WEBVTT - Repetto on Avantis’s Discount Rate Stock Screen 0:00:16.000 --> 0:00:19.279 Welcome to Inside Active, a podcast about active managers that 0:00:19.320 --> 0:00:22.400 goes beyond sound bites and headlines and looks deeper into 0:00:22.440 --> 0:00:27.920 their processes, challenges and philosophies and security selection. I'm David Cohne, 0:00:27.960 --> 0:00:31.080 I lead mutual fund and active research at Bloomberg Intelligence. 0:00:31.400 --> 0:00:35.120 I'm joined today by Christopher Kaine, US quantitive strategists at 0:00:35.120 --> 0:00:38.400 Bloomberg Intelligence. Who'll be my co host, Chris. Thank you 0:00:38.400 --> 0:00:39.280 for joining me today. 0:00:39.680 --> 0:00:42.280 Thank you so much for having me, David, So, in. 0:00:42.159 --> 0:00:44.760 What are your recent factor Friday notes, you wrote about 0:00:44.800 --> 0:00:49.400 adding in profitabil profitability to avoid value traps. This really 0:00:49.479 --> 0:00:52.040 ties into our discussion with our guests today. Can you 0:00:52.080 --> 0:00:55.640 explain how combining the value and profitability factors has led 0:00:55.680 --> 0:00:57.160 to a winning strategy recently? 0:00:58.400 --> 0:00:58.640 Yes? 0:00:58.680 --> 0:01:01.520 Absolutely, As you may, I'm a big fan of having 0:01:01.600 --> 0:01:05.959 some kind of profitability or sometimes called quality component too 0:01:06.800 --> 0:01:09.880 value strategies. I mean to me, the main benefit of 0:01:09.920 --> 0:01:12.000 that is to avoid the value traps. 0:01:12.080 --> 0:01:12.280 Right. 0:01:12.319 --> 0:01:16.000 So, value traps are these companies that are cheap, but 0:01:16.120 --> 0:01:18.720 maybe they're cheap for a very good reason. There is little, 0:01:18.959 --> 0:01:20.800 you know, hope of a turnaround, so you don't want 0:01:20.800 --> 0:01:24.720 to buy those companies. So having some kind of profitability 0:01:25.560 --> 0:01:28.320 factor with your with your value factor, you know has 0:01:28.400 --> 0:01:30.880 been beneficial, and I would also add, at least in 0:01:31.000 --> 0:01:34.959 large caps, you know, that does improve the overall factor 0:01:35.800 --> 0:01:39.760 exposures of a portfolio when you can bind profitability and value. 0:01:39.800 --> 0:01:43.080 So for example, obviously it increases the profitability when you 0:01:43.120 --> 0:01:46.319 add that factor directly, but it also increases things like 0:01:47.040 --> 0:01:50.200 momentum because high momentum is currently pretty profitable, so that 0:01:50.280 --> 0:01:53.760 increases the momentum exposure of a portfolio and even things 0:01:53.760 --> 0:01:57.120 like low volatility. When you add some profitability to your 0:01:57.200 --> 0:01:59.800 value factor, you also skew to a bit lower of 0:01:59.800 --> 0:02:03.520 all utility, which has historically been you know, the way 0:02:03.520 --> 0:02:03.960 you want to go. 0:02:04.800 --> 0:02:07.000 Okay, I think it's time to bring our guests in. 0:02:07.680 --> 0:02:10.720 I'd like to welcome Eduardo or Peto, the chief investment 0:02:10.760 --> 0:02:14.880 officer of Avontis Investors and a portfolio manager for their funds. 0:02:15.440 --> 0:02:19.000 Vontis has actually some great stats twenty eight ETFs. Every 0:02:19.040 --> 0:02:22.120 one of them has seen inflows this year. Their three 0:02:22.200 --> 0:02:25.440 year flows are thirty four billion, which has them number 0:02:25.480 --> 0:02:28.760 five overall in ETFs. Eduardo, thank you so much for 0:02:28.840 --> 0:02:29.320 joining us. 0:02:29.680 --> 0:02:31.120 Thank you for coming me a pleasure. 0:02:31.560 --> 0:02:33.920 Edwardo before we touch upon the two factors Chris was 0:02:33.919 --> 0:02:36.120 talking about. I want to ask, you have a master's 0:02:36.160 --> 0:02:39.200 in engineering in a PhD in aeronautics. How did you 0:02:39.240 --> 0:02:40.600 decide to get into investing. 