June 24, 2025 • 34 mins
Despite a recent rally, European equities may be overly complacent about trade-war risks. In this episode of Inside Active, host David Cohne, mutual-fund and active-management analyst with Bloomberg Intelligence, along with co-host Laurent Douillet, BI’s senior equity strategist, spoke with Danielle Menichella, portfolio manager and senior research analyst at Sands Capital and sub-adviser to the Touchstone Sands Capital International Growth Equity Fund. They discussed why the firm employs a business owner’s mindset to public equity investing, as well as the six investment criteria to select businesses. They also spoke about seeking a balance between high growth and mature businesses, determining relative valuations and which countries the team is currently seeing opportunities. Recorded on May 28.
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Speaker 1 (00:14):
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 cost is Laurent Dulier, Senior equity strategist at
Bloomberg Intelligence. Laurent, thanks for joining me today.
Speaker 2 (00:35):
Welcome.
Speaker 1 (00:37):
So last week you published a note on Q one
earnings in Europe based on earnings calls, what was the
sentiment like with respect to the different sectors.
Speaker 2 (00:47):
Yeah, so, just for our listener, in terms of context,
we do track quarterly earnings results for the past five
years and what is new is that over the past
twelfth to eighteen month in Europe we have introduced AI
model which tracks the frequency and the sentiment towards specific
(01:07):
investment themes. And what is quite interesting in the last
reporting season is two big trends. The first one we
have seen a fivefold increase in the frequency for tariff
related commons and also the collapse in sentiment compared to
the previous two quarters. And now in terms of sentiment,
(01:28):
we are towards the level of twenty eighteen in the
midst of the first US China trade war. And the
second signal that we saw is we have seen a
significant plunge in the sentiment around capital expenditures in the
energy and industrial sector in Europe. We are really at
(01:50):
the lowest since twenty eighteen as well, and I think
it shows that the uncertainty and the stop and go
policy of Donald Trump on tariff do really an impact
on the actwards spending of companies. So in conclusion, we
still think that the European equity market may be too
complacent following its recentrality, and that it may be overlooking
(02:13):
some of the risks associated to the trade war.
Speaker 3 (02:17):
Great speaking of European markets and the international markets in general,
I think it's a great time to bring on our guests.
Danielle Menechela is a portfolio manager and senior research analyst
at Scance Capital, including the Scance Capital International Growth Strategy
and subadvisor to the Touchstone Scance Capital International Growth Equity Fund. Danielle,
thank you so much for joining us.
Speaker 4 (02:38):
Thank you for having me. It's great to meet.
Speaker 1 (02:40):
You, and more this morning before we dive into your strategy.
We'd love to hear your thoughts on you know, what
you kind of learned through Q one earnings in Europe?
Were you seeing you know, similar sentiment at first.
Speaker 5 (02:56):
Sure, we've seen and we've heard a lot more certainty
as it relates to tariffs, as it relates to sentiment,
continued uncertainty as it relates to China and geopolitical aspects.
But I would just point out that the European market
in a broad sense, may have a lot of exposure
(03:18):
to businesses that are cyclical like this and that could
be impacted by this uncertainty. But there are pockets of
businesses and pockets of areas of growth that aren't seeing
as much of that uncertainty. So I would just say
that this is a time in particular when we need
to be extra focused on choosing the best businesses, the
(03:40):
ones that that have things like competitive modes and the
ability to grow in our innovative regardless of what's happening
in the rest of the world.
Speaker 1 (03:49):
Great, So let's talk about SANS Capital. Is there a
firm wide investment philosophy?
Speaker 5 (03:55):
Yes, So at SANS Capital we do one thing. We
invest in leading growth businesses globally our firm was founded
over thirty years ago in nineteen ninety two. Our approach
is simply described as having a business owner's mindset to.
Speaker 4 (04:11):
Public equity invest in investing.
Speaker 5 (04:14):
We do not want to be thought of as stock traders,
but we do want to be thought of as business owners.
Speaker 4 (04:19):
And how do we do that.
Speaker 5 (04:21):
We do bottom up investing by applying deep, fundamental business
focused research with an aim to identify and select businesses
with the capacity to generate sustainable, above average earnings growth
that beat our investment criteria. And then we own those
businesses and concentrated conviction weighted portfolios over a.
Speaker 4 (04:42):
Long time horizon.
Speaker 5 (04:43):
And we start with growth because it's been our observation
that over the long run, earning's growth is the dominant
driver of stock market returns. And while valuation shifts create
volatility like what we were talking about earlier, and also
could be paid for in the short term, they tend
to have a limited impact over the long term. We
(05:04):
also believe that markets systematically underappreciate the compounding impact of
both nonlinear and long duration growth businesses, and this differentiation,
I would say of our investment philosophy enables investors to
benefit from the compounding of that growth, that multiplier effect
(05:25):
over a longer time period than others consider. And I
mentioned growth already. But at SANDS, we choose businesses to
own by rigorously applying our sixth investment criteria. It's the
same criteria that we've used since Sam's was founded and
the same that we use across all of our public strategies.
So growth is our first criteria. We look for businesses
(05:47):
that have sustainable, above average earnings growth. The companies also
need to meet the other five criteria. So Number two
leadership position in a promising business space, so if a
space with under lying attractive economics. And this is because
the disproportionate amount of the reward of any industry accrues
(06:08):
to the leaders. But that only matters if the leaders
can achieve attractive returns. Number three significant competitive advantage deep
motes allow sustainable leadership and growth. Number four clear mission,
strong management, team, value added focus. Number five financial strength
of healthy balance sheets, and number six rational valuation relative
(06:32):
to the market and business prospects. Great.
Speaker 1 (06:36):
So we went through the philosophy. Can you if we
kind of zero in on the international growth strategy, can
you walk us through the process of stock selection sure sure.
Speaker 5 (06:47):
So International growth is led by a three person portfolio
management team that includes pms from our two flagship global strategies.
The portfolio owns about thirty to thirty five businesses. The
recommendations for what we own comes from our investment team
of about twenty analysts across industries, and our top ten
(07:09):
weights comprise about forty five percent of the portfolio, so
on average, our holding size is about three percent. And
what we're doing in this portfolio is we're looking to
have a balance of higher growth, higher valuation businesses, so
businesses with a greater cone of outcomes but potentially higher upside,
(07:30):
and then offset that with a more mature group of
classic growers. So while you'll notice exposure to some large
secular trends within our portfolio, we're also cognizant of having
too much exposure to any singular trend and therefore aim
to get a diversity of earnings drivers across those thirty
(07:50):
to thirty five names. So, for example, you'll see names
that include things as diverse as semiconductor equipment, e commerce,
extremely high end luxury, discounted consumer retail, live and stream
music and events, and emerging market banks. And that's just
to name a few of the things we have exposure to.
