WEBVTT - Madison Funds’ Haruki Toyama on Moat Investing 0:00:14.440 --> 0:00:18.040 Welcome to Inside Active, podcast about active managers that goes 0:00:18.079 --> 0:00:21.960 beyond sound bites and headlines, looks deeper into the processes, 0:00:22.160 --> 0:00:26.200 challenges and philosophies and security selection. I'm David cone I, 0:00:26.280 --> 0:00:29.880 lead mutual fund and active Research at Bloomberg Intelligence. Today 0:00:30.000 --> 0:00:33.240 my co host is Gina Martin Adams, chief equity strategist 0:00:33.240 --> 0:00:36.400 at Bloomberg Intelligence. Gina, thanks for joining me today. 0:00:37.000 --> 0:00:39.280 Thank you for having me, David, I'm delighted to be here. 0:00:39.360 --> 0:00:41.960 Well, it's been an interesting few days in the market. 0:00:42.920 --> 0:00:45.559 Last week you published one of your This Week in 0:00:45.680 --> 0:00:49.600 Charts notes just noting the effect of the tariffs on 0:00:49.640 --> 0:00:52.080 the market the last week or so. How do you 0:00:52.120 --> 0:00:54.240 see them affecting earnings going forward? 0:00:54.600 --> 0:00:57.080 Yeah, good question. I think that's the million dollar question 0:00:57.120 --> 0:01:00.000 that equity markets investors are grappling with at this moment 0:01:00.080 --> 0:01:02.880 and time. One of the things that we've done a 0:01:02.920 --> 0:01:06.240 lot of work on is just how much the S 0:01:06.280 --> 0:01:09.680 and P five hundred in particular has exposure via cost 0:01:09.680 --> 0:01:14.280 of goods sold to overseas suppliers. How much their factory base, 0:01:14.360 --> 0:01:18.680 for instance, is also located overseas and this is a 0:01:19.000 --> 0:01:22.480 primary risk, with the secondary risk being maybe as they 0:01:22.520 --> 0:01:26.240 attempt to pass on price increases, consumers push back of it, 0:01:26.520 --> 0:01:30.800 and we see downside impacts to the economy. So it's 0:01:30.800 --> 0:01:35.520 pretty complicated, is the short answer. Broadly, what we're seeing 0:01:35.520 --> 0:01:40.080 already is earnings expectations have shifted from at the start 0:01:40.080 --> 0:01:42.800 of the year. Analysts we're forecasting thirteen percent growth for 0:01:43.040 --> 0:01:47.000 large cap stocks are now forecasting nine. The moving parts 0:01:47.040 --> 0:01:50.920 of macro, what would lead you to believe that we're 0:01:51.000 --> 0:01:53.720 likely to get closer to zero percent earnings growth over 0:01:53.760 --> 0:01:57.000 the next twelve months, just considering how much slowdown we've 0:01:57.040 --> 0:02:01.160 already seen in new orders and consumer confidence, so we're 0:02:01.160 --> 0:02:04.720 seeing downside revision momentum emerge. I do think right now 0:02:04.760 --> 0:02:07.200 it's just a question of will we ultimately end up 0:02:07.240 --> 0:02:10.000 in a recession as a result of the slowdown that 0:02:10.080 --> 0:02:13.360 has already started, or will we see just more of 0:02:13.440 --> 0:02:15.920 slower growth going forward and that's going to impact the 0:02:15.919 --> 0:02:17.960 earnings out look materially well. 0:02:17.960 --> 0:02:20.520 Definitely be interesting to watch, and so I think this 0:02:20.560 --> 0:02:24.200 is a great time to welcome our guest, Harouki Toyama, 0:02:24.320 --> 0:02:27.480 to Inside Active. Haruki is head of MidCap and large 0:02:27.480 --> 0:02:31.000 cap equity at Madison Funds and a portfolio manager for 0:02:31.040 --> 0:02:34.919 the firm's large cap in MidCap funds tickers m n 0:02:35.080 --> 0:02:38.440 VAX and mr AX. Harouki, thank you so much for 0:02:38.520 --> 0:02:39.320 joining us today. 0:02:39.720 --> 0:02:40.880 Well, thank you for having me. 0:02:41.639 --> 0:02:44.400 Before we start talking about the funds in the market, 0:02:44.800 --> 0:02:47.320 how about we start by just telling us a little 0:02:47.320 --> 0:02:49.800 bit about your investment background, how you got your start 0:02:49.800 --> 0:02:50.440 in the industry. 