0:02:42.080 --> 0:02:44.560 Well, that's a long story, but it is a long 0:02:44.600 --> 0:02:49.600 time back. Yes, I have a civil engineering undergrad, a 0:02:49.680 --> 0:02:54.239 mechanical engineering masters and a PhD in aaronical engineering. But 0:02:54.360 --> 0:02:58.240 they say, what the heck are you doing in finance today? Well? 0:02:58.560 --> 0:03:00.360 I thought there was more interesting I use to have. 0:03:00.639 --> 0:03:04.120 I used to work with the mathematician Louis Rayne. He's 0:03:04.160 --> 0:03:06.959 a pH d in mathematic from hell Tech and he 0:03:07.240 --> 0:03:10.760 moved from science to finance and he always told me 0:03:11.080 --> 0:03:13.520 you will have fun, just try to do it. And 0:03:13.560 --> 0:03:16.040 so when I finished my PhD, now you have to 0:03:16.040 --> 0:03:18.160 make a decision. What do you do? You you are 0:03:18.160 --> 0:03:20.160 going to become a professor what I want to do? 0:03:20.400 --> 0:03:22.480 And I said, well, let's let's give it a try. 0:03:23.120 --> 0:03:26.760 And you know that the financial war is full of 0:03:26.800 --> 0:03:30.600 people with science degree or engineering degree or computer science degree, 0:03:31.120 --> 0:03:33.040 and so I was lucky enough to get the job. 0:03:33.160 --> 0:03:36.560 And then it's history. I love it. You have to 0:03:36.640 --> 0:03:38.520 learn a lot of things, but you know, you always 0:03:38.560 --> 0:03:39.920 have to learn. No matter what you do, you have 0:03:40.000 --> 0:03:43.440 to learn. Imagine you the technology that we're using today 0:03:43.560 --> 0:03:45.440 is not the technology you were using five years ago, 0:03:45.480 --> 0:03:47.960 So you have to learn. So learning is part of life, 0:03:48.040 --> 0:03:50.400 and so this has been an amazing journey for me. 0:03:50.920 --> 0:03:54.000 Okay, great, now, you know, I do want to touch 0:03:54.040 --> 0:03:57.920 upon the Evantage Small Cap Value ETF. We actually just 0:03:58.160 --> 0:04:01.480 Eric and I Eric Beltoons, looked at it this morning 0:04:01.600 --> 0:04:04.120 and we realized that it's outperforming the S and P 0:04:04.200 --> 0:04:08.320 five hundred since the inceptions almost five years ago. Can 0:04:08.320 --> 0:04:10.320 you kind of give us an overview of the investment 0:04:10.320 --> 0:04:13.480 philosophy of advantage so we can understand how you've been 0:04:13.480 --> 0:04:17.440 able to beat the MAG seven with small cap value stocks. 0:04:16.839 --> 0:04:18.840 Well not the MAC seven s and P five hundred. 0:04:18.960 --> 0:04:22.320 Let's put it away. So over a long time, I'm 0:04:22.320 --> 0:04:25.880 pretty sure we're going to to do okay, But so 0:04:27.000 --> 0:04:29.920 the way we think about the investment, the way we 0:04:29.960 --> 0:04:32.760 came to market. We started four years and ten months 0:04:32.760 --> 0:04:36.840 ago and today we have a round fifty billion under management, 0:04:36.839 --> 0:04:39.520 a little bit more the fifty billion under March, so 0:04:39.520 --> 0:04:41.599 we have been growing very nicely. You mentioned we have 0:04:41.680 --> 0:04:45.000 a twenty eightytas were actually new ones. We're even going 0:04:45.040 --> 0:04:48.200 to Europe with some strategies and useage. So things have 0:04:48.279 --> 0:04:50.880 been going well, and so we came to market with 0:04:51.000 --> 0:04:55.040 the proposition we try to systematize acting management. And what 0:04:55.040 --> 0:04:58.279 do I mean by that? You know they haven't picking 0:04:58.400 --> 0:05:01.520 stock one by one with a lot of analysts. A 0:05:01.520 --> 0:05:04.839 big team is expensive. So the idea is can we 0:05:04.960 --> 0:05:08.760 systematize the process so it's still continue adding value, but 0:05:08.920 --> 0:05:12.240 being able to have a more diversify portfolio at a 0:05:12.279 --> 0:05:16.440 lower cost. So you see our ETF have very attractive 0:05:16.440 --> 0:05:20.599 expense ratios, have great have deliver great out performance and 0:05:20.680 --> 0:05:22.560 the expand ration is very attractive, and they are also 0:05:22.640 --> 0:05:26.880 well leversified. You're speaking about our small value strategy. I 0:05:26.920 --> 0:05:29.599 think at our performance related to Russell two thousand values 0:05:29.600 --> 0:05:33.880 around eight percent a year and it has seven hundred names. 