September 30, 2024 • 33 mins
Dave McGarel provides insights on what sort of stocks are poised for long-term outperformance in light of Fed rate cuts, valuation gaps, and factor analysis.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Ryan (00:13):
Hi, welcome to this episode of the First Trust ROI
podcast.
I'm Ryan Isakainen, ETFstrategist at First Trust.
(00:34):
Today, I'm joined by DaveMcGarrel, Chief Investment
Officer at First Trust.
Dave and I are going to talkabout what's going on in the
equity market, when the marketwill broaden out, or will it
continue to broaden out, andwhere there might be
opportunities, especially fromviewed through a factor lens.
Thanks for joining us on thisepisode of the First Trust ROI
Podcast.
All right, Dave.
(00:55):
Well, thank you for joining uson the podcast.
Again.
We are recording this on thefirst day of the Fed two-day
meeting before they announcewhat the results of their policy
will be.
So it's kind of unfair, but Ithink it's pretty safe to assume
that they're going to cut andI'm not going to ask you if it's
going to be 25 or 50, becauseyou'll be proven right or wrong
(01:17):
and it's kind of a coin flip atthis point.
But what I will ask you is howimportant is it that the Fed is
likely tomorrow to have beguncutting rates?
Dave (01:28):
Yeah, I think that's the right way to frame it, ryan, and
a good day to you.
The rate cutting cycle iswhat's important.
$25 or $50 tomorrow, september18th won't be forgotten.
In a week It'll really be aboutthe rhetoric and the Fed speak
(01:49):
of.
Where are we going?
The market currently believeswe're going to have 200 basis
points of rate cuts as early asJuly.
Maybe another 100 basis pointsof cuts by the end of next year
and that would put us at a Fedfunds rate closer to two.5, 275
from 5.5 today.
And if inflation stays benignand actually declines a little
(02:12):
bit more, the market, I think,believes that's where we'll wind
up and that certainly helpedthe economy immediately.
But if the market does believethat that is the path and it is
uninterrupted probably unlikelythen I think that will be a
significant positive for Stenox.
Ryan (02:31):
Do you think we pay too much attention and talk about
the questions of whether it's 25or 50 and pay more attention to
these things than we need to,then Completely If it's 25 or 50
, we're going to five and aquarter or five.
Dave (02:46):
I don't think it'll change anybody's behavior, certainly
overnight.
Eventually it'll change thebehavior of companies and
investors.
When you can't get a risk-freerate of five and a half and when
you are a company and your costof funds goes significantly
lower, even ahead of all ofthose potential rate cuts,
(03:11):
you'll see both consumers andcompanies start responding with
either capital expenditures ordifferent aspects in the housing
markets at the consumer level,indicating that now is the time
to be able to go ahead and makesome of those purchases you
might be holding off on when youhad mortgage rates north of 6%
(03:35):
and close to 7% the last 12 to18 months.
Ryan (03:39):
So one of the byproducts of the front end of the yield
curve moving lower is that theyield curve has now gotten to a
point where it's normalized.
It's no longer inverted and inthe past often we've seen
recessions follow.
After a long inversion, theyield curve normalizes and there
is often a recession.
Do you think that that islikely to happen in this
(04:01):
environment, or is theresomething different about this
time?
Dave (04:03):
I don't know Well.
I mean, there's lots of thingsdifferent about this time.
The Fed had a massive ratehiking cycle that we expected
remember that one to be prettylinear 25 base points a time
over a long period of time, andsomehow the Fed raised 350 basis
points from May of 22 throughDecember of 22, with 475 base
(04:24):
point hikes in there, whichnobody had in the forecast.
So the forecast currently theFed just slowly lowering rates
and that's avoiding a recession,I think is the path forecast.
Will we have a recession?
I don't know that the yieldcurve is.
You know, if you have athousand iterations of something
(04:46):
and 90% of the time it happens,but when you have eight to 10
recessions and you see something, it's really hard to say that's
causation instead of just somelevel of correlation.
Ryan (04:57):
Yeah, I've always thought that too.
It's a small sample size.
Dave (05:00):
Yeah, we need more, in my view, than just the bond market
indicating and telling us thatwe're going to have a recession,
and a few times more than notit actually happening.
So I don't look at that as thebiggest signal.
I think it'll be much moreabout what we see in the
unemployment arena, what we seein the GDP growth arena, what we
(05:27):
see in the GDP growth and whatwe see in companies and capital
expenditures, if they do ramp uphere with the forecast for
lower rates.
Ryan (05:30):
As the Fed begins a rate-cutting cycle, that'll have
some impact on the longer endof the yield curve, but it won't
be point for point.
Do you think that the 10-yearsay and that part of the yield
curve, we're going to see a sortof dramatic reduction in rates,
or is that already being pricedin today?
Dave (05:48):
I think a lot of it's been priced in.
I think in the two-year we lostmaybe 100 base points in the
last couple of months here, onceit was obvious that the Fed was
going to cut with, I believe,that July unemployment report,
and so I think the marketadjusts really quickly when the
(06:08):
thesis changes, and I thinkyou've already seen that.
Certainly, I think theexpectation is that we'll see
the curve steepen as we movethroughout this year and with
the short end coming lower.
But the market, I think, isalways very far ahead of that
and I think they are at thistime as well.
Ryan (06:28):
It seems like that's a good thing for the economy
because if it wasn't beginningto be priced in, it seems like
people would make decisions.
You mentioned capital spendingand all these other decisions
waiting for rates to come downbecause you want to finance
whatever your expenditure is M&Aor something at a lower rate.
But if it's already baked in,then maybe decisions won't be
(06:48):
put off as much.
Dave (06:50):
Yeah, I would agree.
I think if we have eight ratecuts expected 200 basis points
as early as July, that's ninemonths you put your capital
expenditures in place well aheadof actually making all the
expenditures.
So I think it'll start beingreflected in a lot of budgets
(07:13):
and I think, if you look at lastyear, a lot of IT budgets were
cut.
Obviously there's a massivespend with the hyperscalers in
the AI space, but when you lookacross the average company and
its IT spend, it's been veryflat over the last year or so in
the software space and servicespace and I would expect to see
that increase, since obviouslytechnology is a massive spend
(07:38):
across the entire S&P 500, all11 sectors, and I think those
budgets will increase with theexpectation rates are going to
be lower.
Ryan (07:48):
So one of the themes that we've talked about a lot in the
last couple of years is theexpectation that eventually the
stock market's going to broaden.
It's been very narrow for anextended period of time,
favoring those big mega captechnology and tech plus names,
but getting the timing right onthe broadening is kind of a
challenge.
Do you think that we've begun,as the Fed has indicated they're
(08:12):
going to pivot and as rates inthe 10-year have begun to trend
lower, we've seen somebroadening over the last couple
of months.
