Speaker 0:
Welcome to Asset T. V's Master Class on Global Equities With Me, Joanne Baham. Today I'm joined by Kyle Wales, portfolio manager, Flagship Asset Management.

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Victor Mouna, head of research. Old Mutual wealth

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and Gotham Samri, portfolio manager M and G Investments.

Speaker 0:
Welcome to you all

Speaker 0:
global equities is such an exciting asset class, and there's always so much to talk about. But I'm gonna kick off with you, Kyle. The environment we come out of it has been high interest rates, high inflation. It appears to be changing direction. How does this impact your views on global equities?

Speaker 0:
Well, um, Joanne in anything that results in a reduction in in inflation and a reduction in interest rates as a consequence should actually be good for equity prices. Um, at at the moment we've seen growth stocks, for example, rerate, or de rate to the lowest level relative to value stocks for a very, very long time. And in in a more optimistic scenario, we would tend to see growth stocks outperform again as well, I believe.

Speaker 0:
OK, but we've seen growth shares do very well in the first quarter, But we've also seen the market particularly tech dominated by a handful of shares. Do you think that speaks to a strong market or a weak market?

Speaker 0:
Um, I would say probably, uh, a weak market. I I think there's quite a high likelihood that that people are are are seeking safety in some of those bigger names. And as you mentioned earlier, um, the gains have been disproportionately shared, shared amongst the the bigger fang type shares.

Speaker 0:
Ok, Victor, um, just go back to sort of the global macro environment where we've come out of higher interest rates going to, well, potentially pausing. Um, but that tradition kind of at that point because we're starting to worry about recession risks.

Speaker 0:
How do you think about recession risks when you look at your portfolio?

Speaker 0:
Yeah. Thanks. Thanks, John. Um, yeah. Uh, the recession story is, uh, is an interesting one, because I think most global investors have been talking about it for about a year now, and, uh, we keep postponing it. And I think now the expectation is is that sometime in the second half of the year, we're going to get a recession

Speaker 0:
from the way we kind of think about it, you know, rather than trying to time when this recession is going to happen, How deep is it going to be? I think our focus tends to be more on trying to build a portfolio that we believe that is able to withstand. Um, you know, sort of whatever macro environment we're we're going to be to be faced with. Um, you know, a big part of our investment philosophy is trying to look forward

Speaker 0:
what we regard as quality companies. Um, you know, in A in a recessionary environment would expect those companies to do to do well, uh, if that recession ends up being postponed to next year, as has happened over the last year, we're still happy we were still quite happy to in those quality companies.

Speaker 0:
OK, so you're buying companies with the security of earnings, regardless of the economic environment. So go. Let's look at what you do. You run an A I fund. OK, so you're not trying to stick and guess where the market's going. It's machine learning.

Speaker 0:
Is there anything coming out of your your machine learning that says this is what the market is pricing in regarding recessions. This is what the market is pricing in regarding higher for longer or inflation. Give us a feel. Is there anything other inputs from your end result that's giving us an insight into macro,

Speaker 1:
right? Thanks, Joan. And and you're right. So we we design our machine learning models in order to identify repeatable patterns in share prices. And, you know, you look at vast bodies of history to understand certain characteristics and companies, uh, that are associated with share price, out performance or underperformance. And then you try to find similar companies today that resemble those characteristics that have historically performed.

Speaker 1:
Now, as you point out what these are much more dynamic than what traditional quant, um, multifactor models do. So as the environment changes, the kinds of stocks that it likes can change through time. Part of what we've tried to design is we've tried to design a model that is agnostic to macro, so in a way that we're trying to identify patterns that exist in periods of panic, in periods of euphoria,

Speaker 1:
in in slowdowns and in in in economic growth environments. So in a way, the characteristics we don't want to see, uh, the model taking a bet on high quality stocks because the things. We're going into a recession or we don't want the model to start playing with beta. If, if. If, uh if there's an acceleration, we don't we want to eliminate those bets. So at the margin you won't see many of these things come through. But what we are seeing is,

Speaker 1:
um, elements of now wading into the more cyclical parts of the eco, uh, of of, of the market that have been a bit beaten up. So where we do have marginal overweight at the sector level in things like heavy machinery and industrials and oil and gas service companies and indeed some part of the financials, even in the US,

Speaker 1:
it's starting to wade in over there because a lot of the patterns associated with things like oversold indicators are starting to flag up over there. So, yes, it might be viewed as risky If, uh, if, if things materialise. You know if if accidents do happen in the economy, what what it's seeing is that a lot of the oversold indicators are flagging right now. So there is some margin of safety, according to the model built into some of these deeply cyclical stocks at the moment.

Speaker 0:
And are some of those stocks more small and mid cap in orientation? Or were they across the board from a market capitalization perspective?

Speaker 1:
Yeah, we we tend to skew. So there are what we call, uh, some semi permanent style exposures. Uh, and it's just a function of where the biggest opportunities tend to tend to lie historically. So we will skew to the small mid gap space. Um, we will skew. And this is again the function of where the biggest pricing dislocations happen. We will skew into,

Speaker 1:
uh, some of the more volatile parts of the market. So share stocks that typically, um, you know, move a lot more than the average index. Uh, and And what we're trying to do is get the batting average right over there. So we if we get more right than wrong, uh, and have the skew work in our favour, then that's why we come out ahead.

Speaker 0:
OK, so I'm looking back to kind of styles now, Kyle, you mentioned, you know, growth had underperformed and it was now coming back. Part of the reason growth did so well for so long was because interest rates were so low And whilst one might argue that we're pausing, there's quite a bit of a leap of faith to go back to the low interest rate environment we have the last 10 years. How do you think about that? When you talk about you think growth is coming back versus sort of value investing?

Speaker 0:
Yeah, So I I I certainly not expecting a huge rebounding growth, but just on a relative basis, I think I think, uh, growth is looking fairly attractive at the moment. As as I said, Um, And as you said earlier, that the picture is distorted by what's happened in a couple of big names. If if you scrape a little bit below the surface to the mid and small cap space, you're seeing a lot of growth companies trading at, um, you know, multi year and and continuing to decline.

Speaker 0:
So there there certainly is is opportunity in the growth space. Or although certain growth companies, uh, do do look fully priced and continue to get more expensive.

Speaker 0:
So I guess what you're you're kind of agreeing with what Gotham is saying. That this sort of the opportunity set if maybe these small and mid cap shares outside the very big large leaders. Would that be a true statement? Yes. Yes, I would. I would definitely say so.