0:05:34.080 --> 0:05:37.720 So you can deliver our performance without sacrifice and diversification 0:05:38.160 --> 0:05:39.920 and it's twenty five days his point, and you can 0:05:39.960 --> 0:05:41.760 do it a very attractive fee, and you can do 0:05:41.800 --> 0:05:47.159 it in ETF. What great delivers great tax efficiency and 0:05:47.200 --> 0:05:50.200 that's very very important for a small value strategies because 0:05:50.200 --> 0:05:52.760 the while low price securities and they get really when 0:05:52.800 --> 0:05:55.960 the price goes up. So it's a very good package 0:05:56.000 --> 0:05:58.120 what we have been able to put together for investor, 0:05:58.160 --> 0:06:02.400 and that's what's delivered the growth. So our goal is 0:06:02.480 --> 0:06:05.839 to find securities that the market is pricing with the 0:06:05.920 --> 0:06:09.719 big discount rate embedded in the price. What do I 0:06:09.880 --> 0:06:12.360 mean by that? I don't care so much about low 0:06:12.440 --> 0:06:15.640 price securities. Christopher was saying very nicely, you buy low 0:06:15.720 --> 0:06:20.120 price security. The price may be low because deserve to 0:06:20.160 --> 0:06:22.520 be low. No, if we go to buy Sush in 0:06:22.560 --> 0:06:25.560 the gas station, the price is going to be low. 0:06:25.640 --> 0:06:28.360 It's going to be a great experience. I don't think so. 0:06:28.760 --> 0:06:31.080 Maybe it is in some gas station, but in general 0:06:31.160 --> 0:06:34.040 answer is no. So low price is not the goal. 0:06:34.560 --> 0:06:38.320 High high discount rate is the goal. Prices having pushes 0:06:38.400 --> 0:06:40.480 down by a high disc count rate because that high 0:06:40.480 --> 0:06:43.160 this cant rate as and indication of higher respect returns. 0:06:43.440 --> 0:06:46.719 So in general, the security that we love are security, 0:06:46.800 --> 0:06:50.680 have good balanced sheet, could cash flows. But the price 0:06:51.080 --> 0:06:55.200 is low enough that implies a high disc cant rate, 0:06:55.279 --> 0:06:59.440 a high opportunity to growth in that price. And that's 0:06:59.480 --> 0:07:01.479 what we do across everything. We do it in a 0:07:01.480 --> 0:07:03.120 small value, we do it in a large value, we 0:07:03.160 --> 0:07:04.960 do it in a marching markets were doing luge gap 0:07:05.120 --> 0:07:07.240 everywhere around the world. Interesting. 0:07:07.360 --> 0:07:10.360 I mean, the uh, the performance of yours funds are 0:07:10.440 --> 0:07:13.840 just absolutely incredible. And uh, I also would not eat 0:07:13.880 --> 0:07:16.000 gas station sushi. But that's a great analogy. 0:07:16.800 --> 0:07:16.960 You know. 0:07:17.000 --> 0:07:20.200 I was wondering, you know, like you you you describe 0:07:20.200 --> 0:07:22.080 some of your process there, and without giving away the 0:07:22.120 --> 0:07:24.280 secret sauce, you know, is it one. 0:07:24.240 --> 0:07:25.480 Hundred percent systematic? 0:07:25.560 --> 0:07:28.360 I mean, you know, obviously when you have a systematic process, 0:07:28.480 --> 0:07:30.760 there's a human input to develop the model. 0:07:30.840 --> 0:07:31.360 We know that. 0:07:31.760 --> 0:07:35.080 But after that, is it one hundred percent where you 0:07:35.280 --> 0:07:39.000 are are screening for value and other things like margins, profitability, 0:07:39.000 --> 0:07:41.840 et cetera. Or is there some kind of discretionary decision 0:07:41.840 --> 0:07:44.160 making where you have a bunch of value stocks and 0:07:44.200 --> 0:07:46.880 you dig in and say, you know which ones are 0:07:46.920 --> 0:07:47.679 worth your investment? 0:07:48.920 --> 0:07:52.680 Okay, so this is a great question. So I mentioned 0:07:52.720 --> 0:07:55.560 at the beginning that our world was systematized acting management, 0:07:55.600 --> 0:07:59.200 like word is systematizing type writing. Remember typewriters in the 0:07:59.200 --> 0:08:02.760 past a little bit writers now now we use war. 0:08:03.280 --> 0:08:06.360 So that doesn't mean that war writes everything for you. 0:08:06.520 --> 0:08:08.880 But really, the process of writing a paper or a 0:08:08.920 --> 0:08:13.600 memo has been you know, transformed dramatically since WARS is 0:08:13.640 --> 0:08:15.880 with us because it's way more efficient. Here is the 0:08:15.920 --> 0:08:18.360 same o wur going is to systematize act the management. 