WEBVTT - Sands Capital’s Menichella on Its Owner Mindset 0:00:14.280 --> 0:00:17.320 Welcome to Inside Active, a podcast about active managers that 0:00:17.400 --> 0:00:20.400 goes beyond sound bites and headlines and looks deeper into 0:00:20.440 --> 0:00:25.239 their processes, challenges and philosophies and security selection. I'm David Cohne, 0:00:25.280 --> 0:00:28.240 i lead Mutual fund and active Research at Bloomberg Intelligence. 0:00:28.520 --> 0:00:32.680 Today my cost is Laurent Dulier, Senior equity strategist at 0:00:32.680 --> 0:00:35.280 Bloomberg Intelligence. Laurent, thanks for joining me today. 0:00:35.640 --> 0:00:36.080 Welcome. 0:00:37.280 --> 0:00:39.720 So last week you published a note on Q one 0:00:39.800 --> 0:00:43.640 earnings in Europe based on earnings calls, what was the 0:00:43.680 --> 0:00:46.440 sentiment like with respect to the different sectors. 0:00:47.280 --> 0:00:51.280 Yeah, so, just for our listener, in terms of context, 0:00:51.760 --> 0:00:56.360 we do track quarterly earnings results for the past five 0:00:56.440 --> 0:00:59.000 years and what is new is that over the past 0:00:59.040 --> 0:01:02.400 twelfth to eighteen month in Europe we have introduced AI 0:01:02.600 --> 0:01:07.600 model which tracks the frequency and the sentiment towards specific 0:01:07.680 --> 0:01:11.920 investment themes. And what is quite interesting in the last 0:01:11.959 --> 0:01:15.200 reporting season is two big trends. The first one we 0:01:15.240 --> 0:01:19.360 have seen a fivefold increase in the frequency for tariff 0:01:19.400 --> 0:01:24.520 related commons and also the collapse in sentiment compared to 0:01:24.560 --> 0:01:27.560 the previous two quarters. And now in terms of sentiment, 0:01:28.000 --> 0:01:31.399 we are towards the level of twenty eighteen in the 0:01:31.440 --> 0:01:35.280 midst of the first US China trade war. And the 0:01:35.319 --> 0:01:40.120 second signal that we saw is we have seen a 0:01:40.160 --> 0:01:45.800 significant plunge in the sentiment around capital expenditures in the 0:01:46.040 --> 0:01:50.120 energy and industrial sector in Europe. We are really at 0:01:50.160 --> 0:01:53.280 the lowest since twenty eighteen as well, and I think 0:01:53.280 --> 0:01:56.120 it shows that the uncertainty and the stop and go 0:01:56.520 --> 0:02:00.720 policy of Donald Trump on tariff do really an impact 0:02:00.720 --> 0:02:05.560 on the actwards spending of companies. So in conclusion, we 0:02:05.680 --> 0:02:08.760 still think that the European equity market may be too 0:02:08.800 --> 0:02:13.600 complacent following its recentrality, and that it may be overlooking 0:02:13.919 --> 0:02:16.519 some of the risks associated to the trade war. 0:02:17.200 --> 0:02:20.960 Great speaking of European markets and the international markets in general, 0:02:21.160 --> 0:02:23.080 I think it's a great time to bring on our guests. 0:02:23.440 --> 0:02:27.520 Danielle Menechela is a portfolio manager and senior research analyst 0:02:27.520 --> 0:02:31.520 at Scance Capital, including the Scance Capital International Growth Strategy 0:02:31.800 --> 0:02:36.919 and subadvisor to the Touchstone Scance Capital International Growth Equity Fund. Danielle, 0:02:37.040 --> 0:02:38.600 thank you so much for joining us. 0:02:38.919 --> 0:02:41.080 Thank you for having me. It's great to meet. 0:02:40.919 --> 0:02:45.560 You, and more this morning before we dive into your strategy. 0:02:45.639 --> 0:02:47.800 We'd love to hear your thoughts on you know, what 0:02:47.880 --> 0:02:51.720 you kind of learned through Q one earnings in Europe? 0:02:51.919 --> 0:02:56.000 Were you seeing you know, similar sentiment at first. 0:02:56.160 --> 0:03:00.520 Sure, we've seen and we've heard a lot more certainty 0:03:00.720 --> 0:03:03.679 as it relates to tariffs, as it relates to sentiment, 0:03:04.400 --> 0:03:08.680 continued uncertainty as it relates to China and geopolitical aspects. 