April 29, 2025 • 32 mins
Earnings expectations have shifted from the start of the year when analysts were forecasting 13% growth for large-cap stocks and are now predicting 9%. In this episode of Inside Active, host David Cohne, Bloomberg Intelligence mutual fund and active-management analyst, along with co-host Gina Martin Adams, BI’s chief equity strategist, spoke with Head of Mid-Cap & Large-Cap Equity at Madison Funds, Haruki Toyama, who’s also a portfolio manager for the firm’s Large Cap Fund (MNVAX) and Mid Cap Fund (MERAX). They discussed viewing investments as ownership stakes and why the quality of business and its moat are crucial for long-term investments. They also spoke about the critical role of management teams in driving company success and why market downturns can create opportunities for resilient companies.
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Speaker 1 (00:14):
Welcome to Inside Active, podcast about active managers that goes
beyond sound bites and headlines, looks deeper into the processes,
challenges and philosophies and security selection. I'm David cone I,
lead mutual fund and active Research at Bloomberg Intelligence. Today
my co host is Gina Martin Adams, chief equity strategist
at Bloomberg Intelligence. Gina, thanks for joining me today.
Speaker 2 (00:37):
Thank you for having me, David, I'm delighted to be here.
Speaker 1 (00:39):
Well, it's been an interesting few days in the market.
Last week you published one of your This Week in
Charts notes just noting the effect of the tariffs on
the market the last week or so. How do you
see them affecting earnings going forward?
Speaker 2 (00:54):
Yeah, good question. I think that's the million dollar question
that equity markets investors are grappling with at this moment
and time. One of the things that we've done a
lot of work on is just how much the S
and P five hundred in particular has exposure via cost
of goods sold to overseas suppliers. How much their factory base,
for instance, is also located overseas and this is a
(01:19):
primary risk, with the secondary risk being maybe as they
attempt to pass on price increases, consumers push back of it,
and we see downside impacts to the economy. So it's
pretty complicated, is the short answer. Broadly, what we're seeing
already is earnings expectations have shifted from at the start
(01:40):
of the year. Analysts we're forecasting thirteen percent growth for
large cap stocks are now forecasting nine. The moving parts
of macro, what would lead you to believe that we're
likely to get closer to zero percent earnings growth over
the next twelve months, just considering how much slowdown we've
already seen in new orders and consumer confidence, so we're
(02:01):
seeing downside revision momentum emerge. I do think right now
it's just a question of will we ultimately end up
in a recession as a result of the slowdown that
has already started, or will we see just more of
slower growth going forward and that's going to impact the
earnings out look materially well.
Speaker 1 (02:17):
Definitely be interesting to watch, and so I think this
is a great time to welcome our guest, Harouki Toyama,
to Inside Active. Haruki is head of MidCap and large
cap equity at Madison Funds and a portfolio manager for
the firm's large cap in MidCap funds tickers m n
VAX and mr AX. Harouki, thank you so much for
(02:38):
joining us today.
Speaker 3 (02:39):
Well, thank you for having me.
Speaker 1 (02:41):
Before we start talking about the funds in the market,
how about we start by just telling us a little
bit about your investment background, how you got your start
in the industry.
Speaker 4 (02:50):
Sure, so that goes back quite a ways, I guess.
But back when I was in college, I was a
music and artistic toy major and had some pressure to
maybe perhaps study something that had more of a career,
a better career outlook, So I added economics. I had
taken one class, and I was interested, So I ended
(03:11):
up studying economics. Now, the interesting thing is I was
much more interested in political economics and macro and so on.
But I ended up after school getting a job at
a financial advisory firm that got me really interested in
the markets and stock markets specifically, And so that's how
I ended up in the business. And I have to say,
what really drew me in was I happened to stumble
(03:33):
upon the writings of Warren Buffett, and it sort of
clipped with me that investing in stocks is really you
shouldn't think of it as financial markets or pieces of
paper that you trade.
Speaker 3 (03:45):
You should think of it.
Speaker 4 (03:46):
As a fractional ownership in actual companies. And that really
clicked with me psychologically. I just felt like it felt
right to me. It was a good fit with how
I would like to invest, just thinking long term. And
so I ended up going back to business school to
really study more of the micro side of economics, right,
businesses and finance and accounting and strategy and so on,
(04:08):
and then end up in Boston for a long time.
And then I've been here in Madison for a couple
of decades.
Speaker 1 (04:13):
The great well, let's actually talk about Madison. Is there
an investment philosophy the equity managers adhere to at the firm.
Speaker 4 (04:23):
Yeah, at a high level, what we like to think
of a couple things. One is, again we have a
deeply held philosophy that we're not investing in pieces of
paper that we trade. We don't buy something looking to
get out or hope that someone pays a much higher
price a month for now, six months, an hour, or
even one two three years from now. We think of
(04:45):
it as truly taking an ownership stake in a company.
Speaker 3 (04:48):
So at a high level.
Speaker 4 (04:49):
We think of it as, hey, if you had to
buy a company hole and you could only buy five
ten companies, and you had to buy it and leave
it to the next generation of your family, would this
be the kind of company you want to own? So
that's our real high level screen when we look at companies,
and so everything else we do follows from that. And
(05:12):
so we're very risk averse, right, because we don't really
feel like we can get in and get out before
everyone else sees bad stuff happening. So we try to
buy resilient companies, right, So we're not looking to reposition
ourselves just because things are changing in the environment or
outside conditions, whether it's macro rates, terrorists for example. Right,
we're looking to buy companies anticipating that lots of bad
(05:34):
things will happen in the next five, ten, twenty years,
and so the resiliency is probably the most important thing
we look forward. Of course, we want growth, so that's
at a high level. And because of that, we were
not overly diversified or two major strategies, owned sort of
thirty companies give or take at any point in time,
(05:55):
and we're very long term. We own companies on average
seven nine years.
Speaker 3 (06:02):
Great.
Speaker 1 (06:03):
Now if we, you know, focus specifically on the large
cap fund, is there a process you follow to select securities?
Speaker 4 (06:11):
Absolutely, and the process is less of a checklist that
you follow each time, but it's it's number one. Your
first screen is is this a high quality business?
Speaker 3 (06:22):
Right?
Speaker 4 (06:22):
We care about valuation, of course, and we do that
research sort of together at the same time in parallel.
But again it all comes down to what is the
quality of this business? And we really ask ourselves two
main questions. One is how good is the business model itself?
Is this structurally a good sound business?
Speaker 3 (06:42):
Right? So does it have durable growth?
Speaker 4 (06:44):
Because again we're not just thinking about the next one, two,
three years, We're thinking about five, ten, fifteen, twenty plus
years out right, We're thinking about.
Speaker 3 (06:54):
Does it have a mote?
Speaker 4 (06:55):
If we had to really internally, if you listen to
our conversations, we are bously consider a lot of factors
with quality, but probably first among equals is does a
company have a true mote?
Speaker 3 (07:07):
Right?
Speaker 4 (07:07):
So this is the more and buppet sense of if
a company's profitability is a castle, everyone else is trying
to take away those profits right directly or indirectly, And
so how good is your mote to protect those profits.
And it's not just competitors, right. Your customers, right, they
want more from you for less, right. Your vendors they
(07:30):
want to give you less in some ways and charge
you more, right. And they're external factors where there's governments
and so on. So we think about all those things,
and we want companies to have the widest and deep
at most most possible because that's what really allows us
to have confidence and what the profits may look like
five ten, fifteen years out right. We don't want to
own a company for even a day if we don't
(07:52):
think we want to own it for years.