Speaker 0:
Ok. Gotham? Yes. You wanna ask something?

Speaker 1:
Yeah. I was just gonna add over there. I mean, um, just simplistically, if you think about we think about valuation from a building block perspective, and I think many investors do, um, when you move the disc, the global discount rate, which is called it the fed funds rate up 5%. That hits multiples or hits, Uh, sort of the valuation of all asset classes. So a big part of I think what Kyle was referring to is we had de rating across all asset classes, and and growth stocks were one part of it.

Speaker 1:
Now, even if you don't assume that, um, that we go back to sort of zero real interest rates, Um, even if a you have a pause in that discount rate, you can start the earnings side of the equation can start to come through. And that's where if you don't have a global recession, um, you know, growth stocks. And if you take NASDAQ as a proxy, I know it's a bad proxy. you know, the NASDAQ is supposed to grow at earnings 15% per annum for the next couple of years.

Speaker 1:
Um, that could be a pretty attractive return if your earnings stay where they are. So that is the real kind of part of the equation. So I'm kind of siding with Kyle over there.

Speaker 0:
OK, let's go. Let's go into this earnings story, right? So we've had Victor. I think it's the two quarters of negative earnings or definitely one quarter of negative earnings. Um, and now, suddenly, analysts are very bullish about the next two years, and they're all upgrading their earnings. Is that concern you it? Because it's very hard to imagine we come out of a world of interest. Rates went up so quickly and by so much, and somehow we avoid a recession altogether. So

Speaker 0:
one thing has to be true. There's no recession, and earnings are OK or if there's a recession, there's something wrong with earnings in a very long winded way, is what I'm asking you. What do you think about earnings?

Speaker 0:
Yeah, Look, I think earnings are the part of the of the equation that many investors have really struggled to reconcile with the macro data. Uh, you know, as I mentioned earlier on, I think there's been that expectation that, you know, the economy is going to slow, and then we're going to see it being reflected in earnings.

Speaker 0:
Uh, but we to be to a large extent, we haven't We haven't seen that. I mean, earnings are holding up relatively well. So and I think they are down over the last year by about 3% or so, both in the US and in Europe. Um, but And given the expectations earlier on, the expectation was that earnings would be down by a lot by a lot more. And I think one thing that maybe maybe many may have messed up until now is that, you know, while

Speaker 0:
yes, GDP So the real GDP is is is slowing, uh, and other macro factors from a nominal growth perspective, which is what companies actually benefit from right. From a revenue perspective, it's nominal growth that matters. Uh, there's still reasonable nominal growth. I mean, if your GDP is one real GDP is 12% but, uh, you have inflation at five plus percent. Um, there's actually quite a bit of growth there. And I think that's one reason

Speaker 0:
and why earnings have have held up relatively well up until now. That's not to say that going forward, it remains the same to To to your question earlier on. I think the number of, uh, risks, uh, slash concerns that we continue to see in the market, uh, continue to increase, uh, the the most obvious one being of the 5% plus increase that we've seen, uh, from the Fed, Uh, you know, in the space of just over a year and at some point you expect that to start meaningfully impacting sort of consumers and

Speaker 0:
and Corporates as well and also just altering behaviour as as consumers reallocate where they spend their money. So in our view, is that at some point you will see that slowing down in earnings. Um, you know, in terms of the market, what the market is expecting, the expectation is that earnings for this year will either be flat or slightly up, which, which is probably a bit

Speaker 0:
a bit positive, continue con. Considering some of the risks that we've mentioned the most recent also being being the developments in the banking sector. So I think it's fair to say, you know, as the year progresses, you would expect earnings to start disappointing a little bit.

Speaker 0:
Do do you share those views that we could see earnings, um, being disappointing? Or do you think the market's pricing it earnings correctly? Because a lot of people I speak to tell me analysts are way too optimistic on earnings.

Speaker 0:
I'm I'm more more in that camp. Uh, to to be honest, uh, Joanne. So the forecast, obviously, as as Victor said is, is flat to slightly down, um, earnings for the S and P this year. I mean, we one metric that that we're looking at quite closely at the moment and and which could raise, um ear earlier. Um, warning signals

Speaker 0:
is just what's happening in terms of the tightening of of lending standards, as as as well in in the US. So consumers and Corporates are finding it harder and harder to access credit. And, uh, that obviously could could have an impact on on consumption and and investment. So, um, yeah, we'd we'd definitely be in in more of the cautious, cautious camp,

Speaker 0:
just got them back to the kind of the way you guys run money and you're looking at a huge data set to make these decisions. But your data set is reliant. I'd imagine on analyst forecasts or analyst earning, but maybe it doesn't.

Speaker 0:
But But if do you How do you factor that in to when you run money? How do you think about that? If analysts are too optimistic or too pessimistic

Speaker 1:
Yeah, it's a very good question. So I mean, analyst estimates, um, the trend that, uh and and sort of every derivative thereof, if you will are key inputs into this model development part, as are other factors that such as, you know, valuation and and and other technical, um, estimates as well. So, um, it's one part of the jigsaw. Um, what we

Speaker 1:
what we like to use analyst estimates for is a sense check at the end as well. Which is we don't actually trade every single recommendation that comes out of the model, uh, where every every single recommendation is actually then checked by the investment team and we're looking for. But we're not trying to impose our own views about bullishness of Irishness. We take the data for what it is,

Speaker 1:
um, and then we try to look for actually are errors in the in, the analysts estimate. So are some of them just stale. So, as an example during the during covid, when you were looking at companies that were flagging as attractive in the model in the middle of April, a lot of what was happening was

Speaker 1:
it was seeing oversold indicators on things like price on a lot of the technical stuff. Yet analyst estimates had not been revised. And analyst um ratings had not been been revised, primarily because there was a big sort of deer in the headlights moment where you were confronted with the unknown and people were getting much more bearish on the outlook of their companies but not actually changing the estimates. So that's where we come in and try to override, um,

Speaker 1:
recommendations coming out of the model or say, Listen, we don't want to play in these companies because the recommendations are based on estimates and the estimates are stale. What we don't want to do is come in and say, Oh, I think

Speaker 1:
on average, analyst estimates are too expensive, so I'm going to heck up them down myself. That's an imposition of human behaviour. Where then we expose ourselves to all sorts of human biases, and we've seen, uh, to our own peril that actually that's detracted from the process.

