bit of a premium for exceptional growth companies.
Speaker 1: How do you decide when the premium is justified versus
Speaker 1: when evaluation risk becomes too high.
Speaker 4: The starting point is if you look at all of
Speaker 4: the great growth investments or a lot of the great
Speaker 4: growth investments over the last twenty years, at one time
Speaker 4: or another, particularly early in the history, they would have
Speaker 4: traded it very, very high near to multiples of earnings.
Speaker 4: And I think we firstly we accept that a high
Speaker 4: near term multiple does not make for a bad investment case.
Speaker 4: But the question that you come back to is, as
Speaker 4: we're building out our scenario analysis, looking at the growth
Speaker 4: rate thinking of the margins that they can earn when
Speaker 4: you look out five to ten years, can you see
Speaker 4: that possibility from a multiple of upside from the starting point.
Speaker 4: And that really comes back to our scenario analysis focusing
Speaker 4: on what the value will be in five or ten
Speaker 4: years time rather than the immediate spot multiple. And then
Speaker 4: I think the other element is what we've tended to
Speaker 4: find is you need not just analysis, but also Tom
Speaker 4: mentioned the word imagination earlier. You need to be imaginative
Speaker 4: in thinking about where this business can go in the
Speaker 4: very long run. And I don't think financial markets do
Speaker 4: a good job of imagination. And what we see is
Speaker 4: that our very best investments are actually those that have
Speaker 4: multiple opportunity sets. They succeed at one thing and they
Speaker 4: leverage that and they go into succeeding another. And so
Speaker 4: often what you need is to go for an analyze
Speaker 4: it and say what are the other potential market oportun
Speaker 4: it is this company could have. So an example what
Speaker 4: we'll be familiar with was Amazon started as a bookseller,
Speaker 4: became a broad dra online retailer, but then a lot
Speaker 4: of the values actually accrued from aws. We had a
Speaker 4: similar one with Maccada Libra Latin American e commerce company
Speaker 4: and looking at it going into finance. So it's a
Speaker 4: combination of thinking fighting years what these companies can be
Speaker 4: and making sure we don't underestimate just how attractive and
Speaker 4: valuable they can be in the very long run.
Speaker 3: Just if I can add quickly, David on the curiosity point,
Speaker 3: we were unusual as a firm, So we recruit people
Speaker 3: typically out of college, out of university, and train them
Speaker 3: up ourselves, and we overwhelmingly don't hire people with finance
Speaker 3: or economics backgrounds. I studied modern languages. I won't impose
Speaker 3: my French on Laurel. Lawrence studied geography. So we believe
Speaker 3: there's a certain amount of financial analystical capability you need.
Speaker 3: We get able to do the CFA, that kind of stuff,
Speaker 3: but that doesn't give you an advantage. What you need
Speaker 3: to do is retain the curiosity, the imagination, the openness
Speaker 3: that you had when we recruited you, and then kind
Speaker 3: of bolt on the analytical framework the analytical processes on
Speaker 3: top of that. And if you if you get that
Speaker 3: balance right, then it gives you much better chance. We
Speaker 3: think of being able really to hold the outliers in
Speaker 3: the way that Lawrence explained being able to think what
Speaker 3: if this really works over five or any of you,
Speaker 3: and in a sense not be too bounded by the
Speaker 3: constraints of a DCF with its inevitable false precision.
Speaker 2: I would like to do a little on how your
Speaker 2: investment process gener rate views differentiated inside, especially relative to cosensus,
Speaker 2: because many of the subside and least visit companies interview
Speaker 2: managements and the lies a competitive advantage of some companies.
Speaker 2: So where do you think your edge is really coming from?
Speaker 2: As investors?
Speaker 4: I think I think we have a couple of different
Speaker 4: layers of edge. The first is behavioral and that comes
Speaker 4: from the partnership structure, the ability to be long term,
Speaker 4: and I think thinking about an investment becomes easier when
Speaker 4: you're thinking about where does it end up in five
Speaker 4: years time? And yes, you want to consider the journey,
Speaker 4: but that is helpful to have that luxury, to have
Speaker 4: that structure from the firm and the patience from our
Speaker 4: clients to do that, and that puts us in a
Speaker 4: different mindset where if you look at a lot of
Speaker 4: the academic research, it would tell you that humans have
Speaker 4: a far grea dislike for losing a unit of loss
Speaker 4: than they would from a unit of gain and the
Speaker 4: same emotional action as not even And I think it's
Speaker 4: trying to find ways where you reduce career risk so
Speaker 4: that people can weigh upside and downside appropriately. Because a
Speaker 4: lot of the companies at the starting point great growth
Speaker 4: companies are often controversial. People will tell you that it's overvalued.
