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At The Money: Deregulation Will Free Your Portfolio · Masters in Business

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  Speaker 1: Bloomberg Audio Studios, podcasts, radio news. I'm a bad book
• 0:11
  Speaker 1: for breaking her hull. Exactly one year ago, the Free
• 0:36
  Speaker 1: Market's ETF launched ticker symbol FMKT, designed to invest in
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  Speaker 1: companies expected to benefit from deregulation and free market dynamics
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  Speaker 1: in the second term of the Trump presidency. I was
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  Speaker 1: intrigued by the concept and wondered what it might look
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  Speaker 1: like in the second half of this term. To help
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  Speaker 1: us unpack all of this, let's bring in Michael gay Ed.
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  Speaker 1: He is the portfolio manager for Tactical Rotation Management, one
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  Speaker 1: of the subadvisors to the Free Market ETF. So, Michael,
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  Speaker 1: I was intrigued by this concept. What was the original
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  Speaker 1: insight behind FMKT? How was deregulation becoming an investible theme
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  Speaker 1: that perhaps markets were underpricing?
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  Speaker 2: Yeah, and in interesting So when when Trump got like
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  Speaker 2: that with this large network of advisors that I talked to,
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  Speaker 2: with three hundred fifty advisors that I regularly talk to,
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  Speaker 2: which is why my calendar is always so jammed, And
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  Speaker 2: one of the advisers said to me, you know what,
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  Speaker 2: it would be a good investment ideas, you know, something
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  Speaker 2: that focuses on deregulation, and he was kind of saying
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  Speaker 2: it kind off the cops. So yeah, and I get
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  Speaker 2: the guy credit for coming up with the idea, and
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  Speaker 2: it's like, you know, that's actually an interesting idea. I mean,
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  Speaker 2: deregulation arguably makes up the time to market faster, it
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  Speaker 2: increases margins, it should benefit earning from a fundamental perspective,
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  Speaker 2: it should increase competition.
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  Speaker 3: So all that sounds like an interesting thesis.
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  Speaker 2: So I called up three other firms, one which is
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  Speaker 2: the advisor Title Financial Group, and then two other rias
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  Speaker 2: as subadvisors, people that I've known. I wanted to approach
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  Speaker 2: this more from the a VC standpoint. My other funds
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  Speaker 2: I launched on my own. This I wanted to actually
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  Speaker 2: have partners on because it's a very different way of
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  Speaker 2: my style of investing, which is more risk on, risk
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  Speaker 2: off historically.
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  Speaker 3: And came up with the idea and said, okay, well
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  Speaker 3: let's go after Now.
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  Speaker 2: When I had the when I kind of really was
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  Speaker 2: thinking through the idea, it's like, all right, Trump is
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  Speaker 2: making it very clear that he's going to go from this.
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  Speaker 3: You know, for.
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  Speaker 2: Every new regulation you want, I wanted to cut the
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  Speaker 2: goals goes from that to for every new regulation I
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  Speaker 2: want ten cut and he's actually gone more aggressive on
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  Speaker 2: that since since.
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  Speaker 3: He was elected. So come up with a fund idea
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  Speaker 3: of figure out what sectors, what industries benefit the most
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  Speaker 3: from deregulation, and it had that and has to be.
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  Speaker 2: Active because these executive orders come out and you don't
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  Speaker 2: know what's going to be deregulated next, so you've got
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  Speaker 2: to kind of focus and on that as quickly as possible.
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  Speaker 3: Now, deregulation is a very interesting buzzword.
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  Speaker 2: You hear a lot of people on the media talking
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  Speaker 2: about deregulation as a big tail in for the broader markets.
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  Speaker 2: And I do believe that if you look at you
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  Speaker 2: know why has the US outperformed Europe so much, It's
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  Speaker 2: not just because of tech.
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  Speaker 3: It's because we don't have as much regulation as Europe does.
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  Speaker 2: Regulation is a stopping point, is a friction that hurts
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  Speaker 2: earnings and time to market. So came up with the
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  Speaker 2: idea for free markets. It's an active fun stock picking.