Speaker 3 (07:55):
Right.
Speaker 4 (07:55):
So that's what our number one approach and number one
topic is when we look at a company, do we
feel comfortable right making some general sort of broad projection
that profits will be quite a bit higher in five, ten, fifteen,
twenty years than they are today. And once we do that,
then we think about valuation. Now, valuation is obviously hugely important.
(08:16):
We don't want to pay up too much. We're very
disciplined about that, and it plays into maybe which companies
we look at. We don't ignore valuation because we want
to look for companies that might be actionable in the
near term in terms of making investment. So we kind
of look at things that we think maybe close to
discount of value.
Speaker 3 (08:33):
But that's how we are postings.
Speaker 2 (08:36):
Can we take in a little bit more into that
quality factor, because I think it's really fascinating, particularly at
this point in time, to think about quality and an
environment where trade relationships are changing. We're certainly seeing some
pretty big disruptions to the potential margin outlook from a
multitude of companies as a result of trade policy shifts,
(08:57):
right and the ability of companies to take advantage of
globalized supply chains coming under a lot of fire here,
Are you changing the way that you look at quality
at all? Are there certain metrics that you rely on
that you're thinking of of changing, or how do you
see your definition of quality potentially challenged or changed by
(09:19):
this big macro shift that is now underway.
Speaker 4 (09:23):
Yeah, that's a great point, Jane. And so we have
a couple of frameworks from mind. One is the first
question is, of course we try to make predictions and
understand what the regulatory in this case tariff environment will be,
but we also understand that no one really knows, right
will this particular tariff.
Speaker 3 (09:41):
For gam last six months? Will it last six years? Right?
Speaker 4 (09:45):
So we don't want to necessarily assume that it will
be there forever because then you're always swinging around what
you think about companies. Right, So you're asking, do we
make a permanentciation? The answer is yes, to the extent
it matters. But going back to my very first point,
when we try to buy a company, we're already considering
some of these factors in place.
Speaker 2 (10:05):
Right.
Speaker 4 (10:05):
It's not that we're saying what would happen if terrafs
went up fifty percent?
Speaker 3 (10:08):
What would happen?
Speaker 4 (10:08):
But it's how resilient is that company's model to something
like tariffs? And so the main issue, for example is
probably two or three factors matter most. How resilient is
your supply chain. So that's something we've already looked at.
Speaker 3 (10:23):
Right.
Speaker 4 (10:23):
If a company is way too dependent on one or
two countries or certain tariff regimes in place for cross
border flows, we would have already considered that as a
risk factor and already put that in valuation.
Speaker 3 (10:34):
So this shouldn't change things a whole lot.
Speaker 4 (10:37):
Probably the most important thing really is how good is
the pricing power of a company, and how good.
Speaker 3 (10:44):
Is that position relative to its competitors. Right.
Speaker 4 (10:48):
So one example I'll give you. We own a company
called pack Car. They're one of the largest Class eight
and medium duty truck manufacturers in the US. They already
have had a philosophy for a very long time of
build locally for local demand. So for the US trucks
that they sell, over ninety percent of what they sell
is actually manufactured in the US. And the most important
(11:11):
thing is their main competitors have a much much higher
percentage of trucks that they manufacture outside of the US,
especially in Mexico.
Speaker 3 (11:19):
Right.
Speaker 4 (11:20):
And so obviously and demand will get hurt, right if
the economy slows, Right, So that's sort of an overall
macro impact on a company like pack Are, But their
competitive position will actually improve dramatically, right, So we try
to kind of balance those things. What does it mean
for profitability? And obviously from Amerco situation, it's possible that
(11:43):
the reduction and demand will overwhelm any competitive advantage that improves.
But when you really think about five, ten, fifteen years,
you have to make some assumption that trucks are necessary
in this country. I'm not really sure that truck demand
to be suppressed at a very low level forever, So
you have to mix them with some that our economy
will adjust over time. And when that happens, sort of
(12:04):
the unit demand will come back to some sort of
normalized level, and that packer will actually be in a
more improved competitive position and their profits may actually be higher.
We try to run some numbers. It's not exact science
obvious here. So those are the kind of things that
we've thought about in advance. Now you do have when
you own a portfolio thirty stocks, there are some companies
that perhaps are in somewhat of a less advantage position,
(12:26):
or maybe the end demand and we think may overwhelm
those issues, and maybe they can't quite pass on prices
as much. Fourth, So you have to make those adjustments.
But generally speaking, our portfolio is already pretty resilient.
Speaker 2 (12:38):
Right And when you think about this notion of a moat,
and I hear this moat word a lot with the
mag seven for example, in large cap stocks. But I'm
curious how you think about the differences between investing in
mid caps versus large caps with respect to the moat?
Are there great examples of moat some high quality companies
(13:01):
in mid caps that you're finding these days that you
know investors maybe just don't appreciate.
Speaker 4 (13:08):
Yeah, that's a good point, and so one of the
most that the bigger you get, it's very possible that scale,
right becomes an important mode. So that's probably a big
difference between when you look at super large caps. So
when you talk about the maximum and we're talking about megacaps, right,
we're really talking about the biggest ten, twenty thirty companies
(13:28):
in the world.
Speaker 3 (13:29):
At that level, there's.
Speaker 4 (13:30):
A certain amount of scale and network effect that becomes
a tremendous mode. So you want to be careful investing
in even a MidCap, which we call it in our business,
we'd like to call it MidCap. By standards of the
world and economy, these are giant companies, right, but they
become really small compared to the alphabets and so on,
So you have to consider that an account. So if
(13:51):
we see a MidCap and they compete at some level
directly with some of these megacaps that have superior scale
and global and already have a position, we'd be much
more wary. So what we try to do in midcaps
are find companies where they don't have that sort of
competitive landscape, right, they're not competing against much more scale
companies and within the universe or within the industry they
(14:14):
operate in. Our midcaps tend to be the scaled advantage competitors, right,
And so that's how we think about it. It's not
a direct place, it's not just a larger the better.
Therefore Beta and Amazon will beat everybody up, right, So
we'll get an example, so were we'd be much warrier
about investing in a retail company because they do compete
(14:35):
against Amazon, right. It takes much more money and brand
and so on to have.
Speaker 3 (14:39):
The logistical infrastructure. So absolutely it is harder.
Speaker 4 (14:42):
To compete agains an Amazon if you're sort of a
mid sized retail competitor. On the other hand, we've owned
a company, let's call it called copart for a long time.
They're the leading auctioneer of salvage cars. So when you
get in the wreck, right, the insurance company hire someone
to come toll your car away. Copart runs all the
(15:04):
auctions to sell these wrecked cars. That's a very local
business because you don't want to have to toll your
car for hundreds of miles. So there's all these regional
sites where copart holds weekly auctions to sell these wrecked cars.
That's not a giant, scaled market. You're not competing against, right,
an Amazon that has a location in France or Seals
(15:24):
in UK and therefore is much more scale. Brand doesn't
matter as much, right, as long as you can efficiently
sell those cars at an auction, you do well. And
it's already a dominant player in its field. The industry
happens to be a duopoly and co part is a
larger of the two, so it's already scaled. So we've
actually seen bigger competitors try to get into the market
(15:45):
and spend literally hundreds of millions of dollars to break in,
and they can't. So that's kind of what we look for.