Speaker 4: Are there many reasons why it's fail? So you have
Speaker 4: to be prepared to look foolish. So that's one layer
Speaker 4: on the behavioral The second layer then comes from where
Speaker 4: we get our insights from, and we've kind of touched
Speaker 4: a little bit on that. I don't think access is
Speaker 4: even to companies. I think if you want to go
Speaker 4: and spend time with use American examples with Jeff Bezos
Speaker 4: or Jenans and Juan and try and understand their vision,
Speaker 4: that opportunity isn't equally available to everyone. Similarly, for our companies,
Speaker 4: it's the ability to go and have one of our
Speaker 4: larger holdings mentioned early McCaul Libray can go and have
Speaker 4: six hours and meetings of the management team and get
Speaker 4: to know various different executives. They'll tell you nothing about
Speaker 4: what the next quarter is like, but they'll tell you
Speaker 4: an awful lot about their long term vision for the
Speaker 4: company and their views on culture. So I think you
Speaker 4: do get different inputs into making that long term element
Speaker 4: of an investment case. And I would just focus again
Speaker 4: on culture here because I think that's something that doesn't
Speaker 4: fit into the DCS that Tom was talking about. You
Speaker 4: can't ascribe a number to it, and you have to
Speaker 4: spend a lot of time with a company and with
Speaker 4: an ecosystem to truly understand the company's culture. But I
Speaker 4: think if we took a step back from a common
Speaker 4: sense approach, we'd say culture has a huge amount to
Speaker 4: deal to do with whether a company will be successful
Speaker 4: or not in the long term. So I'd see our
Speaker 4: edges being behavioral combined of the insights that we can
Speaker 4: get from our network of company access across public and
Speaker 4: private and for academia.
Speaker 1: I do want to you know, we've talked about what
Speaker 1: you look for when you're going to purchase a company.
Speaker 1: You know, if we think about the fund what would
Speaker 1: trigger a cell decision for you? You know what has
Speaker 1: to change?
Speaker 3: Yeah, it's in essence, it's the it's the reverse of
Speaker 3: the buy decision. So it's fundamentals first and foremost, and
Speaker 3: then valuation. Secondly, particularly if Lawrence has talked about we
Speaker 3: see the possibility of a second act of still there
Speaker 3: being a right tail. We're willing then to hold on.
Speaker 3: We like to run our winners, and we obviously reevaluate
Speaker 3: the investment case constantly. So more usually for us on
Speaker 3: the on the cell side, it's a gradual erosion of
Speaker 3: the investment thesis, either because the moat, the competitor moat
Speaker 3: becomes less deep, or the growth just fades. So we
Speaker 3: sold a business for years ago called Novozymes Novhenesis, which
Speaker 3: is a Danish enzyme business. We've held it for many years.
Speaker 3: It's a very good company. They made a big acquisition
Speaker 3: and often when a management team does that, it tells
Speaker 3: you their own confidence in their organic growth prospects are
Speaker 3: less high than you would have liked. And that's still
Speaker 3: an interesting business. We may come back to it at
Speaker 3: some point, but it's fundamentally if those core aspects of
Speaker 3: the investment fade in some way that we're likely to sell.
Speaker 3: And I would say, honestly, you know, a lot of
Speaker 3: investment is about trade offs. We aim to be good
Speaker 3: buyers and good owners. We are less good sellers. Doesn't
Speaker 3: mean we're bad at it, but it's not what we're
Speaker 3: what we're really optimizing for. We're optimizing for holding, and
Speaker 3: we can accept a bit of slowness, if you like,
Speaker 3: on the cell discipline as a price we're willing to
Speaker 3: pay for being really good owners to get the skewness
Speaker 3: of markets to work for our clients to benefit.
Speaker 1: And I do want to ask also about geographic allocations.
Speaker 1: I mean, you are a bottom up investor, so I
Speaker 1: imagine your stock approach is kind of driving the geographic
Speaker 1: allocations of the portfolio. Has that ever kind of led
Speaker 1: you to an unexpected country or region unexpected?
