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: I'm joined today by Christopher Kaine, US quantitive strategists at
Speaker 1: Bloomberg Intelligence. Who'll be my co host, Chris. Thank you
Speaker 1: for joining me today.
Speaker 2: Thank you so much for having me, David, So, in.
Speaker 1: What are your recent factor Friday notes, you wrote about
Speaker 1: adding in profitabil profitability to avoid value traps. This really
Speaker 1: ties into our discussion with our guests today. Can you
Speaker 1: explain how combining the value and profitability factors has led
Speaker 1: to a winning strategy recently?
Speaker 3: Yes?
Speaker 2: Absolutely, As you may, I'm a big fan of having
Speaker 2: some kind of profitability or sometimes called quality component too
Speaker 2: value strategies. I mean to me, the main benefit of
Speaker 2: that is to avoid the value traps.
Speaker 3: Right.
Speaker 2: So, value traps are these companies that are cheap, but
Speaker 2: maybe they're cheap for a very good reason. There is little,
Speaker 2: you know, hope of a turnaround, so you don't want
Speaker 2: to buy those companies. So having some kind of profitability
Speaker 2: factor with your with your value factor, you know has
Speaker 2: been beneficial, and I would also add, at least in
Speaker 2: large caps, you know, that does improve the overall factor
Speaker 2: exposures of a portfolio when you can bind profitability and value.
Speaker 2: So for example, obviously it increases the profitability when you
Speaker 2: add that factor directly, but it also increases things like
Speaker 2: momentum because high momentum is currently pretty profitable, so that
Speaker 2: increases the momentum exposure of a portfolio and even things
Speaker 2: like low volatility. When you add some profitability to your
Speaker 2: value factor, you also skew to a bit lower of
Speaker 2: all utility, which has historically been you know, the way
Speaker 2: you want to go.
Speaker 1: Okay, I think it's time to bring our guests in.
Speaker 1: I'd like to welcome Eduardo or Peto, the chief investment
Speaker 1: officer of Avontis Investors and a portfolio manager for their funds.
Speaker 1: Vontis has actually some great stats twenty eight ETFs. Every
Speaker 1: one of them has seen inflows this year. Their three
Speaker 1: year flows are thirty four billion, which has them number
Speaker 1: five overall in ETFs. Eduardo, thank you so much for
Speaker 1: joining us.
Speaker 3: Thank you for coming me a pleasure.
Speaker 1: Edwardo before we touch upon the two factors Chris was
Speaker 1: talking about. I want to ask, you have a master's
Speaker 1: in engineering in a PhD in aeronautics. How did you
Speaker 1: decide to get into investing.
Speaker 3: Well, that's a long story, but it is a long
Speaker 3: time back. Yes, I have a civil engineering undergrad, a
Speaker 3: mechanical engineering masters and a PhD in aaronical engineering. But
Speaker 3: they say, what the heck are you doing in finance today? Well?
Speaker 3: I thought there was more interesting I use to have.
Speaker 3: I used to work with the mathematician Louis Rayne. He's
Speaker 3: a pH d in mathematic from hell Tech and he
Speaker 3: moved from science to finance and he always told me
Speaker 3: you will have fun, just try to do it. And
Speaker 3: so when I finished my PhD, now you have to
Speaker 3: make a decision. What do you do? You you are
Speaker 3: going to become a professor what I want to do?
Speaker 3: And I said, well, let's let's give it a try.
Speaker 3: And you know that the financial war is full of
Speaker 3: people with science degree or engineering degree or computer science degree,
Speaker 3: and so I was lucky enough to get the job.
Speaker 3: And then it's history. I love it. You have to
Speaker 3: learn a lot of things, but you know, you always
Speaker 3: have to learn. No matter what you do, you have
Speaker 3: to learn. Imagine you the technology that we're using today
Speaker 3: is not the technology you were using five years ago,
Speaker 3: So you have to learn. So learning is part of life,
Speaker 3: and so this has been an amazing journey for me.