Speaker 2 (15:52):
Okay. Interesting speaking of mid caps, it was so intriguing
to me that in the month of March, large caps
and small caps under performed midcaps, and I just wanted
to get your perspective on this. Is this just a
cork of the data? Was there something really interesting happening
in mid caps? What's behind that trade?
Speaker 4 (16:10):
Well, that's an interesting point. You know, when we look
at monthly performers data of industries, we don't we try to.
Speaker 3 (16:15):
Read too much in it.
Speaker 4 (16:16):
Things can change, there's lots of factors that can influence it,
so we really don't read into that sort of short
term data. What is interesting if you really look at
the long term data, right, we do like the midcaps
space in the sense that they tend to perform as
well or maybe somewhat better than large caps right over time,
(16:40):
just like historically small caps did for a while. But
we do think midcaps are a little bit more of
a sweet spot. They tend to be larger and more
scale than have proven themselves over time, right, and they
tend to have better access to capital markets and so on.
They tend to be resilient, so unlike small caps, they've
kind of gone past that phase of worrying about whether
(17:02):
they're going to survive or thrive in downturns, and yet
they still have a lot of growth runway. So we
think what's interesting if you look at the past thirty
years of Russell mccap data, and so the Russell indices,
as you know, the Russell MidCap is Z takes the
one thousand largest stocks by market cap in the US
(17:23):
and the bottom eight hundred are defined as midcaps. So
if you compare those bottom eight hundred, to say, the
top two hundred, which we can think.
Speaker 3 (17:32):
Of as large caps.
Speaker 4 (17:34):
Right, if you look over the past thirty years, a
total return has been pretty similar. Russell miccaps are actually
ahead by about half a point perhaps, But then you
can divide that thirty years call into two periods. In
the first fifteen years, so the period end in two
thousand and nine, let's call it. Russell mccaps outperform those
(17:54):
top two hundred by quite a bit, two two and
a half points right now in in your since that's reverse,
large caps have outperformed by two two and a half points.
And so these things run in cycles, and these cycles
sometimes can last a long time, but over time they're
going to be similar, and we think very often people
neglect that fact and they sort of they may perhaps
(18:18):
run to what's been working, such as the megacaps the
last call it ten fifteen years. They may run to
perceive safety of large caps, but over time they tend
to wash out. And so we think the caps are
definitely an attracted place to be interesting.
Speaker 2 (18:31):
So that leads me to my next question, and is
that is, how do you navigate volatile or down markets
like what we have today. You know the S and
P five hundred now testing an official bear market. Small
caps really struggling so far this year. Does that make
you think in terms of capitalization concentration in your portfolio
a little bit differently? Do you find yourself leaning into
(18:52):
mid caps for opportunity? How do you think about down
markets like what we have in the spring of twenty
twenty five.
Speaker 3 (18:59):
Yeah.
Speaker 4 (19:00):
Point, So there's two things. One is, we are purely opportunistic,
so we'll look around and if the larger stocks or
larger companies are somewhat cheaper, we look at them one
by one, right, and so we'll go after that whatever
opportunity arises. And again, we don't tend to have a
lot of turnover. We own thirty year stocks. Then we
may buy a handful of new companies a year, so
we only need one or two really great ideas in
(19:21):
the giving year to really make it work for us.
The other point is, I'll go back to that point
of resiliency. Don't We don't necessarily trade a lot in
these times. We hope to find opportunities to find and
purchase and make new investments. But hopefully if we did
it right right, we own a portfolio companies that we like, right,
(19:44):
and regardless of what the market is are in the
economy is doing. Hopefully, we have companies that are resilient
and can weather through this. And in fact, by definition,
a lot of our companies tend to have better balance
sheets and better competitive positioning. So over time, these downturns
are good for them. They will come out of it
in a stronger relative positions. Right, if they have to
(20:07):
compete against the company with a weak balance sheet barring
a lot of money, their CFO, their CEO is now
spending a lot of time talking to their bankers. Right,
They're spending a lot of time plugging holes and having
to sort of be a little bit more defensive and careful. Right,
whereas the kind of companies and we invest and can
play more offense. And so what you tend to see
(20:29):
is that coming out of the downturns, our companies come
out in a better relative position. And so do we
do make sure and like you said, think about what
the opportunity set may be and how we're positioned. But
hopefully we've done it right entering the downturn. And there's
not a whole lot to do except to look for opportunities.
Speaker 1 (20:46):
You mentioned, you know, CI our CEO and CFOs and
kind of brings up my question of do you look
at management teams? Is that part of your research and
if so, what are you really looking for?
Speaker 4 (21:00):
So that's a great point. When I started off earlier
and talked about what we're looking for, I think I
mentioned perhaps two main pillars, and one was about the
structural advantages of a business. The other point was about management.
So what we want, at least, at the very least,
we want a structurally good business, and we want a
management team that's going to be a wonderful caretaker of
the advantages that company has. Right, we want to management
(21:22):
team that's always thinking about widening and deepening that mode
so they can add value on top of the advantage
of the company company has. Now, this is important to
us in the sense that it's a very qualitative assessment.
So we think it's the kind of area where us
as fundamental investors can really differentiate ourselves because a lot
of other things that can be quantified in terms or
(21:44):
returns on equity and growth rates and so on, are
a little bit easier to grasp, or they're tangible. They
can be quantified right, somethings computers can do better, but
this is the kind of stuff that's very qualitative, and
so we put a heavy emphasis on this. And the
one area we think we tend to emphasize more than others,
we want to see aligned management teams. We love to
(22:05):
invest in what we call owner operators. So we love
to see the top decision makers and the governance of
the company. So whether it's a CEO, major board members,
major shareholders, right, but especially the CEO, top C suite people,
board members, we love it when they actually own a
significant stake in the company because we're not obviously not
(22:28):
in the room with them as outside investors when they
make decisions.
Speaker 3 (22:31):
We don't make those decisions.
Speaker 4 (22:33):
For them, right, So we want them to be on
the same side of the table as us. So we
want them to think long term. We don't want them
to think about quarterly earnings.
Speaker 3 (22:41):
Right.
Speaker 4 (22:42):
So I mentioned earlier Copart for example, their chairman and
CEO combined own about ten percent of the company, and
they're very long term. The chairman founded this company back
in the nineteen seventies, and so their time horizon is
not three months, it's not one year, it's not even
three years, they're thinking five ten plus years out, and
so they're willing to sacrifice current earnings if they think
(23:05):
those investments will pan out and result in a higher.
Speaker 3 (23:09):
Value for the company. Right.
Speaker 4 (23:10):
So we love that sort of owner operating alignment, and
I'd say at least half of our portfolios tend to
be invested in owner operators. And then when you take
sort of incentives and other alignments in place, it's a
pretty large majority of our companies run by management teams
with very aligned incentives.
Speaker 3 (23:27):
So it's a very important part of.
Speaker 2 (23:28):
What we do. Can you tell us a little bit
about if you know, you talk about being opportunistic in
times like this, are there any sectors or themes that
are really catching your eye right now?
Speaker 4 (23:37):
Yeah, it's a great point, right So, right, so there's
a whole lot of things. Again we look at companies
one by one, but there's certainly industries and areas where
you see a lot more stress, certainly in the financial market.
Speaker 3 (23:48):
So there's a bunch.
