Speaker 1: Welcome to Inside Active, podcast about active managers that goes
Speaker 1: beyond sound bites and headlines, looks deeper into the processes,
Speaker 1: challenges and philosophies and security selection. I'm David cone I,
Speaker 1: lead mutual fund and active Research at Bloomberg Intelligence. Today
Speaker 1: my co host is Gina Martin Adams, chief equity strategist
Speaker 1: at Bloomberg Intelligence. Gina, thanks for joining me today.
Speaker 2: Thank you for having me, David, I'm delighted to be here.
Speaker 1: Well, it's been an interesting few days in the market.
Speaker 1: Last week you published one of your This Week in
Speaker 1: Charts notes just noting the effect of the tariffs on
Speaker 1: the market the last week or so. How do you
Speaker 1: see them affecting earnings going forward?
Speaker 2: Yeah, good question. I think that's the million dollar question
Speaker 2: that equity markets investors are grappling with at this moment
Speaker 2: and time. One of the things that we've done a
Speaker 2: lot of work on is just how much the S
Speaker 2: and P five hundred in particular has exposure via cost
Speaker 2: of goods sold to overseas suppliers. How much their factory base,
Speaker 2: for instance, is also located overseas and this is a
Speaker 2: primary risk, with the secondary risk being maybe as they
Speaker 2: attempt to pass on price increases, consumers push back of it,
Speaker 2: and we see downside impacts to the economy. So it's
Speaker 2: pretty complicated, is the short answer. Broadly, what we're seeing
Speaker 2: already is earnings expectations have shifted from at the start
Speaker 2: of the year. Analysts we're forecasting thirteen percent growth for
Speaker 2: large cap stocks are now forecasting nine. The moving parts
Speaker 2: of macro, what would lead you to believe that we're
Speaker 2: likely to get closer to zero percent earnings growth over
Speaker 2: the next twelve months, just considering how much slowdown we've
Speaker 2: already seen in new orders and consumer confidence, so we're
Speaker 2: seeing downside revision momentum emerge. I do think right now
Speaker 2: it's just a question of will we ultimately end up
Speaker 2: in a recession as a result of the slowdown that
Speaker 2: has already started, or will we see just more of
Speaker 2: slower growth going forward and that's going to impact the
Speaker 2: earnings out look materially well.
Speaker 1: Definitely be interesting to watch, and so I think this
Speaker 1: is a great time to welcome our guest, Harouki Toyama,
Speaker 1: to Inside Active. Haruki is head of MidCap and large
Speaker 1: cap equity at Madison Funds and a portfolio manager for
Speaker 1: the firm's large cap in MidCap funds tickers m n
Speaker 1: VAX and mr AX. Harouki, thank you so much for
Speaker 1: joining us today.
Speaker 3: Well, thank you for having me.
Speaker 1: Before we start talking about the funds in the market,
Speaker 1: how about we start by just telling us a little
Speaker 1: bit about your investment background, how you got your start
Speaker 1: in the industry.
Speaker 4: Sure, so that goes back quite a ways, I guess.
Speaker 4: But back when I was in college, I was a
Speaker 4: music and artistic toy major and had some pressure to
Speaker 4: maybe perhaps study something that had more of a career,
Speaker 4: a better career outlook, So I added economics. I had
Speaker 4: taken one class, and I was interested, So I ended
Speaker 4: up studying economics. Now, the interesting thing is I was
Speaker 4: much more interested in political economics and macro and so on.
Speaker 4: But I ended up after school getting a job at
Speaker 4: a financial advisory firm that got me really interested in
Speaker 4: the markets and stock markets specifically, And so that's how
Speaker 4: I ended up in the business. And I have to say,
Speaker 4: what really drew me in was I happened to stumble
Speaker 4: upon the writings of Warren Buffett, and it sort of
Speaker 4: clipped with me that investing in stocks is really you
Speaker 4: shouldn't think of it as financial markets or pieces of
Speaker 4: paper that you trade.
Speaker 3: You should think of it.
Speaker 4: As a fractional ownership in actual companies. And that really
Speaker 4: clicked with me psychologically. I just felt like it felt
Speaker 4: right to me. It was a good fit with how
Speaker 4: I would like to invest, just thinking long term. And
Speaker 4: so I ended up going back to business school to
Speaker 4: really study more of the micro side of economics, right,
Speaker 4: businesses and finance and accounting and strategy and so on,
Speaker 4: and then end up in Boston for a long time.
Speaker 4: And then I've been here in Madison for a couple
Speaker 4: of decades.
Speaker 1: The great well, let's actually talk about Madison. Is there
Speaker 1: an investment philosophy the equity managers adhere to at the firm.
