WEBVTT - Reflections of a Goldman Sachs Manager 0:00:00.400 --> 0:00:04.080 Strap on your parachute. Is time for What Goes Up 0:00:04.120 --> 0:00:14.200 with Sarah Ponzick and Mike Reagan. Hello, and welcome to 0:00:14.280 --> 0:00:18.480 What goes Up, a Bloomberg Weekly Markets podcast. I'm Sarah Ponzek, 0:00:18.640 --> 0:00:21.800 a reporter on the Cross Asset team, and I'm Mike Reagan, 0:00:21.960 --> 0:00:24.800 a senior editor at Bloomberg. And you can think of 0:00:24.800 --> 0:00:27.800 me as the captain to Sarah's toneel. You might have 0:00:27.840 --> 0:00:29.840 to google that one, Sarah, I absolutely will have to 0:00:29.840 --> 0:00:32.960 google that before your time. But this week on the show, 0:00:33.360 --> 0:00:37.080 eight months into I can't believe it, Mike, but it's 0:00:37.120 --> 0:00:40.600 time to debrief. To do that, we're joined by Goldman Sachs, 0:00:40.680 --> 0:00:44.760 Asset Management's co head of Fundamental Equity, to discuss how 0:00:44.800 --> 0:00:47.320 the firm has approached the year and also how it's 0:00:47.360 --> 0:00:50.440 positions for the future, And of course we will close 0:00:50.479 --> 0:00:53.800 out the episode with our tradition the Craziest Thing I 0:00:53.840 --> 0:00:58.040 saw in markets and Sarah, as you said, great guests 0:00:58.120 --> 0:01:00.800 this week to talk about the equity markets, because I 0:01:00.840 --> 0:01:03.880 think the big question on a lot of people's minds 0:01:03.920 --> 0:01:07.679 this year is has this market gotten sort of detached 0:01:07.720 --> 0:01:10.120 from the fundamentals. So we have a very much a 0:01:10.160 --> 0:01:13.120 fundamentals expert this week. She, as you said, as the 0:01:13.160 --> 0:01:16.479 co head of fundamental equities at Goldman Sachs Asset Management. 0:01:16.720 --> 0:01:19.160 Her name is Katie Coch. Katie, welcome to the show. 0:01:19.319 --> 0:01:21.399 Thank you so much for having me. I'm excited to 0:01:21.400 --> 0:01:24.080 be here. So Katy, let's get right into it. You know, 0:01:24.400 --> 0:01:27.840 as we've all noticed, the valuation expansion in the market 0:01:28.280 --> 0:01:34.080 this year has been astounding, given the economic uncertainty and 0:01:34.120 --> 0:01:36.640 the sort of nasty recession that we've already seen, and 0:01:36.880 --> 0:01:39.800 who knows how long that's gonna last. Of course, at 0:01:39.800 --> 0:01:42.400 the same time, you have real interest rates are negative. 0:01:42.880 --> 0:01:46.120 It looks like interest rates will stay low, possibly negative 0:01:46.160 --> 0:01:48.559 on a real basis after inflation for a long time. 0:01:49.520 --> 0:01:52.040 I'll phrase it as simply as possible. Does the market 0:01:52.160 --> 0:01:55.040 make sense to you based on the fundamentals were um 0:01:55.240 --> 0:01:58.280 have what we've seen this year? Does it trouble you 0:01:58.320 --> 0:02:01.160 how how aggressive the valuation to spenching has gotten. The 0:02:01.160 --> 0:02:02.920 way that I would look at it is when you 0:02:02.960 --> 0:02:06.960 think about the markets overall, they're effectively flat on the year, 0:02:07.320 --> 0:02:08.760 and so a lot of people will look at that 0:02:08.840 --> 0:02:11.400 and say, how is that possible given all of the 0:02:11.600 --> 0:02:14.160 you know, challenging news that's out there that you alluded to, 0:02:14.840 --> 0:02:16.760 and I want I want to make three points on 0:02:16.800 --> 0:02:21.000 this connected to the headline that we can get behind UM, 0:02:21.040 --> 0:02:25.440 the sensibility of markets if we're selective about opportunities UM. 0:02:25.560 --> 0:02:27.720 And so you know, three things to observe is that 0:02:27.760 --> 0:02:29.799 while the markets flat on the year, there's a lot 0:02:30.000 --> 0:02:34.119 kind of happening underneath that really an exciting return UM. 0:02:34.240 --> 0:02:36.680 So we've had a huge draw down and and a 0:02:36.680 --> 0:02:39.480 tremendous recovery as you know that are involved in getting 0:02:39.600 --> 0:02:42.760 us flat. The media and SMP five hundred stock is 0:02:42.800 --> 0:02:46.400 still you know, somewhere around twenty off. It's high, and 0:02:46.440 --> 0:02:49.080 there's a little group of companies