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Sarah Ketterer Discusses Investment Management · Masters in Business

0:02
Speaker 1: This is Master's in Business with Barry Riddholts on Boomberg Radio.
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Speaker 1: This weekend on the podcast, I have an extra special guest.
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Speaker 1: Her name is Sarah Ketterer and she is the co
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Speaker 1: founder and CEO of Causeway Capital Management. They run about
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Speaker 1: fifty two billion dollars UH. She founded the company in
0:20
Speaker 1: June two thousand and one and is a value and
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Speaker 1: international investor. If you were at all interested in understanding
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Speaker 1: how to use quantitative strategies as part of a value
0:34
Speaker 1: portfolio build, or if you're just interested to hear about
0:37
Speaker 1: how someone put a company together over twenty years and
0:41
Speaker 1: grew it to over fifty billion dollars, then you're going
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Speaker 1: to find this conversation to be absolutely fascinating. So, with
0:49
Speaker 1: no further ado, my interview of Sarah Kettra This is
0:54
Speaker 1: Master's in Business with Barry Riddholts on boom Berg Radio.
0:58
Speaker 1: My special guest today is Sarah Keta. She is the
1:02
Speaker 1: CEO and co founder of Causeway, a fifty two billion
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Speaker 1: dollar asset manager. She's responsible for all of the investment
1:11
Speaker 1: research across all sectors at the firm. She was named
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Speaker 1: morning Star International Manager of the Year in twenty seventeen.
1:19
Speaker 1: She is also a member of the Stanford University Board
1:22
Speaker 1: of Trustees. She is co chair of the l A
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Speaker 1: World Affairs Council and town Hall Director of the Los
1:28
Speaker 1: Angeles Philharmonic Music Center Foundation, as well as chair of
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Speaker 1: the Investment Committee. Sarah Ketterer, Welcome to Bloomberg. Thank you, Marry.
1:37
Speaker 1: Let's start a little bit with your background. You you
1:40
Speaker 1: have an interesting work history. You come out of Stanford
1:43
Speaker 1: and then talk where you got your m b a.
1:46
Speaker 1: And eventually end up at Merrill Lynch where you were
1:50
Speaker 1: running one of their international investment firms. Tell us a
1:54
Speaker 1: little bit about that. I've finished graduate school thinking I
1:57
Speaker 1: wanted to be an investment banker, which turns out I
2:00
Speaker 1: didn't know it then is ideal training to be an
2:03
Speaker 1: investment manager. And the distinction is one is a transactions business, banking,
2:08
Speaker 1: and the other is very much a deep thinking, valuation
2:12
Speaker 1: centric investing type business. And the banking didn't after a
2:18
Speaker 1: few years inspire me, so I left to start a
2:21
Speaker 1: database business, which if I could be I could have
2:25
Speaker 1: an avatar. That's what the avatar would do, because that's
2:27
Speaker 1: a wonderful business. Right now, I'm just a consumer of
2:30
Speaker 1: data but that turned out to be as many startups
2:35
Speaker 1: are money losing and I needed to work living. I
2:38
Speaker 1: was living at the time in New York City, so
2:40
Speaker 1: I got a job at hotch Kiss and Wiley. My
2:44
Speaker 1: late father, John hotch Kiss was the hotch Kiss and
2:46
Speaker 1: George Wiley his business partner, and they had a firm
2:50
Speaker 1: that was thriving but had no international equity. So I
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Speaker 1: got hired to bring my data and help start international equity.
2:56
Speaker 1: You alluded at what I was about to ask you,
2:59
Speaker 1: how did working in a data startup impact your view
3:03
Speaker 1: of investment? Well, I had a very good idea looking
3:07
Speaker 1: at all that data, how much it needed to be
3:12
Speaker 1: cleansed and categorized, and that was beyond my scope. This
3:17
Speaker 1: was this was the nineteen nine when the tools we
3:21
Speaker 1: have today did not exist. So I was delighted to
3:24
Speaker 1: hand over the data and move on to the basics
3:28
Speaker 1: of asset management. So how did Hodgkiss and Wiley eventually
3:33
Speaker 1: become affiliated with Merrill Lynch. It's true of many investment managers,
3:38
Speaker 1: particularly the time when they're run by aging founders. The
3:42
Speaker 1: founders want to settle their estate, and this was true
3:45
Speaker 1: of George Wiley. Both extraordinary investors, But he was in
3:49
Speaker 1: his early seventies when I arrived, and it was time
3:52
Speaker 1: to do something with what they'd built. So they sold
3:56
Speaker 1: it to Merrill lynch In and therefore I became an
4:00
Speaker 1: employee along with a person who became my business partner,
4:04
Speaker 1: Harry Hartford. We met each other in and then by
4:08
Speaker 1: we were working for a completely different firm, and they
4:12
Speaker 1: ran it, it seems more or less from the outside
4:15
Speaker 1: as an independent subsidiary. It didn't get subsumed into the
4:19
Speaker 1: greater mother Meryl or how did that play out? Yeah,
4:22
Speaker 1: it was rough, a bit rough, because Meryl had aspirations
4:26
Speaker 1: for asset growth. And what I've learned over the last
4:29
Speaker 1: couple of decades is asset growth should never be your
4:32
Speaker 1: number one goal if you're an investment manager, even secret goal.
4:37
Speaker 1: Your goal should always be satisfy your clients and the
4:40
Speaker 1: assets will come. And Meryl found that Hotchkiss and Well
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Speaker 1: I didn't have the ability to grow fast enough and
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Speaker 1: ultimately decided to sell it. And so what happened then
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Speaker 1: I had a hard time. By that time, I couldn't
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Speaker 1: look my clients in the eye, nor could Harry and say, ah,
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Speaker 1: this is going to be good for you we're going
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Speaker 1: to now be part of this other firm that's known
5:02
Speaker 1: for its growth investing. We we just couldn't do that.
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Speaker 1: It was beyond our abilities to to tell a lie.
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Speaker 1: So we concocted a to just be began to brainstorm
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Speaker 1: how would we want to see a great asset manager,
5:19
Speaker 1: What would it look like, what would be the characteristics?
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Speaker 1: And we had an idea of best practices and worst
5:24
Speaker 1: we'd seen them all and choosing the best. We put
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Speaker 1: together a business plan for a Causeway and left in
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Speaker 1: two thousand one and got some seed capital and spent
5:36
Speaker 1: the first three years losing lots of money but hiring
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Speaker 1: some of the best people in the industry. Losing money
5:42
Speaker 1: as an operational firm, not necessarily, it was good. Two
5:46
Speaker 1: thousand one post the technology, media and telecommunications bubble was
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Speaker 1: an excellent time to start a value oriented manager. We
5:55
Speaker 1: had the wind at our back and value stocks did
5:58
Speaker 1: very well. We owned a lot of what are It's
6:01
Speaker 1: interesting because back then value with low beta intended to
6:04
Speaker 1: be consumer staples and other industries that today are untouchable
6:09
Speaker 1: valuation wise, they're too expensive. And those stocks stayed extremely well,
6:13
Speaker 1: and we grew very quickly and we also had the
6:16
Speaker 1: benefit of being unique in that. Causeway even from two
6:20
Speaker 1: thousand one has been a convergence of fundamental investing along
6:24
Speaker 1: with quantitative research. So tell us a little bit about that.
6:27
Speaker 1: How do you emerge quant research with fundamental really bottoms
6:32
Speaker 1: up your stock picker? Essentially, how do you merge quantitative
6:35
Speaker 1: with bottoms up stock picking? What we do fundamentally is
6:39
Speaker 1: very bottom up in its orientation. But I learned this
6:43
Speaker 1: was back in the late nineties before forming Causeway, that
6:48
Speaker 1: many of our competitors had no idea what kind of
6:51
Speaker 1: risk they were taking. And that's where quant is so
6:54
Speaker 1: incredibly precise and effective, because our quant colleagues showed us
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Speaker 1: right from the start they could disaggregate the risk. They
7:02
Speaker 1: could show us what sort of risk factors we had
7:04
Speaker 1: in the portfolio systematic risk factors. We knew all about
7:09
Speaker 1: the idiosyncratic the company specific, but when it came to
7:12
Speaker 1: how much cyclicality we were taking, or volatility risk, or
7:17
Speaker 1: value risk, or or any other of these major market
7:21
Speaker 1: risk size risk for example, that was illuminating. Now today
7:24
Speaker 1: it's sort of whole hum humdrum, But in the late
7:28
Speaker 1: nineties that was a revolutionary and so our bottom up
7:32
Speaker 1: process is very much fundamental stock selection combined with quant
7:36
Speaker 1: risk control, and therefore the portfolio is inherently diversified, so
7:40
Speaker 1: it's less risky, less volatile than a portfolio assembled without
7:45
Speaker 1: using a quant overla comment, that's the case, and then
7:48
Speaker 1: quantitatively we use fundamental to make the quant decisions more
7:52
Speaker 1: accurate because our quant approach in emerging markets, these are
7:56
Speaker 1: very broad portfolios that are the stocks are effectively assemble
8:01
Speaker 1: statistically and fundamentally, we're actually meeting with the companies that
8:05
Speaker 1: are in that portfolio, not all, but many, making eye
8:08
Speaker 1: contact with management, probing them on their corporate governance efficacy.