Do you think that is going tocontinue and maybe stay put this
time?
Dave (08:23):
I do.
It's actually probably lost ona lot of investors if you're not
looking every single day at thebest sector.
This year through today isactually not technology.
Technology is in second placeand utilities is the best sector
.
Now some might say, well,that's just an AI playing a
thirst for energy because of AI.
(08:44):
Perhaps, some of them may bethat dividend trade investors
getting ahead of that if the Feddoes cut rates to 100 basis
points and we start talkingabout bond proxies in the equity
markets again.
But if you look at the fourthbest sector, it's up 20%.
That's financials, and on topof that you have consumer
(09:06):
staples, defensive and dividendpaying sector as well, and those
are all right around 20% gains.
And most interestingly, if youtake tech, which is still up 25%
of the year, but realize thatNVIDIA is up 130% year toto-date
and it's 10% of the tech sector, that means tech apps in NVIDIA
(09:30):
is actually only up 12% or 13%,which would put it in eighth or
ninth place when we look at allthe S&P 500 sectors, without
one stock.
So why is tech underperforming?
Financials, utilities, consumerstaples and so many industrials
and all these other sectors?
(09:51):
If you take NVIDIA, the rockstar of the stock market and the
best stock in the stock marketthis year, no stock is up better
than NVIDIA and that is, to me,the market running out.
The problem for investors whoare trying to time everything is
we haven't had any rate cutsand yet the market has already
(10:11):
broadened.
When you say financials are up20%, that's not a big growth
sector.
When you say industrials are upclose to that and staples, the
defensive sector, are up around20%, those are double average
annual returns and it's onlyeight and a half months into the
year without any rate cuts.
It's a little bit of buy therumor, sell the news maybe, but
(10:36):
when we start looking atvaluations and profit forecasts
I think there's still morebroadening to go, because it's
been such a lopsided trade forso long.
Ryan (10:43):
So those areas that you just mentioned, some of the
defensive areas like utilitiesand staples financials, are
valuations for those sectorsstill relatively attractive
compared to something likeinformation technology, sure,
and I think the real story thereis.
Dave (10:59):
Not only are valuations significantly more attractive,
there's still a huge dispersionbetween growth and value stocks,
but the earnings forecasts arewhat will drive a further
broadening.
So if you can get similarearnings or close to similar
earnings in sectors that arepriced 50% of where some of the
(11:21):
glamour sectors are at asignificant discount, that's not
really reflecting the earningsforecast at this point.
It's reflecting pastperformance and kind of the old
phrase skating to the puck whereit's going.
That's what's been happening.
Utilities are up 26% 27% thisyear because people thought
utilities got too cheap.
(11:42):
Or financials at 11 or 12 timesearnings earnings.
That's just such a good bargain.
No, it's looking at thepotential for these companies to
start distributing biggerdividends, buying back more
stock, because earnings profileslook a lot better in a lot of
those areas one of the thingsthat we pay attention to with
some of our product developmentthe products that we offer at
(12:03):
First Trust are factors.
Ryan (12:05):
It's something we talk about a lot.
You've mentioned a little bitabout, maybe, demand for
dividend paying stocks a momentago.
You mentioned as utilities haveoften been a place where you
get dividends.
Is that your favorite factorright now dividends, and are
there any others that peopleshould be paying attention to?
Dave (12:21):
Sure, I think it's clearly been a momentum market.
Even as we sit here today, evenas the market has brought out,
momentum still been a dominantfactor.
There's a decent amount ofspeculation when you have the
kind of momentum we've had thisyear as well.
But when you start looking low,vol is now neck and neck,
because of that volatility inconsumer staples trade with the
(12:44):
momentum factor as far asforecasting some year-to-date
performance.
But if you think about the Fedand a bunch of rate cuts on the
way, what are the beneficiaries?
Well, from a stock marketstandpoint, an investor
standpoint, it would bedividend-paying companies,
because I need to replace thatrisk-free income from T-bills or
(13:07):
T-notes or short-durationrisk-free funds with something
that can give me some comparableincome.
And frankly, in the equityspace, with qualifying dividend
income, you can get better taxconsequences with
dividend-paying stocks in manycases than you can in some of
(13:28):
the fixed income spots, some ofthe fixed income vehicles that
are available today.
Size so small cap stocks have ahigher cost of capital.
It's harder to get capital forthose companies and they also
typically have a lot morefloating rate debt on their
(13:50):
balance sheets.
So if rates do fall 200 basispoints, one of the biggest
beneficiaries will be small caps.
Finally value stocks Valuestocks are traded at much lower
multiples of a price to book orprice to sales, and they also
carry a lot more debt than a lotof growth companies.
(14:11):
They don't have those same kindof quality balance sheets.
Well, if you don't have thebest quality balance sheets,
that means you must have a lotof debt on there, and lower
rates should help that trade aswell.
So it's been again such alopsided trade for so long.
I would implore investors notto think they've missed anything
, even with a little bit of are-rating here.
(14:33):
In the size factor it's beenvery good since last October,
pretty commensurate with largecap, mid cap stocks as well.
So that size factor is evenedup.
But again, it's not linear.
It comes in like big chunks andthen sits there and you say, eh,
maybe that's done.
But when you look at thevaluation gap between small and
(14:55):
large, I think there's still alot of opportunity there.
It hasn't happened in the valuespace really very much.
It's been the higher quality ifyou want to talk about value
names, the biggest names upthere in the S&P 500.
But if some junkier balancesheet companies that still have
good companies, good businessesbut just don't have the same
quality balance sheets, if thatgets a move you could see a
(15:18):
significant re-rating there andI could see multiple expansion
in that space.
Arguably, more than any otherfactor out there would be
something in that value factorspace.
Ryan (15:32):
It's always interesting because we're all subject to
behavioral biases, and thisrecency bias, where we want to
chase what did well mostrecently, I think, is a battle
that all financial professionalshave as they're trying to guide
their clients, and value is oneof those areas that you hear
more and more that you know thisdoesn't work anymore.
These stocks are cheap for areason.
(15:52):
They're going to stay cheap,but that doesn't seem to be your
outlook.
Dave (15:56):
You know we have obviously a lot of interest across the
board in the retail community,in the stock market and some of
it's silly the meme stocks andsome of the initial coin
offerings and things that arejust incredibly speculative.
But there's also thisfascination with the best
companies in the world, andrightfully so.
They garner all the news andsuck with the best companies in
(16:16):
the world, and rightfully so.
They garner all the news andsuck all the oxygen out of the
market.
But at the end of the day thestock market only responded to
cash flows and earnings, and itdoesn't really care what the
ticker symbols are and how bigthe company is.
At the end of the day, it looksat where is their earnings
power?
(16:37):
How much am I paying for thatearnings?
Can I forecast it with anyprecision?