we all know called 0:02:49.120 --> 0:02:52.440 the Fangs, which are up over thirty on the year, 0:02:52.520 --> 0:02:55.000 while actually the rest of the SMP five hundred is 0:02:55.040 --> 0:02:58.560 still down about five. And then of course we also 0:02:58.600 --> 0:03:02.120 have this wide gap between growth and value UM, although 0:03:02.160 --> 0:03:04.399 that's narrowed a little bit in the last couple of weeks, 0:03:04.440 --> 0:03:07.160 which hopefully we'll talk about. So, yeah, the market's flat 0:03:07.200 --> 0:03:09.040 on the year, but then under that lots of different 0:03:09.080 --> 0:03:12.160 stuff happening, and so we can find great value, but 0:03:12.440 --> 0:03:15.239 you have to really hunt for it. The second comment 0:03:15.240 --> 0:03:18.880 I would make quickly would be around valuations. You alluded 0:03:18.919 --> 0:03:22.440 to the fact that valuations are demanding UM and in fact, 0:03:22.480 --> 0:03:24.760 the US market is trading right now on a twenty 0:03:24.800 --> 0:03:27.920 two times twelve month forward multiple, which puts it in 0:03:27.960 --> 0:03:32.400 about the ninety percentile of its its most expensive I 0:03:32.440 --> 0:03:35.040 want to make two balancing comments to that, just to 0:03:35.080 --> 0:03:39.040 put people's fears at ease about how expensive the market is. 0:03:39.480 --> 0:03:41.680 The first is, we really need to look at those 0:03:41.760 --> 0:03:47.080 valuations in other low inflation periods UM and so actually, 0:03:47.080 --> 0:03:50.480 if we look at low inflation regimes, today's valuations are 0:03:50.520 --> 0:03:53.680 really just above median levels UM. And then in addition, 0:03:53.720 --> 0:03:56.360 of course, we we do have depressed earnings because we're 0:03:56.360 --> 0:03:59.400 in a recession, as you mentioned, and so that's elevating 0:03:59.480 --> 0:04:02.520 PE level those two. And then the second point I 0:04:02.560 --> 0:04:06.320 want to make is equities relative to other asset classes. 0:04:06.680 --> 0:04:10.320 So we look at something called the implied equity risk premium, 0:04:10.360 --> 0:04:13.440 which is just a fancy way of talking about how 0:04:13.440 --> 0:04:17.400 expensive equities are to other stuff like bonds, and it's 0:04:17.560 --> 0:04:20.760 at a very attractive three point eight percent premium, and 0:04:20.839 --> 0:04:23.320 that's only been higher about a third of the time 0:04:23.440 --> 0:04:26.760 over history UM and it certainly stands, for example, in 0:04:26.800 --> 0:04:29.920 sharp contrast to the negative equity risk premium we saw 0:04:30.040 --> 0:04:33.719 during the tech bubble. So yes, you know valuations are demanding, 0:04:33.800 --> 0:04:36.040 but it's a little bit more of a nuanced story 0:04:36.080 --> 0:04:38.120 than that. And again, if you are selective, you can 0:04:38.160 --> 0:04:41.560 find opportunity. And then the final comment I want to 0:04:41.560 --> 0:04:44.400 make is that I do believe, and we do believe 0:04:44.760 --> 0:04:48.039 at Coleman's successet Management and on our equity team that 0:04:48.120 --> 0:04:51.280 regardless um of any of the stuff we just talked about, 0:04:51.320 --> 0:04:55.599 equity markets really do need continued monetary support and fiscal 0:04:55.640 --> 0:04:58.560 support um to to be able to hold in at 0:04:58.600 --> 0:05:01.600 these levels. And they also need earnings to come through, 0:05:01.839 --> 0:05:05.120 at least to meet the low expectations out there for earnings. 0:05:05.120 --> 0:05:07.200 And of course we're in the middle of earning season now, 0:05:07.240 --> 0:05:09.960 so we should get a lot of interesting data on 0:05:10.000 --> 0:05:13.080 that front. So let's get back to that dispersion idea 0:05:13.120 --> 0:05:14.560 that you said. You look onto the surface of the 0:05:14.600 --> 0:05:17.000 stock market and clearly not every stock is the same, 0:05:17.400 --> 0:05:20.760 not every stock is a thing stock. So over the 0:05:20.800 --> 0:05:24.200 last eight months, throughout the coronavirus era that we've been 0:05:24.200 --> 0:05:26.880 living in, how have you guys been trying to find 0:05:26.960 --> 0:05:30.080 value within the market. This is a great question. And 