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  Speaker 2: A lot of the focuses around sectors like industrials, financials, cannabis, nuclear,
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  Speaker 2: anything in the aerospace part of the marketplace, not so
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  Speaker 2: much tech.
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  Speaker 3: Maybe we can touch on that.
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  Speaker 2: We believe that tech is probably going to be regulated,
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  Speaker 2: and maybe AI in particular be regulated, especially from a
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  Speaker 2: regulatory perspective. In our business, the investment advisory business. But
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  Speaker 2: you know, out of the game, we had some pretty
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  Speaker 2: strong performances. About a year ago we launched. We had
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  Speaker 2: four and a one thousand traded shares on day one,
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  Speaker 2: a lot of interest in that. We had really strong performance.
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  Speaker 2: We were a thousand basis points over the SMP at
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  Speaker 2: some point. That ended up being a blessing and a curse,
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  Speaker 2: because obviously nothing closes a sale like a chart.
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  Speaker 3: People started chasing the performance.
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  Speaker 2: Of FMKAT and then we to draw down as we
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  Speaker 2: got back to AIS the only play in town.
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  Speaker 3: And right now we're kind of meandering.
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  Speaker 2: But I do believe that the deregulation theme is here
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  Speaker 2: to stay, even if you get a Democrat as president
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  Speaker 2: next go around. The reality is industries that have less
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  Speaker 2: regulation shoot, at least theoretically outperform.
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  Speaker 1: So let's stay with that concept of deregulation. How do
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  Speaker 1: you define what sectors benefit from deregulation, and then how
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  Speaker 1: do you hone in on what companies within those sectors
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  Speaker 1: are going to be the biggest beneficiaries.
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  Speaker 2: So arguably, it would be very hard to do either
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  Speaker 2: of those outside of using AI, which we actually build
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  Speaker 2: out a whole workflow and AI screening process to figure
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  Speaker 2: out exactly that which sectors, which industries benefit, which individual
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  Speaker 2: companies are mentioning deregulation the most in earning transcripts.
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  Speaker 3: So we've got multiple kind of filters.
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  Speaker 2: That are looking at valuation, that are looking at where
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  Speaker 2: SGNA is impacted by regulatory costs. And it's in some
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  Speaker 2: ways that you can argue it's obvious, right, It's like
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  Speaker 2: think about industry wise, sector wise, what has the most regulation?
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  Speaker 3: Banks?
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  Speaker 1: Sure, financials, no doubt, no doubt, right, especially with Dodd Frank.
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  Speaker 3: And then you've got to roll back a basle and
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  Speaker 3: all that, which is.
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  Speaker 2: The dereglation side, you know, cannabis, right, So we saw
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  Speaker 2: Trump obviously trying to get ahead of the Democrats. You
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  Speaker 2: can argue with some of this reclassification on the cannabis sides.
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  Speaker 3: Right. So like we've got Tillray in the portfolio.
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  Speaker 2: Nuclear right, Obviously with all this AI build out, you're
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  Speaker 2: gonna need energy. So you've got to make the time
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  Speaker 2: to market for getting nuclear plants up shorter to meet
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  Speaker 2: the growing demand, of speed of importation of the AI
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  Speaker 2: data censors. So it's all the stuff that our bottlenecks, right,
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  Speaker 2: is kind of the area the way to think about it.
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  Speaker 2: So we do a lot of screening, We do a
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  Speaker 2: lot of AI, We look at executive words when they
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  Speaker 2: come out, we determined from the AI output does this
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  Speaker 2: make sense, and then we're just going granzlar which companies
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  Speaker 2: in theory.
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  Speaker 3: Benefit the most, right. So a good example of that
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  Speaker 3: is Robin Hood.
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  Speaker 2: Robinhood is kind of the forefront of financial deregulation, very
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  Speaker 2: forward thinking company. But then on top of that, on
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  Speaker 2: the crypto side, they're big players, right, So you hit
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  Speaker 2: on all areas of the of the of the sort
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  Speaker 2: of derailatory.
