December 10, 2024 • 40 mins
Recent quarterly results from Japanese companies came out better than expected, with quarterly year-over-year growth of around 26%. In this episode of Inside Active, host David Cohne, mutual fund and active management analyst with Bloomberg Intelligence, along with co-host Laurent Douillet, senior equity strategist for Bloomberg Intelligence, spoke with Graeme Forster, an international equity strategy and global equity strategy portfolio manager at Orbis Investment Management, about the importance of intrinsic value and independent decision-making in stock evaluation. They also discuss how market inefficiencies can create significant investment opportunities, what industry he currently likes in Japan and the role of risk management in investment decisions.
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Speaker 1 (00:12):
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges and philosophies and security selection. I'm David Cohne,
I lead mutual fund and active research at Bloomberg Intelligence.
Today my co host is Laurent Julie, senior equity strategist
(00:32):
at Bloomberg Intelligence. Laurent, thank you for joining.
Speaker 2 (00:35):
Me today We come.
Speaker 1 (00:38):
So you wrote an interesting note last week about Japanese
EPs growth during the third quarter. You know, I'd love
to see how these companies performed in terms of EPs
growth and you know, maybe some positive surprises.
Speaker 2 (00:53):
So in fact, we did a quite deep dive into
the September quarter results of Japanese companies and as you mention,
I mean the results came out better than expected. As
a quarterly year of your growth was around twenty six
percent compared to seventeen percent initially expected. But I think
the key point is that the breadth of positive surprise
(01:16):
has been quite narrow. Out of eleven sectors, only Free
delivered positive surprise. There are technology, financial, sorry, healthcare and materials,
and also soft Bank Group also did blowout market expectations.
In fact, if you exclude those three sectors and soft bank,
(01:37):
in fact, the Japanese results would have been much lower
than expected. In addition, if you look at the full
year guidance which has been provided by the companies for
the moment, there are still seven percent below the market
consensus and they were revised only one percent during the
reporting season. So that's quite disappointing, and I think it
(01:59):
was not enough to get the market excited. And the
last point that I would like to make is that
I think now investors focus shifted back to the macro
and especially what the BOJ will do at its next meeting,
which is towards the end of December. For the moment,
the probability of a twenty five basis point rise is
(02:19):
about sixty percent because later inflation data are still above
two percent, and also the currency, as we can a
little bit compared to the month of July. So I
think market expect the BOJ to provide support to the currency.
And that's it.
Speaker 1 (02:38):
Well, that's great, and speaking of international stocks, i'd like
to welcome our guests. Graham Forster, a portfolio manager of
the International Equity Strategy and Global Equity strategy at Orbist
Investment Management. Graham, thank you for joining us today.
Speaker 3 (02:52):
It's great to be here. Thank you for the kind invite.
Speaker 1 (02:57):
Well, before we kind of jump into your background, i'd
love to hear your thoughts on you know what Laurent
was just you know, mentioning you know, you know what
kind of occurred during the third quarter in terms of
Japanese EPs.
Speaker 3 (03:10):
So I think there's interesting things happening in Japan. We
tend not to look at a quarter by a quarter basis,
but you know, in terms of what's happening on the
longer term, longer term trends. But I think some of
the things that Lauren said rhymed the financials. I think
we were quite large in the financials for some time.
(03:31):
That's come down quite a lot because they're trading, you know,
that sort of more normalized multiples. But I think I
think there could be much more in terms of positive
surprises coming out of that sector, because if you think
about what they've been through for twenty years in terms
of their altitude training, from having such low rates for
so long and building up the muscle to survive and
(03:55):
not quite thrive, but at least survived through that period
and wrote tad more into sort of feed driven businesses.
I think if you start to see rates move off,
you know, off zero and and and higher from here,
which I think is more likely to happen than not,
you'll see a lot more positive surprise on their interest
(04:16):
margins and people expect just because it's been so low
for so long. And also they're doing you know, a
lot in terms of capital efficiency and unwinding all of
their cross shareholdings and and that's releasing capital. I think
they're in a nice phase. It's just that you know
that the prices are reflecting some of that positivity.
Speaker 1 (04:37):
So I'd like to take a step back and kind
of I know our audience would love to hear how
you became a portfolio manager.
Speaker 3 (04:43):
That's going way back, so I I mean I I
was studying applied mathematics at Cambridge University in the UK,
and I could have gone down that route. There's a
lot of lots to be said for academia, but I
you know, the short story is that I started getting
interested in decision making under uncertainty, and that involved an
(05:06):
interest in investing and an interest in games which had
that characteristic like you know, you think think poker, and
you know, that's that's what kind of led me into
the investment industry. I find I found it interesting from
the perspective of everyone suited to something. Right, your character
(05:26):
and you know, your aptitude is typically suited to doing
something in the world. You know, that's how we've evolved
as humans. We all have some role to play, and
mine was I found I had an aptitude for decision
making in the situations where there's a lot of uncertainty.
And you know it if you think about game selection,
(05:50):
which we think about a lot in the poker world
and in the investing world as well, I think investing
as a whole is sensible game selection because what it does,
given there's so much statisticity and so much noise in
the business, and the noise to skill ratio is actually
quite high. It attracts in a lot of in the
poker world, they call them fish people who who you know,
(06:11):
play the game but really, you know, really shouldn't be
playing the game. They don't really have an aptitude for it,
but they're attracted to it because they can win. They
can win for you know, two three sessions. In investing,
you can win for years without having real skill and
edge and therefore it's a game that anyone feels they
can play. So you drawing a lot of people and
(06:33):
if you can do it well that there is sustainable
edge you can you can develop. So I was attracted,
you know, for I guess for those two reasons.
Speaker 1 (06:41):
It's great. And so you're at Orbis, you know, can
you tell us a little bit more about the investment
philosophy of the firm?
Speaker 3 (06:50):
So Orbis I've been I've been at the firm since
two thousand and seven. What what I thought? I found
fascinating when I was thinking about, you know, where in
the investment world do you go? One thing that struck
me was what is the enduring What is the enduring
way to gain edge in investment management? And for me,
(07:10):
you know, given we are owning pieces of businesses, it's
obviously assessing the value of what you earn. Right that
there's there's all these there's a plethora that's of different
styles that have developed within the investment industry. There's the
quant sidne and you know, the quality and this growth
and the value and all these different flavors of investment.
(07:30):
For me, that there's only really one signal. There's only
really one signal, and that is understanding that the value
of a business and trying to buy at a big
discount to that, and that should be enduring as long
as as prices move away from intrinsic value. And that's
really the core of Orbis's philosophy and what drew me
(07:51):
to the firm. You know, it's interesting from the sense
I was talking about game selection. Given the industry invests
attracts a lot of or has the potential to attract
a lot of people who really don't have sustainable edge,
you would think that there would be quite a large
cohort of management firms and people within the industry that
have very long term superior track records. And as I
(08:14):
was digging, you know, around in the data back in
two thousand and six when I was thinking about where
I should be in this industry, it's really quite hard
to find examples of sustainable long term excess performance. There
aren't that many, which is fascinating, and I think there's
a whole host of reasons for that, but one of
(08:36):
the ones that stood out was Orbis, and it goes
right back to nineteen seventy three. So Alan Gray founded
Alan Gray Limited, nineteen seventy three, and then the sister
firm was Orbis, which was started in nineteen ninety and
we run about five or six different concentrated long only
and hedge strategies and I've generated on average between five
(09:00):
and ten percent excess return over the various benchmarks. And
if you think about, you know, what is the power
what's you know, what gets us to work every day?