And then they forget aboutexactly what the company might
actually be doing to earn allthat income.
As long as they are comfortablewith all that fundamental
picture and right now we'restill in a market that is
clearly fascinated with thepotential and the forecast for
(16:58):
things into the future that arevery unknown, and that AI spend
is dramatic and that's whereretail investors continually go.
But they're also the bestcompanies in the world, so
that's where the portfoliomanagers go as well.
But there's going to become apoint in time where a portfolio
manager starts to realize thebest returns are to be had
somewhere else, and that's howyou beat that index, that top
(17:20):
heavy index, and I think we'regetting closer and closer to
that, and there's all kinds ofdata to support that If you
really look underneath thesurface instead of look at the
headlines and say what's thestory about NVIDIA or Microsoft
or Apple today?
Ryan (17:34):
So you mentioned re-rating the valuations of some of those
value stocks, some of thosesmaller stocks that are
relatively cheap.
Does that happen at the otherend as well?
Do you think where you've gotsome of these expensive stocks
and maybe they don't have roomto expand their multiples, but
do you think those multiples arelikely to fade, especially as
you mentioned some of the fundmanagers and others?
Dave (18:00):
start thinking about rebalancing out of those stocks.
Absolutely, I think there's thepotential for that.
It's certainly hard to find waysfor a lot of those companies to
expand their multiples and thenwhen you look at their earnings
growth, in most cases andNVIDIA is the wild card and you
don't really know it, but theircomparisons are getting more and
more difficult every singlequarter after an unbelievable
earnings surge the last six orseven quarters, it gets really
(18:24):
hard to figure if we're notgoing to see faster earnings
growth than the rest of themarket, significantly faster.
We're already paying a verylarge premium for a lot of those
companies.
Why would we start to paysignificantly more for those
companies in the absence ofsomething new happening which
would dictate that earnings aregoing to go much faster from a
(18:47):
much larger base when you startlooking at those companies,
those FANG type of companies atthe very top of the market?
So I think that's potential tosee at least stop that multiple
expansion from increasing anyfurther multiple expansion in
that continuum of stocks andthen narrowing the gap, whether
(19:09):
it's value or size or dividendyield, in that valuation gap
between that basket Again it'sreally narrow at the top.
I mean we know that 10 stocksare 36% of the S&P 500.
That's almost a $50 trillionmarket and a third of it is in
(19:30):
10 companies and they're pricedin the high 20, multiple, 28, 29
times in a market that's pricedcloser to 22.
And the earnings growthforecast.
It's much more spread out thansaying that 30% of the profits
is coming from those 10companies.
No close to 36%.
That's where they traded muchhigher multiples than the total
(19:51):
earnings forecast.
So that opportunity to kind ofclose the gap by one contingent
of stocks that have been theglamour stocks the last decade,
coming down or plateauing as faras only following some earnings
and the rest of the marketstarting to say let's lift up
some multiples here.
And oh, by the way, a lot ofthese companies have some pretty
(20:13):
good earnings forecasts thereis a value stock that becomes a
growth stock is a phenomenalreturn story every single time.
And I think we're going to see abunch of value stocks that
start following their earnings.
The market starts understandingearnings are going to continue
to increase and decide theyshould pay a lot more for a lot
(20:34):
of those companies and we'regoing to see a contingent of
those companies that I believehave a very good rest of this
decade in the equity markets,especially if the Fed is able to
take rates down to 250 basepoints in the next year or so.
Ryan (20:49):
So I think it was.
Microsoft earlier todayannounced that they were going
to increase the buyback ofshares and they were, I think,
going to boost their dividendsas well.
As some of those mega capcompanies start thinking about
what to do to grow and theymaybe don't find as many options
for reinvesting in growth, doyou think that the reinvesting
will just be acquiring some oftheir shares, like we've seen in
(21:09):
the past?
Dave (21:10):
I do, and the difficulty is Microsoft trades.
It's a $3.2 trillion company.
They're going to buy $60billion back, so that's less
than 2% of their float of theircompany's outstanding shares and
it costs $60 billion.
So it's not going to have asdramatic of an impact as
companies like Apple in the pastwhen they bought 38% of their
(21:34):
stock back in the last decadeplus and it's had a huge impact
on earnings per share.
But when you trade at that kindof multiple and you need to use
Microsoft's free cash flow isin the $80 billion range, I
believe last year or so.
So if you're going to use $60billion in a period of time and
top of the dividend, which wasan ordinary dividend increase
(21:56):
about the same rate that they'vedone you don't.
And additionally, they'respending a massive amount of
money on capital expenditures.
Obviously that doesn't hitincome.
It's fixed assets, but theircash flow is really spoken for
and they can't really increaseit.
So the markets I think Microsoftwas up on that news, but not
(22:19):
anything extraordinary thatthey're delivering to
shareholders.
I actually think it was alittle bit more of a defensive
move because shareholders aregetting very concerned about
that AI spend and a company likeMicrosoft that typically just a
few years ago was spending $10or $12 billion in capital
expenditures in 2018-19.
(22:41):
And don't quote me on thosenumbers, but they're in that
range.
I believe Next year is talkingabout spending somewhere north
of $60 billion.
So this is only five, six yearsago that you're seeing this
massive increase, and it's alsoa significant increase in your
capital expenditures compared torevenue.
That percentage increase is upfrom maybe 13 or 14 to about 21,
(23:04):
22 percent of your revenue.
That doesn't seem like asustainable model and I think
investors have started toquestion Microsoft.
So what's in it for us ifyou're going to spend all this
money on capital building outthe AI?
And so today, I thought wasmore of a defensive move to?
say hey no, no, we're still inmy back stock, but the market
(23:26):
didn't applaud it, like youwould expect them to do with
those kind of numbers.
Ryan (23:32):
I don't know if this is a good analogy or not, but it
almost reminds me of what theenergy sector did for a long
time, where they took all theircash flow and they reinvested it
and it wasn't capitalexpenditure and AI equipment,
but it was trying to pull moreoil out of the ground and gas
out of the ground, but similar.
Dave (23:48):
Clearly, investors got frustrated with that and then
energy companies, after COVIDespecially, started really
rewarding shareholders withstock buybacks and cash
dividends and special dividends.
In many cases, the sector firstshrunk a small way.
I mean, we're talking aboutvery different return profiles,
obviously, where you havemargins in the tech space that
(24:09):
are just magnificent.
This is clearly the secularstory of our lifetimes here, but
energy is going to be aroundfor a long time and energy
companies figured out how to gethigher multiples and to deliver
cash in return to shareholders,and the tech companies could be
in that spot one day.
There's no question that they'rethe dominant companies, but if
(24:32):
I had to give you an analogy,I'd say Tom Brady is the best
quarterback of all time, billBelichick the best coach of all
time, and I don't think thatchanged during either one of
their careers.
