October 28, 2025 • 40 mins
AI’s next competitive edge is increasingly tied to vertical integration, connecting digital capacity with physical infrastructure. In this episode of the Inside Active podcast, host David Cohne, mutual fund and active management analyst with Bloomberg Intelligence, and co-host Breanne Dougherty, BI’s head of thematic strategy, speak with Eli Horton, managing director of equities at TCW and senior portfolio manager for the TCW Transform Systems ETF (PWRD). Horton discusses why he rejects traditional sector-based investing, arguing instead for a systems-based approach, which views the economy as interconnected systems. They also discuss why changing legacy industries is crucial for transformation, how bottlenecks in the power supply present investment opportunities and why he views decentralized energy systems as highly promising. The podcast was recorded on Oct. 14.
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Speaker 1 (00:13):
Welcome to Inside Active, a podcast about active managers that
goes beyond soundbites 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 Brian Dharty, head of Thematic Strategy at
Bloomberg Intelligence. Brie, thank you for joining me today.
Speaker 2 (00:35):
Always a pleasure. David love getting invited back. Actually to
have these conversations with you highlight of my week.
Speaker 1 (00:42):
So I did want to ask about a note you
put out last week. I think it's really topical to
today's discussion. You describe how AI's next competitive edge lies
in vertical integration were compute meets commodities, data center meets
power generation. How should investors think about this new convergence
between digital and physical infrastructure.
Speaker 2 (01:02):
Yeah, it's been something that's been actually really compelling for
us to watch throughout twenty twenty five. Actually, we saw
the first inclaims of it really starting to form in January.
I think that the deep Seep disruption that we saw
in January was that first a little bit of a
Eureka moment for a lot of investors when they did
actually see some of the more physical environment theme names.
So when I say physical environment themes, that's where we
(01:23):
put our themes are related to power generation, be they
upstream or grid tech, all the way down to hydrogen
and any of those other physical environment focused themes. So
those names that include the likes of semen and Energy invertive,
we saw those names actually see as much volatility off
the back of the deep seep destruction as we did Navidia, right,
(01:44):
So that was kind of the first inklaim that investors
were cluing in, and then what we've seen throughout twenty
twenty five is just more of that, right, and seeing
more of that correlation emerge. We are actually identifying that
several other physical environment themes, specifically decentralized Energy, which is
quite focused on decentralization off the centralized grid for instance,
are seeing rising correlations to AI. We have a lot
(02:07):
of these physical environment themes actually hold high beta to AI,
so moving quite aggressively off of any sort of movement
we're seeing across our AI theme as well. The other
thing that I think is something that's gaining more and
more traction is naturally the fact that we're seeing tech
investors block to those power generation materials, industrial's names. They're
(02:28):
doing this through partnerships. I mean we can just in
the last year there's been several partnerships that have been announced,
be it from Meta or Amazon related to nuclear right
as that nuclear buildout and the buildout opportunity that BI
is estimated to be about three hundred and fifty billion
dollars by twenty fifty for nuclear buildout opportunity set. We're
seeing those types of relationships emergent. I think that's actually
(02:49):
creating an entirely different shift in the equities landscape again,
providing a lot more really identifiable technology tailwinds to do
these physical environment themes, our generation industrials, data center build outs.
And that's what brings me here today. Actually, I think
it's gonna be a really compelling conversation because this is
(03:09):
I'm hey, I won't I won't speak to it, but
this feels very spot on to actually the product that
we're here to talk about today and who we're speaking
with today. So I'm excited for that.
Speaker 1 (03:20):
Great Well, speaking of which, I'd like to welcome our
guest today. Eli Horton is a managing director of Equities
at TCW and a senior portfolio manager for the firm's
equity products, including the TCW Transformed Systems ETF ticker pwr D. Eli,
thank you for joining the podcast.
Speaker 3 (03:39):
Thank you for having me. It's it's great to be
here with you both.
Speaker 1 (03:42):
So let's talk about pwr D. How do you define
transform systems? In other words, what kinds of transformations are
you talking about?
Speaker 4 (03:52):
Well, it's a it's a good place to start because
there are many transformations that are taking place in our
economy and that are accelerating it and bre hit on
one of them, which I know we'll come back to
with power and the grid. But if you think about it,
we're really going through somewhat of an energy and an
(04:13):
industrial revolution, and there are multiple catalysts for this, but
one is that we're trying to drive our economy forward
to be based on renewable energy generation.
Speaker 3 (04:27):
That is a monumental task.
Speaker 4 (04:29):
We've been working on this for decades in the US.
Still less than twenty percent of our powers from truly
renewable sources, so we're nowhere close, and there have been
targets in the past that we might accomplish this sort
of net zero emission state. By twenty fifty, we were
quite public with our view that we felt that that
(04:50):
was just not feasible. I think that's now probably a
consensus view, and I think current targets are twenty seventy
or so. But the words trying to get to this
renewable power energy generation state that has massive implications on
a wide range of systems, and we tend to think
about the world in terms of systems, not sectors. I
think sectors are some arbitrary oversimplification of how the economy
(05:14):
works just for an investor, but that's not how the
world functions. Take the grid, for example, you have a
variety of commodities, whether it's the metals, the construction materials
I think concrete that they're building the infrastructure. You have
the whatever's powering the power generation, coal, net gas, maybe
the sun. You have the engineering and construction firms that
(05:37):
are building these. You've got electrical equipment, you've got grid software.
I just listed off a whole bunch of different sectors
that form the system.
Speaker 3 (05:45):
And that's just for the grid. And that was even
a simplification.
Speaker 4 (05:48):
Think electric vehicles, Think our agriculture economy, so on, so forth.
Speaker 3 (05:52):
For us to get to.
Speaker 4 (05:53):
This renewable state, we need all of these systems to
function together. That's incredibly complicated. We also need trillions of
investment and many many years, so it's a very long
dated opportunity with a lot of capital behind it.
Speaker 3 (06:11):
Great.
Speaker 1 (06:12):
So with the portfolio, how many names do you typically
carry and what drives your decision to overweight or underweight
a company?
Speaker 4 (06:20):
So we have a slightly different investment approach I think
than a lot of long only managers. We own twenty
to thirty stocks in the powered portfolio. We believe that
is an appropriate amount of diversification for our clients while
allowing us to maximize our investors' capital and our best ideas.
(06:40):
We believe strongly that that type of concentration is how
you outperform the market through the cycle. So I think
we tend to be a little more concentrated than many
fund managers. We actually don't really think about the world
in terms of overweight and underweight because that implies some
sort of relative lens and relative to a benchmark.
Speaker 3 (06:57):
And while we absolutely do measure how we.
Speaker 4 (07:01):
Perform with our investors capital compared to the SP five hundred,
we don't think about weights relative to the market. What
we're trying to do is identifying this universe of businesses
that are enabling or benefiting from the transformation of our
energy system. What are the best twenty to thirty investment
(07:21):
ideas on a resuggested basis that we can construct a
portfolio with. So that's good of our starting point.
Speaker 2 (07:29):
I think this is really interesting because one, you're preaching
to the choir here. I also spend most of my
days making the argument for not being bound by sector classifications.
So really appreciate that part of the conversation. But I
think you touched on something else that's really compelling. I
mean this energy transformation. I think that as those targets,
for instance, starting merge related to renewable energy. I think
(07:51):
the one thing that I used to be very focused
on energy, and the one thing that we always kept
mentioning was it's a journey, right that there's going to
be some winding roads with respect to that journey. You
launched this fund in twenty twenty two. I think what's
interesting is that twenty twenty two time frame was at
(08:12):
a bit of a swing, pretty significant swing, I would say,
related to that renewables journey or the general appetite or
acceleration of the renewables journey versus some very real world
hindrances related to shifting towards renewable energies. So I think
that's really interesting as to when you launched this and
then where we're at right now, if you could talk
through how maybe you've how your equities within this strategy
(08:39):
have shifted through that time period, or has it been
relatively stable. I'm just really interested to know how your
mindset or your approach you've had to shift alongside some
of these shifts we've seen in the broader market.
Speaker 4 (08:50):
Yeah, it's such an interesting topic that we could spend
way too long on. Have a bunch of thoughts that
flooded my mind here. So one I think, I think
a sign of great investors and that we you know,
we strive to be is that when facts change, you
change your mind. You have to be able to not
(09:11):
get dug in and to evolve and adapt to new
information and to where you know the best opportunities are.