What's the power of that? Well, it's Warren Buffett's sort
of time compounding. Most of his wealth has generated after
the retirement age because he stays in the game for
a long period of time and excess returns. And Alan
(09:22):
Gray Limited, you know, the original firm assist company to Orbis,
has been investing for fifty two years. And if you
just sort of stuck the equity as premium, you just
got the equity's premium plus the risk free rate for
fifty years. You know, you're extraordinarily wealthy. If you can
do eight or nine percent above that, it's just incredible
(09:43):
the wealth and the way the wealth can compound. So
that struck me and that was one of the reasons
I joined. And we've been doing the same thing since.
So I'm responsible for the International Strategy that started in
two thousand and nine, which is a four five billion
strategy outside of the US. And I also I am
a portfolio manager on the Global strategy, which was one
(10:04):
of the flagship strategies for August we started in nineteen ninety.
Speaker 1 (10:09):
So how does the process work on the international equity strategy,
you know, applying that philosophy.
Speaker 3 (10:15):
Well, it's all very intrinsic value, you know, focused what
we spend almost all our time trying to figure out
the value of businesses. I think that's the enduring signal
in all of the noise, So you spend your time
doing things that really count. I would say there's a
couple of characteristics of the firm that may be a
(10:37):
bit differentiated and worth talking about. One is very very
independent decision making, very independent decision making, and that that
actually varies across the investment industry. There's this idea of
wisdom of the crowds, right, You've heard and a lot
of academic, literal and wisdom of the crowds. Crowds make
good decisions, do they not. There's a wisdom there. I
(10:59):
think what that is based on the wisdom of the
crowds is you imagine your jar of candies, your child sweets,
and everybody's guessing how many candies are in the jar,
and the average of all this guess is actually quite good.
That's the wisdom of the crowds. The key thing with
(11:19):
you know that that, you know, the success of the
wisdom of the crowds is independent decision making. Everyone is
guessing independently of each other, and some people are way off,
some people are closer, but on average it comes out
quite good. If you had a circle of people around
the jar and they're all chatting about how many candies
are in the jar, and there's a you know, there's
(11:39):
a few dominant voices in there, and they, you know, they,
and some people are just referring to their wisdom, and
if you had then then I think there's been I
don't know if there's been studies done on this, but
I suspect that would be a horrible outcome versus the
very independent decision making. So the market is much like
the second case. Everyone's standing around the jar and talking
about it, and that's why you get such big distortions
(12:00):
in markets. What we try to do internally is be very,
very independent and deliberate about that as to how we
make decisions. So the analysis is very independently driven and
the views are independently driven, and then we have then
we have a sort of a method to sense check that.
So that's one kind of thing that runs through the
firm independent decision making. The second is accountability. Everyone's accountable
(12:25):
for their independent decisions. I think one of the mistakes
the industry makes, generally speaking, is you take great stock
pickers who are exceptional at finding those unique opportunities, and
you promote them into managing a portfolio, and then those
key insights that they've had over the years of picking
one or two stocks a year. You know, Warren Buffett,
(12:46):
you only swing at the fat pitches. You know, really
there really is something to that gets diluted by having
to look at the other forty stocks in the portfolio,
and then you know, that's where things start to go wrong.
So what we really try to do is emphasize, you know,
we value we value one or two stock picks a year.
So our analysts are focused in these niches around the world,
(13:07):
and all they want, all they've got to do is
find one to have one of two great insights, one
or two ideas and then they build a paper portfolio
of those best ideas, and then you track that performance
over time, so you get an idea of you know,
what people are good at, what people are not so
good at. You get a great signaling mechanism to the
portfolio managers as to which share should be in the portfolio.
So that's you know, the individual accountability around that's really important.
(13:30):
And the third thing is alignment. You need alignment within
the firm. We all need to be pulling in the
same direction. But critically you need alignment with clients because
another one of the problems with this industry, and there
are many and I keep listing them, is that the
actual return that a manager delivers is very rarely what
the client gets because the client is trading in and
(13:51):
out of the funds and they're buying at the top
of the selling at the bottom, and you see it
over and over again. So but if you can drive
alignment with your clients to the extent that the dollar
weighted return of the client experience is the same or
better than the actual you know, the line on the
chart that you're showing in terms of the fund return,
that's absolutely critical. But those are the kind of the key,
(14:11):
key elements of our structure.
Speaker 1 (14:13):
So if we go back to the intrinsic value, are
there metrics that help drive that?
Speaker 3 (14:18):
Ultimately, what are you doing when you invest? What is
your objective? What's your utility function? The utility function has
to be to make money. I'm afraid that's everyone's utility function.
And so it's the cash. The cash that that business
can generate is the key. And you know, some businesses
(14:40):
are throwing all of that cash that they generate back
into the business for growth, but ultimately the reason they're
doing that is that they can generate cash off a
bigger base in the future. So if you want to
just cut through the chase, what is the was the
core to intrinsic values, the cash that you're going to
get out of that business over the long term versus
you know, obviously the price you pay and then and
(15:00):
so that's the high level, and then you're going down.
There's lots of layers below that in terms of, you know,
what are they doing with the cash today, how fast
are they going to grow, what's the distribution of outcomes
around that, how uncertain is the.
Speaker 2 (15:12):
You know, just a follow up question on this. Usually
I don't know, if you screen a large amount of
companies to try to identify first what could be the
set of opportunities. I mean, are you using a more
specific valuation metric, either price to book or EV to
a BIDA or P And do you related to either
(15:32):
return on equity or operating margin to better guide you
towards what could be a good investment opportunity which is
unfairly valued.
Speaker 3 (15:46):
So all those metrics are critical, all of them. You know,
the return on capital business generate is absolutely critical to
the value of that business, the growth rate critical, and
then what do you pay? So we try to put
all the pieces together and get a view as to
what the business is worth holistically. Now, when it comes
(16:07):
to screening, we have a very dedicated quant group and
they are doing a lot of good work on which
areas of the market could market could be dislocated. And
the way we do that is we run our own
proprietary internal models. They're effectively fancy dividend discount models, so
cash flow based models, where we run that on every
(16:27):
stock in the world, and then we monitor and we see, Okay,
what's looking more interesting and what's looking less interesting. That's helpful,
but ultimately there's a lot of noise in it, right
because the model you know, uses the past, doesn't know
the future right come in. But you know, on top
of that, we it's absolutely critical to have a big
(16:49):
investment team. So we're a forty billion dollar asset manager,
which isn't that big in today's you know, today's inflating money.
And and so the size of our vest ten is
quite large versus the the asset base. But we think
it's absolutely critical because we're so geared to our performance.
We're so geared at delivering returns for clients that are
(17:10):
above the averages that you need to combine both breadth
and depth. And so we have a big analyst team
to cover the world, but we also have a lot
of depth within each area. So when it comes to screening,
each analyst's just looking at Japanese financials or they're just
looking at European industrials, they have a small, smaller universe,
(17:32):
a universe they can manage the universe that they can
understand what the top twenty company is, what they're worth,
and then and therefore you are screening that whole universe.
Screening is important, but it's a little bit less so
because you know, you have that deep knowledge within each section.
Speaker 2 (17:45):
Coming back towards the Japanese equity market, so, I mean
a lot of investors think they are definitely structural change
happening in the economy, but also in terms of corpor
right governance, where potentially companies management are much more shareholder
friendly than they used to be. I monitored the position
(18:07):
of your portfolio, and you were heavily invested in Japanese
equities at the beginning of the year. You have reduced
your position, which is quite a wise move because I
would say since about March April, the Japanese market has
not done anything spectacular. So do you think, as you
were mentioning earlier, that potentially the Japanese market, despite all
(18:32):
these good news, this is already priced in. Or do
you think that, in fact, all those structural change could
really carry this market for many years to go.
Speaker 3 (18:43):
I'm more in the latter. Despite the fact that our
position is reduced, I think we've been investing in Japan
with great hope and expectation that corporate governance was going
to improve since about nineteen ninety eight, and every year
our team go to Japan and they talk to management
teams and they get the same kind of blank stairs
(19:03):
when we talk about you know, better capital management ETCA.
