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 cost is Laurent Dulier, Senior equity strategist at
Speaker 1: Bloomberg Intelligence. Laurent, thanks for joining me today.
Speaker 2: Welcome.
Speaker 1: So last week you published a note on Q one
Speaker 1: earnings in Europe based on earnings calls, what was the
Speaker 1: sentiment like with respect to the different sectors.
Speaker 2: Yeah, so, just for our listener, in terms of context,
Speaker 2: we do track quarterly earnings results for the past five
Speaker 2: years and what is new is that over the past
Speaker 2: twelfth to eighteen month in Europe we have introduced AI
Speaker 2: model which tracks the frequency and the sentiment towards specific
Speaker 2: investment themes. And what is quite interesting in the last
Speaker 2: reporting season is two big trends. The first one we
Speaker 2: have seen a fivefold increase in the frequency for tariff
Speaker 2: related commons and also the collapse in sentiment compared to
Speaker 2: the previous two quarters. And now in terms of sentiment,
Speaker 2: we are towards the level of twenty eighteen in the
Speaker 2: midst of the first US China trade war. And the
Speaker 2: second signal that we saw is we have seen a
Speaker 2: significant plunge in the sentiment around capital expenditures in the
Speaker 2: energy and industrial sector in Europe. We are really at
Speaker 2: the lowest since twenty eighteen as well, and I think
Speaker 2: it shows that the uncertainty and the stop and go
Speaker 2: policy of Donald Trump on tariff do really an impact
Speaker 2: on the actwards spending of companies. So in conclusion, we
Speaker 2: still think that the European equity market may be too
Speaker 2: complacent following its recentrality, and that it may be overlooking
Speaker 2: some of the risks associated to the trade war.
Speaker 3: Great speaking of European markets and the international markets in general,
Speaker 3: I think it's a great time to bring on our guests.
Speaker 3: Danielle Menechela is a portfolio manager and senior research analyst
Speaker 3: at Scance Capital, including the Scance Capital International Growth Strategy
Speaker 3: and subadvisor to the Touchstone Scance Capital International Growth Equity Fund. Danielle,
Speaker 3: thank you so much for joining us.
Speaker 4: Thank you for having me. It's great to meet.
Speaker 1: You, and more this morning before we dive into your strategy.
Speaker 1: We'd love to hear your thoughts on you know, what
Speaker 1: you kind of learned through Q one earnings in Europe?
Speaker 1: Were you seeing you know, similar sentiment at first.
Speaker 5: Sure, we've seen and we've heard a lot more certainty
Speaker 5: as it relates to tariffs, as it relates to sentiment,
Speaker 5: continued uncertainty as it relates to China and geopolitical aspects.
Speaker 5: But I would just point out that the European market
Speaker 5: in a broad sense, may have a lot of exposure
Speaker 5: to businesses that are cyclical like this and that could
Speaker 5: be impacted by this uncertainty. But there are pockets of
Speaker 5: businesses and pockets of areas of growth that aren't seeing
Speaker 5: as much of that uncertainty. So I would just say
Speaker 5: that this is a time in particular when we need
Speaker 5: to be extra focused on choosing the best businesses, the
Speaker 5: ones that that have things like competitive modes and the
Speaker 5: ability to grow in our innovative regardless of what's happening
Speaker 5: in the rest of the world.
Speaker 1: Great, So let's talk about SANS Capital. Is there a
Speaker 1: firm wide investment philosophy?
Speaker 5: Yes, So at SANS Capital we do one thing. We
Speaker 5: invest in leading growth businesses globally our firm was founded
Speaker 5: over thirty years ago in nineteen ninety two. Our approach
Speaker 5: is simply described as having a business owner's mindset to.
Speaker 4: Public equity invest in investing.
Speaker 5: We do not want to be thought of as stock traders,
Speaker 5: but we do want to be thought of as business owners.
Speaker 4: And how do we do that.