0:02:50.960 --> 0:02:53.400 Sure, so that goes back quite a ways, I guess. 0:02:54.400 --> 0:02:57.840 But back when I was in college, I was a 0:02:58.000 --> 0:03:02.920 music and artistic toy major and had some pressure to 0:03:03.000 --> 0:03:06.040 maybe perhaps study something that had more of a career, 0:03:07.400 --> 0:03:09.720 a better career outlook, So I added economics. I had 0:03:09.720 --> 0:03:11.640 taken one class, and I was interested, So I ended 0:03:11.680 --> 0:03:14.720 up studying economics. Now, the interesting thing is I was 0:03:14.840 --> 0:03:18.760 much more interested in political economics and macro and so on. 0:03:19.639 --> 0:03:22.240 But I ended up after school getting a job at 0:03:22.240 --> 0:03:25.240 a financial advisory firm that got me really interested in 0:03:25.280 --> 0:03:28.040 the markets and stock markets specifically, And so that's how 0:03:28.040 --> 0:03:31.079 I ended up in the business. And I have to say, 0:03:31.120 --> 0:03:33.760 what really drew me in was I happened to stumble 0:03:33.840 --> 0:03:36.760 upon the writings of Warren Buffett, and it sort of 0:03:36.840 --> 0:03:41.720 clipped with me that investing in stocks is really you 0:03:41.760 --> 0:03:44.560 shouldn't think of it as financial markets or pieces of 0:03:44.560 --> 0:03:45.560 paper that you trade. 0:03:45.600 --> 0:03:46.440 You should think of it. 0:03:46.400 --> 0:03:50.240 As a fractional ownership in actual companies. And that really 0:03:50.280 --> 0:03:53.960 clicked with me psychologically. I just felt like it felt 0:03:54.040 --> 0:03:55.839 right to me. It was a good fit with how 0:03:55.880 --> 0:03:58.280 I would like to invest, just thinking long term. And 0:03:58.360 --> 0:04:01.120 so I ended up going back to business school to 0:04:01.160 --> 0:04:04.800 really study more of the micro side of economics, right, 0:04:04.880 --> 0:04:08.160 businesses and finance and accounting and strategy and so on, 0:04:08.280 --> 0:04:10.720 and then end up in Boston for a long time. 0:04:10.800 --> 0:04:13.080 And then I've been here in Madison for a couple 0:04:13.040 --> 0:04:13.440 of decades. 0:04:13.480 --> 0:04:17.839 The great well, let's actually talk about Madison. Is there 0:04:18.000 --> 0:04:22.800 an investment philosophy the equity managers adhere to at the firm. 0:04:23.680 --> 0:04:26.160 Yeah, at a high level, what we like to think 0:04:26.200 --> 0:04:29.640 of a couple things. One is, again we have a 0:04:29.720 --> 0:04:34.159 deeply held philosophy that we're not investing in pieces of 0:04:34.200 --> 0:04:37.280 paper that we trade. We don't buy something looking to 0:04:37.320 --> 0:04:39.839 get out or hope that someone pays a much higher 0:04:39.880 --> 0:04:42.480 price a month for now, six months, an hour, or 0:04:42.560 --> 0:04:44.919 even one two three years from now. We think of 0:04:45.000 --> 0:04:48.200 it as truly taking an ownership stake in a company. 0:04:48.800 --> 0:04:49.919 So at a high level. 0:04:49.960 --> 0:04:52.600 We think of it as, hey, if you had to 0:04:52.680 --> 0:04:56.640 buy a company hole and you could only buy five 0:04:56.800 --> 0:04:59.599 ten companies, and you had to buy it and leave 0:04:59.640 --> 0:05:02.360 it to the next generation of your family, would this 0:05:02.440 --> 0:05:04.440 be the kind of company you want to own? So 0:05:04.480 --> 0:05:07.920 that's our real high level screen when we look at companies, 0:05:08.200 --> 0:05:11.960 and so everything else we do follows from that. And 0:05:12.000 --> 0:05:15.080 so we're very risk averse, right, because we don't really 0:05:15.080 --> 0:05:17.320 feel like we can get in and get out before 0:05:17.480 --> 0:05:20.200 everyone else sees bad stuff happening. So we try to 0:05:20.200 --> 0:05:24.160 buy resilient companies, right, So we're not looking to reposition 0:05:24.240 --> 0:05:27.560 ourselves just because things are changing in the environment or 0:05:27.640 --> 0:05:31.159 outside conditions, whether