Speaker 4 (23:49):
But just to give you a couple examples, anything that
might be consumer big ticket oriented obviously right now, right
you have a huge amount of pressures, which is the
prices for a lot of the stuff that consumers brought by,
especially discretionary, may be going up. At the same time,
you may have just general economic stress, right, so consumers
(24:11):
may end up with lower spending power stress balance sheets
or recession may or may not becoming certainly some slower
growth economic and the nutriment is likely. So you see
a lot of those stocks come down. We're spending some
time there. There's some interesting factors. Obviously this is recently.
More recently, interest rates are coming down a little bit
because the fears of recession. So it's possible some of
(24:33):
those areas such as housing that may be related to
big ticket consumer may see a little bit of a
release valve. But certainly those stocks are coming down, so
we're taking a look. You certainly have a lot of
companies I mentioned retail or distribution right where it's a
very simple sort of passed through business. You buy stuff
at wholesale, you sell at retail, and now all of
(24:54):
a sudden, the cost of goods and your wholesale is
going on quite a bit, and so a lot of
those companies are getting hit. And so that's where we're
really sitting and looking at, well, how much pricing power
do these companies have to pass through any increases. So
those are the kind of areas we'd be looking at, right,
And so you.
Speaker 1 (25:10):
You know, you keep mentioning about the concentrated portfolio. You
know a lot of managers have you know, these best
ideas portfolios, but in terms of you know, how do
you mitigate risk with a concentrated portfolio if you know,
say some of them are some of the stocks are
heading in the same trend.
Speaker 4 (25:29):
Yeah, So a couple of things we do. Even though
we're concentrated, we make sure we're what we what we
say adequately diversify, right, so we do have some limits.
We think about all the different risk factors that may
be contained, and so we don't really just think about
say industry or sector concentration. We go way more granular
than that. You have lots of different companies that may
(25:51):
be in totally different industry, but they may be exposed
to similar risks.
Speaker 3 (25:56):
Right. Tariffs are a great example.
Speaker 4 (25:57):
You could have an industrial company, it could be a
consumer company, but if they're buying a lot of their
goods overseas, they're exposed to.
Speaker 3 (26:04):
The same risks.
Speaker 4 (26:05):
They may be in totally different sectors, right, Or you
may have a healthcare service company that relies on government
or Medicare payments, and then you may have a defense
contractor that sells to the DoD quite a bit, two
totally different industries, but yet if there are federal budget cuts,
they're exposed to that factor, right, So we look at
that way and make sure we're adequately.
Speaker 3 (26:24):
Diversified from that standpoint.
Speaker 4 (26:27):
The other thing I'd mentioned is that we're very careful
about trying to mitigate risk in every level of our process,
and so we want each investment we make to stand
on z own. Now, obviously you want to be diversified,
and you can't. You can't avoid every single risk out there.
But again going back to the comment I made about
(26:48):
if this is one of the five to tenk companies
you had to own for years, would you do it?
And so that already puts a mentality in place as
we research companies. You know, it makes you think a
little bit less about Hey, they're the real high level
tail risks. But we're going to own enough companies that
I'm okay taking this risk. We try to avoid it
as much as we can, right, So we're already thinking
(27:09):
about buying companies that are so resilient, and so many
different scenarios to begin with that you're already mitigating a
huge amount of risk one by one in each company
that you're invest in.
Speaker 1 (27:21):
Now in terms of you know, we've talked about what
you look for in companies to buy is in terms
of selling positions? Is it valuations, better opportunities or just
you know, the business factor isn't there anymore?
Speaker 4 (27:35):
Yeah, So the two main reasons that we sell or
either valuation or the fundamentals aren't as good as before.
Speaker 3 (27:43):
Something has changed.
Speaker 4 (27:43):
Structurally, and very often there are a combination of two.
I'd say we tend to buy companies. As you can
tell by a holding period, we tend to buy companies
that we help to own for many, many years. Valuation
is tricky in getting out because if we do this right,
the management team teams in the structural soundness of the
business tend to be better than we hoped.
Speaker 3 (28:04):
Right.
Speaker 4 (28:04):
So when we make financial projections when we make an investment,
we tend to be fairly conservative. But management teams can
add a lot of value beyond that that you can't anticipate.
Speaker 3 (28:13):
Right.
Speaker 4 (28:13):
They can buy backstock at operation of times, they can
make wonderful acquisitions, they can enter into new areas that
you may not have anticipated and do well.
Speaker 3 (28:21):
Right.
Speaker 4 (28:22):
So there's a lot of optionality investing with a good
management team with a structurally sound business. And so we're
very careful about not just automatically saying this is the
multiple that we will get out and so on, because
things change overly years.
Speaker 2 (28:34):
Right.
Speaker 4 (28:34):
So what we say is, once we find a really
good company, we tend to hold on unless it's approaching
or get into those bleed valuations Truki.
Speaker 2 (28:43):
As you know, David and I are both part of
the Bloomberg Intelligence team at Bloomberg, So I would be
remiss if I didn't ask you if you use external research,
and if you do, what do you find you know,
where do you find yourself leaning in, where do you
find it most valuable least valuable? Sort of just give
us an assessment of the research landscape if you don't.
Speaker 4 (29:03):
Yeah, So we use whatever we think can be an
input to us. So we do all of our own
internal research. So we use a lot of external research,
but external research meaning does it give us insights into
that companies and the company's fundamental business model management R Right,
So we don't use research in the sense of telling
us what to buy, their opinions, people's ratings on the stocks.
(29:26):
We do all that, right, that insights sort of valuation,
decision to buy, sales, and we do all that internally.
But we do you know, when we try to research
a company, obviously, we're trying to research anything about that company,
the people that run it, the people that work with
that company, the industry around it, and so we talk
(29:46):
to anybody that we think we have insights into it, right,
and so we're talking to lots of people that work
for competitors, We talk to people that used to work
at the company. We certainly talk to sell side analysts
or consultants that may have a deep knowledge of that
company industry. And so we're trying to gather as much intelligence,
like you said, and information as we can and hopefully
(30:07):
get some insights as well as well as develop our own.
Speaker 1 (30:11):
Great So we just have one more question before we
let you go. You mentioned earlier you know you're a
big fan of Warren Buffett, and I imagine you probably
read a lot of his you know, notes that he
puts out. But do you have some I guess favorite
financial books.
Speaker 4 (30:28):
Yeah, it's a good question. So we read a lot.
I'd say it helps. It helps to read a lot
of financial history. Certainly I enjoy it. Maybe that's just
sort of my my predilections a little bit, but I
love reading about history of the financial markets, the financial systems,
the banking system. There's so many great ones out there.
(30:50):
Maybe I highlight a couple that may be listener known
to some. There's a book called The Richest Man who
Ever Lived. It's about an industrialist in Europe from a
few hundred years ago named Jacob Fuger, written by a
friend of mine, Greg Steinitz. That's a wonderful book. There's
another one called The Exchange Artist, by another friend of mine,
(31:10):
Jane Kominski, but goes back to sort of the free
wheeling days in the US when the banking system was
still forming. And so there's a lot of interesting things
about the monetary system. You know, back when paper money
was sort of seeing as very dubious, and you couldn't
when people paid you with paper money, you weren't sure
if there was actually someone behind that money as you
(31:31):
so it's all right. So those two are kind of
interesting from a financial market standpoint. I'd say there's a
lot of good business books, right, because again we're trying
to buy businesses, and so I think it helps a
lot to read books that sort of tell you the
history of particular businesses and you learn.
Speaker 3 (31:45):
A lot more about that business and industry. It makes sense.
Speaker 1 (31:49):
Well, this is great, Harouki, thank you so much for
joining us again.