Speaker 5: We do bottom up investing by applying deep, fundamental business
Speaker 5: focused research with an aim to identify and select businesses
Speaker 5: with the capacity to generate sustainable, above average earnings growth
Speaker 5: that beat our investment criteria. And then we own those
Speaker 5: businesses and concentrated conviction weighted portfolios over a.
Speaker 4: Long time horizon.
Speaker 5: And we start with growth because it's been our observation
Speaker 5: that over the long run, earning's growth is the dominant
Speaker 5: driver of stock market returns. And while valuation shifts create
Speaker 5: volatility like what we were talking about earlier, and also
Speaker 5: could be paid for in the short term, they tend
Speaker 5: to have a limited impact over the long term. We
Speaker 5: also believe that markets systematically underappreciate the compounding impact of
Speaker 5: both nonlinear and long duration growth businesses, and this differentiation,
Speaker 5: I would say of our investment philosophy enables investors to
Speaker 5: benefit from the compounding of that growth, that multiplier effect
Speaker 5: over a longer time period than others consider. And I
Speaker 5: mentioned growth already. But at SANDS, we choose businesses to
Speaker 5: own by rigorously applying our sixth investment criteria. It's the
Speaker 5: same criteria that we've used since Sam's was founded and
Speaker 5: the same that we use across all of our public strategies.
Speaker 5: So growth is our first criteria. We look for businesses
Speaker 5: that have sustainable, above average earnings growth. The companies also
Speaker 5: need to meet the other five criteria. So Number two
Speaker 5: leadership position in a promising business space, so if a
Speaker 5: space with under lying attractive economics. And this is because
Speaker 5: the disproportionate amount of the reward of any industry accrues
Speaker 5: to the leaders. But that only matters if the leaders
Speaker 5: can achieve attractive returns. Number three significant competitive advantage deep
Speaker 5: motes allow sustainable leadership and growth. Number four clear mission,
Speaker 5: strong management, team, value added focus. Number five financial strength
Speaker 5: of healthy balance sheets, and number six rational valuation relative
Speaker 5: to the market and business prospects. Great.
Speaker 1: So we went through the philosophy. Can you if we
Speaker 1: kind of zero in on the international growth strategy, can
Speaker 1: you walk us through the process of stock selection sure sure.
Speaker 5: So International growth is led by a three person portfolio
Speaker 5: management team that includes pms from our two flagship global strategies.
Speaker 5: The portfolio owns about thirty to thirty five businesses. The
Speaker 5: recommendations for what we own comes from our investment team
Speaker 5: of about twenty analysts across industries, and our top ten
Speaker 5: weights comprise about forty five percent of the portfolio, so
Speaker 5: on average, our holding size is about three percent. And
Speaker 5: what we're doing in this portfolio is we're looking to
Speaker 5: have a balance of higher growth, higher valuation businesses, so
Speaker 5: businesses with a greater cone of outcomes but potentially higher upside,
Speaker 5: and then offset that with a more mature group of
Speaker 5: classic growers. So while you'll notice exposure to some large
Speaker 5: secular trends within our portfolio, we're also cognizant of having
Speaker 5: too much exposure to any singular trend and therefore aim
Speaker 5: to get a diversity of earnings drivers across those thirty
Speaker 5: to thirty five names. So, for example, you'll see names
Speaker 5: that include things as diverse as semiconductor equipment, e commerce,
Speaker 5: extremely high end luxury, discounted consumer retail, live and stream
Speaker 5: music and events, and emerging market banks. And that's just
Speaker 5: to name a few of the things we have exposure to.
Speaker 5: So the result is that we build a high conviction,
Speaker 5: highly concentrated portfolio that looks meaningfully different from the benchmark.
Speaker 5: And I think that's really important when you're investing internationally
Speaker 5: international indices, especially developed ones. They're large, they're broad, and perception,
Speaker 5: perhaps rightfully so, is that they're filled with mediocre, slow
Speaker 5: growing or even declining companies. And for the most part,
Speaker 5: that may be true, but we would argue if you're patient,
Speaker 5: if you go deep, you know where to look. In
Speaker 5: these markets, you can find a top tier of businesses
Speaker 5: that are every bit as high quality and innovative as
Speaker 5: anywhere in the world, and we aim to build a
Speaker 5: portfolio of those gems.