0:05:30.160 --> 0:05:34.360 one of the things with the coronavirus environment has done 0:05:34.839 --> 0:05:39.560 UM is created a lot of differentiation between business models, 0:05:39.920 --> 0:05:43.240 and so there really has never been a more important 0:05:43.279 --> 0:05:47.240 time to embrace active management and navigate which of those 0:05:47.279 --> 0:05:50.600 business models are going to win and which ones are 0:05:50.640 --> 0:05:53.799 are going to lose. And so I think that stock 0:05:53.880 --> 0:05:58.039 specific dynamics really matter now more than ever, and we're 0:05:58.040 --> 0:06:01.640 seeing huge differentiation within narrow parts the market, and this 0:06:01.720 --> 0:06:06.080 really creates tremendous opportunities for for active managers. So I 0:06:06.120 --> 0:06:08.360 want to give you a couple of examples to help 0:06:08.440 --> 0:06:13.040 us understand that. So let's take restaurants, relatively narrow category. UM. 0:06:13.080 --> 0:06:16.679 We've been focused on the millennial preference for value, digital 0:06:16.720 --> 0:06:20.680 and delivery for a really long time, and COVID, of course, 0:06:20.800 --> 0:06:23.880 is accelerating a lot of these trends and drawing in 0:06:23.960 --> 0:06:27.520 more demographics beyond the millennial consumer as we have to 0:06:27.560 --> 0:06:31.320 consume more things online now. In restaurants, on the one hand, 0:06:31.360 --> 0:06:33.760 you have a company like Dominoes, and we think of 0:06:33.800 --> 0:06:37.159 Dominoes as a technology company that happens to deliver pizza. 0:06:37.680 --> 0:06:42.640 Seventy of their sales are digital UM. They reported earnings recently, 0:06:42.760 --> 0:06:46.839 same store sales up sixteen percent year over year UM 0:06:46.920 --> 0:06:50.520 and the share price reacting very positively on the year. 0:06:51.240 --> 0:06:54.240 On the other hand, in the same category, you have 0:06:54.360 --> 0:06:57.480 a franchise like Darden Restaurants. They own a bunch of brands, 0:06:57.520 --> 0:07:01.359 including Olive Garden, which probably most people have heard of. UM. 0:07:01.400 --> 0:07:04.799 They are a dine in establishment. The delivery and digital 0:07:04.839 --> 0:07:10.520 sales is very limited. They're reporting same store sales down 0:07:11.040 --> 0:07:14.040 and of course the stocks reacting quite negatively on the year. 0:07:14.200 --> 0:07:16.120 So that gives you a sense of how important in 0:07:16.120 --> 0:07:20.840 this environment it is to distinguish between business models. Another 0:07:20.880 --> 0:07:24.120 example would be big box retailers, and many of them 0:07:24.600 --> 0:07:29.040 were really struggling before COVID because of amazon ification of 0:07:29.080 --> 0:07:33.480 the retail market that's taken place over the last decade. However, 0:07:33.720 --> 0:07:35.960 there are a couple of big box retailers that are 0:07:36.120 --> 0:07:40.240 succeeding despite Amazon and UH, and despite the recession that 0:07:40.280 --> 0:07:43.880 we're in. The markers of those winning companies are are 0:07:43.920 --> 0:07:46.880 really two things. They usually have products that are in 0:07:46.960 --> 0:07:50.920 demand during quarantine UH and second, they have tremendous e 0:07:51.040 --> 0:07:55.880 commerce strategies. The pandemic is accelerating e commerce trends that 0:07:55.920 --> 0:07:59.160 were already in place, and as Toby um Luca, who's 0:07:59.160 --> 0:08:02.440 the c E Shopify, has said, e commerce has made 0:08:02.520 --> 0:08:06.280 a ten year jump in a matter of months. And so, 0:08:06.400 --> 0:08:09.120 on the one hand, you have a company like best Buy, 0:08:09.160 --> 0:08:12.840 which is an electronics retailer. They have sales that are 0:08:13.000 --> 0:08:17.520 up year over year both domestically and internationally. Now why, 0:08:17.680 --> 0:08:20.760 First they have that relevant products set for quarantine. They 0:08:20.760 --> 0:08:24.640 have the largest product category of sales for computing, working 0:08:24.680 --> 0:08:28.280 from home appliances because we're eating more at home, and 0:08:28.360 --> 0:08:31.680 tablets because we're learning from home, so great products set 0:08:31.720 --> 0:08:34.719 for the