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Speaker 1: And this makes our quant we believe, over the long term,
8:16
Speaker 1: much more effective than just a pure computer driven process.
8:20
Speaker 1: Quite quite interesting. Let's talk a little bit about the
8:23
Speaker 1: company you founded in two thousand and one. What's it
8:26
Speaker 1: like being a woman co founder and CEO in finance
8:31
Speaker 1: that just seems to have an awful lot of dudes
8:35
Speaker 1: running everything. And I use that word especially because it
8:39
Speaker 1: seems to be just rampant and there aren't a lot
8:43
Speaker 1: of people like you running fifty billion dollar farms. Yes,
8:47
Speaker 1: that's true, and not only do we recognize it a causeway.
8:51
Speaker 1: It does help having a female CEO, no doubt, because
8:55
Speaker 1: it shows the other women in our organization there is
8:58
Speaker 1: there's no limit, there's no last ceiling. Then go all
9:01
Speaker 1: the way to the top. But we do find that
9:03
Speaker 1: the pool of women to choose from is pretty small,
9:06
Speaker 1: even in graduate schools of business, that there are fewer
9:09
Speaker 1: women than men almost universally, and have those have those
9:13
Speaker 1: numbers kind of a little bit, but not a whole
9:16
Speaker 1: lot of nowhere near fifty as much as the graduate
9:19
Speaker 1: schools would like to think otherwise. And that means the
9:22
Speaker 1: pools already smaller from a recruiting perspective. And of those
9:26
Speaker 1: many are interested in other careers. They're enchanted by technology,
9:30
Speaker 1: and finance seems to have lost some of its luster.
9:33
Speaker 1: But there are groups of these women out there and
9:35
Speaker 1: it is up to us to find them. So for
9:37
Speaker 1: a while we thought of it like an ocean of
9:39
Speaker 1: graphic experiment. We would tag them in like the whales,
9:42
Speaker 1: and where did they go? Exactly where did they go?
9:46
Speaker 1: And uh, that didn't turn out to be very successful.
9:49
Speaker 1: But a former client of mine absolutely brilliant idea. This
9:53
Speaker 1: is Seema Hangarani. If she ran the city of New
9:55
Speaker 1: York's equities for years. Their pension fund started something called
9:59
Speaker 1: Girls Who in Vest, and then we Causeway got behind that.
10:03
Speaker 1: So we not only have been an early supporter financially,
10:05
Speaker 1: but we're also we can take these interns. Is the
10:08
Speaker 1: fourth year we've had an internet usually arising sophomore junior
10:12
Speaker 1: in college, a young woman brilliant. They have to get
10:15
Speaker 1: through a tough application process, so Barry, in effect, we
10:18
Speaker 1: are seating the pipeline. What's your involvement with Girls Who Invest?
10:21
Speaker 1: You're on one of the advisory boards. I'm on their
10:24
Speaker 1: advisory board and it's an honor to be a part
10:27
Speaker 1: of that organization. It's very inspiring for the women in
10:30
Speaker 1: my organization because they can see that Causeway is actively
10:33
Speaker 1: involved in something that's quasi philanthropic for us in that
10:37
Speaker 1: these young women are so young, they're nineteen or twenty
10:40
Speaker 1: years old. We can't hire them for years. They need
10:42
Speaker 1: to finish college and then typically we expect them to
10:45
Speaker 1: get their cf A and or an NBA before they're
10:49
Speaker 1: hirable as Causeway analysts. So that's years and years from now.
10:55
Speaker 1: But you guys are long term investors. We are. This
10:58
Speaker 1: sounds like another long term investment where you're thinking in
11:01
Speaker 1: terms of decades, not quarters. Well, this is again if
11:04
Speaker 1: you're going to go, if you have to think about
11:06
Speaker 1: the problem and in a long term perspective, this is
11:10
Speaker 1: how to deal with it is get women in college
11:13
Speaker 1: who are connected through social media to let each other
11:15
Speaker 1: know how exciting this is. And after our interns the
11:18
Speaker 1: next year they get another job and investment management and
11:20
Speaker 1: so forth, and best of all for us, so of
11:23
Speaker 1: course there's something in it for us other than having
11:25
Speaker 1: more women. It's a brand building exercise. It's reputation enhancing.
11:30
Speaker 1: So they tell their friends, who tell their friends how
11:33
Speaker 1: great it is to work a causeway, and that in
11:35
Speaker 1: turn gets back to the employees. So it's a virtuous
11:38
Speaker 1: cycle in terms of culture and reputation. And girls who
11:41
Speaker 1: invest is four years or five years old for four
11:44
Speaker 1: and a half, so you're five years away from seeing
11:48
Speaker 1: the first um harvest, so to speak. Of women who
11:52
Speaker 1: entered this as this group, as as interns, made their
11:55
Speaker 1: way through the process and eventually will be getting hired.
11:59
Speaker 1: And apparently the retention in the industry is very high.
12:01
Speaker 1: They're not deciding to go to something else, which to
12:04
Speaker 1: me is a testament to what they were, what they
12:06
Speaker 1: learned in their four weeks on one of these university
12:09
Speaker 1: campuses over the summer and their first internship, and how
12:12
Speaker 1: much they enjoyed the industry. So it'll take some time,
12:15
Speaker 1: but we started with thirty interns and this last summer
12:17
Speaker 1: was a hundred fifty interns and rising quite quite interesting.
12:22
Speaker 1: Let's talk a little bit about the Causeway portfolio. Um
12:25
Speaker 1: your global value portfolio has about fifty one holdings, average
12:30
Speaker 1: size about seventy billion dollars. What do you do with
12:34
Speaker 1: that sort of portfolio, what do you use for a
12:37
Speaker 1: benchmark and how do you expect clients to judge your performance,
12:42
Speaker 1: because that's not the most typical international portfolio. Yes, are
12:47
Speaker 1: both our international our global portfolios are fairly concentrated Global,
12:50
Speaker 1: more soil international because it has the enormous US market
12:53
Speaker 1: to choose from. As well. A number of value stocks
12:56
Speaker 1: out there has gotten larger over the last few years
13:00
Speaker 1: and especially true in twenty nineteen year to date, meaning
13:04
Speaker 1: investors have abandoned these stocks. They don't want chemicals, they
13:07
Speaker 1: don't want autos, they don't want banks, and especially don't
13:11
Speaker 1: want them outside of the US market. And for a
13:14
Speaker 1: value manager, this is the time. I haven't seen anything
13:19
Speaker 1: like this, nor have my colleagues since the two thousand
13:22
Speaker 1: when these stocks were all Dialue stocks were abandoned, or
13:26
Speaker 1: the end of two thousand and eight when they were
13:28
Speaker 1: they were left for dead. So that's one of the
13:32
Speaker 1: reasons why we have such a large market average market
13:34
Speaker 1: cap you mentioned seventy billion dollars. These are some of
13:36
Speaker 1: these are very large companies. You've heard of them. You've
13:38
Speaker 1: German giants like b A, S f Or or Volkswagen
13:43
Speaker 1: the parent company, if not only Volkswagen Brown but portion
13:46
Speaker 1: Audi at the forefront of electric vehicles at Barclay's Bank
13:51
Speaker 1: or Lloyd's in the UK now downtrodden due to Brexit,
13:54
Speaker 1: but sound financial institutions. The market is treating them as
13:59
Speaker 1: if they are all going to shrink and just as
14:02
Speaker 1: if their growth rates are negative, which is true of
14:04
Speaker 1: the entire value index. So let's use a couple of
14:07
Speaker 1: those examples because I want to dig into your thought process.
14:11
Speaker 1: Volkswagen has their big diesel scandal, the emissions rigging scandal,
14:16
Speaker 1: the stock gets clawbered. You immediately look at that as
14:20
Speaker 1: an opportunity. What is the internal process like when your
14:24
Speaker 1: investment committee sits down and says, let's talk about Volkswagen
14:28
Speaker 1: and do we want to step into this mess. We
14:30
Speaker 1: divide fundamental research into six clusters. Their sector oriented and
14:35
Speaker 1: our industrials cluster looks after automobile, so the it also
14:39
Speaker 1: covers consumer discretionary and the head of that as a
14:43
Speaker 1: excellent portfolio manager named Jonathan Ang, and he saw this problem.
14:48
Speaker 1: We didn't know the company was committing fraud in September
14:51
Speaker 1: off when diesel Gate was announced, but it took us
14:54
Speaker 1: a couple of weeks and with Jonathan leadership, to do
14:57
Speaker 1: the research to determine based on prior recalls of vehicles
15:02
Speaker 1: that the sticky accelerators at Toyota. Remember Whens Congress had
15:07
Speaker 1: keep those cards in the garage. They're dangerous. They were.
15:10
Speaker 1: They turned out the drivers couldn't tell the break from
15:12
Speaker 1: the accelerator. But that is similar yeah, GM, the sticky
15:17
Speaker 1: the ignition switches, and some of those incidents caused deaths.