So that would suggest that there should be changes from
time to time, and I'll give you some examples of
changes that we've made. I also, you know, I think
that in any secular theme, and maybe this is what
you meant by your comments on energy is going to
(09:31):
take a long time. I don't remember the exact phrase
you used, but in any secular theme, you're going to
have periods of exuberance and then quite the opposite. And
there's a lot of discussion right now trying to tie
the current moment back to the two thousands dot com era,
and there's some things that rhyme, and there's there's some
that don't. But we have this tendency to overestimate trends
(09:55):
in the short term and underestimate them in the long term.
And oftentimes that type of volatility, even within a secular theme,
really can be to an investor's advantage if you have
a long term horizon and you can capitalize when the
market's fearful. So a couple of random thoughts there, What
have we actually done? So we launched the strategy in
February of twenty twenty two. As you mentioned, that was
(10:16):
a really interesting time because the world had moved from
this growth at all costs is the way to invest
into more of a value or into factor tended to perform,
and that worked to our benefit. We had a significant
amount of the portfolio invested in oil and gas.
Speaker 3 (10:35):
In twenty twenty two, we.
Speaker 4 (10:37):
Also had a very heavy investment in the agriculture economy.
So agriculture is actually quite emissions heavy, whether it's the
fertilizers or the pesticides, or how the machinery operates, and
so throughout the agriculture economy we were finding pretty interesting investments.
Moved forward into late twenty two to early twenty three,
(10:57):
we had large investments in solar and in lithium electric vehicles.
In twenty four we really added to our investments in aerospace,
I think actually twenty three, and we've been building investments
in power and great along the way. Today are to
give you some numbers around this. When we launched the strategy,
(11:17):
we probably had a third of our capital investment in
oil and gas, and today we have probably four percent.
Speaker 3 (11:22):
Okay, so we will be active.
Speaker 4 (11:24):
We underwrite all of our investments to three to five years,
but when opportunities change, will make changes with the portfolio.
Speaker 1 (11:34):
When we talk about, you know, kind of entering a
new green world, you know, looking at the fund's website,
there is an emphasis on not just pure green names,
but brown to green transition opportunities such as legacy industries
that you know must reinvent themselves. Can you give any
examples of where you see value there.
Speaker 3 (11:52):
Today in the brown de green side. So look, it's
like Charlie Munger was famous, this invert everything work backwards,
and we do it all the time.
Speaker 4 (12:04):
So what is actually happening and why? So the why
we talked about this earlier. The world's trying to move
to some sort of renewable energy state. So what is
it doing. We're electrifying everything, We're finding ways to capture carbon.
We're going through these large scale transformations of old economy industry.
(12:24):
So that's what's happening. You can't accomplish those goals without
the missions heavy companies changing what they do and taking
a leadership role. And there was a lot of investors
for a number of years that said, we're going to
starve those businesses of capital, We're going to divest them
from investors' portfolios. And my view is that it was counterproductive.
(12:51):
It by starving them with capital, it raised the cost
of capital of these old economy businesses. And so if
your CEO, your job is to invest your holder capital
at a rate of return that is higher than your
cost of capital and to add value. And if your
cost of capital is going up, then by definition, some
investments will no longer meet that hurdle. And we have
the view that that is just the wrong way to
(13:14):
further this transformation. It's also probably not the right way
to make money either, and so we've always taken the
belief that you have to change the eighty percent of
equation the old economy industrials and energy businesses to accomplish
this transformation. And we have also found that that's where
the best opportunities lie. I think scale is a huge
(13:35):
competitive mantage. I think many of these old economy companies
have unit economics that are very attractive versus some green
businesses don't without government incentives. And so we've always focused
your older capital on that side of the equation.
Speaker 3 (13:48):
I would expect that continued.
Speaker 1 (13:51):
So, you know, some of these transitions are long in nature.
How do you think about valuation and what's your signal
for too expensive?
Speaker 4 (13:59):
And actually this completely ties with your last question on
green and brown to green.
Speaker 3 (14:06):
So we've mostly.
Speaker 4 (14:11):
Mostly focused on the brown to green side because a
number of let's say, solar and wind and experimental technologies
didn't have unit economics that worked and had valuations that
were unattractive. There's this SMP Clean Energy Transition Index, which
I think launched in two thousand and four, so it's
a little over twenty years. It's grown at about a
one percent compound rate of returns since then versus the
(14:33):
market at eleven. That's that's an area of the economy
that you would have looked at in two thousand fourth.
So that these companies are going to grow so fast,
but it was profitless growth and valuations absolutely matter. I
think that you know, when it comes to valuation discipline,
our north star is owning a company with competitive vantages
(14:53):
that is adding value to the system at a rate
that is greater than what the marketppreciates. We care first
and foremost about that. For every company we own, we
have you know, expected IRRs, we have risk rewards, and
we will anchor to those. And when an idea becomes
(15:14):
somewhat unattractive, we probably have another idea on the sidelines
that we've researched it. We're just waiting for a moment
that we would replace that that stock with. But I'd
say that valuation is not the top one or two
things we care about. We first care about, you know,
the quality of a company, the durability of its mode,
the value it's adding, how it's understood. And then valuation
(15:37):
usually comes after.
Speaker 2 (15:39):
You're touching on a couple of things. And unfortunately I
do I do love to talk you life, so it's
very possible I derail this down some rabbit holes. David
will keep me in check. But when I mean the
Brown Degreen conversation, that and of itself, I think is
really interesting because it's something that I think sometimes gets missed.
Here is just how critical again this transition actually is, right,
(16:03):
And so when you look too heavily at the just
the green side, when you think of how a grid
works or how the actual infrastructure system works, you can't
just you know, switch from one to the other seamlessly
and think everything goes along right, That there really is
a transition associated with it. And how critical, as you say,
those more traditional companies and the traditional structures that were
(16:26):
in place, how critical they are to maintaining that resiliency
and that and the operational integrity of this broader system
that you can't continue to electrify if you're jeopardizing the
operational integrity and resiliency, right, So I think I think
sometimes that gets forgotten and people think, I remember a
conversation that I used to have all the time. People
seem to think that a blackout happens because you know,
(16:49):
it was some sort of giant failure and how much
power is available. I mean, it is seconds that can
cause a grid to go down right that you couldn't bridge.
And you know, I think that people don't often think
about it as far as just how critical that resilience
factor is. With that in mind, and thinking about how
there's such an acceleration in power generation demand right now
(17:12):
and over the next ten years, whether we want to
talk about it related to data centers, are just in
general that everything's electrifying, right, How are you looking across
this physical backbone, if you will, of innovation and where
do you see the most compelling aspects of that investment.
I mean, we can look at your holdings. It looks
(17:32):
like to me, I'm looking at this and I see
that you like downstream and upstream right, that you're kind
of looking across the entire ecosystem there. So I think
it'd be interesting to hear your thoughts on what you
think is most compelling right now, considering the ten year
roadmap ahead that people seem to have their eye on
with respect to power generation needs.
Speaker 3 (17:53):
Power is short in this country, bull stop.
Speaker 4 (17:56):
And the problem is you have a demand side of
the equation, that is, it structurally changes faster than.
Speaker 3 (18:04):
Supply can react. You were kind of alluding to this.
Speaker 4 (18:08):
You just can't bring new power online quickly. There's so
many different moving pieces of that equation from all the
different materials in the componentry and the technology and the
people to build it, and then you throw in environmental
reviews and permitting and I mean, look, we have interconnection
delays in this country that are five years on average.
Speaker 3 (18:26):
I think there's seven in my home state of California.
So we're doing great. So it's really tricky, and that
creates a lot of bottlenecks. We love to invest with.
There's bottlenecks.
Speaker 4 (18:41):
The intersection of demand that structurally outstrips power is a
signal to us. If it's a durable bottleneck, it's a
signal to us that unit economics will expand for those
who can fulfill that need.
Speaker 3 (18:54):
And so we love to look there. So you were
talking about ultream and downstream.
Speaker 4 (18:58):
And I would reflect back to that when we started
investing in this sub theme, if you will, of power
and grid. Well over two years ago, we did this
exercise where sort of tore down the system, if you will,
and so we actually had a graphic, but on one
side of the graphic where the plants that generate the
power your cold plants are great natural gas plants, utility
(19:21):
scale solar or whatever. That power then goes into some
sort of substation. It then goes through high voltage transmission
cables to another substation. The power gets reduced, it gets
transmitted all the way down to a community level and
to the end use facility.
Speaker 3 (19:39):
So that could be a bunch of places.
Speaker 4 (19:41):
It could be a factory, it could be a data center,
it could be our offices or our homes.