Speaker 0:
OK, then, Devil's Advocate, then, if the data is relevant at the moment and not stale, do you? Even if your human behaviour is saying to you because of the credit contraction of the states that's coming? And concerns of higher interest rates have been around for a long time. You say you don't get involved. The the the model saying the earnings are X, the data isn't stale and you run it. Would that be a true statement?

Speaker 1:
That is, and it's a very hard thing to do. It's It's very hard to downgrade, uh, your own, uh, beliefs, Uh, but what? Where, where? Where we do see comfort is there was an active human decision as to in the design of the model, which was when we designed the model. We designed it to do certain things. Some of the things that we designed it to do was to not take bets on macro, not take bets on sectors not take bets on countries. Um

Speaker 1:
and have certain style biases where we think they're appropriate, and then and then we run with it. So we've been involved in the setup of the process and and then all we're trying to do is now be stewards of the process. When when the model recommendations come forward and even that's quite difficult as human beings.

Speaker 1:
Um, especially when we pass the names to our analysts over here and every name goes to our analyst, our industry analysts and they'll say, Oh, I wouldn't touch that name of the barge ball. They tend to be the ones that work the best, unfortunately, so you don't want to get involved in that process.

Speaker 0:
OK, well, let let's get back to, you know, fundamental markets. And I think one of you mentioned mean reversion. But I'll ask you, Carl, we we've gone from an environment where interest rates were very low for a very long time, and even if we're now at a pause and you know, maybe they don't cut rates very quickly. But it's hard to understand that we'll go back to the interest rate environment we've been in for the last 10 years. How do you think about that from a mean reversion perspective when it comes to growth shares.

Speaker 0:
Well, um,

Speaker 0:
I I I think interest rates will probably settle somewhere in the middle. Uh, certainly if you look look at long term averages, Um, a again mean reversion there. There are many factors to look at. Uh, the one that's most concerning for us is is just,

Speaker 0:
uh, the valuation of the market overall. Uh so So at the moment, we're sitting on about a 24 p for the market overall versus a long run average of 17 with with risks to the downside in terms of earnings forecasts, in our view.

Speaker 0:
So that's that's That's where we stand today, where where we're most concerned, certainly we we think growth stocks will be beneficiaries even if interest rates don't plough the lows that we've seen in the past but but come off off their current levels.

Speaker 0:
OK, next time, I'll ask you the same question. You know, you talked about you talked about structural stories with the cyclical stories going forward in your commentaries. But if we go into a different world where you know inflation is a bit stickier, interest rates don't fall as much as they were in the past. Surely the PE ratio you would have paid 10 years ago or five years ago is very different. The PE ratio paid today. So how do you think about mean reversion?

Speaker 0:
No, Look, I think that's a That's a That's a very valid point because you know where the environment that we're coming from over the last decade, Uh, you know where interest rates were below the average. Uh, it's fair to say that there were also a lot of, um, call it circular stories, uh, that benefited from that low interest rate environment.

Speaker 0:
Um, even if you know to Carl's point, even if interest rates going forward do not get back to to the point where they were in the past decade, they'll certainly be a little bit higher, right? Um, than than than than where they even if they come down from the current levels. Rather, uh, they won't be at the level that they were that they were previously. So I think a lot of themes that we saw previously, or a lot of trends that we saw previously and seem very circular, uh, I think going

Speaker 0:
they become a lot more. A lot more. A lot more cyclical. Um, and and if I speak to sort of the the the the call it the elephant in the room being tech, you know that you touched on earlier on that's been driving markets for the for the year to date. I think it's fair to say that there are some segments within tech. Uh, that over the last, um, sort of 10 years, uh, filed Sort of mean reversion, right? If you sort of think of

Speaker 0:
the move to digital advertising the move to, um online, uh, booking. Um, you know, those are those are sectors that for many investors seemed as though they were. They were circular. They were always going to continue going up.

Speaker 0:
And the way we're seeing it is that in a more sort of normalised interest rate environment, you know where we're kind of reverting to that mean those sub sectors within the technology space, um, then become a little bit more cyclical and that that affects the PE that you're willing to pay for those multiples. You're not going to be willing to pay the same multiples as you did

Speaker 0:
sort of five years ago. Having said that, you know, um, I'm painting sort of tech at the same brush here within tech. You obviously still do have some circular themes in there. And I think you touched on one earlier on sort of the emergence of a I I think that's one that has some some some some leads to run. Um, that's an example.

Speaker 0:
OK, let's talk about a I Let's you know, uh, we've got Avi. So, Carl, what's NEDA's PE ratio At the moment? I think it's 100 and 66 or something. Or maybe I got that wrong. Where are we sitting on this company? Something like that.

Speaker 0:
Certainly too expensive for us to earn. We've We've been wrong about it for a while, unfortunately, uh, but obviously a huge, huge beneficiary of of the trend. Um, you know, uh, they, uh

Speaker 0:
you know, they they design GP US, which is is a computer component which is obviously crucial to to running these very, very, um, advanced models. And, uh, yeah, they certainly will be a huge, huge beneficiary.

Speaker 0:
OK, but you're saying you're not buying at the moment, even though there's a lot of hype around this and just back to Victor's story. He talks about secular themes. A. I is clearly a secular theme at the moment. It's not a cyclical one. Are you just saying it's just too expensive? And how do you determine what too expensive is when we don't know where the earnings are going to? I mean, we we use, uh, techniques as simple as discounted cash flow. So So I might be be on the wrong side of this A I t trend.

Speaker 0:
But, uh, you know, 100 times earnings you've got to and and certainly using a a realistic discount rate. You know, you you've got to expect

Speaker 0:
blistering rates of growth for an extremely long period of time. And and we just don't think, uh, there's a margin of safety at at those valuations. Certainly A. I is also very topical at at the moment. But as as we know, um, there's there's always the hot thing for the moment. So perhaps, uh, you know, sitting in a few years time, um, it it will be less topical. And and valuations will, um, adjust

Speaker 0:
diamonds.

Speaker 0:
OK, Victor, you want to say something?