15:22
Speaker 1: In this case, it's a pollution problem. So we were
15:25
Speaker 1: able to make an assessment of both the monetary damages
15:29
Speaker 1: associated with the fines and regulatory problem fees, as well
15:34
Speaker 1: as the recall costs, the marketing spend but the reason
15:38
Speaker 1: why we went into that stock is emblematic of what
15:40
Speaker 1: we do would causeway. Fundamentally, we find companies with great
15:43
Speaker 1: assets with tremendous financial strength. So that company, Volkswagen, had
15:50
Speaker 1: twenty four billion euros of net cash on the balance
15:54
Speaker 1: sheet before they went in net cash, so that means
15:56
Speaker 1: they had no net debt when they went into this scandal,
16:00
Speaker 1: and they had operating margins a third of that of
16:02
Speaker 1: their best competitors. That to us is a it's a
16:06
Speaker 1: flashing red light of wow, this company is really poorly managed.
16:12
Speaker 1: And if we can be there at the time when
16:14
Speaker 1: new management steps in and runs the business more efficiently,
16:17
Speaker 1: if we can influence them as soft activists making not
16:22
Speaker 1: talking about next quarter, but talking about the long term
16:25
Speaker 1: investors multiple years exactly. We have a two year price
16:28
Speaker 1: target on all two hundred stocks we follow closely, of
16:31
Speaker 1: which that you mentioned the fifty one in the portfolio,
16:34
Speaker 1: they are a subset of that. And we went to
16:37
Speaker 1: management and said, you have a crisis on your hands.
16:39
Speaker 1: What are you going to do about it? And they
16:42
Speaker 1: had to replace all their senior people and then some
16:45
Speaker 1: But this this company, if it weren't for the fact
16:48
Speaker 1: we were in a trade war, and the and the
16:50
Speaker 1: global investment community seems to be worried deeply about recession.
16:55
Speaker 1: This stock would be much higher than it is today,
16:57
Speaker 1: are you? Are you guys still well? First of all,
17:01
Speaker 1: VW has done pretty well, hasn't it. It's put on
17:04
Speaker 1: from its lows about fifty in local currency terms. Not
17:07
Speaker 1: too shabby. It isn't too shabby, but it could be
17:10
Speaker 1: much better. So I assume you're still along the position.
17:13
Speaker 1: Still along the position, let's talk a little bit about
17:16
Speaker 1: the state of the world, um, both here and in Europe.
17:21
Speaker 1: Um you mentioned earlier, the trade war and tariffs is
17:25
Speaker 1: having a problem a lot of Europeans who are fearful
17:28
Speaker 1: of recession. UH Germany is either in recession or about
17:33
Speaker 1: to be. And who knows what the UK is going
17:36
Speaker 1: to do to themselves with their Brexit, whether it's a
17:39
Speaker 1: hard Brexit or or a heart of Breaxit it looks
17:41
Speaker 1: like as the choices, how do you deal with this
17:45
Speaker 1: sort of global mayhem and distractions when you're investing internationally? Well,
17:50
Speaker 1: to some degree, the more mayhem the better if you're
17:52
Speaker 1: a value investor, because that's when invest other investors discard
17:57
Speaker 1: great companies and our mantra as value investors is there's
18:03
Speaker 1: always a price. There's a price for everything, no matter
18:06
Speaker 1: what it is. At some point in time you say
18:08
Speaker 1: that's just too cheap. I think the biggest problem for
18:11
Speaker 1: Europe is that investors appeared to have become despondent, and
18:16
Speaker 1: the quintupling of central bank balance sheets from early two
18:20
Speaker 1: thousand nine has led to this wave of money washing
18:24
Speaker 1: over the globe. And as rates have fallen, savers in
18:28
Speaker 1: Europe and an aging population have panicked and decided they
18:32
Speaker 1: need to save more. So now there's this glut of savings,
18:35
Speaker 1: and that's a lot of people looking for low risk
18:38
Speaker 1: investments that they can retire on, and there just isn't
18:42
Speaker 1: enough low risk investments. Hence the price goes up, and
18:44
Speaker 1: guess what falls the yield. And that's one of the
18:46
Speaker 1: reasons why bond yields, not just sovereign bonds, but corporate bonds,
18:51
Speaker 1: mortgage bonds all over Europe and in Japan are negative yielding,
18:56
Speaker 1: and that scares equity investors and then they panic more
19:00
Speaker 1: and they sell off the cyclical stocks. And we think
19:04
Speaker 1: this is a tremendous opportunity to own some of these
19:08
Speaker 1: great companies, whether they be financial institutions or or manufacturers
19:13
Speaker 1: at crisis level valuations, and yet looking at the businesses,
19:17
Speaker 1: how much better managements have become over the years. How
19:20
Speaker 1: much more impressive is their financial strength? They're not even comfortable.
19:25
Speaker 1: The banks have three to four times as much capital
19:28
Speaker 1: as they did in the Eurozone crisis in and there's
19:32
Speaker 1: nothing wrong with the Brits, thank god, they have the
19:35
Speaker 1: I think the best economy in all of Europe. Whether
19:37
Speaker 1: they're alone or together, it doesn't matter. So when we
19:41
Speaker 1: when we look at Europe, how do those valuations and
19:44
Speaker 1: yields compared to what we see in the United States?
19:47
Speaker 1: The SMP just sore. It's yield notch a little above
19:52
Speaker 1: the ten years the tenure yield is falling this past summer.
19:55
Speaker 1: What do yields look like on quality value companies in Europe?
19:59
Speaker 1: The banks have a very high yield and likely to
20:02
Speaker 1: be higher as they continue to improve their asset quality
20:06
Speaker 1: and cut costs further, which is one of the few
20:09
Speaker 1: areas of control they have. They can't control rates, but
20:12
Speaker 1: they can definitely control their costs, and as they generate
20:14
Speaker 1: more cash, we expect them too. As the US banks
20:17
Speaker 1: have already done, returned that to shareholders, so their yields
20:20
Speaker 1: are taking higher. What's the average yield of a decent
20:24
Speaker 1: sized bankst somewhere around three to four percent, so not
20:27
Speaker 1: Sometimes yields get too high. It's almost a warning sign
20:30
Speaker 1: either the dividend is going to get cut or there's
20:32
Speaker 1: some of the problem. This is rational within the realm
20:36
Speaker 1: of what makes sense. Well, I don't know how rational
20:39
Speaker 1: it is. If the tenure German government bond is negative
20:43
Speaker 1: seventy basis boids, that's a tremendous amount, but it looks
20:49
Speaker 1: at the industrial is. One of my favorites to mention
20:51
Speaker 1: is the German Chemical Company b A s F. They are,
20:55
Speaker 1: They're a giant across the whole panapoly different kinds of
20:57
Speaker 1: chemicals from from organic to agricultural, healthcare related. They're phenomenal
21:04
Speaker 1: integrated business. And that davidend deal is over five percent
21:07
Speaker 1: and nobody seems to be at all interested. What's the fear?
21:11
Speaker 1: Why are people afraid of buying an internationally diversified industrial
21:16
Speaker 1: life that it's there's the crowding effect isn't just within
21:20
Speaker 1: the US market globally, it is the US market, the
21:23
Speaker 1: US market and the US dollar have attracted a huge
21:26
Speaker 1: amount of buying attention, and part of this has to
21:29
Speaker 1: do with what's happened to the composition of investors. You're
21:33
Speaker 1: talking to me as if we make saying decisions. I
21:36
Speaker 1: certainly believe we do. But we're making these discretionary type
21:40
Speaker 1: decisions fundamentally in our quants are doing so, they're creating
21:44
Speaker 1: a portfolio systematically with also fundamental risk control. So in
21:49
Speaker 1: every way, shape or form, there's some type of valuation
21:53
Speaker 1: effort underpinning our portfolios. That's not true with a lot
21:57
Speaker 1: of what's happening in markets today. We see not just
22:00
Speaker 1: the advent of or the massive increase in indexation, which,
22:05
Speaker 1: as you know, as stocks get larger and index they
22:08
Speaker 1: just attract more money and more buying, and conversely, as
22:12
Speaker 1: they fall, they fall further. But the the momentum trend
22:15
Speaker 1: following has been extraordinarily active, So more momentum trend falling
22:23
Speaker 1: and then money behind that. And as these European stocks
22:27
Speaker 1: to the point sell off, then they tend to sell
22:31
Speaker 1: off further. So if value, if if fair value is
22:34
Speaker 1: some sort of line that continuum, these stocks have been
22:38
Speaker 1: trading so far below and they continue to fall versus
22:41
Speaker 1: fair value because because they're falling already. So momentum is
22:47
Speaker 1: a strange beast. And as there are more algorithmic, more
22:52
Speaker 1: computer driven trading globally, we've noticed more market much more
22:57
Speaker 1: the way of market inefficiency. So we're willing to take
23:00
Speaker 1: positions in these securities and we expect that, saying investors
23:06
Speaker 1: will prevail. But it's really tough to see this happen.