0:08:18.960 --> 0:08:22.920 But you cannot put every possibly scenario in a piece 0:08:22.960 --> 0:08:25.320 of code, you know, because at the end of the day, 0:08:25.360 --> 0:08:28.840 systematizing everything is a computer runs everything. We humans look 0:08:28.880 --> 0:08:32.160 at that and smile, and that's not possible because that 0:08:32.200 --> 0:08:34.440 means that a piece of cold will have to have 0:08:35.000 --> 0:08:40.120 absolutely every possible scenario you can ever imagine, and no 0:08:40.240 --> 0:08:43.520 piece of code does something like that. So there is 0:08:43.640 --> 0:08:47.320 human intervention. Our portfolios are managed on a daily basis. 0:08:47.360 --> 0:08:50.360 It's not that we just buy today, hold securities no 0:08:50.480 --> 0:08:54.160 matter what for six months and then we're rebalance our security. 0:08:54.360 --> 0:08:57.040 Our performance are managed on the daily basis. Why because 0:08:57.080 --> 0:08:59.480 prices changed on a daily basis. Remember game is Top 0:09:00.120 --> 0:09:02.559 Top was a small company went to twenty three billion 0:09:02.600 --> 0:09:07.120 bucks in January. Well prosss reconstituting June, so it went 0:09:07.320 --> 0:09:12.000 up and down with without being sold. And so we 0:09:12.040 --> 0:09:16.040 need humans. But you need a special set of humans. 0:09:16.080 --> 0:09:20.800 It's a human that understand finance, understand valuations of companies, 0:09:20.960 --> 0:09:24.720 understand systems because we have systems that running, so they 0:09:24.720 --> 0:09:27.120 need to understand the system and the limitation, understand data 0:09:27.400 --> 0:09:31.400 and so our portfolio manages are people that are able 0:09:31.480 --> 0:09:35.559 to combine these sets of skills to interact with the computers, 0:09:36.040 --> 0:09:39.720 interact with the data to be very very efficient. But 0:09:40.040 --> 0:09:41.800 whenever they have to step in, step in. 0:09:42.880 --> 0:09:47.520 Okay, you know you had mentioned you know, your other funds. 0:09:47.640 --> 0:09:51.240 So the strategy is pretty similar across the different market caps. 0:09:51.240 --> 0:09:53.400 So you know, in addition to the small cap value 0:09:54.080 --> 0:09:56.880 you have a US largeat equity which is a little newer. 0:09:57.080 --> 0:09:59.439 Is that the strategy is pretty much the same, just 0:09:59.480 --> 0:10:00.760 with the different market cap. 0:10:01.400 --> 0:10:04.360 That that's a great question. So the ETF is newer. 0:10:04.400 --> 0:10:06.760 We haven't running the strategy for a longer time with 0:10:06.800 --> 0:10:10.160 the with the keeps track record because we used to 0:10:10.400 --> 0:10:13.120 we have that in separate accounts. At some point a 0:10:13.160 --> 0:10:15.040 client in a separate account to all us, can you 0:10:15.040 --> 0:10:17.600 transform a separate account in ANTF so I holdly one 0:10:17.679 --> 0:10:20.680 name is holding four hundred names and said yeah, sure 0:10:20.679 --> 0:10:24.240 we can. And that's how the strategy came to life. Uh, 0:10:24.880 --> 0:10:28.120 we have we have different set of a strategy. We 0:10:28.160 --> 0:10:30.480 have a strategy that focus in them in the security 0:10:30.800 --> 0:10:35.720 trading at the highest country possibles. Yeah, and that's what 0:10:35.760 --> 0:10:38.680 we call value strategy. For US. Value is a high 0:10:38.679 --> 0:10:42.400 discount rate. So when you say a small value, what 0:10:42.480 --> 0:10:45.480 it is is of all these small cup companies, we 0:10:45.600 --> 0:10:48.240 buy the security that are training at the highest count rate, 0:10:48.320 --> 0:10:51.160 the twenty five percent of the companies the highest count rate. 0:10:51.559 --> 0:10:55.600 In large cup values similar story or international small value, 0:10:55.679 --> 0:10:59.199 that's value strategy for US. Then we have blended strategies. 