Speaker 0:
No, I wanted to say You know, I think I think the interesting thing. And it's kind of carrying on where, where we found there to say, you know, with these sort of new innovations and and and and And as you rightly pointed out, the thematic one at the moment, I, uh, to to sort of try and argue that it has been priced or hasn't been priced into the market. I think that's that's just guess work, to be honest, because I I I think we have no idea

Speaker 0:
how big or how small it's going to be, Um, and at the moment I think the likes of NVIDIA that are rallying on, um, I think that's more sort of people taking a a bit, um, they could end up being right or they could end up being wrong. But to sort of try and quantify sort of new technology such as this at at this, uh, level at at at this stage, I think it's just way too early to try.

Speaker 0:
Awesome.

Speaker 1:
Yeah. So I'd like to sort of a framework for thinking about this. Um, certainly what we're seeing in a I is fascinating and, you know, us being at the centre of trying to develop a I based investment models. We're both excited and frightened by what's going on. Um, in terms of perspective, I think it's worth thinking about it in normal in the normal sort of innovation cycle stuff, which is these innovations tend to disappoint over the short term and then massively surprise positively over the medium to long term,

Speaker 1:
um, and thinking about investing directly in the technologies versus investing in the companies that deliver those technologies. You you have a good analogue as to what happened during the tech bubble. You know, if you were if you were investing directly in Internet companies, uh, you would have everything burned off. Um, you know, by the time you got to the early two thousands yet actually, we can all agree that the Internet has been massively transformational as the technology,

Speaker 1:
yet the businesses that actually developed on it you you wouldn't have identified Xan, so it's absolutely going to be a big thing. Um, I'd I'd wager that we're in sort of the, um where we're in sort of the explosion of the tech piece, where people haven't people are excited, but haven't really found the killer applications. And there'll be new businesses, new business models and basically new industries that will develop on top of these generative a I based,

Speaker 1:
uh, technologies out there that we don't know about today. So it's so it's It's a lot of guesswork as, uh, as Victor pointed out, it's absolutely transformational. But it doesn't mean that the companies of today touting their A I capabilities are the ones that are going to benefit from it.

Speaker 0:
OK, let's look at the reverse of that. We we don't know which companies are gonna be destroyed. So let let's go back to your the way you look at companies and and creating a portfolio of stocks. You have a lot of data on companies that were huge winners. And Google Alphabet comes to mind in terms of this what we're discussing, because arguably, it could be destroyed one day by these new technologies in terms of search.

Speaker 0:
How do you think about that when you you got your machine learning telling you these companies look great, But in the background there's this enormous £10.10 million pound gorilla about to destroy these businesses. How do you think about that?

Speaker 1:
So it comes back to fundamentally. What do you think drives asset prices and share prices if you it's not. It's not game changing structural technologies that I mean, sure, they provide the fundamental background. Um, but ultimately, mispricing of assets comes from stupidity of human beings participating in markets.

Speaker 1:
And and that's not something that's changed. Um, yes, we're we're seeing great applications of a I based systems in the market, but it's a very small percentage of a U. M right now, So the patterns associated with asset price or or with asset mispricing. Those things exist and are as prevalent today as they have been 10 years ago. And they will always be there as long as human beings are involved with markets. So in terms of actually identifying those those patterns um

Speaker 1:
uh, I don't think the opportunity set changes that much

Speaker 0:
victor to sort of horribly misquote. Warren Buffett recently said to Ruffin's comment that there'll always be stupid people in markets. You know, value investing might get more difficult, but there'll always be stupid people. Where do you see the best pricing? Most obvious at the moment in global equity markets,

Speaker 0:
Um, you know, I mean, that's that's that's That's an interesting question. I think,

Speaker 0:
um, what we have seen over the last sort of just over a year, you know where, uh, interest rates have gone up significantly. It has meant that the areas where there was the most most pricing, uh, the obvious ones, uh, I think those we have seen those, all right? I think one that was there

Speaker 0:
not too long ago. It was sort of Bitcoin and the crypto et cetera, and and and that's been cleaned up. So I would say the low hanging fruit in terms of mispricing, um, have actually been cleared. Cleared out. Uh, I think the mis pricings that are there at the moment are a little bit harder to a little bit harder to, um to see, um maybe one area that that sort of comes to mind, it's It's around, um, unprofitable tech. Um,

Speaker 0:
you know, So if you look at the year to date performance of tech as an example, I mean, we know that profitable tech has done has done a lot better. But when you look at the companies that that the unprofitable tech they've, they've also still done sort of reasonably OK, even though they haven't kept up with your with your large tech companies and nothing's there.

Speaker 0:
Perhaps there's still a little bit more, uh, mispricing to happen there, you know, in terms of, um, in terms of the market, getting a clear sense that, you know, these businesses are still are telling a good story, but long term, they will not be able to generate significant cash flow. So maybe that's that's one of the,

Speaker 0:
um, Carl. Do you have any other areas? If you're looking at where you think there's most pricing exists either on the I want to buy it or I wouldn't touch it. Perspective?

Speaker 0:
Yeah, We, um you know, we we run a very concentrated part of our portfolio. So So we're still finding, um, you know, parts of the market that are this price. There's there's nothing that stands out, you know, in in a general sense. Um, I think perhaps and and, uh, was talking about it earlier,

Speaker 0:
Um, there there definitely is a disparity between the way that sort of a small midcap stocks that perform relative to the larger cap stocks. So So perhaps that that needs to correct itself. And, uh, yeah, certainly, as as as I said earlier, you know, growth growth has taken a bit of a bath at the moment and is trading at at below. It's it's, you know, 10 plus year median relative to value,

Speaker 0:
so that that that might require a a paradigm change in terms of interest rates. But but it stands out in in terms of valuation today.

Speaker 0:
OK, so let's go back to this kind of growth paradigm as its value, and it's looking a bit cheaper. Well, how does it compare like relative to its earnings profile? So if if to to Victor's point earlier that we're going to go into a higher, nominal growth world even if it's a lower, real return growth world, what does that mean for, like value companies with nominal earnings that didn't used to be there of the last 10 years? And is it cheap from an earnings perspective? So let's just argue this growth is his value point with more detail.

Speaker 0:
Well, I mean you, you're raising the question. You know, the the sustainability of earnings for for low P high dividend yielding stocks, you know, and and the concept of of a value trap, and I think that's still there. I mean, there's there's a reason why some of these shares are priced the way they are priced. Um, and yes, they've experienced about part of art performance. Um, because their earning streams are,

Speaker 0:
um, you know, relatively front. But, uh, yeah, that that remains a concern. And and growth stocks, uh, again, what? What you call a growth stock, um, changes over time. But these are companies that are, um, beneficiaries of of the trends happening in the world today. So on on a relative earnings basis or growth outlook basis between the two I, I'd say it's hard to judge.