(08:11):
So the result is that we build a high conviction,
highly concentrated portfolio that looks meaningfully different from the benchmark.
And I think that's really important when you're investing internationally
international indices, especially developed ones. They're large, they're broad, and perception,
(08:33):
perhaps rightfully so, is that they're filled with mediocre, slow
growing or even declining companies. And for the most part,
that may be true, but we would argue if you're patient,
if you go deep, you know where to look. In
these markets, you can find a top tier of businesses
that are every bit as high quality and innovative as
(08:54):
anywhere in the world, and we aim to build a
portfolio of those gems.
Speaker 1 (08:59):
Makes sense if we go back to the philosophy a
little bit at the end, you mentioned rational valuation. What
measures you know, a particular are you looking at.
Speaker 5 (09:10):
Yeah, I'm glad you coned in on the rational valuation
because that's what it really is. It's we're not looking
to find great value, or we're not looking to get
a great deal because a company may or may not
continue to exist.
Speaker 4 (09:26):
What we're looking for is rational valuation based on.
Speaker 5 (09:30):
How large we believe the business can be over a
five year period, so how much can it grow in
that time. And this begins with the strict adherence to
the six criteria, so quantitative qualitative assessments, consideration of the market,
the competitive landscape, management, long term strategy, potential, ability to
cause disruption or to be disrupted.
Speaker 4 (09:52):
And then risks.
Speaker 5 (09:53):
So it's really a combination of analytical rigor and creative thinking.
And then we discuss and we debate. We have a
really collaborative research process at SANDS. We have a team
that has a lot of years of different kinds of experiences,
you know, different markets, different different sectors, different countries, exposures,
(10:15):
and so we put all of those people together to
pride ourselves on a culture of meaningful discourse, you know,
high trust, share context. And so when we think about
a rational valuation we're having these debates. We want to
think about terms. We want to think about it in
terms of both absolute and relative terms. We want to
(10:35):
bring in the shared experiences of the team. When it
comes to risk. We want to focus on the long term,
what that valuation could be in five years time, and
what the is the growth rate that would support that valuation.
And you know, don't get me wrong, I keep saying
five years, but our analysts and our PM teams are
really thinking more about in terms.
Speaker 4 (10:57):
Of ten or more years.
Speaker 5 (10:58):
But the actual quantitative valuation is based on fibers.
Speaker 2 (11:06):
Okay, DANIELI, And now I'm going to switch gear a
little bit and ask you some questions on some of
the specific sectors where potentially you can find those growth opportunities.
So the first one, your strategy is massively overweight TMT.
So is it really a bet on the rollout of
(11:27):
AI or is it just a coincidence of many growth
opportunities existing and being concentrated in both sectors.
Speaker 5 (11:37):
Okay, So I'm going to show my age here because
when you say TMT, I want to say what no,
because it comes to mind as like cell phone plans
and fixed line service providers and dial up internet companies.
But I understand what you're asking, and you're right in
terms of waiting. As of March thirty first, approximately twenty
(11:57):
percent of our portfolio businesses or classes by it is
it versus twelve percent for the benchmark, which is the
ms AQUI XUS index, by the way, and approximately eighteen
percent are classified as communications services versus the BENCHMARKT six percent.
So yes, large overweight, but I wouldn't call that a
(12:17):
bet on their rollout of AI per se. I mean,
we're strong believers in AI and the demand for more
and greater compute, but this portfolio is not built with
That is the only factor. I keep saying diversity of
earnings drivers, and you have many different factors driving the
growth in IT and communications. So thinking of the businesses
(12:40):
that we own the fall into TMT, they actually benefit
from quite different secular changes. For example, the retail revolution
that is e commerce. The pandemic turbocharged e commerce adoption,
but it still accounts for less than thirty percent of
total global retail sales. So we own several of the
(13:01):
global leaders in the e commerce space in different regions.
We also own one of the key providers of border
and digital payment services. Another trend would be legacy process improvements.
So growth investors seek to benefit from change across industries.
Digitalization and new technologies are upending legacy processes with products
(13:24):
and services that are better, cheaper, faster than the status quo.
Factory automation and robotics, computer aided design, digital twins are
examples of this. We own several businesses in Japan and
Europe that do that. And then we have the future
of computing, perhaps the most obvious for AI. Demand for
computing powers accelerating far faster than most appreciate in our view,
(13:49):
with new use cases created, this demand's going to require
new and more efficient ways to access, store, manipulate, process
data and enabling technologies becoming increasingly complex require higher manufacturing intensity,
this resulting in pricing power for select businesses positioned a
key choke points in the semiconductor value chain, so we
(14:11):
own a view of those, and then probably worth calling
out the truly diverse businesses in what we classify as
as our communications holdings. One of them is a large
e commerce slash gaining business, but we also have exposure
to the rights for one of the fastest growing viewerships
and sports with strong potential for modernization. And we have
(14:35):
some businesses exposed to streaming and watching live music and
other live events.
Speaker 2 (14:41):
Okay, so it may be more media oriented rather than
telecom oriented. One of also, when I look at your strategy,
it seems to be underweight elsecare, which is often viewed
as a growth sector and now it is different at
a reasonable valuation. Do you think that there are reasons
(15:06):
to be conscious or underweight this sector at this point
in time, or do you think that the policy of
the Trump administration, which seems to be quite a stein
towards the sector, may be an impediment to invest in it.
Speaker 5 (15:23):
Yeah, I think there are reasons why we are underweight.
Ten to fifteen years ago, healthcare sector was a rich
opportunity set for finding growth businesses that matter criteria, but
this really hasn't been the case in recent years. Although
we do have some exposure. We own a CDMO business,
a glass tools company that sells to pharmaceutical companies. We've
(15:47):
recently purchased an innovative software hardware razor razor plate model
for radiologists. So it is possible to find special businesses
within healthcare, but we don't expect this to be a
material sector for us going forward. And part of this
is due to the fact that most of the value creation,
(16:08):
especially within the innovative areas of therapeutics and diagnostics, is
occurring while the businesses are still private. Additionally, healthcare businesses
tend to be less capable of what we say in
our jargon making their own weather than we'd like to
see for our businesses.
Speaker 4 (16:26):
So this is.
Speaker 5 (16:27):
Largely due to the outsized influence that regulation, reimbursement rates,
even political whims can have on these businesses, which can
materially affect their earnings power and their valuation. And they're
largely outside of the businesses control. And then the last
thing I would point out is that healthcare traditionally has
(16:48):
been thought of as a more defensive sector that provides
ballast to an overall portfolio. And this is not what
we observed in recent years, especially going through COVID and
coming out of it. There's been more volatility and less
of the diversification benefit than in the past.