0:03:08.960 --> 0:03:13.360 But I would just point out that the European market 0:03:14.560 --> 0:03:18.120 in a broad sense, may have a lot of exposure 0:03:18.200 --> 0:03:21.200 to businesses that are cyclical like this and that could 0:03:21.240 --> 0:03:25.560 be impacted by this uncertainty. But there are pockets of 0:03:25.760 --> 0:03:28.799 businesses and pockets of areas of growth that aren't seeing 0:03:29.160 --> 0:03:32.359 as much of that uncertainty. So I would just say 0:03:32.360 --> 0:03:35.320 that this is a time in particular when we need 0:03:35.360 --> 0:03:40.520 to be extra focused on choosing the best businesses, the 0:03:40.560 --> 0:03:44.760 ones that that have things like competitive modes and the 0:03:44.840 --> 0:03:48.120 ability to grow in our innovative regardless of what's happening 0:03:48.120 --> 0:03:49.040 in the rest of the world. 0:03:49.720 --> 0:03:53.240 Great, So let's talk about SANS Capital. Is there a 0:03:53.480 --> 0:03:55.360 firm wide investment philosophy? 0:03:55.720 --> 0:03:59.280 Yes, So at SANS Capital we do one thing. We 0:03:59.360 --> 0:04:03.440 invest in leading growth businesses globally our firm was founded 0:04:03.480 --> 0:04:07.360 over thirty years ago in nineteen ninety two. Our approach 0:04:07.520 --> 0:04:11.320 is simply described as having a business owner's mindset to. 0:04:11.320 --> 0:04:13.640 Public equity invest in investing. 0:04:14.280 --> 0:04:16.560 We do not want to be thought of as stock traders, 0:04:16.760 --> 0:04:19.440 but we do want to be thought of as business owners. 0:04:19.880 --> 0:04:20.920 And how do we do that. 0:04:21.400 --> 0:04:26.040 We do bottom up investing by applying deep, fundamental business 0:04:26.080 --> 0:04:30.200 focused research with an aim to identify and select businesses 0:04:30.279 --> 0:04:34.440 with the capacity to generate sustainable, above average earnings growth 0:04:34.800 --> 0:04:37.720 that beat our investment criteria. And then we own those 0:04:37.800 --> 0:04:42.200 businesses and concentrated conviction weighted portfolios over a. 0:04:42.120 --> 0:04:43.240 Long time horizon. 0:04:43.839 --> 0:04:46.960 And we start with growth because it's been our observation 0:04:47.160 --> 0:04:50.719 that over the long run, earning's growth is the dominant 0:04:50.800 --> 0:04:55.160 driver of stock market returns. And while valuation shifts create 0:04:55.240 --> 0:04:59.080 volatility like what we were talking about earlier, and also 0:04:59.200 --> 0:05:01.760 could be paid for in the short term, they tend 0:05:01.760 --> 0:05:04.760 to have a limited impact over the long term. We 0:05:04.839 --> 0:05:09.960 also believe that markets systematically underappreciate the compounding impact of 0:05:10.000 --> 0:05:15.359 both nonlinear and long duration growth businesses, and this differentiation, 0:05:15.760 --> 0:05:20.640 I would say of our investment philosophy enables investors to 0:05:20.720 --> 0:05:25.239 benefit from the compounding of that growth, that multiplier effect 0:05:25.520 --> 0:05:28.919 over a longer time period than others consider. And I 0:05:29.040 --> 0:05:32.320 mentioned growth already. But at SANDS, we choose businesses to 0:05:32.400 --> 0:05:36.800 own by rigorously applying our sixth investment criteria. It's the 0:05:36.800 --> 0:05:40.720 same criteria that we've used since Sam's was founded and 0:05:40.760 --> 0:05:43.880 the same that we use across all of our public strategies. 0:05:44.320 --> 0:05:47.240 So growth is our first criteria. We look for businesses 0:05:47.279 --> 0:05:51.240 that have sustainable, above average earnings growth. The companies also 0:05:51.320 --> 0:05:54.120 need to meet the other five criteria. So Number two 0:05:55.000 --> 0:05:58.599 leadership position in a promising business space, so if a 0:05:58.680 --> 0:06:03.839 space with under lying attractive economics. And this is because 0:06:03.920 --> 0:06:08.440 the disproportionate amount of the reward of any industry accrues 0:06:08.520 --> 0:06:11.600 to the leaders. But that only matters if the leaders 0:06:11.600 --> 0:06:17.599 can achieve attractive returns. Number three significant competitive advantage deep 0:06:17.640 --> 0:06:22.640 motes allow sustainable leadership and growth. Number four clear mission, 0:06:22.839 --> 0:06:27.480 strong management, team, value added focus. Number five financial strength 0:06:27.560 --> 0:06:32.200 of healthy balance sheets, and number six rational valuation relative 0:06:32.320 --> 0:06:36.000 to the market and business prospects. Great. 