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  Speaker 3: Focus from the Trump administration, which again is not going
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  Speaker 3: to go away.
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  Speaker 2: It's hard to once you deregulate something to reregulate it,
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  Speaker 2: at least that quickly.
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  Speaker 1: Unless there's a crisis. It's almost impossible. Fmkt's mandate says
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  Speaker 1: at least eighty percent of assets go into companies expected
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  Speaker 1: to benefit from regulatory shifts. What's the remaining twenty percent?
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  Speaker 2: Yeah, So, and arguably it's it goes to sort of
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  Speaker 2: like how do you define it? Right, what benefits from derailation.
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  Speaker 2: But five percent of the portfolio can go into bitcoin
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  Speaker 2: and ethereum.
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  Speaker 3: That's listed in the perspectives.
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  Speaker 1: Now that was done any crypto or just those two,
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  Speaker 1: just those two.
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  Speaker 3: And also we can go into gold as well.
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  Speaker 2: And the over there is that those if you don't
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  Speaker 2: about what a free market is, which is unencumbered by regulation,
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  Speaker 2: those are those almost by definition free market plays right
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  Speaker 2: when you come to the crypto space and gold in particular,
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  Speaker 2: So we can do a little bit and we've gone
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  Speaker 2: into that in the past. It's obviously momentum has been weak,
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  Speaker 2: so we've gotten out of it. Part of the act
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  Speaker 2: of nature of it trying to avoid these big clients
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  Speaker 2: in those positions.
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  Speaker 3: But that's for almost any perspectives.
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  Speaker 2: In order to be considered a theme, you have to
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  Speaker 2: have that eighty percent threshold, right, So part of it's
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  Speaker 2: kind of a regular an it's kind of a regulatory
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  Speaker 2: requirement to say that if you're going to be focused
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  Speaker 2: on a particular theme, you've got to have at least
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  Speaker 2: eighty pariliar portfolio.
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  Speaker 1: That.
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  Speaker 2: The reality is the every single holding to some extent,
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  Speaker 2: has some kind of deregulation tie into it. Some of
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  Speaker 2: it's direct, some of it's more indirect, but there's always
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  Speaker 2: a justification for why we're positioning in particular.
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  Speaker 1: Holy, So the fun kind of sits at the intersection
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  Speaker 1: of markets and politics, and I've long cautioned against allowing
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  Speaker 1: partisan politics to influence investing. You're really trying to walk
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  Speaker 1: a line where it's not a political expression etf but
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  Speaker 1: rather a policy driven theme. How do you balance that?
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  Speaker 1: How do you keep this from becoming a darling of
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  Speaker 1: one side or the other.
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  Speaker 2: Yeah, it's like politics goes into the policy, policy goes
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  Speaker 2: into profits, right, So it's it's really more of the
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  Speaker 2: profit side, the fundamental aspect of it.
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  Speaker 3: So we've got that question before it's all right.
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  Speaker 2: So you know, I'm having a Democrat come in place,
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  Speaker 2: and it seems like it's a republican fund. I'd argue
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  Speaker 2: it's not because even under a democratic regime, there will
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  Speaker 2: be some sectors that will be deregulated the Democrats, like
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  Speaker 2: like alternative energy, in which case then the holding's change
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  Speaker 2: because now that's where the focus on the regulation might be.
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  Speaker 1: My solar wind we more democrat issue than republics issue exactly.
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  Speaker 2: And I go back to OSAs and Yeah, you're gonna
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  Speaker 2: have deregulation there. And then the holding shift energy is
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  Speaker 2: a big part of the theme behind f MKT, which
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  Speaker 2: obviously makes sense because Trump is so focused on releasing
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  Speaker 2: as much domestic oil as possible and removing frictions there,
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  Speaker 2: so it.
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  Speaker 3: Benefits from that. But then it's just a shift, right.
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  Speaker 4: You want to follow the policy because the following the
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  Speaker 4: policy follows is where profits end up coming from, and
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  Speaker 4: policy as winners and losers, and often the winners are
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  Speaker 4: things with are favored, which can to be things which
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  Speaker 4: we'll get to market faster, which exactly what deregulation is.