0:11:00.400 --> 0:11:03.800 And in a blended strategy like the large copy strategy 0:11:03.920 --> 0:11:07.319 that you mentioned, the bench market is are Russell one 0:11:07.360 --> 0:11:10.720 selves and so we have most of the securities in 0:11:10.760 --> 0:11:14.840 the Russell one in our large copy strategy, but the 0:11:14.920 --> 0:11:19.199 waiting is very different. You can add value by security 0:11:19.200 --> 0:11:23.320 selection or you can add value by security waiting. Waiting 0:11:23.600 --> 0:11:27.840 securities are higher respect relturns you overweighth an underweight security 0:11:28.000 --> 0:11:30.760 lower respect returns is a weay to add value. So 0:11:31.040 --> 0:11:35.000 our blend strategies, the main source of value added is 0:11:35.120 --> 0:11:40.000 security is waiting overweighting securities who higher respect returns underweighted 0:11:40.040 --> 0:11:44.840 security who lower respect returns our value strategies. The man's 0:11:45.240 --> 0:11:48.079 the main source of value. Security selection. They also do 0:11:48.200 --> 0:11:52.920 security weighting, but security selection is the main source of value. Added, 0:11:53.240 --> 0:11:57.640 so the feel also is the same across all our strategies. 0:11:58.120 --> 0:12:02.360 We are looking to emphasize securities that despite the good 0:12:02.440 --> 0:12:06.079 balance sheet, despite the good cash flows, the price is 0:12:06.600 --> 0:12:10.000 attractive enough. Those are the security who are trying to 0:12:10.040 --> 0:12:13.680 emphasize or select, and security that have bad balance sheet 0:12:13.760 --> 0:12:16.000 or weak balance sheet and not good cash flows or 0:12:16.080 --> 0:12:18.959 negative cash flows and high price. Those ones the ones 0:12:19.000 --> 0:12:21.960 that are trying to shy away. And that's the same 0:12:22.120 --> 0:12:26.480 across everything that we do. One is selection, selection, one 0:12:26.600 --> 0:12:30.600 is waiting. But the philosophy is the same. So interesting. 0:12:31.800 --> 0:12:33.199 You know, one thing I wanted to ask you, and 0:12:33.559 --> 0:12:36.040 you know, I like to ask people that do small 0:12:36.120 --> 0:12:38.240 cap factors, and I know you do more than that, 0:12:38.440 --> 0:12:42.000 but specifically your small cap fund is just just on fire? 0:12:43.320 --> 0:12:44.520 Do you I see this. 0:12:44.720 --> 0:12:47.760 Argument, and I don't really have an opinion here. I mean, 0:12:47.880 --> 0:12:51.000 I see this argument that factor investing should do better 0:12:51.200 --> 0:12:54.160 in small caps, and I think the theory basically goes 0:12:54.280 --> 0:12:57.680 that you know, these these smaller caps have less attention, 0:12:57.960 --> 0:13:02.079 maybe they're you know, marget less efficient, and thus you 0:13:02.160 --> 0:13:05.400 know common factors, you know, open secrets if you will, 0:13:05.440 --> 0:13:08.439 and finance should work better in small caps. Empirically, that 0:13:08.559 --> 0:13:11.800 seems to be true. Do you do you subscribe to 0:13:11.880 --> 0:13:12.280 that theory? 0:13:13.160 --> 0:13:19.080 Absolutely? I think because of different storages. So so think 0:13:19.120 --> 0:13:23.000 about that. In large cups, let's let's follow Russle definition. 0:13:23.080 --> 0:13:25.520 A large cup you have a thousand companies. In small 0:13:25.559 --> 0:13:30.480 cups you have twenty five hundred companies or three thousand companies, 0:13:30.720 --> 0:13:34.280 so you have more companies. If you look at evaluations 0:13:34.320 --> 0:13:37.719 of company the dispersion of valuation, how different evaluation is 0:13:37.920 --> 0:13:41.520 among large cup companies. You know the most attractive large 0:13:41.800 --> 0:13:44.800 company vers so the least attractive larger company, That difference 0:13:44.880 --> 0:13:49.640 in valuation is smaller than the different need dispersion of 0:13:49.720 --> 0:13:51.760 valuation that you have in a small cup. In a 0:13:51.840 --> 0:13:54.000 small cup, you have some companies that are way more 0:13:54.040 --> 0:13:57.840 attractive and you also have some that are real less attractive. 