0:06:36.160 --> 0:06:38.560 So we went through the philosophy. Can you if we 0:06:38.720 --> 0:06:42.400 kind of zero in on the international growth strategy, can 0:06:42.440 --> 0:06:47.480 you walk us through the process of stock selection sure sure. 0:06:47.480 --> 0:06:51.600 So International growth is led by a three person portfolio 0:06:51.720 --> 0:06:56.640 management team that includes pms from our two flagship global strategies. 0:06:57.279 --> 0:07:01.200 The portfolio owns about thirty to thirty five businesses. The 0:07:01.279 --> 0:07:05.040 recommendations for what we own comes from our investment team 0:07:05.240 --> 0:07:09.640 of about twenty analysts across industries, and our top ten 0:07:09.680 --> 0:07:13.640 weights comprise about forty five percent of the portfolio, so 0:07:13.760 --> 0:07:17.040 on average, our holding size is about three percent. And 0:07:17.120 --> 0:07:20.520 what we're doing in this portfolio is we're looking to 0:07:20.600 --> 0:07:25.440 have a balance of higher growth, higher valuation businesses, so 0:07:25.520 --> 0:07:29.840 businesses with a greater cone of outcomes but potentially higher upside, 0:07:30.160 --> 0:07:33.320 and then offset that with a more mature group of 0:07:33.360 --> 0:07:38.520 classic growers. So while you'll notice exposure to some large 0:07:38.520 --> 0:07:43.040 secular trends within our portfolio, we're also cognizant of having 0:07:43.080 --> 0:07:47.160 too much exposure to any singular trend and therefore aim 0:07:47.200 --> 0:07:50.680 to get a diversity of earnings drivers across those thirty 0:07:50.720 --> 0:07:55.320 to thirty five names. So, for example, you'll see names 0:07:55.320 --> 0:07:59.960 that include things as diverse as semiconductor equipment, e commerce, 0:08:00.640 --> 0:08:06.120 extremely high end luxury, discounted consumer retail, live and stream 0:08:06.200 --> 0:08:08.680 music and events, and emerging market banks. And that's just 0:08:08.720 --> 0:08:11.040 to name a few of the things we have exposure to. 0:08:11.760 --> 0:08:15.400 So the result is that we build a high conviction, 0:08:16.000 --> 0:08:21.160 highly concentrated portfolio that looks meaningfully different from the benchmark. 0:08:21.480 --> 0:08:25.200 And I think that's really important when you're investing internationally 0:08:25.800 --> 0:08:32.360 international indices, especially developed ones. They're large, they're broad, and perception, 0:08:33.080 --> 0:08:37.760 perhaps rightfully so, is that they're filled with mediocre, slow 0:08:37.800 --> 0:08:40.880 growing or even declining companies. And for the most part, 0:08:40.920 --> 0:08:44.880 that may be true, but we would argue if you're patient, 0:08:45.400 --> 0:08:47.439 if you go deep, you know where to look. In 0:08:47.520 --> 0:08:51.559 these markets, you can find a top tier of businesses 0:08:51.640 --> 0:08:54.559 that are every bit as high quality and innovative as 0:08:54.600 --> 0:08:56.839 anywhere in the world, and we aim to build a 0:08:56.880 --> 0:08:58.920 portfolio of those gems. 0:08:59.600 --> 0:09:03.040 Makes sense if we go back to the philosophy a 0:09:03.080 --> 0:09:07.199 little bit at the end, you mentioned rational valuation. What 0:09:07.360 --> 0:09:10.199 measures you know, a particular are you looking at. 0:09:10.559 --> 0:09:14.720 Yeah, I'm glad you coned in on the rational valuation 0:09:15.480 --> 0:09:18.600 because that's what it really is. It's we're not looking 0:09:19.080 --> 0:09:22.800 to find great value, or we're not looking to get 0:09:22.800 --> 0:09:25.280 a great deal because a company may or may not 0:09:25.360 --> 0:09:26.440 continue to exist. 0:09:26.840 --> 0:09:30.240 What we're looking for is rational valuation based on. 0:09:30.160 --> 0:09:33.160 How large we believe the business can be over a 0:09:33.200 --> 0:09:35.520 five year period, so how much can it grow in 0:09:35.520 --> 0:09:38.520 that time. And this begins with the strict adherence to 0:09:38.559 --> 0:09:44.240 the six criteria, so quantitative qualitative assessments, consideration of the market, 0:09:44.600 --> 0:09:49.760 the competitive landscape, management, long term strategy, potential, ability to 0:09:49.840 --> 0:09:52.800 cause disruption or to be disrupted. 