Speaker 1: Okay, great, now, you know, I do want to touch
Speaker 1: upon the Evantage Small Cap Value ETF. We actually just
Speaker 1: Eric and I Eric Beltoons, looked at it this morning
Speaker 1: and we realized that it's outperforming the S and P
Speaker 1: five hundred since the inceptions almost five years ago. Can
Speaker 1: you kind of give us an overview of the investment
Speaker 1: philosophy of advantage so we can understand how you've been
Speaker 1: able to beat the MAG seven with small cap value stocks.
Speaker 3: Well not the MAC seven s and P five hundred.
Speaker 3: Let's put it away. So over a long time, I'm
Speaker 3: pretty sure we're going to to do okay, But so
Speaker 3: the way we think about the investment, the way we
Speaker 3: came to market. We started four years and ten months
Speaker 3: ago and today we have a round fifty billion under management,
Speaker 3: a little bit more the fifty billion under March, so
Speaker 3: we have been growing very nicely. You mentioned we have
Speaker 3: a twenty eightytas were actually new ones. We're even going
Speaker 3: to Europe with some strategies and useage. So things have
Speaker 3: been going well, and so we came to market with
Speaker 3: the proposition we try to systematize acting management. And what
Speaker 3: do I mean by that? You know they haven't picking
Speaker 3: stock one by one with a lot of analysts. A
Speaker 3: big team is expensive. So the idea is can we
Speaker 3: systematize the process so it's still continue adding value, but
Speaker 3: being able to have a more diversify portfolio at a
Speaker 3: lower cost. So you see our ETF have very attractive
Speaker 3: expense ratios, have great have deliver great out performance and
Speaker 3: the expand ration is very attractive, and they are also
Speaker 3: well leversified. You're speaking about our small value strategy. I
Speaker 3: think at our performance related to Russell two thousand values
Speaker 3: around eight percent a year and it has seven hundred names.
Speaker 3: So you can deliver our performance without sacrifice and diversification
Speaker 3: and it's twenty five days his point, and you can
Speaker 3: do it a very attractive fee, and you can do
Speaker 3: it in ETF. What great delivers great tax efficiency and
Speaker 3: that's very very important for a small value strategies because
Speaker 3: the while low price securities and they get really when
Speaker 3: the price goes up. So it's a very good package
Speaker 3: what we have been able to put together for investor,
Speaker 3: and that's what's delivered the growth. So our goal is
Speaker 3: to find securities that the market is pricing with the
Speaker 3: big discount rate embedded in the price. What do I
Speaker 3: mean by that? I don't care so much about low
Speaker 3: price securities. Christopher was saying very nicely, you buy low
Speaker 3: price security. The price may be low because deserve to
Speaker 3: be low. No, if we go to buy Sush in
Speaker 3: the gas station, the price is going to be low.
Speaker 3: It's going to be a great experience. I don't think so.
Speaker 3: Maybe it is in some gas station, but in general
Speaker 3: answer is no. So low price is not the goal.
Speaker 3: High high discount rate is the goal. Prices having pushes
Speaker 3: down by a high disc count rate because that high
Speaker 3: this cant rate as and indication of higher respect returns.
Speaker 3: So in general, the security that we love are security,
Speaker 3: have good balanced sheet, could cash flows. But the price
Speaker 3: is low enough that implies a high disc cant rate,
Speaker 3: a high opportunity to growth in that price. And that's
Speaker 3: what we do across everything. We do it in a
Speaker 3: small value, we do it in a large value, we
Speaker 3: do it in a marching markets were doing luge gap
Speaker 3: everywhere around the world. Interesting.
Speaker 2: I mean, the uh, the performance of yours funds are
Speaker 2: just absolutely incredible. And uh, I also would not eat
Speaker 2: gas station sushi. But that's a great analogy.
Speaker 3: You know.
Speaker 2: I was wondering, you know, like you you you describe
Speaker 2: some of your process there, and without giving away the
Speaker 2: secret sauce, you know, is it one.
Speaker 3: Hundred percent systematic?