environment. And second, they have a tremendous e 0:08:34.840 --> 0:08:38.640 commerce footprint. Their online sales have grown two hundred and 0:08:38.679 --> 0:08:43.040 fifty five percent versus last year UM and they've even 0:08:43.120 --> 0:08:46.720 sustained that at close to a hundred and nine since 0:08:46.760 --> 0:08:50.840 stores have reopened, and the stocks obviously reacting positively on that. 0:08:50.960 --> 0:08:53.360 So that's a winner. And then on the other hand, 0:08:53.520 --> 0:08:58.800 we have a plethora of undifferentiated mall based retailers. Sales 0:08:58.840 --> 0:09:02.319 are down more than dee percent. In most cases, they're 0:09:02.320 --> 0:09:06.800 facing many of them are facing bankruptcys. On the product side, 0:09:06.880 --> 0:09:10.320 they're not selling particularly differentiated products or products that are 0:09:10.360 --> 0:09:13.240 in demand during quarantine, A lot of clothing and as 0:09:13.280 --> 0:09:15.640 as you probably would recognize, we're not all going out 0:09:15.679 --> 0:09:19.520 and buying new clothing unless it's sweatpants. Um. And then 0:09:19.559 --> 0:09:22.920 on the the the e commerce footprints side, really they've 0:09:22.960 --> 0:09:25.560 they've done too little, too late. So those give you 0:09:25.640 --> 0:09:28.680 some examples of how UM, there is a lot of 0:09:28.720 --> 0:09:33.480 bifurcation in the market between winning and boot losing business models. Um, 0:09:33.480 --> 0:09:36.600 this recession is really different from any other recession we've seen. 0:09:37.120 --> 0:09:40.040 But if you're selective and you can get on get 0:09:40.120 --> 0:09:42.880 behind the right business models at the right valuations, there 0:09:42.880 --> 0:10:01.920 really should be tremendous opportunities here for active managers. So, Sarah, 0:10:02.040 --> 0:10:03.960 a lot of great points in there, you know, I 0:10:04.160 --> 0:10:06.240 Katie especially like the point about best Buy. I know 0:10:06.360 --> 0:10:09.640 personally I've been looking to upgrade my TV during the pandemic. 0:10:11.160 --> 0:10:14.400 But so Katie, talk us through then, how your team 0:10:14.480 --> 0:10:18.640 looks at those giant gorillas in the room, the top 0:10:18.720 --> 0:10:25.520 five stocks in the SMP. You know, your Apple, Amazon, Alphabet, Microsoft, 0:10:26.160 --> 0:10:29.920 you know, taking up a record weight in in indexes 0:10:29.960 --> 0:10:33.000 like the SMP. I think less. I checked something between 0:10:33.040 --> 0:10:35.440 a quarter and a fifth of the SMP was just 0:10:35.559 --> 0:10:39.000 those five stocks. I mean, does it lead you to 0:10:39.040 --> 0:10:44.760 want to underweight those super richly valued heavyweight stocks, uh, 0:10:44.800 --> 0:10:46.760 and look for those value stocks like the ones you 0:10:46.800 --> 0:10:49.960 mentioned in retail and restaurants or is it the type 0:10:50.000 --> 0:10:53.960 of environment where you really can't afford to underweight these 0:10:54.000 --> 0:10:57.680 big names. We think the things are are great franchises, 0:10:57.760 --> 0:10:59.840 We own some of them, but we do believe that 0:11:00.080 --> 0:11:04.120 investors would be well served to diversify beyond them in 0:11:04.200 --> 0:11:07.520 the hunt for future tech leaders. UM. So, a couple 0:11:07.559 --> 0:11:10.760 of points to make here. Um. As you know, many 0:11:10.920 --> 0:11:13.120 US investors and a lot of people listening to your 0:11:13.160 --> 0:11:17.720 program have embraced passive investing. And what I would observe 0:11:17.760 --> 0:11:19.800 at the outset here is that we need to consider 0:11:19.840 --> 0:11:23.119 whether a passive investing has in fact become too aggressive 0:11:23.840 --> 0:11:26.760 Because to your point, there's lots of concentration in a 0:11:26.800 --> 0:11:29.680 little number of companies. So it's about twenty two of 0:11:29.720 --> 0:11:32.440 the market cap in the top one percent of the 0:11:32.559 --> 0:11:35.880 names that exceeds the eighteen percent we reached in in 0:11:35.960 --> 0:11:39.200 two thousand. Um. There's lots of of of different you know, 0:11:39.240 --> 0:11:41.360 ways of looking at this. But another way to put 0:11:41.400 --> 