Speaker 4: Yeah, at a high level, what we like to think
Speaker 4: of a couple things. One is, again we have a
Speaker 4: deeply held philosophy that we're not investing in pieces of
Speaker 4: paper that we trade. We don't buy something looking to
Speaker 4: get out or hope that someone pays a much higher
Speaker 4: price a month for now, six months, an hour, or
Speaker 4: even one two three years from now. We think of
Speaker 4: it as truly taking an ownership stake in a company.
Speaker 3: So at a high level.
Speaker 4: We think of it as, hey, if you had to
Speaker 4: buy a company hole and you could only buy five
Speaker 4: ten companies, and you had to buy it and leave
Speaker 4: it to the next generation of your family, would this
Speaker 4: be the kind of company you want to own? So
Speaker 4: that's our real high level screen when we look at companies,
Speaker 4: and so everything else we do follows from that. And
Speaker 4: so we're very risk averse, right, because we don't really
Speaker 4: feel like we can get in and get out before
Speaker 4: everyone else sees bad stuff happening. So we try to
Speaker 4: buy resilient companies, right, So we're not looking to reposition
Speaker 4: ourselves just because things are changing in the environment or
Speaker 4: outside conditions, whether it's macro rates, terrorists for example. Right,
Speaker 4: we're looking to buy companies anticipating that lots of bad
Speaker 4: things will happen in the next five, ten, twenty years,
Speaker 4: and so the resiliency is probably the most important thing
Speaker 4: we look forward. Of course, we want growth, so that's
Speaker 4: at a high level. And because of that, we were
Speaker 4: not overly diversified or two major strategies, owned sort of
Speaker 4: thirty companies give or take at any point in time,
Speaker 4: and we're very long term. We own companies on average
Speaker 4: seven nine years.
Speaker 3: Great.
Speaker 1: Now if we, you know, focus specifically on the large
Speaker 1: cap fund, is there a process you follow to select securities?
Speaker 4: Absolutely, and the process is less of a checklist that
Speaker 4: you follow each time, but it's it's number one. Your
Speaker 4: first screen is is this a high quality business?
Speaker 3: Right?
Speaker 4: We care about valuation, of course, and we do that
Speaker 4: research sort of together at the same time in parallel.
Speaker 4: But again it all comes down to what is the
Speaker 4: quality of this business? And we really ask ourselves two
Speaker 4: main questions. One is how good is the business model itself?
Speaker 4: Is this structurally a good sound business?
Speaker 3: Right? So does it have durable growth?
Speaker 4: Because again we're not just thinking about the next one, two,
Speaker 4: three years, We're thinking about five, ten, fifteen, twenty plus
Speaker 4: years out right, We're thinking about.
Speaker 3: Does it have a mote?
Speaker 4: If we had to really internally, if you listen to
Speaker 4: our conversations, we are bously consider a lot of factors
Speaker 4: with quality, but probably first among equals is does a
Speaker 4: company have a true mote?
Speaker 3: Right?
Speaker 4: So this is the more and buppet sense of if
Speaker 4: a company's profitability is a castle, everyone else is trying
Speaker 4: to take away those profits right directly or indirectly, And
Speaker 4: so how good is your mote to protect those profits.
Speaker 4: And it's not just competitors, right. Your customers, right, they
Speaker 4: want more from you for less, right. Your vendors they
Speaker 4: want to give you less in some ways and charge
Speaker 4: you more, right. And they're external factors where there's governments
Speaker 4: and so on. So we think about all those things,
Speaker 4: and we want companies to have the widest and deep
Speaker 4: at most most possible because that's what really allows us
Speaker 4: to have confidence and what the profits may look like
Speaker 4: five ten, fifteen years out right. We don't want to
Speaker 4: own a company for even a day if we don't
Speaker 4: think we want to own it for years.
Speaker 3: Right.
Speaker 4: So that's what our number one approach and number one
Speaker 4: topic is when we look at a company, do we
Speaker 4: feel comfortable right making some general sort of broad projection
Speaker 4: that profits will be quite a bit higher in five, ten, fifteen,
Speaker 4: twenty years than they are today. And once we do that,
Speaker 4: then we think about valuation. Now, valuation is obviously hugely important.
Speaker 4: We don't want to pay up too much. We're very
Speaker 4: disciplined about that, and it plays into maybe which companies
Speaker 4: we look at. We don't ignore valuation because we want
Speaker 4: to look for companies that might be actionable in the
Speaker 4: near term in terms of making investment. So we kind
Speaker 4: of look at things that we think maybe close to
Speaker 4: discount of value.