But for 10 years, from 2005through 2015, they didn't win
any Super Bowls.
They were still just as greatas they were, but somebody else
(24:53):
won the day, and I think we'regoing to see that happen here
across a continuum of a lot ofcompanies as we move forward,
that we're still going to havethose companies being the best
companies in the world, butwhere they're priced today, and
the expectation on top of themmeans there's going to be a lot
of other winners out there, notjust the select companies that
have dominated the last 10 years.
Ryan (25:15):
Are there any specific, maybe underappreciated, themes
that you think will be lookingback five or 10 years from now?
Investors will maybe kickthemselves for not being exposed
to, or maybe pat themselves onthe back for having exposure to,
that theme.
Yeah, well, first I think smallcaps.
Dave (25:35):
I mean they're terribly cheap.
Rates are going lower.
This idea that small caps won'tbe able to grow faster than
large caps may be pertinent fora small period of time, and then
history says they grow faster.
I mean, I always just readWarren Buffett's shareholder
letter.
I can't grow Berkshire Hathawayas fast as I did in the past.
It's much bigger.
It's much harder to grow it.
(25:55):
So certainly I think the smallcap space is something that if
your patient is going to deliveroutsized returns because we're
not trading at parity to largecaps, we're not trading above
what we've typically seen, thatvaluation, we're actually
trading at a significantdiscount, not unlike the late
1990s.
(26:15):
And then if you look at theearly 2000s, you saw small and
mid-cap stocks just dominate forfour, five, six years and
deliver outsized returns.
I actually believe we're in amarket where you might not see
the S&P 500 appreciate much.
Obviously, it's incrediblytop-heavy 36% of it almost is in
only 10 names and eight ofthose names are the biggest tech
companies in the world.
They're tech-like companiesonly 10 names and eight of those
names are the biggest techcompanies in the world.
They're tech-like companies.
(26:37):
But you could see lots ofportfolios perform.
I'm not a big fan of the termstock picker's market, but this
is a market where, if you'relooking at fundamentals, instead
of saying I need to hew to thebenchmark which so many managers
will do, so many retailinvestors will want that S&P 500
exposure.
(26:57):
We actually believe that as wego through the rest of this
decade, the index won't do aswell as lots and lots of other
portfolios that have a broaderbet on companies, broader sector
exposure than what the indicesgive you and certainly less
concentration in just a few moreexpensive names at the very top
of the market.
Ryan (27:18):
Okay.
So we're, as I mentionedearlier, late September.
That means there's an electioncoming up in early November.
I think most of the odds makerssay it's something like a 50-50
toss-up we don't know who thenext president's going to be.
Does it matter from a stockinvestor perspective?
Dave (27:36):
It probably matters in certain industries.
Although, if you look backhistorically, whether it's about
green energy or oil, if youhave a candidate who says we're
going to get as much oil out ofground as we can, well, is that
really good for oil companies?
I mean, yeah, regulation'seasier, but we're going to get
as much oil out of the ground aswe can, well, is that really
good for oil companies?
I mean, yeah, regulation'seasier, but we're going to be
(28:03):
washing oil, perhaps.
And so maybe a candidate whosays we're not going to allow a
lot of oil to be pumped would bebetter for any company.
So you really have to decipherit Instead of trying to read
between all those lines andfiguring out on a coin flip.
I think if you stick to thefundamentals the market and
companies and entrepreneurs theylook at the environment, they
(28:25):
see where it's changing, whereit might change, and they
navigate it.
And so does it matter?
Sure, it matters to lots ofpeople who the president of the
United States is and make up ofthe Senate and the House, but as
an investor, to get caught upon that, I think you make more
mistakes than you make goodpossibilities for yourself.
Ryan (28:45):
Okay, my last question for you, Dave.
You are the Chief InvestmentOfficer at First Trust.
You've been the ChiefInvestment Officer for quite
some time, but how long have youbeen at First Trust?
Dave (28:54):
Been at First Trust since August of 1997.
Ryan (28:58):
Okay, let's say you did not come to First Trust and you
had a different career path.
What do you think it would havebeen?
Dave (29:05):
Not as good.
I'm quite sure about that.
I came out of school in 88 andI went to work for a public
accounting firm in Chicago and Iwas there for eight years and
probably would have stayed.
I enjoyed it, I was okay at itand great.
(29:26):
I got my CPA and I just had anopportunity through
relationships to meet somebodyat First Trust and end up here
and never look back and neverwanted to leave after six months
being here.
I would probably be some levelof an accountant, more so than a
(29:49):
finance person if I did notfind my way to First Trust.
So I definitely had looked intosome accounting jobs and
potentially CFO roles of somesmaller companies but I'm
certainly thankful that I passedon those and found First Trust
(30:12):
in 1997.
I passed on those and foundFirst Trust in 1997.
And it's been a great story ofa company that is so unorthodox
in so many of their ways ofdoing business, but absolutely
something that I embrace and hasbeen just wonderful for myself
(30:33):
and my career.
Ryan (30:34):
So I know I said that was the last question, but I have a
follow-up question.
So what aspect of working asthe Chief Investment Officer at
First Trust do you find most?
You know what gets you chargedup, what's most fulfilling,
rewarding in that role.
Dave (30:48):
Well, our model and I told you it's pretty unorthodox.
There's no print advertisingthat you see anywhere.
So what we do is we go on theroad and we talk to thousands
and thousands of advisors, andBrian Westbury is the chief
economist he's the rock star.
Jim Bowen is a fantastic CEOand is going to put this company
(31:09):
together and then I get to justprovide some market data and
investment solutions foradvisors who are serving their
customers.
And that's my goal every singletime that I go out on the road
is and I start with, I want togive you something that can help
you in a conversation with onefamily that you serve, mr and
Mrs Advisor, that can help you,help them protect and build
(31:33):
their wealth over time, providefor their family and their
family's future.
And the feedback that I getfrom that, you know, over the
years has been just fantastic,and it's not about a single
recommendation.
I did this and you said to dothat.
It's no.
Thank you for giving mesomething to show my clients so
(31:53):
that I can help them achievetheir goals, and so that, to me,
is one of the most fulfillingthings.
And then the people at FirstTrust.
I mean we have such acontinuation of employees and
many of the people I hired rightaway in 1997 are still there
running different departments ofthe company and to see their
growth and then the benefitsthat we've been able to give to
(32:17):
newer employees, because wedidn't have anything when we
started building this thing.
Certainly, I got there six yearsafter it started to be built,
with 70 or 80 employees when Iarrived, but the opportunities
that you provide for so manyother people and their families
internally, it is pretty greatto look back on.
(32:37):
So we've got a long way to gohere at First Trust, but it's
been a wonderful ride.
Ryan (32:43):
Well, dave, once again, thanks for joining us on the
podcast, Thanks for all yourinsight and perspective, and
thanks to all of you for joiningus on this episode of the First
Trust ROI Podcast.