Speaker 2 (17:06):
Interesting, And I mean, when we look at the ottest
theme in Europe, it's definitely defense investing in defense companies.
You seem to have no investment in this theme. I mean,
do you think it is because it is massively overplayed
and so the rational valuation does not exist in this
(17:31):
industry or is it because you do not want to
invest in defense stocks?
Speaker 4 (17:37):
In defense stocks? Is that what you said?
Speaker 2 (17:40):
Yeah?
Speaker 4 (17:40):
Yeah, defense?
Speaker 5 (17:41):
Yeah, So defense companies the other button topic. So European
and Asian defense companies are an area of active research
focus for US. We should also note that Scance Capital
does own some defense related businesses US our strategies like
(18:02):
our private equity strategies, but we've not invested in any
international growth and that's partially because historically we've found these
businesses to be more controversial from the client perspective.
Speaker 4 (18:17):
But the overwhelming reason.
Speaker 5 (18:18):
We haven't invested in defense names for the portfolio is
we haven't completed research that suggests these businesses meet our
six criteria. So business spaces that tend to be cyclical,
where companies cannot create their own demand, they tend to
be unattractive to US, and defense companies tend to be
(18:39):
beholden to government wins. So additionally, a lot of these
companies are large, with many different divisions and segments, which
tends to cloud the growth and dampen the overall overall
top line. For sure, you could make money in this space,
and people definitely have been doing that recently while you're
(19:00):
p and defense businesses have garnered headlines in recent in
recent months. At this point, we're comfortable with our lack
of representation, especially considering what valuations have done, and that
I would classify these these businesses in general as being
lower growth opportunities.
Speaker 1 (19:19):
Now we've talked about the types of companies you're looking for.
You know, is there an average length of how long
you hold them or is it you know, I imagine
it's dependent on the company, but you know, is there
like a number that's typical.
Speaker 5 (19:33):
Yeah, we try to own businesses on average for five years.
We've owned some for ten, some even for fifteen, but
on average are holding periods five years, which gives us
a turnover of about twenty percent.
Speaker 2 (19:50):
I mean, regarding tarifs, do you think we have past
maximum uncertainty and market relativity or are we currently just
a bear markets run.
Speaker 4 (20:03):
The infamous tariff question.
Speaker 5 (20:05):
We've had a lot of that over the past few months,
and unfortunately, I don't think I have an answer that
you want, Like, it's a great question, but I can't
answer it with any certainty. But it does get at
the heart of what we think about investing at scance Capital.
Speaker 4 (20:23):
The short answers.
Speaker 5 (20:24):
We don't pretend to have a crystal ball on macro
variables or tariffs, volatility, the market's next move.
Speaker 4 (20:31):
What we do know is that uncertainty is a constant
in markets.
Speaker 5 (20:35):
So whether it's tariffs today, interest rates tomorrow, geopolitical tensions
next year. There's always something that investors in the short term,
and for sure tariffs have done that. But when you
only have to own a handful of businesses and you
choose ones with strong competitive modes that are growing in
(20:57):
attractive business spaces, they have market leadership. That's the definition
of competitive advantage, the ability to pass on prices, to
withstand demand disruption, the ability to continue to invest and
win market share. So we believe that's our best protection
against uncertainty. So rather than trying to time the market,
(21:17):
call the top, call the bottom, we stay focused on
identifying those businesses, yes, understanding the risks, but also being
able to stay focused and maintain conviction during these difficult
emotional times. And that's what they are, they're emotional times.
So are we in a bear market rally maybe, or
maybe we're at the beginning of a new bull cycle.
(21:39):
What matters more to us is whether the businesses we
own are continuing to innovate, gain market share, reinvest intelligently.
And so we have we passed max uncertainty in my opinion, yes.
Speaker 4 (21:53):
For a short time, but probably not overall.
Speaker 5 (21:57):
However, for disciplined, business focused investors, Enduring uncertainty is part
of the job, and that's part of the opportunity as well.
Speaker 2 (22:07):
As a follow up, when you discuss with the management
of the companies you owned, have you noticed a change
in the tone on how they speak about their market,
their positioning because of tariffs.
Speaker 5 (22:24):
You know, I think there's been a lot of writing
on the wall in terms of a potential uncertainty that
could come out of terrifs for a while. I mean,
I don't think this was new, something new that happened
three months ago, and so a lot of the businesses
that we owed it, they, first of all, I have,
you know, sort of limited exposure to to these things
(22:46):
that really are impacted. But they've been thinking about it,
and so they have been diversifying their supply chains, and
they have been building factories in new places, and they've
been doing things to try to minimize the impact of terriffs.
But overall, these are companies that have such leadership and
have sell things or services that people need and that
(23:11):
they're going to pay, and there really is an elastic
demand for it, so they can pass on the prices
pretty easily. But certainly everyone who speaks to these management
teams when you're in investor groups, they're asking about tariffs
and the impact of tariffs, and the.
Speaker 4 (23:29):
Companies are being thoughtful about it. They're being honest.
Speaker 5 (23:32):
They're saying, we don't really know what ultimately will happen,
but we have been trying to position ourselves to be
flexible and to maneuver quickly.
Speaker 4 (23:41):
And then there's some.
Speaker 5 (23:42):
Businesses that we own that actually could benefit from tariffs.
Speaker 4 (23:46):
You know, these automation companies that we own in Japan.
Speaker 5 (23:50):
These are companies that will allow companies to build manufacturing
facilities and lines that use less labor, that are you know,
lower costs, that are more efficient, that have less waste,
and so.
Speaker 4 (24:04):
They will improve.
Speaker 5 (24:06):
So not only are they benefiting from building out these
new lines that are closer to home, but they're also
benefiting from trying to bring down prices, whereas otherwise they
would be going up.
Speaker 1 (24:20):
Now, your strategy is pretty concentrated, and so I was
just wondering if there are any part of your process
that looks at risk, you know, just the risk that
could come from a concentrated strategy or just risk in general.
Speaker 5 (24:36):
So let me first say that although some investors assert
that a concentrated strategy poses greater risk in terms of
higher short term volatility. We believe that a portfolio diluted
with a large number of holdings could introduce the risk
of not knowing each of those businesses well enough, or
(24:57):
having to choose businesses that don't really need our criteria,
like you can't just own the market leader. The more
companies you own, the more likely it is you're also
going to own the number two or the one that's
not as good. So on average, and also on average,
our analysts cover a single digit number of businesses and
they cover them for years, so our pms go deep
(25:20):
in that ongoing research with analysts, and we assert that
we own our businesses more than we know our businesses.