Speaker 2: I mean, you know, obviously when you have a systematic process,
Speaker 2: there's a human input to develop the model.
Speaker 3: We know that.
Speaker 2: But after that, is it one hundred percent where you
Speaker 2: are are screening for value and other things like margins, profitability,
Speaker 2: et cetera. Or is there some kind of discretionary decision
Speaker 2: making where you have a bunch of value stocks and
Speaker 2: you dig in and say, you know which ones are
Speaker 2: worth your investment?
Speaker 3: Okay, so this is a great question. So I mentioned
Speaker 3: at the beginning that our world was systematized acting management,
Speaker 3: like word is systematizing type writing. Remember typewriters in the
Speaker 3: past a little bit writers now now we use war.
Speaker 3: So that doesn't mean that war writes everything for you.
Speaker 3: But really, the process of writing a paper or a
Speaker 3: memo has been you know, transformed dramatically since WARS is
Speaker 3: with us because it's way more efficient. Here is the
Speaker 3: same o wur going is to systematize act the management.
Speaker 3: But you cannot put every possibly scenario in a piece
Speaker 3: of code, you know, because at the end of the day,
Speaker 3: systematizing everything is a computer runs everything. We humans look
Speaker 3: at that and smile, and that's not possible because that
Speaker 3: means that a piece of cold will have to have
Speaker 3: absolutely every possible scenario you can ever imagine, and no
Speaker 3: piece of code does something like that. So there is
Speaker 3: human intervention. Our portfolios are managed on a daily basis.
Speaker 3: It's not that we just buy today, hold securities no
Speaker 3: matter what for six months and then we're rebalance our security.
Speaker 3: Our performance are managed on the daily basis. Why because
Speaker 3: prices changed on a daily basis. Remember game is Top
Speaker 3: Top was a small company went to twenty three billion
Speaker 3: bucks in January. Well prosss reconstituting June, so it went
Speaker 3: up and down with without being sold. And so we
Speaker 3: need humans. But you need a special set of humans.
Speaker 3: It's a human that understand finance, understand valuations of companies,
Speaker 3: understand systems because we have systems that running, so they
Speaker 3: need to understand the system and the limitation, understand data
Speaker 3: and so our portfolio manages are people that are able
Speaker 3: to combine these sets of skills to interact with the computers,
Speaker 3: interact with the data to be very very efficient. But
Speaker 3: whenever they have to step in, step in.
Speaker 1: Okay, you know you had mentioned you know, your other funds.
Speaker 1: So the strategy is pretty similar across the different market caps.
Speaker 1: So you know, in addition to the small cap value
Speaker 1: you have a US largeat equity which is a little newer.
Speaker 1: Is that the strategy is pretty much the same, just
Speaker 1: with the different market cap.
Speaker 3: That that's a great question. So the ETF is newer.
Speaker 3: We haven't running the strategy for a longer time with
Speaker 3: the with the keeps track record because we used to
Speaker 3: we have that in separate accounts. At some point a
Speaker 3: client in a separate account to all us, can you
Speaker 3: transform a separate account in ANTF so I holdly one
Speaker 3: name is holding four hundred names and said yeah, sure
Speaker 3: we can. And that's how the strategy came to life. Uh,
Speaker 3: we have we have different set of a strategy. We
Speaker 3: have a strategy that focus in them in the security
Speaker 3: trading at the highest country possibles. Yeah, and that's what
Speaker 3: we call value strategy. For US. Value is a high
Speaker 3: discount rate. So when you say a small value, what
Speaker 3: it is is of all these small cup companies, we
Speaker 3: buy the security that are training at the highest count rate,
Speaker 3: the twenty five percent of the companies the highest count rate.
Speaker 3: In large cup values similar story or international small value,
Speaker 3: that's value strategy for US. Then we have blended strategies.