it's macro rates, terrorists for example. Right, 0:05:31.400 --> 0:05:34.720 we're looking to buy companies anticipating that lots of bad 0:05:34.760 --> 0:05:38.000 things will happen in the next five, ten, twenty years, 0:05:38.200 --> 0:05:41.240 and so the resiliency is probably the most important thing 0:05:41.279 --> 0:05:43.479 we look forward. Of course, we want growth, so that's 0:05:43.480 --> 0:05:47.599 at a high level. And because of that, we were 0:05:47.640 --> 0:05:52.479 not overly diversified or two major strategies, owned sort of 0:05:52.560 --> 0:05:54.960 thirty companies give or take at any point in time, 0:05:55.440 --> 0:05:59.159 and we're very long term. We own companies on average 0:05:59.600 --> 0:06:02.440 seven nine years. 0:06:02.640 --> 0:06:02.919 Great. 0:06:03.000 --> 0:06:06.360 Now if we, you know, focus specifically on the large 0:06:06.360 --> 0:06:11.360 cap fund, is there a process you follow to select securities? 0:06:11.680 --> 0:06:14.800 Absolutely, and the process is less of a checklist that 0:06:14.839 --> 0:06:18.520 you follow each time, but it's it's number one. Your 0:06:18.520 --> 0:06:22.040 first screen is is this a high quality business? 0:06:22.400 --> 0:06:22.640 Right? 0:06:22.839 --> 0:06:25.280 We care about valuation, of course, and we do that 0:06:25.360 --> 0:06:28.600 research sort of together at the same time in parallel. 0:06:28.640 --> 0:06:32.240 But again it all comes down to what is the 0:06:32.360 --> 0:06:35.880 quality of this business? And we really ask ourselves two 0:06:35.920 --> 0:06:39.240 main questions. One is how good is the business model itself? 0:06:39.440 --> 0:06:41.719 Is this structurally a good sound business? 0:06:42.160 --> 0:06:44.000 Right? So does it have durable growth? 0:06:44.040 --> 0:06:46.440 Because again we're not just thinking about the next one, two, 0:06:46.480 --> 0:06:49.719 three years, We're thinking about five, ten, fifteen, twenty plus 0:06:49.800 --> 0:06:53.280 years out right, We're thinking about. 0:06:54.080 --> 0:06:55.240 Does it have a mote? 0:06:55.600 --> 0:06:57.640 If we had to really internally, if you listen to 0:06:57.680 --> 0:07:01.680 our conversations, we are bously consider a lot of factors 0:07:01.680 --> 0:07:05.200 with quality, but probably first among equals is does a 0:07:05.240 --> 0:07:06.679 company have a true mote? 0:07:07.560 --> 0:07:07.720 Right? 0:07:07.760 --> 0:07:10.480 So this is the more and buppet sense of if 0:07:10.520 --> 0:07:15.320 a company's profitability is a castle, everyone else is trying 0:07:15.360 --> 0:07:19.120 to take away those profits right directly or indirectly, And 0:07:19.200 --> 0:07:22.000 so how good is your mote to protect those profits. 0:07:22.000 --> 0:07:25.960 And it's not just competitors, right. Your customers, right, they 0:07:26.000 --> 0:07:30.160 want more from you for less, right. Your vendors they 0:07:30.200 --> 0:07:32.440 want to give you less in some ways and charge 0:07:32.440 --> 0:07:35.160 you more, right. And they're external factors where there's governments 0:07:35.160 --> 0:07:36.960 and so on. So we think about all those things, 0:07:37.360 --> 0:07:39.680 and we want companies to have the widest and deep 0:07:39.760 --> 0:07:43.280 at most most possible because that's what really allows us 0:07:43.280 --> 0:07:47.040 to have confidence and what the profits may look like 0:07:47.200 --> 0:07:49.640 five ten, fifteen years out right. We don't want to 0:07:49.720 --> 0:07:52.960 own a company for even a day if we don't 0:07:52.960 --> 0:07:54.400 think we want to own it for years. 0:07:55.080 --> 0:07:55.240 Right. 0:07:55.320 --> 0:07:58.640 So that's what our number one approach and number one 0:07:58.680 --> 0:08:00.520 topic is when we look at a company, do we 0:08:00.520 --> 0:08:06.040 feel comfortable right making some general sort of broad projection 0:08:06.280 --> 0:08:10.160 that profits will be quite a bit higher in five, ten, fifteen, 0:08:10.200 --> 0:08:12.920 twenty years than they are today. And once we do that, 0:08:12.960 --> 0:08:16.640 then we think about valuation. Now, valuation is obviously hugely important. 