Speaker 3: But that's how we are postings.
Speaker 2: Can we take in a little bit more into that
Speaker 2: quality factor, because I think it's really fascinating, particularly at
Speaker 2: this point in time, to think about quality and an
Speaker 2: environment where trade relationships are changing. We're certainly seeing some
Speaker 2: pretty big disruptions to the potential margin outlook from a
Speaker 2: multitude of companies as a result of trade policy shifts,
Speaker 2: right and the ability of companies to take advantage of
Speaker 2: globalized supply chains coming under a lot of fire here,
Speaker 2: Are you changing the way that you look at quality
Speaker 2: at all? Are there certain metrics that you rely on
Speaker 2: that you're thinking of of changing, or how do you
Speaker 2: see your definition of quality potentially challenged or changed by
Speaker 2: this big macro shift that is now underway.
Speaker 4: Yeah, that's a great point, Jane. And so we have
Speaker 4: a couple of frameworks from mind. One is the first
Speaker 4: question is, of course we try to make predictions and
Speaker 4: understand what the regulatory in this case tariff environment will be,
Speaker 4: but we also understand that no one really knows, right
Speaker 4: will this particular tariff.
Speaker 3: For gam last six months? Will it last six years? Right?
Speaker 4: So we don't want to necessarily assume that it will
Speaker 4: be there forever because then you're always swinging around what
Speaker 4: you think about companies. Right, So you're asking, do we
Speaker 4: make a permanentciation? The answer is yes, to the extent
Speaker 4: it matters. But going back to my very first point,
Speaker 4: when we try to buy a company, we're already considering
Speaker 4: some of these factors in place.
Speaker 2: Right.
Speaker 4: It's not that we're saying what would happen if terrafs
Speaker 4: went up fifty percent?
Speaker 3: What would happen?
Speaker 4: But it's how resilient is that company's model to something
Speaker 4: like tariffs? And so the main issue, for example is
Speaker 4: probably two or three factors matter most. How resilient is
Speaker 4: your supply chain. So that's something we've already looked at.
Speaker 3: Right.
Speaker 4: If a company is way too dependent on one or
Speaker 4: two countries or certain tariff regimes in place for cross
Speaker 4: border flows, we would have already considered that as a
Speaker 4: risk factor and already put that in valuation.
Speaker 3: So this shouldn't change things a whole lot.
Speaker 4: Probably the most important thing really is how good is
Speaker 4: the pricing power of a company, and how good.
Speaker 3: Is that position relative to its competitors. Right.
Speaker 4: So one example I'll give you. We own a company
Speaker 4: called pack Car. They're one of the largest Class eight
Speaker 4: and medium duty truck manufacturers in the US. They already
Speaker 4: have had a philosophy for a very long time of
Speaker 4: build locally for local demand. So for the US trucks
Speaker 4: that they sell, over ninety percent of what they sell
Speaker 4: is actually manufactured in the US. And the most important
Speaker 4: thing is their main competitors have a much much higher
Speaker 4: percentage of trucks that they manufacture outside of the US,
Speaker 4: especially in Mexico.
Speaker 3: Right.
Speaker 4: And so obviously and demand will get hurt, right if
Speaker 4: the economy slows, Right, So that's sort of an overall
Speaker 4: macro impact on a company like pack Are, But their
Speaker 4: competitive position will actually improve dramatically, right, So we try
Speaker 4: to kind of balance those things. What does it mean
Speaker 4: for profitability? And obviously from Amerco situation, it's possible that
Speaker 4: the reduction and demand will overwhelm any competitive advantage that improves.
Speaker 4: But when you really think about five, ten, fifteen years,
Speaker 4: you have to make some assumption that trucks are necessary
Speaker 4: in this country. I'm not really sure that truck demand
Speaker 4: to be suppressed at a very low level forever, So
Speaker 4: you have to mix them with some that our economy
Speaker 4: will adjust over time. And when that happens, sort of
Speaker 4: the unit demand will come back to some sort of
Speaker 4: normalized level, and that packer will actually be in a
Speaker 4: more improved competitive position and their profits may actually be higher.
Speaker 4: We try to run some numbers. It's not exact science
Speaker 4: obvious here. So those are the kind of things that
Speaker 4: we've thought about in advance. Now you do have when
Speaker 4: you own a portfolio thirty stocks, there are some companies
Speaker 4: that perhaps are in somewhat of a less advantage position,
Speaker 4: or maybe the end demand and we think may overwhelm
Speaker 4: those issues, and maybe they can't quite pass on prices
Speaker 4: as much. Fourth, So you have to make those adjustments.