Speaker 4 (25:28):
More than most.
Speaker 5 (25:30):
However, to address to your questions specifically, we implement risk
mitigation tools that help us understand the volatility profile of
our businesses throughout the cycle, as well as how correlated
our businesses are to each other. I mentioned earlier that
we look to have a diversity of earnings drivers or
(25:50):
businesses geared to different end markets and different trends.
Speaker 4 (25:54):
So these tools help us see.
Speaker 5 (25:55):
Those correlations in a more objective way than our internal
thought process.
Speaker 1 (26:01):
Okay, And in terms of selling securities, you know we've
talked about what you look for, but what would have
you triggered? What would trigger selling the portfolio? Could it
be you know, valuations, poor fundamentals, or just better ideas?
Speaker 4 (26:15):
Yes, all three of those things.
Speaker 5 (26:18):
I mean, in theory, it's an easy answer, right it
fails to meet one of our six investment criteria, but
in practice it's a bit more nuanced. You know, we
need to evaluate whether the business is dealing with a
transitory issue or if there's real business impairment. So, for instance,
in twenty twenty two, we had several businesses that saw
(26:39):
growth impaired because demand pulled forward during COVID, so then
revenue subsequently slowed.
Speaker 4 (26:45):
But at the same time, these businesses continue to.
Speaker 5 (26:48):
Spend and invest in their customers to win more market share,
and that further pressure EPs. So on a growth basis,
didn't look so great. But those businesses were going through
a temporary hiccup that actually allow aut.
Speaker 4 (27:00):
Them to emerge even stronger with less competition.
Speaker 5 (27:03):
So that's an example of a transitory issue, not permanent impairment.
And we would have been wrong if we sold those
companies during that time. So sometimes something happens that changes
the investment thesis due to regulatory shift. Sometimes valuation just
has gotten too high for the growth expected. I think
the key point on what triggers to sell is that
(27:26):
these are highly concentrated portfolios, so oftentime, to buy a
new business, we have to sell an existing one, and
I call that attrition due to better opportunity. We have
a saying that we don't want to be rearranging deck chairs,
but when we sell something to buy a new company,
we need a good reason for it. So maybe it
(27:46):
brings a new growth driver to the portfolio, maybe it
cuts down exposure to a secular trend that has been
overly appreciated recently, or maybe the new company is just
a stronger criteria fit.
Speaker 2 (28:01):
I have a question on Japan, because many investors see
or think that the country is undergoing structural shifts in
terms of the economy, in terms of corporate governance. Do
you think it gives a good new growth opportunities which
have not been the case for Japan for the past
(28:23):
two decades, or do you think that this is something
which is most of the growth opportunities are already priced
in after the rally of the past two to three years.
Speaker 4 (28:35):
I do.
Speaker 5 (28:36):
I think Japan is a very interesting place right now.
I've been to Japan about six times in the last
eighteen months, So Japan is experiencing a resurgence, and I
would say it's driven by demand for industrial automation, but
also those corporate governance reforms increase tourism, a re energized
(28:57):
consumer class, and then you have the macro economic factors
such as wage growth, inflation normalization, some global supply chain shifts,
Japan's neutrality proximity to the rest of Asia.
Speaker 4 (29:11):
These can all help create a favorable backdrop for investment.
Speaker 5 (29:16):
So we've found opportunities investing in the country's more innovative
companies that are blending tradition with cutting edge technology to
redefine their industries and also expand across geographies. Interestingly, we
own a century old consumer stables business that used to
(29:38):
that's used this knowledge and expertise to expand outside of
food and seasonings and become a monopoly provider of a
key semiconductor input as well as a growing player in
biopharmer services. So that's one example of the kinds of
things that we're finding there in terms of valuation the
Japanese market, it's important to acknowledge historically has been considered
(30:01):
normal for growth for Japanese businesses. It was like mid
mid single digits, maybe high single digits.
Speaker 4 (30:09):
So when businesses have above.
Speaker 5 (30:12):
Earnings growth rates in Japan, they deserve to trade at
a premium, and that premium becomes more justified given the
improving macro backdrop than further justified when we're seeing these
Japanese management teams all of a sudden starts to be
really invest your friendly. Focusing on corporate governance reforms. These
(30:34):
are reforms that encourage the use of large cash balances
that many of these companies have sat on for years,
some even decades, and in many cases these piles are
quite large. So the useful and careful deployment of such
cash can bring faster growth opportunities, whether it's organic or inorganic,
(30:57):
higher dividends, more share repurchases, is all of this generating
higher ros and more investor friendly interactions. So these are
all things that shoul drive returns and should justify the valuations.
Speaker 2 (31:11):
Okay, I mean regarding Europe, I mean European equities have
outperformed the US quite significantly here to date. Do you
think that this still offers some good value at the
current multiple or do you think that most of the
growth of opportunities which you have identified are quite well
(31:33):
priced at the time being.
Speaker 5 (31:37):
So, yes, the European equities have done really well here
to date, and for propably like that, like we run,
it really inspires us. The European equities have staged a
historic comeback relative to US equities here today.
Speaker 4 (31:54):
But I note a few things.
Speaker 5 (31:56):
First, if you look at MSCI Europe at about fourteen
times currently versus SMP at twenty one, so there's still
a significant discount there, and especially when you consider that
the average over the past fifteen years was only three points.
So Europe went up, but there's still more room for
it to go up. And the second thing I'd say
(32:18):
is as fundamental business focused investors or not choosing markets
to invest in instead, we're seeking to just own the
best growth businesses that made our criteria. And with that perspective,
we continue to believe that there are attractive businesses domiciled
in Europe that we believe are under appreciated.
Speaker 4 (32:40):
Most.
Speaker 5 (32:41):
And then the third thing is most and probably the
most important. We would argue, and we have argued that
as a whole, Europe's not that attractive of an opportunity set.
The economic and the market underpinnings, including the greater representation
of cyclical and value oriented stocks, make it a more shallow.
Speaker 4 (33:00):
Opportunity set for growth equity investors.
Speaker 5 (33:04):
And it was this opportunity set whose stocks have performed
well recently. But this is all what really gets me excited.
There are a select group of high quality growth businesses
domiciled in Europe. They are innovative, they're growing, they're good
stewards of capital, they meet our investment criteria, and these
may continue to get lost in equity index returns, but
(33:28):
they're not going to be lost by us or an
active manager. We only need to uncover thirty five of
those businesses across all international markets and hold them in
a low turnover, longtime horizon, high conviction international growth portfolio.
Speaker 1 (33:46):
Well, thank you, Danielle, this was great. Thank you again
for joining us.