Speaker 3: And in a blended strategy like the large copy strategy
Speaker 3: that you mentioned, the bench market is are Russell one
Speaker 3: selves and so we have most of the securities in
Speaker 3: the Russell one in our large copy strategy, but the
Speaker 3: waiting is very different. You can add value by security
Speaker 3: selection or you can add value by security waiting. Waiting
Speaker 3: securities are higher respect relturns you overweighth an underweight security
Speaker 3: lower respect returns is a weay to add value. So
Speaker 3: our blend strategies, the main source of value added is
Speaker 3: security is waiting overweighting securities who higher respect returns underweighted
Speaker 3: security who lower respect returns our value strategies. The man's
Speaker 3: the main source of value. Security selection. They also do
Speaker 3: security weighting, but security selection is the main source of value. Added,
Speaker 3: so the feel also is the same across all our strategies.
Speaker 3: We are looking to emphasize securities that despite the good
Speaker 3: balance sheet, despite the good cash flows, the price is
Speaker 3: attractive enough. Those are the security who are trying to
Speaker 3: emphasize or select, and security that have bad balance sheet
Speaker 3: or weak balance sheet and not good cash flows or
Speaker 3: negative cash flows and high price. Those ones the ones
Speaker 3: that are trying to shy away. And that's the same
Speaker 3: across everything that we do. One is selection, selection, one
Speaker 3: is waiting. But the philosophy is the same. So interesting.
Speaker 2: You know, one thing I wanted to ask you, and
Speaker 2: you know, I like to ask people that do small
Speaker 2: cap factors, and I know you do more than that,
Speaker 2: but specifically your small cap fund is just just on fire?
Speaker 3: Do you I see this.
Speaker 2: Argument, and I don't really have an opinion here. I mean,
Speaker 2: I see this argument that factor investing should do better
Speaker 2: in small caps, and I think the theory basically goes
Speaker 2: that you know, these these smaller caps have less attention,
Speaker 2: maybe they're you know, marget less efficient, and thus you
Speaker 2: know common factors, you know, open secrets if you will,
Speaker 2: and finance should work better in small caps. Empirically, that
Speaker 2: seems to be true. Do you do you subscribe to
Speaker 2: that theory?
Speaker 3: Absolutely? I think because of different storages. So so think
Speaker 3: about that. In large cups, let's let's follow Russle definition.
Speaker 3: A large cup you have a thousand companies. In small
Speaker 3: cups you have twenty five hundred companies or three thousand companies,
Speaker 3: so you have more companies. If you look at evaluations
Speaker 3: of company the dispersion of valuation, how different evaluation is
Speaker 3: among large cup companies. You know the most attractive large
Speaker 3: company vers so the least attractive larger company, That difference
Speaker 3: in valuation is smaller than the different need dispersion of
Speaker 3: valuation that you have in a small cup. In a
Speaker 3: small cup, you have some companies that are way more
Speaker 3: attractive and you also have some that are real less attractive.
Speaker 3: So a small cup, because of this is personal evaluation,
Speaker 3: provides bigger opportunity to find companies that are price very,
Speaker 3: very attractively. And that's why the premiums that you can
Speaker 3: achieve in small cups are larger. I give you some
Speaker 3: statistic and sorry if I get a little bit kicky.
Speaker 3: You know I high PhD for cultextry. Okay, So if
Speaker 3: you look at the For example, we have a metric
Speaker 3: that is like an adjusted book tow price that we
Speaker 3: use for some part of the evaluation. If I look
Speaker 3: at the standard aviation, I get all the companies in
Speaker 3: large cups and I compute the standard aviation of this
Speaker 3: book to price metric. The standard aviation in large cup
Speaker 3: is point thirty five. If I look at the symmetric
Speaker 3: among the small cup companies is one point three. It's
Speaker 3: four times bigger that these personal invaluations that you're achieving.
Speaker 3: You see observing small cups relative to large cups. That
Speaker 3: means that some companies are really really much more a
Speaker 3: active and others are really Please don't touch me, because
Speaker 3: you're going to suffer.
Speaker 1: I want to ask to macroeconomic issues affect your decision making.