Speaker 0:
OK, let's talk to some easy stuff to judge, um, share buybacks. Um, remember when when you look at your your models is share buyback is one of the drivers. Is that a part of the machine learning? Because I look at a company like apple and and the valuations don't look very compelling to me. But you've got a company that's buying back its own shares, even if the market doesn't want to. How do you think about things like that?

Speaker 1:
Yeah, so I mean, it's it's certainly again a part of part of the jigsaw. So if you think about the inputs that we have that these models learn from, it's literally every single item on the income state balance sheet cash flow statement that you would look at as a as a fundamental analyst in order to assess the prospects of a company. And definitely when you're doing fundamental due diligence on a company like Apple or, you know, um, companies more generally, you want to see what is the capital allocation plan

Speaker 1:
in in the business model. So it's a part of the input. Um, what we do is we interrogate our models then to try to understand for a particular company. So if you can imagine, there's about 450 of these different inputs per company that drive the overall prediction in algorithms. So So what we also want to understand, then, is on the on the front side. If our model is bullish on a particular company, what are the key

Speaker 1:
inputs that it's focusing on at a time in order to make that prediction? So then we can go check one that the data is correct and then go actually understand whether maybe it's not as applicable for this company. So for for sort of more mature companies, um, that that generate sufficient amounts of free of free cash flow share buybacks are absolutely a significant part of what drives predictions.

Speaker 1:
But that won't be the case for an early stage growth company. It'll be focusing on something else. So it's very company specific, and it's very attuned to think about what an analyst would look at in order to, uh, to understand where, where, where to go with this thing.

Speaker 0:
Yeah, I guess what I'm trying to think about here is that you've got companies with great fundamentals. The liquidity is not there. You've got companies that are so large and spewing cash, and basically they become the market for their own companies. It's kind of where I'm going with this thought pattern. Victor, You wanna say something?

Speaker 0:
Yeah, I was I was going to say I mean, the share buybacks on that's a that's a hotly debated one. It's almost similar to to s G E S G no, which is which is a very polarised discussion, but but in our view, we're not we're not as as sort of negative on on the share buybacks. Um,

Speaker 0:
you know, because at the heart of it, you know, it's a capital allocation decision that that management is making, you know when faced with several options, you know, do they retain that cash? Do they spend it on Capex, expanding their operations, or do they make acquisitions? And I think when you when you look at those those options, it's fair to say that, you know, share buybacks are probably one of the less risky of those options, in part because management know their business. Uh, very well, certainly a lot better than they know,

Speaker 0:
uh, other targets that they want to acquire there. So, you know, we we we we're quite happy with that. You know, if management are seeing it as an option of you as one of the options that they that they consider, you know, in addition to that, if we if we actually hold the stock all right, I assume that assumes that it's a stock, that we are a company that we that we like. So if management are buying back their shares, in essence, they're actually agreeing with with our view that it's a it's a great company, and and and they and we're on the same page. So

Speaker 0:
So we think, you know, I think maybe that's that's one that that that that has become very, very, uh, topical. But But I think over over time it's shown that it it increases shareholder value.

Speaker 0:
Now, if you are looking at a company at the share buyback programme and to Victor's Point, they don't have better opportunities than they buy their own share backs. Do do you think that deserves a high P multiple? At that point, is it still a growth company?

Speaker 0:
Well, I'm I'm I'm a little bit cautious on on share buybacks. Uh, to to be honest, uh, Joanne, um, and especially relative to dividends, because what we've seen with some of these larger tech companies is is that all the buybacks effectively do is offset, uh, offset dilution from, uh, you know, share grants to management. So you've you've got to ask yourself, you know, what's what's happening here and and why is all the value going to management teams and and the shareholders not really participating? Um,

Speaker 0:
but yeah, so that's that certainly is something which which makes us us sceptical. Obviously a great thing when management buy back shares. Um, because they view the company as undervalued, but that's that's fairly rare. Um, you know, typically, managements aren't aren't brave enough to to do that. And and and in that case, they'd rather just pay the money out out as a dividend and give it to capital allocators such as us.

Speaker 0:
OK, so it's gonna remain one of these hotly debated topics. As you point out, with E S G. Victor. So let's go. Let's look at the portfolios you guys run. We've had quite a few topics we're throwing around here, so I'm gonna start with you, Karl. Where are you? Kind of seeing the best opportunity sets. What kind of sectors You talked about growth earlier. Just give us a feel for how you're running your portfolio Currently.

Speaker 0:
So we've, um As I said earlier, we we run a very concentrated portfolio maximum 25 stocks and and we're seeing a a range of very interesting investment cases at at the moment. So ob obviously, in this uncertain world, we're seeing value in certain consumer staples. Um,

Speaker 0:
like I f f for example, we We think that, um, offers relatively decent upside. We're seeing actually quite a lot of value in some of the semiconductor stocks. Obviously, uh, more value in those than in the consumer staples. But obviously they come with more risks. And then on on the top end of of the, um, you know, fair value ranking. You know, we we're seeing sort of small, uh, midcap, uh, you know,

Speaker 0:
former market darlings, which whose investment cases haven't really changed that much, but whose whose valuations have fallen a lot and and in those stocks, sometimes we we're seeing well north of 100% upside. So, uh, it's it's it's quite a range. It's quite a range, and it's very stock specific, and it's very bottom up.

Speaker 0:
OK, let's just stick to the bottom up side of things. So if you're looking at these companies you're holding today because you're only I mean you're only talking about Global agrees today. What kind of upside? To share prices on the average. So is it like when you look at your company, you're saying there's a 20% upside 30% upside, 40% upside, what I'm trying to get at the bottom up here is how cheap is your portfolio today?

Speaker 0:
Well, our our blended upside is is probably around the the the 40% level, but we we obviously chase the opportunities where we think the upside is the greatest. So, uh, for the market as a whole, uh, that wouldn't be my view. Uh, but, you know, even in a very expensive market, there will be, uh, you know, opportunities.