Speaker 3 (19:46):
It could be a charging station.
Speaker 4 (19:48):
And that whole system, that economic system. There's a couple
hundred companies maybe a little more that we could invest in.
It had some role in it, and we just started
looking for the bottlenecks and we found them actually throughout
the system. So on the power generation side, we've owned
this business with I don't think people had really heard
of at the time. It's now sort of a household
(20:08):
name called Tistra, which is utility based in Texas and
they have some attractive nuclear power assets and natural aids
as well as we own Fistra and a couple other
power generators. We own businesses that are manufacturing turbines, Doova,
Ernova and Semen's energy businesses that are all the way
(20:30):
at the far and use side of this equation that
are downstream if you want to call them, that of
electrical components like vertiv or Schneider Electric or eating.
Speaker 3 (20:39):
So there's opportunities throughout.
Speaker 4 (20:41):
And what we've really tried to seek out is where
are the bottlenecks that are going to allow companies fundamentals
to inflect in a way that the market doesn't appreciate.
Speaker 2 (20:51):
Do you think that there's very specific regions where you're
more focused on those bottlenecks or we're just by nature
of the fact that they might have more bottlenecks. So
the regions that you're more focused on, because most the
names you listed there, I would say are probably across regions, right,
you know, they tend to we think of the Schneiders
and the Siemens. They operate globally, But are there specific
regional bottlenecks that you're.
Speaker 3 (21:12):
Narrowed in on.
Speaker 4 (21:14):
I think the US presents the best investment opportunity here. Look,
I think this is a global theme, but we're particularly
focused on the US because that's where the starkest change
is taking place.
Speaker 3 (21:27):
So over the past couple of decades, electricity.
Speaker 4 (21:29):
Demand in this country was basically flat, and it was
I think that's odd to think that electricity demand would
be flat when the economy grew, when population grew, but
it's because we took a third of our manufacturing base
and we moved it over to Asia.
Speaker 3 (21:44):
We got a little bit more efficient with some of.
Speaker 4 (21:46):
The electrical equipment, and that led to roughly flat electricity demand.
Despite that flat demand profile, the grid can still barely
handle it. And you were talking about brownouts or blackouts earlier.
We've had almost every single year we set a new
record for the cost of brown outs in this country.
So the grid's already fragile. But I mentioned that there's
(22:07):
a stark change in the future versus the past and
the US, and that's because that demand profile is going
from flat to it's growing at three percent a year,
which doesn't sound like a lot, But if you do
that for you know, from twenty twenty to twenty fifty,
you'll double the amount of aggregate electricity demand in this country,
which means trillions of dollars of capital investment to support
(22:28):
it on the grid side. And I would argue that
if power demand doubles, you probably have to increase supply
by more than double because we are adding so much
intermittent power to the grid, intermittent being solar and wind,
which you cannot function twenty four to seven like our
economy does.
Speaker 2 (22:47):
I think that's the other interesting point, right, is that
we have become more of a twenty four to seven.
It used to be that in the power when you
were scheduling power, you had peak off peak times. We think,
guess if R is going to look at that profile
these days, it's a very different wave pattern than there
was ten years ago. Twenty four Our nature, I think,
also just adds a new layer of complexity to the
(23:09):
needs from a power generation perspective. I mean, we look
at decentralized energy, so I look at a grid tech
one where we're very focused centralized grid, obviously critically important, modernization, resiliency,
all those things that we've just been talking about, how
or if are you guys really looking at the rise
of more decentralized energy systems. So when we think of
large scale storage or kind of moving off centralized grid
(23:30):
as these industrials in particular, these manufacturing plants might be
looking to sort of own their whole vertical integration and
not have vulnerability to a centralized grid. Do you think
that's compelling or not yet really in your mix.
Speaker 4 (23:43):
I think it's incredibly compelling. And we obviously are focused
on the public markets, and there are quite I think
there's a my view, there's a misperception that oftentimes the
way to invest in energy transition is in the private markets,
and I would push back strongly and say that that's
a misconception. There are scaled businesses that have huge advantages
(24:09):
in the public markets that we think are the winners
of this transformation. And one area that I think would
be counter to what I just said, though, is around
energy storage and distributed power.
Speaker 3 (24:22):
So we own Tesla.
Speaker 4 (24:23):
They have a wonderful energy storage business, and there's obviously
other parts of Tesla that comprise its valuation, but their
energy storage businesses is very good. Well, we we don't
see a lot of storage opportunities that are just pure
playing in the public markets though, that's that's been an
area that we look for and it's still too early now.
(24:46):
What we do see is a lot of time to
power solutions that comes up a lot in AI data centers,
and so these companies are fully engaged in an arms
race and they need to bring their data centers on yesterday.
The sooner the better, and when you have interconnection delays
of five years, that creates a lot of problems. And
(25:06):
so if you can build on site power, there's some
meaningful time value to a company like Microsoft or Amazon
or Google. And so we see some innovative solutions on
the time to power side, but the battery storage is
a little trickier in the public markets right now.
Speaker 1 (25:27):
How do you how do you look at policy, regulation, government,
subsidy dynamics. Does that drive your investments at all?
Speaker 4 (25:36):
So I wouldn't say that it drives it, but it's
incredibly relevant. We are focused on making explicit bets and
avoiding implicit bets with the portfolio, and.
Speaker 3 (25:48):
With that in mind, it.
Speaker 4 (25:49):
Would be unusual to see us lead with a policy
point in an investment thesis because I don't think we
have a differentiated perspective on policy or regulatory re outcomes.
But we just want to size the risk of it,
and I can give you an example of this. So
the we own this business called First Solar. They're the
largest manufacturer of utility scale solar panels in this country,
(26:13):
and it's been very embroiled in the potential repealing of
tax credits through the Inflation Reduction Act. And if you
go back six months, eight months, maybe the stock was
trading around one hundred twenty dollars. Consensus estimates for the
business were twenty five twenty seven dollars per share of earnings,
(26:35):
and I'd say about twelve ten to twelve dollars of
that twenty five was the company's own earnings power. The
rest of it was due to incentives from the IRA.
And so we looked at that twelve bucks of earnings
power that was standalone for First Solar, and that our
thesis was around.
Speaker 3 (26:56):
We said, look, this is probably.
Speaker 4 (26:57):
One hundred and sixty one hundred and eight dollars value
in the stock train in one twenty and so we've
got actually meaningful upside on this with a call option
that the IRA doesn't get repealed in a way the
market is fearfull of So that's an example of how
we would absolutely factor policy.
Speaker 3 (27:16):
Or regulation into our investments, but we would rarely lead
with it as part of our thesis. Now this wasn't
your question, but at a much higher level, I think
energy security is a big focus of policy and where
the administration and probably i'd be comfortable saying future administrations
are focused and I think that's generally a good thing
(27:37):
for us.
Speaker 2 (27:39):
ELI. It's like you read my mind because that off
the back of the regulation, That's where I wanted to
go next was when we think about that focus on
energy security. For instance, we are seeing a lot of
that drive towards the materials component, right, so very very
much upstream, be it rare earths, We've seen a lot
of obviously attention come to We've seen it our transition
(28:00):
metals across our electric vehicles indices because EVS also has
that materials component to it. We've seen it naturally within
the Uranian names, within our nuclear We are definitely seeing
some of that policy prioritization, not just within the US
but globally, everybody prioritizing their own access to critical materials.
Speaker 3 (28:21):
I think.
Speaker 2 (28:22):
But you know, correct, if you're wrong here. I don't
see what I would say was probably explicit materials exposure,
but I might be missing as I'm scanning the holdings here.
How are you looking? Is that too much volatility in
that real upstream component? Related to that more commodities exposure?
I mean obviously not commodities, but equities that are developing
commodities themselves, or what are you guys thinking there?
Speaker 4 (28:44):
Yeah, I think you know, energy, security, defense security, critical
mineral security.
Speaker 3 (28:50):
We talk about things like shipbuilding.
Speaker 4 (28:52):
Those a very headline grabbing and it might be a
bit of a red hearing, but there's a lot of
focus on security, and I think that's a long duration opportunity.
You're right, we don't have a lot of critical mineral
investments in the portfolio.
Speaker 3 (29:05):
We've looked at some.
Speaker 4 (29:08):
We have invested in nuclear though, and I think nuclear
is one very key strategic element of driving innersecurity policy
in this country. And so we own a few businesses
that are in that value chain. One that that I
highlight that has the mineral side is Camico. So Chemico's
roughly fifty percent of the value is in the Uranian
(29:30):
business and the rest is in a stake in westing House,
which is involved in the manufacturing process and equipment side
of large scale reactors. So that's one area we've invested.