0:09:52.280 --> 0:09:53.000 And then risks. 0:09:53.679 --> 0:09:59.040 So it's really a combination of analytical rigor and creative thinking. 0:09:59.520 --> 0:10:02.200 And then we discuss and we debate. We have a 0:10:02.240 --> 0:10:05.440 really collaborative research process at SANDS. We have a team 0:10:05.480 --> 0:10:09.120 that has a lot of years of different kinds of experiences, 0:10:09.200 --> 0:10:14.000 you know, different markets, different different sectors, different countries, exposures, 0:10:15.000 --> 0:10:18.680 and so we put all of those people together to 0:10:18.720 --> 0:10:22.200 pride ourselves on a culture of meaningful discourse, you know, 0:10:22.280 --> 0:10:24.800 high trust, share context. And so when we think about 0:10:24.840 --> 0:10:27.840 a rational valuation we're having these debates. We want to 0:10:27.880 --> 0:10:31.440 think about terms. We want to think about it in 0:10:31.520 --> 0:10:35.000 terms of both absolute and relative terms. We want to 0:10:35.040 --> 0:10:37.680 bring in the shared experiences of the team. When it 0:10:37.720 --> 0:10:41.000 comes to risk. We want to focus on the long term, 0:10:41.240 --> 0:10:44.959 what that valuation could be in five years time, and 0:10:45.040 --> 0:10:48.719 what the is the growth rate that would support that valuation. 0:10:49.679 --> 0:10:51.200 And you know, don't get me wrong, I keep saying 0:10:51.280 --> 0:10:54.800 five years, but our analysts and our PM teams are 0:10:54.960 --> 0:10:57.520 really thinking more about in terms. 0:10:57.240 --> 0:10:58.360 Of ten or more years. 0:10:58.559 --> 0:11:04.520 But the actual quantitative valuation is based on fibers. 0:11:06.320 --> 0:11:09.559 Okay, DANIELI, And now I'm going to switch gear a 0:11:09.640 --> 0:11:12.200 little bit and ask you some questions on some of 0:11:12.240 --> 0:11:18.640 the specific sectors where potentially you can find those growth opportunities. 0:11:18.679 --> 0:11:23.280 So the first one, your strategy is massively overweight TMT. 0:11:24.000 --> 0:11:27.400 So is it really a bet on the rollout of 0:11:27.520 --> 0:11:31.160 AI or is it just a coincidence of many growth 0:11:31.200 --> 0:11:37.400 opportunities existing and being concentrated in both sectors. 0:11:37.400 --> 0:11:39.880 Okay, So I'm going to show my age here because 0:11:39.920 --> 0:11:43.199 when you say TMT, I want to say what no, 0:11:43.360 --> 0:11:46.040 because it comes to mind as like cell phone plans 0:11:46.080 --> 0:11:49.599 and fixed line service providers and dial up internet companies. 0:11:49.840 --> 0:11:53.200 But I understand what you're asking, and you're right in 0:11:53.280 --> 0:11:57.480 terms of waiting. As of March thirty first, approximately twenty 0:11:57.520 --> 0:12:00.480 percent of our portfolio businesses or classes by it is 0:12:00.520 --> 0:12:03.760 it versus twelve percent for the benchmark, which is the 0:12:03.880 --> 0:12:08.240 ms AQUI XUS index, by the way, and approximately eighteen 0:12:08.360 --> 0:12:13.520 percent are classified as communications services versus the BENCHMARKT six percent. 0:12:13.920 --> 0:12:17.800 So yes, large overweight, but I wouldn't call that a 0:12:17.920 --> 0:12:20.840 bet on their rollout of AI per se. I mean, 0:12:20.800 --> 0:12:24.320 we're strong believers in AI and the demand for more 0:12:24.559 --> 0:12:28.360 and greater compute, but this portfolio is not built with 0:12:28.559 --> 0:12:31.920 That is the only factor. I keep saying diversity of 0:12:31.960 --> 0:12:36.280 earnings drivers, and you have many different factors driving the 0:12:36.320 --> 0:12:40.320 growth in IT and communications. So thinking of the businesses 0:12:40.360 --> 0:12:44.520 that we own the fall into TMT, they actually benefit 0:12:44.559 --> 0:12:49.840 from quite different secular changes. For example, the retail revolution 0:12:50.000 --> 0:12:54.680 that is e commerce. The pandemic turbocharged e commerce adoption, 0:12:55.280 --> 0:12:57.400 but it still accounts for less than thirty percent of 0:12:57.480 --> 0:13:01.040 total global retail sales. So we own several of the 0:13:01.080 --> 0:13:04.400 global leaders in the e commerce space in different regions. 