0:13:58.480 --> 0:14:02.400 So a small cup, because of this is personal evaluation, 0:14:02.800 --> 0:14:08.199 provides bigger opportunity to find companies that are price very, 0:14:08.360 --> 0:14:10.640 very attractively. And that's why the premiums that you can 0:14:10.720 --> 0:14:13.520 achieve in small cups are larger. I give you some 0:14:13.720 --> 0:14:16.080 statistic and sorry if I get a little bit kicky. 0:14:16.280 --> 0:14:21.880 You know I high PhD for cultextry. Okay, So if 0:14:21.920 --> 0:14:24.720 you look at the For example, we have a metric 0:14:24.840 --> 0:14:27.200 that is like an adjusted book tow price that we 0:14:27.360 --> 0:14:30.000 use for some part of the evaluation. If I look 0:14:30.240 --> 0:14:33.400 at the standard aviation, I get all the companies in 0:14:33.520 --> 0:14:36.320 large cups and I compute the standard aviation of this 0:14:36.520 --> 0:14:40.160 book to price metric. The standard aviation in large cup 0:14:40.280 --> 0:14:43.920 is point thirty five. If I look at the symmetric 0:14:44.000 --> 0:14:49.040 among the small cup companies is one point three. It's 0:14:49.320 --> 0:14:52.840 four times bigger that these personal invaluations that you're achieving. 0:14:53.240 --> 0:14:56.840 You see observing small cups relative to large cups. That 0:14:57.000 --> 0:14:59.800 means that some companies are really really much more a 0:15:00.120 --> 0:15:03.760 active and others are really Please don't touch me, because 0:15:04.280 --> 0:15:05.160 you're going to suffer. 0:15:06.400 --> 0:15:09.960 I want to ask to macroeconomic issues affect your decision making. 0:15:10.840 --> 0:15:14.000 It has to be something extremely big, like a market 0:15:14.120 --> 0:15:19.520 is top functioning? You know? If not, it doesn't. So 0:15:19.720 --> 0:15:23.880 we are being hired to deliver very good equity portfolio 0:15:24.000 --> 0:15:28.720 that deliver higher respector turns value added to clients. And 0:15:29.640 --> 0:15:32.840 so our job is someone the equity securities that we 0:15:32.960 --> 0:15:35.840 have to select, be sure that we pick the ones that, 0:15:36.000 --> 0:15:38.720 in our opinion, are going to deliver more for the client, 0:15:39.160 --> 0:15:41.400 and do that at the low cost, weill lot turn 0:15:41.480 --> 0:15:46.840 over with high tax efficiency, good diversification. We don't like 0:15:47.000 --> 0:15:49.680 very concentrated portfolio, as you can see from our retfs, 0:15:50.080 --> 0:15:52.000 and so if we are able to achieve that, we 0:15:52.120 --> 0:15:55.200 think we're delivering what the client was Sometimes you have 0:15:55.320 --> 0:15:58.400 to tap in because something happened in some market and 0:15:59.320 --> 0:16:01.800 let's stop investing in this market, or things like that. 0:16:02.280 --> 0:16:07.440 In general, more common macro decisions doesn't effect like what 0:16:07.600 --> 0:16:10.440 happened with the FED meeting, and that doesn't affect us 0:16:10.520 --> 0:16:11.640 too much. Okay. 0:16:11.960 --> 0:16:14.120 So actually a follow up for that is what about sectors? 0:16:15.160 --> 0:16:17.280 You know, are you more focused on kind of the 0:16:18.080 --> 0:16:21.880 bottom up or you actually kind of evaluating sectors as well. 0:16:22.880 --> 0:16:25.800 That's a great question. So our decision making is all 0:16:25.920 --> 0:16:27.680 bottom up, if you want to think about that. So 0:16:27.920 --> 0:16:30.800 we look at the most attractive securities and then we 0:16:31.280 --> 0:16:33.960 have a collection the most attractive securities and those are 0:16:34.000 --> 0:16:36.880 the ones that create our portfolio. You know, we want 0:16:36.960 --> 0:16:42.400 the minimum level of diversification, but it's bought on up. 0:16:42.800 --> 0:16:45.240 Now we look at sector. We don't want to have 0:16:45.400 --> 0:16:48.800 portfolios that are extremely