But I think it's a very powerful theme that we
certainly look around for ideas.
Speaker 2 (29:46):
Do we think that the rising tech company or tech
investors focus on I'm trying to think of a way
to frame this that doesn't sound as though I'm just
feeding into news headlines the tech interest, if you will,
that's flocking towards industrials materials. I mean for people who
(30:06):
have been looking in this space for now a very
long time, sometimes having tech valuations or tech investors flocking
into that space is disrupting, if you will, say, the
natural way of things looking and being valued across those
areas of the market. Do you think that there's some
risk there now that we're getting more of this intersection,
(30:28):
or do you think generally this is you know, it'll
work through towards the new era where we are naturally
combining these two things.
Speaker 3 (30:36):
Yeah, again a couple things again working backwards.
Speaker 4 (30:40):
Right, So why are we seeing interest in these really
boring old economy and industrial businesses emerge. I think it's
because there's increasing awareness of two things. One, there's a
regime regime change taking place, that headwinds have dissipated in
are turning into structural tail I can flesh that out,
(31:02):
but that's one two. I think there's appreciation that many
investors are very heavily exposed to a certain type of
business that has certain types of style factors, and they
are very under exposed to a lot of these old economy, industrial.
Speaker 3 (31:16):
Infrastructure supporting types of companies. I think that's why it's happening.
On point one.
Speaker 4 (31:25):
Look, we hollowed up the manufacturing base of the US
and moved it to China. That was a headwind for
our domestic industrial business.
Speaker 3 (31:33):
For a long time.
Speaker 4 (31:34):
We have not invested in the grid gapex to sales
ratios up until a couple of years ago have been
near twenty year lows, and that has been at the
expense of the manufacturing equipment base and the infrastructure in
this country. So there's been a bunch of headwinds. There's
a need to repair those situations or to reinvest in
(32:02):
the industrial and infrastructure based in this country for cyclical reasons.
Just as there's these accelerating structural themes with the energy transition,
with power demand, with energy security, and that's driving a
change in fundamentals role economy companies. And we owned GeV Vvernova.
They no one cared about this company when it was
inside of g it was Gpower. People only cared about
(32:27):
the aerospace business. Aerospace business is fantastic, but giev Renova
is one of three companies in the world that makes
large scale natural gas turbans. That portion of the not
gas turbans didn't grow for about a decade. Giev Renova
is now sold out through twenty twenty eight. They're growing
earnings at sixty percent a year. It's gone from a
(32:48):
business that was X growth to a company that is
growing very rapidly. And so this is that regime shift
that's taking place that I was talking about.
Speaker 3 (32:55):
So I think that's why you see tech interest.
Speaker 4 (33:00):
And last thing I'll say, at risk of being long
winded on this, so I was at this conference two
and a half years ago, I think it was September
of twenty three, and I was in a meeting with
Eaton Electrical Equipment Square and there was an analyst at
a tech focused edge fund that was in the meeting,
(33:20):
and I was just shocked to see this fund in
the meeting because they never invest in these types of names.
It turns out they were investing in this space. And
the very next day, I think Eaton was down seven
percent because they said something in the conference about their
backlog not growing as fast in the future. And I
don't know this, but you can imagine that a number
(33:41):
of folks who were newer to that space could have
easily blown out of this dock. I don't know if
this fund or not, but it was one hundred and
eighty bucks back then. Now this doc's three eighty. You know,
something about really knowing what you own is critical here
when you have these pockets of volatility.
Speaker 2 (34:00):
I think it's interesting I talk about this a lot.
We've talked about this with respect to our defense theme
we talk about with industrials, and one of those things
whenever I speak to that tech migration towards these types
of themes and these types of potential pockets of opportunity
is very much that tension. Tech investors live and breathe
by quarter to quarter, Right, investors who typically are looking
(34:21):
at these types or you know, in this space that's
not the same type of investment profile or of the
same way that they're approaching these companies. They really do
look at the durability the stuff their growth trend. So
I think that that tension will be interesting to see
what happens over the next year.
Speaker 3 (34:37):
You hit it earlier on the deep seek moment.
Speaker 4 (34:40):
So in February, a lot of these businesses on the
power side of AI sold off as much or more
than some of the AI semi conductor companies we ownvert
if it was down sixty percent or something peaked a.
Speaker 3 (34:56):
Drought, and that's obviously it's painful, full stop.
Speaker 4 (35:03):
But we took a step back and we kind of
reunderwrote all of our investments in the thesis, and our
thesis on the demand side for why power is growing
is far more than just AI. So AI is one
leg of the stool. It gets all the news, and
that's totally fine. But we're electrifying our entire economy. We're
electrifying transportation buildings, We're bringing manufacturing back, which is very
(35:27):
electricity intensive. And if AI just went away, that's about
one percent of the three percent electricity growth demand that
we expect for many years to come, and for some
of the businesses we own to be cut in half.
On some concerns around AI capex because the deep seak
(35:48):
model we.
Speaker 3 (35:49):
Viewed as.
Speaker 4 (35:51):
Over the punitive, and so you have to know what
you own as an investor, otherwise you end up selling
at the bottom, and that's obviously the worst.
Speaker 3 (36:00):
Thing you can do.
Speaker 2 (36:01):
I think that. I think that's a really good point.
And these were secular growth trends that people were investing in,
as you say, long before the data center excitement, if
you will. That's adding, if you will, and that's if anything,
that's just adding the urgency, adding sort of the amount
of investment opportunity that's potentially going to be surrounding this.
And I do think it's going to be really interesting.
(36:23):
As you say that that was an overreaction. Those names
did bounce back, I'm remembering correctly, did bounce back relatively
quickly and quicker. Then we saw some of those tech
names bounce back. But again it spoke to just how
aggressively some of the investment landscape was immediately worried about opportunity.
Speaker 4 (36:42):
There one hundred percent. I like to say the AI
poured gasoline on the fire. This was already happening, right
the electricity man And to your point, you know the
way they sold off like it could have just been
a week set of hands and maybe two hours in
the stocks, who knows, But we we don't care about quarters.
We believe that have having differentiated perspective and anchoring to
(37:04):
a longer time horizon gives us some competitive advantage, and
so volatility like that, while it's not fun in the moment,
we've background and recognition tells us that it's our.
Speaker 2 (37:16):
Friend, and you've handled those those things in the past.
I'm sure I'm going to avoid the question of does
that mean we should go to less frequent reporting, because
I don't want to have that conversation today. But I
am going to ask one other question, and I think
you nail at least what I would probably say was
what I would think was the most unappreciated thing right
(37:37):
underappreciated thing right now. But I'm going to put the
question to you anyways, because actually, maybe you've got something
else that you're hiding in your back pocket to answer
on this. But what are you watching really closely that
you think the market isn't getting right now, or that
is really unappreciated by the market right now that you
think could surprise people over the next year, let's say,
(37:58):
Or I'll let you choose your time and what you
think is underappreciated.
Speaker 4 (38:02):
Look, I don't have a fancy answer for you on that,
but we really focus on this theme and where we
think there's either an extreme amount of pessimism or they're
just is non appreciation for how large an opportunity is.
And our portfolio speaks for itself right now. We think
(38:22):
that power scarcity and a need for good reinforcement is
an incredibly large opportunity. There are a number of businesses
that I think are still quite unknown within that space, and.
Speaker 3 (38:37):
We do our best to uncover them.
Speaker 4 (38:40):
We've allocated quite a bit of capital to nuclear over
the past six to twelve months, and it's not in
some of the smaller cap names that are experimental technologies.
It's businesses like Miriaan Technologies, which have a presence in
almost all the large scale nuclear reactors in this country
(39:02):
and in the world, providing nuclear radiation detection systems. It's
a really high quality company that most folks have probably
never heard of. So we stick to ournating and we
look for opportunities in those, you know, in those areas
of the theme that we think are most exciting, and
we've talked around this a few times, but you just
(39:23):
can't solve the power side of this equation quickly.
Speaker 3 (39:29):
You need years and a ton of capital. So these
bottlenecks remain. We think they persist for years to come.
Speaker 1 (39:39):
Well, great, we need to end here unfortunately, but this
was a great conversation. Eli, thank you again for joining us.
Speaker 3 (39:46):
Thanks every thanks pre I enjoyed it.
Speaker 1 (39:48):
Eli and brit thank you again for being my co host.