Speaker 3: It has to be something extremely big, like a market
Speaker 3: is top functioning? You know? If not, it doesn't. So
Speaker 3: we are being hired to deliver very good equity portfolio
Speaker 3: that deliver higher respector turns value added to clients. And
Speaker 3: so our job is someone the equity securities that we
Speaker 3: have to select, be sure that we pick the ones that,
Speaker 3: in our opinion, are going to deliver more for the client,
Speaker 3: and do that at the low cost, weill lot turn
Speaker 3: over with high tax efficiency, good diversification. We don't like
Speaker 3: very concentrated portfolio, as you can see from our retfs,
Speaker 3: and so if we are able to achieve that, we
Speaker 3: think we're delivering what the client was Sometimes you have
Speaker 3: to tap in because something happened in some market and
Speaker 3: let's stop investing in this market, or things like that.
Speaker 3: In general, more common macro decisions doesn't effect like what
Speaker 3: happened with the FED meeting, and that doesn't affect us
Speaker 3: too much. Okay.
Speaker 1: So actually a follow up for that is what about sectors?
Speaker 1: You know, are you more focused on kind of the
Speaker 1: bottom up or you actually kind of evaluating sectors as well.
Speaker 3: That's a great question. So our decision making is all
Speaker 3: bottom up, if you want to think about that. So
Speaker 3: we look at the most attractive securities and then we
Speaker 3: have a collection the most attractive securities and those are
Speaker 3: the ones that create our portfolio. You know, we want
Speaker 3: the minimum level of diversification, but it's bought on up.
Speaker 3: Now we look at sector. We don't want to have
Speaker 3: portfolios that are extremely concentrated in any word sector because
Speaker 3: we want to deliver portfolios that are diversified, and unless
Speaker 3: if you speak about our real estate portfolio, our global reachs,
Speaker 3: that's only one sector. The rest are broadly the ify
Speaker 3: across all different sectors. Some sectors we don't include in
Speaker 3: some of our portfolios. For example, if you look at
Speaker 3: our value portfolio, what is a value portfolio for us?
Speaker 3: The portfolio where we want to have very very high
Speaker 3: spector returns. So if you think about utilities, they're not
Speaker 3: going to deliver high spector returns in general. Why everyone
Speaker 3: all of us think about that's a defensive lot better.
Speaker 3: So we don't include utilities in our value portfolios because
Speaker 3: we can't really achieve much higher spect returns with other
Speaker 3: sets of companies. So things like that we take into account.
Speaker 3: There's some modifications how we do valuations in some sectors
Speaker 3: related to others because some metrics are not present. But
Speaker 3: if we treat all the companies basically the same after
Speaker 3: these considerations, what you will see in our portfolios that
Speaker 3: sometimes they get overweighted in some particular sector and other
Speaker 3: times other sectors. And why is that? Because if we
Speaker 3: are finding more attractive securities in one particular sector than others,
Speaker 3: that sector would have more representation in our portfolio than others,
Speaker 3: and that sector will become overweighted. So when you look
Speaker 3: at our stategery, you will see some slow moving sector rotation.
Speaker 3: But it's not that we are just oh, let's buy
Speaker 3: energy today or let's buy financials today. It's because of
Speaker 3: the underlying securities that we're finding that are becoming more
Speaker 3: attracted at that point in time. Give enterprise and fundamentals,
Speaker 3: and those are the one we find more energy securities
Speaker 3: today than financial Well, energy will be a little bit
Speaker 3: more overweighted.
Speaker 2: I want to quickly just go back to a security
Speaker 2: waiting real fast. You know, you mentioned kind of two
Speaker 2: sources of alpha, you know, waiting the securities by expected
Speaker 2: returns and security selection. So let's put aside waitings by
Speaker 2: by factory returns? Is there or expected returns? Is there
Speaker 2: any other you know, things that you look at from
Speaker 2: a risk reducing uh, you know, perspectives such as you know,
Speaker 2: do you do any kind of like me invariance optimization
Speaker 2: or eco risk parity or anything like that as far
Speaker 2: as other inputs to your security weighting.