Speaker 4 (33:51):
Thank you so much for having me.
Speaker 5 (33:52):
It's been great to chat with you and hear your
perspectives on Europe and Japan and defense companies.
Speaker 1 (34:00):
And Lauran, thank you for joining me as my co
host today. Thank you until our next episode. This is
David Cohne with Inside Active
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 cost is Laurent Dulier, Senior equity strategist at
Bloomberg Intelligence. Laurent, thanks for joining me today.
Speaker 2 (00:35):
Welcome.
Speaker 1 (00:37):
So last week you published a note on Q one
earnings in Europe based on earnings calls, what was the
sentiment like with respect to the different sectors.
Speaker 2 (00:47):
Yeah, so, just for our listener, in terms of context,
we do track quarterly earnings results for the past five
years and what is new is that over the past
twelfth to eighteen month in Europe we have introduced AI
model which tracks the frequency and the sentiment towards specific
(01:07):
investment themes. And what is quite interesting in the last
reporting season is two big trends. The first one we
have seen a fivefold increase in the frequency for tariff
related commons and also the collapse in sentiment compared to
the previous two quarters. And now in terms of sentiment,
(01:28):
we are towards the level of twenty eighteen in the
midst of the first US China trade war. And the
second signal that we saw is we have seen a
significant plunge in the sentiment around capital expenditures in the
energy and industrial sector in Europe. We are really at
(01:50):
the lowest since twenty eighteen as well, and I think
it shows that the uncertainty and the stop and go
policy of Donald Trump on tariff do really an impact
on the actwards spending of companies. So in conclusion, we
still think that the European equity market may be too
complacent following its recentrality, and that it may be overlooking
(02:13):
some of the risks associated to the trade war.
Speaker 3 (02:17):
Great speaking of European markets and the international markets in general,
I think it's a great time to bring on our guests.
Danielle Menechela is a portfolio manager and senior research analyst
at Scance Capital, including the Scance Capital International Growth Strategy
and subadvisor to the Touchstone Scance Capital International Growth Equity Fund. Danielle,
thank you so much for joining us.
Speaker 4 (02:38):
Thank you for having me. It's great to meet.
Speaker 1 (02:40):
You, and more this morning before we dive into your strategy.
We'd love to hear your thoughts on you know, what
you kind of learned through Q one earnings in Europe?
Were you seeing you know, similar sentiment at first.
Speaker 5 (02:56):
Sure, we've seen and we've heard a lot more certainty
as it relates to tariffs, as it relates to sentiment,
continued uncertainty as it relates to China and geopolitical aspects.
But I would just point out that the European market
in a broad sense, may have a lot of exposure
(03:18):
to businesses that are cyclical like this and that could
be impacted by this uncertainty. But there are pockets of
businesses and pockets of areas of growth that aren't seeing
as much of that uncertainty. So I would just say
that this is a time in particular when we need
to be extra focused on choosing the best businesses, the
(03:40):
ones that that have things like competitive modes and the
ability to grow in our innovative regardless of what's happening
in the rest of the world.
Speaker 1 (03:49):
Great, So let's talk about SANS Capital. Is there a
firm wide investment philosophy?
Speaker 5 (03:55):
Yes, So at SANS Capital we do one thing. We
invest in leading growth businesses globally our firm was founded
over thirty years ago in nineteen ninety two. Our approach
is simply described as having a business owner's mindset to.
Speaker 4 (04:11):
Public equity invest in investing.
Speaker 5 (04:14):
We do not want to be thought of as stock traders,
but we do want to be thought of as business owners.
Speaker 4 (04:19):
And how do we do that.
Speaker 5 (04:21):
We do bottom up investing by applying deep, fundamental business
focused research with an aim to identify and select businesses
with the capacity to generate sustainable, above average earnings growth
that beat our investment criteria. And then we own those
businesses and concentrated conviction weighted portfolios over a.
Speaker 4 (04:42):
Long time horizon.
Speaker 5 (04:43):
And we start with growth because it's been our observation
that over the long run, earning's growth is the dominant
driver of stock market returns. And while valuation shifts create
volatility like what we were talking about earlier, and also
could be paid for in the short term, they tend
to have a limited impact over the long term. We
(05:04):
also believe that markets systematically underappreciate the compounding impact of
both nonlinear and long duration growth businesses, and this differentiation,
I would say of our investment philosophy enables investors to
benefit from the compounding of that growth, that multiplier effect
(05:25):
over a longer time period than others consider. And I
mentioned growth already. But at SANDS, we choose businesses to
own by rigorously applying our sixth investment criteria. It's the
same criteria that we've used since Sam's was founded and
the same that we use across all of our public strategies.
So growth is our first criteria. We look for businesses
(05:47):
that have sustainable, above average earnings growth. The companies also
need to meet the other five criteria. So Number two
leadership position in a promising business space, so if a
space with under lying attractive economics. And this is because
the disproportionate amount of the reward of any industry accrues
(06:08):
to the leaders. But that only matters if the leaders
can achieve attractive returns. Number three significant competitive advantage deep
motes allow sustainable leadership and growth. Number four clear mission,
strong management, team, value added focus. Number five financial strength
of healthy balance sheets, and number six rational valuation relative
(06:32):
to the market and business prospects. Great.
Speaker 1 (06:36):
So we went through the philosophy. Can you if we
kind of zero in on the international growth strategy, can
you walk us through the process of stock selection sure sure.
Speaker 5 (06:47):
So International growth is led by a three person portfolio
management team that includes pms from our two flagship global strategies.
The portfolio owns about thirty to thirty five businesses. The
recommendations for what we own comes from our investment team
of about twenty analysts across industries, and our top ten
(07:09):
weights comprise about forty five percent of the portfolio, so
on average, our holding size is about three percent. And
what we're doing in this portfolio is we're looking to
have a balance of higher growth, higher valuation businesses, so
businesses with a greater cone of outcomes but potentially higher upside,
(07:30):
and then offset that with a more mature group of
classic growers. So while you'll notice exposure to some large
secular trends within our portfolio, we're also cognizant of having
too much exposure to any singular trend and therefore aim
to get a diversity of earnings drivers across those thirty
(07:50):
to thirty five names. So, for example, you'll see names
that include things as diverse as semiconductor equipment, e commerce,
extremely high end luxury, discounted consumer retail, live and stream
music and events, and emerging market banks. And that's just
to name a few of the things we have exposure to.
(08:11):
So the result is that we build a high conviction,
highly concentrated portfolio that looks meaningfully different from the benchmark.