0:11:46.079 it into context for people is that the four largest Amazon, Apple, Microsoft, 0:11:46.120 --> 0:11:50.040 Google currently have a market capitalization that's bigger than the 0:11:50.200 --> 0:11:53.760 entire country of Japan. Uh, they're worth just shy of 0:11:53.880 --> 0:11:57.040 six trillion. Well, Japan's equity markets worth five point eight 0:11:57.080 --> 0:12:00.880 four trillion. You know, despite the sharpest session on record, 0:12:01.000 --> 0:12:03.199 these companies have added more than a third to their 0:12:03.200 --> 0:12:06.000 market values in and I think we really do need 0:12:06.080 --> 0:12:08.240 to pause and ask ourselves this question, you know, is 0:12:08.280 --> 0:12:12.760 it justified and will it persist? So let's break it 0:12:12.800 --> 0:12:15.640 down this way. There are some real positives for these companies. 0:12:15.640 --> 0:12:17.960 So on the one hand, they've got the cleanest balance 0:12:18.000 --> 0:12:21.400 sheets within the market. That's the first point I would make, 0:12:21.760 --> 0:12:25.360 more than two and sixty billion dollars of net cash um, 0:12:25.520 --> 0:12:28.520 lower leverage than the rest of the market, better liquidity 0:12:28.520 --> 0:12:31.280 and visibility. Uh. The second point I would make is 0:12:31.320 --> 0:12:34.160 that they do have strong growth prospects. Their near term 0:12:34.200 --> 0:12:38.080 growth expectations are about fifteen percent versus eight percent for 0:12:38.120 --> 0:12:42.080 the media and SMP five company, and their catering towards 0:12:42.120 --> 0:12:45.480 trends with both secular and cyclical tailwinds like cloud, e 0:12:45.640 --> 0:12:49.320 commerce and digital payments. So those are all, you know, 0:12:49.520 --> 0:12:53.120 very positive. And I'd also just mentioned From a valuation perspective, 0:12:53.559 --> 0:12:56.400 you know, these are valuations are just not as demanding 0:12:56.440 --> 0:13:00.280 as they were at the peak of the tech bub bole. 0:13:00.679 --> 0:13:03.360 And these stocks are driven not just by long term 0:13:03.400 --> 0:13:06.160 growth expectations, which we saw a lot more of in 0:13:06.160 --> 0:13:10.120 in two thousand, but actually by strong realized profitability again, 0:13:10.160 --> 0:13:13.559 lower leverage, and all these other markers of quality. UM. 0:13:13.600 --> 0:13:16.160 I'd also say, you know, something we should give them 0:13:16.200 --> 0:13:19.000 credit for is that they've shown offensive as well as 0:13:19.040 --> 0:13:22.280 defensive characteristics. They were leaders in the market correction and 0:13:22.320 --> 0:13:26.559 also the rebound, which you know generally warrant's higher evaluations. 0:13:26.559 --> 0:13:29.720 So those are all some reasons to feel good about 0:13:29.760 --> 0:13:32.720 the Fangs. However, as I stated at the outset, I 0:13:32.760 --> 0:13:35.440 do think we need to consider the possibility of UM 0:13:35.600 --> 0:13:38.080 that we need to diversify beyond them, and that passive 0:13:38.120 --> 0:13:41.480 has become too aggressive. So on the other hand, I 0:13:41.480 --> 0:13:44.160 want to point out some some balancing comments to that. 0:13:44.240 --> 0:13:46.800 I do think there could be some clouds forming on 0:13:46.840 --> 0:13:50.640 the horizon which could threaten their dominance going forward, and 0:13:50.679 --> 0:13:54.840 this should motivate investors to to diversify beyond the Fangs. 0:13:55.400 --> 0:14:00.199 There's tremendous turnover historically in the tech ecosystem. Over the 0:14:00.320 --> 0:14:03.040 last twenty three years, the largest tech company by market 0:14:03.040 --> 0:14:07.160 cap has changed eight different times. UM market leaders have 0:14:07.360 --> 0:14:10.559 historically not really been able to maintain their leadership positions 0:14:10.600 --> 0:14:12.760 for more than five or six years. So a decade 0:14:12.800 --> 0:14:17.800 ago with Cisco, Intel, IBM, Oracle, et cetera. Mark Zuckerberg 0:14:17.880 --> 0:14:21.840 himself alluded in his his congressional testimony that after ten 0:14:21.920 --> 0:14:24.680 years of fang dominance, you know the next ten years 0:14:24.720 --> 0:14:27.800 and big companies in the next ten years could look different. 