Speaker 3: Yes, not not the ones that you mentioned. So we
Speaker 3: we we we don't do mean vialdance optimization. We don't
Speaker 3: think it is too stable, and so, but we do
Speaker 3: something similar in order to mean virdance optimization basically trying
Speaker 3: to maximize returns subject to risk consideration, we do something
Speaker 3: similar or not me imviotance optimization, per se, we do
Speaker 3: something that is way more stable than mean bodless optimization.
Speaker 3: And we have other considerations. So, look, if you're buying
Speaker 3: a value portfolio, for example, what is the buying security
Speaker 3: have a low price? While it's if security has high
Speaker 3: price and the price crashes, you know dramatically, at some
Speaker 3: point it will be low price. You're going to wit
Speaker 3: immediately or you're going to consider other things. You mentioned
Speaker 3: momentum at the very beginning of the conversation when you
Speaker 3: were speaking with David. Yeah, we have to take into
Speaker 3: account momentum, We have to take into account other things
Speaker 3: that that gives you a little bit better approach of
Speaker 3: when to enter the position, when to get out of
Speaker 3: the position. So, yes, you have valuations, but if you
Speaker 3: have an expectation that that price will continue to go
Speaker 3: down for some short period of time, and you can't
Speaker 3: wait and do it a little bit later, and so
Speaker 3: we take into account other let's call it factors or
Speaker 3: considerations when we're managing portfolios.
Speaker 1: I know you had mentioned you're looking at prices daily.
Speaker 1: How do you keep turnover low when you're you know,
Speaker 1: keeping track of the portfolio on a daily basis.
Speaker 3: That's a great question. The first the first question that
Speaker 3: I get asked when I say, oh, we manage the
Speaker 3: portfolio on a daily basis, everyone said, oh, your turnomo
Speaker 3: must be here. Our turnomo is not big at all,
Speaker 3: because basically it's a trade off. You're always thinking about
Speaker 3: what how much do I gain my making this trade?
Speaker 3: The benefit of making the trade persue what the costs
Speaker 3: associated with the trade. Yeah, the moment that you consider
Speaker 3: that trade off, it will cause some benefits. Turnover goes
Speaker 3: down dramatically. So in high turnover in general is high cost,
Speaker 3: and so you don't want to have high costs for
Speaker 3: no purpose. So I'm willing to enter into a cost
Speaker 3: if I get the benefit that is much better than
Speaker 3: the cost that I'm facing. And that's a consideration happens
Speaker 3: on a daily basis in our porfolio. Now, some people
Speaker 3: have managed turnover by doing buy and holy strategies. So
Speaker 3: think about any one of the inst we were speaking
Speaker 3: about Russell Russia constitutes once a year. Yeah, so the
Speaker 3: turnover is low because they buy small caps today, they
Speaker 3: close their eyes for twelve months, they open their eyes
Speaker 3: and say, oh, some of the securities a small cup,
Speaker 3: let's change it. So that's not the best way for
Speaker 3: us to deal with turn over. The best way to
Speaker 3: deliver and over is dealing on a daily basis. And
Speaker 3: it's a security moved from a small too large, Maybe
Speaker 3: it's time to sell it. But it's a security moved
Speaker 3: from a small to a little bit higher than a small.
Speaker 3: Maybe you should wait because the truth is that it's
Speaker 3: more or less small at this point. So that kind
Speaker 3: of trade off on a spector returns. How much is
Speaker 3: a spector return that I'm picking up? So the cost
Speaker 3: associated with that trade is what we are considering a
Speaker 3: daily basis to maintain turnover reasonably low.
Speaker 2: I have another question on specifically the value factor. I
Speaker 2: know you do more than just a value factor, but
Speaker 2: specifically with value and I'm not asking for the secret
Speaker 2: sauce here, but you know, I get a lot of
Speaker 2: questions like, you know, what value factors should I use?
Speaker 2: You know, the classic farmer of French is like book
Speaker 2: to market, but there could be potentially some problems with that.