Speaker 4: But generally speaking, our portfolio is already pretty resilient.
Speaker 2: Right And when you think about this notion of a moat,
Speaker 2: and I hear this moat word a lot with the
Speaker 2: mag seven for example, in large cap stocks. But I'm
Speaker 2: curious how you think about the differences between investing in
Speaker 2: mid caps versus large caps with respect to the moat?
Speaker 2: Are there great examples of moat some high quality companies
Speaker 2: in mid caps that you're finding these days that you
Speaker 2: know investors maybe just don't appreciate.
Speaker 4: Yeah, that's a good point, and so one of the
Speaker 4: most that the bigger you get, it's very possible that scale,
Speaker 4: right becomes an important mode. So that's probably a big
Speaker 4: difference between when you look at super large caps. So
Speaker 4: when you talk about the maximum and we're talking about megacaps, right,
Speaker 4: we're really talking about the biggest ten, twenty thirty companies
Speaker 4: in the world.
Speaker 3: At that level, there's.
Speaker 4: A certain amount of scale and network effect that becomes
Speaker 4: a tremendous mode. So you want to be careful investing
Speaker 4: in even a MidCap, which we call it in our business,
Speaker 4: we'd like to call it MidCap. By standards of the
Speaker 4: world and economy, these are giant companies, right, but they
Speaker 4: become really small compared to the alphabets and so on,
Speaker 4: So you have to consider that an account. So if
Speaker 4: we see a MidCap and they compete at some level
Speaker 4: directly with some of these megacaps that have superior scale
Speaker 4: and global and already have a position, we'd be much
Speaker 4: more wary. So what we try to do in midcaps
Speaker 4: are find companies where they don't have that sort of
Speaker 4: competitive landscape, right, they're not competing against much more scale
Speaker 4: companies and within the universe or within the industry they
Speaker 4: operate in. Our midcaps tend to be the scaled advantage competitors, right,
Speaker 4: And so that's how we think about it. It's not
Speaker 4: a direct place, it's not just a larger the better.
Speaker 4: Therefore Beta and Amazon will beat everybody up, right, So
Speaker 4: we'll get an example, so were we'd be much warrier
Speaker 4: about investing in a retail company because they do compete
Speaker 4: against Amazon, right. It takes much more money and brand
Speaker 4: and so on to have.
Speaker 3: The logistical infrastructure. So absolutely it is harder.
Speaker 4: To compete agains an Amazon if you're sort of a
Speaker 4: mid sized retail competitor. On the other hand, we've owned
Speaker 4: a company, let's call it called copart for a long time.
Speaker 4: They're the leading auctioneer of salvage cars. So when you
Speaker 4: get in the wreck, right, the insurance company hire someone
Speaker 4: to come toll your car away. Copart runs all the
Speaker 4: auctions to sell these wrecked cars. That's a very local
Speaker 4: business because you don't want to have to toll your
Speaker 4: car for hundreds of miles. So there's all these regional
Speaker 4: sites where copart holds weekly auctions to sell these wrecked cars.
Speaker 4: That's not a giant, scaled market. You're not competing against, right,
Speaker 4: an Amazon that has a location in France or Seals
Speaker 4: in UK and therefore is much more scale. Brand doesn't
Speaker 4: matter as much, right, as long as you can efficiently
Speaker 4: sell those cars at an auction, you do well. And
Speaker 4: it's already a dominant player in its field. The industry
Speaker 4: happens to be a duopoly and co part is a
Speaker 4: larger of the two, so it's already scaled. So we've
Speaker 4: actually seen bigger competitors try to get into the market
Speaker 4: and spend literally hundreds of millions of dollars to break in,
Speaker 4: and they can't. So that's kind of what we look for.
Speaker 2: Okay. Interesting speaking of mid caps, it was so intriguing
Speaker 2: to me that in the month of March, large caps
Speaker 2: and small caps under performed midcaps, and I just wanted
Speaker 2: to get your perspective on this. Is this just a
Speaker 2: cork of the data? Was there something really interesting happening
Speaker 2: in mid caps? What's behind that trade?
Speaker 4: Well, that's an interesting point. You know, when we look
Speaker 4: at monthly performers data of industries, we don't we try to.
Speaker 3: Read too much in it.
Speaker 4: Things can change, there's lots of factors that can influence it,
Speaker 4: so we really don't read into that sort of short
Speaker 4: term data. What is interesting if you really look at
Speaker 4: the long term data, right, we do like the midcaps
Speaker 4: space in the sense that they tend to perform as
Speaker 4: well or maybe somewhat better than large caps right over time,
Speaker 4: just like historically small caps did for a while. But
Speaker 4: we do think midcaps are a little bit more of
Speaker 4: a sweet spot. They tend to be larger and more
Speaker 4: scale than have proven themselves over time, right, and they
Speaker 4: tend to have better access to capital markets and so on.