Speaker 1: Makes sense if we go back to the philosophy a
Speaker 1: little bit at the end, you mentioned rational valuation. What
Speaker 1: measures you know, a particular are you looking at.
Speaker 5: Yeah, I'm glad you coned in on the rational valuation
Speaker 5: because that's what it really is. It's we're not looking
Speaker 5: to find great value, or we're not looking to get
Speaker 5: a great deal because a company may or may not
Speaker 5: continue to exist.
Speaker 4: What we're looking for is rational valuation based on.
Speaker 5: How large we believe the business can be over a
Speaker 5: five year period, so how much can it grow in
Speaker 5: that time. And this begins with the strict adherence to
Speaker 5: the six criteria, so quantitative qualitative assessments, consideration of the market,
Speaker 5: the competitive landscape, management, long term strategy, potential, ability to
Speaker 5: cause disruption or to be disrupted.
Speaker 4: And then risks.
Speaker 5: So it's really a combination of analytical rigor and creative thinking.
Speaker 5: And then we discuss and we debate. We have a
Speaker 5: really collaborative research process at SANDS. We have a team
Speaker 5: that has a lot of years of different kinds of experiences,
Speaker 5: you know, different markets, different different sectors, different countries, exposures,
Speaker 5: and so we put all of those people together to
Speaker 5: pride ourselves on a culture of meaningful discourse, you know,
Speaker 5: high trust, share context. And so when we think about
Speaker 5: a rational valuation we're having these debates. We want to
Speaker 5: think about terms. We want to think about it in
Speaker 5: terms of both absolute and relative terms. We want to
Speaker 5: bring in the shared experiences of the team. When it
Speaker 5: comes to risk. We want to focus on the long term,
Speaker 5: what that valuation could be in five years time, and
Speaker 5: what the is the growth rate that would support that valuation.
Speaker 5: And you know, don't get me wrong, I keep saying
Speaker 5: five years, but our analysts and our PM teams are
Speaker 5: really thinking more about in terms.
Speaker 4: Of ten or more years.
Speaker 5: But the actual quantitative valuation is based on fibers.
Speaker 2: Okay, DANIELI, And now I'm going to switch gear a
Speaker 2: little bit and ask you some questions on some of
Speaker 2: the specific sectors where potentially you can find those growth opportunities.
Speaker 2: So the first one, your strategy is massively overweight TMT.
Speaker 2: So is it really a bet on the rollout of
Speaker 2: AI or is it just a coincidence of many growth
Speaker 2: opportunities existing and being concentrated in both sectors.
Speaker 5: Okay, So I'm going to show my age here because
Speaker 5: when you say TMT, I want to say what no,
Speaker 5: because it comes to mind as like cell phone plans
Speaker 5: and fixed line service providers and dial up internet companies.
Speaker 5: But I understand what you're asking, and you're right in
Speaker 5: terms of waiting. As of March thirty first, approximately twenty
Speaker 5: percent of our portfolio businesses or classes by it is
Speaker 5: it versus twelve percent for the benchmark, which is the
Speaker 5: ms AQUI XUS index, by the way, and approximately eighteen
Speaker 5: percent are classified as communications services versus the BENCHMARKT six percent.
Speaker 5: So yes, large overweight, but I wouldn't call that a
Speaker 5: bet on their rollout of AI per se. I mean,
Speaker 5: we're strong believers in AI and the demand for more
Speaker 5: and greater compute, but this portfolio is not built with
Speaker 5: That is the only factor. I keep saying diversity of
Speaker 5: earnings drivers, and you have many different factors driving the
Speaker 5: growth in IT and communications. So thinking of the businesses
Speaker 5: that we own the fall into TMT, they actually benefit
Speaker 5: from quite different secular changes. For example, the retail revolution
Speaker 5: that is e commerce. The pandemic turbocharged e commerce adoption,
Speaker 5: but it still accounts for less than thirty percent of
Speaker 5: total global retail sales. So we own several of the
Speaker 5: global leaders in the e commerce space in different regions.