Speaker 2: The economy has changed a lot over the you know,
Speaker 2: fifty years. Do you find value in like a composite
Speaker 2: of value factors as opposed to just one? How do
Speaker 2: you think through that? Yeah, without giving away the secret sauce,
Speaker 2: I would love to know.
Speaker 3: We think about value differently, and we're going to do
Speaker 3: it together. So you are a very solvy investor. You're
Speaker 3: working in Bloombergers amazing company. And if I tell you,
Speaker 3: will you ever buy a company by just looking at
Speaker 3: the balance sheet and not thinking about the cash flows?
Speaker 3: The answer is no. So when you buy companies based
Speaker 3: on price to book, that's what you are doing. You
Speaker 3: are in learning cash flows and band price to look
Speaker 3: because book is balance sheet information. So we agree that
Speaker 3: that's not enough information. The same if I tell you,
Speaker 3: will you ever buy a company based on price to earnings, say, well,
Speaker 3: I would be scared that someone sells me a company
Speaker 3: has good earnings, but the balance sheet is full of liabilities,
Speaker 3: and that's reasonable to be scared of that. So that's
Speaker 3: telling you that you need to consider balance sheet and
Speaker 3: cash flows or earnings at the same time that you're
Speaker 3: considering price. You cannot ignore any one of the fundamentals.
Speaker 3: You have to consider all of the fundamentals, and you
Speaker 3: can think about the compositey of erations. Like you say,
Speaker 3: the way for us to deal with that is just
Speaker 3: dealing with higher discount rates. So and I totally at
Speaker 3: the very beginning that translates into what balance sheet good
Speaker 3: balance sheet, good cash flows and low price, because if
Speaker 3: you have a company that has balance sheet, good cash
Speaker 3: flows and the price is low, the indication is that
Speaker 3: price has been pushed down, so it's a high discount rate.
Speaker 3: That's value for us.
Speaker 1: So you just mentioned a little while ago that you know,
Speaker 1: you might consider selling a security if it gets too big.
Speaker 1: You know, if we're talking about the small cap value,
Speaker 1: is there anything else that would trigger a sell signal,
Speaker 1: you know, if it goes beyond that discount rate or
Speaker 1: other factors that might have you want to, you know,
Speaker 1: sell security in the portfolio.
Speaker 3: Yeah, there may be many different different things. So why
Speaker 3: white things change? The fundamentals may be changing. So you
Speaker 3: can have an amazingly positive surprise in some of the
Speaker 3: fundamentals or negative surprise in the fundamentals now, or it
Speaker 3: can be a merger, or it can be there are
Speaker 3: many reasons beyond price that may be the reason why
Speaker 3: a company just leaves the portfolio. And so price is
Speaker 3: the main source of turnover. So that's always why we
Speaker 3: mentioned price because you think about how much fundamentals change,
Speaker 3: but so how much price changes. Price changes on a second, no,
Speaker 3: every minute, everything is changing a lot. So price is
Speaker 3: the main source of turnover for our strategy, but there
Speaker 3: are other sources of turnover.
Speaker 1: Okay, I just said a couple more, you know, before
Speaker 1: we go. So you know, Eric and our team, we've
Speaker 1: looked at expense ratios compared to inflows, you know, for
Speaker 1: active ETFs and found that the most successful active funds
Speaker 1: so far only charged for active and not beta, you know,
Speaker 1: whereas the old way of you know, in the old
Speaker 1: mutual funds twenty years ago, we charge a high fee
Speaker 1: for both beta and active. In your average expense ratio
Speaker 1: is around twenty four basis points or something around that range.
Speaker 1: What are your thoughts about the future of active products
Speaker 1: and only charging for the active component.
Speaker 3: Look, we can, as I mentioned at the very beginning,
Speaker 3: we came to market trying to have a very very
Speaker 3: attractive proposition for investors. So if you have a good restaurant.
Speaker 3: Let's just peak up a soushal. Now let's peak about restaurants.
Speaker 3: You have a good restaurant where you have a good menu,
Speaker 3: good service and low price, the restaurant will be before Yeah.