Speaker 4: They tend to be resilient, so unlike small caps, they've
Speaker 4: kind of gone past that phase of worrying about whether
Speaker 4: they're going to survive or thrive in downturns, and yet
Speaker 4: they still have a lot of growth runway. So we
Speaker 4: think what's interesting if you look at the past thirty
Speaker 4: years of Russell mccap data, and so the Russell indices,
Speaker 4: as you know, the Russell MidCap is Z takes the
Speaker 4: one thousand largest stocks by market cap in the US
Speaker 4: and the bottom eight hundred are defined as midcaps. So
Speaker 4: if you compare those bottom eight hundred, to say, the
Speaker 4: top two hundred, which we can think.
Speaker 3: Of as large caps.
Speaker 4: Right, if you look over the past thirty years, a
Speaker 4: total return has been pretty similar. Russell miccaps are actually
Speaker 4: ahead by about half a point perhaps, But then you
Speaker 4: can divide that thirty years call into two periods. In
Speaker 4: the first fifteen years, so the period end in two
Speaker 4: thousand and nine, let's call it. Russell mccaps outperform those
Speaker 4: top two hundred by quite a bit, two two and
Speaker 4: a half points right now in in your since that's reverse,
Speaker 4: large caps have outperformed by two two and a half points.
Speaker 4: And so these things run in cycles, and these cycles
Speaker 4: sometimes can last a long time, but over time they're
Speaker 4: going to be similar, and we think very often people
Speaker 4: neglect that fact and they sort of they may perhaps
Speaker 4: run to what's been working, such as the megacaps the
Speaker 4: last call it ten fifteen years. They may run to
Speaker 4: perceive safety of large caps, but over time they tend
Speaker 4: to wash out. And so we think the caps are
Speaker 4: definitely an attracted place to be interesting.
Speaker 2: So that leads me to my next question, and is
Speaker 2: that is, how do you navigate volatile or down markets
Speaker 2: like what we have today. You know the S and
Speaker 2: P five hundred now testing an official bear market. Small
Speaker 2: caps really struggling so far this year. Does that make
Speaker 2: you think in terms of capitalization concentration in your portfolio
Speaker 2: a little bit differently? Do you find yourself leaning into
Speaker 2: mid caps for opportunity? How do you think about down
Speaker 2: markets like what we have in the spring of twenty
Speaker 2: twenty five.
Speaker 3: Yeah.
Speaker 4: Point, So there's two things. One is, we are purely opportunistic,
Speaker 4: so we'll look around and if the larger stocks or
Speaker 4: larger companies are somewhat cheaper, we look at them one
Speaker 4: by one, right, and so we'll go after that whatever
Speaker 4: opportunity arises. And again, we don't tend to have a
Speaker 4: lot of turnover. We own thirty year stocks. Then we
Speaker 4: may buy a handful of new companies a year, so
Speaker 4: we only need one or two really great ideas in
Speaker 4: the giving year to really make it work for us.
Speaker 4: The other point is, I'll go back to that point
Speaker 4: of resiliency. Don't We don't necessarily trade a lot in
Speaker 4: these times. We hope to find opportunities to find and
Speaker 4: purchase and make new investments. But hopefully if we did
Speaker 4: it right right, we own a portfolio companies that we like, right,
Speaker 4: and regardless of what the market is are in the
Speaker 4: economy is doing. Hopefully, we have companies that are resilient
Speaker 4: and can weather through this. And in fact, by definition,
Speaker 4: a lot of our companies tend to have better balance
Speaker 4: sheets and better competitive positioning. So over time, these downturns
Speaker 4: are good for them. They will come out of it
Speaker 4: in a stronger relative positions. Right, if they have to
Speaker 4: compete against the company with a weak balance sheet barring
Speaker 4: a lot of money, their CFO, their CEO is now
Speaker 4: spending a lot of time talking to their bankers. Right,
Speaker 4: They're spending a lot of time plugging holes and having
Speaker 4: to sort of be a little bit more defensive and careful. Right,
Speaker 4: whereas the kind of companies and we invest and can
Speaker 4: play more offense. And so what you tend to see
Speaker 4: is that coming out of the downturns, our companies come
Speaker 4: out in a better relative position. And so do we
Speaker 4: do make sure and like you said, think about what
Speaker 4: the opportunity set may be and how we're positioned. But
Speaker 4: hopefully we've done it right entering the downturn. And there's
Speaker 4: not a whole lot to do except to look for opportunities.