Speaker 3: I think it's always intentional, but I suppose it has
Speaker 3: led us to have investments Macada Lieber. It might be
Speaker 3: one might be a good example that Lawrence come on
Speaker 3: to in a minute. But we're pretty intentional and where
Speaker 3: you know, we're bottom up, and then we clearly look
Speaker 3: at the portfolio outputs and say, okay, we're five percent
Speaker 3: overweight China, ten percent overweight to underweight here. Are we
Speaker 3: comfortable with that? Are we comfortable with the risks? Are
Speaker 3: the individual businesses correlated or idiosyncratic that all of that
Speaker 3: kind of stuff, you know, I'm very happy having a
Speaker 3: fifteen percent overweight in Sweden because there's not much political
Speaker 3: risk there. Am I happy having a fifteen percent overweight
Speaker 3: in China? No, I'm not, because there are political risks
Speaker 3: there that I think we need to be where over
Speaker 3: the portfolio level, I mean, Lawrence, maybe the Meley one
Speaker 3: is an interesting case of where if you're like this
Speaker 3: stock specific overrode the macro concerns.
Speaker 2: Yeah.
Speaker 4: So if you go back to when we first discussed it,
Speaker 4: one of the main pushbacks in our investment discussions where
Speaker 4: it might be a good company, but at the end
Speaker 4: of the day, it's not going to deliver a great
Speaker 4: US dollar return for our lines, and a lot of
Speaker 4: that pushback was kind of right. The macroeconomic environment has
Speaker 4: not been plain sailing over the fifteen odd years that
Speaker 4: we've owned the company. But it's an example of where
Speaker 4: you have a structurally grown company that executes exceptionally well
Speaker 4: and is able to deliver multiple acts of growth, you're
Speaker 4: able to overpower that and so over that time period
Speaker 4: you will have had a very high multiple return of
Speaker 4: revenues and profits and US dollar terms, despite a macroeconomic
Speaker 4: backdrop that has probably been a roughly flat in US
Speaker 4: dollar terms, and I think for US that's an important
Speaker 4: learning of the very best companies can overcome all but
Speaker 4: the most harshest of economic conditions, and sometimes it is
Speaker 4: the difficulty of those conditions is why they succeed. So
Speaker 4: why are Amazon not the number one company in Brazil? Well,
Speaker 4: part of the reason was it was a very hard
Speaker 4: market to crack. The logistics was terrible, there was protectionism,
Speaker 4: there was a need to buy products on credit, and
Speaker 4: none of those things Amazon wanted to do. And so
Speaker 4: sometimes what you see of international markets is that the
Speaker 4: the flaws, the inefficiencies of what enable exceptional companies to
Speaker 4: actually thrive.
Speaker 2: As a follow up question, are they any parts of
Speaker 2: the international equity universe that you find structurally less attractive
Speaker 2: at this point, either for fundamental or evaluation reasons? And
Speaker 2: why you would go underweight was regients on themes.
Speaker 3: Yeah, I think we're not dogmatic, but clearly we're growth investors.
Speaker 3: So if we don't see a decent level of structural
Speaker 3: growth in a market, in an industry, we're unlikely to
Speaker 3: be interested. So you could think of telecoms and utilities
Speaker 3: and those sort of areas as being ones we haven't
Speaker 3: had representation in for a very long time. One where
Speaker 3: I wouldn't say it's structurally less attractive, but it maybe
Speaker 3: brings in the valuation point, and we've been discussed at
Speaker 3: actively is defense within Europe. Clearly there's big long term demand.
Speaker 3: You clearly had a rerating of those businesses, but the
Speaker 3: industry economics, we think still are pretty challenging. You've got
Speaker 3: a concentrated customer base, you've got very long cycles, you've
Speaker 3: got limited pricing power in the long run. Frankly, and
Speaker 3: more importantly for us, the nature of warfare I think
Speaker 3: has probably changed. So the big defense companies of yesterday
Speaker 3: are it's not obvious to me those are going to
Speaker 3: be tomorrow. It's winners, and we think out as Laurence said,
Speaker 3: five ten years, we think a lot about technology. So
Speaker 3: that's that's an area of live debate. I wouldn't say it'
Speaker 3: structurally unattractive, but it's an area that's that's run pretty hard.
Speaker 3: We've done five or six rounds of work on that.
Speaker 3: We haven't taken any holdings yet within the defense area.
Speaker 3: So that maybe it broadens out your question a little
Speaker 3: bit and gives a bit more context to how we
Speaker 3: think about some of these areas.