0:13:04.640 --> 0:13:07.520 We also own one of the key providers of border 0:13:07.559 --> 0:13:13.760 and digital payment services. Another trend would be legacy process improvements. 0:13:14.640 --> 0:13:19.439 So growth investors seek to benefit from change across industries. 0:13:19.600 --> 0:13:24.880 Digitalization and new technologies are upending legacy processes with products 0:13:24.920 --> 0:13:28.520 and services that are better, cheaper, faster than the status quo. 0:13:28.840 --> 0:13:33.080 Factory automation and robotics, computer aided design, digital twins are 0:13:33.120 --> 0:13:36.320 examples of this. We own several businesses in Japan and 0:13:36.360 --> 0:13:39.880 Europe that do that. And then we have the future 0:13:39.960 --> 0:13:44.360 of computing, perhaps the most obvious for AI. Demand for 0:13:44.440 --> 0:13:48.640 computing powers accelerating far faster than most appreciate in our view, 0:13:49.480 --> 0:13:52.960 with new use cases created, this demand's going to require 0:13:53.440 --> 0:13:57.480 new and more efficient ways to access, store, manipulate, process 0:13:57.600 --> 0:14:04.480 data and enabling technologies becoming increasingly complex require higher manufacturing intensity, 0:14:05.280 --> 0:14:08.719 this resulting in pricing power for select businesses positioned a 0:14:08.840 --> 0:14:11.400 key choke points in the semiconductor value chain, so we 0:14:11.480 --> 0:14:16.320 own a view of those, and then probably worth calling 0:14:16.360 --> 0:14:20.800 out the truly diverse businesses in what we classify as 0:14:21.680 --> 0:14:24.560 as our communications holdings. One of them is a large 0:14:24.560 --> 0:14:28.520 e commerce slash gaining business, but we also have exposure 0:14:28.720 --> 0:14:31.479 to the rights for one of the fastest growing viewerships 0:14:31.480 --> 0:14:35.480 and sports with strong potential for modernization. And we have 0:14:35.520 --> 0:14:38.720 some businesses exposed to streaming and watching live music and 0:14:38.760 --> 0:14:40.479 other live events. 0:14:41.920 --> 0:14:45.880 Okay, so it may be more media oriented rather than 0:14:47.560 --> 0:14:52.960 telecom oriented. One of also, when I look at your strategy, 0:14:53.680 --> 0:14:57.640 it seems to be underweight elsecare, which is often viewed 0:14:57.680 --> 0:15:00.880 as a growth sector and now it is different at 0:15:00.920 --> 0:15:06.040 a reasonable valuation. Do you think that there are reasons 0:15:06.480 --> 0:15:11.160 to be conscious or underweight this sector at this point 0:15:11.200 --> 0:15:14.400 in time, or do you think that the policy of 0:15:14.520 --> 0:15:18.200 the Trump administration, which seems to be quite a stein 0:15:19.080 --> 0:15:23.040 towards the sector, may be an impediment to invest in it. 0:15:23.920 --> 0:15:27.280 Yeah, I think there are reasons why we are underweight. 0:15:27.800 --> 0:15:31.120 Ten to fifteen years ago, healthcare sector was a rich 0:15:31.160 --> 0:15:35.320 opportunity set for finding growth businesses that matter criteria, but 0:15:35.440 --> 0:15:38.280 this really hasn't been the case in recent years. Although 0:15:38.280 --> 0:15:42.720 we do have some exposure. We own a CDMO business, 0:15:43.160 --> 0:15:47.400 a glass tools company that sells to pharmaceutical companies. We've 0:15:47.400 --> 0:15:52.920 recently purchased an innovative software hardware razor razor plate model 0:15:53.440 --> 0:15:57.760 for radiologists. So it is possible to find special businesses 0:15:57.800 --> 0:16:00.840 within healthcare, but we don't expect this to be a 0:16:00.920 --> 0:16:04.240 material sector for us going forward. And part of this 0:16:04.800 --> 0:16:08.000 is due to the fact that most of the value creation, 0:16:08.760 --> 0:16:13.240 especially within the innovative areas of therapeutics and diagnostics, is 0:16:13.280 --> 0:16:18.360 occurring while the businesses are still private. Additionally, healthcare businesses 0:16:18.520 --> 0:16:21.320 tend to be less capable of what we say in 0:16:21.400 --> 0:16:24.880 our jargon making their own weather than we'd like to 0:16:24.880 --> 0:16:26.160 see for our businesses. 