Over the last five years, that's dramatically change. We go
to Japan and we we're talking the same language, and
our team, our Japan specialist team. Twice a year, we've
done a lot of presentations to management and you know,
(19:26):
the management teams are listening, stuff happening, they're acting, and
that's a big deal. It's a big deal for market
market that has become so capital inefficient over such a
long period of time. So I think it is enduring,
and I think there is that there's there's a there's
a momentum to it, just like there was a stagnation
to the previous you know, the way it was. It's
(19:49):
a very sort of consensus driven society, so the way
it was was very sticky. But as soon as it
starts to change, everyone starts to change together. And that's
exactly what we're seeing. What the problem is that the
yen is so cheap now that the the exporters we
think over earning and so a lot of those companies
(20:14):
on a normalized earnings basis don't look as interesting to us,
and they are the big they're the big stocks in
the market, you know, the the big liquid businesses. So
the opportunity today in our view sits in the MidCap
domestic companies that are suffering under this very very weak end.
So if you can find MidCap Japanese businesses where you know,
(20:35):
you have this nice corporate governance story we like, for example,
the drug stores in Japan, where there's this kind of
the more interesting things going on on the consolidation side,
and and you know, and and on a couple of
management side. If you can find those businesses, domestic businesses,
they're cheap, and you have the yen upside as well,
(20:56):
because you know, they they're true yen assets, so you
can get that, you know, the uplift from the end,
which we think will eventually appreciate just because it's it's
so undervalued at this point. That's where the opportunity is.
The trouble is you have to access the liquidity and
you know, so you have to buy baskets for these companies.
(21:18):
It's just a bit more tricky for a very sort
of focus bottom up investor.
Speaker 2 (21:23):
In terms of implementation. Yeah, so now maybe a bit
a bit more macro questions have been given that all
the market focuses around the potential tariff policies of Donald Trump.
I mean, I don't know if you. I know you
are more bottom up rather than top down. But do
(21:43):
you think that there are international markets which may be
better positions than others and that you would favor investing
given that some of them could be definitely at risk
of those trade policies are coming from the US.
Speaker 3 (22:02):
I think it's difficult to invest on that basis. On
the one hand, Trump is quite a predictable character, and
he's been saying the same thing since he was twenty
two years old. You know what he thinks by now,
but you don't know exactly how he's going to implement
(22:24):
and you don't know to what degree each let's say
tariff that is put on that will be put on,
You don't know you know how enduring they'll be. And
in terms of the intrinsic value of a business, you know,
that's ten years of free cash flow, it's not six
months based on a tariff policy. And the other thing
(22:46):
we know about Trump is he's quite a transactional person.
And so you know, if you can get a good
deal from a country or extract something that he feels, okay,
the USA has gained in this transaction, the tariffs, you know,
might be fleeting on whichever country they're dealing with, So
it is just a difficult environment. From that perspective, I
(23:09):
think what one thing you can say is we are
on a trend now. It looks like a very clear
trend towards a much more protectionist world and a breakdown
of the global world order of as we've known it
for the last thirty forty years. And that you know,
you can see that in the USA, but you can
also see it all the way across Europe as well
(23:30):
and in various other countries. I think it's a little
bit of a function of an aging population. As we age,
you know, just very very simplistically, we've become more conservative
and adverse to change, and you know, I think that's
we're seeing that playing out in politics all around the world.
And so I worry about Europe in terms of the
(23:52):
potential for the the EU too. I don't want to
say break up. There's a protect there. There's in terms
of people becoming more nationalistic. I think they'll be more
global conflict just because the global world order has been
in place for so long and when you have a
(24:16):
very strong, you know, huge power that the US has been,
it just kept everything, you know, it kept everything quiet
as soon as you start as soon as that starts
breaking down. In a period where individual countries have not
built up their defense capability because it's just atrophied over
the last twenty thirty years, I think that you're going
(24:38):
to see a lot of friction across borders as well.
So those will be the macro things I would be
concerned about in terms of the new policies of the
US administration. The biggest thing I worry about is the
you know, the efficiency drive from from elon Musk and
because that that could be game changing if they can
execute on on on getting their their their fists in order,
(25:02):
because that's that looks like an inevitable freight train for
a long time in terms of the deteriorating fiscal position
in the US. So it'll be interesting to observe how
that evolves.
Speaker 2 (25:14):
Okay, Now a question which is more about process, which
is your selling discipline? I mean, which is I think
is very relevant when you have a value based investment strategy.
I mean, when do you decide to exceed a position?
Is it just because you think it's just fairly valued,
(25:36):
you were right, and so you take your gain or
I know that some people tend to run with their winners.
And also when sometimes I mean there's especially in Europe
for example, there are a lot of investment case which
are value traps. Sometimes some are our value traps, others
are not. So some companies initially may lose or your
(25:58):
investment may lose money, but you may be right over
the medium to long term. So also how do you
react to when one of your investments is not turning
out right? I mean, how often do you reconsider what
do you do to make sure that you are on
the right track or that potentially it could be a
value trap and it's better to sell with a ten
(26:20):
or fifteen percent loss rather than a fifty percent one.
So how do you approach those both goals of on
the on the positive and negative side.
Speaker 3 (26:31):
So that I mean, there's all great questions. I mean,
the very glib, high level answer is, as you would expect,
price versus intrinsic value is key. So if you know,
you realize you're intrinsic value, then then the position will
But there's a second element of that is that the
market environment might be such that there's a lot of
(26:52):
things that traded a big discount. You know, if you
look at twenty twenty one, very you knowaningful discounts in
certain areas of the market, in which case we might
sail before something gets to intrinsic value because we can
buy something else at a much deeper discount. So that's
the very high level answer. Now your your point is
much more kind of in the weeds and intricate in
(27:13):
the sense that what if you're wrong, what you know?
How do you what if you're intrinsic value is wrong?
And so we I think that we're very conscious of
the biggest trap you can get caught in this business
is getting dogmatic on a position and what you think
of business is worth and you keep doubling, and you
keep doubling, you keep things deteriorating things, and that's, you know,
(27:34):
such a big trap. So what we we have a
few things in place for that. One is we review
positions if they've been in the portfolio and they've not worked,
or they've been in a long time and they've not
really done very much, or something's changed in the thesis.
We have set points. We review But the bigger and
most interesting piece is probably to talk about our decision
analytics team. I talked about individual accountability running through the firm,
(27:57):
and we've obsessed about collecting data on every person's decisions
right back to sort of the early nineties, and we
got this big database of everyone's decision making over time,
and we have a specific team called the decision Analytics team,
and they take all that data and they pick it
apart and they figure out what it is you're doing wrong,
and what it is you're doing very well, and how
you can improve and how you can change. And we
(28:19):
look at things common to the firm, to the funds,
you look at things that are very specific to individuals,
and we try and tailor that analysis. And one of
this the elements is you know, selling decisions or you know,
getting stuck in. So one of the common comments are
common bias. You you you're sitting in a position and
a losing position, and you're just not doing anything. It's
(28:41):
almost like you're frozen. And then we do see that
across certain individuals in the firm, and the data can
pull that out and just hold it up to you
and say, you know, based on what you currently hold
these stocks fit that pattern, and you get you'll get
a nut, they'll call you up. But you also get
sort of digital nudges within your platform, within through email
(29:01):
saying I have a think about this. You know, maybe
you should be doing this so x or y, maybe
you should be reviewing it.
Speaker 2 (29:07):
You know.
Speaker 3 (29:07):
Really what it's a one good way is start from scratch.
If you're going to start from scratch today, where do
you own this or not?
Speaker 2 (29:14):
You know?
Speaker 3 (29:14):
I know, we know you own it? Would you own
it if you're just building a portfolio? So a little
mental exercises like that helps simple stuff. But that's been
really helpful to have the objective data driven team come
in and and help us to understand, you know, what
we could do better in that regard.
