Announcer: Welcome to part three of a special edition of Breadth of Experience, a TDAM Talks Podcast. On this episode we're joined by Damian Fernandes, Ben Gossack and Jose Alancherry, who will have a roundtable discussion on the equity market. They'll be chatting about election cycles, diversion trends in investing and revealing their equities origin stories. Welcome to the third part of the conversation.
Jose: I think the title of the podcast is perfect ... it’s “Breadth of Experience”, you know, breadth of experience, breadth of viewpoints, different backgrounds. And yet we all tried to get to that investment decision, putting our heads together. And there's been a fascinating discussion. But I do want to change track a little bit. And looking ahead this year, I'm fairly certain it'll be a top question (with) many investors and just ordinary citizens worldwide - is a lot of the world is going to elections, one big country down south. The U.S., of course, being the most talked about - and you will hear all ranges of opinions as to whether it matters or it doesn't matter. Why do we have two geriatric (men) ... are these the best candidates that are as dynamic as the U.S. could present just level set for the audience?
Jose: How you approach this election cycle? Does it matter to the markets in the first place and what ultimately matters for equities for us?
Ben: I'd say first and foremost, especially for our portfolios, what matters to us are what human beings are doing and looking at their trends and their activities and then looking across value chains and trying to understand the companies that best exploit that. That will not change. Whoever is in charge of the White House, the Senate, the Congress, whichever state governor. So that doesn't change, that's enduring and that has survived many different election cycles or budget impasses, all that type of stuff. Now, should someone come in and then change the rules of the game, then that's when Damien and our team of analysts and our other co-PMs (portfolio managers) would sit and figure out what does that impair, does that help?
Ben: But what I would caution and refrain people from doing, yes, election cycles can get quite emotional and we can make rash decisions. And I also find the reaction from stocks are always something that you may not have expected. So, you know, right now you have President Biden. He was supposed to come in on this green wave, but when I look at the stock market and some of the stocks that have done the worst - have been tied to clean energy and green energy.
Ben: They're trading… they're the ones that are fighting the new 52 week lows. And some of the stocks that you would think that would be an anti ... the inverse. So, you know, going after, let's say, conventional energy is sort of ... heavy industrials are the ones that are in that new 52 week list. So that's where I'd say ... I'm already seeing that in my inboxes. People are making the blue basket, the red basket, and that's great. You know, it's good content and it gets people talking. But for anyone to then say, you know, I need to sort of, turn over my portfolio again, the discipline for us has always been - how does it affect the secular trend? Does it affect the cycle or does it make a new a new cycle?
BEN: And that's all I'll be thinking about.
Damian: Look, Ben said it quite correctly, but implicit in what he is saying right, is that and I hope we convey this as this level of humility we have on our team, for us to reposition our portfolio in anticipation of... And by the way, it's not just the U.S. election, right? Europe is heading to the polls. You know…India…
Damian: But it's pretty well understood about, you know, favorites and stuff. But just think about this for us to, you know, reposition our portfolio in anticipation of an election outcome. We have to A) believe with, you know, utmost confidence that we know who's going to win. We know the hit rate on that. I'm better picking stocks and picking electoral winners ... and the secondly we have to ... Ben’s point, right we have to believe after we know who's going to win we have to be able to anticipate their policy prescriptions.
Damian: What they're going to do, what's going to be the focus point. And then we have to anticipate how the stocks are going to react. That's like that's like three variables, three degrees, you know, three variables, each with their own standard errors that we're compounding. And it's like, well, why don't we just wait to see who wins it? Let's see what the, you know, policy prescription is and then make a decision before we...
Jose: Let's see what the American people say.
Ben: But, you know, that sounds like a parlay.
Damian: Yeah!
Ben: I mean, it's crazy when you watch live sports that seems to be all they want to talk about. But effectively, what Damian has described here is a parlay. And the reason why parlay is have big payoffs is to be right about each individual... I think maybe it was a six part parlay if I if I was listening to you correctly? So I mean, I took a stats class back in the day. But you know when you multiply the probabilities of you being right six ways through so that's why the payoffs big because the odds to be right about all of them are very slim and every time you compound another decision than another bet probability of success already, you know it diminishes itself.
Jose: I don't doubt I feel like FanDuel at some point is going to have election parlays...
Damian: That they'll be shut down before that.
Jose: They’ll probably be shut down before they ever do this. This is an interesting year in general because you have so many awesome developments and interesting developments in the markets. You have the U.S. economy and the U.S. equity market on fire at the other end. You also have some interesting stories like Japan that has risen after three decades. You have question marks in China that is now in the doldrums. And as global equity managers, how are you taking stock of the world with these different diverging trends happening in different books?
Ben: And Damian's been really big on Japan, so I think you should go first on that.