We'll see you next time.
Hi, welcome to this episode of the First Trust ROI
podcast.
I'm Ryan Isakainen, ETFstrategist at First Trust.
(00:34):
Today, I'm joined by DaveMcGarrel, Chief Investment
Officer at First Trust.
Dave and I are going to talkabout what's going on in the
equity market, when the marketwill broaden out, or will it
continue to broaden out, andwhere there might be
opportunities, especially fromviewed through a factor lens.
Thanks for joining us on thisepisode of the First Trust ROI
Podcast.
All right, Dave.
(00:55):
Well, thank you for joining uson the podcast.
Again.
We are recording this on thefirst day of the Fed two-day
meeting before they announcewhat the results of their policy
will be.
So it's kind of unfair, but Ithink it's pretty safe to assume
that they're going to cut andI'm not going to ask you if it's
going to be 25 or 50, becauseyou'll be proven right or wrong
(01:17):
and it's kind of a coin flip atthis point.
But what I will ask you is howimportant is it that the Fed is
likely tomorrow to have beguncutting rates?
Dave (01:28):
Yeah, I think that's the right way to frame it, ryan, and
a good day to you.
The rate cutting cycle iswhat's important.
$25 or $50 tomorrow, september18th won't be forgotten.
In a week It'll really be aboutthe rhetoric and the Fed speak
(01:49):
of.
Where are we going?
The market currently believeswe're going to have 200 basis
points of rate cuts as early asJuly.
Maybe another 100 basis pointsof cuts by the end of next year
and that would put us at a Fedfunds rate closer to two.5, 275
from 5.5 today.
And if inflation stays benignand actually declines a little
(02:12):
bit more, the market, I think,believes that's where we'll wind
up and that certainly helpedthe economy immediately.
But if the market does believethat that is the path and it is
uninterrupted probably unlikelythen I think that will be a
significant positive for Stenox.
Ryan (02:31):
Do you think we pay too much attention and talk about
the questions of whether it's 25or 50 and pay more attention to
these things than we need to,then Completely If it's 25 or 50
, we're going to five and aquarter or five.
Dave (02:46):
I don't think it'll change anybody's behavior, certainly
overnight.
Eventually it'll change thebehavior of companies and
investors.
When you can't get a risk-freerate of five and a half and when
you are a company and your costof funds goes significantly
lower, even ahead of all ofthose potential rate cuts,
(03:11):
you'll see both consumers andcompanies start responding with
either capital expenditures ordifferent aspects in the housing
markets at the consumer level,indicating that now is the time
to be able to go ahead and makesome of those purchases you
might be holding off on when youhad mortgage rates north of 6%
(03:35):
and close to 7% the last 12 to18 months.
Ryan (03:39):
So one of the byproducts of the front end of the yield
curve moving lower is that theyield curve has now gotten to a
point where it's normalized.
It's no longer inverted and inthe past often we've seen
recessions follow.
After a long inversion, theyield curve normalizes and there
is often a recession.
Do you think that that islikely to happen in this
(04:01):
environment, or is theresomething different about this
time?
Dave (04:03):
I don't know Well.
I mean, there's lots of thingsdifferent about this time.
The Fed had a massive ratehiking cycle that we expected
remember that one to be prettylinear 25 base points a time
over a long period of time, andsomehow the Fed raised 350 basis
points from May of 22 throughDecember of 22, with 475 base
(04:24):
point hikes in there, whichnobody had in the forecast.
So the forecast currently theFed just slowly lowering rates
and that's avoiding a recession,I think is the path forecast.
Will we have a recession?
I don't know that the yieldcurve is.
You know, if you have athousand iterations of something
(04:46):
and 90% of the time it happens,but when you have eight to 10
recessions and you see something, it's really hard to say that's
causation instead of just somelevel of correlation.
Ryan (04:57):
Yeah, I've always thought that too.
It's a small sample size.
Dave (05:00):
Yeah, we need more, in my view, than just the bond market
indicating and telling us thatwe're going to have a recession,
and a few times more than notit actually happening.
So I don't look at that as thebiggest signal.
I think it'll be much moreabout what we see in the
unemployment arena, what we seein the GDP growth arena, what we
(05:27):
see in the GDP growth and whatwe see in companies and capital
expenditures, if they do ramp uphere with the forecast for
lower rates.
Ryan (05:30):
As the Fed begins a rate-cutting cycle, that'll have
some impact on the longer endof the yield curve, but it won't
be point for point.
Do you think that the 10-yearsay and that part of the yield
curve, we're going to see a sortof dramatic reduction in rates,
or is that already being pricedin today?
Dave (05:48):
I think a lot of it's been priced in.
I think in the two-year we lostmaybe 100 base points in the
last couple of months here, onceit was obvious that the Fed was
going to cut with, I believe,that July unemployment report,
and so I think the marketadjusts really quickly when the
(06:08):
thesis changes, and I thinkyou've already seen that.
Certainly, I think theexpectation is that we'll see
the curve steepen as we movethroughout this year and with
the short end coming lower.
But the market, I think, isalways very far ahead of that
and I think they are at thistime as well.
Ryan (06:28):
It seems like that's a good thing for the economy
because if it wasn't beginningto be priced in, it seems like
people would make decisions.
You mentioned capital spendingand all these other decisions
waiting for rates to come downbecause you want to finance
whatever your expenditure is M&Aor something at a lower rate.
But if it's already baked in,then maybe decisions won't be
(06:48):
put off as much.
Dave (06:50):
Yeah, I would agree.
I think if we have eight ratecuts expected 200 basis points
as early as July, that's ninemonths you put your capital
expenditures in place well aheadof actually making all the
expenditures.
So I think it'll start beingreflected in a lot of budgets
(07:13):
and I think, if you look at lastyear, a lot of IT budgets were
cut.
Obviously there's a massivespend with the hyperscalers in
the AI space, but when you lookacross the average company and
its IT spend, it's been veryflat over the last year or so in
the software space and servicespace and I would expect to see
that increase, since obviouslytechnology is a massive spend
(07:38):
across the entire S&P 500, all11 sectors, and I think those
budgets will increase with theexpectation rates are going to
be lower.
Ryan (07:48):
So one of the themes that we've talked about a lot in the
last couple of years is theexpectation that eventually the
stock market's going to broaden.
It's been very narrow for anextended period of time,
favoring those big mega captechnology and tech plus names,
but getting the timing right onthe broadening is kind of a
challenge.
Do you think that we've begun,as the Fed has indicated they're
(08:12):
going to pivot and as rates inthe 10-year have begun to trend
lower, we've seen somebroadening over the last couple
of months.
Do you think that is going tocontinue and maybe stay put this
time?
Dave (08:23):
I do.