Speaker 2 (29:34):
I mean, one of my last questions is your often
has done tremendously wells on the short and medium and
long term as well. I mean, what do you think
of all the market has missed on all these market
opportunities that you have been able to identify. Do you
think it was really the work on the valuation that
(29:54):
you are better at really estimating what is an interesting
value of a company? Or do you think because market
is paying too much attention to the noise, or so
it's I think what was a very good comment about
Portfralio manager sometime coming from being an industry analyst with
(30:16):
very great expertise on a limited set of stocks, but
then when you have to manage a much bigger set
it becomes a much bigger challenge. Or what do you
think is really behind your the result of your success.
Speaker 3 (30:31):
I think a part of it is, you know so
that latter, well, let me hit that first. It's difficult.
The industry is so difficult because you could have the
most skilled person looking at Japanese financials and you could
reward them incredibly well for a wonderful job they're doing.
(30:51):
And because that is the secret source having people do that,
that's the secret source of any manager having that expertise
and someone with an incredible judgment finding those few ideas
a year. But we're all people. We've got to manage people,
and people have career aspirations and they don't want to
be looking at one sector for thirty years, and so
(31:14):
you have to manage that balance. But what we think
we've done quite well is sort of is emphasized internally
and externally just how critical that is, that is the
engine of our success. Having key people with the stock
pickers across our different team. That's number one. Number two,
I think sometimes the market goes absolutely bonkers, right, We've
seen the period like it's the people standing around the
(31:37):
candy jar and convincing one or two people convincing everybody
else that there's only ten candies in the jar when
there's a thousand or whatever. It's just they get so
inefficiencies get so out of whack at certain periods. And
we saw that of course in the late eighties, we
saw it in the mid seventies, we've seen in the
(31:58):
late nineties. In twenty twenty one was the biggest we've
ever seen. We've got data on this. You can see
the dislocations were absolutely immense. So having a portfolio that's
able to move capital efficiently and effectively to those most
dislocated areas in a really kind of dispassionate way, I
think about it as you know, the market could be
a surface, and if the surface is completely flat and perfect,
(32:19):
it's efficient. But you know, often these big crevices emerge
and they're the inefficiencies and big undervaluations, and the portfolio
has to be like water. It has to just flow
into the crevices with no friction. And so we've been
quite good at that getting the portfolio the right areas.
And then it's at other times normal times, it's just
(32:42):
it's just the being very, very disciplined and mechanical about
what we're doing and finding those sort of rare inefficiencies
which comes from the specialists and comes from having the
right people.
Speaker 1 (32:54):
Now you had mentioned your decision analytics team, and so
kind of brought up in my mind. Do you have
a you know, as part of the process, a risk
management aspect of you know, trying to limit risk for
the portfolio. Is that part of it in terms of
decision making?
Speaker 3 (33:11):
Yes, So I would say there's three things that go
into a position. Size one would be discount to intrinsic value,
the big one, right, Two would be the distribution of
outcomes around an intrinsic value. You know, some some some
companies you have very high confidence in how the future
(33:34):
is going to look as high as you possibly can
have in a sort of uncertain world, and other companies
you've got a massive range of outcomes. Massive you are,
and that gives you an intrinsic value range. It's huge,
and you know, if the price is at the bottom
of that, that's great, but you might not put a
big position behind it because just the distribution of outcomes
(33:54):
are so wide. And the third is, which is to
your point, correlations in the polio. So what we don't want,
which quite often happens in markets, is inefficiencies will gather
all in one area. We don't want to just put
all our capital in that one area, even if we're
very confident. So we have a risk team which is
sort of four or five people, and they analyze the market,
(34:17):
they analyze the portfolio, and they look for correlations which
are obvious, you know, the kind of sector and commodity
and interest rates sort of stuff, but also ones that
aren't obvious, because those are the ones that bite you.
If we're building and we're using some AI in that
in terms of trying to identify I mean, when we
think about AI is really I'm really talking about large
(34:39):
language models because AI has been around for a long time,
but specifically the innovation now is applying that to language
and so you can apply that in your business to
you know, what what what things that aren't captured in
your typical quant model. Can you find in ten k's
and your reports you know that are common to these
different companies that you hold, and then bring that to
(35:01):
a risk model for example. So those are the sorts
of things they.
Speaker 2 (35:04):
Look at, maybe in terms of sectors. Coming back to
investment strategy and some of your earlier comments about the
generation of cash and how potentially is the market value it.
Do you have any preference when investing in sectors? I mean,
do you think that there are sectors which are definitely
(35:25):
high grows, very high return on capital employed because there
are some really mootes within those sectors which favor I
mean the returns. So do you have any preference or
are you very agnostic about Okay, I'm looking everywhere because
all investment opportunities can happen in any sector.
Speaker 3 (35:48):
So very much the latter I mean preferences are dangerous
in my opinion. Okay, you end up biasing yourself towards
certain aspect, and I think that can color or what
should be a holistic view of intrinsic value of a business.
And you know, the decision analytics team help us a
(36:11):
little bit with that in terms of our own individual
preferences and biases. Now, it is true that certain people
are better at certain things. So you can always think
of like someone who is more oriented towards growth companies,
as you know, if they're doing it well, they are
genuinely better at being a futurist trying to look around
the corner, really thinking deeply about what the future is
(36:33):
going to look like. And there are other people that
an'swer good at that, and so that's okay, that's okay
to have a preference one way or the other because
it's around what you are good at, what your superpower is,
and we try to structure the firm to allow people
to leverage their superpower as much as possible, but holistically
across everybody in the firm. We should not be pushed
(36:55):
one way or the other towards certain types of companies.
It should be should be driven by what you know,
holistically what a business is worth. And so that's you
know how I would think about it.
Speaker 1 (37:08):
Okay, great, So we just have one more question for
you before we let you go. More of a I
guess reflective question. You know, I know you mentioned Warren
Buffett at the beginning of this, you know, as a
good investor. I was just curious if you had, you know,
any there are any investors at the start of your
career you wanted to emulate.
Speaker 3 (37:31):
So in the start of my career, you know, you
go and you read everything you can. That's what I
don't think I've read an investment book for ten years,
but I read them all early and I felt like
I gathered as much as I could possibly get from
the different people. And you know what what did strike
me was people all had different ways of going about it.
(37:53):
You know, Warren Buffett was very different to Peter Lynch,
very different to George Soros and and I love that
right because you know you can you can try to
pick bits from each of them and each thing works
better at different times and different market environments. The one
person I would would highlight who is won't be well known,
(38:17):
but he started at Fidelity in the in the sixties
with with I think with Jerry's is it Jerry side?
Is that the guy's name and Peter Lynch and all
of that cohort so with a very very strong group
and Fidelity in the sixties was Alan Gray who was
the founder of the Orbits. And Alan Gray and the
(38:39):
reason I would choose him because he was exceptional, absolutely exceptional,
and he was so under the radar because he was very,
very private about everything he did, to the point where
he believed that if he talked publicly about things, positions,
or whatever, it would impact his decision making and there
(39:00):
for impact client returns. He was so obsessed with, you know,
generating the best return he possibly could four clients that
he would almost his privacy came as a result of that.
He would be very you know, wouldn't He didn't like
the active way of going investing. But he was exceptional
and I got to work with him directly here for
(39:21):
quite a few years before he died, and he was
right up to the end. He was passionate about stock picking, obsessive.
It was just in his blood. And he was so
flexible in the way he invested. It was bottom up, intrinsic,
value driven, but he could go anywhere deep deep value,
(39:42):
high high growth. He could. You know, he would sometimes
come into my office and show me all of these charts.
He was a chartist technician, you know, he was a
macro guy. He could do currencies. It was just his
mind was absolutely phenomenal. And I learned, you know, in
a men to amount from him Oh.