Speaker 2 (39:51):
David always appreciate the invite anytime, and.
Speaker 1 (39:54):
I want to thank you for listening. If you liked
the episode, please subscribe and leave a review. Also, if
you'd like to see more of our research, go to
BI fund Go and b I T H E M.
Go on the Bloomberg Terminal until our next episode. This
is David Cohne with Inside Out.
Welcome to Inside Active, a podcast about active managers that
goes beyond soundbites 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 Brian Dharty, head of Thematic Strategy at
Bloomberg Intelligence. Brie, thank you for joining me today.
Speaker 2 (00:35):
Always a pleasure. David love getting invited back. Actually to
have these conversations with you highlight of my week.
Speaker 1 (00:42):
So I did want to ask about a note you
put out last week. I think it's really topical to
today's discussion. You describe how AI's next competitive edge lies
in vertical integration were compute meets commodities, data center meets
power generation. How should investors think about this new convergence
between digital and physical infrastructure.
Speaker 2 (01:02):
Yeah, it's been something that's been actually really compelling for
us to watch throughout twenty twenty five. Actually, we saw
the first inclaims of it really starting to form in January.
I think that the deep Seep disruption that we saw
in January was that first a little bit of a
Eureka moment for a lot of investors when they did
actually see some of the more physical environment theme names.
So when I say physical environment themes, that's where we
(01:23):
put our themes are related to power generation, be they
upstream or grid tech, all the way down to hydrogen
and any of those other physical environment focused themes. So
those names that include the likes of semen and Energy invertive,
we saw those names actually see as much volatility off
the back of the deep seep destruction as we did Navidia, right,
(01:44):
So that was kind of the first inklaim that investors
were cluing in, and then what we've seen throughout twenty
twenty five is just more of that, right, and seeing
more of that correlation emerge. We are actually identifying that
several other physical environment themes, specifically decentralized Energy, which is
quite focused on decentralization off the centralized grid for instance,
are seeing rising correlations to AI. We have a lot
(02:07):
of these physical environment themes actually hold high beta to AI,
so moving quite aggressively off of any sort of movement
we're seeing across our AI theme as well. The other
thing that I think is something that's gaining more and
more traction is naturally the fact that we're seeing tech
investors block to those power generation materials, industrial's names. They're
(02:28):
doing this through partnerships. I mean we can just in
the last year there's been several partnerships that have been announced,
be it from Meta or Amazon related to nuclear right
as that nuclear buildout and the buildout opportunity that BI
is estimated to be about three hundred and fifty billion
dollars by twenty fifty for nuclear buildout opportunity set. We're
seeing those types of relationships emergent. I think that's actually
(02:49):
creating an entirely different shift in the equities landscape again,
providing a lot more really identifiable technology tailwinds to do
these physical environment themes, our generation industrials, data center build outs.
And that's what brings me here today. Actually, I think
it's gonna be a really compelling conversation because this is
(03:09):
I'm hey, I won't I won't speak to it, but
this feels very spot on to actually the product that
we're here to talk about today and who we're speaking
with today. So I'm excited for that.
Speaker 1 (03:20):
Great Well, speaking of which, I'd like to welcome our
guest today. Eli Horton is a managing director of Equities
at TCW and a senior portfolio manager for the firm's
equity products, including the TCW Transformed Systems ETF ticker pwr D. Eli,
thank you for joining the podcast.
Speaker 3 (03:39):
Thank you for having me. It's it's great to be
here with you both.
Speaker 1 (03:42):
So let's talk about pwr D. How do you define
transform systems? In other words, what kinds of transformations are
you talking about?
Speaker 4 (03:52):
Well, it's a it's a good place to start because
there are many transformations that are taking place in our
economy and that are accelerating it and bre hit on
one of them, which I know we'll come back to
with power and the grid. But if you think about it,
we're really going through somewhat of an energy and an
(04:13):
industrial revolution, and there are multiple catalysts for this, but
one is that we're trying to drive our economy forward
to be based on renewable energy generation.
Speaker 3 (04:27):
That is a monumental task.
Speaker 4 (04:29):
We've been working on this for decades in the US.
Still less than twenty percent of our powers from truly
renewable sources, so we're nowhere close, and there have been
targets in the past that we might accomplish this sort
of net zero emission state. By twenty fifty, we were
quite public with our view that we felt that that
(04:50):
was just not feasible. I think that's now probably a
consensus view, and I think current targets are twenty seventy
or so. But the words trying to get to this
renewable power energy generation state that has massive implications on
a wide range of systems, and we tend to think
about the world in terms of systems, not sectors. I
think sectors are some arbitrary oversimplification of how the economy
(05:14):
works just for an investor, but that's not how the
world functions. Take the grid, for example, you have a
variety of commodities, whether it's the metals, the construction materials
I think concrete that they're building the infrastructure. You have
the whatever's powering the power generation, coal, net gas, maybe
the sun. You have the engineering and construction firms that
(05:37):
are building these. You've got electrical equipment, you've got grid software.
I just listed off a whole bunch of different sectors
that form the system.
Speaker 3 (05:45):
And that's just for the grid. And that was even
a simplification.
Speaker 4 (05:48):
Think electric vehicles, Think our agriculture economy, so on, so forth.
Speaker 3 (05:52):
For us to get to.
Speaker 4 (05:53):
This renewable state, we need all of these systems to
function together. That's incredibly complicated. We also need trillions of
investment and many many years, so it's a very long
dated opportunity with a lot of capital behind it.
Speaker 3 (06:11):
Great.
Speaker 1 (06:12):
So with the portfolio, how many names do you typically
carry and what drives your decision to overweight or underweight
a company?
Speaker 4 (06:20):
So we have a slightly different investment approach I think
than a lot of long only managers. We own twenty
to thirty stocks in the powered portfolio. We believe that
is an appropriate amount of diversification for our clients while
allowing us to maximize our investors' capital and our best ideas.
(06:40):
We believe strongly that that type of concentration is how
you outperform the market through the cycle. So I think
we tend to be a little more concentrated than many
fund managers. We actually don't really think about the world
in terms of overweight and underweight because that implies some
sort of relative lens and relative to a benchmark.
Speaker 3 (06:57):
And while we absolutely do measure how we.
Speaker 4 (07:01):
Perform with our investors capital compared to the SP five hundred,
we don't think about weights relative to the market. What
we're trying to do is identifying this universe of businesses
that are enabling or benefiting from the transformation of our
energy system. What are the best twenty to thirty investment
(07:21):
ideas on a resuggested basis that we can construct a
portfolio with. So that's good of our starting point.
Speaker 2 (07:29):
I think this is really interesting because one, you're preaching
to the choir here. I also spend most of my
days making the argument for not being bound by sector classifications.
So really appreciate that part of the conversation. But I
think you touched on something else that's really compelling. I
mean this energy transformation. I think that as those targets,
for instance, starting merge related to renewable energy. I think
(07:51):
the one thing that I used to be very focused
on energy, and the one thing that we always kept
mentioning was it's a journey, right that there's going to
be some winding roads with respect to that journey. You
launched this fund in twenty twenty two. I think what's
interesting is that twenty twenty two time frame was at
(08:12):
a bit of a swing, pretty significant swing, I would say,
related to that renewables journey or the general appetite or
acceleration of the renewables journey versus some very real world
hindrances related to shifting towards renewable energies. So I think
that's really interesting as to when you launched this and
then where we're at right now, if you could talk
through how maybe you've how your equities within this strategy
(08:39):
have shifted through that time period, or has it been
relatively stable. I'm just really interested to know how your
mindset or your approach you've had to shift alongside some
of these shifts we've seen in the broader market.
Speaker 4 (08:50):
Yeah, it's such an interesting topic that we could spend
way too long on. Have a bunch of thoughts that
flooded my mind here. So one I think, I think
a sign of great investors and that we you know,
we strive to be is that when facts change, you
change your mind. You have to be able to not
(09:11):
get dug in and to evolve and adapt to new
information and to where you know the best opportunities are.
So that would suggest that there should be changes from
time to time, and I'll give you some examples of
changes that we've made. I also, you know, I think
that in any secular theme, and maybe this is what
you meant by your comments on energy is going to
(09:31):
take a long time. I don't remember the exact phrase
you used, but in any secular theme, you're going to
have periods of exuberance and then quite the opposite. And
there's a lot of discussion right now trying to tie
the current moment back to the two thousands dot com era,
and there's some things that rhyme, and there's there's some
that don't. But we have this tendency to overestimate trends
(09:55):
in the short term and underestimate them in the long term.