Speaker 1: You mentioned, you know, CI our CEO and CFOs and
Speaker 1: kind of brings up my question of do you look
Speaker 1: at management teams? Is that part of your research and
Speaker 1: if so, what are you really looking for?
Speaker 4: So that's a great point. When I started off earlier
Speaker 4: and talked about what we're looking for, I think I
Speaker 4: mentioned perhaps two main pillars, and one was about the
Speaker 4: structural advantages of a business. The other point was about management.
Speaker 4: So what we want, at least, at the very least,
Speaker 4: we want a structurally good business, and we want a
Speaker 4: management team that's going to be a wonderful caretaker of
Speaker 4: the advantages that company has. Right, we want to management
Speaker 4: team that's always thinking about widening and deepening that mode
Speaker 4: so they can add value on top of the advantage
Speaker 4: of the company company has. Now, this is important to
Speaker 4: us in the sense that it's a very qualitative assessment.
Speaker 4: So we think it's the kind of area where us
Speaker 4: as fundamental investors can really differentiate ourselves because a lot
Speaker 4: of other things that can be quantified in terms or
Speaker 4: returns on equity and growth rates and so on, are
Speaker 4: a little bit easier to grasp, or they're tangible. They
Speaker 4: can be quantified right, somethings computers can do better, but
Speaker 4: this is the kind of stuff that's very qualitative, and
Speaker 4: so we put a heavy emphasis on this. And the
Speaker 4: one area we think we tend to emphasize more than others,
Speaker 4: we want to see aligned management teams. We love to
Speaker 4: invest in what we call owner operators. So we love
Speaker 4: to see the top decision makers and the governance of
Speaker 4: the company. So whether it's a CEO, major board members,
Speaker 4: major shareholders, right, but especially the CEO, top C suite people,
Speaker 4: board members, we love it when they actually own a
Speaker 4: significant stake in the company because we're not obviously not
Speaker 4: in the room with them as outside investors when they
Speaker 4: make decisions.
Speaker 3: We don't make those decisions.
Speaker 4: For them, right, So we want them to be on
Speaker 4: the same side of the table as us. So we
Speaker 4: want them to think long term. We don't want them
Speaker 4: to think about quarterly earnings.
Speaker 3: Right.
Speaker 4: So I mentioned earlier Copart for example, their chairman and
Speaker 4: CEO combined own about ten percent of the company, and
Speaker 4: they're very long term. The chairman founded this company back
Speaker 4: in the nineteen seventies, and so their time horizon is
Speaker 4: not three months, it's not one year, it's not even
Speaker 4: three years, they're thinking five ten plus years out, and
Speaker 4: so they're willing to sacrifice current earnings if they think
Speaker 4: those investments will pan out and result in a higher.
Speaker 3: Value for the company. Right.
Speaker 4: So we love that sort of owner operating alignment, and
Speaker 4: I'd say at least half of our portfolios tend to
Speaker 4: be invested in owner operators. And then when you take
Speaker 4: sort of incentives and other alignments in place, it's a
Speaker 4: pretty large majority of our companies run by management teams
Speaker 4: with very aligned incentives.
Speaker 3: So it's a very important part of.
Speaker 2: What we do. Can you tell us a little bit
Speaker 2: about if you know, you talk about being opportunistic in
Speaker 2: times like this, are there any sectors or themes that
Speaker 2: are really catching your eye right now?
Speaker 4: Yeah, it's a great point, right So, right, so there's
Speaker 4: a whole lot of things. Again we look at companies
Speaker 4: one by one, but there's certainly industries and areas where
Speaker 4: you see a lot more stress, certainly in the financial market.
Speaker 3: So there's a bunch.
Speaker 4: But just to give you a couple examples, anything that
Speaker 4: might be consumer big ticket oriented obviously right now, right
Speaker 4: you have a huge amount of pressures, which is the
Speaker 4: prices for a lot of the stuff that consumers brought by,
Speaker 4: especially discretionary, may be going up. At the same time,
Speaker 4: you may have just general economic stress, right, so consumers
Speaker 4: may end up with lower spending power stress balance sheets
Speaker 4: or recession may or may not becoming certainly some slower
Speaker 4: growth economic and the nutriment is likely. So you see
Speaker 4: a lot of those stocks come down. We're spending some
Speaker 4: time there. There's some interesting factors. Obviously this is recently.