Speaker 1 (40:02):
That's great. This is a great discussion. Graham, thank you
again for joining us.
Speaker 3 (40:06):
Thank you that much fun.
Speaker 1 (40:08):
And Laurent, thank you for serving as my co host today.
All welcome until our next episode. This is David Cohne
with Inside Active
Speaker 2 (40:18):
M
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges and philosophies and security selection. I'm David Cohne,
I lead mutual fund and active research at Bloomberg Intelligence.
Today my co host is Laurent Julie, senior equity strategist
(00:32):
at Bloomberg Intelligence. Laurent, thank you for joining.
Speaker 2 (00:35):
Me today We come.
Speaker 1 (00:38):
So you wrote an interesting note last week about Japanese
EPs growth during the third quarter. You know, I'd love
to see how these companies performed in terms of EPs
growth and you know, maybe some positive surprises.
Speaker 2 (00:53):
So in fact, we did a quite deep dive into
the September quarter results of Japanese companies and as you mention,
I mean the results came out better than expected. As
a quarterly year of your growth was around twenty six
percent compared to seventeen percent initially expected. But I think
the key point is that the breadth of positive surprise
(01:16):
has been quite narrow. Out of eleven sectors, only Free
delivered positive surprise. There are technology, financial, sorry, healthcare and materials,
and also soft Bank Group also did blowout market expectations.
In fact, if you exclude those three sectors and soft bank,
(01:37):
in fact, the Japanese results would have been much lower
than expected. In addition, if you look at the full
year guidance which has been provided by the companies for
the moment, there are still seven percent below the market
consensus and they were revised only one percent during the
reporting season. So that's quite disappointing, and I think it
(01:59):
was not enough to get the market excited. And the
last point that I would like to make is that
I think now investors focus shifted back to the macro
and especially what the BOJ will do at its next meeting,
which is towards the end of December. For the moment,
the probability of a twenty five basis point rise is
(02:19):
about sixty percent because later inflation data are still above
two percent, and also the currency, as we can a
little bit compared to the month of July. So I
think market expect the BOJ to provide support to the currency.
And that's it.
Speaker 1 (02:38):
Well, that's great, and speaking of international stocks, i'd like
to welcome our guests. Graham Forster, a portfolio manager of
the International Equity Strategy and Global Equity strategy at Orbist
Investment Management. Graham, thank you for joining us today.
Speaker 3 (02:52):
It's great to be here. Thank you for the kind invite.
Speaker 1 (02:57):
Well, before we kind of jump into your background, i'd
love to hear your thoughts on you know what Laurent
was just you know, mentioning you know, you know what
kind of occurred during the third quarter in terms of
Japanese EPs.
Speaker 3 (03:10):
So I think there's interesting things happening in Japan. We
tend not to look at a quarter by a quarter basis,
but you know, in terms of what's happening on the
longer term, longer term trends. But I think some of
the things that Lauren said rhymed the financials. I think
we were quite large in the financials for some time.
(03:31):
That's come down quite a lot because they're trading, you know,
that sort of more normalized multiples. But I think I
think there could be much more in terms of positive
surprises coming out of that sector, because if you think
about what they've been through for twenty years in terms
of their altitude training, from having such low rates for
so long and building up the muscle to survive and
(03:55):
not quite thrive, but at least survived through that period
and wrote tad more into sort of feed driven businesses.
I think if you start to see rates move off,
you know, off zero and and and higher from here,
which I think is more likely to happen than not,
you'll see a lot more positive surprise on their interest
(04:16):
margins and people expect just because it's been so low
for so long. And also they're doing you know, a
lot in terms of capital efficiency and unwinding all of
their cross shareholdings and and that's releasing capital. I think
they're in a nice phase. It's just that you know
that the prices are reflecting some of that positivity.
Speaker 1 (04:37):
So I'd like to take a step back and kind
of I know our audience would love to hear how
you became a portfolio manager.
Speaker 3 (04:43):
That's going way back, so I I mean I I
was studying applied mathematics at Cambridge University in the UK,
and I could have gone down that route. There's a
lot of lots to be said for academia, but I
you know, the short story is that I started getting
interested in decision making under uncertainty, and that involved an
(05:06):
interest in investing and an interest in games which had
that characteristic like you know, you think think poker, and
you know, that's that's what kind of led me into
the investment industry. I find I found it interesting from
the perspective of everyone suited to something. Right, your character
(05:26):
and you know, your aptitude is typically suited to doing
something in the world. You know, that's how we've evolved
as humans. We all have some role to play, and
mine was I found I had an aptitude for decision
making in the situations where there's a lot of uncertainty.
And you know it if you think about game selection,
(05:50):
which we think about a lot in the poker world
and in the investing world as well, I think investing
as a whole is sensible game selection because what it does,
given there's so much statisticity and so much noise in
the business, and the noise to skill ratio is actually
quite high. It attracts in a lot of in the
poker world, they call them fish people who who you know,
(06:11):
play the game but really, you know, really shouldn't be
playing the game. They don't really have an aptitude for it,
but they're attracted to it because they can win. They
can win for you know, two three sessions. In investing,
you can win for years without having real skill and
edge and therefore it's a game that anyone feels they
can play. So you drawing a lot of people and
(06:33):
if you can do it well that there is sustainable
edge you can you can develop. So I was attracted,
you know, for I guess for those two reasons.
Speaker 1 (06:41):
It's great. And so you're at Orbis, you know, can
you tell us a little bit more about the investment
philosophy of the firm?
Speaker 3 (06:50):
So Orbis I've been I've been at the firm since
two thousand and seven. What what I thought? I found
fascinating when I was thinking about, you know, where in
the investment world do you go? One thing that struck
me was what is the enduring What is the enduring
way to gain edge in investment management? And for me,
(07:10):
you know, given we are owning pieces of businesses, it's
obviously assessing the value of what you earn. Right that
there's there's all these there's a plethora that's of different
styles that have developed within the investment industry. There's the
quant sidne and you know, the quality and this growth
and the value and all these different flavors of investment.
(07:30):
For me, that there's only really one signal. There's only
really one signal, and that is understanding that the value
of a business and trying to buy at a big
discount to that, and that should be enduring as long
as as prices move away from intrinsic value. And that's
really the core of Orbis's philosophy and what drew me
(07:51):
to the firm. You know, it's interesting from the sense
I was talking about game selection. Given the industry invests
attracts a lot of or has the potential to attract
a lot of people who really don't have sustainable edge,
you would think that there would be quite a large
cohort of management firms and people within the industry that
have very long term superior track records. And as I
(08:14):
was digging, you know, around in the data back in
two thousand and six when I was thinking about where
I should be in this industry, it's really quite hard
to find examples of sustainable long term excess performance. There
aren't that many, which is fascinating, and I think there's
a whole host of reasons for that, but one of
(08:36):
the ones that stood out was Orbis, and it goes
right back to nineteen seventy three. So Alan Gray founded
Alan Gray Limited, nineteen seventy three, and then the sister
firm was Orbis, which was started in nineteen ninety and
we run about five or six different concentrated long only
and hedge strategies and I've generated on average between five
(09:00):
and ten percent excess return over the various benchmarks. And
if you think about, you know, what is the power
what's you know, what gets us to work every day?
What's the power of that? Well, it's Warren Buffett's sort
of time compounding. Most of his wealth has generated after
the retirement age because he stays in the game for
a long period of time and excess returns. And Alan
(09:22):
Gray Limited, you know, the original firm assist company to Orbis,
has been investing for fifty two years. And if you
just sort of stuck the equity as premium, you just
got the equity's premium plus the risk free rate for
fifty years. You know, you're extraordinarily wealthy. If you can
do eight or nine percent above that, it's just incredible
(09:43):
the wealth and the way the wealth can compound. So
that struck me and that was one of the reasons
I joined. And we've been doing the same thing since.