Speaker 3 (31:52):
Sure, thank you very much. Pleasure to be.
Speaker 1 (31:54):
Here, Gina, thank you for bringing my cost today.
Speaker 2 (31:57):
My pleasure, so lovely to meet you, Haruki. Thank you
for for joining us, and thanks David for hosting untill.
Speaker 1 (32:02):
Our next episode. This is David Cohne with Inside unt
Welcome to Inside Active, podcast about active managers that goes
beyond sound bites and headlines, looks deeper into the processes,
challenges and philosophies and security selection. I'm David cone I,
lead mutual fund and active Research at Bloomberg Intelligence. Today
my co host is Gina Martin Adams, chief equity strategist
at Bloomberg Intelligence. Gina, thanks for joining me today.
Speaker 2 (00:37):
Thank you for having me, David, I'm delighted to be here.
Speaker 1 (00:39):
Well, it's been an interesting few days in the market.
Last week you published one of your This Week in
Charts notes just noting the effect of the tariffs on
the market the last week or so. How do you
see them affecting earnings going forward?
Speaker 2 (00:54):
Yeah, good question. I think that's the million dollar question
that equity markets investors are grappling with at this moment
and time. One of the things that we've done a
lot of work on is just how much the S
and P five hundred in particular has exposure via cost
of goods sold to overseas suppliers. How much their factory base,
for instance, is also located overseas and this is a
(01:19):
primary risk, with the secondary risk being maybe as they
attempt to pass on price increases, consumers push back of it,
and we see downside impacts to the economy. So it's
pretty complicated, is the short answer. Broadly, what we're seeing
already is earnings expectations have shifted from at the start
(01:40):
of the year. Analysts we're forecasting thirteen percent growth for
large cap stocks are now forecasting nine. The moving parts
of macro, what would lead you to believe that we're
likely to get closer to zero percent earnings growth over
the next twelve months, just considering how much slowdown we've
already seen in new orders and consumer confidence, so we're
(02:01):
seeing downside revision momentum emerge. I do think right now
it's just a question of will we ultimately end up
in a recession as a result of the slowdown that
has already started, or will we see just more of
slower growth going forward and that's going to impact the
earnings out look materially well.
Speaker 1 (02:17):
Definitely be interesting to watch, and so I think this
is a great time to welcome our guest, Harouki Toyama,
to Inside Active. Haruki is head of MidCap and large
cap equity at Madison Funds and a portfolio manager for
the firm's large cap in MidCap funds tickers m n
VAX and mr AX. Harouki, thank you so much for
(02:38):
joining us today.
Speaker 3 (02:39):
Well, thank you for having me.
Speaker 1 (02:41):
Before we start talking about the funds in the market,
how about we start by just telling us a little
bit about your investment background, how you got your start
in the industry.
Speaker 4 (02:50):
Sure, so that goes back quite a ways, I guess.
But back when I was in college, I was a
music and artistic toy major and had some pressure to
maybe perhaps study something that had more of a career,
a better career outlook, So I added economics. I had
taken one class, and I was interested, So I ended
(03:11):
up studying economics. Now, the interesting thing is I was
much more interested in political economics and macro and so on.
But I ended up after school getting a job at
a financial advisory firm that got me really interested in
the markets and stock markets specifically, And so that's how
I ended up in the business. And I have to say,
what really drew me in was I happened to stumble
(03:33):
upon the writings of Warren Buffett, and it sort of
clipped with me that investing in stocks is really you
shouldn't think of it as financial markets or pieces of
paper that you trade.
Speaker 3 (03:45):
You should think of it.
Speaker 4 (03:46):
As a fractional ownership in actual companies. And that really
clicked with me psychologically. I just felt like it felt
right to me. It was a good fit with how
I would like to invest, just thinking long term. And
so I ended up going back to business school to
really study more of the micro side of economics, right,
businesses and finance and accounting and strategy and so on,
(04:08):
and then end up in Boston for a long time.
And then I've been here in Madison for a couple
of decades.
Speaker 1 (04:13):
The great well, let's actually talk about Madison. Is there
an investment philosophy the equity managers adhere to at the firm.
Speaker 4 (04:23):
Yeah, at a high level, what we like to think
of a couple things. One is, again we have a
deeply held philosophy that we're not investing in pieces of
paper that we trade. We don't buy something looking to
get out or hope that someone pays a much higher
price a month for now, six months, an hour, or
even one two three years from now. We think of
(04:45):
it as truly taking an ownership stake in a company.
Speaker 3 (04:48):
So at a high level.
Speaker 4 (04:49):
We think of it as, hey, if you had to
buy a company hole and you could only buy five
ten companies, and you had to buy it and leave
it to the next generation of your family, would this
be the kind of company you want to own? So
that's our real high level screen when we look at companies,
and so everything else we do follows from that. And
(05:12):
so we're very risk averse, right, because we don't really
feel like we can get in and get out before
everyone else sees bad stuff happening. So we try to
buy resilient companies, right, So we're not looking to reposition
ourselves just because things are changing in the environment or
outside conditions, whether it's macro rates, terrorists for example. Right,
we're looking to buy companies anticipating that lots of bad
(05:34):
things will happen in the next five, ten, twenty years,
and so the resiliency is probably the most important thing
we look forward. Of course, we want growth, so that's
at a high level. And because of that, we were
not overly diversified or two major strategies, owned sort of
thirty companies give or take at any point in time,
(05:55):
and we're very long term. We own companies on average
seven nine years.
Speaker 3 (06:02):
Great.
Speaker 1 (06:03):
Now if we, you know, focus specifically on the large
cap fund, is there a process you follow to select securities?
Speaker 4 (06:11):
Absolutely, and the process is less of a checklist that
you follow each time, but it's it's number one. Your
first screen is is this a high quality business?
Speaker 3 (06:22):
Right?
Speaker 4 (06:22):
We care about valuation, of course, and we do that
research sort of together at the same time in parallel.
But again it all comes down to what is the
quality of this business? And we really ask ourselves two
main questions. One is how good is the business model itself?
Is this structurally a good sound business?
Speaker 3 (06:42):
Right? So does it have durable growth?
Speaker 4 (06:44):
Because again we're not just thinking about the next one, two,
three years, We're thinking about five, ten, fifteen, twenty plus
years out right, We're thinking about.
Speaker 3 (06:54):
Does it have a mote?
Speaker 4 (06:55):
If we had to really internally, if you listen to
our conversations, we are bously consider a lot of factors
with quality, but probably first among equals is does a
company have a true mote?
Speaker 3 (07:07):
Right?
Speaker 4 (07:07):
So this is the more and buppet sense of if
a company's profitability is a castle, everyone else is trying
to take away those profits right directly or indirectly, And
so how good is your mote to protect those profits.
And it's not just competitors, right. Your customers, right, they
want more from you for less, right. Your vendors they
(07:30):
want to give you less in some ways and charge
you more, right. And they're external factors where there's governments
and so on. So we think about all those things,
and we want companies to have the widest and deep
at most most possible because that's what really allows us
to have confidence and what the profits may look like
five ten, fifteen years out right. We don't want to
own a company for even a day if we don't
(07:52):
think we want to own it for years.
Speaker 3 (07:55):
Right.
Speaker 4 (07:55):
So that's what our number one approach and number one
topic is when we look at a company, do we
feel comfortable right making some general sort of broad projection
that profits will be quite a bit higher in five, ten, fifteen,
twenty years than they are today. And once we do that,
then we think about valuation. Now, valuation is obviously hugely important.