It's actually probably lost ona lot of investors if you're not
looking every single day at thebest sector.
This year through today isactually not technology.
Technology is in second placeand utilities is the best sector
.
Now some might say, well,that's just an AI playing a
thirst for energy because of AI.
(08:44):
Perhaps, some of them may bethat dividend trade investors
getting ahead of that if the Feddoes cut rates to 100 basis
points and we start talkingabout bond proxies in the equity
markets again.
But if you look at the fourthbest sector, it's up 20%.
That's financials, and on topof that you have consumer
(09:06):
staples, defensive and dividendpaying sector as well, and those
are all right around 20% gains.
And most interestingly, if youtake tech, which is still up 25%
of the year, but realize thatNVIDIA is up 130% year toto-date
and it's 10% of the tech sector, that means tech apps in NVIDIA
(09:30):
is actually only up 12% or 13%,which would put it in eighth or
ninth place when we look at allthe S&P 500 sectors, without
one stock.
So why is tech underperforming?
Financials, utilities, consumerstaples and so many industrials
and all these other sectors?
(09:51):
If you take NVIDIA, the rockstar of the stock market and the
best stock in the stock marketthis year, no stock is up better
than NVIDIA and that is, to me,the market running out.
The problem for investors whoare trying to time everything is
we haven't had any rate cutsand yet the market has already
(10:11):
broadened.
When you say financials are up20%, that's not a big growth
sector.
When you say industrials are upclose to that and staples, the
defensive sector, are up around20%, those are double average
annual returns and it's onlyeight and a half months into the
year without any rate cuts.
It's a little bit of buy therumor, sell the news maybe, but
(10:36):
when we start looking atvaluations and profit forecasts
I think there's still morebroadening to go, because it's
been such a lopsided trade forso long.
Ryan (10:43):
So those areas that you just mentioned, some of the
defensive areas like utilitiesand staples financials, are
valuations for those sectorsstill relatively attractive
compared to something likeinformation technology, sure,
and I think the real story thereis.
Dave (10:59):
Not only are valuations significantly more attractive,
there's still a huge dispersionbetween growth and value stocks,
but the earnings forecasts arewhat will drive a further
broadening.
So if you can get similarearnings or close to similar
earnings in sectors that arepriced 50% of where some of the
(11:21):
glamour sectors are at asignificant discount, that's not
really reflecting the earningsforecast at this point.
It's reflecting pastperformance and kind of the old
phrase skating to the puck whereit's going.
That's what's been happening.
Utilities are up 26% 27% thisyear because people thought
utilities got too cheap.
(11:42):
Or financials at 11 or 12 timesearnings earnings.
That's just such a good bargain.
No, it's looking at thepotential for these companies to
start distributing biggerdividends, buying back more
stock, because earnings profileslook a lot better in a lot of
those areas one of the thingsthat we pay attention to with
some of our product developmentthe products that we offer at
(12:03):
First Trust are factors.
Ryan (12:05):
It's something we talk about a lot.
You've mentioned a little bitabout, maybe, demand for
dividend paying stocks a momentago.
You mentioned as utilities haveoften been a place where you
get dividends.
Is that your favorite factorright now dividends, and are
there any others that peopleshould be paying attention to?
Dave (12:21):
Sure, I think it's clearly been a momentum market.
Even as we sit here today, evenas the market has brought out,
momentum still been a dominantfactor.
There's a decent amount ofspeculation when you have the
kind of momentum we've had thisyear as well.
But when you start looking low,vol is now neck and neck,
because of that volatility inconsumer staples trade with the
(12:44):
momentum factor as far asforecasting some year-to-date
performance.
But if you think about the Fedand a bunch of rate cuts on the
way, what are the beneficiaries?
Well, from a stock marketstandpoint, an investor
standpoint, it would bedividend-paying companies,
because I need to replace thatrisk-free income from T-bills or
(13:07):
T-notes or short-durationrisk-free funds with something
that can give me some comparableincome.
And frankly, in the equityspace, with qualifying dividend
income, you can get better taxconsequences with
dividend-paying stocks in manycases than you can in some of
(13:28):
the fixed income spots, some ofthe fixed income vehicles that
are available today.
Size so small cap stocks have ahigher cost of capital.
It's harder to get capital forthose companies and they also
typically have a lot morefloating rate debt on their
(13:50):
balance sheets.
So if rates do fall 200 basispoints, one of the biggest
beneficiaries will be small caps.
Finally value stocks Valuestocks are traded at much lower
multiples of a price to book orprice to sales, and they also
carry a lot more debt than a lotof growth companies.
(14:11):
They don't have those same kindof quality balance sheets.
Well, if you don't have thebest quality balance sheets,
that means you must have a lotof debt on there, and lower
rates should help that trade aswell.
So it's been again such alopsided trade for so long.
I would implore investors notto think they've missed anything
, even with a little bit of are-rating here.
(14:33):
In the size factor it's beenvery good since last October,
pretty commensurate with largecap, mid cap stocks as well.
So that size factor is evenedup.
But again, it's not linear.
It comes in like big chunks andthen sits there and you say, eh,
maybe that's done.
But when you look at thevaluation gap between small and
(14:55):
large, I think there's still alot of opportunity there.
It hasn't happened in the valuespace really very much.
It's been the higher quality ifyou want to talk about value
names, the biggest names upthere in the S&P 500.
But if some junkier balancesheet companies that still have
good companies, good businessesbut just don't have the same
quality balance sheets, if thatgets a move you could see a
(15:18):
significant re-rating there andI could see multiple expansion
in that space.
Arguably, more than any otherfactor out there would be
something in that value factorspace.
Ryan (15:32):
It's always interesting because we're all subject to
behavioral biases, and thisrecency bias, where we want to
chase what did well mostrecently, I think, is a battle
that all financial professionalshave as they're trying to guide
their clients, and value is oneof those areas that you hear
more and more that you know thisdoesn't work anymore.
These stocks are cheap for areason.
(15:52):
They're going to stay cheap,but that doesn't seem to be your
outlook.
Dave (15:56):
You know we have obviously a lot of interest across the
board in the retail community,in the stock market and some of
it's silly the meme stocks andsome of the initial coin
offerings and things that arejust incredibly speculative.
But there's also thisfascination with the best
companies in the world, andrightfully so.
They garner all the news andsuck with the best companies in
(16:16):
the world, and rightfully so.
They garner all the news andsuck all the oxygen out of the
market.
But at the end of the day thestock market only responded to
cash flows and earnings, and itdoesn't really care what the
ticker symbols are and how bigthe company is.
At the end of the day, it looksat where is their earnings
power?
(16:37):
How much am I paying for thatearnings?
Can I forecast it with anyprecision?
And then they forget aboutexactly what the company might
actually be doing to earn allthat income.