0:16:26.200 --> 0:16:26.880 So this is. 0:16:27.560 --> 0:16:32.920 Largely due to the outsized influence that regulation, reimbursement rates, 0:16:33.320 --> 0:16:36.760 even political whims can have on these businesses, which can 0:16:36.800 --> 0:16:41.000 materially affect their earnings power and their valuation. And they're 0:16:41.080 --> 0:16:44.720 largely outside of the businesses control. And then the last 0:16:44.720 --> 0:16:48.160 thing I would point out is that healthcare traditionally has 0:16:48.200 --> 0:16:51.320 been thought of as a more defensive sector that provides 0:16:51.400 --> 0:16:55.600 ballast to an overall portfolio. And this is not what 0:16:55.640 --> 0:16:59.520 we observed in recent years, especially going through COVID and 0:16:59.520 --> 0:17:02.880 coming out of it. There's been more volatility and less 0:17:02.880 --> 0:17:05.080 of the diversification benefit than in the past. 0:17:06.640 --> 0:17:10.080 Interesting, And I mean, when we look at the ottest 0:17:10.720 --> 0:17:17.199 theme in Europe, it's definitely defense investing in defense companies. 0:17:18.320 --> 0:17:23.040 You seem to have no investment in this theme. I mean, 0:17:23.080 --> 0:17:25.760 do you think it is because it is massively overplayed 0:17:26.119 --> 0:17:31.320 and so the rational valuation does not exist in this 0:17:31.560 --> 0:17:34.159 industry or is it because you do not want to 0:17:34.240 --> 0:17:36.680 invest in defense stocks? 0:17:37.480 --> 0:17:39.600 In defense stocks? Is that what you said? 0:17:40.080 --> 0:17:40.320 Yeah? 0:17:40.640 --> 0:17:41.360 Yeah, defense? 0:17:41.520 --> 0:17:49.600 Yeah, So defense companies the other button topic. So European 0:17:49.600 --> 0:17:53.800 and Asian defense companies are an area of active research 0:17:53.840 --> 0:17:57.240 focus for US. We should also note that Scance Capital 0:17:57.320 --> 0:18:01.800 does own some defense related businesses US our strategies like 0:18:02.000 --> 0:18:07.480 our private equity strategies, but we've not invested in any 0:18:07.840 --> 0:18:12.360 international growth and that's partially because historically we've found these 0:18:12.400 --> 0:18:16.440 businesses to be more controversial from the client perspective. 0:18:17.160 --> 0:18:19.240 But the overwhelming reason. 0:18:18.960 --> 0:18:23.320 We haven't invested in defense names for the portfolio is 0:18:23.640 --> 0:18:27.840 we haven't completed research that suggests these businesses meet our 0:18:27.880 --> 0:18:31.719 six criteria. So business spaces that tend to be cyclical, 0:18:32.400 --> 0:18:35.879 where companies cannot create their own demand, they tend to 0:18:35.880 --> 0:18:39.040 be unattractive to US, and defense companies tend to be 0:18:39.080 --> 0:18:42.440 beholden to government wins. So additionally, a lot of these 0:18:42.440 --> 0:18:48.200 companies are large, with many different divisions and segments, which 0:18:48.240 --> 0:18:51.400 tends to cloud the growth and dampen the overall overall 0:18:51.440 --> 0:18:56.360 top line. For sure, you could make money in this space, 0:18:56.440 --> 0:18:59.960 and people definitely have been doing that recently while you're 0:19:00.119 --> 0:19:03.919 p and defense businesses have garnered headlines in recent in 0:19:03.960 --> 0:19:07.360 recent months. At this point, we're comfortable with our lack 0:19:07.400 --> 0:19:12.199 of representation, especially considering what valuations have done, and that 0:19:12.359 --> 0:19:15.880 I would classify these these businesses in general as being 0:19:16.000 --> 0:19:17.600 lower growth opportunities. 0:19:19.800 --> 0:19:23.080 Now we've talked about the types of companies you're looking for. 0:19:24.119 --> 0:19:26.560 You know, is there an average length of how long 0:19:26.640 --> 0:19:28.679 you hold them or is it you know, I imagine 0:19:28.680 --> 0:19:31.720 it's dependent on the company, but you know, is there 0:19:31.760 --> 0:19:32.800 like a number that's typical. 