Speaker 3: And so we want to have good products, good service,
Speaker 3: and very recentable expense rations. And I want expense rations
Speaker 3: go from fifteen basis points like you mentioned a large
Speaker 3: cape strategy or large Baldy strategies or our US market.
Speaker 3: Why fifteen basis points? The small values is twenty five?
Speaker 3: You going to international, we have higher costs, so we
Speaker 3: have to charge a little bit more, but that our
Speaker 3: expense ratios are are very attractive and we think we're
Speaker 3: going to get We got a lot of clients and
Speaker 3: we think we're going to get even more clients. So
Speaker 3: from the point of view of running a business, I
Speaker 3: think we're running some business that can provide something that
Speaker 3: is good value after expense ratios to the in client.
Speaker 3: So if you provide something that is good to the
Speaker 3: in client, your business will grow. And that's our philosophy.
Speaker 3: We want to be providing something that is good for you,
Speaker 3: mister investor, misinvestor, and if we do that, you will
Speaker 3: knock at the door and buy what we have and
Speaker 3: everyone is happy. We are happy because we provide a
Speaker 3: good service that hopefully you like and you enjoy our
Speaker 3: long pinions of time. And if investors are happy, we succeed.
Speaker 1: Well, you're definitely setting the blueprint for active management, you know,
Speaker 1: at least in the etf rapper. But you know, I
Speaker 1: do want to ask you one question before we let
Speaker 1: you go. What do you would you say that you
Speaker 1: know today about invest thing you wish you knew twenty
Speaker 1: twenty five years ago.
Speaker 3: Oh, that's a difficult one. I will say, every day
Speaker 3: we learn something so and in the next twenty years
Speaker 3: we will learn new things. So it is a difficult one.
Speaker 3: But one thing that is important I think with Christopher
Speaker 3: was mentioned at the beginning, is all of us learn
Speaker 3: a lot through factors, you know, so we come try
Speaker 3: re quiant worlds of factors. And I think that factors
Speaker 3: and valuations are merging into something that now is indistinguishable,
Speaker 3: you know, And that's where we are. We are at
Speaker 3: the point where thinking about factors, thinking of valuation is
Speaker 3: basically thinking. If you think about right, a lot of
Speaker 3: the things you are really thinking about valuations holistically. The
Speaker 3: company level, because that's what drives the existence of factors.
Speaker 3: That's what it drives the existence of premiums. And it's
Speaker 3: much much better to think about a company holistically than
Speaker 3: thinking about individual factors that they are. There is a
Speaker 3: paper out there called the Factors Zoo and probably Christopher
Speaker 3: knows very well, or four hundred factors documenting there what
Speaker 3: doesn't mean? Well, can we put all that into evaluation
Speaker 3: of a company and from there understand what's going on?
Speaker 3: Because that's going to help us have better portfolios. And
Speaker 3: so I will have a love to know this and
Speaker 3: think about these twenty years ago. Oh, but you know,
Speaker 3: that's life. We'll learn every day we learn something new
Speaker 3: and we evolved when we come better hopefully and in
Speaker 3: the next twenty years, we will speak again and say
Speaker 3: what you learned from from last time that start meeting
Speaker 3: twenty years ago? And I say, oh, we learned all
Speaker 3: these things, and you know, I hope I could have
Speaker 3: known that twenty years ago. But that's life. You know,
Speaker 3: we'll learn markets has changed twenty years ago. It CTF
Speaker 3: were just nothing. Remember twenty years ago, Yeah, we're tiny.
Speaker 3: And today you know you see the flows into TF.
Speaker 3: So that flows into funds. It's obvious. You know, what's
Speaker 3: a better technology?
Speaker 1: Yeah, well, this is definitely a great discussion. Chris Eduardo,
Speaker 1: thank you guys so much for joining me today.
Speaker 3: A pleasure. Thank you Eduardo.
Speaker 1: Until our next episode, this is David Cohne with Inside
Speaker 1: Active