0:14:27.840 --> 0:14:31.280 So ecosystem turnover historically has been high. We expect that 0:14:31.320 --> 0:14:34.120 to persist. The second point I'd make is, you know 0:14:34.240 --> 0:14:36.520 these companies, and this doesn't get talked about a lot, 0:14:36.560 --> 0:14:39.840 but they are catering to somewhat saturated markets. So if 0:14:39.880 --> 0:14:43.360 you take Apple, it's fully penetrated market for high end 0:14:43.440 --> 0:14:48.040 smartphones UM, leaving growth more dependent on replacements and services 0:14:48.120 --> 0:14:51.000 that are attached to to the phones. But it's hard 0:14:51.000 --> 0:14:52.880 to move the multiple on that. In the case of 0:14:52.920 --> 0:14:56.400 Amazon Aws, which is a real driver for that business, 0:14:56.400 --> 0:15:00.240 their cloud business obviously has real competition from Microsoft often 0:15:00.320 --> 0:15:03.120 and Google, so growth is going to naturally be slower. 0:15:03.640 --> 0:15:07.479 And then the company is involved with online advertising. UM 0:15:07.520 --> 0:15:10.320 you know, that's now fifty percent of global advertising, so 0:15:10.600 --> 0:15:14.880 one would expect growth to decelerate over time. So the 0:15:14.960 --> 0:15:18.200 third comment would be that there is potential for increased 0:15:18.200 --> 0:15:21.200 regulation and we're obviously seeing that play out right now. 0:15:22.080 --> 0:15:26.000 Uncertainty over government regulatory actions is generally not good for 0:15:26.120 --> 0:15:29.520 corporate decision making, and we saw that with Microsoft in 0:15:29.520 --> 0:15:33.520 the two thousands when it faced various antitrust investigations UM, 0:15:33.600 --> 0:15:36.320 and it makes doing M and A, which has historically 0:15:36.320 --> 0:15:39.040 been a driver of growth for these companies, more difficult. 0:15:39.120 --> 0:15:41.800 So that regulatory overhang, you know, we we do think 0:15:42.520 --> 0:15:46.160 UM could persist. UM. So taking all those comments together, 0:15:46.280 --> 0:15:49.160 some reasons to feel positive about the things, some balancing 0:15:49.240 --> 0:15:52.360 comments that, you know, give us pause. I think that 0:15:52.520 --> 0:15:55.480 the headline is that passive has become too aggressive and 0:15:55.560 --> 0:15:58.640 we really need to invest and look for opportunities in 0:15:58.720 --> 0:16:01.600 tech beyond the things. And I'll highlight two areas that 0:16:01.600 --> 0:16:04.240 that we're looking at UM. The first would be in 0:16:04.320 --> 0:16:08.040 companies outside the US. We particularly like local tech leaders 0:16:08.040 --> 0:16:11.320 and emerging markets. So e M consumers are getting access 0:16:11.360 --> 0:16:15.440 to fast, ubiquitous internet for the first time in history. UM. 0:16:15.520 --> 0:16:18.440 They're also now able to access the internet via their 0:16:18.480 --> 0:16:20.800 mobile phones, and this is giving rise to something we 0:16:20.880 --> 0:16:23.680 call the splinter neet effects. So this is local companies 0:16:23.680 --> 0:16:27.240 applying proven business models from the US in new, high 0:16:27.280 --> 0:16:30.600 growth markets um SO. Examples of these local tech titans 0:16:30.600 --> 0:16:33.880 would be Mercado Libre Um which is the Amazon of 0:16:33.960 --> 0:16:38.840 Latin America where online penetration is only five percent versus 0:16:38.880 --> 0:16:41.840 fifteen to twenty and most developed markets, or see which 0:16:41.880 --> 0:16:45.200 is the Amazon of Southeast Asia. Um and these companies, 0:16:45.240 --> 0:16:47.440 I would note, are also trying to become leaders in 0:16:47.520 --> 0:16:51.200 other fields beyond e commerce. So Mercado Libre is getting 0:16:51.200 --> 0:16:55.520 into payments and see um is getting into online gaming. 0:16:55.640 --> 0:16:57.960 And one might argue this would be like investing in 0:16:58.000 --> 0:17:01.360 Amazon five to ten years ago with big addressable markets. 