Speaker 0:
Perfect, Victor. Just wanna get back to this constant of valuations. Can you? We all like to throw out there that markets are expensive, and and yet we both had Gotham and Kyle talk about some of these small and midcap shares that aren't expensive. So my question to you is, are markets actually expensive, or are they dominated by a small number of shares that are horribly expensive? And the rest of the market is quite cheap. Are are markets expensive,

Speaker 0:
you know, But I think at an at an index level, um, it's fair to say that markets are probably on the wrong side of of their value, but that that that really is at an index level. I mean, now, about a year ago or So we did an exercise where we looked at the food, uh, P multiple for the for the market. And then we stripped out,

Speaker 0:
um, the 15th of more expensive companies and the markets will call them the nifty the 15 at the time. Um, and at the time when we did this exercise the 40 p of the multiple about 17 times. Uh, that's the entire market. Once you strip out those 15 shares, it came down to about 12 times. And that's sort of, uh, similar to the way it was trading the rest of the market. Similar way it was trading about 10 years ago. 2012 or so,

Speaker 0:
Um, since then, particularly given the performance in the market for the year to date, I'd imagine that disparity has widened a lot more. So I think that that that's just evidence, you know, to to the point that that's been made earlier, that I think on an index level, the market is certainly looking a little bit expensive. But once you get

Speaker 0:
out of sort of the top 15, uh, there a market is probably not as expensive as many people think it is.

Speaker 0:
But then, when you look at your portfolio, Is it telling a similar story that, you know, you strip out these very large companies, and then the valuations are more compelling underneath it.

Speaker 1:
Um, so if you do a look through into the portfolio, um, and and this is again where you where you take design choices, Um, when you when you When? When you design your a I based models, Um, we've actually got

Speaker 1:
a portfolio that is overweight both value and growth at the same time. Um and so it's got a slightly more advantageous p as a starting point versus the MS c R country world, but it's got growth characteristics that are slightly above as well. And you can find that in the small to mid gap space. So So, yes, it's a function of where we operate and where we find our ideas. But I think more philosophically it is. Um,

Speaker 1:
it it comes back to that design question that that that we put before, which is you. We don't want to take big bets on value versus growth. We think that that is a regime conditional call and and, you know, if you're using big data to predict regimes. You're, uh you're in a bit of trouble because you don't have a big enough sample to do that. So that's primarily why we're we We are where we are on that,

Speaker 0:
OK, if we go into a regime shift because we're not taking a regime call and we go into a world where we were we move from, you know, with summers I talk about the new normal. And if the new normal is not actually true and we're actually going to the old normal and it is a regime shift, how does that impact a portfolio that you run where you don't want to take any style style bits?

Speaker 1:
Yeah. So hopefully it doesn't and and and this is this is so we thought very carefully about when we started. When we launched our models, we started running real money on this in 24 2018. Um, we knew that because all all the biases and data, the vast majority of data in the world is created over the last couple of years. So you have a recent C bias, no matter how you how you cut it.

Speaker 1:
And so we thought very carefully about how we create models that reduce that recency bias and sort of generalised across multiple multiple regimes. And so it was slightly disadvantageous

Speaker 1:
during the 2018 2019 2020 phase, whereby because of that balancing act, we didn't outperform by as much. We did really well in our in our in our strategies, but we didn't outperform as as much as we might have if we had a growth bias model deployed. But equally where that came to. Our rescue was last year, where,

Speaker 1:
you know, heavily growth biassed models

Speaker 1:
absolutely struggled, but because we had taken that regime piece out of it, we were able to outperform last year. So, you know, when I look at quant competitors, you don't come very, very many that were able to outperform in 2020 2021 2022. But that's exactly what we did in our strategies because we designed out regime. We said That's not something we want to take on. So we're looking for patterns that exist outside of macro regimes, and that's why I think that no matter what, I can give you my opinion on regimes,

Speaker 1:
but that's not gonna affect the performance of our global equity portfolio.

Speaker 0:
Yeah, so style agnostic. Is that what I'm hearing? You don't You don't want to make take a style.

Speaker 1:
We have certain style biases, but they're not value or growth, OK?

Speaker 0:
And what are they?

Speaker 1:
Um, we do have because because of the because of the the nature of where asset mispricing tends to happen, we do tend to have a small midcap bias and and this is and the second one is we do actually tend to skew into the more volatile sector of the market. And if you think about traditional quant, people think about low beta and low volatility as a factor that you want to be exposed to, not high beta or high volatility.

Speaker 1:
So that's where we're slightly against the grain. But we think that actually, within that subset, the distribution of returns is massively skewed. And if you've got a chance of increasing your batting rate, getting more of the winners and the losers, then you can make more money over there. And that's kind of what we want. And that's how we designed it.

Speaker 0:
And because you have 100 shares in your portfolio, correct, more or less 9500 more

Speaker 1:
or less, more or less 100 shares, More or less equal active weight, OK?

Speaker 0:
And Carl, I think you mentioned earlier. You have 30 40 shares. Where you sitting with? What's your number? 2025 25. Is the the sort of semi hard of our of our number of counters at any given time.

Speaker 0:
And my question really around, that is, how on earth do you decide on which 25 shares you're gonna choose from when you're running global equities? What's your sort of? How do you screen for that?

Speaker 0:
So, um, you know, on a very high level basis, there are hundreds of thousands of listed companies, but you can narrow it down quite quickly. If you look at things like, uh, market caps a above a certain amount R e is above a certain amount. Ours. Uh, actually, we don't derive our, uh, watch list from either of of of those ways of doing things. We've actually met hundreds of companies over many years and, um, done detailed analyses of these companies and, uh, when

Speaker 0:
when we do like a company and we think it's a company, we would like to own at at, you know, at some point in time at the right valuation. You know, we we add it to to our watch list. And, um, you know, we look at its competitors, suppliers, um, customers and and we built up a watch list of around 400 names, which which we track,

Speaker 0:
um, you know, regularly and and as soon as one or two or 10 flags being treated, we we look at those and and we reconsider our our portfolio accordingly.

Speaker 0:
Hey, Victor, you also run, I think, as quite a concentrated portfolio. Correct?

Speaker 0:
Correct. Yeah. So how do you go screening for, like, best ideas? You know, Carl's argument is there's four on the watch list and other companies as well. You know, Gotham explained how he looks at the world. How do you think about it?