0:08:16.640 --> 0:08:18.200 We don't want to pay up too much. We're very 0:08:18.200 --> 0:08:22.120 disciplined about that, and it plays into maybe which companies 0:08:22.160 --> 0:08:24.840 we look at. We don't ignore valuation because we want 0:08:24.880 --> 0:08:27.360 to look for companies that might be actionable in the 0:08:27.360 --> 0:08:29.800 near term in terms of making investment. So we kind 0:08:29.840 --> 0:08:31.800 of look at things that we think maybe close to 0:08:32.720 --> 0:08:33.680 discount of value. 0:08:33.720 --> 0:08:35.320 But that's how we are postings. 0:08:36.720 --> 0:08:38.400 Can we take in a little bit more into that 0:08:38.559 --> 0:08:41.480 quality factor, because I think it's really fascinating, particularly at 0:08:41.480 --> 0:08:43.960 this point in time, to think about quality and an 0:08:44.040 --> 0:08:49.560 environment where trade relationships are changing. We're certainly seeing some 0:08:49.600 --> 0:08:53.160 pretty big disruptions to the potential margin outlook from a 0:08:53.240 --> 0:08:57.120 multitude of companies as a result of trade policy shifts, 0:08:57.200 --> 0:08:59.800 right and the ability of companies to take advantage of 0:09:00.000 --> 0:09:02.959 globalized supply chains coming under a lot of fire here, 0:09:03.760 --> 0:09:06.080 Are you changing the way that you look at quality 0:09:06.240 --> 0:09:09.200 at all? Are there certain metrics that you rely on 0:09:09.320 --> 0:09:14.840 that you're thinking of of changing, or how do you 0:09:14.920 --> 0:09:19.760 see your definition of quality potentially challenged or changed by 0:09:19.800 --> 0:09:22.880 this big macro shift that is now underway. 0:09:23.800 --> 0:09:26.240 Yeah, that's a great point, Jane. And so we have 0:09:26.280 --> 0:09:29.480 a couple of frameworks from mind. One is the first 0:09:29.559 --> 0:09:31.839 question is, of course we try to make predictions and 0:09:32.000 --> 0:09:35.320 understand what the regulatory in this case tariff environment will be, 0:09:35.800 --> 0:09:39.760 but we also understand that no one really knows, right 0:09:39.800 --> 0:09:41.600 will this particular tariff. 0:09:41.320 --> 0:09:44.920 For gam last six months? Will it last six years? Right? 0:09:45.000 --> 0:09:47.160 So we don't want to necessarily assume that it will 0:09:47.200 --> 0:09:50.000 be there forever because then you're always swinging around what 0:09:50.040 --> 0:09:52.080 you think about companies. Right, So you're asking, do we 0:09:52.080 --> 0:09:55.360 make a permanentciation? The answer is yes, to the extent 0:09:55.440 --> 0:09:59.600 it matters. But going back to my very first point, 0:09:59.679 --> 0:10:02.720 when we try to buy a company, we're already considering 0:10:03.640 --> 0:10:04.920 some of these factors in place. 0:10:05.000 --> 0:10:05.080 Right. 0:10:05.080 --> 0:10:07.240 It's not that we're saying what would happen if terrafs 0:10:07.280 --> 0:10:08.280 went up fifty percent? 0:10:08.320 --> 0:10:08.920 What would happen? 0:10:08.960 --> 0:10:12.760 But it's how resilient is that company's model to something 0:10:12.920 --> 0:10:16.120 like tariffs? And so the main issue, for example is 0:10:17.840 --> 0:10:20.520 probably two or three factors matter most. How resilient is 0:10:20.520 --> 0:10:22.880 your supply chain. So that's something we've already looked at. 0:10:23.000 --> 0:10:23.120 Right. 0:10:23.160 --> 0:10:25.760 If a company is way too dependent on one or 0:10:25.800 --> 0:10:29.680 two countries or certain tariff regimes in place for cross 0:10:29.720 --> 0:10:32.160 border flows, we would have already considered that as a 0:10:32.240 --> 0:10:34.760 risk factor and already put that in valuation. 