Damian: Yeah, well, I'm excited about Japan for just two reasons and I think and then, you know, we can talk about China right after, but on Japan you have two things going for it, right? One, we talked about (the fact that) we’re in the early part of a cycle and the “Occam's Razor approach” like Japan is an early cyclical. Japan makes machinery parts, semiconductor parts. It makes automobile components. It doesn't make oil and gas and it doesn't drill for materials which are late cyclical parts. So is it a surprise that the Japanese market is, moving on but it's Beta to the economic cycle that's consistent? What's also happening in Japan is you're actually having true corporate reform where the Tokyo Stock Exchange and changes for savings rates for Japanese households are incentivizing both corporates to increase distributions, to improve on returns on invested capital and ROEs (Return on Equity), but also incentivizing households in Japan to increase their ownership of stocks.
Damian: So all of these things ... we could spend a whole podcast on this, but there is obviously the cyclical Beta component of the cycle that's helping move the market. But there's also a structural piece where fundamentals and cash flow generation and returns on capital and shareholder distributions are all in favor of an equity investor. And both those two things make me excited.
Jose: Sounds like the land of rising opportunity.
Damian: Land of rising ... and Ben, I don't know on China. Like, what do we do on China?
Ben: I would just say we're very macro where in our portfolios, but we don't ... it's very difficult. And again, there's many different ways to make money in the market. I would say it's very difficult for our style and then ... apply that then to individual securities that we own. So a lot of the stuff that's happening in China people have been talking about for the last ten, 15 years, there are a lot of things that people have issues in terms of Social Security and entitlements in the US, and they've been talking about that for the last 20 years. And at some point that will be an issue that we'll all be discussing on a future podcast. And so, these issues can take a long time before they end up showing. And, right now that people have now focused on the stocks and then the composite indices across China are now down. The other thing I'd say again, when it comes to our global portfolios, the way that we select our stocks ...is not ... in the case of Japan, there's a specific secular trend, you know, and then we've tied on into certain securities that benefit from that.
Ben: But we're not investing in Europe because it's like ... Europe's cheap. That to me has always been very hot money. And hot money comes in, hot money comes out, and every couple of years people will say, this is a country, and then everyone piles in and then you see a whole bunch of, sort of, ETFs. They then get built around that. And so for us, again, our global portfolio would be like - looking at secular trends, look at us cycles, finding the best stocks and at those best stocks...
Damian: Happen to be ...
Ben: …Sweden or Denmark or Japan or Indonesia, so be it. That's where we're going to invest in those countries.
Damian: Yeah. And I think, you talked about China and Ben talked about this. When you look at the fundamentals of these Chinese companies, there's no acceleration. There is write downs. There's concerns that the property sector there is a disaster. And so why would we, you know, Ben talked about, looking at 52 week lows like those 52 week low is there for a reason and if our investment style is quality growth and cash flow under depreciation and compounding, we're just not seeing it. It doesn't matter if it was if the country is called China, the individual securities that comprise are not are not showing us signs of that.
Jose: That's amazing that the tide in the thought process of cycles just on a global scale, it's not just a local thing that we look on. We want our stocks to be exposed to those teams. You know, they win across. And that is a perfect way to kind of segue to a last section and this being an equity podcast, I want a couple of questions just to get a sense of how you think of businesses. Which is rapid-fire... very quickly, both of you, what kind of ...
Damian: Ben goes first!
Jose: …what kind of business model do you like and what is a good example of a good representation of that business model?
Ben: So I have this line where I don't like to pick winners. That's hard. I like to pick companies that always win. So the business model, the setup that I'm always striving for is that classic pick and shovel play. So, you know, you had the gold boom here in California and so you could have made bets on which.
Jose: Which mine is going to be ...
Ben: Which mine is going to be the one that pays off - that's really hard - really hard to do. And the people that made a fortune with you know, or selling blue jeans and the picks and the shovels. Right. And so for us, again, you know, whether it's in the semiconductor industry or whether it's in, the industrial sector or consumer, I'm always focused.
Ben: So my favorite models are the ones where, they win, no matter who is the actual or declared winner, that's my favorite type of business to sort of strive and seek out for.
Jose: On the champion behind the scenes powering it all ... not....
Damian: I should have gone first because Ben took the line ... no, but he's right. Like we what we ought to be, you know, agnostic. Like if you need more semiconductor capacity and more fabrication facilities, we want to buy semi caps because they don't get don't care if it's Intel or Micron or any you know, we’re talking about semi (conductors) the other business model we like so there is actually two and like Ben got first pass ...
Ben: You gave me the first pass!
Damian: I know, I know, the but the other one we like is that we love reoccurring cash flow capital light business models you know think Costco's or membership fees think Microsoft or every single employee having to pay a subscription to access these like capital light business models with reoccurring fees that are growing every year in established modes where they’re oligopolistic like these are just high returning businesses like they're like you know keep calm and compound on.