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  Speaker 3: So I don't view it as a political play.
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  Speaker 2: I think it's just sort of the nature of the
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  Speaker 2: beast is you will have certain parties that will favor
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  Speaker 2: certain sectors, certain industries. How do they do it by
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  Speaker 2: either providing funding directly or by making resulting less friction
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  Speaker 2: for those companies.
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  Speaker 1: That makes a lot of sense. It also means that
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  Speaker 1: trying to come up with some rational benchmark almost impossible.
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  Speaker 1: How do you figure out what your frame of reference is?
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  Speaker 1: The S and P five hundred doesn't seem right? What
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  Speaker 1: do you use for a benchmark? Yeah?
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  Speaker 3: And it's interesting.
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  Speaker 2: So I mean by we have to have a benchmark
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  Speaker 2: from from a regulatory perspective, because everyone, you know, that's
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  Speaker 2: how the regulators think about these things. For us, it's
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  Speaker 2: more about, you know, the the entire landscape of the
• 9:47
  Speaker 2: equity universe. Is the fund outperforming or not. Now again,
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  Speaker 2: we outperform the S and P strongly. The S and P,
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  Speaker 2: to your point, is not really a proper benchmark for
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  Speaker 2: a free markets type of fun because the S and P, now,
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  Speaker 2: i'd argue, is an AI index. I mean, I'm sorry,
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  Speaker 2: but it's like, yesb BI quinary is no longer as
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  Speaker 2: diversified as.
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  Speaker 3: People think it is. It is a thematic fund.
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  Speaker 2: Right under large cab growth, large large cat growth is
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  Speaker 2: what it's basic AI.
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  Speaker 3: I mean, that's that's.
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  Speaker 1: It's AI, it's semiconductors, it's software, it's go down the
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  Speaker 1: whole less.
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  Speaker 3: Right, exactly right.
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  Speaker 2: So, so I think anybody that's looking at FMKT is
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  Speaker 2: looking at from the standpoint that they.
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  Speaker 3: Believe in the thesis.
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  Speaker 2: And a lot of small business owners believe that derelation
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  Speaker 2: is more important than taxes because that impacts their day
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  Speaker 2: to day activity and working. Right, And and I go
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  Speaker 2: back to finding a benchmark is more function of sort
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  Speaker 2: of your own personal you know, financial requirements.
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  Speaker 3: It's not about are you beating the SMP is it is?
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  Speaker 2: It's is this does it fit your your objectives from
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  Speaker 2: a risk return perspective? Does it make the journey from
• 10:47
  Speaker 2: the investment perspective better? And a lot of the free
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  Speaker 2: market positions are parts of the marketplace that the market
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  Speaker 2: have not rewarded.
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  Speaker 3: There is a value tilt.
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  Speaker 2: Interestingly enough, when you look at the holdings of f
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  Speaker 2: M K T sure there are some of these more
• 11:01
  Speaker 2: spective positions that we have that you almost have to
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  Speaker 2: have a position in, like Archer and Joby. I know,
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  Speaker 2: I know, you know, your your colleague Josh Brown talks
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  Speaker 2: about I think Joby quite a.
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  Speaker 3: Bit and Archer as well.
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  Speaker 2: Those are classic deregulation plays because of the focus around
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  Speaker 2: flying U taxis basically and derelation as far as the
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  Speaker 2: FAA side goes. But there's a value tilt, so there's
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  Speaker 2: an environment that favors the value.
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  Speaker 3: It's gonna favor free markets anyway.
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  Speaker 1: So let's let's talk a little bit about some of
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  Speaker 1: the most recent holdings I was able to look up.
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  Speaker 1: Some are pretty obvious. You mentioned Robin Hood, Key Corp,
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  Speaker 1: Citizens Financial, even Blackstone, some of them are a little
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  Speaker 1: I had to scratch my head. Palo Alto Networks a
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  Speaker 1: d M oracle. The financials are obvious, be goes to deregulation.