Speaker 4: More recently, interest rates are coming down a little bit
Speaker 4: because the fears of recession. So it's possible some of
Speaker 4: those areas such as housing that may be related to
Speaker 4: big ticket consumer may see a little bit of a
Speaker 4: release valve. But certainly those stocks are coming down, so
Speaker 4: we're taking a look. You certainly have a lot of
Speaker 4: companies I mentioned retail or distribution right where it's a
Speaker 4: very simple sort of passed through business. You buy stuff
Speaker 4: at wholesale, you sell at retail, and now all of
Speaker 4: a sudden, the cost of goods and your wholesale is
Speaker 4: going on quite a bit, and so a lot of
Speaker 4: those companies are getting hit. And so that's where we're
Speaker 4: really sitting and looking at, well, how much pricing power
Speaker 4: do these companies have to pass through any increases. So
Speaker 4: those are the kind of areas we'd be looking at, right,
Speaker 4: And so you.
Speaker 1: You know, you keep mentioning about the concentrated portfolio. You
Speaker 1: know a lot of managers have you know, these best
Speaker 1: ideas portfolios, but in terms of you know, how do
Speaker 1: you mitigate risk with a concentrated portfolio if you know,
Speaker 1: say some of them are some of the stocks are
Speaker 1: heading in the same trend.
Speaker 4: Yeah, So a couple of things we do. Even though
Speaker 4: we're concentrated, we make sure we're what we what we
Speaker 4: say adequately diversify, right, so we do have some limits.
Speaker 4: We think about all the different risk factors that may
Speaker 4: be contained, and so we don't really just think about
Speaker 4: say industry or sector concentration. We go way more granular
Speaker 4: than that. You have lots of different companies that may
Speaker 4: be in totally different industry, but they may be exposed
Speaker 4: to similar risks.
Speaker 3: Right. Tariffs are a great example.
Speaker 4: You could have an industrial company, it could be a
Speaker 4: consumer company, but if they're buying a lot of their
Speaker 4: goods overseas, they're exposed to.
Speaker 3: The same risks.
Speaker 4: They may be in totally different sectors, right, Or you
Speaker 4: may have a healthcare service company that relies on government
Speaker 4: or Medicare payments, and then you may have a defense
Speaker 4: contractor that sells to the DoD quite a bit, two
Speaker 4: totally different industries, but yet if there are federal budget cuts,
Speaker 4: they're exposed to that factor, right, So we look at
Speaker 4: that way and make sure we're adequately.
Speaker 3: Diversified from that standpoint.
Speaker 4: The other thing I'd mentioned is that we're very careful
Speaker 4: about trying to mitigate risk in every level of our process,
Speaker 4: and so we want each investment we make to stand
Speaker 4: on z own. Now, obviously you want to be diversified,
Speaker 4: and you can't. You can't avoid every single risk out there.
Speaker 4: But again going back to the comment I made about
Speaker 4: if this is one of the five to tenk companies
Speaker 4: you had to own for years, would you do it?
Speaker 4: And so that already puts a mentality in place as
Speaker 4: we research companies. You know, it makes you think a
Speaker 4: little bit less about Hey, they're the real high level
Speaker 4: tail risks. But we're going to own enough companies that
Speaker 4: I'm okay taking this risk. We try to avoid it
Speaker 4: as much as we can, right, So we're already thinking
Speaker 4: about buying companies that are so resilient, and so many
Speaker 4: different scenarios to begin with that you're already mitigating a
Speaker 4: huge amount of risk one by one in each company
Speaker 4: that you're invest in.
Speaker 1: Now in terms of you know, we've talked about what
Speaker 1: you look for in companies to buy is in terms
Speaker 1: of selling positions? Is it valuations, better opportunities or just
Speaker 1: you know, the business factor isn't there anymore?
Speaker 4: Yeah, So the two main reasons that we sell or
Speaker 4: either valuation or the fundamentals aren't as good as before.
Speaker 3: Something has changed.
Speaker 4: Structurally, and very often there are a combination of two.
Speaker 4: I'd say we tend to buy companies. As you can
Speaker 4: tell by a holding period, we tend to buy companies
Speaker 4: that we help to own for many, many years. Valuation
Speaker 4: is tricky in getting out because if we do this right,
Speaker 4: the management team teams in the structural soundness of the
Speaker 4: business tend to be better than we hoped.
Speaker 3: Right.
Speaker 4: So when we make financial projections when we make an investment,
Speaker 4: we tend to be fairly conservative. But management teams can
Speaker 4: add a lot of value beyond that that you can't anticipate.
Speaker 3: Right.
Speaker 4: They can buy backstock at operation of times, they can
Speaker 4: make wonderful acquisitions, they can enter into new areas that
Speaker 4: you may not have anticipated and do well.