23:10
Speaker 1: So investors like Michael Burry have said indexing is a
23:14
Speaker 1: bubble and it's going to blow up. You seem to
23:17
Speaker 1: be eluding that the more we index, the more opportunities
23:21
Speaker 1: are created for active management, if there are that many
23:24
Speaker 1: more identifiable inefficiencies. I get asked at every single client
23:29
Speaker 1: meeting these days, what's the catalyst for value to outperform? Well, frankly,
23:33
Speaker 1: I wish I knew, but there are many possible catalysts,
23:37
Speaker 1: and one is simply that the very expectsive growth stocks
23:40
Speaker 1: disappointed earn these terms and then they become the victims
23:43
Speaker 1: of momentum selling. He doesn't take much in order to
23:47
Speaker 1: get that gap, massive gap to close between value and growth,
23:51
Speaker 1: and we just you could drive a truck through it now.
23:54
Speaker 1: But but I do think that as value turns up
23:56
Speaker 1: and it attracts more money. This could end up being
23:59
Speaker 1: a sort of change reaction, and we saw this from
24:03
Speaker 1: the end of February of two thousand nine. Is value
24:06
Speaker 1: stocks just took off, and the more cyclicality back then
24:10
Speaker 1: the better. Just remember markets are tremendous discounting mechanisms, so
24:16
Speaker 1: in advance of whatever the event, typically that event is
24:19
Speaker 1: already priced into the markets. And that event now is recession.
24:23
Speaker 1: You hinted at the concern of recession in Europe. Let's
24:28
Speaker 1: talk a little bit about that. Is this a distinctly
24:31
Speaker 1: European concern? China and the US should we be concerned
24:35
Speaker 1: about recession? We've we've had the yield curve inverted now
24:38
Speaker 1: for depending on which pair of bonds you look at
24:41
Speaker 1: for a couple of months. What do we think about
24:43
Speaker 1: the possibility of recession? Recession could easily happen in the US.
24:48
Speaker 1: I don't see why not. In fact, it's so funny
24:50
Speaker 1: everyone is so panicked about recession. It strikes me that
24:54
Speaker 1: they've forgotten history because recessions are there's simply what happen.
25:00
Speaker 1: And in healthy economies, healthy economies expanded, then they contract,
25:03
Speaker 1: and then they expand again, ideally the expansions overwhelmed the contractions.
25:07
Speaker 1: But the as for China, if they have a recession,
25:10
Speaker 1: we may never know about it. I'm not sure those
25:12
Speaker 1: statistics will be revealed. And that you don't buy the
25:16
Speaker 1: Bernie made Off school of statistical analysis. The Chinese seems
25:19
Speaker 1: to try to stay far away from that as possible,
25:22
Speaker 1: but they we do a lot of on the ground
25:24
Speaker 1: research and so well. Were already see the concern small
25:28
Speaker 1: to meaum sized businesses have, and that's one of the
25:30
Speaker 1: reasons why they're, for example, advertising less. There are lots
25:33
Speaker 1: of different ways of measuring the health, but one way
25:37
Speaker 1: or another, recessions are just a transient effect, and out
25:41
Speaker 1: of that comes recovery, and the recovery gets discounted by markets,
25:45
Speaker 1: typically four quarters at least in advance. If you want
25:49
Speaker 1: to own the beneficiaries of recovery, you need to buy
25:52
Speaker 1: them during the dark, gloomy periods. So that's interesting. Look,
25:57
Speaker 1: it's been over a decade since we've had a recept question.
26:00
Speaker 1: As you point out their cyclical they're they're not to
26:03
Speaker 1: be feared, and yet it seems like the US Federal
26:06
Speaker 1: Reserve and the White House are horrified by the thought
26:10
Speaker 1: of recession. Is that just concerns about re election or
26:14
Speaker 1: is there a real fundamental reason to be concerned about
26:18
Speaker 1: the first recession following the Great Financial Crisis. My colleagues
26:21
Speaker 1: and I don't see the same type of financial leverage
26:25
Speaker 1: that unwound the global economy in two thousand and eight,
26:29
Speaker 1: But there are other risks out there, and there is
26:33
Speaker 1: plenty of debt, certainly in the corporate sector. The way
26:38
Speaker 1: we look at this cycle is, let's just say there's
26:41
Speaker 1: a slow down. It may just be something psychological that
26:45
Speaker 1: all you have to have is purchasing managers and those
26:48
Speaker 1: in charge of Catholic expenditures to decide to pull back.
26:51
Speaker 1: So investment slows, and consumers may be concerned about the
26:56
Speaker 1: price of goods, they may slow their purchases. It doesn't
26:59
Speaker 1: take much um in this country. And as for Europe,
27:02
Speaker 1: I mean Italy has sort of gone going through a recession.
27:05
Speaker 1: Germany maybe in one now. Whether they can spend their
27:09
Speaker 1: way out of it, this is sort of the hundred
27:11
Speaker 1: million dollar question. Will the government's there decide that says
27:14
Speaker 1: it doesn't cost them anything to borrow, In fact, they
27:17
Speaker 1: get paid to borrow, which is again the bizarreness of this.
27:21
Speaker 1: Will they take advantage of that and engage in enough
27:24
Speaker 1: fiscal stimulus to revitalize their economies. Just a little fiscal
27:28
Speaker 1: stimus would be phenomenal for investor excitement because there's been
27:34
Speaker 1: so much bunker mentality. Let's let's talk about that. Because
27:37
Speaker 1: following the financial crisis, look, we know the kinges playbook
27:42
Speaker 1: what you're supposed to do after a crisis. Europe, especially
27:45
Speaker 1: the UK, seemed to have forgotten about that and they
27:48
Speaker 1: went on austerity instead of saying, oh, the private sector
27:52
Speaker 1: is pulled back, we will temporarily step in to fill
27:55
Speaker 1: the gap. What what happened there? Why was the psychology
27:58
Speaker 1: so backwards and how much of that is still lingering
28:03
Speaker 1: or how much of that is fixable? As the other question,
28:06
Speaker 1: these are aging populations. But my colleagues and I draw
28:09
Speaker 1: a very deliberate distinction between Europe and Japan. Japan a
28:14
Speaker 1: closed economy no significant immigration versus Europe with three million
28:19
Speaker 1: immigrants in the last five years. Europe has still the
28:23
Speaker 1: potential not to stagnate as Japan has, and it hasn't
28:28
Speaker 1: been that awful in Japan. It just hasn't been great
28:30
Speaker 1: in terms of growth, they sort of tip on the
28:32
Speaker 1: edge of deflation continuously, which again is it both a
28:35
Speaker 1: monetary phenomenon and a psychological one. But Europe doesn't have
28:40
Speaker 1: to grow very quickly. For European listed stocks some of
28:45
Speaker 1: them to do very well. When you say not very quickly,
28:49
Speaker 1: I think two percent would be nominal, would be more
28:52
Speaker 1: than enough, I think. And there's no inflation really in
28:55
Speaker 1: the in Europe now, very nothing that's really measurable. There's
28:59
Speaker 1: some background, but inflation we're pressed to find it anywhere
29:03
Speaker 1: in the developed world. So is deflation the bigger concern
29:06
Speaker 1: than inflation? Deflation? Are we or Europe going to turn Japanese?
29:11
Speaker 1: Is that unique? And I don't think so. And there's
29:13
Speaker 1: a sufficiently there's an influx of immigrants and a younger
29:17
Speaker 1: population and the companies in Europe. And here's where I
29:21
Speaker 1: draw the distinction with Japan all those If I think
29:24
Speaker 1: back to the early part of my career and that
29:26
Speaker 1: of my more senior colleagues from the early nineties, we
29:28
Speaker 1: worried so much about Japan and why didn't we have
29:31
Speaker 1: an index weight in the Japanese market? Our clients would
29:33
Speaker 1: ask us. And you may remember Japan from the late
29:36
Speaker 1: eighties early nine and taking it all back to Japan
29:42
Speaker 1: with them. They there was no need to worry because
29:46
Speaker 1: by capping, by putting a floor under the any kind
29:50
Speaker 1: of downside in that economy, they capped the upside. Or
29:52
Speaker 1: think of it this way. Too much capacity and no
29:55
Speaker 1: willingness to really consolidate. And will the Europeans follow that path?
30:00
Speaker 1: We think less likely. They will allow some bank consolidation,
30:03
Speaker 1: they will have to have the job cuts necessary, And
30:06
Speaker 1: the Brits, the UK in particular, has been good about that.
30:10
Speaker 1: They have more labor flexibility and mobility than anywhere else
30:13
Speaker 1: in Europe and less regulation. And as they pull out
30:17
Speaker 1: of the rest of the EU, that will be one
30:19
Speaker 1: less market that has the chokehold of EU regulation. So
30:24
Speaker 1: what does that mean in terms of the growth in
30:27
Speaker 1: in the UK? Will they still be able to export
30:31
Speaker 1: on a competitive basis to the rest of Europe? What's
30:36
Speaker 1: to to someone on this side of the Atlantic. It
30:39
Speaker 1: looks like the UK, second only to Germany, has been
30:43
Speaker 1: a huge beneficiary of the EU and they managed to
30:47
Speaker 1: maintain their own currency in central bank. They seem to
30:50
Speaker 1: have had the best of both worlds. What why Brexit?