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  Speaker 1: Oracle seems more like a political Hey, you know, Larry
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  Speaker 1: Ellison is a big buddy of Trump. His son is
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  Speaker 1: in the midst of the whole mayhem with VIACOM and
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  Speaker 1: and all of that. How do you distinguish what's the
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  Speaker 1: beneficiary of a deregulation and what's politically favored.
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  Speaker 3: How do you separate those?
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  Speaker 2: Well, to some extent, if you're politically favored, you're going
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  Speaker 2: to you're going to try to put deregulation in place.
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  Speaker 2: And the way that looks is in the speed with
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  Speaker 2: which government contracts take place.
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  Speaker 1: So I was thinking more along the lines of M
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  Speaker 1: and A and anti trust rules as well.
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  Speaker 3: For sure.
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  Speaker 2: Right in the case of an oracle, there's there's a
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  Speaker 2: something called FED Federal Risk, an authorization management program, which
• 12:38
  Speaker 2: basically is, without getting too deep to it, it's a
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  Speaker 2: way of getting approvals right to get a government contract.
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  Speaker 3: To sort of be a pipeline for like an RP.
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  Speaker 2: Last year, the Trumpet administration did something that basically removed
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  Speaker 2: a lot of that friction, so it wouldn't take as
• 12:52
  Speaker 2: long to try to apply for a government contract which
• 12:55
  Speaker 2: directly impacts Oracle.
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  Speaker 1: Right.
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  Speaker 2: It's it's that's the kind of deregulation which is important
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  Speaker 2: because it's all about speed to market.
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  Speaker 1: So let's talk about Palenteer and Archie Daniel, similar situation.
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  Speaker 3: There's an element of that as well.
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  Speaker 1: On that.
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  Speaker 2: Again, AI companies tend to not be true the strongest
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  Speaker 2: deregulation plays, but Palenteer does have an aspect of that
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  Speaker 2: because against speed to market for them is around government
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  Speaker 2: contracts for fence, right. So I think there's you know,
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  Speaker 2: it was never sort of a major major holding the fund,
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  Speaker 2: but it made sense to us to have some kind
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  Speaker 2: of exposure to it. And then on the energy front
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  Speaker 2: and Palo Alto, it's like anything that's tied to AI
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  Speaker 2: has to be deregulated from a bottom night perspective, which
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  Speaker 2: is energy, electricity utilities. So there is a reasoning behind
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  Speaker 2: data center permitting and utility usage, right, and the derelation
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  Speaker 2: that comes from that. I keep going back to this
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  Speaker 2: idea that what you own matters a lot less than
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  Speaker 2: how much you own of it. So a large part
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  Speaker 2: of the active nature of FMKT is, yes, we're being
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  Speaker 2: thematic on deregulation, but we're also actively trying to see
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  Speaker 2: is there momentum in this or that deregulation plate with
• 14:03
  Speaker 2: that heavier. So a lot of the holdings in the
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  Speaker 2: top ten are not based on how strong.
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  Speaker 3: The deregulation fit may be.
• 14:09
  Speaker 2: It could be just this deregulation fit and this strong
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  Speaker 2: momentum we want to be there.
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  Speaker 3: Gotcha.
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  Speaker 1: That makes a lot of sense. So we talked about financials, technology.
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  Speaker 1: Healthcare is another deregulation issue, but I want to ask
• 14:22
  Speaker 1: you about the defense sector and energy. When the war
• 14:26
  Speaker 1: and Iran began, how does that affect how you look
• 14:29
  Speaker 1: at the portfolio and what is a potential beneficiary of
• 14:33
  Speaker 1: this quicker, more frictionless deregulatory environment.
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  Speaker 2: Yeah, and when the war took place here we meet
• 14:41
  Speaker 2: once a week, me and the other portfolio managers. When
• 14:44
  Speaker 2: the war took place, they said, all right, we gotta
• 14:45
  Speaker 2: get some defense companies in here and then figure ou
• 14:47
  Speaker 2: which defense companies benefit the most from deregulation. And they're
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  Speaker 2: kind of in bed with each other government defense obviously,
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  Speaker 2: so it's all about speed. If you're going to grow
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  Speaker 2: to war, it has a faster speed of bringing things
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  Speaker 2: to market.