And I think that's really important when you're investing internationally
international indices, especially developed ones. They're large, they're broad, and perception,
(08:33):
perhaps rightfully so, is that they're filled with mediocre, slow
growing or even declining companies. And for the most part,
that may be true, but we would argue if you're patient,
if you go deep, you know where to look. In
these markets, you can find a top tier of businesses
that are every bit as high quality and innovative as
(08:54):
anywhere in the world, and we aim to build a
portfolio of those gems.
Speaker 1 (08:59):
Makes sense if we go back to the philosophy a
little bit at the end, you mentioned rational valuation. What
measures you know, a particular are you looking at.
Speaker 5 (09:10):
Yeah, I'm glad you coned in on the rational valuation
because that's what it really is. It's we're not looking
to find great value, or we're not looking to get
a great deal because a company may or may not
continue to exist.
Speaker 4 (09:26):
What we're looking for is rational valuation based on.
Speaker 5 (09:30):
How large we believe the business can be over a
five year period, so how much can it grow in
that time. And this begins with the strict adherence to
the six criteria, so quantitative qualitative assessments, consideration of the market,
the competitive landscape, management, long term strategy, potential, ability to
cause disruption or to be disrupted.
Speaker 4 (09:52):
And then risks.
Speaker 5 (09:53):
So it's really a combination of analytical rigor and creative thinking.
And then we discuss and we debate. We have a
really collaborative research process at SANDS. We have a team
that has a lot of years of different kinds of experiences,
you know, different markets, different different sectors, different countries, exposures,
(10:15):
and so we put all of those people together to
pride ourselves on a culture of meaningful discourse, you know,
high trust, share context. And so when we think about
a rational valuation we're having these debates. We want to
think about terms. We want to think about it in
terms of both absolute and relative terms. We want to
(10:35):
bring in the shared experiences of the team. When it
comes to risk. We want to focus on the long term,
what that valuation could be in five years time, and
what the is the growth rate that would support that valuation.
And you know, don't get me wrong, I keep saying
five years, but our analysts and our PM teams are
really thinking more about in terms.
Speaker 4 (10:57):
Of ten or more years.
Speaker 5 (10:58):
But the actual quantitative valuation is based on fibers.
Speaker 2 (11:06):
Okay, DANIELI, And now I'm going to switch gear a
little bit and ask you some questions on some of
the specific sectors where potentially you can find those growth opportunities.
So the first one, your strategy is massively overweight TMT.
So is it really a bet on the rollout of
(11:27):
AI or is it just a coincidence of many growth
opportunities existing and being concentrated in both sectors.
Speaker 5 (11:37):
Okay, So I'm going to show my age here because
when you say TMT, I want to say what no,
because it comes to mind as like cell phone plans
and fixed line service providers and dial up internet companies.
But I understand what you're asking, and you're right in
terms of waiting. As of March thirty first, approximately twenty
(11:57):
percent of our portfolio businesses or classes by it is
it versus twelve percent for the benchmark, which is the
ms AQUI XUS index, by the way, and approximately eighteen
percent are classified as communications services versus the BENCHMARKT six percent.
So yes, large overweight, but I wouldn't call that a
(12:17):
bet on their rollout of AI per se. I mean,
we're strong believers in AI and the demand for more
and greater compute, but this portfolio is not built with
That is the only factor. I keep saying diversity of
earnings drivers, and you have many different factors driving the
growth in IT and communications. So thinking of the businesses
(12:40):
that we own the fall into TMT, they actually benefit
from quite different secular changes. For example, the retail revolution
that is e commerce. The pandemic turbocharged e commerce adoption,
but it still accounts for less than thirty percent of
total global retail sales. So we own several of the
(13:01):
global leaders in the e commerce space in different regions.
We also own one of the key providers of border
and digital payment services. Another trend would be legacy process improvements.
So growth investors seek to benefit from change across industries.
Digitalization and new technologies are upending legacy processes with products
(13:24):
and services that are better, cheaper, faster than the status quo.
Factory automation and robotics, computer aided design, digital twins are
examples of this. We own several businesses in Japan and
Europe that do that. And then we have the future
of computing, perhaps the most obvious for AI. Demand for
computing powers accelerating far faster than most appreciate in our view,
(13:49):
with new use cases created, this demand's going to require
new and more efficient ways to access, store, manipulate, process
data and enabling technologies becoming increasingly complex require higher manufacturing intensity,
this resulting in pricing power for select businesses positioned a
key choke points in the semiconductor value chain, so we
(14:11):
own a view of those, and then probably worth calling
out the truly diverse businesses in what we classify as
as our communications holdings. One of them is a large
e commerce slash gaining business, but we also have exposure
to the rights for one of the fastest growing viewerships
and sports with strong potential for modernization. And we have
(14:35):
some businesses exposed to streaming and watching live music and
other live events.
Speaker 2 (14:41):
Okay, so it may be more media oriented rather than
telecom oriented. One of also, when I look at your strategy,
it seems to be underweight elsecare, which is often viewed
as a growth sector and now it is different at
a reasonable valuation. Do you think that there are reasons
(15:06):
to be conscious or underweight this sector at this point
in time, or do you think that the policy of
the Trump administration, which seems to be quite a stein
towards the sector, may be an impediment to invest in it.
Speaker 5 (15:23):
Yeah, I think there are reasons why we are underweight.
Ten to fifteen years ago, healthcare sector was a rich
opportunity set for finding growth businesses that matter criteria, but
this really hasn't been the case in recent years. Although
we do have some exposure. We own a CDMO business,
a glass tools company that sells to pharmaceutical companies. We've
(15:47):
recently purchased an innovative software hardware razor razor plate model
for radiologists. So it is possible to find special businesses
within healthcare, but we don't expect this to be a
material sector for us going forward. And part of this
is due to the fact that most of the value creation,
(16:08):
especially within the innovative areas of therapeutics and diagnostics, is
occurring while the businesses are still private. Additionally, healthcare businesses
tend to be less capable of what we say in
our jargon making their own weather than we'd like to
see for our businesses.
Speaker 4 (16:26):
So this is.
Speaker 5 (16:27):
Largely due to the outsized influence that regulation, reimbursement rates,
even political whims can have on these businesses, which can
materially affect their earnings power and their valuation. And they're
largely outside of the businesses control. And then the last
thing I would point out is that healthcare traditionally has
(16:48):
been thought of as a more defensive sector that provides
ballast to an overall portfolio. And this is not what
we observed in recent years, especially going through COVID and
coming out of it. There's been more volatility and less
of the diversification benefit than in the past.
Speaker 2 (17:06):
Interesting, And I mean, when we look at the ottest
theme in Europe, it's definitely defense investing in defense companies.