30:54
Speaker 1: Why get out that? Like so many different possible economic scenarios.
31:00
Speaker 1: This one has a lot of politics behind it, but
31:03
Speaker 1: the idea of blaming globalization or immigrants seems to be
31:06
Speaker 1: a very popular way for politicians to get ahead. And
31:09
Speaker 1: it's a lazy demo, but it's effective. It's very you know,
31:13
Speaker 1: it's it's part of the greatest hits because it's worked
31:16
Speaker 1: so well over the very fact, we couldn't have anticipated
31:18
Speaker 1: it would take the it's three years plus post their
31:22
Speaker 1: referendum in June to make a decision. That was a
31:26
Speaker 1: tough one, but the UK were that we have the
31:29
Speaker 1: largest in our international fund, the largest active weight, which
31:32
Speaker 1: is our which is the weight versus the benchmark, So
31:35
Speaker 1: the greatest overweight is in UK listed stocks. They're not
31:38
Speaker 1: all indigenous UK company In other words, these companies operate multinationally.
31:43
Speaker 1: They're like yeah, yeah, many of them are global in scope,
31:48
Speaker 1: and their revenues are either tied to or somehow related
31:51
Speaker 1: to the US dollar and maybe oil and gas businesses
31:54
Speaker 1: or pharmaceutical businesses. So there's the pounds sterling weekends, all
31:58
Speaker 1: other things being equal. Sadly they never are. These companies
32:01
Speaker 1: are even more profitable. But we've also liked there are
32:05
Speaker 1: companies in the UK where the specter Brexit hangs over
32:08
Speaker 1: them and that's made them especially undervalued. But one way
32:11
Speaker 1: or another, what we do know about the vast majority
32:15
Speaker 1: of politicians elected democratically is that they'd like to stay
32:18
Speaker 1: in office, and cratering an economy is not typically a
32:21
Speaker 1: way of staying in office. So there we are going
32:24
Speaker 1: to be negotiating. I assume the Brits will be negotiating
32:27
Speaker 1: right up until the eleventh hour i end of October,
32:30
Speaker 1: if not before then, and then they will strike a
32:34
Speaker 1: deal and the deal will be to spend the next
32:36
Speaker 1: two years working out a trade arrangement with Europe. So
32:40
Speaker 1: when many investors look at things like trade wars or
32:45
Speaker 1: Brexit and they see confusion and uncertainty and we don't
32:48
Speaker 1: know what's going to happen, I get the sense you
32:50
Speaker 1: look at these sort of disruptive events as saying, hey,
32:54
Speaker 1: creating all sorts of opportunities to buy otherwise great companies
32:59
Speaker 1: at a great discount. It is a huge opportunity and
33:03
Speaker 1: is long. What's crucial is the financial strength is there
33:06
Speaker 1: because we have no way of knowing how long we'll
33:09
Speaker 1: have to wait client meetings, clients will look a little
33:12
Speaker 1: limp and broken, like what's wrong with your value managers?
33:15
Speaker 1: And and this is true what we do quantitatively in
33:17
Speaker 1: emerging markets, we have more of a value emphasis, and
33:19
Speaker 1: it has been like swimming upstream. But that's okay because
33:24
Speaker 1: when value snaps back we see this historically, it does
33:27
Speaker 1: so very quickly and the rewards are significant, so it
33:31
Speaker 1: does pay to wait. And those that income that from
33:34
Speaker 1: dividends is very important to assure a certain level of patients.
33:38
Speaker 1: So value is underperforming growth for what ten years now?
33:42
Speaker 1: Is that about right? And the US has just about
33:46
Speaker 1: outperformed everything internationally, So you're in two of the most
33:50
Speaker 1: challenging sectors there are. International has been battling up hill.
33:55
Speaker 1: Values battling up hill. You mentioned clients look broken. How
34:00
Speaker 1: much time do you have to spend explaining mean reversion?
34:03
Speaker 1: And this too, shall pass to to your clients. The
34:07
Speaker 1: vast majority of our large institutional clients. I'm paraphrasing, but
34:11
Speaker 1: I think they've said something to the effect of they
34:13
Speaker 1: look at values, they have to have it right. They
34:16
Speaker 1: know that they it's painful for now, but eventually, like
34:19
Speaker 1: an insurance policy, Okay, we don't really know when you're
34:22
Speaker 1: going to have the hurricane, but you want to make
34:24
Speaker 1: sure you're covered in terms of property insurance, and you'll
34:26
Speaker 1: pay the premium, which is some underperformance for some period
34:30
Speaker 1: of time that you're looking at that as an insurance premium. Yes,
34:34
Speaker 1: and I suppose I value went through consecutive years about performance.
34:38
Speaker 1: They look at their growth exposure in that very light.
34:42
Speaker 1: I recall back in the late nineties hearing the sky
34:46
Speaker 1: Warren Buffett was all washed up, and that was whenever
34:49
Speaker 1: you start to hear that, you know you're late in
34:51
Speaker 1: the value under performing growth cycle. And it's a matter
34:55
Speaker 1: of time. And and for the decade plus since then,
34:58
Speaker 1: value did really well. Um, and now we're on the
35:01
Speaker 1: other end of that. Are you expecting this to turn
35:05
Speaker 1: anytime soon or we have no idea when value will
35:08
Speaker 1: reassert itself. Yeah, well, we don't know, but every quarter
35:13
Speaker 1: that goes by. And this is particularly true of this summer,
35:16
Speaker 1: the July August period nineteen, where value just seemed to
35:22
Speaker 1: take another sharp leg down and the risk aversion levels
35:26
Speaker 1: in markets spiked up. In other words, investors would buy
35:29
Speaker 1: negative yielding bonds because that was the supposed risk free asset.
35:34
Speaker 1: They're they're buying consumer staples and healthcare and of course
35:39
Speaker 1: real estate they can't get enough, and then dumping everything else.
35:43
Speaker 1: And again I'm not sure this is a this is
35:46
Speaker 1: a group of people sitting in a room making decisions.
35:48
Speaker 1: But rather some of this is very momentum tread following
35:53
Speaker 1: software that just does what it's told. But that opportunity
35:58
Speaker 1: now has become so long arch we think of it
36:00
Speaker 1: in terms of statistically, in terms of valuation gaps and
36:04
Speaker 1: how many standard deviations from the long term mean is it?
36:06
Speaker 1: And we're now getting to the point where extreme levels
36:09
Speaker 1: and the more extreme the valuation gap becomes between growth
36:13
Speaker 1: and value, the more likely it is that that big
36:16
Speaker 1: premium for growth will shrink. I have a bunch of
36:19
Speaker 1: questions we didn't get to, but there were two in
36:22
Speaker 1: particular I wanted to ask you about. Let's talk a
36:26
Speaker 1: little bit about corporate culture. So you have an ensemble approach,
36:31
Speaker 1: how does that affect your corporate culture and how does
36:35
Speaker 1: the culture affect the way you invest? I've then I
36:40
Speaker 1: believed in teamwork ever since grad school. That's what they
36:43
Speaker 1: specialize in at the Touch School at Dart mess is
36:46
Speaker 1: doing everything in teams. But it wasn't until I got
36:50
Speaker 1: to the world of investment management and saw the other
36:53
Speaker 1: side of the coin, which is, if it's not team,
36:55
Speaker 1: it's star system. It's one or two people making all
36:58
Speaker 1: the investment decisions. And what I didn't like. There are
37:01
Speaker 1: two reasons I don't like that and didn't want to
37:03
Speaker 1: build a nord in my business partner Harry Hartford want
37:05
Speaker 1: to build a business around that is because one, it's
37:09
Speaker 1: too risky for clients anyone. If the star gets up
37:12
Speaker 1: and leaves, your business is over. So that's no good
37:15
Speaker 1: in the star also, and this is the second reason,
37:19
Speaker 1: he or she or maybe it's a couple of stars.
37:22
Speaker 1: As humans, we have biases. We have investment biases. Some
37:25
Speaker 1: people are are very short term and how they think,
37:27
Speaker 1: Some are long term. Some are maybe a little gullible
37:30
Speaker 1: and believe management too often, and and others are maybe
37:34
Speaker 1: too skeptical to the point of cynical. Whatever the biases are,
37:38
Speaker 1: you don't want to have any one person's biases or
37:42
Speaker 1: one or two people embedded in your client portfolios all
37:45
Speaker 1: the time. So that's one of the reasons why we
37:47
Speaker 1: dispersed the responsibility for portfolio management amongst in our fundamental
37:52
Speaker 1: portfolios amongst six different heads of these research clusters. And
37:57
Speaker 1: it's not as if people have a sleeve. There's stocks
38:00
Speaker 1: have to compete with everyone else's stocks in the group.