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  Speaker 3: So it hasn't been a main your major thematic play.
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  Speaker 2: But arguably it goes back to if it's about government
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  Speaker 2: contracts and it's about speed, then deregulation is about removing
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  Speaker 2: the friction to get something to the government's agency's.
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  Speaker 3: Relative hands to get approved.
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  Speaker 2: It's interesting, don't I don't view free markets as a
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  Speaker 2: geopolitical play. I view it more as if you believe
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  Speaker 2: that deregulation is how you have more profits, then you're
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  Speaker 2: simply trying to figure out which companies benefit from that
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  Speaker 2: the most. And arguably there's there's more art and science
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  Speaker 2: to that, right, but it's it's not as catalyst driven
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  Speaker 2: as much as.
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  Speaker 3: It's more about executive orders that are taking place.
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  Speaker 1: All right, final question, how do you separate genuine deregulation
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  Speaker 1: tailwinds from talking points and narrative? For more specifically, how
• 15:53
  Speaker 1: do you distinguish a company that's talking about receiving regulatory
• 15:57
  Speaker 1: relief from one who's marr gens or growth rates are
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  Speaker 1: actually improving?
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  Speaker 2: Yeah, and that goes back to its art versus science.
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  Speaker 2: I mean to some extent, there are some very clear,
• 16:09
  Speaker 2: you know, cause effects on the deregulation side impacting certain companies, right,
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  Speaker 2: But to your point, a lot of it is going
• 16:16
  Speaker 2: to be analyzing SG and a fundamental line items, looking
• 16:20
  Speaker 2: at and seeing what CEOs and executives are saying on
• 16:24
  Speaker 2: earning transcripts.
• 16:25
  Speaker 3: You know, one of the filters is.
• 16:26
  Speaker 2: How many times this deregulation mentioned, you know, by various
• 16:29
  Speaker 2: people at companies as a driving factor, because they're not
• 16:32
  Speaker 2: going to say it unless it's somewhat true, you would think, right, So.
• 16:36
  Speaker 3: It is.
• 16:37
  Speaker 2: It is not as clear cut, which is why again
• 16:39
  Speaker 2: it needs to be active. It's not something you can
• 16:40
  Speaker 2: quantitatively say, this is the ID regulation score.
• 16:43
  Speaker 3: So a lot of this comes with judgment.
• 16:45
  Speaker 2: A lot of this comes with which why it's good
• 16:47
  Speaker 2: that I have a team not just me that's coming
• 16:49
  Speaker 2: up with these these allocations and just trying.
• 16:51
  Speaker 3: To be fast in terms of figuring out where to position.
• 16:54
  Speaker 3: This has been a very it's been an odd environment.
• 16:57
  Speaker 2: Right because Trump's been talking about a lot of people
• 17:01
  Speaker 2: were excited about derelation. Derelation has a lag, right, So
• 17:04
  Speaker 2: any executive words from last year you'll start to maybe
• 17:06
  Speaker 2: see this year showing up in the actual earnings. The
• 17:09
  Speaker 2: market I think is still largely undervaluing the impact of deregulation.
• 17:14
  Speaker 2: And if that's the case, then towards the end of
• 17:16
  Speaker 2: the year you have a rerating and then you start
• 17:18
  Speaker 2: seeing it filter through in the ball market. Just as
• 17:21
  Speaker 2: a rotation away from this AI focus, passive.
• 17:24
  Speaker 1: Bid really really interesting. So to wrap up, if you're
• 17:28
  Speaker 1: intrigued by the concept of deregulation, of reduction of frictions,
• 17:33
  Speaker 1: of more opportunity for companies to throw walk off the
• 17:38
  Speaker 1: yoke of big government, I say, as a New York
• 17:43
  Speaker 1: left coaster, you can actually get exposure to that through
• 17:49
  Speaker 1: active ETFs like free markets. I'm Barry Ridults. You're listening
• 17:54
  Speaker 1: to Bloomberg's at the Money