0:10:34.920 --> 0:10:36.760 So this shouldn't change things a whole lot. 0:10:37.360 --> 0:10:40.440 Probably the most important thing really is how good is 0:10:40.480 --> 0:10:44.600 the pricing power of a company, and how good. 0:10:44.480 --> 0:10:48.040 Is that position relative to its competitors. Right. 0:10:48.240 --> 0:10:50.440 So one example I'll give you. We own a company 0:10:50.559 --> 0:10:53.280 called pack Car. They're one of the largest Class eight 0:10:53.640 --> 0:10:57.280 and medium duty truck manufacturers in the US. They already 0:10:57.320 --> 0:11:00.120 have had a philosophy for a very long time of 0:11:00.200 --> 0:11:04.120 build locally for local demand. So for the US trucks 0:11:04.160 --> 0:11:07.199 that they sell, over ninety percent of what they sell 0:11:07.400 --> 0:11:11.400 is actually manufactured in the US. And the most important 0:11:11.400 --> 0:11:15.400 thing is their main competitors have a much much higher 0:11:15.880 --> 0:11:18.280 percentage of trucks that they manufacture outside of the US, 0:11:18.400 --> 0:11:19.480 especially in Mexico. 0:11:19.679 --> 0:11:19.880 Right. 0:11:20.000 --> 0:11:24.760 And so obviously and demand will get hurt, right if 0:11:24.800 --> 0:11:28.120 the economy slows, Right, So that's sort of an overall 0:11:28.240 --> 0:11:31.480 macro impact on a company like pack Are, But their 0:11:31.520 --> 0:11:36.760 competitive position will actually improve dramatically, right, So we try 0:11:36.800 --> 0:11:38.920 to kind of balance those things. What does it mean 0:11:39.000 --> 0:11:43.800 for profitability? And obviously from Amerco situation, it's possible that 0:11:43.840 --> 0:11:48.880 the reduction and demand will overwhelm any competitive advantage that improves. 0:11:49.120 --> 0:11:51.320 But when you really think about five, ten, fifteen years, 0:11:51.320 --> 0:11:53.439 you have to make some assumption that trucks are necessary 0:11:53.840 --> 0:11:56.120 in this country. I'm not really sure that truck demand 0:11:56.120 --> 0:11:58.840 to be suppressed at a very low level forever, So 0:11:58.880 --> 0:12:01.040 you have to mix them with some that our economy 0:12:01.080 --> 0:12:04.199 will adjust over time. And when that happens, sort of 0:12:04.240 --> 0:12:06.679 the unit demand will come back to some sort of 0:12:06.679 --> 0:12:09.600 normalized level, and that packer will actually be in a 0:12:09.640 --> 0:12:12.560 more improved competitive position and their profits may actually be higher. 0:12:12.559 --> 0:12:14.560 We try to run some numbers. It's not exact science 0:12:14.559 --> 0:12:16.600 obvious here. So those are the kind of things that 0:12:16.640 --> 0:12:19.600 we've thought about in advance. Now you do have when 0:12:19.600 --> 0:12:22.280 you own a portfolio thirty stocks, there are some companies 0:12:22.679 --> 0:12:26.520 that perhaps are in somewhat of a less advantage position, 0:12:26.679 --> 0:12:28.920 or maybe the end demand and we think may overwhelm 0:12:28.960 --> 0:12:31.600 those issues, and maybe they can't quite pass on prices 0:12:31.600 --> 0:12:33.599 as much. Fourth, So you have to make those adjustments. 0:12:33.880 --> 0:12:36.880 But generally speaking, our portfolio is already pretty resilient. 0:12:38.200 --> 0:12:42.480 Right And when you think about this notion of a moat, 0:12:42.800 --> 0:12:44.760 and I hear this moat word a lot with the 0:12:44.840 --> 0:12:48.559 mag seven for example, in large cap stocks. But I'm 0:12:48.600 --> 0:12:53.080 curious how you think about the differences between investing in 0:12:53.160 --> 0:12:56.360 mid caps versus large caps with respect to the moat? 0:12:56.800 --> 0:13:01.520 Are there great examples of moat some high quality companies 0:13:01.559 --> 0:13:05.079 in mid caps that you're finding these days that you 0:13:05.120 --> 0:13:06.920 know investors maybe just don't appreciate. 