So I'm responsible for the International Strategy that started in
two thousand and nine, which is a four five billion
strategy outside of the US. And I also I am
a portfolio manager on the Global strategy, which was one
(10:04):
of the flagship strategies for August we started in nineteen ninety.
Speaker 1 (10:09):
So how does the process work on the international equity strategy,
you know, applying that philosophy.
Speaker 3 (10:15):
Well, it's all very intrinsic value, you know, focused what
we spend almost all our time trying to figure out
the value of businesses. I think that's the enduring signal
in all of the noise, So you spend your time
doing things that really count. I would say there's a
couple of characteristics of the firm that may be a
(10:37):
bit differentiated and worth talking about. One is very very
independent decision making, very independent decision making, and that that
actually varies across the investment industry. There's this idea of
wisdom of the crowds, right, You've heard and a lot
of academic, literal and wisdom of the crowds. Crowds make
good decisions, do they not. There's a wisdom there. I
(10:59):
think what that is based on the wisdom of the
crowds is you imagine your jar of candies, your child sweets,
and everybody's guessing how many candies are in the jar,
and the average of all this guess is actually quite good.
That's the wisdom of the crowds. The key thing with
(11:19):
you know that that, you know, the success of the
wisdom of the crowds is independent decision making. Everyone is
guessing independently of each other, and some people are way off,
some people are closer, but on average it comes out
quite good. If you had a circle of people around
the jar and they're all chatting about how many candies
are in the jar, and there's a you know, there's
(11:39):
a few dominant voices in there, and they, you know, they,
and some people are just referring to their wisdom, and
if you had then then I think there's been I
don't know if there's been studies done on this, but
I suspect that would be a horrible outcome versus the
very independent decision making. So the market is much like
the second case. Everyone's standing around the jar and talking
about it, and that's why you get such big distortions
(12:00):
in markets. What we try to do internally is be very,
very independent and deliberate about that as to how we
make decisions. So the analysis is very independently driven and
the views are independently driven, and then we have then
we have a sort of a method to sense check that.
So that's one kind of thing that runs through the
firm independent decision making. The second is accountability. Everyone's accountable
(12:25):
for their independent decisions. I think one of the mistakes
the industry makes, generally speaking, is you take great stock
pickers who are exceptional at finding those unique opportunities, and
you promote them into managing a portfolio, and then those
key insights that they've had over the years of picking
one or two stocks a year. You know, Warren Buffett,
(12:46):
you only swing at the fat pitches. You know, really
there really is something to that gets diluted by having
to look at the other forty stocks in the portfolio,
and then you know, that's where things start to go wrong.
So what we really try to do is emphasize, you know,
we value we value one or two stock picks a year.
So our analysts are focused in these niches around the world,
(13:07):
and all they want, all they've got to do is
find one to have one of two great insights, one
or two ideas and then they build a paper portfolio
of those best ideas, and then you track that performance
over time, so you get an idea of you know,
what people are good at, what people are not so
good at. You get a great signaling mechanism to the
portfolio managers as to which share should be in the portfolio.
So that's you know, the individual accountability around that's really important.
(13:30):
And the third thing is alignment. You need alignment within
the firm. We all need to be pulling in the
same direction. But critically you need alignment with clients because
another one of the problems with this industry, and there
are many and I keep listing them, is that the
actual return that a manager delivers is very rarely what
the client gets because the client is trading in and
(13:51):
out of the funds and they're buying at the top
of the selling at the bottom, and you see it
over and over again. So but if you can drive
alignment with your clients to the extent that the dollar
weighted return of the client experience is the same or
better than the actual you know, the line on the
chart that you're showing in terms of the fund return,
that's absolutely critical. But those are the kind of the key,
(14:11):
key elements of our structure.
Speaker 1 (14:13):
So if we go back to the intrinsic value, are
there metrics that help drive that?
Speaker 3 (14:18):
Ultimately, what are you doing when you invest? What is
your objective? What's your utility function? The utility function has
to be to make money. I'm afraid that's everyone's utility function.
And so it's the cash. The cash that that business
can generate is the key. And you know, some businesses
(14:40):
are throwing all of that cash that they generate back
into the business for growth, but ultimately the reason they're
doing that is that they can generate cash off a
bigger base in the future. So if you want to
just cut through the chase, what is the was the
core to intrinsic values, the cash that you're going to
get out of that business over the long term versus
you know, obviously the price you pay and then and
(15:00):
so that's the high level, and then you're going down.
There's lots of layers below that in terms of, you know,
what are they doing with the cash today, how fast
are they going to grow, what's the distribution of outcomes
around that, how uncertain is the.
Speaker 2 (15:12):
You know, just a follow up question on this. Usually
I don't know, if you screen a large amount of
companies to try to identify first what could be the
set of opportunities. I mean, are you using a more
specific valuation metric, either price to book or EV to
a BIDA or P And do you related to either
(15:32):
return on equity or operating margin to better guide you
towards what could be a good investment opportunity which is
unfairly valued.
Speaker 3 (15:46):
So all those metrics are critical, all of them. You know,
the return on capital business generate is absolutely critical to
the value of that business, the growth rate critical, and
then what do you pay? So we try to put
all the pieces together and get a view as to
what the business is worth holistically. Now, when it comes
(16:07):
to screening, we have a very dedicated quant group and
they are doing a lot of good work on which
areas of the market could market could be dislocated. And
the way we do that is we run our own
proprietary internal models. They're effectively fancy dividend discount models, so
cash flow based models, where we run that on every
(16:27):
stock in the world, and then we monitor and we see, Okay,
what's looking more interesting and what's looking less interesting. That's helpful,
but ultimately there's a lot of noise in it, right
because the model you know, uses the past, doesn't know
the future right come in. But you know, on top
of that, we it's absolutely critical to have a big
(16:49):
investment team. So we're a forty billion dollar asset manager,
which isn't that big in today's you know, today's inflating money.
And and so the size of our vest ten is
quite large versus the the asset base. But we think
it's absolutely critical because we're so geared to our performance.
We're so geared at delivering returns for clients that are
(17:10):
above the averages that you need to combine both breadth
and depth. And so we have a big analyst team
to cover the world, but we also have a lot
of depth within each area. So when it comes to screening,
each analyst's just looking at Japanese financials or they're just
looking at European industrials, they have a small, smaller universe,
(17:32):
a universe they can manage the universe that they can
understand what the top twenty company is, what they're worth,
and then and therefore you are screening that whole universe.
Screening is important, but it's a little bit less so
because you know, you have that deep knowledge within each section.
Speaker 2 (17:45):
Coming back towards the Japanese equity market, so, I mean
a lot of investors think they are definitely structural change
happening in the economy, but also in terms of corpor
right governance, where potentially companies management are much more shareholder
friendly than they used to be. I monitored the position
(18:07):
of your portfolio, and you were heavily invested in Japanese
equities at the beginning of the year. You have reduced
your position, which is quite a wise move because I
would say since about March April, the Japanese market has
not done anything spectacular. So do you think, as you
were mentioning earlier, that potentially the Japanese market, despite all
(18:32):
these good news, this is already priced in. Or do
you think that, in fact, all those structural change could
really carry this market for many years to go.
Speaker 3 (18:43):
I'm more in the latter. Despite the fact that our
position is reduced, I think we've been investing in Japan
with great hope and expectation that corporate governance was going
to improve since about nineteen ninety eight, and every year
our team go to Japan and they talk to management
teams and they get the same kind of blank stairs
(19:03):
when we talk about you know, better capital management ETCA.