Speaker 5: We also own one of the key providers of border
Speaker 5: and digital payment services. Another trend would be legacy process improvements.
Speaker 5: So growth investors seek to benefit from change across industries.
Speaker 5: Digitalization and new technologies are upending legacy processes with products
Speaker 5: and services that are better, cheaper, faster than the status quo.
Speaker 5: Factory automation and robotics, computer aided design, digital twins are
Speaker 5: examples of this. We own several businesses in Japan and
Speaker 5: Europe that do that. And then we have the future
Speaker 5: of computing, perhaps the most obvious for AI. Demand for
Speaker 5: computing powers accelerating far faster than most appreciate in our view,
Speaker 5: with new use cases created, this demand's going to require
Speaker 5: new and more efficient ways to access, store, manipulate, process
Speaker 5: data and enabling technologies becoming increasingly complex require higher manufacturing intensity,
Speaker 5: this resulting in pricing power for select businesses positioned a
Speaker 5: key choke points in the semiconductor value chain, so we
Speaker 5: own a view of those, and then probably worth calling
Speaker 5: out the truly diverse businesses in what we classify as
Speaker 5: as our communications holdings. One of them is a large
Speaker 5: e commerce slash gaining business, but we also have exposure
Speaker 5: to the rights for one of the fastest growing viewerships
Speaker 5: and sports with strong potential for modernization. And we have
Speaker 5: some businesses exposed to streaming and watching live music and
Speaker 5: other live events.
Speaker 2: Okay, so it may be more media oriented rather than
Speaker 2: telecom oriented. One of also, when I look at your strategy,
Speaker 2: it seems to be underweight elsecare, which is often viewed
Speaker 2: as a growth sector and now it is different at
Speaker 2: a reasonable valuation. Do you think that there are reasons
Speaker 2: to be conscious or underweight this sector at this point
Speaker 2: in time, or do you think that the policy of
Speaker 2: the Trump administration, which seems to be quite a stein
Speaker 2: towards the sector, may be an impediment to invest in it.
Speaker 5: Yeah, I think there are reasons why we are underweight.
Speaker 5: Ten to fifteen years ago, healthcare sector was a rich
Speaker 5: opportunity set for finding growth businesses that matter criteria, but
Speaker 5: this really hasn't been the case in recent years. Although
Speaker 5: we do have some exposure. We own a CDMO business,
Speaker 5: a glass tools company that sells to pharmaceutical companies. We've
Speaker 5: recently purchased an innovative software hardware razor razor plate model
Speaker 5: for radiologists. So it is possible to find special businesses
Speaker 5: within healthcare, but we don't expect this to be a
Speaker 5: material sector for us going forward. And part of this
Speaker 5: is due to the fact that most of the value creation,
Speaker 5: especially within the innovative areas of therapeutics and diagnostics, is
Speaker 5: occurring while the businesses are still private. Additionally, healthcare businesses
Speaker 5: tend to be less capable of what we say in
Speaker 5: our jargon making their own weather than we'd like to
Speaker 5: see for our businesses.
Speaker 4: So this is.
Speaker 5: Largely due to the outsized influence that regulation, reimbursement rates,
Speaker 5: even political whims can have on these businesses, which can
Speaker 5: materially affect their earnings power and their valuation. And they're
Speaker 5: largely outside of the businesses control. And then the last
Speaker 5: thing I would point out is that healthcare traditionally has
Speaker 5: been thought of as a more defensive sector that provides
Speaker 5: ballast to an overall portfolio. And this is not what
Speaker 5: we observed in recent years, especially going through COVID and
Speaker 5: coming out of it. There's been more volatility and less
Speaker 5: of the diversification benefit than in the past.
Speaker 2: Interesting, And I mean, when we look at the ottest
Speaker 2: theme in Europe, it's definitely defense investing in defense companies.