0:13:08.000 --> 0:13:11.959 Yeah, that's a good point, and so one of the 0:13:11.960 --> 0:13:16.880 most that the bigger you get, it's very possible that scale, 0:13:17.600 --> 0:13:20.360 right becomes an important mode. So that's probably a big 0:13:20.400 --> 0:13:23.480 difference between when you look at super large caps. So 0:13:23.520 --> 0:13:25.960 when you talk about the maximum and we're talking about megacaps, right, 0:13:26.000 --> 0:13:28.760 we're really talking about the biggest ten, twenty thirty companies 0:13:28.760 --> 0:13:29.199 in the world. 0:13:29.559 --> 0:13:31.040 At that level, there's. 0:13:30.880 --> 0:13:33.680 A certain amount of scale and network effect that becomes 0:13:33.679 --> 0:13:36.000 a tremendous mode. So you want to be careful investing 0:13:36.080 --> 0:13:39.120 in even a MidCap, which we call it in our business, 0:13:39.120 --> 0:13:41.520 we'd like to call it MidCap. By standards of the 0:13:41.600 --> 0:13:45.199 world and economy, these are giant companies, right, but they 0:13:45.280 --> 0:13:49.000 become really small compared to the alphabets and so on, 0:13:49.040 --> 0:13:51.240 So you have to consider that an account. So if 0:13:51.280 --> 0:13:54.199 we see a MidCap and they compete at some level 0:13:54.280 --> 0:13:58.280 directly with some of these megacaps that have superior scale 0:13:58.320 --> 0:14:01.360 and global and already have a position, we'd be much 0:14:01.360 --> 0:14:04.520 more wary. So what we try to do in midcaps 0:14:04.520 --> 0:14:06.920 are find companies where they don't have that sort of 0:14:07.240 --> 0:14:10.600 competitive landscape, right, they're not competing against much more scale 0:14:10.640 --> 0:14:14.040 companies and within the universe or within the industry they 0:14:14.080 --> 0:14:20.080 operate in. Our midcaps tend to be the scaled advantage competitors, right, 0:14:20.160 --> 0:14:21.840 And so that's how we think about it. It's not 0:14:21.920 --> 0:14:24.080 a direct place, it's not just a larger the better. 0:14:24.160 --> 0:14:28.560 Therefore Beta and Amazon will beat everybody up, right, So 0:14:28.600 --> 0:14:31.520 we'll get an example, so were we'd be much warrier 0:14:32.440 --> 0:14:35.680 about investing in a retail company because they do compete 0:14:35.720 --> 0:14:38.720 against Amazon, right. It takes much more money and brand 0:14:38.840 --> 0:14:39.800 and so on to have. 0:14:39.800 --> 0:14:43.160 The logistical infrastructure. So absolutely it is harder. 0:14:42.800 --> 0:14:45.760 To compete agains an Amazon if you're sort of a 0:14:45.760 --> 0:14:48.960 mid sized retail competitor. On the other hand, we've owned 0:14:49.000 --> 0:14:52.560 a company, let's call it called copart for a long time. 0:14:52.600 --> 0:14:57.000 They're the leading auctioneer of salvage cars. So when you 0:14:57.080 --> 0:15:00.760 get in the wreck, right, the insurance company hire someone 0:15:00.840 --> 0:15:04.160 to come toll your car away. Copart runs all the 0:15:04.240 --> 0:15:07.840 auctions to sell these wrecked cars. That's a very local 0:15:07.880 --> 0:15:09.600 business because you don't want to have to toll your 0:15:09.640 --> 0:15:12.400 car for hundreds of miles. So there's all these regional 0:15:12.440 --> 0:15:17.040 sites where copart holds weekly auctions to sell these wrecked cars. 0:15:17.480 --> 0:15:21.720 That's not a giant, scaled market. You're not competing against, right, 0:15:22.200 --> 0:15:24.840 an Amazon that has a location in France or Seals 0:15:24.880 --> 0:15:27.480 in UK and therefore is much more scale. Brand doesn't 0:15:27.480 --> 0:15:29.720 matter as much, right, as long as you can efficiently 0:15:30.480 --> 0:15:33.400 sell those cars at an auction, you do well. And 0:15:33.800 --> 0:15:36.720 it's already a dominant player in its field. The industry 0:15:36.720 --> 0:15:39.000 happens to be a duopoly and co part is a 0:15:39.080 --> 0:15:41.960 larger of the two, so it's already scaled. So we've 0:15:42.000 --> 0:15:45.360 actually seen bigger competitors try to get into the market 0:15:45.640 --> 0:15:49.240 and spend