Over the last five years, that's dramatically change. We go
to Japan and we we're talking the same language, and
our team, our Japan specialist team. Twice a year, we've
done a lot of presentations to management and you know,
(19:26):
the management teams are listening, stuff happening, they're acting, and
that's a big deal. It's a big deal for market
market that has become so capital inefficient over such a
long period of time. So I think it is enduring,
and I think there is that there's there's a there's
a momentum to it, just like there was a stagnation
to the previous you know, the way it was. It's
(19:49):
a very sort of consensus driven society, so the way
it was was very sticky. But as soon as it
starts to change, everyone starts to change together. And that's
exactly what we're seeing. What the problem is that the
yen is so cheap now that the the exporters we
think over earning and so a lot of those companies
(20:14):
on a normalized earnings basis don't look as interesting to us,
and they are the big they're the big stocks in
the market, you know, the the big liquid businesses. So
the opportunity today in our view sits in the MidCap
domestic companies that are suffering under this very very weak end.
So if you can find MidCap Japanese businesses where you know,
(20:35):
you have this nice corporate governance story we like, for example,
the drug stores in Japan, where there's this kind of
the more interesting things going on on the consolidation side,
and and you know, and and on a couple of
management side. If you can find those businesses, domestic businesses,
they're cheap, and you have the yen upside as well,
(20:56):
because you know, they they're true yen assets, so you
can get that, you know, the uplift from the end,
which we think will eventually appreciate just because it's it's
so undervalued at this point. That's where the opportunity is.
The trouble is you have to access the liquidity and
you know, so you have to buy baskets for these companies.
(21:18):
It's just a bit more tricky for a very sort
of focus bottom up investor.
Speaker 2 (21:23):
In terms of implementation. Yeah, so now maybe a bit
a bit more macro questions have been given that all
the market focuses around the potential tariff policies of Donald Trump.
I mean, I don't know if you. I know you
are more bottom up rather than top down. But do
(21:43):
you think that there are international markets which may be
better positions than others and that you would favor investing
given that some of them could be definitely at risk
of those trade policies are coming from the US.
Speaker 3 (22:02):
I think it's difficult to invest on that basis. On
the one hand, Trump is quite a predictable character, and
he's been saying the same thing since he was twenty
two years old. You know what he thinks by now,
but you don't know exactly how he's going to implement
(22:24):
and you don't know to what degree each let's say
tariff that is put on that will be put on,
You don't know you know how enduring they'll be. And
in terms of the intrinsic value of a business, you know,
that's ten years of free cash flow, it's not six
months based on a tariff policy. And the other thing
(22:46):
we know about Trump is he's quite a transactional person.
And so you know, if you can get a good
deal from a country or extract something that he feels, okay,
the USA has gained in this transaction, the tariffs, you know,
might be fleeting on whichever country they're dealing with, So
it is just a difficult environment. From that perspective, I
(23:09):
think what one thing you can say is we are
on a trend now. It looks like a very clear
trend towards a much more protectionist world and a breakdown
of the global world order of as we've known it
for the last thirty forty years. And that you know,
you can see that in the USA, but you can
also see it all the way across Europe as well
(23:30):
and in various other countries. I think it's a little
bit of a function of an aging population. As we age,
you know, just very very simplistically, we've become more conservative
and adverse to change, and you know, I think that's
we're seeing that playing out in politics all around the world.
And so I worry about Europe in terms of the
(23:52):
potential for the the EU too. I don't want to
say break up. There's a protect there. There's in terms
of people becoming more nationalistic. I think they'll be more
global conflict just because the global world order has been
in place for so long and when you have a
(24:16):
very strong, you know, huge power that the US has been,
it just kept everything, you know, it kept everything quiet
as soon as you start as soon as that starts
breaking down. In a period where individual countries have not
built up their defense capability because it's just atrophied over
the last twenty thirty years, I think that you're going
(24:38):
to see a lot of friction across borders as well.
So those will be the macro things I would be
concerned about in terms of the new policies of the
US administration. The biggest thing I worry about is the
you know, the efficiency drive from from elon Musk and
because that that could be game changing if they can
execute on on on getting their their their fists in order,
(25:02):
because that's that looks like an inevitable freight train for
a long time in terms of the deteriorating fiscal position
in the US. So it'll be interesting to observe how
that evolves.
Speaker 2 (25:14):
Okay, Now a question which is more about process, which
is your selling discipline? I mean, which is I think
is very relevant when you have a value based investment strategy.
I mean, when do you decide to exceed a position?
Is it just because you think it's just fairly valued,
(25:36):
you were right, and so you take your gain or
I know that some people tend to run with their winners.
And also when sometimes I mean there's especially in Europe
for example, there are a lot of investment case which
are value traps. Sometimes some are our value traps, others
are not. So some companies initially may lose or your
(25:58):
investment may lose money, but you may be right over
the medium to long term. So also how do you
react to when one of your investments is not turning
out right? I mean, how often do you reconsider what
do you do to make sure that you are on
the right track or that potentially it could be a
value trap and it's better to sell with a ten
(26:20):
or fifteen percent loss rather than a fifty percent one.
So how do you approach those both goals of on
the on the positive and negative side.
Speaker 3 (26:31):
So that I mean, there's all great questions. I mean,
the very glib, high level answer is, as you would expect,
price versus intrinsic value is key. So if you know,
you realize you're intrinsic value, then then the position will
But there's a second element of that is that the
market environment might be such that there's a lot of
(26:52):
things that traded a big discount. You know, if you
look at twenty twenty one, very you knowaningful discounts in
certain areas of the market, in which case we might
sail before something gets to intrinsic value because we can
buy something else at a much deeper discount. So that's
the very high level answer. Now your your point is
much more kind of in the weeds and intricate in
(27:13):
the sense that what if you're wrong, what you know?
How do you what if you're intrinsic value is wrong?
And so we I think that we're very conscious of
the biggest trap you can get caught in this business
is getting dogmatic on a position and what you think
of business is worth and you keep doubling, and you
keep doubling, you keep things deteriorating things, and that's, you know,
(27:34):
such a big trap. So what we we have a
few things in place for that. One is we review
positions if they've been in the portfolio and they've not worked,
or they've been in a long time and they've not
really done very much, or something's changed in the thesis.
We have set points. We review But the bigger and
most interesting piece is probably to talk about our decision
analytics team. I talked about individual accountability running through the firm,
(27:57):
and we've obsessed about collecting data on every person's decisions
right back to sort of the early nineties, and we
got this big database of everyone's decision making over time,
and we have a specific team called the decision Analytics team,
and they take all that data and they pick it
apart and they figure out what it is you're doing wrong,
and what it is you're doing very well, and how
you can improve and how you can change. And we
(28:19):
look at things common to the firm, to the funds,
you look at things that are very specific to individuals,
and we try and tailor that analysis. And one of
this the elements is you know, selling decisions or you know,
getting stuck in. So one of the common comments are
common bias. You you you're sitting in a position and
a losing position, and you're just not doing anything. It's
(28:41):
almost like you're frozen. And then we do see that
across certain individuals in the firm, and the data can
pull that out and just hold it up to you
and say, you know, based on what you currently hold
these stocks fit that pattern, and you get you'll get
a nut, they'll call you up. But you also get
sort of digital nudges within your platform, within through email
(29:01):
saying I have a think about this. You know, maybe
you should be doing this so x or y, maybe
you should be reviewing it.
Speaker 2 (29:07):
You know.
Speaker 3 (29:07):
Really what it's a one good way is start from scratch.
If you're going to start from scratch today, where do
you own this or not?
Speaker 2 (29:14):
You know?
Speaker 3 (29:14):
I know, we know you own it? Would you own
it if you're just building a portfolio? So a little
mental exercises like that helps simple stuff. But that's been
really helpful to have the objective data driven team come
in and and help us to understand, you know, what
we could do better in that regard.