38:04
Speaker 1: So and everybody is subject to the scrutiny and the
38:07
Speaker 1: and the professional criticism of other colleagues. But for example,
38:13
Speaker 1: when financial institutions are extremely cheap and we think they
38:16
Speaker 1: have a promising future, Connor Muldoon, who runs our Financials
38:19
Speaker 1: and Materials cluster, he will have more stocks in the
38:21
Speaker 1: portfolio than say, maybe Ellen Lee, who's looking after consumer staples,
38:26
Speaker 1: because staples generally across the globe are very expensive right now.
38:30
Speaker 1: But as if the tables turn and it turns out
38:32
Speaker 1: that people realize that Diageo isn't worth twenty five times
38:37
Speaker 1: earnings and they'd rather uh sell that and own something else,
38:41
Speaker 1: we'll have a chance. Ellen will have a chance to
38:43
Speaker 1: get more of her stocks in the portfolio. So that's
38:45
Speaker 1: why we work in a ranking system the highest risk
38:47
Speaker 1: adjusted return stocks down to the lowest, and the returns
38:51
Speaker 1: come from the work that each one of these six
38:54
Speaker 1: cluster groups are doing. With the oversight and the critique
38:59
Speaker 1: of all all of my other colleagues in research and
39:02
Speaker 1: quant colleagues, as well participate. So when you mentioned portfolio
39:06
Speaker 1: construction from these six sleeves, it's not like I have
39:09
Speaker 1: to have five from each sleeve. You this is done
39:13
Speaker 1: very soon. That would be a disaster there, but that's
39:16
Speaker 1: how some funds run. We're gonna have X of each.
39:19
Speaker 1: So then there's a wizard on top who decides how
39:21
Speaker 1: much sleeve should be at any point. Is that the
39:24
Speaker 1: so we don't have. Thankfully, there are no wizards there.
39:28
Speaker 1: We're not born equal, but we're definitely then there's no
39:31
Speaker 1: one making an allocation decision. The allocation and our international
39:36
Speaker 1: fund and on our global fund is entirely a byproduct
39:39
Speaker 1: of that bottom up stock selection process. So stocks compete
39:43
Speaker 1: with each other. If we have a we talked earlier
39:46
Speaker 1: today about Volkswagen. If Volkswagen's return is has a certain
39:50
Speaker 1: let's say it's a double digit percentage return per year,
39:53
Speaker 1: and we know what the risk is. We know it's
39:55
Speaker 1: risk of just a return. It has to compete with
39:57
Speaker 1: the next stock on the list. Maybe it's Barkley Bank
40:00
Speaker 1: in the UK as another large return but even more risk.
40:04
Speaker 1: So when a risk adjust a return basis the stocks,
40:07
Speaker 1: this ranking gives us as a portfolio management team the roadmap,
40:11
Speaker 1: we now know that we should have larger weights in
40:14
Speaker 1: the stocks that are higher ranking and less weights in
40:17
Speaker 1: those that are lower ranking. And as the stocks ranking
40:19
Speaker 1: changes over time because their share prices typically rise and
40:23
Speaker 1: converge with their price targets, that means the return diminishes
40:26
Speaker 1: and the stocks naturally fall on the ranking, So we
40:28
Speaker 1: have to sell them and then recycle proceeds back in
40:31
Speaker 1: the higher ranking stocks. So so that's by sector. What
40:35
Speaker 1: about by that's a national region. That's the same process
40:39
Speaker 1: that the process So when the stocks are researched by sector,
40:44
Speaker 1: then they get put together into a long list or
40:47
Speaker 1: this ranking, and then it's from that we select the
40:50
Speaker 1: fifty stocks ago in the portfolio. How does how does
40:53
Speaker 1: the regional aspect of that play out? Is it? So,
40:56
Speaker 1: for example, you mentioned you were overweight the UK. I'm
41:00
Speaker 1: assuming it's not a macro. There is no there's no
41:03
Speaker 1: regional allocation. The only region of the world where we
41:07
Speaker 1: have a specialized team, and you could guess this is China,
41:11
Speaker 1: and that is largely that's that is a function of
41:13
Speaker 1: the fact that there are so many stocks there and
41:16
Speaker 1: it requires a lot of local knowledge to get through
41:19
Speaker 1: the mall. I mean three thousand new stocks for investors
41:22
Speaker 1: to cover, and the and the indices are including larger
41:25
Speaker 1: and larger percentages of them. And it used to be
41:28
Speaker 1: foreign investors were a huge disadvantage with A shares and
41:31
Speaker 1: B shares. How has that changed in China? A couple
41:35
Speaker 1: of years ago, the Hong Kong Shanghai Connect program allows
41:40
Speaker 1: investors to invest northbound as well as a southbound into
41:43
Speaker 1: Hong Kong, So we can from Hong Kong invest directly
41:46
Speaker 1: into those A shares on behalf of our clients. And
41:49
Speaker 1: that opens up a whole new investing panorama because formally
41:54
Speaker 1: you had to get a specific license to buy those
41:57
Speaker 1: if you were a foreigner. And this is all part
41:59
Speaker 1: of the actual opening up of the financial services sector
42:02
Speaker 1: in China. It's a two steps forward a step back.
42:06
Speaker 1: But how is China valuation wise compared to places like
42:11
Speaker 1: you mentioned Italy and the UK. Well, if you would
42:14
Speaker 1: ask me what I considered to be the next great
42:17
Speaker 1: frontier in terms of of undervalued stocks that are misunderstood.
42:22
Speaker 1: As much as we like all the developed world, the
42:25
Speaker 1: greatest number of them reside in the Chinese market. They're
42:29
Speaker 1: they're literally hundreds of phenomenally well managed businesses, often with
42:34
Speaker 1: a family or family members owning large percentages of the business,
42:38
Speaker 1: so private sector, not state controlled, and completely misunderstood or
42:45
Speaker 1: not well followed. That will correct itself over time. There'll
42:49
Speaker 1: be more and more investors focusing in on the Chinese market,
42:53
Speaker 1: but for now, the alpha opportunity is enormous, really, so
42:58
Speaker 1: that's that's quite interesting about China. The another area of
43:00
Speaker 1: the world I want to ask you about um that
43:03
Speaker 1: also tends to be neglected by US investors is India.
43:07
Speaker 1: What do you think about what's been going on over there,
43:10
Speaker 1: both politically and economically, as well as their valuation situation
43:16
Speaker 1: the Indian market we it's represented in our Emerging market portfolio,
43:21
Speaker 1: and the last election turned out to put Prime Minister
43:24
Speaker 1: Motive back in place, which is good. Has done a
43:27
Speaker 1: good job. The demonetization are taking some of the cash
43:30
Speaker 1: out of the economy. Has been helpful. But it's in
43:33
Speaker 1: India we see a distinction. They're just more stocks in
43:36
Speaker 1: China and the and the enterprising and ambitious nature of
43:41
Speaker 1: management makes them the Many of these Chinese companies, and
43:44
Speaker 1: I'm generalizing broadly, but they're in a huge hurry to
43:47
Speaker 1: be to China. Yes, China to deliver profits for investors,
43:53
Speaker 1: and we see that less so in India. Just just
43:57
Speaker 1: it's just the size of the Chinese market is parallel
44:00
Speaker 1: to it will be, we think, like the US. It
44:02
Speaker 1: will be. There'll be two large stock markets in the
44:05
Speaker 1: world in ten years, and we may not be talking
44:07
Speaker 1: about India in that light. Really, is that there's that
44:10
Speaker 1: much of a there's that much of a difference between
44:13
Speaker 1: China and The pushback I get on that is Oh,
44:15
Speaker 1: but Sarah, there will be a recession. China will slow it.
44:19
Speaker 1: So what I mean you come out of recessions, and
44:22
Speaker 1: what they do is they tend to clean out any
44:24
Speaker 1: misinvestment where their money has gone into poor return projects
44:30
Speaker 1: or businesses. Those will fizzle and the in the Darwinian process,
44:35
Speaker 1: the better ones will come out of that. I don't
44:37
Speaker 1: remember whose quote I'm about to steal, but I love
44:40
Speaker 1: love the expression recessions or where capital returns to its
44:44
Speaker 1: rightful owners. And there's some some degree of truth in that.
44:48
Speaker 1: Um So, So, we've seen the US outperform the rest
44:51
Speaker 1: of the world for a long time. Um how long
44:56
Speaker 1: can this continue? It? It's been a solid decade. Are
45:00
Speaker 1: we almost done, or we halfway through, or do we
45:03
Speaker 1: have no idea whatsoever. Were given the extreme valuation gap
45:08
Speaker 1: to the degree of ur want a bargain, it definitely um.
45:12
Speaker 1: They're more of them outside the US. It's one of
45:14
Speaker 1: the reasons why in our global portfolios we are such
45:17
Speaker 1: a large underweight. I think we're at least fifteen percentage
45:20
Speaker 1: points underweight the US market, and that also seems to
45:24
Speaker 1: make clients a little nervous. But we have to go
45:28
Speaker 1: where the most undervaluation resides. As for when the US
45:33
Speaker 1: market is the laggard, not the winner, it could happen
45:37
Speaker 1: at any time. It's certainly a recession wouldn't be taken well.