And oftentimes that type of volatility, even within a secular theme,
really can be to an investor's advantage if you have
a long term horizon and you can capitalize when the
market's fearful. So a couple of random thoughts there, What
have we actually done? So we launched the strategy in
February of twenty twenty two. As you mentioned, that was
(10:16):
a really interesting time because the world had moved from
this growth at all costs is the way to invest
into more of a value or into factor tended to perform,
and that worked to our benefit. We had a significant
amount of the portfolio invested in oil and gas.
Speaker 3 (10:35):
In twenty twenty two, we.
Speaker 4 (10:37):
Also had a very heavy investment in the agriculture economy.
So agriculture is actually quite emissions heavy, whether it's the
fertilizers or the pesticides, or how the machinery operates, and
so throughout the agriculture economy we were finding pretty interesting investments.
Moved forward into late twenty two to early twenty three,
(10:57):
we had large investments in solar and in lithium electric vehicles.
In twenty four we really added to our investments in aerospace,
I think actually twenty three, and we've been building investments
in power and great along the way. Today are to
give you some numbers around this. When we launched the strategy,
(11:17):
we probably had a third of our capital investment in
oil and gas, and today we have probably four percent.
Speaker 3 (11:22):
Okay, so we will be active.
Speaker 4 (11:24):
We underwrite all of our investments to three to five years,
but when opportunities change, will make changes with the portfolio.
Speaker 1 (11:34):
When we talk about, you know, kind of entering a
new green world, you know, looking at the fund's website,
there is an emphasis on not just pure green names,
but brown to green transition opportunities such as legacy industries
that you know must reinvent themselves. Can you give any
examples of where you see value there.
Speaker 3 (11:52):
Today in the brown de green side. So look, it's
like Charlie Munger was famous, this invert everything work backwards,
and we do it all the time.
Speaker 4 (12:04):
So what is actually happening and why? So the why
we talked about this earlier. The world's trying to move
to some sort of renewable energy state. So what is
it doing. We're electrifying everything, We're finding ways to capture carbon.
We're going through these large scale transformations of old economy industry.
(12:24):
So that's what's happening. You can't accomplish those goals without
the missions heavy companies changing what they do and taking
a leadership role. And there was a lot of investors
for a number of years that said, we're going to
starve those businesses of capital, We're going to divest them
from investors' portfolios. And my view is that it was counterproductive.
(12:51):
It by starving them with capital, it raised the cost
of capital of these old economy businesses. And so if
your CEO, your job is to invest your holder capital
at a rate of return that is higher than your
cost of capital and to add value. And if your
cost of capital is going up, then by definition, some
investments will no longer meet that hurdle. And we have
the view that that is just the wrong way to
(13:14):
further this transformation. It's also probably not the right way
to make money either, and so we've always taken the
belief that you have to change the eighty percent of
equation the old economy industrials and energy businesses to accomplish
this transformation. And we have also found that that's where
the best opportunities lie. I think scale is a huge
(13:35):
competitive mantage. I think many of these old economy companies
have unit economics that are very attractive versus some green
businesses don't without government incentives. And so we've always focused
your older capital on that side of the equation.
Speaker 3 (13:48):
I would expect that continued.
Speaker 1 (13:51):
So, you know, some of these transitions are long in nature.
How do you think about valuation and what's your signal
for too expensive?
Speaker 4 (13:59):
And actually this completely ties with your last question on
green and brown to green.
Speaker 3 (14:06):
So we've mostly.
Speaker 4 (14:11):
Mostly focused on the brown to green side because a
number of let's say, solar and wind and experimental technologies
didn't have unit economics that worked and had valuations that
were unattractive. There's this SMP Clean Energy Transition Index, which
I think launched in two thousand and four, so it's
a little over twenty years. It's grown at about a
one percent compound rate of returns since then versus the
(14:33):
market at eleven. That's that's an area of the economy
that you would have looked at in two thousand fourth.
So that these companies are going to grow so fast,
but it was profitless growth and valuations absolutely matter. I
think that you know, when it comes to valuation discipline,
our north star is owning a company with competitive vantages
(14:53):
that is adding value to the system at a rate
that is greater than what the marketppreciates. We care first
and foremost about that. For every company we own, we
have you know, expected IRRs, we have risk rewards, and
we will anchor to those. And when an idea becomes
(15:14):
somewhat unattractive, we probably have another idea on the sidelines
that we've researched it. We're just waiting for a moment
that we would replace that that stock with. But I'd
say that valuation is not the top one or two
things we care about. We first care about, you know,
the quality of a company, the durability of its mode,
the value it's adding, how it's understood. And then valuation
(15:37):
usually comes after.
Speaker 2 (15:39):
You're touching on a couple of things. And unfortunately I
do I do love to talk you life, so it's
very possible I derail this down some rabbit holes. David
will keep me in check. But when I mean the
Brown Degreen conversation, that and of itself, I think is
really interesting because it's something that I think sometimes gets missed.
Here is just how critical again this transition actually is, right,
(16:03):
And so when you look too heavily at the just
the green side, when you think of how a grid
works or how the actual infrastructure system works, you can't
just you know, switch from one to the other seamlessly
and think everything goes along right, That there really is
a transition associated with it. And how critical, as you say,
those more traditional companies and the traditional structures that were
(16:26):
in place, how critical they are to maintaining that resiliency
and that and the operational integrity of this broader system
that you can't continue to electrify if you're jeopardizing the
operational integrity and resiliency, right, So I think I think
sometimes that gets forgotten and people think, I remember a
conversation that I used to have all the time. People
seem to think that a blackout happens because you know,
(16:49):
it was some sort of giant failure and how much
power is available. I mean, it is seconds that can
cause a grid to go down right that you couldn't bridge.
And you know, I think that people don't often think
about it as far as just how critical that resilience
factor is. With that in mind, and thinking about how
there's such an acceleration in power generation demand right now
(17:12):
and over the next ten years, whether we want to
talk about it related to data centers, are just in
general that everything's electrifying, right, How are you looking across
this physical backbone, if you will, of innovation and where
do you see the most compelling aspects of that investment.
I mean, we can look at your holdings. It looks
(17:32):
like to me, I'm looking at this and I see
that you like downstream and upstream right, that you're kind
of looking across the entire ecosystem there. So I think
it'd be interesting to hear your thoughts on what you
think is most compelling right now, considering the ten year
roadmap ahead that people seem to have their eye on
with respect to power generation needs.
Speaker 3 (17:53):
Power is short in this country, bull stop.
Speaker 4 (17:56):
And the problem is you have a demand side of
the equation, that is, it structurally changes faster than.
Speaker 3 (18:04):
Supply can react. You were kind of alluding to this.
Speaker 4 (18:08):
You just can't bring new power online quickly. There's so
many different moving pieces of that equation from all the
different materials in the componentry and the technology and the
people to build it, and then you throw in environmental
reviews and permitting and I mean, look, we have interconnection
delays in this country that are five years on average.
Speaker 3 (18:26):
I think there's seven in my home state of California.
So we're doing great. So it's really tricky, and that
creates a lot of bottlenecks. We love to invest with.
There's bottlenecks.
Speaker 4 (18:41):
The intersection of demand that structurally outstrips power is a
signal to us. If it's a durable bottleneck, it's a
signal to us that unit economics will expand for those
who can fulfill that need.
Speaker 3 (18:54):
And so we love to look there. So you were
talking about ultream and downstream.
Speaker 4 (18:58):
And I would reflect back to that when we started
investing in this sub theme, if you will, of power
and grid. Well over two years ago, we did this
exercise where sort of tore down the system, if you will,
and so we actually had a graphic, but on one
side of the graphic where the plants that generate the
power your cold plants are great natural gas plants, utility
(19:21):
scale solar or whatever. That power then goes into some
sort of substation. It then goes through high voltage transmission
cables to another substation. The power gets reduced, it gets
transmitted all the way down to a community level and
to the end use facility.
Speaker 3 (19:39):
So that could be a bunch of places.
Speaker 4 (19:41):
It could be a factory, it could be a data center,
it could be our offices or our homes.
Speaker 3 (19:46):
It could be a charging station.
Speaker 4 (19:48):
And that whole system, that economic system. There's a couple
hundred companies maybe a little more that we could invest in.