(08:16):
We don't want to pay up too much. We're very
disciplined about that, and it plays into maybe which companies
we look at. We don't ignore valuation because we want
to look for companies that might be actionable in the
near term in terms of making investment. So we kind
of look at things that we think maybe close to
discount of value.
Speaker 3 (08:33):
But that's how we are postings.
Speaker 2 (08:36):
Can we take in a little bit more into that
quality factor, because I think it's really fascinating, particularly at
this point in time, to think about quality and an
environment where trade relationships are changing. We're certainly seeing some
pretty big disruptions to the potential margin outlook from a
multitude of companies as a result of trade policy shifts,
(08:57):
right and the ability of companies to take advantage of
globalized supply chains coming under a lot of fire here,
Are you changing the way that you look at quality
at all? Are there certain metrics that you rely on
that you're thinking of of changing, or how do you
see your definition of quality potentially challenged or changed by
(09:19):
this big macro shift that is now underway.
Speaker 4 (09:23):
Yeah, that's a great point, Jane. And so we have
a couple of frameworks from mind. One is the first
question is, of course we try to make predictions and
understand what the regulatory in this case tariff environment will be,
but we also understand that no one really knows, right
will this particular tariff.
Speaker 3 (09:41):
For gam last six months? Will it last six years? Right?
Speaker 4 (09:45):
So we don't want to necessarily assume that it will
be there forever because then you're always swinging around what
you think about companies. Right, So you're asking, do we
make a permanentciation? The answer is yes, to the extent
it matters. But going back to my very first point,
when we try to buy a company, we're already considering
some of these factors in place.
Speaker 2 (10:05):
Right.
Speaker 4 (10:05):
It's not that we're saying what would happen if terrafs
went up fifty percent?
Speaker 3 (10:08):
What would happen?
Speaker 4 (10:08):
But it's how resilient is that company's model to something
like tariffs? And so the main issue, for example is
probably two or three factors matter most. How resilient is
your supply chain. So that's something we've already looked at.
Speaker 3 (10:23):
Right.
Speaker 4 (10:23):
If a company is way too dependent on one or
two countries or certain tariff regimes in place for cross
border flows, we would have already considered that as a
risk factor and already put that in valuation.
Speaker 3 (10:34):
So this shouldn't change things a whole lot.
Speaker 4 (10:37):
Probably the most important thing really is how good is
the pricing power of a company, and how good.
Speaker 3 (10:44):
Is that position relative to its competitors. Right.
Speaker 4 (10:48):
So one example I'll give you. We own a company
called pack Car. They're one of the largest Class eight
and medium duty truck manufacturers in the US. They already
have had a philosophy for a very long time of
build locally for local demand. So for the US trucks
that they sell, over ninety percent of what they sell
is actually manufactured in the US. And the most important
(11:11):
thing is their main competitors have a much much higher
percentage of trucks that they manufacture outside of the US,
especially in Mexico.
Speaker 3 (11:19):
Right.
Speaker 4 (11:20):
And so obviously and demand will get hurt, right if
the economy slows, Right, So that's sort of an overall
macro impact on a company like pack Are, But their
competitive position will actually improve dramatically, right, So we try
to kind of balance those things. What does it mean
for profitability? And obviously from Amerco situation, it's possible that
(11:43):
the reduction and demand will overwhelm any competitive advantage that improves.
But when you really think about five, ten, fifteen years,
you have to make some assumption that trucks are necessary
in this country. I'm not really sure that truck demand
to be suppressed at a very low level forever, So
you have to mix them with some that our economy
will adjust over time. And when that happens, sort of
(12:04):
the unit demand will come back to some sort of
normalized level, and that packer will actually be in a
more improved competitive position and their profits may actually be higher.
We try to run some numbers. It's not exact science
obvious here. So those are the kind of things that
we've thought about in advance. Now you do have when
you own a portfolio thirty stocks, there are some companies
that perhaps are in somewhat of a less advantage position,
(12:26):
or maybe the end demand and we think may overwhelm
those issues, and maybe they can't quite pass on prices
as much. Fourth, So you have to make those adjustments.
But generally speaking, our portfolio is already pretty resilient.
Speaker 2 (12:38):
Right And when you think about this notion of a moat,
and I hear this moat word a lot with the
mag seven for example, in large cap stocks. But I'm
curious how you think about the differences between investing in
mid caps versus large caps with respect to the moat?
Are there great examples of moat some high quality companies
(13:01):
in mid caps that you're finding these days that you
know investors maybe just don't appreciate.
Speaker 4 (13:08):
Yeah, that's a good point, and so one of the
most that the bigger you get, it's very possible that scale,
right becomes an important mode. So that's probably a big
difference between when you look at super large caps. So
when you talk about the maximum and we're talking about megacaps, right,
we're really talking about the biggest ten, twenty thirty companies
(13:28):
in the world.
Speaker 3 (13:29):
At that level, there's.
Speaker 4 (13:30):
A certain amount of scale and network effect that becomes
a tremendous mode. So you want to be careful investing
in even a MidCap, which we call it in our business,
we'd like to call it MidCap. By standards of the
world and economy, these are giant companies, right, but they
become really small compared to the alphabets and so on,
So you have to consider that an account. So if
(13:51):
we see a MidCap and they compete at some level
directly with some of these megacaps that have superior scale
and global and already have a position, we'd be much
more wary. So what we try to do in midcaps
are find companies where they don't have that sort of
competitive landscape, right, they're not competing against much more scale
companies and within the universe or within the industry they
(14:14):
operate in. Our midcaps tend to be the scaled advantage competitors, right,
And so that's how we think about it. It's not
a direct place, it's not just a larger the better.
Therefore Beta and Amazon will beat everybody up, right, So
we'll get an example, so were we'd be much warrier
about investing in a retail company because they do compete
(14:35):
against Amazon, right. It takes much more money and brand
and so on to have.
Speaker 3 (14:39):
The logistical infrastructure. So absolutely it is harder.
Speaker 4 (14:42):
To compete agains an Amazon if you're sort of a
mid sized retail competitor. On the other hand, we've owned
a company, let's call it called copart for a long time.
They're the leading auctioneer of salvage cars. So when you
get in the wreck, right, the insurance company hire someone
to come toll your car away. Copart runs all the
(15:04):
auctions to sell these wrecked cars. That's a very local
business because you don't want to have to toll your
car for hundreds of miles. So there's all these regional
sites where copart holds weekly auctions to sell these wrecked cars.
That's not a giant, scaled market. You're not competing against, right,
an Amazon that has a location in France or Seals
(15:24):
in UK and therefore is much more scale. Brand doesn't
matter as much, right, as long as you can efficiently
sell those cars at an auction, you do well. And
it's already a dominant player in its field. The industry
happens to be a duopoly and co part is a
larger of the two, so it's already scaled. So we've
actually seen bigger competitors try to get into the market
(15:45):
and spend literally hundreds of millions of dollars to break in,
and they can't. So that's kind of what we look for.
Speaker 2 (15:52):
Okay. Interesting speaking of mid caps, it was so intriguing
to me that in the month of March, large caps
and small caps under performed midcaps, and I just wanted
to get your perspective on this. Is this just a
cork of the data? Was there something really interesting happening
in mid caps? What's behind that trade?
Speaker 4 (16:10):
Well, that's an interesting point. You know, when we look
at monthly performers data of industries, we don't we try to.
Speaker 3 (16:15):
Read too much in it.