0:17:01.960 --> 0:17:04.600 And then the second place would be going further down 0:17:04.720 --> 0:17:07.920 the market cap spectrum UM looking at small and mid 0:17:07.960 --> 0:17:11.440 cap companies versus the mega cap So we like innovative 0:17:11.480 --> 0:17:15.040 and differentiated, pure play small cap companies that are developing 0:17:15.280 --> 0:17:20.040 highly differentiated and superior technology to service new markets. Um SO. 0:17:20.080 --> 0:17:23.320 An example here would be Ping Identity, which is a 0:17:23.359 --> 0:17:27.840 provider of intelligent identity solutions and is disrupting identity and 0:17:28.320 --> 0:17:31.080 access management market, which is you know, identity being a 0:17:31.920 --> 0:17:34.560 very big focus now and this is a very specific 0:17:34.640 --> 0:17:37.600 provider with a high growth rate and obviously not something 0:17:37.640 --> 0:17:41.439 captured when investing UM in the fangs UM and so 0:17:41.480 --> 0:17:43.360 in some way, well, I think the Fangs are are 0:17:43.359 --> 0:17:46.520 fine franchises to own. Again, some reasons to be positive, 0:17:46.560 --> 0:17:49.400 but certainly some reasons to be concerned. What investors need 0:17:49.440 --> 0:17:52.879 to do, UM is think about allocating some capital away 0:17:52.920 --> 0:17:56.440 from those dominant franchises in search of you know, new 0:17:56.480 --> 0:17:59.240 emerging tech leaders which we can find both outside the 0:17:59.320 --> 0:18:02.399 US and with in the US down the market cap, Katie, 0:18:02.440 --> 0:18:04.760 I find it really interesting that of the industries that 0:18:04.760 --> 0:18:08.400 you've high lighted so far, so that being restaurants, retail, 0:18:08.480 --> 0:18:11.919 and tech, I mean two of them are presumably completely 0:18:12.119 --> 0:18:15.720 coronavirus losers, except where you highlighted you can find winners. 0:18:16.160 --> 0:18:22.040 And tech has just developed into the star of once again, 0:18:22.200 --> 0:18:25.840 two ends of the spectrum. I mean between those two spectrums, 0:18:25.880 --> 0:18:29.000 are there any areas that you would just absolutely stay 0:18:29.000 --> 0:18:31.399 away from you think it's too difficult right now to 0:18:31.480 --> 0:18:33.920 really find something that's worth it to throw capital at. 0:18:34.359 --> 0:18:36.840 I think it's really important that in this environment, and 0:18:36.880 --> 0:18:40.879 really any environment, that investors run balanced portfolios and that 0:18:40.960 --> 0:18:44.720 they capture both growth and value ideas. And I guess 0:18:44.760 --> 0:18:47.560 my my overarching point here would be that I think 0:18:47.560 --> 0:18:51.320 it's possible to find winners in every sector, but you 0:18:51.400 --> 0:18:54.400 really have to get behind the right business models. Um, 0:18:54.560 --> 0:18:57.840 and that difference between winners and losers is going to 0:18:57.920 --> 0:19:01.240 express itself in every single sector. If take energy, for example, 0:19:01.280 --> 0:19:04.080 there's a lot of reasons that everyone listening to this 0:19:04.200 --> 0:19:07.000 knows that we shouldn't be super excited about the future 0:19:07.000 --> 0:19:09.960 of energy, and that's reflected in share prices. But what 0:19:10.040 --> 0:19:13.280 about renewable companies within the energy space. Some of those 0:19:13.320 --> 0:19:17.640 companies are up thirty to renewable fuel companies for example, 0:19:17.960 --> 0:19:20.200 which we think is the future of the energy market. 0:19:20.520 --> 0:19:22.840 So even in the sectors that are at least loved 0:19:22.960 --> 0:19:26.520 within the market, you can actually find winning franchises if 0:19:26.560 --> 0:19:29.280 you hunt, and again, you know, you get behind the 0:19:29.359 --> 0:19:32.240 right business models. I think that's always been important in investing, 0:19:32.320 --> 0:19:35.720 but this crisis has made that more important than ever. Yeah, Katie, 0:19:35.760 --> 0:19:38.520 that mention of renewable energy is uh, it's a good 0:19:38.520 --> 0:19:41.720 segue to the topic of E S g uh And 0:19:42.040 --> 0:19:44.560 for anyone listening, who's I don't know, been asleep for 0:19:44.560 --> 0:19:46.199 the last five years and doesn't know what that is. 0:19:46.800 --> 0:19:54.200 It's basically investing with the idea of the environment, social issues, 0:19:54.320 --> 0:19:58.119 and government governance issues in mind when you're picking out companies. 