It had some role in it, and we just started
looking for the bottlenecks and we found them actually throughout
the system. So on the power generation side, we've owned
this business with I don't think people had really heard
of at the time. It's now sort of a household
(20:08):
name called Tistra, which is utility based in Texas and
they have some attractive nuclear power assets and natural aids
as well as we own Fistra and a couple other
power generators. We own businesses that are manufacturing turbines, Doova,
Ernova and Semen's energy businesses that are all the way
(20:30):
at the far and use side of this equation that
are downstream if you want to call them, that of
electrical components like vertiv or Schneider Electric or eating.
Speaker 3 (20:39):
So there's opportunities throughout.
Speaker 4 (20:41):
And what we've really tried to seek out is where
are the bottlenecks that are going to allow companies fundamentals
to inflect in a way that the market doesn't appreciate.
Speaker 2 (20:51):
Do you think that there's very specific regions where you're
more focused on those bottlenecks or we're just by nature
of the fact that they might have more bottlenecks. So
the regions that you're more focused on, because most the
names you listed there, I would say are probably across regions, right,
you know, they tend to we think of the Schneiders
and the Siemens. They operate globally, But are there specific
regional bottlenecks that you're.
Speaker 3 (21:12):
Narrowed in on.
Speaker 4 (21:14):
I think the US presents the best investment opportunity here. Look,
I think this is a global theme, but we're particularly
focused on the US because that's where the starkest change
is taking place.
Speaker 3 (21:27):
So over the past couple of decades, electricity.
Speaker 4 (21:29):
Demand in this country was basically flat, and it was
I think that's odd to think that electricity demand would
be flat when the economy grew, when population grew, but
it's because we took a third of our manufacturing base
and we moved it over to Asia.
Speaker 3 (21:44):
We got a little bit more efficient with some of.
Speaker 4 (21:46):
The electrical equipment, and that led to roughly flat electricity demand.
Despite that flat demand profile, the grid can still barely
handle it. And you were talking about brownouts or blackouts earlier.
We've had almost every single year we set a new
record for the cost of brown outs in this country.
So the grid's already fragile. But I mentioned that there's
(22:07):
a stark change in the future versus the past and
the US, and that's because that demand profile is going
from flat to it's growing at three percent a year,
which doesn't sound like a lot, But if you do
that for you know, from twenty twenty to twenty fifty,
you'll double the amount of aggregate electricity demand in this country,
which means trillions of dollars of capital investment to support
(22:28):
it on the grid side. And I would argue that
if power demand doubles, you probably have to increase supply
by more than double because we are adding so much
intermittent power to the grid, intermittent being solar and wind,
which you cannot function twenty four to seven like our
economy does.
Speaker 2 (22:47):
I think that's the other interesting point, right, is that
we have become more of a twenty four to seven.
It used to be that in the power when you
were scheduling power, you had peak off peak times. We think,
guess if R is going to look at that profile
these days, it's a very different wave pattern than there
was ten years ago. Twenty four Our nature, I think,
also just adds a new layer of complexity to the
(23:09):
needs from a power generation perspective. I mean, we look
at decentralized energy, so I look at a grid tech
one where we're very focused centralized grid, obviously critically important, modernization, resiliency,
all those things that we've just been talking about, how
or if are you guys really looking at the rise
of more decentralized energy systems. So when we think of
large scale storage or kind of moving off centralized grid
(23:30):
as these industrials in particular, these manufacturing plants might be
looking to sort of own their whole vertical integration and
not have vulnerability to a centralized grid. Do you think
that's compelling or not yet really in your mix.
Speaker 4 (23:43):
I think it's incredibly compelling. And we obviously are focused
on the public markets, and there are quite I think
there's a my view, there's a misperception that oftentimes the
way to invest in energy transition is in the private markets,
and I would push back strongly and say that that's
a misconception. There are scaled businesses that have huge advantages
(24:09):
in the public markets that we think are the winners
of this transformation. And one area that I think would
be counter to what I just said, though, is around
energy storage and distributed power.
Speaker 3 (24:22):
So we own Tesla.
Speaker 4 (24:23):
They have a wonderful energy storage business, and there's obviously
other parts of Tesla that comprise its valuation, but their
energy storage businesses is very good. Well, we we don't
see a lot of storage opportunities that are just pure
playing in the public markets though, that's that's been an
area that we look for and it's still too early now.
(24:46):
What we do see is a lot of time to
power solutions that comes up a lot in AI data centers,
and so these companies are fully engaged in an arms
race and they need to bring their data centers on yesterday.
The sooner the better, and when you have interconnection delays
of five years, that creates a lot of problems. And
(25:06):
so if you can build on site power, there's some
meaningful time value to a company like Microsoft or Amazon
or Google. And so we see some innovative solutions on
the time to power side, but the battery storage is
a little trickier in the public markets right now.
Speaker 1 (25:27):
How do you how do you look at policy, regulation, government,
subsidy dynamics. Does that drive your investments at all?
Speaker 4 (25:36):
So I wouldn't say that it drives it, but it's
incredibly relevant. We are focused on making explicit bets and
avoiding implicit bets with the portfolio, and.
Speaker 3 (25:48):
With that in mind, it.
Speaker 4 (25:49):
Would be unusual to see us lead with a policy
point in an investment thesis because I don't think we
have a differentiated perspective on policy or regulatory re outcomes.
But we just want to size the risk of it,
and I can give you an example of this. So
the we own this business called First Solar. They're the
largest manufacturer of utility scale solar panels in this country,
(26:13):
and it's been very embroiled in the potential repealing of
tax credits through the Inflation Reduction Act. And if you
go back six months, eight months, maybe the stock was
trading around one hundred twenty dollars. Consensus estimates for the
business were twenty five twenty seven dollars per share of earnings,
(26:35):
and I'd say about twelve ten to twelve dollars of
that twenty five was the company's own earnings power. The
rest of it was due to incentives from the IRA.
And so we looked at that twelve bucks of earnings
power that was standalone for First Solar, and that our
thesis was around.
Speaker 3 (26:56):
We said, look, this is probably.
Speaker 4 (26:57):
One hundred and sixty one hundred and eight dollars value
in the stock train in one twenty and so we've
got actually meaningful upside on this with a call option
that the IRA doesn't get repealed in a way the
market is fearfull of So that's an example of how
we would absolutely factor policy.
Speaker 3 (27:16):
Or regulation into our investments, but we would rarely lead
with it as part of our thesis. Now this wasn't
your question, but at a much higher level, I think
energy security is a big focus of policy and where
the administration and probably i'd be comfortable saying future administrations
are focused and I think that's generally a good thing
(27:37):
for us.
Speaker 2 (27:39):
ELI. It's like you read my mind because that off
the back of the regulation, That's where I wanted to
go next was when we think about that focus on
energy security. For instance, we are seeing a lot of
that drive towards the materials component, right, so very very
much upstream, be it rare earths, We've seen a lot
of obviously attention come to We've seen it our transition
(28:00):
metals across our electric vehicles indices because EVS also has
that materials component to it. We've seen it naturally within
the Uranian names, within our nuclear We are definitely seeing
some of that policy prioritization, not just within the US
but globally, everybody prioritizing their own access to critical materials.
Speaker 3 (28:21):
I think.
Speaker 2 (28:22):
But you know, correct, if you're wrong here. I don't
see what I would say was probably explicit materials exposure,
but I might be missing as I'm scanning the holdings here.
How are you looking? Is that too much volatility in
that real upstream component? Related to that more commodities exposure?
I mean obviously not commodities, but equities that are developing
commodities themselves, or what are you guys thinking there?
Speaker 4 (28:44):
Yeah, I think you know, energy, security, defense security, critical
mineral security.
Speaker 3 (28:50):
We talk about things like shipbuilding.
Speaker 4 (28:52):
Those a very headline grabbing and it might be a
bit of a red hearing, but there's a lot of
focus on security, and I think that's a long duration opportunity.
You're right, we don't have a lot of critical mineral
investments in the portfolio.
Speaker 3 (29:05):
We've looked at some.
Speaker 4 (29:08):
We have invested in nuclear though, and I think nuclear
is one very key strategic element of driving innersecurity policy
in this country. And so we own a few businesses
that are in that value chain. One that that I
highlight that has the mineral side is Camico. So Chemico's
roughly fifty percent of the value is in the Uranian
(29:30):
business and the rest is in a stake in westing House,
which is involved in the manufacturing process and equipment side
of large scale reactors. So that's one area we've invested.
But I think it's a very powerful theme that we
certainly look around for ideas.