Speaker 4 (16:16):
Things can change, there's lots of factors that can influence it,
so we really don't read into that sort of short
term data. What is interesting if you really look at
the long term data, right, we do like the midcaps
space in the sense that they tend to perform as
well or maybe somewhat better than large caps right over time,
(16:40):
just like historically small caps did for a while. But
we do think midcaps are a little bit more of
a sweet spot. They tend to be larger and more
scale than have proven themselves over time, right, and they
tend to have better access to capital markets and so on.
They tend to be resilient, so unlike small caps, they've
kind of gone past that phase of worrying about whether
(17:02):
they're going to survive or thrive in downturns, and yet
they still have a lot of growth runway. So we
think what's interesting if you look at the past thirty
years of Russell mccap data, and so the Russell indices,
as you know, the Russell MidCap is Z takes the
one thousand largest stocks by market cap in the US
(17:23):
and the bottom eight hundred are defined as midcaps. So
if you compare those bottom eight hundred, to say, the
top two hundred, which we can think.
Speaker 3 (17:32):
Of as large caps.
Speaker 4 (17:34):
Right, if you look over the past thirty years, a
total return has been pretty similar. Russell miccaps are actually
ahead by about half a point perhaps, But then you
can divide that thirty years call into two periods. In
the first fifteen years, so the period end in two
thousand and nine, let's call it. Russell mccaps outperform those
(17:54):
top two hundred by quite a bit, two two and
a half points right now in in your since that's reverse,
large caps have outperformed by two two and a half points.
And so these things run in cycles, and these cycles
sometimes can last a long time, but over time they're
going to be similar, and we think very often people
neglect that fact and they sort of they may perhaps
(18:18):
run to what's been working, such as the megacaps the
last call it ten fifteen years. They may run to
perceive safety of large caps, but over time they tend
to wash out. And so we think the caps are
definitely an attracted place to be interesting.
Speaker 2 (18:31):
So that leads me to my next question, and is
that is, how do you navigate volatile or down markets
like what we have today. You know the S and
P five hundred now testing an official bear market. Small
caps really struggling so far this year. Does that make
you think in terms of capitalization concentration in your portfolio
a little bit differently? Do you find yourself leaning into
(18:52):
mid caps for opportunity? How do you think about down
markets like what we have in the spring of twenty
twenty five.
Speaker 3 (18:59):
Yeah.
Speaker 4 (19:00):
Point, So there's two things. One is, we are purely opportunistic,
so we'll look around and if the larger stocks or
larger companies are somewhat cheaper, we look at them one
by one, right, and so we'll go after that whatever
opportunity arises. And again, we don't tend to have a
lot of turnover. We own thirty year stocks. Then we
may buy a handful of new companies a year, so
we only need one or two really great ideas in
(19:21):
the giving year to really make it work for us.
The other point is, I'll go back to that point
of resiliency. Don't We don't necessarily trade a lot in
these times. We hope to find opportunities to find and
purchase and make new investments. But hopefully if we did
it right right, we own a portfolio companies that we like, right,
(19:44):
and regardless of what the market is are in the
economy is doing. Hopefully, we have companies that are resilient
and can weather through this. And in fact, by definition,
a lot of our companies tend to have better balance
sheets and better competitive positioning. So over time, these downturns
are good for them. They will come out of it
in a stronger relative positions. Right, if they have to
(20:07):
compete against the company with a weak balance sheet barring
a lot of money, their CFO, their CEO is now
spending a lot of time talking to their bankers. Right,
They're spending a lot of time plugging holes and having
to sort of be a little bit more defensive and careful. Right,
whereas the kind of companies and we invest and can
play more offense. And so what you tend to see
(20:29):
is that coming out of the downturns, our companies come
out in a better relative position. And so do we
do make sure and like you said, think about what
the opportunity set may be and how we're positioned. But
hopefully we've done it right entering the downturn. And there's
not a whole lot to do except to look for opportunities.
Speaker 1 (20:46):
You mentioned, you know, CI our CEO and CFOs and
kind of brings up my question of do you look
at management teams? Is that part of your research and
if so, what are you really looking for?
Speaker 4 (21:00):
So that's a great point. When I started off earlier
and talked about what we're looking for, I think I
mentioned perhaps two main pillars, and one was about the
structural advantages of a business. The other point was about management.
So what we want, at least, at the very least,
we want a structurally good business, and we want a
management team that's going to be a wonderful caretaker of
the advantages that company has. Right, we want to management
(21:22):
team that's always thinking about widening and deepening that mode
so they can add value on top of the advantage
of the company company has. Now, this is important to
us in the sense that it's a very qualitative assessment.
So we think it's the kind of area where us
as fundamental investors can really differentiate ourselves because a lot
of other things that can be quantified in terms or
(21:44):
returns on equity and growth rates and so on, are
a little bit easier to grasp, or they're tangible. They
can be quantified right, somethings computers can do better, but
this is the kind of stuff that's very qualitative, and
so we put a heavy emphasis on this. And the
one area we think we tend to emphasize more than others,
we want to see aligned management teams. We love to
(22:05):
invest in what we call owner operators. So we love
to see the top decision makers and the governance of
the company. So whether it's a CEO, major board members,
major shareholders, right, but especially the CEO, top C suite people,
board members, we love it when they actually own a
significant stake in the company because we're not obviously not
(22:28):
in the room with them as outside investors when they
make decisions.
Speaker 3 (22:31):
We don't make those decisions.
Speaker 4 (22:33):
For them, right, So we want them to be on
the same side of the table as us. So we
want them to think long term. We don't want them
to think about quarterly earnings.
Speaker 3 (22:41):
Right.
Speaker 4 (22:42):
So I mentioned earlier Copart for example, their chairman and
CEO combined own about ten percent of the company, and
they're very long term. The chairman founded this company back
in the nineteen seventies, and so their time horizon is
not three months, it's not one year, it's not even
three years, they're thinking five ten plus years out, and
so they're willing to sacrifice current earnings if they think
(23:05):
those investments will pan out and result in a higher.
Speaker 3 (23:09):
Value for the company. Right.
Speaker 4 (23:10):
So we love that sort of owner operating alignment, and
I'd say at least half of our portfolios tend to
be invested in owner operators. And then when you take
sort of incentives and other alignments in place, it's a
pretty large majority of our companies run by management teams
with very aligned incentives.
Speaker 3 (23:27):
So it's a very important part of.
Speaker 2 (23:28):
What we do. Can you tell us a little bit
about if you know, you talk about being opportunistic in
times like this, are there any sectors or themes that
are really catching your eye right now?
Speaker 4 (23:37):
Yeah, it's a great point, right So, right, so there's
a whole lot of things. Again we look at companies
one by one, but there's certainly industries and areas where
you see a lot more stress, certainly in the financial market.
Speaker 3 (23:48):
So there's a bunch.
Speaker 4 (23:49):
But just to give you a couple examples, anything that
might be consumer big ticket oriented obviously right now, right
you have a huge amount of pressures, which is the
prices for a lot of the stuff that consumers brought by,
especially discretionary, may be going up. At the same time,
you may have just general economic stress, right, so consumers
(24:11):
may end up with lower spending power stress balance sheets
or recession may or may not becoming certainly some slower
growth economic and the nutriment is likely. So you see
a lot of those stocks come down. We're spending some
time there. There's some interesting factors. Obviously this is recently.