Speaker 2: You seem to have no investment in this theme. I mean,
Speaker 2: do you think it is because it is massively overplayed
Speaker 2: and so the rational valuation does not exist in this
Speaker 2: industry or is it because you do not want to
Speaker 2: invest in defense stocks?
Speaker 4: In defense stocks? Is that what you said?
Speaker 2: Yeah?
Speaker 4: Yeah, defense?
Speaker 5: Yeah, So defense companies the other button topic. So European
Speaker 5: and Asian defense companies are an area of active research
Speaker 5: focus for US. We should also note that Scance Capital
Speaker 5: does own some defense related businesses US our strategies like
Speaker 5: our private equity strategies, but we've not invested in any
Speaker 5: international growth and that's partially because historically we've found these
Speaker 5: businesses to be more controversial from the client perspective.
Speaker 4: But the overwhelming reason.
Speaker 5: We haven't invested in defense names for the portfolio is
Speaker 5: we haven't completed research that suggests these businesses meet our
Speaker 5: six criteria. So business spaces that tend to be cyclical,
Speaker 5: where companies cannot create their own demand, they tend to
Speaker 5: be unattractive to US, and defense companies tend to be
Speaker 5: beholden to government wins. So additionally, a lot of these
Speaker 5: companies are large, with many different divisions and segments, which
Speaker 5: tends to cloud the growth and dampen the overall overall
Speaker 5: top line. For sure, you could make money in this space,
Speaker 5: and people definitely have been doing that recently while you're
Speaker 5: p and defense businesses have garnered headlines in recent in
Speaker 5: recent months. At this point, we're comfortable with our lack
Speaker 5: of representation, especially considering what valuations have done, and that
Speaker 5: I would classify these these businesses in general as being
Speaker 5: lower growth opportunities.
Speaker 1: Now we've talked about the types of companies you're looking for.
Speaker 1: You know, is there an average length of how long
Speaker 1: you hold them or is it you know, I imagine
Speaker 1: it's dependent on the company, but you know, is there
Speaker 1: like a number that's typical.
Speaker 5: Yeah, we try to own businesses on average for five years.
Speaker 5: We've owned some for ten, some even for fifteen, but
Speaker 5: on average are holding periods five years, which gives us
Speaker 5: a turnover of about twenty percent.
Speaker 2: I mean, regarding tarifs, do you think we have past
Speaker 2: maximum uncertainty and market relativity or are we currently just
Speaker 2: a bear markets run.
Speaker 4: The infamous tariff question.
Speaker 5: We've had a lot of that over the past few months,
Speaker 5: and unfortunately, I don't think I have an answer that
Speaker 5: you want, Like, it's a great question, but I can't
Speaker 5: answer it with any certainty. But it does get at
Speaker 5: the heart of what we think about investing at scance Capital.
Speaker 4: The short answers.
Speaker 5: We don't pretend to have a crystal ball on macro
Speaker 5: variables or tariffs, volatility, the market's next move.
Speaker 4: What we do know is that uncertainty is a constant
Speaker 4: in markets.
Speaker 5: So whether it's tariffs today, interest rates tomorrow, geopolitical tensions
Speaker 5: next year. There's always something that investors in the short term,
Speaker 5: and for sure tariffs have done that. But when you
Speaker 5: only have to own a handful of businesses and you
Speaker 5: choose ones with strong competitive modes that are growing in
Speaker 5: attractive business spaces, they have market leadership. That's the definition
Speaker 5: of competitive advantage, the ability to pass on prices, to
Speaker 5: withstand demand disruption, the ability to continue to invest and
Speaker 5: win market share. So we believe that's our best protection
Speaker 5: against uncertainty. So rather than trying to time the market,
Speaker 5: call the top, call the bottom, we stay focused on
Speaker 5: identifying those businesses, yes, understanding the risks, but also being
Speaker 5: able to stay focused and maintain conviction during these difficult
Speaker 5: emotional times. And that's what they are, they're emotional times.