Speaker 0:
Yeah. So to to the earlier point. I mean, there are thousands and thousands rights of listed companies, but you know, a key part of our investment process is looking for quality companies. That's that's sort of how how we would bucket ourselves from a

Speaker 0:
from, uh, from an investment style perspective and, uh, you know, The first step of that is just screening as well, you know, and and and that's just to narrow down the universe to make sure that it's it's it's digestible. Um, and it's to to Carl's point earlier on it. It really is it. It is fairly easy or quick, rather to

Speaker 0:
separate, sort of a quality company and companies that that have not been quality or that are not quality companies. And then once you sort of narrow down that universe and then you start doing a lot more detailed work, and, uh, we supplement sort of that, uh, quantitative screener

Speaker 0:
with a lot of thematic work. We, uh, read extensively discuss debate around key themes that we see, uh, emerging, Um and then sort of once we've narrowed it down to that, this themes across different sectors and once we've sort of narrowed it down to to to to a more manageable universe. And then we and then we look for our best ideas to your earlier question earlier on, you know, how do you sort of narrow the world down to just 25

Speaker 0:
25 holdings? I I I don't think the idea is really to sort of try and capture the whole investment universe,

Speaker 0:
uh, from our perspective, but rather is to make sure that what we what we look at, we sort of stick to our core competence, uh, businesses that we understand. And once we've done sort of detailed work on it and we're happy with it, then we take a concentrated view. Um, from a portfolio perspective.

Speaker 0:
Can I ask Karl just now what was sort of his upside to fair value was in his portfolio? Or do you do a similar thing to look at your portfolio? If you have a concentrated portfolio, what's your upside to be value?

Speaker 0:
You know, we we look at it from a stock by stock basis, So I'm kind of going off the top of my my, you know, going off the top of my head here in terms of sort of a blended rate for the portfolio. But I would I would imagine it's not as it's not as high as sort of the 40% that mentioned, I would assume it's probably close to closer to 15 or 20% or so.

Speaker 0:
OK, I got them. I don't know if this is something you look at. But do you have a feeling for kind of upside to fair value of how you see these companies?

Speaker 1:
Yeah. So we model everything relative to to to the global equity universe. So we're not We're not actually

Speaker 1:
coming up with a prediction of what global equities are going to do. We're just looking for companies that are going to outperform. Um, what what I'd say is,

Speaker 1:
you know, it's very, very hard to consistently do

Speaker 1:
plus 5% over global equity. So if we can, um, you know, our our our modelling has a certain sort of expectation of what companies that sit in and we're talking about. We've got 10,000 companies that we generate a prediction on every single day, right? That's the investable universe, and we own 100. So that's the top 1% of companies based on our predictions. If we get that right with a slightly positive hit rate over batting average, as we call it,

Speaker 1:
you know our expectation is that we can do index plus 5% and that's what we go for. I think it's, um pretty. I mean, pretty commendable. If anybody can do more than that in a fairly consistent basis.

Speaker 0:
And I guess you're not thinking from an absolute return perspective. I think from a relative return perspective and the question, I guess I asked both Carl for, you know, an absolute return upside, because people listening to this want to know whether they should be investing in global equities or not. And, you know, we've come out, you know, battle weary after 2022 now we're looking at 2023 it's just about four. Shares have gone up, and we're saying to ourselves, Why should we invest? Because it all looks a bit scary. So

Speaker 0:
your points about relative returns, theirs is about absolute returns. What should people be worried about, Carl? What should you know? You are. You talked a lot, actually, about index levels. Is is that what keeps you guys awake? You know, awake at night? Or are you worried that even if your stock calls are right, the the market is gonna fall because the market is too expensive?

Speaker 0:
Yeah. So we we run a a few flexible funds, uh, as as well, to Joanne and and in those funds we We very underweight equities as an as a class at at the moment because we think a expectations, um, in terms of earnings for 23 24 are are are too high. And and you've got the market trading at

Speaker 0:
at levels that are way above the median over the last 50 years. So

Speaker 0:
I would say people should should be cautious about buying equities as an asset class, even though there are obviously pockets of value within the equity space.

Speaker 0:
But that's name specific,

Speaker 0:
OK, and Victor, same sort of question.

Speaker 0:
You know, I I think the concern or what people should be aware of. Maybe it's I mean, I I I I'll probably say investor behaviour is probably what What concerns us the most? Because, you know, I think we we speak And we spent quite a bit of time today, uh, amongst ourselves here and and also with with with clients just talking around, you know, there's a recession that's coming, and so I'm going to stay out of the market, et cetera. But, you know, this is probably the most anticipated recession that

Speaker 0:
that I can think of, you know, and and I think the risk there is that people obsess over what happens over the next three or four months And forget the fact that, you know, in our certainly in our investment philosophy, we are buying equities for for the long term, you know, And And if you manage to get equities that are reasonable, uh, valuation and you hold for the for the right period, you'll come out ahead, as opposed to sort of trying to make sure that, you know, uh, at the exact point. You know, when the recession hits, you know, that's when you buy. So So I'll say investor behaviour.

Speaker 0:
OK, All right. So you run the episodic funds as well, Kat, and you obviously have a view on equities outside this portfolio we're talking about today. Are you guys under way to overweight? Kind of, given the views that Carl's just shared?

Speaker 1:
Yeah. So we're pretty what we'd call cautiously positioned when I say cautiously. I mean, we're not bearish. We just don't think that there there are times where you want to take big swings. This doesn't appear to be one of them. So we can come up with stories, uh, as to why equities look quite attractive and in fact, from a valuation perspective, if you exclude the US market, there's a collection of global equities out there that are fairly attractively priced.

Speaker 1:
Um, but equally you can come up with that. Those valuations are conditional. So when we talk about the long term average, the long term average is a nonsense, Really. You know, it's it's it's kind of regime specific. It's just something that you pass through on your way to a new fad or some panic. Um, And so if you are in a regime where real interest rate structures are higher

Speaker 1:
and, um, the capital or or sort of the relative balance between capital and labour seems to be swinging back towards labour, then you might command higher risk premium for for equities. More generally, which means that you want to be at the higher end of the band in terms of earnings yield or the low end of the band in terms of PE ratios.

Speaker 1:
Um, but do you really want to make a big commitment and bet as to where which regime we're gonna fall into? We don't think so. So so where the big opportunity with an equity is actually the relativity of equities. So if you just look at,

Speaker 1:
you know, a global dispersion of country based earnings y signals. Um, you haven't seen this amount of relative value within equity markets since the early two thousands.