0:19:58.720 --> 0:20:01.600 And I'm kind of fast needed at how you look 0:20:01.640 --> 0:20:06.000 at that at the E s G world through the 0:20:06.040 --> 0:20:09.399 sort of the goggles of a fundamental investor, because I 0:20:09.440 --> 0:20:11.439 do think there's a case to be made that, Hey, 0:20:11.480 --> 0:20:14.679 if your company is less likely to get say a 0:20:14.720 --> 0:20:18.000 big fine for an environmental issue, or uh, you know, 0:20:18.119 --> 0:20:21.720 less likely to be boycotted over a social issue, or 0:20:21.840 --> 0:20:25.400 less likely to you know, have the CEO forced out 0:20:25.400 --> 0:20:27.800 in a governance issue, that type of thing, that there 0:20:27.880 --> 0:20:31.720 is very much a fundamental case to be made for 0:20:31.920 --> 0:20:36.119 incorporating E s G factors in your research. Is that 0:20:36.200 --> 0:20:39.320 a big part of the reason why E s G 0:20:39.480 --> 0:20:42.359 is so hot? Is it not just sort of a 0:20:42.440 --> 0:20:45.200 clear investing with a clearer conscience, And not to say 0:20:45.240 --> 0:20:46.840 there's anything wrong with that, I'm all for that, but 0:20:46.960 --> 0:20:49.680 is there also, you know, from the work you've done, 0:20:49.800 --> 0:20:53.040 is there a fundamental case to be made for why 0:20:53.080 --> 0:20:57.040 this stuff is important? Absolutely at Goldman Success that management 0:20:57.080 --> 0:21:00.680 and in particular within our our fundamental equity team, we 0:21:00.800 --> 0:21:04.200 think that consideration of E s G issues is often 0:21:04.280 --> 0:21:08.959 just correlates to quality UM, and we have a strong belief. 0:21:09.240 --> 0:21:11.760 We're long term investors and have a very strong belief 0:21:11.840 --> 0:21:16.320 that quality will outperform over time, and so we consider 0:21:16.600 --> 0:21:20.760 E s G across the entire sixty billion dollars of 0:21:20.520 --> 0:21:23.719 of of assets that we manage UM, in addition to 0:21:23.800 --> 0:21:26.879 our our dedicated E s G portfolios, because focus on 0:21:26.920 --> 0:21:31.080 these issues should be a way to UH avoid risks 0:21:31.119 --> 0:21:35.560 but also to generate alpha for all investors, regardless of 0:21:35.680 --> 0:21:38.639 how focused the organization or the individual might be on 0:21:38.840 --> 0:21:41.560 on E s G UM. I'll take a step back 0:21:41.560 --> 0:21:44.560 and maybe make a couple of quick points about the 0:21:44.600 --> 0:21:48.320 space UM. The first would be that we believe very 0:21:48.359 --> 0:21:51.159 deeply that the world is on the cusp of a 0:21:51.240 --> 0:21:55.800 sustainable investing revolution and UM we think it could be 0:21:55.880 --> 0:22:00.159 one of the biggest investment opportunities ever. It had the 0:22:00.200 --> 0:22:04.119 magnitude of the industrial revolution coupled with the speed of 0:22:04.119 --> 0:22:08.520 the digital revolution and a tale from from COVID. You know, 0:22:08.640 --> 0:22:11.600 how do we account for that? As I mentioned earlier, 0:22:11.680 --> 0:22:14.880 we we integrate consideration of E s G issues into 0:22:14.880 --> 0:22:17.600 all the assets we manage. We also have a lot 0:22:17.640 --> 0:22:20.960 of idea generation on the back of this UH emphasis 0:22:21.040 --> 0:22:22.800 on e s G. So, in other words, we invest 0:22:22.880 --> 0:22:26.120 in solutions providers to E s G issues. And then 0:22:26.160 --> 0:22:28.280 of course we think about this a lot when we're 0:22:28.400 --> 0:22:33.439 engaging companies. So just from an environmental perspective, UM, we 0:22:33.520 --> 0:22:37.119 think that's going to continue to grow in an importance 0:22:37.160 --> 0:22:40.120 and an emphasis. A winner on this front, by the way, 0:22:40.200 --> 0:22:42.920 is Europe. So you know, there's a lot of bad 0:22:42.960 --> 0:22:46.320 news over time around Europe UM, but this is actually 0:22:46.480 --> 0:22:49.280 a place where Europe can really excel and own and 0:22:49.280 --> 0:22:53.040 and and succeed UM. The EU estimates the additional yearly 0:22:53.080 --> 0:22:57.320 investment required to achieve the EU Green Deal targets UM, 0:22:57.359 --> 0:23:00.560 which are are mostly environmental focus, is more between a 0:23:00.640 --> 0:23:04.639