Speaker 2 (29:46):
Do we think that the rising tech company or tech
investors focus on I'm trying to think of a way
to frame this that doesn't sound as though I'm just
feeding into news headlines the tech interest, if you will,
that's flocking towards industrials materials. I mean for people who
(30:06):
have been looking in this space for now a very
long time, sometimes having tech valuations or tech investors flocking
into that space is disrupting, if you will, say, the
natural way of things looking and being valued across those
areas of the market. Do you think that there's some
risk there now that we're getting more of this intersection,
(30:28):
or do you think generally this is you know, it'll
work through towards the new era where we are naturally
combining these two things.
Speaker 3 (30:36):
Yeah, again a couple things again working backwards.
Speaker 4 (30:40):
Right, So why are we seeing interest in these really
boring old economy and industrial businesses emerge. I think it's
because there's increasing awareness of two things. One, there's a
regime regime change taking place, that headwinds have dissipated in
are turning into structural tail I can flesh that out,
(31:02):
but that's one two. I think there's appreciation that many
investors are very heavily exposed to a certain type of
business that has certain types of style factors, and they
are very under exposed to a lot of these old economy, industrial.
Speaker 3 (31:16):
Infrastructure supporting types of companies. I think that's why it's happening.
On point one.
Speaker 4 (31:25):
Look, we hollowed up the manufacturing base of the US
and moved it to China. That was a headwind for
our domestic industrial business.
Speaker 3 (31:33):
For a long time.
Speaker 4 (31:34):
We have not invested in the grid gapex to sales
ratios up until a couple of years ago have been
near twenty year lows, and that has been at the
expense of the manufacturing equipment base and the infrastructure in
this country. So there's been a bunch of headwinds. There's
a need to repair those situations or to reinvest in
(32:02):
the industrial and infrastructure based in this country for cyclical reasons.
Just as there's these accelerating structural themes with the energy transition,
with power demand, with energy security, and that's driving a
change in fundamentals role economy companies. And we owned GeV Vvernova.
They no one cared about this company when it was
inside of g it was Gpower. People only cared about
(32:27):
the aerospace business. Aerospace business is fantastic, but giev Renova
is one of three companies in the world that makes
large scale natural gas turbans. That portion of the not
gas turbans didn't grow for about a decade. Giev Renova
is now sold out through twenty twenty eight. They're growing
earnings at sixty percent a year. It's gone from a
(32:48):
business that was X growth to a company that is
growing very rapidly. And so this is that regime shift
that's taking place that I was talking about.
Speaker 3 (32:55):
So I think that's why you see tech interest.
Speaker 4 (33:00):
And last thing I'll say, at risk of being long
winded on this, so I was at this conference two
and a half years ago, I think it was September
of twenty three, and I was in a meeting with
Eaton Electrical Equipment Square and there was an analyst at
a tech focused edge fund that was in the meeting,
(33:20):
and I was just shocked to see this fund in
the meeting because they never invest in these types of names.
It turns out they were investing in this space. And
the very next day, I think Eaton was down seven
percent because they said something in the conference about their
backlog not growing as fast in the future. And I
don't know this, but you can imagine that a number
(33:41):
of folks who were newer to that space could have
easily blown out of this dock. I don't know if
this fund or not, but it was one hundred and
eighty bucks back then. Now this doc's three eighty. You know,
something about really knowing what you own is critical here
when you have these pockets of volatility.
Speaker 2 (34:00):
I think it's interesting I talk about this a lot.
We've talked about this with respect to our defense theme
we talk about with industrials, and one of those things
whenever I speak to that tech migration towards these types
of themes and these types of potential pockets of opportunity
is very much that tension. Tech investors live and breathe
by quarter to quarter, Right, investors who typically are looking
(34:21):
at these types or you know, in this space that's
not the same type of investment profile or of the
same way that they're approaching these companies. They really do
look at the durability the stuff their growth trend. So
I think that that tension will be interesting to see
what happens over the next year.
Speaker 3 (34:37):
You hit it earlier on the deep seek moment.
Speaker 4 (34:40):
So in February, a lot of these businesses on the
power side of AI sold off as much or more
than some of the AI semi conductor companies we ownvert
if it was down sixty percent or something peaked a.
Speaker 3 (34:56):
Drought, and that's obviously it's painful, full stop.
Speaker 4 (35:03):
But we took a step back and we kind of
reunderwrote all of our investments in the thesis, and our
thesis on the demand side for why power is growing
is far more than just AI. So AI is one
leg of the stool. It gets all the news, and
that's totally fine. But we're electrifying our entire economy. We're
electrifying transportation buildings, We're bringing manufacturing back, which is very
(35:27):
electricity intensive. And if AI just went away, that's about
one percent of the three percent electricity growth demand that
we expect for many years to come, and for some
of the businesses we own to be cut in half.
On some concerns around AI capex because the deep seak
(35:48):
model we.
Speaker 3 (35:49):
Viewed as.
Speaker 4 (35:51):
Over the punitive, and so you have to know what
you own as an investor, otherwise you end up selling
at the bottom, and that's obviously the worst.
Speaker 3 (36:00):
Thing you can do.
Speaker 2 (36:01):
I think that. I think that's a really good point.
And these were secular growth trends that people were investing in,
as you say, long before the data center excitement, if
you will. That's adding, if you will, and that's if anything,
that's just adding the urgency, adding sort of the amount
of investment opportunity that's potentially going to be surrounding this.
And I do think it's going to be really interesting.
(36:23):
As you say that that was an overreaction. Those names
did bounce back, I'm remembering correctly, did bounce back relatively
quickly and quicker. Then we saw some of those tech
names bounce back. But again it spoke to just how
aggressively some of the investment landscape was immediately worried about opportunity.
Speaker 4 (36:42):
There one hundred percent. I like to say the AI
poured gasoline on the fire. This was already happening, right
the electricity man And to your point, you know the
way they sold off like it could have just been
a week set of hands and maybe two hours in
the stocks, who knows, But we we don't care about quarters.
We believe that have having differentiated perspective and anchoring to
(37:04):
a longer time horizon gives us some competitive advantage, and
so volatility like that, while it's not fun in the moment,
we've background and recognition tells us that it's our.
Speaker 2 (37:16):
Friend, and you've handled those those things in the past.
I'm sure I'm going to avoid the question of does
that mean we should go to less frequent reporting, because
I don't want to have that conversation today. But I
am going to ask one other question, and I think
you nail at least what I would probably say was
what I would think was the most unappreciated thing right
(37:37):
underappreciated thing right now. But I'm going to put the
question to you anyways, because actually, maybe you've got something
else that you're hiding in your back pocket to answer
on this. But what are you watching really closely that
you think the market isn't getting right now, or that
is really unappreciated by the market right now that you
think could surprise people over the next year, let's say,
(37:58):
Or I'll let you choose your time and what you
think is underappreciated.
Speaker 4 (38:02):
Look, I don't have a fancy answer for you on that,
but we really focus on this theme and where we
think there's either an extreme amount of pessimism or they're
just is non appreciation for how large an opportunity is.
And our portfolio speaks for itself right now. We think
(38:22):
that power scarcity and a need for good reinforcement is
an incredibly large opportunity. There are a number of businesses
that I think are still quite unknown within that space, and.
Speaker 3 (38:37):
We do our best to uncover them.
Speaker 4 (38:40):
We've allocated quite a bit of capital to nuclear over
the past six to twelve months, and it's not in
some of the smaller cap names that are experimental technologies.
It's businesses like Miriaan Technologies, which have a presence in
almost all the large scale nuclear reactors in this country
(39:02):
and in the world, providing nuclear radiation detection systems. It's
a really high quality company that most folks have probably
never heard of. So we stick to ournating and we
look for opportunities in those, you know, in those areas
of the theme that we think are most exciting, and
we've talked around this a few times, but you just
(39:23):
can't solve the power side of this equation quickly.
Speaker 3 (39:29):
You need years and a ton of capital. So these
bottlenecks remain. We think they persist for years to come.
Speaker 1 (39:39):
Well, great, we need to end here unfortunately, but this
was a great conversation. Eli, thank you again for joining us.
Speaker 3 (39:46):
Thanks every thanks pre I enjoyed it.
Speaker 1 (39:48):
Eli and brit thank you again for being my co host.
Speaker 2 (39:51):
David always appreciate the invite anytime, and.
Speaker 1 (39:54):
I want to thank you for listening. If you liked
the episode, please subscribe and leave a review. Also, if
you'd like to see more of our research, go to
BI fund Go and b I T H E M.
Go on the Bloomberg Terminal until our next episode. This
is David Cohne with Inside Out.
Host
Gina Martin Adams
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