concentrated in any word sector because 0:16:48.880 --> 0:16:52.920 we want to deliver portfolios that are diversified, and unless 0:16:52.920 --> 0:16:55.840 if you speak about our real estate portfolio, our global reachs, 0:16:56.280 --> 0:17:00.400 that's only one sector. The rest are broadly the ify 0:17:00.520 --> 0:17:04.359 across all different sectors. Some sectors we don't include in 0:17:04.480 --> 0:17:06.639 some of our portfolios. For example, if you look at 0:17:06.680 --> 0:17:09.119 our value portfolio, what is a value portfolio for us? 0:17:09.480 --> 0:17:12.200 The portfolio where we want to have very very high 0:17:12.280 --> 0:17:16.159 spector returns. So if you think about utilities, they're not 0:17:16.240 --> 0:17:19.880 going to deliver high spector returns in general. Why everyone 0:17:20.119 --> 0:17:22.400 all of us think about that's a defensive lot better. 0:17:23.920 --> 0:17:27.960 So we don't include utilities in our value portfolios because 0:17:28.000 --> 0:17:31.040 we can't really achieve much higher spect returns with other 0:17:31.200 --> 0:17:35.679 sets of companies. So things like that we take into account. 0:17:35.800 --> 0:17:39.560 There's some modifications how we do valuations in some sectors 0:17:39.560 --> 0:17:44.000 related to others because some metrics are not present. But 0:17:45.960 --> 0:17:49.600 if we treat all the companies basically the same after 0:17:49.680 --> 0:17:53.080 these considerations, what you will see in our portfolios that 0:17:53.280 --> 0:17:57.480 sometimes they get overweighted in some particular sector and other 0:17:57.560 --> 0:18:01.159 times other sectors. And why is that? Because if we 0:18:01.200 --> 0:18:06.760 are finding more attractive securities in one particular sector than others, 0:18:07.000 --> 0:18:10.600 that sector would have more representation in our portfolio than others, 0:18:10.840 --> 0:18:14.560 and that sector will become overweighted. So when you look 0:18:14.560 --> 0:18:18.959 at our stategery, you will see some slow moving sector rotation. 0:18:21.480 --> 0:18:23.600 But it's not that we are just oh, let's buy 0:18:23.720 --> 0:18:27.240 energy today or let's buy financials today. It's because of 0:18:27.359 --> 0:18:31.480 the underlying securities that we're finding that are becoming more 0:18:31.560 --> 0:18:34.159 attracted at that point in time. Give enterprise and fundamentals, 0:18:34.200 --> 0:18:37.480 and those are the one we find more energy securities 0:18:37.560 --> 0:18:41.040 today than financial Well, energy will be a little bit 0:18:41.280 --> 0:18:42.119 more overweighted. 0:18:43.040 --> 0:18:46.720 I want to quickly just go back to a security 0:18:46.760 --> 0:18:49.320 waiting real fast. You know, you mentioned kind of two 0:18:49.400 --> 0:18:52.720 sources of alpha, you know, waiting the securities by expected 0:18:52.800 --> 0:18:58.840 returns and security selection. So let's put aside waitings by 0:18:59.200 --> 0:19:03.040 by factory returns? Is there or expected returns? Is there 0:19:03.080 --> 0:19:06.240 any other you know, things that you look at from 0:19:06.280 --> 0:19:10.920 a risk reducing uh, you know, perspectives such as you know, 0:19:10.960 --> 0:19:13.840 do you do any kind of like me invariance optimization 0:19:14.440 --> 0:19:17.440 or eco risk parity or anything like that as far 0:19:17.560 --> 0:19:20.080 as other inputs to your security weighting. 0:19:20.320 --> 0:19:22.359 Yes, not not the ones that you mentioned. So we 0:19:22.600 --> 0:19:25.680 we we we don't do mean vialdance optimization. We don't 0:19:25.720 --> 0:19:28.080 think it is too stable, and so, but we do 0:19:28.240 --> 0:19:33.960 something similar in order to mean virdance optimization basically trying 0:19:34.000 --> 0:19:38.000 to maximize returns subject to risk consideration, we do something 0:19:38.240 --> 0:19:42.800 similar or not me imviotance optimization, per se, we do 0:19:42.960 --> 0:19:45.919 something that is way more stable than mean bodless optimization. 