literally hundreds of millions of dollars to break in, 0:15:49.280 --> 0:15:51.480 and they can't. So that's kind of what we look for. 0:15:52.240 --> 0:15:56.880 Okay. Interesting speaking of mid caps, it was so intriguing 0:15:56.920 --> 0:15:59.120 to me that in the month of March, large caps 0:15:59.120 --> 0:16:01.840 and small caps under performed midcaps, and I just wanted 0:16:01.840 --> 0:16:03.520 to get your perspective on this. Is this just a 0:16:03.560 --> 0:16:06.880 cork of the data? Was there something really interesting happening 0:16:06.920 --> 0:16:09.800 in mid caps? What's behind that trade? 0:16:10.040 --> 0:16:12.560 Well, that's an interesting point. You know, when we look 0:16:12.600 --> 0:16:15.760 at monthly performers data of industries, we don't we try to. 0:16:15.760 --> 0:16:16.440 Read too much in it. 0:16:16.520 --> 0:16:20.160 Things can change, there's lots of factors that can influence it, 0:16:20.440 --> 0:16:23.160 so we really don't read into that sort of short 0:16:23.240 --> 0:16:27.240 term data. What is interesting if you really look at 0:16:27.240 --> 0:16:31.000 the long term data, right, we do like the midcaps 0:16:31.040 --> 0:16:34.760 space in the sense that they tend to perform as 0:16:34.840 --> 0:16:39.560 well or maybe somewhat better than large caps right over time, 0:16:40.080 --> 0:16:42.760 just like historically small caps did for a while. But 0:16:42.840 --> 0:16:44.640 we do think midcaps are a little bit more of 0:16:44.640 --> 0:16:47.720 a sweet spot. They tend to be larger and more 0:16:47.760 --> 0:16:51.920 scale than have proven themselves over time, right, and they 0:16:51.920 --> 0:16:54.600 tend to have better access to capital markets and so on. 0:16:54.680 --> 0:16:58.160 They tend to be resilient, so unlike small caps, they've 0:16:58.200 --> 0:17:02.200 kind of gone past that phase of worrying about whether 0:17:02.200 --> 0:17:05.560 they're going to survive or thrive in downturns, and yet 0:17:05.600 --> 0:17:08.280 they still have a lot of growth runway. So we 0:17:08.359 --> 0:17:11.040 think what's interesting if you look at the past thirty 0:17:11.119 --> 0:17:14.680 years of Russell mccap data, and so the Russell indices, 0:17:14.720 --> 0:17:18.679 as you know, the Russell MidCap is Z takes the 0:17:18.800 --> 0:17:23.520 one thousand largest stocks by market cap in the US 0:17:23.680 --> 0:17:27.359 and the bottom eight hundred are defined as midcaps. So 0:17:28.600 --> 0:17:31.200 if you compare those bottom eight hundred, to say, the 0:17:31.240 --> 0:17:33.040 top two hundred, which we can think. 0:17:32.920 --> 0:17:34.000 Of as large caps. 0:17:34.440 --> 0:17:37.600 Right, if you look over the past thirty years, a 0:17:37.680 --> 0:17:41.240 total return has been pretty similar. Russell miccaps are actually 0:17:41.240 --> 0:17:44.760 ahead by about half a point perhaps, But then you 0:17:44.800 --> 0:17:47.399 can divide that thirty years call into two periods. In 0:17:47.440 --> 0:17:51.040 the first fifteen years, so the period end in two 0:17:51.080 --> 0:17:54.760 thousand and nine, let's call it. Russell mccaps outperform those 0:17:54.800 --> 0:17:57.840 top two hundred by quite a bit, two two and 0:17:57.880 --> 0:18:01.640 a half points right now in in your since that's reverse, 0:18:01.880 --> 0:18:04.959 large caps have outperformed by two two and a half points. 0:18:05.240 --> 0:18:07.520 And so these things run in cycles, and these cycles 0:18:07.520 --> 0:18:10.160 sometimes can last a long time, but over time they're 0:18:10.200 --> 0:18:13.520 going to be similar, and we think very often people 0:18:13.600 --> 0:18:18.520 neglect that fact and they sort of they may perhaps 0:18:18.960 --> 0:18:21.399 run to what's been working, such as the megacaps the 0:18:21.480 --> 0:18:23.960 last call it ten fifteen years. They may run to 0:18:24.119 --> 0:18:27.080 perceive safety of large caps, but over time they tend 0:18:27.119 --> 0:18:29.080 to wash out. And so we think the caps are 0:18:29.080 --> 0:18:31.280 definitely an attracted place to be interesting. 