Speaker 2: Given what is happening in upon market and potentially your
Speaker 2: return of the vigilantes, do you think we are in
Speaker 2: the higher for longer inflation and interest rate environment and
Speaker 2: does it really influence the way you think about what
Speaker 2: for your construction. Given Zane Bags, that higher year could
Speaker 2: have on gross on the valuation of gross companies.
Speaker 3: We don't have a super strong view on interest rates.
Speaker 3: We're equity investors first and foremost. I think as long
Speaker 3: as rates stay within let's say a four to six
Speaker 3: per corridor, maybe at the high end of that it
Speaker 3: gets painful for some businesses, but structurally that seems okay
Speaker 3: to us. The big the big headwind clearly was the
Speaker 3: sharp rise in interest rates from twenty twenty two onwards.
Speaker 3: I think we're now into quote unquote a more normal
Speaker 3: environment for the foreseeable future. The broader answer, I think
Speaker 3: underpinning that is that while on the one hand you've
Speaker 3: got potential deflation from AI, over the long run, the
Speaker 3: world is I think a more complicated, more uncertain place
Speaker 3: than it was a few years ago. So discount rates generally,
Speaker 3: I think you would expect to be higher, and I
Speaker 3: think that's likely to last. Lawrence talked about academics, we
Speaker 3: talked to. We had Adam Two's the economic historian, in
Speaker 3: chatting to us last week. His take is, this period
Speaker 3: of deep uncertainty in the global economy, let's date it
Speaker 3: back to Brexit in twenty sixteen as a starting point,
Speaker 3: perhaps is here to stay. And I think that's right. So,
Speaker 3: in a period of elevated risk, more diverse opportunities in
Speaker 3: some ways, whether that's defense or not, I think it
Speaker 3: makes spread sense for us to kind of spread our
Speaker 3: bets across a wider range of industries and perhaps geographies
Speaker 3: than we did ten years ago. Maybe so's and we've
Speaker 3: done that process, have been through that process. That's not
Speaker 3: directly maybe on the interest rate question, on the bond
Speaker 3: market vigilante question, but I think structurally that the world
Speaker 3: economy is a tougher place, is a more uncertain place
Speaker 3: than it has been for most of my investing career
Speaker 3: twenty seven years now. And I think we're reflecting that
Speaker 3: in some of the changes we've made to the portfolio
Speaker 3: and how we think about individual names and correlations across
Speaker 3: the portfolio.
Speaker 2: Okay, followings of Frost Squatter results, we have seen really
Speaker 2: stronger earnings revision cycle not just in the US, but
Speaker 2: also in Europe as well, and or sorry in the
Speaker 2: emerging market or how are you positioning your folio around
Speaker 2: earning cycle and where do you see the most companying
Speaker 2: stories in terms of earnings revision.
Speaker 3: Yeah, we're maybe back to trade offs. As I mentioned earlier,
Speaker 3: we're not We're not big players and thinking about sort
Speaker 3: of earnings revision, earning cycles, that sort of thing that's
Speaker 3: maybe a bit more tactical than our than our very
Speaker 3: long term approach. We're where opportunities are emerging globally, and
Speaker 3: for us that is a range of idiosyncratic growth opportunities
Speaker 3: across a wide range of industries. And then maybe specifically,
Speaker 3: the big thing that we're seeing driving markets clearly at
Speaker 3: the moment is AI AI capex in a In an
Speaker 3: international context, there are many choke points, frankly, many monopolistic
Speaker 3: quasi monopolistic type businesses where demand is far exceeding supply,
Speaker 3: and most of those businesses, with the exception in video
Speaker 3: in the AI semikapex chain operates a domicile in outside
Speaker 3: the US, so ASML in the Netherlands is a great example.
Speaker 3: T SMC in Taiwan, and then a bunch of companies
Speaker 3: like people would't have heard of, like advantest or Disco
Speaker 3: in Japan, which which are small parts but critical critical
Speaker 3: parts of the semi supply chain. And that's an area
Speaker 3: where we're pretty constructive.
Speaker 2: On one thing on your comments regarding AI related companies,
Speaker 2: I mean, what is your thinking around the valuation because
Speaker 2: companies like AICML, advantest or Disco now are trading on
Speaker 2: multipoles which are much higher than where as they were
Speaker 2: trading about five, ten or fifteen years ago. So do
Speaker 2: you think there is maybe a little bit of a
Speaker 2: bubble in the valuation of with AI related companies or
Speaker 2: do you think that the gross prospects for them do
Speaker 2: justify the current valuation multipoles.