Speaker 2 (29:34):
I mean, one of my last questions is your often
has done tremendously wells on the short and medium and
long term as well. I mean, what do you think
of all the market has missed on all these market
opportunities that you have been able to identify. Do you
think it was really the work on the valuation that
(29:54):
you are better at really estimating what is an interesting
value of a company? Or do you think because market
is paying too much attention to the noise, or so
it's I think what was a very good comment about
Portfralio manager sometime coming from being an industry analyst with
(30:16):
very great expertise on a limited set of stocks, but
then when you have to manage a much bigger set
it becomes a much bigger challenge. Or what do you
think is really behind your the result of your success.
Speaker 3 (30:31):
I think a part of it is, you know so
that latter, well, let me hit that first. It's difficult.
The industry is so difficult because you could have the
most skilled person looking at Japanese financials and you could
reward them incredibly well for a wonderful job they're doing.
(30:51):
And because that is the secret source having people do that,
that's the secret source of any manager having that expertise
and someone with an incredible judgment finding those few ideas
a year. But we're all people. We've got to manage people,
and people have career aspirations and they don't want to
be looking at one sector for thirty years, and so
(31:14):
you have to manage that balance. But what we think
we've done quite well is sort of is emphasized internally
and externally just how critical that is, that is the
engine of our success. Having key people with the stock
pickers across our different team. That's number one. Number two,
I think sometimes the market goes absolutely bonkers, right, We've
seen the period like it's the people standing around the
(31:37):
candy jar and convincing one or two people convincing everybody
else that there's only ten candies in the jar when
there's a thousand or whatever. It's just they get so
inefficiencies get so out of whack at certain periods. And
we saw that of course in the late eighties, we
saw it in the mid seventies, we've seen in the
(31:58):
late nineties. In twenty twenty one was the biggest we've
ever seen. We've got data on this. You can see
the dislocations were absolutely immense. So having a portfolio that's
able to move capital efficiently and effectively to those most
dislocated areas in a really kind of dispassionate way, I
think about it as you know, the market could be
a surface, and if the surface is completely flat and perfect,
(32:19):
it's efficient. But you know, often these big crevices emerge
and they're the inefficiencies and big undervaluations, and the portfolio
has to be like water. It has to just flow
into the crevices with no friction. And so we've been
quite good at that getting the portfolio the right areas.
And then it's at other times normal times, it's just
(32:42):
it's just the being very, very disciplined and mechanical about
what we're doing and finding those sort of rare inefficiencies
which comes from the specialists and comes from having the
right people.
Speaker 1 (32:54):
Now you had mentioned your decision analytics team, and so
kind of brought up in my mind. Do you have
a you know, as part of the process, a risk
management aspect of you know, trying to limit risk for
the portfolio. Is that part of it in terms of
decision making?
Speaker 3 (33:11):
Yes, So I would say there's three things that go
into a position. Size one would be discount to intrinsic value,
the big one, right, Two would be the distribution of
outcomes around an intrinsic value. You know, some some some
companies you have very high confidence in how the future
(33:34):
is going to look as high as you possibly can
have in a sort of uncertain world, and other companies
you've got a massive range of outcomes. Massive you are,
and that gives you an intrinsic value range. It's huge,
and you know, if the price is at the bottom
of that, that's great, but you might not put a
big position behind it because just the distribution of outcomes
(33:54):
are so wide. And the third is, which is to
your point, correlations in the polio. So what we don't want,
which quite often happens in markets, is inefficiencies will gather
all in one area. We don't want to just put
all our capital in that one area, even if we're
very confident. So we have a risk team which is
sort of four or five people, and they analyze the market,
(34:17):
they analyze the portfolio, and they look for correlations which
are obvious, you know, the kind of sector and commodity
and interest rates sort of stuff, but also ones that
aren't obvious, because those are the ones that bite you.
If we're building and we're using some AI in that
in terms of trying to identify I mean, when we
think about AI is really I'm really talking about large
(34:39):
language models because AI has been around for a long time,
but specifically the innovation now is applying that to language
and so you can apply that in your business to
you know, what what what things that aren't captured in
your typical quant model. Can you find in ten k's
and your reports you know that are common to these
different companies that you hold, and then bring that to
(35:01):
a risk model for example. So those are the sorts
of things they.
Speaker 2 (35:04):
Look at, maybe in terms of sectors. Coming back to
investment strategy and some of your earlier comments about the
generation of cash and how potentially is the market value it.
Do you have any preference when investing in sectors? I mean,
do you think that there are sectors which are definitely
(35:25):
high grows, very high return on capital employed because there
are some really mootes within those sectors which favor I
mean the returns. So do you have any preference or
are you very agnostic about Okay, I'm looking everywhere because
all investment opportunities can happen in any sector.
Speaker 3 (35:48):
So very much the latter I mean preferences are dangerous
in my opinion. Okay, you end up biasing yourself towards
certain aspect, and I think that can color or what
should be a holistic view of intrinsic value of a business.
And you know, the decision analytics team help us a
(36:11):
little bit with that in terms of our own individual
preferences and biases. Now, it is true that certain people
are better at certain things. So you can always think
of like someone who is more oriented towards growth companies,
as you know, if they're doing it well, they are
genuinely better at being a futurist trying to look around
the corner, really thinking deeply about what the future is
(36:33):
going to look like. And there are other people that
an'swer good at that, and so that's okay, that's okay
to have a preference one way or the other because
it's around what you are good at, what your superpower is,
and we try to structure the firm to allow people
to leverage their superpower as much as possible, but holistically
across everybody in the firm. We should not be pushed
(36:55):
one way or the other towards certain types of companies.
It should be should be driven by what you know,
holistically what a business is worth. And so that's you
know how I would think about it.
Speaker 1 (37:08):
Okay, great, So we just have one more question for
you before we let you go. More of a I
guess reflective question. You know, I know you mentioned Warren
Buffett at the beginning of this, you know, as a
good investor. I was just curious if you had, you know,
any there are any investors at the start of your
career you wanted to emulate.
Speaker 3 (37:31):
So in the start of my career, you know, you
go and you read everything you can. That's what I
don't think I've read an investment book for ten years,
but I read them all early and I felt like
I gathered as much as I could possibly get from
the different people. And you know what what did strike
me was people all had different ways of going about it.
(37:53):
You know, Warren Buffett was very different to Peter Lynch,
very different to George Soros and and I love that
right because you know you can you can try to
pick bits from each of them and each thing works
better at different times and different market environments. The one
person I would would highlight who is won't be well known,
(38:17):
but he started at Fidelity in the in the sixties
with with I think with Jerry's is it Jerry side?
Is that the guy's name and Peter Lynch and all
of that cohort so with a very very strong group
and Fidelity in the sixties was Alan Gray who was
the founder of the Orbits. And Alan Gray and the
(38:39):
reason I would choose him because he was exceptional, absolutely exceptional,
and he was so under the radar because he was very,
very private about everything he did, to the point where
he believed that if he talked publicly about things, positions,
or whatever, it would impact his decision making and there
(39:00):
for impact client returns. He was so obsessed with, you know,
generating the best return he possibly could four clients that
he would almost his privacy came as a result of that.
He would be very you know, wouldn't He didn't like
the active way of going investing. But he was exceptional
and I got to work with him directly here for
(39:21):
quite a few years before he died, and he was
right up to the end. He was passionate about stock picking, obsessive.
It was just in his blood. And he was so
flexible in the way he invested. It was bottom up, intrinsic,
value driven, but he could go anywhere deep deep value,
(39:42):
high high growth. He could. You know, he would sometimes
come into my office and show me all of these charts.
He was a chartist technician, you know, he was a
macro guy. He could do currencies. It was just his
mind was absolutely phenomenal. And I learned, you know, in
a men to amount from him Oh.
Speaker 1 (40:02):
That's great. This is a great discussion. Graham, thank you
again for joining us.
Speaker 3 (40:06):
Thank you that much fun.
Speaker 1 (40:08):
And Laurent, thank you for serving as my co host today.
All welcome until our next episode. This is David Cohne
with Inside Active
Speaker 2 (40:18):
M
Host
Gina Martin Adams
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