Damian: So both those and if you look I think of our portfolio that's the bulk of it right. It's not a: hey we have you know like this really great idea, this beaten up stock that's going to you know, it’s ...
Jose: It's a 52 week low.
Ben: That again not to say that that that isn't a very valid approach…
Damian: I agree. Yes.
Ben: So I think you know especially when you know you manage mandates, it really has to sort of you have to have a certain philosophy. And this has been our philosophy and it's worked for us. But like I said, there's a million different ways that people can approach making money and they all can work.
Jose: That is that is the best. That's what I actually find very fascinating, what the markets you can be in the same company and there's - at TDAM itself there's ten ... variety of different strategies all with the same goal of ultimately delivering on their client expectations. And to end with ... two rapid-fire questions. What got you into the stock market?
Jose: What was that moment ... or book? Basically, yeah, what was that book that got you hooked into the stock market.
Ben: So Damian can go first on this one!
Damian: Oh… I that's ... there's no moment. I absolutely love what we do because it's competitive. It is like every single day, Ben and I ... like I don't, I don't know about Ben. I'm pretty sure about it. I haven't quizzed his wife, but I'm pretty sure the first thing he does when he wakes up in the morning, probably before he says hello to his wife as he checks the score at his on our mandates, he will pull up what performance was the night before.
Damian: And every single day we're focused on we have a process. We implement that process with discipline and over time, that process leads to separation. And it's one of the few ... and I've been in this for 20 been for 20 years. It's been one of the few professions where, you can say you're good. I'm really good at ... no, there's a report card.
Jose: There's a YTD.
Damian: Yeah, there's a report card attached to you. And I love the ... like, most like I played sports growing up. It just it's competition and it's competition, but not just. It's based on skill and talent and the repetitive process of doing it every day that gets you there, right? Like it's practice.
Jose: I get that.
Ben: So sadly, Damian is correct. Then the last thing…
Damian: He does…
Jose: And the first thing?
Ben: And last thing I look at is, what stocks are doing and, and the overseas markets. And then the first thing I do is I like I want stocks are doing in the European markets and now they're close and the Asian markets - look I'd say for me...
Jose: Especially for you because you made it from aerospace engineering to finance what was that that got you here.
Ben: So you know my origin story was never I ... read the stock tickers in the local newspaper and then, you know, I told my mom and my dad to open up a brokerage (account) and (I) picked those stocks.
Damian: And so I should give you the “Intelligent Investor” by Warren Buffett or...
Ben: Yes! That is a future gift you could give me ... so that's not my origin story and so that was, especially when I was interviewing for jobs like that's what I heard from everyone and I was like, that's not me. And I have to be authentic. I only discover what a mutual fund is when I'm working as an aerospace engineer. And our company had a defined contribution pension plan. And that's when I found out that there is this, portfolio manager that looks after a fund and they know about stocks and they and they pick stocks. And that's when I was like, wow, now I know what I want to be when I grew up.
Jose: Talk about a rabbit hole on those that is shaped your path and made you who you are today. This is interesting and that's…that's the amazing part about working in financial services. At the end of the day, you know, the stock market doesn't matter what your background is, put in the work you all can make it ...
Ben: And look that that's something I remember early on, you know sitting with Bruce Cooper (CEO, TDAM) and he was saying, the people that do well in this industry have curiosity. And people will say, well, I'm curious, but it's…it's the curiosity, going back to, why were we doing different things and what the consensus was saying. And we were curious as to why homebuilders were relatively outperforming. Again, why (inaud) stocks were outperforming. And so I think anyone can come into this industry with any background. And if anything, the more diverse backgrounds are there. I think that's great for an organization and for our portfolios. And then it goes back to that curiosity to ask questions Why are certain things doing this and why are certain things doing that? And then coming back to our process.
Damian: You know, like this. You said this right, Jose - this is called “Breadth of Experience.” If I could summarize our process and our historical delivery of helping clients achieve their goals... we kind of try and do two things really well. We try and be truly intellectually curious, like when something doesn't ... like when something ... doesn't add up, like why keep digging, do the research? And we try and remain really humble about things - about our skill set, about ... we're always we're not looking for about what's, you know, what's going right. It's like what do we all that's going wrong and why and what can we do and how we should how should we think about this? Like what's happening in the world that allows us to, you know, gives us an edge anyway?
Jose: No - it's amazing that we ended up with the homebuilders as a perfect way to tie in with the curiosity. And gentlemen, this has been an amazing conversation and I think a lot of great points that our listeners can hopefully take in and probably even incorporate in some of their personal investing activities, even if that is the case. Ben and Damian, again, thank you so much for joining us. And with that will sign out of TDAM Talks.
Damian: All right. That's always a pleasure.
Ben: Thank you.
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