0:19:33.160 --> 0:19:37.240 Yeah, we try to own businesses on average for five years. 0:19:37.880 --> 0:19:41.720 We've owned some for ten, some even for fifteen, but 0:19:41.800 --> 0:19:44.600 on average are holding periods five years, which gives us 0:19:44.920 --> 0:19:47.320 a turnover of about twenty percent. 0:19:50.320 --> 0:19:54.160 I mean, regarding tarifs, do you think we have past 0:19:54.359 --> 0:19:59.720 maximum uncertainty and market relativity or are we currently just 0:20:00.000 --> 0:20:01.399 a bear markets run. 0:20:03.080 --> 0:20:04.560 The infamous tariff question. 0:20:05.720 --> 0:20:08.440 We've had a lot of that over the past few months, 0:20:09.000 --> 0:20:11.280 and unfortunately, I don't think I have an answer that 0:20:11.359 --> 0:20:15.800 you want, Like, it's a great question, but I can't 0:20:15.840 --> 0:20:18.680 answer it with any certainty. But it does get at 0:20:18.680 --> 0:20:22.600 the heart of what we think about investing at scance Capital. 0:20:23.359 --> 0:20:24.399 The short answers. 0:20:24.840 --> 0:20:26.960 We don't pretend to have a crystal ball on macro 0:20:27.119 --> 0:20:30.400 variables or tariffs, volatility, the market's next move. 0:20:31.080 --> 0:20:34.240 What we do know is that uncertainty is a constant 0:20:34.240 --> 0:20:34.840 in markets. 0:20:35.320 --> 0:20:39.960 So whether it's tariffs today, interest rates tomorrow, geopolitical tensions 0:20:40.000 --> 0:20:44.159 next year. There's always something that investors in the short term, 0:20:44.440 --> 0:20:48.199 and for sure tariffs have done that. But when you 0:20:48.280 --> 0:20:51.320 only have to own a handful of businesses and you 0:20:51.440 --> 0:20:57.159 choose ones with strong competitive modes that are growing in 0:20:57.200 --> 0:21:01.400 attractive business spaces, they have market leadership. That's the definition 0:21:01.480 --> 0:21:04.720 of competitive advantage, the ability to pass on prices, to 0:21:04.800 --> 0:21:09.679 withstand demand disruption, the ability to continue to invest and 0:21:09.800 --> 0:21:13.320 win market share. So we believe that's our best protection 0:21:13.480 --> 0:21:17.679 against uncertainty. So rather than trying to time the market, 0:21:17.880 --> 0:21:20.840 call the top, call the bottom, we stay focused on 0:21:20.920 --> 0:21:25.880 identifying those businesses, yes, understanding the risks, but also being 0:21:25.920 --> 0:21:29.760 able to stay focused and maintain conviction during these difficult 0:21:29.960 --> 0:21:32.840 emotional times. And that's what they are, they're emotional times. 0:21:33.600 --> 0:21:36.840 So are we in a bear market rally maybe, or 0:21:36.880 --> 0:21:38.960 maybe we're at the beginning of a new bull cycle. 0:21:39.520 --> 0:21:42.479 What matters more to us is whether the businesses we 0:21:42.560 --> 0:21:47.399 own are continuing to innovate, gain market share, reinvest intelligently. 0:21:48.119 --> 0:21:52.600 And so we have we passed max uncertainty in my opinion, yes. 0:21:53.000 --> 0:21:56.679 For a short time, but probably not overall. 0:21:57.400 --> 0:22:03.680 However, for disciplined, business focused investors, Enduring uncertainty is part 0:22:03.720 --> 0:22:06.400 of the job, and that's part of the opportunity as well. 0:22:07.119 --> 0:22:10.240 As a follow up, when you discuss with the management 0:22:10.440 --> 0:22:14.920 of the companies you owned, have you noticed a change 0:22:15.400 --> 0:22:18.320 in the tone on how they speak about their market, 0:22:18.960 --> 0:22:21.399 their positioning because of tariffs. 0:22:24.520 --> 0:22:27.080 You know, I think there's been a lot of writing 0:22:27.400 --> 0:22:31.080 on the wall in terms of a potential uncertainty that 0:22:31.080 --> 0:22:33.040 could come out of terrifs for a while. I mean, 0:22:33.280 --> 0:22:36.359 I don't think this was new, something new that happened 0:22:36.400 --> 0:22:38.879 three months ago, and so a lot of the businesses 0:22:38.880 --> 0:22:41.199 that we owed it, they, first of all, I have, 0:22:41.400 --> 0:22:46.080 you know, sort of limited exposure to to these things 0:22:46.080 --> 0:22:50.159 that really are impacted. But they've been thinking about it, 0:22:50.200 --> 0:22:53.159 and so they have been diversifying their supply chains, and 0:22:53.200 --> 0:22:57.560 they have been building factories in new places, and they've 0:22:57.560 --> 0:23:01.880 been doing things to try to minimize the impact of terriffs. 