More recently, interest rates are coming down a little bit
because the fears of recession. So it's possible some of
(24:33):
those areas such as housing that may be related to
big ticket consumer may see a little bit of a
release valve. But certainly those stocks are coming down, so
we're taking a look. You certainly have a lot of
companies I mentioned retail or distribution right where it's a
very simple sort of passed through business. You buy stuff
at wholesale, you sell at retail, and now all of
(24:54):
a sudden, the cost of goods and your wholesale is
going on quite a bit, and so a lot of
those companies are getting hit. And so that's where we're
really sitting and looking at, well, how much pricing power
do these companies have to pass through any increases. So
those are the kind of areas we'd be looking at, right,
And so you.
Speaker 1 (25:10):
You know, you keep mentioning about the concentrated portfolio. You
know a lot of managers have you know, these best
ideas portfolios, but in terms of you know, how do
you mitigate risk with a concentrated portfolio if you know,
say some of them are some of the stocks are
heading in the same trend.
Speaker 4 (25:29):
Yeah, So a couple of things we do. Even though
we're concentrated, we make sure we're what we what we
say adequately diversify, right, so we do have some limits.
We think about all the different risk factors that may
be contained, and so we don't really just think about
say industry or sector concentration. We go way more granular
than that. You have lots of different companies that may
(25:51):
be in totally different industry, but they may be exposed
to similar risks.
Speaker 3 (25:56):
Right. Tariffs are a great example.
Speaker 4 (25:57):
You could have an industrial company, it could be a
consumer company, but if they're buying a lot of their
goods overseas, they're exposed to.
Speaker 3 (26:04):
The same risks.
Speaker 4 (26:05):
They may be in totally different sectors, right, Or you
may have a healthcare service company that relies on government
or Medicare payments, and then you may have a defense
contractor that sells to the DoD quite a bit, two
totally different industries, but yet if there are federal budget cuts,
they're exposed to that factor, right, So we look at
that way and make sure we're adequately.
Speaker 3 (26:24):
Diversified from that standpoint.
Speaker 4 (26:27):
The other thing I'd mentioned is that we're very careful
about trying to mitigate risk in every level of our process,
and so we want each investment we make to stand
on z own. Now, obviously you want to be diversified,
and you can't. You can't avoid every single risk out there.
But again going back to the comment I made about
(26:48):
if this is one of the five to tenk companies
you had to own for years, would you do it?
And so that already puts a mentality in place as
we research companies. You know, it makes you think a
little bit less about Hey, they're the real high level
tail risks. But we're going to own enough companies that
I'm okay taking this risk. We try to avoid it
as much as we can, right, So we're already thinking
(27:09):
about buying companies that are so resilient, and so many
different scenarios to begin with that you're already mitigating a
huge amount of risk one by one in each company
that you're invest in.
Speaker 1 (27:21):
Now in terms of you know, we've talked about what
you look for in companies to buy is in terms
of selling positions? Is it valuations, better opportunities or just
you know, the business factor isn't there anymore?
Speaker 4 (27:35):
Yeah, So the two main reasons that we sell or
either valuation or the fundamentals aren't as good as before.
Speaker 3 (27:43):
Something has changed.
Speaker 4 (27:43):
Structurally, and very often there are a combination of two.
I'd say we tend to buy companies. As you can
tell by a holding period, we tend to buy companies
that we help to own for many, many years. Valuation
is tricky in getting out because if we do this right,
the management team teams in the structural soundness of the
business tend to be better than we hoped.
Speaker 3 (28:04):
Right.
Speaker 4 (28:04):
So when we make financial projections when we make an investment,
we tend to be fairly conservative. But management teams can
add a lot of value beyond that that you can't anticipate.
Speaker 3 (28:13):
Right.
Speaker 4 (28:13):
They can buy backstock at operation of times, they can
make wonderful acquisitions, they can enter into new areas that
you may not have anticipated and do well.
Speaker 3 (28:21):
Right.
Speaker 4 (28:22):
So there's a lot of optionality investing with a good
management team with a structurally sound business. And so we're
very careful about not just automatically saying this is the
multiple that we will get out and so on, because
things change overly years.
Speaker 2 (28:34):
Right.
Speaker 4 (28:34):
So what we say is, once we find a really
good company, we tend to hold on unless it's approaching
or get into those bleed valuations Truki.
Speaker 2 (28:43):
As you know, David and I are both part of
the Bloomberg Intelligence team at Bloomberg, So I would be
remiss if I didn't ask you if you use external research,
and if you do, what do you find you know,
where do you find yourself leaning in, where do you
find it most valuable least valuable? Sort of just give
us an assessment of the research landscape if you don't.
Speaker 4 (29:03):
Yeah, So we use whatever we think can be an
input to us. So we do all of our own
internal research. So we use a lot of external research,
but external research meaning does it give us insights into
that companies and the company's fundamental business model management R Right,
So we don't use research in the sense of telling
us what to buy, their opinions, people's ratings on the stocks.
(29:26):
We do all that, right, that insights sort of valuation,
decision to buy, sales, and we do all that internally.
But we do you know, when we try to research
a company, obviously, we're trying to research anything about that company,
the people that run it, the people that work with
that company, the industry around it, and so we talk
(29:46):
to anybody that we think we have insights into it, right,
and so we're talking to lots of people that work
for competitors, We talk to people that used to work
at the company. We certainly talk to sell side analysts
or consultants that may have a deep knowledge of that
company industry. And so we're trying to gather as much intelligence,
like you said, and information as we can and hopefully
(30:07):
get some insights as well as well as develop our own.
Speaker 1 (30:11):
Great So we just have one more question before we
let you go. You mentioned earlier you know you're a
big fan of Warren Buffett, and I imagine you probably
read a lot of his you know, notes that he
puts out. But do you have some I guess favorite
financial books.
Speaker 4 (30:28):
Yeah, it's a good question. So we read a lot.
I'd say it helps. It helps to read a lot
of financial history. Certainly I enjoy it. Maybe that's just
sort of my my predilections a little bit, but I
love reading about history of the financial markets, the financial systems,
the banking system. There's so many great ones out there.
(30:50):
Maybe I highlight a couple that may be listener known
to some. There's a book called The Richest Man who
Ever Lived. It's about an industrialist in Europe from a
few hundred years ago named Jacob Fuger, written by a
friend of mine, Greg Steinitz. That's a wonderful book. There's
another one called The Exchange Artist, by another friend of mine,
(31:10):
Jane Kominski, but goes back to sort of the free
wheeling days in the US when the banking system was
still forming. And so there's a lot of interesting things
about the monetary system. You know, back when paper money
was sort of seeing as very dubious, and you couldn't
when people paid you with paper money, you weren't sure
if there was actually someone behind that money as you
(31:31):
so it's all right. So those two are kind of
interesting from a financial market standpoint. I'd say there's a
lot of good business books, right, because again we're trying
to buy businesses, and so I think it helps a
lot to read books that sort of tell you the
history of particular businesses and you learn.
Speaker 3 (31:45):
A lot more about that business and industry. It makes sense.
Speaker 1 (31:49):
Well, this is great, Harouki, thank you so much for
joining us again.
Speaker 3 (31:52):
Sure, thank you very much. Pleasure to be.
Speaker 1 (31:54):
Here, Gina, thank you for bringing my cost today.
Speaker 2 (31:57):
My pleasure, so lovely to meet you, Haruki. Thank you
for for joining us, and thanks David for hosting untill.
Speaker 1 (32:02):
Our next episode. This is David Cohne with Inside unt
Host
Gina Martin Adams
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