You seem to have no investment in this theme. I mean,
do you think it is because it is massively overplayed
and so the rational valuation does not exist in this
(17:31):
industry or is it because you do not want to
invest in defense stocks?
Speaker 4 (17:37):
In defense stocks? Is that what you said?
Speaker 2 (17:40):
Yeah?
Speaker 4 (17:40):
Yeah, defense?
Speaker 5 (17:41):
Yeah, So defense companies the other button topic. So European
and Asian defense companies are an area of active research
focus for US. We should also note that Scance Capital
does own some defense related businesses US our strategies like
(18:02):
our private equity strategies, but we've not invested in any
international growth and that's partially because historically we've found these
businesses to be more controversial from the client perspective.
Speaker 4 (18:17):
But the overwhelming reason.
Speaker 5 (18:18):
We haven't invested in defense names for the portfolio is
we haven't completed research that suggests these businesses meet our
six criteria. So business spaces that tend to be cyclical,
where companies cannot create their own demand, they tend to
be unattractive to US, and defense companies tend to be
(18:39):
beholden to government wins. So additionally, a lot of these
companies are large, with many different divisions and segments, which
tends to cloud the growth and dampen the overall overall
top line. For sure, you could make money in this space,
and people definitely have been doing that recently while you're
(19:00):
p and defense businesses have garnered headlines in recent in
recent months. At this point, we're comfortable with our lack
of representation, especially considering what valuations have done, and that
I would classify these these businesses in general as being
lower growth opportunities.
Speaker 1 (19:19):
Now we've talked about the types of companies you're looking for.
You know, is there an average length of how long
you hold them or is it you know, I imagine
it's dependent on the company, but you know, is there
like a number that's typical.
Speaker 5 (19:33):
Yeah, we try to own businesses on average for five years.
We've owned some for ten, some even for fifteen, but
on average are holding periods five years, which gives us
a turnover of about twenty percent.
Speaker 2 (19:50):
I mean, regarding tarifs, do you think we have past
maximum uncertainty and market relativity or are we currently just
a bear markets run.
Speaker 4 (20:03):
The infamous tariff question.
Speaker 5 (20:05):
We've had a lot of that over the past few months,
and unfortunately, I don't think I have an answer that
you want, Like, it's a great question, but I can't
answer it with any certainty. But it does get at
the heart of what we think about investing at scance Capital.
Speaker 4 (20:23):
The short answers.
Speaker 5 (20:24):
We don't pretend to have a crystal ball on macro
variables or tariffs, volatility, the market's next move.
Speaker 4 (20:31):
What we do know is that uncertainty is a constant
in markets.
Speaker 5 (20:35):
So whether it's tariffs today, interest rates tomorrow, geopolitical tensions
next year. There's always something that investors in the short term,
and for sure tariffs have done that. But when you
only have to own a handful of businesses and you
choose ones with strong competitive modes that are growing in
(20:57):
attractive business spaces, they have market leadership. That's the definition
of competitive advantage, the ability to pass on prices, to
withstand demand disruption, the ability to continue to invest and
win market share. So we believe that's our best protection
against uncertainty. So rather than trying to time the market,
(21:17):
call the top, call the bottom, we stay focused on
identifying those businesses, yes, understanding the risks, but also being
able to stay focused and maintain conviction during these difficult
emotional times. And that's what they are, they're emotional times.
So are we in a bear market rally maybe, or
maybe we're at the beginning of a new bull cycle.
(21:39):
What matters more to us is whether the businesses we
own are continuing to innovate, gain market share, reinvest intelligently.
And so we have we passed max uncertainty in my opinion, yes.
Speaker 4 (21:53):
For a short time, but probably not overall.
Speaker 5 (21:57):
However, for disciplined, business focused investors, Enduring uncertainty is part
of the job, and that's part of the opportunity as well.
Speaker 2 (22:07):
As a follow up, when you discuss with the management
of the companies you owned, have you noticed a change
in the tone on how they speak about their market,
their positioning because of tariffs.
Speaker 5 (22:24):
You know, I think there's been a lot of writing
on the wall in terms of a potential uncertainty that
could come out of terrifs for a while. I mean,
I don't think this was new, something new that happened
three months ago, and so a lot of the businesses
that we owed it, they, first of all, I have,
you know, sort of limited exposure to to these things
(22:46):
that really are impacted. But they've been thinking about it,
and so they have been diversifying their supply chains, and
they have been building factories in new places, and they've
been doing things to try to minimize the impact of terriffs.
But overall, these are companies that have such leadership and
have sell things or services that people need and that
(23:11):
they're going to pay, and there really is an elastic
demand for it, so they can pass on the prices
pretty easily. But certainly everyone who speaks to these management
teams when you're in investor groups, they're asking about tariffs
and the impact of tariffs, and the.
Speaker 4 (23:29):
Companies are being thoughtful about it. They're being honest.
Speaker 5 (23:32):
They're saying, we don't really know what ultimately will happen,
but we have been trying to position ourselves to be
flexible and to maneuver quickly.
Speaker 4 (23:41):
And then there's some.
Speaker 5 (23:42):
Businesses that we own that actually could benefit from tariffs.
Speaker 4 (23:46):
You know, these automation companies that we own in Japan.
Speaker 5 (23:50):
These are companies that will allow companies to build manufacturing
facilities and lines that use less labor, that are you know,
lower costs, that are more efficient, that have less waste,
and so.
Speaker 4 (24:04):
They will improve.
Speaker 5 (24:06):
So not only are they benefiting from building out these
new lines that are closer to home, but they're also
benefiting from trying to bring down prices, whereas otherwise they
would be going up.
Speaker 1 (24:20):
Now, your strategy is pretty concentrated, and so I was
just wondering if there are any part of your process
that looks at risk, you know, just the risk that
could come from a concentrated strategy or just risk in general.
Speaker 5 (24:36):
So let me first say that although some investors assert
that a concentrated strategy poses greater risk in terms of
higher short term volatility. We believe that a portfolio diluted
with a large number of holdings could introduce the risk
of not knowing each of those businesses well enough, or
(24:57):
having to choose businesses that don't really need our criteria,
like you can't just own the market leader. The more
companies you own, the more likely it is you're also
going to own the number two or the one that's
not as good. So on average, and also on average,
our analysts cover a single digit number of businesses and
they cover them for years, so our pms go deep
(25:20):
in that ongoing research with analysts, and we assert that
we own our businesses more than we know our businesses.
Speaker 4 (25:28):
More than most.
Speaker 5 (25:30):
However, to address to your questions specifically, we implement risk
mitigation tools that help us understand the volatility profile of
our businesses throughout the cycle, as well as how correlated
our businesses are to each other. I mentioned earlier that
we look to have a diversity of earnings drivers or
(25:50):
businesses geared to different end markets and different trends.