Speaker 5: So are we in a bear market rally maybe, or
Speaker 5: maybe we're at the beginning of a new bull cycle.
Speaker 5: What matters more to us is whether the businesses we
Speaker 5: own are continuing to innovate, gain market share, reinvest intelligently.
Speaker 5: And so we have we passed max uncertainty in my opinion, yes.
Speaker 4: For a short time, but probably not overall.
Speaker 5: However, for disciplined, business focused investors, Enduring uncertainty is part
Speaker 5: of the job, and that's part of the opportunity as well.
Speaker 2: As a follow up, when you discuss with the management
Speaker 2: of the companies you owned, have you noticed a change
Speaker 2: in the tone on how they speak about their market,
Speaker 2: their positioning because of tariffs.
Speaker 5: You know, I think there's been a lot of writing
Speaker 5: on the wall in terms of a potential uncertainty that
Speaker 5: could come out of terrifs for a while. I mean,
Speaker 5: I don't think this was new, something new that happened
Speaker 5: three months ago, and so a lot of the businesses
Speaker 5: that we owed it, they, first of all, I have,
Speaker 5: you know, sort of limited exposure to to these things
Speaker 5: that really are impacted. But they've been thinking about it,
Speaker 5: and so they have been diversifying their supply chains, and
Speaker 5: they have been building factories in new places, and they've
Speaker 5: been doing things to try to minimize the impact of terriffs.
Speaker 5: But overall, these are companies that have such leadership and
Speaker 5: have sell things or services that people need and that
Speaker 5: they're going to pay, and there really is an elastic
Speaker 5: demand for it, so they can pass on the prices
Speaker 5: pretty easily. But certainly everyone who speaks to these management
Speaker 5: teams when you're in investor groups, they're asking about tariffs
Speaker 5: and the impact of tariffs, and the.
Speaker 4: Companies are being thoughtful about it. They're being honest.
Speaker 5: They're saying, we don't really know what ultimately will happen,
Speaker 5: but we have been trying to position ourselves to be
Speaker 5: flexible and to maneuver quickly.
Speaker 4: And then there's some.
Speaker 5: Businesses that we own that actually could benefit from tariffs.
Speaker 4: You know, these automation companies that we own in Japan.
Speaker 5: These are companies that will allow companies to build manufacturing
Speaker 5: facilities and lines that use less labor, that are you know,
Speaker 5: lower costs, that are more efficient, that have less waste,
Speaker 5: and so.
Speaker 4: They will improve.
Speaker 5: So not only are they benefiting from building out these
Speaker 5: new lines that are closer to home, but they're also
Speaker 5: benefiting from trying to bring down prices, whereas otherwise they
Speaker 5: would be going up.
Speaker 1: Now, your strategy is pretty concentrated, and so I was
Speaker 1: just wondering if there are any part of your process
Speaker 1: that looks at risk, you know, just the risk that
Speaker 1: could come from a concentrated strategy or just risk in general.
Speaker 5: So let me first say that although some investors assert
Speaker 5: that a concentrated strategy poses greater risk in terms of
Speaker 5: higher short term volatility. We believe that a portfolio diluted
Speaker 5: with a large number of holdings could introduce the risk
Speaker 5: of not knowing each of those businesses well enough, or
Speaker 5: having to choose businesses that don't really need our criteria,
Speaker 5: like you can't just own the market leader. The more
Speaker 5: companies you own, the more likely it is you're also
Speaker 5: going to own the number two or the one that's
Speaker 5: not as good. So on average, and also on average,
Speaker 5: our analysts cover a single digit number of businesses and
Speaker 5: they cover them for years, so our pms go deep
Speaker 5: in that ongoing research with analysts, and we assert that
Speaker 5: we own our businesses more than we know our businesses.
Speaker 4: More than most.
Speaker 5: However, to address to your questions specifically, we implement risk
Speaker 5: mitigation tools that help us understand the volatility profile of
Speaker 5: our businesses throughout the cycle, as well as how correlated
Speaker 5: our businesses are to each other. I mentioned earlier that
Speaker 5: we look to have a diversity of earnings drivers or
Speaker 5: businesses geared to different end markets and different trends.