45:40
Speaker 1: And if it's if you think about some of the
45:42
Speaker 1: leaders in the US, especially in the technology area, this
45:45
Speaker 1: was one of the misperceptions that gripped investors in the
45:48
Speaker 1: late nineties. They really thought technology stocks were we're defensive
45:52
Speaker 1: what some they didn't weren't. Just because they grow year
45:56
Speaker 1: of a year, it doesn't mean they're speculative it's a defense. Well,
45:59
Speaker 1: it's not just it's just that many of them are
46:00
Speaker 1: cylical there they depend on advertising, or they depend on
46:04
Speaker 1: some levels of consumers. Simmer demands that that may wane,
46:08
Speaker 1: doesn't mean it's gone forever, but at at lofty valuations,
46:11
Speaker 1: there's a level of vulnerability in those stocks that we
46:14
Speaker 1: haven't tested in years. So when I speak to value
46:16
Speaker 1: investors about the US, they sort of fall into two camps.
46:20
Speaker 1: One is the oh, the US is wildly overvalued, We've
46:24
Speaker 1: never seen anything like this, And the others are the
46:27
Speaker 1: US is at the upper end of of fair. It's pricey,
46:31
Speaker 1: but it's not Where do you fall? The answer this
46:38
Speaker 1: question somewhat depends on where interest rates go, and if
46:41
Speaker 1: they continue to fall, investors may get more and more
46:45
Speaker 1: nervous and defensive, and they will want to hide in
46:48
Speaker 1: what they consider to be the current both the currency
46:51
Speaker 1: and the market, where they can be the greatest shelter.
46:55
Speaker 1: On the other hand, if we just have an economic
46:57
Speaker 1: slowdown and then come out of it, it's all bets
47:00
Speaker 1: are off on the US market, it could end up
47:02
Speaker 1: not looking like it deserves its valuation. But I'm not
47:07
Speaker 1: sure it really, frankly, really matters as long as there
47:10
Speaker 1: are value opportunities globally, and there's there are plenty of
47:14
Speaker 1: them today. We see it in our I talked about
47:18
Speaker 1: that ranking we have the two year price target, and
47:21
Speaker 1: all the stocks we follow we're following two globally at
47:23
Speaker 1: any point in time, including US companies, and the returns
47:28
Speaker 1: are huge for for the value segment. It doesn't matter
47:32
Speaker 1: whether they're in the U S or out of the US.
47:34
Speaker 1: If investors don't like them, they also don't like them
47:37
Speaker 1: in the US. The sites are set very narrowly on
47:41
Speaker 1: economically defensive and or growth oriented, so not not value,
47:47
Speaker 1: even even though we've seen value really be a good
47:50
Speaker 1: place to hide during recessions, be it uh, the dot
47:54
Speaker 1: Com crash or the Great Financial Crash. Value now directly
47:57
Speaker 1: linked with cyclicality, and because those have been the cheapest
48:01
Speaker 1: stocks and the cynical stocks are considered to be very
48:04
Speaker 1: vulnerable to economic slowing. But again, I'm convinced that that
48:09
Speaker 1: slowing is already discounting the price, and I would expect
48:12
Speaker 1: nothing less from markets. Quite quite interesting. Let's get to
48:16
Speaker 1: our favorite questions that we ask all of our guests.
48:21
Speaker 1: Um hopefully these will be a bit revealing about you
48:24
Speaker 1: tell us the first car you've ever owned, your making model.
48:29
Speaker 1: I laugh at that question because it's the security question
48:32
Speaker 1: for a lot of my password recreaval somebody else said that,
48:35
Speaker 1: and I I'm fascinated because I'm waiting for the first
48:38
Speaker 1: guest to say I've never owned a car, so it's
48:41
Speaker 1: sort of like my canary in the cold line. But
48:43
Speaker 1: you're the second part up. I can't tell you, Barry,
48:47
Speaker 1: is that car. I brought it to college and in
48:50
Speaker 1: my great independent period. Well, you know, I'm not going
48:54
Speaker 1: to take this to JF. Loup. I'll just change the
48:57
Speaker 1: oil myself. So I crawled underneath and unscrewed a plug
49:01
Speaker 1: and that was the transmission fluid. There you go. So
49:05
Speaker 1: I learned a lot about cars very quickly. That's that's
49:08
Speaker 1: pretty funny. You um, you know the secret to doing
49:11
Speaker 1: an oil changes. The oil is in the the engine block,
49:15
Speaker 1: not in the fans for casing, right, um tell us
49:20
Speaker 1: the most important thing that people don't know about Sarah Keta. Well,
49:25
Speaker 1: I don't like to sit I think this is the
49:27
Speaker 1: longest period I've been in it. You I'm fidgety. You
49:31
Speaker 1: make me look like an amateur. Yeah. I have a
49:33
Speaker 1: stand up desk at so do we? So do I
49:35
Speaker 1: in the office. It's funny. First one in my office
49:37
Speaker 1: and I there was a certain amount of skepticism of
49:39
Speaker 1: scoffing at me, and then it then it took off
49:41
Speaker 1: and everybody has one. They're they're pretty much everywhere. And
49:47
Speaker 1: as long as it's not the treadmill desk, that's the
49:49
Speaker 1: treadmill desk is terrifies me. When eye contact of their
49:52
Speaker 1: in motion, that doesn't work for me. Um, who are
49:55
Speaker 1: some of your early mentors? I assume your father a
49:59
Speaker 1: hot kiss. Well parents I had. My parents were brilliant
50:03
Speaker 1: and inspirational and worked very hard. They they sent all
50:07
Speaker 1: the right messages to their kids, so I was really
50:10
Speaker 1: really lucky. And in terms of investing, my father had
50:14
Speaker 1: this curious hobby. He was an amateur race car driver,
50:17
Speaker 1: and he drove on all the tracks around the United States,
50:21
Speaker 1: and a couple of times he drove at Lament and
50:24
Speaker 1: his driving partner for a number of years was the
50:27
Speaker 1: late Bob Kirby, who was one of the co founders
50:30
Speaker 1: of Capital Guardian Trust Company, the Capital Group, and one
50:33
Speaker 1: of the most extraordinary and greatest longevity investors ever. And
50:38
Speaker 1: I had lots of time with Bob sitting around sort
50:40
Speaker 1: of sitting on a couple of stack of tires and
50:43
Speaker 1: we talked about investing, and he he was the he's
50:46
Speaker 1: known for his coffee can portfolio. He just put it
50:49
Speaker 1: in there and seal it up and it'll be fine
50:51
Speaker 1: ten years later because of transaction costs, which we know
50:54
Speaker 1: today of course have come way down. But this idea
50:57
Speaker 1: of being long term and owning thinking about the company
51:00
Speaker 1: is if you owned it all, you didn't just own
51:02
Speaker 1: a few shares. They're not names their stocks. That is
51:06
Speaker 1: stuck with me for years. Did you spend a lot
51:08
Speaker 1: of time traveling with your dad while he was going
51:13
Speaker 1: so other kids took vacations to fun places. I went
51:15
Speaker 1: to tracks? Really do have you spent any time on
51:18
Speaker 1: trash yourself? Not driving, just sitting and walking walking around?
51:23
Speaker 1: I am I'm surprised. I don't have a hearing problem.
51:26
Speaker 1: So you mentioned your mentors. What investors influenced the way
51:30
Speaker 1: you think about putting together a portfolio? Every investor I've
51:34
Speaker 1: worked with, including my current colleagues, I worked with the
51:37
Speaker 1: most remarkable team of people, and they're all a little different.
51:41
Speaker 1: We deliberately chose them because they fit together nicely, and
51:45
Speaker 1: they there It's a very diversified group, but they inspire
51:49
Speaker 1: me to this day, along with our rising core of analysts.
51:52
Speaker 1: There the remarkably clear thinkers, and they're innovative, and they
51:58
Speaker 1: can look at a problem from a variety of angles.
52:01
Speaker 1: So I I'm convinced, and I tell this to clients.
52:04
Speaker 1: This team isn't the same team it was five years ago. Yes,
52:07
Speaker 1: we've added a few more people. They look like the
52:09
Speaker 1: same people, but they're so much more experienced. Some of
52:12
Speaker 1: my most amazing colleagues started in the late nineties, which,
52:16
Speaker 1: as you can recall, was the Asia financial crisis where
52:20
Speaker 1: stocks were just coming a part of the seams where yeah, yeah,
52:24
Speaker 1: there was no started with Thailand, there was investors sold
52:28
Speaker 1: indiscriminately and to see both indiscriminate selling where evaluation doesn't
52:32
Speaker 1: matter and its cousin indiscriminated buying just complete an investor.
52:38
Speaker 1: Right that that that was an interesting era. UM let's
52:42
Speaker 1: talk about everybody's favorite question, Uh, tell us about the
52:45
Speaker 1: books you enjoy reading, fiction, nonfiction, investing related or otherwise nonfiction.
52:53
Speaker 1: Perhaps the most helpful to me was Daniel Kahneman's The
52:57
Speaker 1: Signal in the Noise. The it not the signaling noise.