Speaker 3: Right.
Speaker 4: So there's a lot of optionality investing with a good
Speaker 4: management team with a structurally sound business. And so we're
Speaker 4: very careful about not just automatically saying this is the
Speaker 4: multiple that we will get out and so on, because
Speaker 4: things change overly years.
Speaker 2: Right.
Speaker 4: So what we say is, once we find a really
Speaker 4: good company, we tend to hold on unless it's approaching
Speaker 4: or get into those bleed valuations Truki.
Speaker 2: As you know, David and I are both part of
Speaker 2: the Bloomberg Intelligence team at Bloomberg, So I would be
Speaker 2: remiss if I didn't ask you if you use external research,
Speaker 2: and if you do, what do you find you know,
Speaker 2: where do you find yourself leaning in, where do you
Speaker 2: find it most valuable least valuable? Sort of just give
Speaker 2: us an assessment of the research landscape if you don't.
Speaker 4: Yeah, So we use whatever we think can be an
Speaker 4: input to us. So we do all of our own
Speaker 4: internal research. So we use a lot of external research,
Speaker 4: but external research meaning does it give us insights into
Speaker 4: that companies and the company's fundamental business model management R Right,
Speaker 4: So we don't use research in the sense of telling
Speaker 4: us what to buy, their opinions, people's ratings on the stocks.
Speaker 4: We do all that, right, that insights sort of valuation,
Speaker 4: decision to buy, sales, and we do all that internally.
Speaker 4: But we do you know, when we try to research
Speaker 4: a company, obviously, we're trying to research anything about that company,
Speaker 4: the people that run it, the people that work with
Speaker 4: that company, the industry around it, and so we talk
Speaker 4: to anybody that we think we have insights into it, right,
Speaker 4: and so we're talking to lots of people that work
Speaker 4: for competitors, We talk to people that used to work
Speaker 4: at the company. We certainly talk to sell side analysts
Speaker 4: or consultants that may have a deep knowledge of that
Speaker 4: company industry. And so we're trying to gather as much intelligence,
Speaker 4: like you said, and information as we can and hopefully
Speaker 4: get some insights as well as well as develop our own.
Speaker 1: Great So we just have one more question before we
Speaker 1: let you go. You mentioned earlier you know you're a
Speaker 1: big fan of Warren Buffett, and I imagine you probably
Speaker 1: read a lot of his you know, notes that he
Speaker 1: puts out. But do you have some I guess favorite
Speaker 1: financial books.
Speaker 4: Yeah, it's a good question. So we read a lot.
Speaker 4: I'd say it helps. It helps to read a lot
Speaker 4: of financial history. Certainly I enjoy it. Maybe that's just
Speaker 4: sort of my my predilections a little bit, but I
Speaker 4: love reading about history of the financial markets, the financial systems,
Speaker 4: the banking system. There's so many great ones out there.
Speaker 4: Maybe I highlight a couple that may be listener known
Speaker 4: to some. There's a book called The Richest Man who
Speaker 4: Ever Lived. It's about an industrialist in Europe from a
Speaker 4: few hundred years ago named Jacob Fuger, written by a
Speaker 4: friend of mine, Greg Steinitz. That's a wonderful book. There's
Speaker 4: another one called The Exchange Artist, by another friend of mine,
Speaker 4: Jane Kominski, but goes back to sort of the free
Speaker 4: wheeling days in the US when the banking system was
Speaker 4: still forming. And so there's a lot of interesting things
Speaker 4: about the monetary system. You know, back when paper money
Speaker 4: was sort of seeing as very dubious, and you couldn't
Speaker 4: when people paid you with paper money, you weren't sure
Speaker 4: if there was actually someone behind that money as you
Speaker 4: so it's all right. So those two are kind of
Speaker 4: interesting from a financial market standpoint. I'd say there's a
Speaker 4: lot of good business books, right, because again we're trying
Speaker 4: to buy businesses, and so I think it helps a
Speaker 4: lot to read books that sort of tell you the
Speaker 4: history of particular businesses and you learn.
Speaker 3: A lot more about that business and industry. It makes sense.
Speaker 1: Well, this is great, Harouki, thank you so much for
Speaker 1: joining us again.
Speaker 3: Sure, thank you very much. Pleasure to be.
Speaker 1: Here, Gina, thank you for bringing my cost today.
Speaker 2: My pleasure, so lovely to meet you, Haruki. Thank you
Speaker 2: for for joining us, and thanks David for hosting untill.
Speaker 1: Our next episode. This is David Cohne with Inside unt