Speaker 4: So these tools help us see.
Speaker 5: Those correlations in a more objective way than our internal
Speaker 5: thought process.
Speaker 1: Okay, And in terms of selling securities, you know we've
Speaker 1: talked about what you look for, but what would have
Speaker 1: you triggered? What would trigger selling the portfolio? Could it
Speaker 1: be you know, valuations, poor fundamentals, or just better ideas?
Speaker 4: Yes, all three of those things.
Speaker 5: I mean, in theory, it's an easy answer, right it
Speaker 5: fails to meet one of our six investment criteria, but
Speaker 5: in practice it's a bit more nuanced. You know, we
Speaker 5: need to evaluate whether the business is dealing with a
Speaker 5: transitory issue or if there's real business impairment. So, for instance,
Speaker 5: in twenty twenty two, we had several businesses that saw
Speaker 5: growth impaired because demand pulled forward during COVID, so then
Speaker 5: revenue subsequently slowed.
Speaker 4: But at the same time, these businesses continue to.
Speaker 5: Spend and invest in their customers to win more market share,
Speaker 5: and that further pressure EPs. So on a growth basis,
Speaker 5: didn't look so great. But those businesses were going through
Speaker 5: a temporary hiccup that actually allow aut.
Speaker 4: Them to emerge even stronger with less competition.
Speaker 5: So that's an example of a transitory issue, not permanent impairment.
Speaker 5: And we would have been wrong if we sold those
Speaker 5: companies during that time. So sometimes something happens that changes
Speaker 5: the investment thesis due to regulatory shift. Sometimes valuation just
Speaker 5: has gotten too high for the growth expected. I think
Speaker 5: the key point on what triggers to sell is that
Speaker 5: these are highly concentrated portfolios, so oftentime, to buy a
Speaker 5: new business, we have to sell an existing one, and
Speaker 5: I call that attrition due to better opportunity. We have
Speaker 5: a saying that we don't want to be rearranging deck chairs,
Speaker 5: but when we sell something to buy a new company,
Speaker 5: we need a good reason for it. So maybe it
Speaker 5: brings a new growth driver to the portfolio, maybe it
Speaker 5: cuts down exposure to a secular trend that has been
Speaker 5: overly appreciated recently, or maybe the new company is just
Speaker 5: a stronger criteria fit.
Speaker 2: I have a question on Japan, because many investors see
Speaker 2: or think that the country is undergoing structural shifts in
Speaker 2: terms of the economy, in terms of corporate governance. Do
Speaker 2: you think it gives a good new growth opportunities which
Speaker 2: have not been the case for Japan for the past
Speaker 2: two decades, or do you think that this is something
Speaker 2: which is most of the growth opportunities are already priced
Speaker 2: in after the rally of the past two to three years.
Speaker 4: I do.
Speaker 5: I think Japan is a very interesting place right now.
Speaker 5: I've been to Japan about six times in the last
Speaker 5: eighteen months, So Japan is experiencing a resurgence, and I
Speaker 5: would say it's driven by demand for industrial automation, but
Speaker 5: also those corporate governance reforms increase tourism, a re energized
Speaker 5: consumer class, and then you have the macro economic factors
Speaker 5: such as wage growth, inflation normalization, some global supply chain shifts,
Speaker 5: Japan's neutrality proximity to the rest of Asia.
Speaker 4: These can all help create a favorable backdrop for investment.
Speaker 5: So we've found opportunities investing in the country's more innovative
Speaker 5: companies that are blending tradition with cutting edge technology to
Speaker 5: redefine their industries and also expand across geographies. Interestingly, we
Speaker 5: own a century old consumer stables business that used to
Speaker 5: that's used this knowledge and expertise to expand outside of
Speaker 5: food and seasonings and become a monopoly provider of a
Speaker 5: key semiconductor input as well as a growing player in
Speaker 5: biopharmer services. So that's one example of the kinds of
Speaker 5: things that we're finding there in terms of valuation the
Speaker 5: Japanese market, it's important to acknowledge historically has been considered
Speaker 5: normal for growth for Japanese businesses. It was like mid
Speaker 5: mid single digits, maybe high single digits.