0:23:01.880 --> 0:23:05.600 But overall, these are companies that have such leadership and 0:23:05.800 --> 0:23:11.679 have sell things or services that people need and that 0:23:11.720 --> 0:23:14.880 they're going to pay, and there really is an elastic 0:23:14.920 --> 0:23:17.360 demand for it, so they can pass on the prices 0:23:17.520 --> 0:23:23.240 pretty easily. But certainly everyone who speaks to these management 0:23:23.280 --> 0:23:26.080 teams when you're in investor groups, they're asking about tariffs 0:23:26.080 --> 0:23:29.560 and the impact of tariffs, and the. 0:23:29.520 --> 0:23:32.040 Companies are being thoughtful about it. They're being honest. 0:23:32.119 --> 0:23:34.760 They're saying, we don't really know what ultimately will happen, 0:23:34.840 --> 0:23:38.119 but we have been trying to position ourselves to be 0:23:38.600 --> 0:23:40.400 flexible and to maneuver quickly. 0:23:41.680 --> 0:23:42.400 And then there's some. 0:23:42.359 --> 0:23:46.159 Businesses that we own that actually could benefit from tariffs. 0:23:46.400 --> 0:23:49.920 You know, these automation companies that we own in Japan. 0:23:50.600 --> 0:23:56.040 These are companies that will allow companies to build manufacturing 0:23:56.440 --> 0:24:00.240 facilities and lines that use less labor, that are you know, 0:24:00.359 --> 0:24:04.200 lower costs, that are more efficient, that have less waste, 0:24:04.280 --> 0:24:04.840 and so. 0:24:04.920 --> 0:24:06.080 They will improve. 0:24:06.920 --> 0:24:10.040 So not only are they benefiting from building out these 0:24:10.080 --> 0:24:12.960 new lines that are closer to home, but they're also 0:24:13.000 --> 0:24:17.840 benefiting from trying to bring down prices, whereas otherwise they 0:24:17.840 --> 0:24:18.520 would be going up. 0:24:20.800 --> 0:24:24.520 Now, your strategy is pretty concentrated, and so I was 0:24:24.600 --> 0:24:28.120 just wondering if there are any part of your process 0:24:28.200 --> 0:24:31.119 that looks at risk, you know, just the risk that 0:24:31.160 --> 0:24:34.280 could come from a concentrated strategy or just risk in general. 0:24:36.760 --> 0:24:42.240 So let me first say that although some investors assert 0:24:42.320 --> 0:24:45.960 that a concentrated strategy poses greater risk in terms of 0:24:46.160 --> 0:24:50.800 higher short term volatility. We believe that a portfolio diluted 0:24:50.840 --> 0:24:54.040 with a large number of holdings could introduce the risk 0:24:54.080 --> 0:24:57.399 of not knowing each of those businesses well enough, or 0:24:57.440 --> 0:25:00.879 having to choose businesses that don't really need our criteria, 0:25:00.960 --> 0:25:03.320 like you can't just own the market leader. The more 0:25:03.359 --> 0:25:06.120 companies you own, the more likely it is you're also 0:25:06.160 --> 0:25:08.240 going to own the number two or the one that's 0:25:08.280 --> 0:25:11.720 not as good. So on average, and also on average, 0:25:11.760 --> 0:25:15.399 our analysts cover a single digit number of businesses and 0:25:15.440 --> 0:25:19.480 they cover them for years, so our pms go deep 0:25:20.440 --> 0:25:23.280 in that ongoing research with analysts, and we assert that 0:25:23.320 --> 0:25:28.879 we own our businesses more than we know our businesses. 0:25:28.359 --> 0:25:29.080 More than most. 0:25:30.200 --> 0:25:34.680 However, to address to your questions specifically, we implement risk 0:25:34.920 --> 0:25:39.359 mitigation tools that help us understand the volatility profile of 0:25:39.400 --> 0:25:43.360 our businesses throughout the cycle, as well as how correlated 0:25:43.720 --> 0:25:48.240 our businesses are to each other. I mentioned earlier that 0:25:48.280 --> 0:25:50.520 we look to have a diversity of earnings drivers or 0:25:50.560 --> 0:25:54.440