Speaker 4: I'll start on that. I mean, I think to decide
Speaker 4: whether or not those valuations are justified. And I think
Speaker 4: it's natural if you believe that we're in a massive
Speaker 4: structural role out of AI, that these companies would trade
Speaker 4: on slightly higher multiples. TSMC is actually our largest holding,
Speaker 4: and there you're paying a twenties multiple for something that's
Speaker 4: growing top line at forty percent and earnings even higher.
Speaker 4: So actually where we look in the portfolio, we're not
Speaker 4: seeing anywhere near nose bleed valuations, but we're obviously thinking
Speaker 4: about over many years the degree to which this can
Speaker 4: be sustained. And I think where we come to is,
Speaker 4: and this goes back to getting out and talking to people,
Speaker 4: is is there going to be a good enough ROI
Speaker 4: on that AI cap extent? Mean people are going to
Speaker 4: want to keep growing the amount of it year after year.
Speaker 4: And I think one of the things that's given us
Speaker 4: a increased conviction has been versus eighteen months ago, the
Speaker 4: companies we're talking to in all manner of industries and
Speaker 4: now telling us we think AI is having a material
Speaker 4: impact on our business, whether it's cutting costs or whether
Speaker 4: it's helping generate revenue. And they're saying, yeah, we are
Speaker 4: getting really good returns on our tokens that we're using here.
Speaker 4: We want to use more of them. We're rolling out
Speaker 4: into new areas of our business. And you may see
Speaker 4: our growth inflect because of some of this. And that's
Speaker 4: a very different change mating months ago. And so when
Speaker 4: you combine that with valuations that might be a bit
Speaker 4: elevated versus the pass but are far from those bleed.
Speaker 4: We think that that still remains attractive within our portfolio context.
Speaker 4: And then the only other point I would make think
Speaker 4: is a key one and builds on this idea of
Speaker 4: AI semiconductor bottleneck, is it's very hard to know how
Speaker 4: AI is a technology develops, which applications win, which one
Speaker 4: don't win. It's also quite hard to know because they
Speaker 4: keep jocking in terms of position, which AI model provide
Speaker 4: at which frontier lab is the best? Is it Google's Gemini,
Speaker 4: is it anthropic? Is it open AI? The advantage is
Speaker 4: that whoever wins at the application level layer in AI,
Speaker 4: whoever wins in the ALI model race, These semiconductor companies
Speaker 4: benefit regardless, and so it's an interesting simplification of owning
Speaker 4: them that they benefit in all scenarios where AI grows,
Speaker 4: whereas a lot of the US tech companies that isn't
Speaker 4: necessarily the case. They depend on winning or a certain
Speaker 4: type of AI rollout.
Speaker 3: Just if I may Lauren to go. But to go
Speaker 3: back to your question you've framed at austin binary terms,
Speaker 3: is there enough growth or is it a bubble? I think
Speaker 3: both can be true, actually, and so if you think
Speaker 3: about if I translate that down to our portfolio actions.
Speaker 3: We've taken something like ten percentage points out of our
Speaker 3: semicaductor exposure over the last six or eight months, but
Speaker 3: we still have a significant overweight position, so we have
Speaker 3: been taking some money out. I think you do that
Speaker 3: naturally on the way. As one of these things develops,
Speaker 3: there are signs that you'll probably look back on in
Speaker 3: five or ten years time and say, okay, that was
Speaker 3: one of the indicators that we were heading towards a
Speaker 3: bubble or a bubble was forming. So yesterday, for example,
Speaker 3: one of the Asian brokers that covers Korean Taiwanese chip
Speaker 3: makers removed made all its ratings on those companies hold
Speaker 3: or buy ratings. That may be the perfectly rational thing
Speaker 3: to do given the supply demand constraints, but also it's
Speaker 3: the sort of thing we might look back on an
Speaker 3: ten year's time and say, well, that was the sign
Speaker 3: that we were getting towards the stage where the companies
Speaker 3: could do no wrong. So I think clients should expect
Speaker 3: to see us probably continue to take money out as
Speaker 3: these companies do well over the next cooming years. But
Speaker 3: I think this has still got quite a long way
Speaker 3: to run.