0:19:46.520 --> 0:19:49.600 And we have other considerations. So, look, if you're buying 0:19:49.640 --> 0:19:52.399 a value portfolio, for example, what is the buying security 0:19:52.480 --> 0:19:54.440 have a low price? While it's if security has high 0:19:54.480 --> 0:19:58.720 price and the price crashes, you know dramatically, at some 0:19:58.800 --> 0:20:00.600 point it will be low price. You're going to wit 0:20:00.720 --> 0:20:03.320 immediately or you're going to consider other things. You mentioned 0:20:03.400 --> 0:20:06.760 momentum at the very beginning of the conversation when you 0:20:06.840 --> 0:20:08.880 were speaking with David. Yeah, we have to take into 0:20:08.920 --> 0:20:11.720 account momentum, We have to take into account other things 0:20:12.400 --> 0:20:16.000 that that gives you a little bit better approach of 0:20:16.200 --> 0:20:18.879 when to enter the position, when to get out of 0:20:19.000 --> 0:20:22.240 the position. So, yes, you have valuations, but if you 0:20:22.320 --> 0:20:25.320 have an expectation that that price will continue to go 0:20:25.480 --> 0:20:28.080 down for some short period of time, and you can't 0:20:28.119 --> 0:20:29.800 wait and do it a little bit later, and so 0:20:30.080 --> 0:20:34.000 we take into account other let's call it factors or 0:20:34.560 --> 0:20:37.119 considerations when we're managing portfolios. 0:20:37.920 --> 0:20:41.280 I know you had mentioned you're looking at prices daily. 0:20:41.920 --> 0:20:45.159 How do you keep turnover low when you're you know, 0:20:45.800 --> 0:20:48.240 keeping track of the portfolio on a daily basis. 0:20:49.000 --> 0:20:51.399 That's a great question. The first the first question that 0:20:51.520 --> 0:20:53.280 I get asked when I say, oh, we manage the 0:20:53.320 --> 0:20:56.160 portfolio on a daily basis, everyone said, oh, your turnomo 0:20:56.280 --> 0:20:59.000 must be here. Our turnomo is not big at all, 0:21:00.520 --> 0:21:04.080 because basically it's a trade off. You're always thinking about 0:21:04.240 --> 0:21:08.040 what how much do I gain my making this trade? 0:21:08.320 --> 0:21:11.520 The benefit of making the trade persue what the costs 0:21:11.640 --> 0:21:15.040 associated with the trade. Yeah, the moment that you consider 0:21:15.160 --> 0:21:17.920 that trade off, it will cause some benefits. Turnover goes 0:21:17.960 --> 0:21:23.680 down dramatically. So in high turnover in general is high cost, 0:21:24.119 --> 0:21:27.320 and so you don't want to have high costs for 0:21:27.480 --> 0:21:30.119 no purpose. So I'm willing to enter into a cost 0:21:31.000 --> 0:21:34.520 if I get the benefit that is much better than 0:21:34.560 --> 0:21:37.639 the cost that I'm facing. And that's a consideration happens 0:21:37.680 --> 0:21:40.120 on a daily basis in our porfolio. Now, some people 0:21:40.280 --> 0:21:44.359 have managed turnover by doing buy and holy strategies. So 0:21:45.000 --> 0:21:47.840 think about any one of the inst we were speaking 0:21:47.840 --> 0:21:51.359 about Russell Russia constitutes once a year. Yeah, so the 0:21:51.480 --> 0:21:55.520 turnover is low because they buy small caps today, they 0:21:55.600 --> 0:21:58.560 close their eyes for twelve months, they open their eyes 0:21:58.600 --> 0:22:00.600 and say, oh, some of the securities a small cup, 0:22:00.680 --> 0:22:03.760 let's change it. So that's not the best way for 0:22:03.920 --> 0:22:05.600 us to deal with turn over. The best way to 0:22:05.640 --> 0:22:08.560 deliver and over is dealing on a daily basis. And 0:22:08.880 --> 0:22:12.960 it's a security moved from a small too large, Maybe 0:22:13.000 --> 0:22:15.120 it's time to sell it. But it's a security moved 0:22:15.119 --> 0:22:17.320 from a small to a little bit higher than a small. 0:22:17.359 --> 0:22:20.320 Maybe you should wait because the truth is that it's 0:22:20.440 --> 0:22:23.440 more or less small at this point. So that kind 0:22:23.480 --> 0:22:26.560 of trade off on a spector returns. How much is 0:22:26.640 --> 0:22:28.920 a spector return that I'm picking up? So the cost 0:22:28.960 --> 0:22:33.680