Speaker 4 (25:54):
So these tools help us see.
Speaker 5 (25:55):
Those correlations in a more objective way than our internal
thought process.
Speaker 1 (26:01):
Okay, And in terms of selling securities, you know we've
talked about what you look for, but what would have
you triggered? What would trigger selling the portfolio? Could it
be you know, valuations, poor fundamentals, or just better ideas?
Speaker 4 (26:15):
Yes, all three of those things.
Speaker 5 (26:18):
I mean, in theory, it's an easy answer, right it
fails to meet one of our six investment criteria, but
in practice it's a bit more nuanced. You know, we
need to evaluate whether the business is dealing with a
transitory issue or if there's real business impairment. So, for instance,
in twenty twenty two, we had several businesses that saw
(26:39):
growth impaired because demand pulled forward during COVID, so then
revenue subsequently slowed.
Speaker 4 (26:45):
But at the same time, these businesses continue to.
Speaker 5 (26:48):
Spend and invest in their customers to win more market share,
and that further pressure EPs. So on a growth basis,
didn't look so great. But those businesses were going through
a temporary hiccup that actually allow aut.
Speaker 4 (27:00):
Them to emerge even stronger with less competition.
Speaker 5 (27:03):
So that's an example of a transitory issue, not permanent impairment.
And we would have been wrong if we sold those
companies during that time. So sometimes something happens that changes
the investment thesis due to regulatory shift. Sometimes valuation just
has gotten too high for the growth expected. I think
the key point on what triggers to sell is that
(27:26):
these are highly concentrated portfolios, so oftentime, to buy a
new business, we have to sell an existing one, and
I call that attrition due to better opportunity. We have
a saying that we don't want to be rearranging deck chairs,
but when we sell something to buy a new company,
we need a good reason for it. So maybe it
(27:46):
brings a new growth driver to the portfolio, maybe it
cuts down exposure to a secular trend that has been
overly appreciated recently, or maybe the new company is just
a stronger criteria fit.
Speaker 2 (28:01):
I have a question on Japan, because many investors see
or think that the country is undergoing structural shifts in
terms of the economy, in terms of corporate governance. Do
you think it gives a good new growth opportunities which
have not been the case for Japan for the past
(28:23):
two decades, or do you think that this is something
which is most of the growth opportunities are already priced
in after the rally of the past two to three years.
Speaker 4 (28:35):
I do.
Speaker 5 (28:36):
I think Japan is a very interesting place right now.
I've been to Japan about six times in the last
eighteen months, So Japan is experiencing a resurgence, and I
would say it's driven by demand for industrial automation, but
also those corporate governance reforms increase tourism, a re energized
(28:57):
consumer class, and then you have the macro economic factors
such as wage growth, inflation normalization, some global supply chain shifts,
Japan's neutrality proximity to the rest of Asia.
Speaker 4 (29:11):
These can all help create a favorable backdrop for investment.
Speaker 5 (29:16):
So we've found opportunities investing in the country's more innovative
companies that are blending tradition with cutting edge technology to
redefine their industries and also expand across geographies. Interestingly, we
own a century old consumer stables business that used to
(29:38):
that's used this knowledge and expertise to expand outside of
food and seasonings and become a monopoly provider of a
key semiconductor input as well as a growing player in
biopharmer services. So that's one example of the kinds of
things that we're finding there in terms of valuation the
Japanese market, it's important to acknowledge historically has been considered
(30:01):
normal for growth for Japanese businesses. It was like mid
mid single digits, maybe high single digits.
Speaker 4 (30:09):
So when businesses have above.
Speaker 5 (30:12):
Earnings growth rates in Japan, they deserve to trade at
a premium, and that premium becomes more justified given the
improving macro backdrop than further justified when we're seeing these
Japanese management teams all of a sudden starts to be
really invest your friendly. Focusing on corporate governance reforms. These
(30:34):
are reforms that encourage the use of large cash balances
that many of these companies have sat on for years,
some even decades, and in many cases these piles are
quite large. So the useful and careful deployment of such
cash can bring faster growth opportunities, whether it's organic or inorganic,
(30:57):
higher dividends, more share repurchases, is all of this generating
higher ros and more investor friendly interactions. So these are
all things that shoul drive returns and should justify the valuations.
Speaker 2 (31:11):
Okay, I mean regarding Europe, I mean European equities have
outperformed the US quite significantly here to date. Do you
think that this still offers some good value at the
current multiple or do you think that most of the
growth of opportunities which you have identified are quite well
(31:33):
priced at the time being.
Speaker 5 (31:37):
So, yes, the European equities have done really well here
to date, and for propably like that, like we run,
it really inspires us. The European equities have staged a
historic comeback relative to US equities here today.
Speaker 4 (31:54):
But I note a few things.
Speaker 5 (31:56):
First, if you look at MSCI Europe at about fourteen
times currently versus SMP at twenty one, so there's still
a significant discount there, and especially when you consider that
the average over the past fifteen years was only three points.
So Europe went up, but there's still more room for
it to go up. And the second thing I'd say
(32:18):
is as fundamental business focused investors or not choosing markets
to invest in instead, we're seeking to just own the
best growth businesses that made our criteria. And with that perspective,
we continue to believe that there are attractive businesses domiciled
in Europe that we believe are under appreciated.
Speaker 4 (32:40):
Most.
Speaker 5 (32:41):
And then the third thing is most and probably the
most important. We would argue, and we have argued that
as a whole, Europe's not that attractive of an opportunity set.
The economic and the market underpinnings, including the greater representation
of cyclical and value oriented stocks, make it a more shallow.
Speaker 4 (33:00):
Opportunity set for growth equity investors.
Speaker 5 (33:04):
And it was this opportunity set whose stocks have performed
well recently. But this is all what really gets me excited.
There are a select group of high quality growth businesses
domiciled in Europe. They are innovative, they're growing, they're good
stewards of capital, they meet our investment criteria, and these
may continue to get lost in equity index returns, but
(33:28):
they're not going to be lost by us or an
active manager. We only need to uncover thirty five of
those businesses across all international markets and hold them in
a low turnover, longtime horizon, high conviction international growth portfolio.
Speaker 1 (33:46):
Well, thank you, Danielle, this was great. Thank you again
for joining us.
Speaker 4 (33:51):
Thank you so much for having me.
Speaker 5 (33:52):
It's been great to chat with you and hear your
perspectives on Europe and Japan and defense companies.
Speaker 1 (34:00):
And Lauran, thank you for joining me as my co
host today. Thank you until our next episode. This is
David Cohne with Inside Active
Host
Gina Martin Adams
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