Speaker 2: Okay, I'll have a more top down question in terms
Speaker 2: of international macro theme right now in Europe we have
Speaker 2: to have them, which is a fiscal expansion that we
Speaker 2: are seeing in German as a market was really oart
Speaker 2: on the theme in twenty twenty five. We continue also
Speaker 2: to see increasing defense spending in Europe. So on those
Speaker 2: two theme, how are you position and do you think
Speaker 2: they are sustainable and good investment opportunities? And the last
Speaker 2: one is really is a dollar weakness and of that
Speaker 2: we have seen in twenty twenty five a little bit
Speaker 2: in twenty six before the conflict. So how are you
Speaker 2: thinking or so about donald weakness in your investment process,
Speaker 2: especially when you look at the emerging market names.
Speaker 3: Gosh, there's a lot there, yeaes sir, No, no, no,
Speaker 3: That's what I'll do my best, I think. I mean,
Speaker 3: I've touched on the defense, there's a super interesting things
Speaker 3: happening there. We're not yet persuaded that the bottom up
Speaker 3: stock level investment opportunities are there for us in public markets,
Speaker 3: certainly within Europe. We're continuing to look and to and
Speaker 3: some of those names have come back quite a long way,
Speaker 3: so that's potentially interesting. German fiscal policy I don't spend
Speaker 3: much time thinking about the last time I used to
Speaker 3: run our European equity team for a few years. The
Speaker 3: last time we seriously paid attention to European macro was
Speaker 3: twenty eleven twelve the Arizona crisis, when we thought things
Speaker 3: were well oversold, and we did make some allocations to
Speaker 3: a few European companies quite narrowly on the back of that,
Speaker 3: and some of those worked very well for us. So
Speaker 3: I don't see erman fiscal stimulus as being in the
Speaker 3: same category on the dollar. Again, unhelpfully add out of
Speaker 3: a strong view on the dollar, I would say, on
Speaker 3: a bottom up basis, you have to look for You
Speaker 3: have to think in hard currency terms. Picky currency okay,
Speaker 3: but currency volatile matters. Lawrence touched on South American businesses,
Speaker 3: for example, you have to look at the dollar return.
Speaker 3: Most of our clients are a US or Canadian clients.
Speaker 3: You have to look at the dollar return, the dollar
Speaker 3: growth rates of companies you're investing in. And I would
Speaker 3: much rather have a business that faces the short term
Speaker 3: headwind of a strong currency, let's say a Swiss company
Speaker 3: or a Singaporean business, because you don't have the easy
Speaker 3: comfort of operating in a in a debasing currency, which
Speaker 3: I think can make life a bit easier artificially easier
Speaker 3: for a business a business owner. So I'd much rather
Speaker 3: have a strong currency business than a week currency business,
Speaker 3: and companies operating in markets where there's a weaker currency,
Speaker 3: we just translate it back to the to the currency
Speaker 3: the matters to our client, which for most of them
Speaker 3: is the US dollar, and where that goes from here.
Speaker 3: I'm afraid I don't have a strong.
Speaker 2: View so our slangyes, advantage for Japan museequities.
Speaker 3: Yes, yes, I have to say we're pretty I'm personally
Speaker 3: pretty constructive on Japan. But I think Japan has and
Speaker 3: I know you know the market well. It's one of
Speaker 3: the features of international in the last year or eighteen
Speaker 3: months has been a very strong value rally which have
Speaker 3: just been ahead wind for US, and I think if
Speaker 3: you look at Japan in particular, where we've had a
Speaker 3: big underweight for many years, as that value rally has
Speaker 3: played through, you've seen a lot of high quality, good
Speaker 3: growth names really fall by the wayside. We've taken holdings
Speaker 3: in a couple over the last six twelve months, and
Speaker 3: I wouldn't be surprised if we buy a couple more
Speaker 3: over the next six twelve months. There are some really interesting,
Speaker 3: high quality, good growth businesses available at pretty attractive prices
Speaker 3: in Japan right now, I think.
Speaker 2: Regardless of the yeah, that'll be changes opening over there yea,
Speaker 2: and maybe not all investrials are current here. Where are you? Yeah,
Speaker 2: I'd agree.
Speaker 1: Well, unfortunately we need to end here, but this is great,
Speaker 1: Tom Lawrence, thanks again for joining us today.
Speaker 3: Thank you David, Thank you Laurena for your time. A
Speaker 3: few questions. We've really enjoyed it.
Speaker 4: Thanks for having.
Speaker 1: Us and Laurent thank you again for being my host.
Speaker 1: I also want to thank our listeners. If you liked
Speaker 1: the episode, please share, subscribe and leave a review. And
Speaker 1: if you'd like to see more of our research on
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Speaker 1: This is David Cone with Inside Active