Speaker 4: So when businesses have above.
Speaker 5: Earnings growth rates in Japan, they deserve to trade at
Speaker 5: a premium, and that premium becomes more justified given the
Speaker 5: improving macro backdrop than further justified when we're seeing these
Speaker 5: Japanese management teams all of a sudden starts to be
Speaker 5: really invest your friendly. Focusing on corporate governance reforms. These
Speaker 5: are reforms that encourage the use of large cash balances
Speaker 5: that many of these companies have sat on for years,
Speaker 5: some even decades, and in many cases these piles are
Speaker 5: quite large. So the useful and careful deployment of such
Speaker 5: cash can bring faster growth opportunities, whether it's organic or inorganic,
Speaker 5: higher dividends, more share repurchases, is all of this generating
Speaker 5: higher ros and more investor friendly interactions. So these are
Speaker 5: all things that shoul drive returns and should justify the valuations.
Speaker 2: Okay, I mean regarding Europe, I mean European equities have
Speaker 2: outperformed the US quite significantly here to date. Do you
Speaker 2: think that this still offers some good value at the
Speaker 2: current multiple or do you think that most of the
Speaker 2: growth of opportunities which you have identified are quite well
Speaker 2: priced at the time being.
Speaker 5: So, yes, the European equities have done really well here
Speaker 5: to date, and for propably like that, like we run,
Speaker 5: it really inspires us. The European equities have staged a
Speaker 5: historic comeback relative to US equities here today.
Speaker 4: But I note a few things.
Speaker 5: First, if you look at MSCI Europe at about fourteen
Speaker 5: times currently versus SMP at twenty one, so there's still
Speaker 5: a significant discount there, and especially when you consider that
Speaker 5: the average over the past fifteen years was only three points.
Speaker 5: So Europe went up, but there's still more room for
Speaker 5: it to go up. And the second thing I'd say
Speaker 5: is as fundamental business focused investors or not choosing markets
Speaker 5: to invest in instead, we're seeking to just own the
Speaker 5: best growth businesses that made our criteria. And with that perspective,
Speaker 5: we continue to believe that there are attractive businesses domiciled
Speaker 5: in Europe that we believe are under appreciated.
Speaker 4: Most.
Speaker 5: And then the third thing is most and probably the
Speaker 5: most important. We would argue, and we have argued that
Speaker 5: as a whole, Europe's not that attractive of an opportunity set.
Speaker 5: The economic and the market underpinnings, including the greater representation
Speaker 5: of cyclical and value oriented stocks, make it a more shallow.
Speaker 4: Opportunity set for growth equity investors.
Speaker 5: And it was this opportunity set whose stocks have performed
Speaker 5: well recently. But this is all what really gets me excited.
Speaker 5: There are a select group of high quality growth businesses
Speaker 5: domiciled in Europe. They are innovative, they're growing, they're good
Speaker 5: stewards of capital, they meet our investment criteria, and these
Speaker 5: may continue to get lost in equity index returns, but
Speaker 5: they're not going to be lost by us or an
Speaker 5: active manager. We only need to uncover thirty five of
Speaker 5: those businesses across all international markets and hold them in
Speaker 5: a low turnover, longtime horizon, high conviction international growth portfolio.
Speaker 1: Well, thank you, Danielle, this was great. Thank you again
Speaker 1: for joining us.
Speaker 4: Thank you so much for having me.
Speaker 5: It's been great to chat with you and hear your
Speaker 5: perspectives on Europe and Japan and defense companies.
Speaker 1: And Lauran, thank you for joining me as my co
Speaker 1: host today. Thank you until our next episode. This is
Speaker 1: David Cohne with Inside Active