As long as they are comfortablewith all that fundamental
picture and right now we'restill in a market that is
clearly fascinated with thepotential and the forecast for
(16:58):
things into the future that arevery unknown, and that AI spend
is dramatic and that's whereretail investors continually go.
But they're also the bestcompanies in the world, so
that's where the portfoliomanagers go as well.
But there's going to become apoint in time where a portfolio
manager starts to realize thebest returns are to be had
somewhere else, and that's howyou beat that index, that top
(17:20):
heavy index, and I think we'regetting closer and closer to
that, and there's all kinds ofdata to support that If you
really look underneath thesurface instead of look at the
headlines and say what's thestory about NVIDIA or Microsoft
or Apple today?
Ryan (17:34):
So you mentioned re-rating the valuations of some of those
value stocks, some of thosesmaller stocks that are
relatively cheap.
Does that happen at the otherend as well?
Do you think where you've gotsome of these expensive stocks
and maybe they don't have roomto expand their multiples, but
do you think those multiples arelikely to fade, especially as
you mentioned some of the fundmanagers and others?
Dave (18:00):
start thinking about rebalancing out of those stocks.
Absolutely, I think there's thepotential for that.
It's certainly hard to find waysfor a lot of those companies to
expand their multiples and thenwhen you look at their earnings
growth, in most cases andNVIDIA is the wild card and you
don't really know it, but theircomparisons are getting more and
more difficult every singlequarter after an unbelievable
earnings surge the last six orseven quarters, it gets really
(18:24):
hard to figure if we're notgoing to see faster earnings
growth than the rest of themarket, significantly faster.
We're already paying a verylarge premium for a lot of those
companies.
Why would we start to paysignificantly more for those
companies in the absence ofsomething new happening which
would dictate that earnings aregoing to go much faster from a
(18:47):
much larger base when you startlooking at those companies,
those FANG type of companies atthe very top of the market?
So I think that's potential tosee at least stop that multiple
expansion from increasing anyfurther multiple expansion in
that continuum of stocks andthen narrowing the gap, whether
(19:09):
it's value or size or dividendyield, in that valuation gap
between that basket Again it'sreally narrow at the top.
I mean we know that 10 stocksare 36% of the S&P 500.
That's almost a $50 trillionmarket and a third of it is in
(19:30):
10 companies and they're pricedin the high 20, multiple, 28, 29
times in a market that's pricedcloser to 22.
And the earnings growthforecast.
It's much more spread out thansaying that 30% of the profits
is coming from those 10companies.
No close to 36%.
That's where they traded muchhigher multiples than the total
(19:51):
earnings forecast.
So that opportunity to kind ofclose the gap by one contingent
of stocks that have been theglamour stocks the last decade,
coming down or plateauing as faras only following some earnings
and the rest of the marketstarting to say let's lift up
some multiples here.
And oh, by the way, a lot ofthese companies have some pretty
(20:13):
good earnings forecasts thereis a value stock that becomes a
growth stock is a phenomenalreturn story every single time.
And I think we're going to see abunch of value stocks that
start following their earnings.
The market starts understandingearnings are going to continue
to increase and decide theyshould pay a lot more for a lot
(20:34):
of those companies and we'regoing to see a contingent of
those companies that I believehave a very good rest of this
decade in the equity markets,especially if the Fed is able to
take rates down to 250 basepoints in the next year or so.
Ryan (20:49):
So I think it was.
Microsoft earlier todayannounced that they were going
to increase the buyback ofshares and they were, I think,
going to boost their dividendsas well.
As some of those mega capcompanies start thinking about
what to do to grow and theymaybe don't find as many options
for reinvesting in growth, doyou think that the reinvesting
will just be acquiring some oftheir shares, like we've seen in
(21:09):
the past?
Dave (21:10):
I do, and the difficulty is Microsoft trades.
It's a $3.2 trillion company.
They're going to buy $60billion back, so that's less
than 2% of their float of theircompany's outstanding shares and
it costs $60 billion.
So it's not going to have asdramatic of an impact as
companies like Apple in the pastwhen they bought 38% of their
(21:34):
stock back in the last decadeplus and it's had a huge impact
on earnings per share.
But when you trade at that kindof multiple and you need to use
Microsoft's free cash flow isin the $80 billion range, I
believe last year or so.
So if you're going to use $60billion in a period of time and
top of the dividend, which wasan ordinary dividend increase
(21:56):
about the same rate that they'vedone you don't.
And additionally, they'respending a massive amount of
money on capital expenditures.
Obviously that doesn't hitincome.
It's fixed assets, but theircash flow is really spoken for
and they can't really increaseit.
So the markets I think Microsoftwas up on that news, but not
(22:19):
anything extraordinary thatthey're delivering to
shareholders.
I actually think it was alittle bit more of a defensive
move because shareholders aregetting very concerned about
that AI spend and a company likeMicrosoft that typically just a
few years ago was spending $10or $12 billion in capital
expenditures in 2018-19.
(22:41):
And don't quote me on thosenumbers, but they're in that
range.
I believe Next year is talkingabout spending somewhere north
of $60 billion.
So this is only five, six yearsago that you're seeing this
massive increase, and it's alsoa significant increase in your
capital expenditures compared torevenue.
That percentage increase is upfrom maybe 13 or 14 to about 21,
(23:04):
22 percent of your revenue.
That doesn't seem like asustainable model and I think
investors have started toquestion Microsoft.
So what's in it for us ifyou're going to spend all this
money on capital building outthe AI?
And so today, I thought wasmore of a defensive move to?
say hey no, no, we're still inmy back stock, but the market
(23:26):
didn't applaud it, like youwould expect them to do with
those kind of numbers.
Ryan (23:32):
I don't know if this is a good analogy or not, but it
almost reminds me of what theenergy sector did for a long
time, where they took all theircash flow and they reinvested it
and it wasn't capitalexpenditure and AI equipment,
but it was trying to pull moreoil out of the ground and gas
out of the ground, but similar.
Dave (23:48):
Clearly, investors got frustrated with that and then
energy companies, after COVIDespecially, started really
rewarding shareholders withstock buybacks and cash
dividends and special dividends.
In many cases, the sector firstshrunk a small way.
I mean, we're talking aboutvery different return profiles,
obviously, where you havemargins in the tech space that
(24:09):
are just magnificent.
This is clearly the secularstory of our lifetimes here, but
energy is going to be aroundfor a long time and energy
companies figured out how to gethigher multiples and to deliver
cash in return to shareholders,and the tech companies could be
in that spot one day.
There's no question that they'rethe dominant companies, but if
(24:32):
I had to give you an analogy,I'd say Tom Brady is the best
quarterback of all time, billBelichick the best coach of all
time, and I don't think thatchanged during either one of
their careers.
But for 10 years, from 2005through 2015, they didn't win
any Super Bowls.