53:02
Speaker 1: It's thinking fast and fast and slow. I'm not thinking
53:05
Speaker 1: so economons thinking fast and slow. I didn't really understand
53:11
Speaker 1: behavioral economics, and he got a Nobel Prize for his
53:14
Speaker 1: work in behavioral economics and social sciences and economic sciences.
53:19
Speaker 1: And this idea of loss of version never really occurred
53:23
Speaker 1: to me, that people were asymmetric and how they think.
53:25
Speaker 1: And I found that really useful, not only thinking about
53:28
Speaker 1: investor mentality, but also in managing a team of people.
53:33
Speaker 1: How does loss of version or risk aversion impact managing
53:38
Speaker 1: a team, especially when it comes to decision making and
53:43
Speaker 1: the concern about making about any type of loss or mistake.
53:48
Speaker 1: And this is true in a group setting, the hesitancy
53:51
Speaker 1: of someone bright to make a comment because it could
53:54
Speaker 1: be wrong, which seems to overwhelm there. They're to participate.
54:02
Speaker 1: We want them to my colleagues, and I want everyone there,
54:05
Speaker 1: no matter how junior, to know that their comments are
54:08
Speaker 1: valued and whether they're wrong or right, it's their participation
54:12
Speaker 1: is crucial because everybody else thinking interesting? What other so
54:17
Speaker 1: thinking fast and slow is one? Yeah? And then I
54:19
Speaker 1: was Nate's silver. That kind of got jumbled in my head.
54:21
Speaker 1: But Nate Silver, the signal and noise. Yeah, some predictions
54:25
Speaker 1: are right and others aren't. But understanding how statistics can
54:32
Speaker 1: manipulated and investors can use data very erroneously. That couldn't
54:38
Speaker 1: be more relevant than today. We at Causeway, we hired
54:41
Speaker 1: a data scientists and and data experts software engineers to
54:45
Speaker 1: back him up to make sure that as a team,
54:47
Speaker 1: both fundamentally and quantitable, we have the data we need.
54:50
Speaker 1: But if we work with it incorrectly and we find
54:52
Speaker 1: false what we think our signals, which are actually noise,
54:56
Speaker 1: will be misled. It's using that data is so important
55:01
Speaker 1: and not to be misled by it. And that book
55:05
Speaker 1: was revolutionary for me, quite quite interesting. Any others, Oh,
55:09
Speaker 1: I have a like a million books like everything that
55:13
Speaker 1: the fiction wise that Robert Galbreth a K. J. K
55:16
Speaker 1: Rowling ever wrote a wonderful those are so you're Harry
55:19
Speaker 1: Potter fan. No, no, no, this is all her mysteries
55:22
Speaker 1: are Cormer and strikes my goodness. This was the one
55:26
Speaker 1: she did underpen name, and people figured out it was
55:28
Speaker 1: Robert Galeah why she chose a man's very interesting. You'll
55:33
Speaker 1: have to have her on your show and ask her
55:34
Speaker 1: if please make an interest, um, tell us about a
55:38
Speaker 1: time you failed and what you learned from the experience.
55:42
Speaker 1: That I get most upset with myself as a portfolio
55:45
Speaker 1: manager when I don't have enough confidence in the decision,
55:49
Speaker 1: so not owning enough of the some great companies when
55:54
Speaker 1: it's when you look backwards you think, oh, it's so obvious,
55:57
Speaker 1: but at the time struggling with should we should be not?
56:01
Speaker 1: And especially in areas where you can keep these in
56:03
Speaker 1: the portfolio for a long time, like some of these
56:06
Speaker 1: healthcare stocks. That's the frustrating hindsight biases. Always, Um, what
56:12
Speaker 1: do you do for fun? What do you do when
56:13
Speaker 1: you're not picking value stocks? I enjoyed being with my
56:19
Speaker 1: family and then when they kick me out, then I'm hiking. Okay, Um,
56:24
Speaker 1: tell us about what your most optimistic today within the
56:28
Speaker 1: finance industry and what are you most pessimistic about. I'm
56:34
Speaker 1: most optimistic about my team. I mentioned them earlier. But
56:38
Speaker 1: to have such talent and such dedicated talent. We have
56:41
Speaker 1: twenty one partners at our firm, and that's deliberate rather
56:43
Speaker 1: than keep it narrow out of over a hundred employees,
56:46
Speaker 1: now over a hundred employees, thirty six investment professionals, and
56:50
Speaker 1: not all the partners are investment professionals. Some lead very
56:53
Speaker 1: key areas, illegal and operate our our CEO is an
56:58
Speaker 1: important partner of our for the that team is everything
57:02
Speaker 1: that those people up and down the elevator every day
57:05
Speaker 1: and in the human capital business are really all we
57:08
Speaker 1: have for our clients. And I'm so proud of them,
57:10
Speaker 1: and I'm so excited to work with them again. They've
57:13
Speaker 1: because we've been through such torture as value managers in
57:17
Speaker 1: the last few years, they're more. Their quality and their
57:22
Speaker 1: depth and their experience level I think now is unmatched.
57:26
Speaker 1: And as for pessimistic finance wise, not really, not really anything.
57:31
Speaker 1: I'm so I'm so optimistic about being a value manager now,
57:35
Speaker 1: but I think about my life and my eight year
57:37
Speaker 1: old loves baseball, the one sport I didn't want them
57:40
Speaker 1: to play. I had to be sitting through so many games.
57:44
Speaker 1: Let's talk about advice you would give to a millennial.
57:48
Speaker 1: Someone comes to you and says they're interested in the
57:50
Speaker 1: career and finance. What sort of advice might you give them?
57:54
Speaker 1: M I give them too much advice, but I had
57:56
Speaker 1: to distill it to one piece of information. It would
57:58
Speaker 1: be read read more. Read everything you can get, not
58:02
Speaker 1: just the Wall Street Journal in the Financial Times and
58:05
Speaker 1: the Economist every week, but go and read the books
58:10
Speaker 1: written by famous investors, read the biographies, read tomes that
58:15
Speaker 1: deal with different segments of market history, so that you
58:18
Speaker 1: can fill in the gaps. If you're in your twenties,
58:21
Speaker 1: you don't know much yet. In fact, you really only
58:24
Speaker 1: know a period generally of falling interest rates and rising markets.
58:27
Speaker 1: Not not the norm. In other words, well not not
58:31
Speaker 1: my norm and um our final question, what is it
58:35
Speaker 1: that you know about the world of investing today you
58:38
Speaker 1: wish you knew thirty years ago. I wished I've taken Chinese.
58:44
Speaker 1: I would love to be a fluent Mandarin speaker. Uh,
58:48
Speaker 1: it's not just that's a huge population, not just as
58:50
Speaker 1: an important markets. Much of the talent. Many of the
58:53
Speaker 1: talented people we hire were born there. So and I
58:57
Speaker 1: took French and German, which is beauty of full languages both,
59:01
Speaker 1: but they're not nearly as helpful and it's tough for
59:05
Speaker 1: a tonal language to grasp as an adult. It takes
59:08
Speaker 1: a lot of time that I don't have. So I'm
59:10
Speaker 1: listening in my commute and when I'm walking anywhere. I have,
59:15
Speaker 1: but it's gonna take me at this rate, it's gonna
59:17
Speaker 1: take me time. I also wished I don't not to
59:20
Speaker 1: fret about Japan because I didn't need to. It took
59:23
Speaker 1: care of itself. We were chronically underweight as an international manager,
59:26
Speaker 1: took tremendous criticism, and but we did the right thing.
59:30
Speaker 1: Quite quite interesting. We have been speaking with Sarah Kettera.
59:34
Speaker 1: She is the co founder and CEO of Causeway Capital Management.
59:38
Speaker 1: If you enjoy this conversation, well, be sure to look
59:41
Speaker 1: up an Inch or down an inch on Apple iTunes
59:43
Speaker 1: and you could see any of the previous two hundred
59:46
Speaker 1: and fifty or so conversations we've recorded over the past
59:50
Speaker 1: five years. You could see that pretty much wherever Finer
59:54
Speaker 1: podcasts are sold Bloomberg, SoundCloud, iTunes, Spotify, Overcast, Stitcher, etcetera.
1:00:00
Speaker 1: We love your comments, feedback, in suggestions. Write to us
1:00:03
Speaker 1: at m I be podcast at Bloomberg dot net. Check
1:00:07
Speaker 1: out my weekly column on Bloomberg dot com. Check out
1:00:10
Speaker 1: my daily reads at Ridholts dot com. You could follow
1:00:13
Speaker 1: me on Twitter at rid Halts. I would be remiss
1:00:16
Speaker 1: if I did not thank the crack staff that helps
1:00:18
Speaker 1: put this together each week. We would not be able
1:00:21
Speaker 1: to do this without the help of Attica val Bron,
1:00:24
Speaker 1: who is our project manager. UH Michael Boyle is my producer.
1:00:29
Speaker 1: Michael bat Nick is my head of research. I'm Barry Ritolts.
1:00:34
Speaker 1: You've been listening to Masters in Business on Bloomberg Radio.