0:18:31.320 --> 0:18:33.040 So that leads me to my next question, and is 0:18:33.040 --> 0:18:36.600 that is, how do you navigate volatile or down markets 0:18:36.640 --> 0:18:38.879 like what we have today. You know the S and 0:18:38.920 --> 0:18:41.879 P five hundred now testing an official bear market. Small 0:18:41.920 --> 0:18:45.640 caps really struggling so far this year. Does that make 0:18:45.720 --> 0:18:49.760 you think in terms of capitalization concentration in your portfolio 0:18:49.800 --> 0:18:52.280 a little bit differently? Do you find yourself leaning into 0:18:52.320 --> 0:18:56.200 mid caps for opportunity? How do you think about down 0:18:56.240 --> 0:18:58.520 markets like what we have in the spring of twenty 0:18:58.560 --> 0:18:59.080 twenty five. 0:18:59.480 --> 0:18:59.640 Yeah. 0:19:00.080 --> 0:19:03.200 Point, So there's two things. One is, we are purely opportunistic, 0:19:03.600 --> 0:19:06.560 so we'll look around and if the larger stocks or 0:19:06.640 --> 0:19:09.080 larger companies are somewhat cheaper, we look at them one 0:19:09.080 --> 0:19:11.840 by one, right, and so we'll go after that whatever 0:19:11.880 --> 0:19:14.600 opportunity arises. And again, we don't tend to have a 0:19:14.640 --> 0:19:17.080 lot of turnover. We own thirty year stocks. Then we 0:19:17.119 --> 0:19:19.119 may buy a handful of new companies a year, so 0:19:19.160 --> 0:19:21.840 we only need one or two really great ideas in 0:19:21.880 --> 0:19:25.040 the giving year to really make it work for us. 0:19:25.720 --> 0:19:28.000 The other point is, I'll go back to that point 0:19:28.040 --> 0:19:33.560 of resiliency. Don't We don't necessarily trade a lot in 0:19:33.640 --> 0:19:36.679 these times. We hope to find opportunities to find and 0:19:36.760 --> 0:19:39.560 purchase and make new investments. But hopefully if we did 0:19:39.600 --> 0:19:44.280 it right right, we own a portfolio companies that we like, right, 0:19:44.520 --> 0:19:46.720 and regardless of what the market is are in the 0:19:46.720 --> 0:19:49.360 economy is doing. Hopefully, we have companies that are resilient 0:19:49.440 --> 0:19:52.960 and can weather through this. And in fact, by definition, 0:19:53.440 --> 0:19:55.840 a lot of our companies tend to have better balance 0:19:55.880 --> 0:20:01.800 sheets and better competitive positioning. So over time, these downturns 0:20:01.840 --> 0:20:03.639 are good for them. They will come out of it 0:20:03.760 --> 0:20:07.639 in a stronger relative positions. Right, if they have to 0:20:07.680 --> 0:20:10.800 compete against the company with a weak balance sheet barring 0:20:10.840 --> 0:20:13.840 a lot of money, their CFO, their CEO is now 0:20:13.920 --> 0:20:17.520 spending a lot of time talking to their bankers. Right, 0:20:17.880 --> 0:20:21.280 They're spending a lot of time plugging holes and having 0:20:21.320 --> 0:20:24.600 to sort of be a little bit more defensive and careful. Right, 0:20:24.640 --> 0:20:26.640 whereas the kind of companies and we invest and can 0:20:26.640 --> 0:20:29.120 play more offense. And so what you tend to see 0:20:29.160 --> 0:20:31.720 is that coming out of the downturns, our companies come 0:20:31.760 --> 0:20:35.159 out in a better relative position. And so do we 0:20:35.200 --> 0:20:37.359 do make sure and like you said, think about what 0:20:37.400 --> 0:20:39.879 the opportunity set may be and how we're positioned. But 0:20:40.080 --> 0:20:43.000 hopefully we've done it right entering the downturn. And there's 0:20:43.040 --> 0:20:45.840 not a whole lot to do except to look for opportunities. 0:20:46.359 --> 0:20:50.320 You mentioned, you know, CI our CEO and CFOs and 0:20:50.640 --> 0:20:53.880 kind of brings up my question of do you look 0:20:53.920 --> 0:20:57.120 at management teams? Is that part of your research and 0:20:57.160 --> 0:20:59.120