Speaker 1:
And, of course, it's pretty bold betting against the S and P 500 especially what it's done in earning space over the past decade or so. But there's there's things around the regime that helped earnings in in developed market worlds and especially in the US over the which which appear to be changing things in the labour market

Speaker 1:
and and and And if those things turn out to be true, then actually, uh, those earnings may be challenged alongside the valuation gap that you're now seeing. So we see much more opportunity in the relativity between US and ex US equities.

Speaker 0:
I guess on that subject. But, uh, when I interviewed a whole bunch of managers at the beginning of the year, they were all shouting from the rooftops, you know, by global equities at the expense of the US. So the rest of the world outperforms the US and lo and behold, here we are in May. And again the U is flying. I mean, you know, Europe's also done very well to be fair. But but listening to Gotham's argument Iran to kind and he's not saying there's no regime change, he says, but potentially if there is one what that, like leads to is the rest of the world outperforms the US.

Speaker 0:
What's your view on that?

Speaker 0:
Yeah. Look, I think it's I think it's

Speaker 0:
probably would fit into the sort of mean reversion, uh, discussion that we mentioned earlier on, right? Because the US has has performed recently and and so possibly that could happen. Um, but my sense, you know, sort of our sense around, uh, you know, sort of Europe. Uh, u the rest of the world is I think that that argument, um,

Speaker 0:
something gets lost in that argument. You know, the fact that the the the fact that's lost in this argument is that the makeup of the US market is actually just different to the makeup in other regions. Um, And when you look at when we were talking about tech earlier on

Speaker 0:
and if you look at Europe, for example, which, you know, I think to your comment earlier on. Earlier in the year, many people were saying Europe was going to outperform. And if you look at the largest companies in Europe using stock 600 as an example, I think most of the top 15 are sort of automakers, uh, miners and, uh, and energy companies, oil companies,

Speaker 0:
you know. So when when? When people are sort of talking about the rest of the world outperforming the US. You know, you you're actually taking more of a of a sector and industry bet as opposed to a regional bet,

Speaker 0:
you know, and I think that's that's part of the argument that's that's often lost there. Um, well, I think I I possibly agree with with with sort of the the earlier assertion is is that, you know, from a valuation perspective again, this is sort of speaking at an index level The US market has has done sort of very well compared to the other markets. So, sort of, you know, I think once one takes into account sort of the dynamics around, you know, the structure of each market, um Then then then there are opportunities outside of the US.

Speaker 0:
Um, given that you run a constant Porto? Are they mostly US stocks or they European stocks? So it's a mixture of everything, because what do you think about the rest of the world up forming the US argument?

Speaker 0:
Yeah, so I'll I'll I'll

Speaker 0:
investment calls on on based on where the where the companies are. But I mean, in

Speaker 0:
in our fund of funds product, for example, we we are quite constructive on on Japanese, uh, equities. Obviously, the the exchange rate there is is a big part of that call, as as as well as domestic UK focused businesses, because u UK looks like it's been punished. Um, quite a bit. We actually quite quite bearish on on emerging markets. I mean, China is a very big part of the, um,

Speaker 0:
emerging market index, and and China is becoming a more and more, uh, investor unfriendly. I mean, we we seen it, Um, I think this week or late last week with cap vision as a sort of, um, management consultant or their offices being shut. Uh, China is making it harder and harder for foreign investors to, uh, to to get a glimpse behind the curtain. Uh, as it were and, uh, and unfortunately, that that's not a way to attract capital or or increase valuations.

Speaker 0:
I think he bring, um, on the subject of China, you know, not being very free and willing to give away data at the moment. And my understanding of a I is that it? It needs data more than anything in the whole world to to Carl's comment. If you start seeing China being more hesitant to give this information over, does that make you want to avoid those markets because you can't actually price it properly?

Speaker 1:
Yeah, well, there's there's different sorts of data, so I mean, where they are very conscious about, um or very careful is things like granular consumer data. Um,

Speaker 1:
privacy, those kind of things. If we talk about just the more tabulate structural financial data, I mean, it's those Those data points are vastly available. And and and if anything, um, we see the mispricing opportunities because of the structure of the underlying market and some of the emerging markets in China being one of them, uh, we tend to see those sort of, um, mispricing happen more in those kind of markets, so it tends to be

Speaker 1:
one of the better markets for online models to perform. In fact, the US is quite

Speaker 1:
you've heard this many times, I'm sure, but the US is actually quite a mature market and and and therefore sort of extracting. Uh, mispricing opportunities in the US is actually quite hard. China tends to be actually one of the better opportunities. It's an interesting question going forward if you and we are starting to incorporate many alternative data signals, sentiment, consumer, consumer data, et cetera.

Speaker 1:
All those opportunities are we going to be able to integrate those data sets in parts of the world where, where they're much more protective about that data? Um, possibly not. But you don't need that in order to succeed.

Speaker 0:
OK, All right, guys, global equities in my portfolio. So normally, my market neutral is 60% of global equities. I'm gonna start with you, Victor. Should I be at 70 or 50 at the moment in a multi asset portfolio? Where should I be sitting?

Speaker 0:
Well, it depends on your alternatives. Um, but I would I would probably say, Let's pretend I'm right. Let's pretend 60 is a long term average and I'm right. Let's not argue about s a a here. What I'm trying to figure out is, should I be overweight or underweight? Equities within a multi asset portfolio? Global equities. OK, well within, within our multi asset portfolios, we're equal weight to global equities. I would say Stick to 60%.

Speaker 0:
OK, Carl, I think you answered it earlier, but let's go again.

Speaker 0:
45 45 got you're saying is you don't make that call within your portfolio, but within your episodic funds, What what's your Yeah, and

Speaker 1:
in our in our balanced multi asset funds as well. I mean, we are very neutral. I don't think this is the time to be making grandstanding calls on either direction. You, you have had a year after which, you know, you've had double digit high teens declines in global equities, and you've had a bit of a bounce off of that. The major valuation adjustment has happened.

Speaker 1:
Um, it's not a time to be making grandstanding goals over there, unfortunately, so I'll be with Victor and I'll be sitting on the fence.

Speaker 0:
OK, guys, thank you so much. Um, most of what I'm reading at the moment says, sit on your hands and do nothing. So maybe, except for Kyle, that's what we're confirming today. But then Karl does run a very concentrated portfolio. Slightly different. Thank you so much for your time. And I've learned loads today. I hope the audience has too. Thank you.

Speaker 0:
Thank you. Thank you.