They were still just as greatas they were, but somebody else
(24:53):
won the day, and I think we'regoing to see that happen here
across a continuum of a lot ofcompanies as we move forward,
that we're still going to havethose companies being the best
companies in the world, butwhere they're priced today, and
the expectation on top of themmeans there's going to be a lot
of other winners out there, notjust the select companies that
have dominated the last 10 years.
Ryan (25:15):
Are there any specific, maybe underappreciated, themes
that you think will be lookingback five or 10 years from now?
Investors will maybe kickthemselves for not being exposed
to, or maybe pat themselves onthe back for having exposure to,
that theme.
Yeah, well, first I think smallcaps.
Dave (25:35):
I mean they're terribly cheap.
Rates are going lower.
This idea that small caps won'tbe able to grow faster than
large caps may be pertinent fora small period of time, and then
history says they grow faster.
I mean, I always just readWarren Buffett's shareholder
letter.
I can't grow Berkshire Hathawayas fast as I did in the past.
It's much bigger.
It's much harder to grow it.
(25:55):
So certainly I think the smallcap space is something that if
your patient is going to deliveroutsized returns because we're
not trading at parity to largecaps, we're not trading above
what we've typically seen, thatvaluation, we're actually
trading at a significantdiscount, not unlike the late
1990s.
(26:15):
And then if you look at theearly 2000s, you saw small and
mid-cap stocks just dominate forfour, five, six years and
deliver outsized returns.
I actually believe we're in amarket where you might not see
the S&P 500 appreciate much.
Obviously, it's incrediblytop-heavy 36% of it almost is in
only 10 names and eight ofthose names are the biggest tech
companies in the world.
They're tech-like companiesonly 10 names and eight of those
names are the biggest techcompanies in the world.
They're tech-like companies.
(26:37):
But you could see lots ofportfolios perform.
I'm not a big fan of the termstock picker's market, but this
is a market where, if you'relooking at fundamentals, instead
of saying I need to hew to thebenchmark which so many managers
will do, so many retailinvestors will want that S&P 500
exposure.
(26:57):
We actually believe that as wego through the rest of this
decade, the index won't do aswell as lots and lots of other
portfolios that have a broaderbet on companies, broader sector
exposure than what the indicesgive you and certainly less
concentration in just a few moreexpensive names at the very top
of the market.
Ryan (27:18):
Okay.
So we're, as I mentionedearlier, late September.
That means there's an electioncoming up in early November.
I think most of the odds makerssay it's something like a 50-50
toss-up we don't know who thenext president's going to be.
Does it matter from a stockinvestor perspective?
Dave (27:36):
It probably matters in certain industries.
Although, if you look backhistorically, whether it's about
green energy or oil, if youhave a candidate who says we're
going to get as much oil out ofground as we can, well, is that
really good for oil companies?
I mean, yeah, regulation'seasier, but we're going to get
as much oil out of the ground aswe can, well, is that really
good for oil companies?
I mean, yeah, regulation'seasier, but we're going to be
(28:03):
washing oil, perhaps.
And so maybe a candidate whosays we're not going to allow a
lot of oil to be pumped would bebetter for any company.
So you really have to decipherit Instead of trying to read
between all those lines andfiguring out on a coin flip.
I think if you stick to thefundamentals the market and
companies and entrepreneurs theylook at the environment, they
(28:25):
see where it's changing, whereit might change, and they
navigate it.
And so does it matter?
Sure, it matters to lots ofpeople who the president of the
United States is and make up ofthe Senate and the House, but as
an investor, to get caught upon that, I think you make more
mistakes than you make goodpossibilities for yourself.
Ryan (28:45):
Okay, my last question for you, Dave.
You are the Chief InvestmentOfficer at First Trust.
You've been the ChiefInvestment Officer for quite
some time, but how long have youbeen at First Trust?
Dave (28:54):
Been at First Trust since August of 1997.
Ryan (28:58):
Okay, let's say you did not come to First Trust and you
had a different career path.
What do you think it would havebeen?
Dave (29:05):
Not as good.
I'm quite sure about that.
I came out of school in 88 andI went to work for a public
accounting firm in Chicago and Iwas there for eight years and
probably would have stayed.
I enjoyed it, I was okay at itand great.
(29:26):
I got my CPA and I just had anopportunity through
relationships to meet somebodyat First Trust and end up here
and never look back and neverwanted to leave after six months
being here.
I would probably be some levelof an accountant, more so than a
(29:49):
finance person if I did notfind my way to First Trust.
So I definitely had looked intosome accounting jobs and
potentially CFO roles of somesmaller companies but I'm
certainly thankful that I passedon those and found First Trust
(30:12):
in 1997.
I passed on those and foundFirst Trust in 1997.
And it's been a great story ofa company that is so unorthodox
in so many of their ways ofdoing business, but absolutely
something that I embrace and hasbeen just wonderful for myself
(30:33):
and my career.
Ryan (30:34):
So I know I said that was the last question, but I have a
follow-up question.
So what aspect of working asthe Chief Investment Officer at
First Trust do you find most?
You know what gets you chargedup, what's most fulfilling,
rewarding in that role.
Dave (30:48):
Well, our model and I told you it's pretty unorthodox.
There's no print advertisingthat you see anywhere.
So what we do is we go on theroad and we talk to thousands
and thousands of advisors, andBrian Westbury is the chief
economist he's the rock star.
Jim Bowen is a fantastic CEOand is going to put this company
(31:09):
together and then I get to justprovide some market data and
investment solutions foradvisors who are serving their
customers.
And that's my goal every singletime that I go out on the road
is and I start with, I want togive you something that can help
you in a conversation with onefamily that you serve, mr and
Mrs Advisor, that can help you,help them protect and build
(31:33):
their wealth over time, providefor their family and their
family's future.
And the feedback that I getfrom that, you know, over the
years has been just fantastic,and it's not about a single
recommendation.
I did this and you said to dothat.
It's no.
Thank you for giving mesomething to show my clients so
(31:53):
that I can help them achievetheir goals, and so that, to me,
is one of the most fulfillingthings.
And then the people at FirstTrust.
I mean we have such acontinuation of employees and
many of the people I hired rightaway in 1997 are still there
running different departments ofthe company and to see their
growth and then the benefitsthat we've been able to give to
(32:17):
newer employees, because wedidn't have anything when we
started building this thing.
Certainly, I got there six yearsafter it started to be built,
with 70 or 80 employees when Iarrived, but the opportunities
that you provide for so manyother people and their families
internally, it is pretty greatto look back on.
(32:37):
So we've got a long way to gohere at First Trust, but it's
been a wonderful ride.
Ryan (32:43):
Well, dave, once again, thanks for joining us on the
podcast, Thanks for all yourinsight and perspective, and
thanks to all of you for joiningus on this episode of the First
Trust ROI Podcast.
We'll see you next time.
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