Pod Insights Masters in Business Christine Phillpotts on Investing in Emerging Markets About this episode Barry speaks with Christine Phillpotts, Portfolio Manager for Ariel Investments’ emerging markets value strategies. She is also Senior Research Analyst for Consumer and Real Estate across Asia, Latin America, Middle East and Eastern Europe. She also covers all sectors in Africa. She spent 10 years at AllianceBernstein as Portfolio Manager and Senior Research analyst in emerging markets. Christine also helped launched the ‘Next 50 Emerging Markets Fund’, AllianceBernstein’s Frontier fund. She also worked as JPMorgan Asset Management equity research associate for US Tech. On this episode, Barry and Christine discuss her path through finance, the structural differences in emerging markets, and the latest market trends.
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Transcript 12,553 words · 6 speakers
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1:59 Speaker 01 This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
2:10 Barry Ritholtz? This week on the podcast, I have another extra special guest. Christine Philpotts of Ariel Investments has specialized in emerging markets and frontier markets for most of her career. She has been around the world, and if you name a hotspot investing place, she's been there. South America, Asia, Africa, Sub-Saharan Africa and Middle East, as well as Southeast Asia and Asia. She's a boots-on-the-ground type of investor who focuses and specializes in emerging market value. What makes that style of investing so interesting and different is simply market inefficiencies.
2:52 Barry Ritholtz? You know, the US markets are so efficient, large-cap tech stocks, it's really hard to have an edge in that space. But when you look at emerging markets and when you look at value, the opportunity for alpha is much, much greater than it is in traditional large-cap growth stocks in the US. And a lot of managers in that space actually beat their benchmark. You can't say the same for US large-cap stocks. I thought this conversation was really informative and fascinating, and I think you will also. With no further ado, Ariel Investments, Christine Phillpotts.
3:31 Speaker 03 Thank you for having me.
3:32 Barry Ritholtz? So that's a really fascinating background. I'm curious, I didn't even talk about the grassroots business fund we'll get to, where you work at JP Morgan, but economics bachelor's from Columbia, MBA from Harvard. Was finance and investing always part of the plan?
3:49 Speaker 03 The quick answer is no. So I pretty much tripped into finance when I was in middle school and high school. I wanted to be a concert pianist, so actually...
3:59 Barry Ritholtz? Oh, really?
4:00 Speaker 03 Yeah, so I spent probably 90% of my time outside of school. On the piano, practicing and playing at concerts.
4:07 Barry Ritholtz? Wow.
4:07 Speaker 03 And essentially decided to pivot from that original plan. Because it became clear to me as I got older that to really make a living as a concert pianist, you need to be the top 1% in the world.
4:19 Barry Ritholtz? Right.
4:19 Speaker 03 And I was good.
4:20 Barry Ritholtz? Even that might not be, maybe 0.1%.
4:23 Speaker 03 0.1, exactly. And so I was told that I was very good, but that's a pretty high bar. So.
4:29 Barry Ritholtz? Do you still play?
4:30 Speaker 03 I don't actually, but my kids are taking piano lessons, so I'm being inspired to kind of restart.
4:37 Speaker 03 So then I decided to explore other options, but finance was not one of them because I just had no exposure to finance whatsoever. And so the way I came across finance is when I was in high school, I was applying for scholarships for college and I came across the Thomas K. Lebrecht Smart Start Scholarship Program that was run by Chase Bank. So it's a program that selects New York City high school students who are going to university in New York City. And it offers a four-year, full tuition paid scholarship to college.
5:08 Barry Ritholtz? Right.
5:09 Speaker 03 As well as a paid internship, full-time during the summer, part-time during the school year.
5:13 Barry Ritholtz? Wow.
5:13 Speaker 03 So I came across that opportunity, I applied and was lucky enough to get it. And then I said, okay, now I need to figure out what finance is actually all about. And luckily, as I, you know, started my internship when I was 18, over the years, you know, throughout college, I learned more and more about the different areas of the bank and became really intrigued with investment management specifically. But if it was not for that program, I may not be in this industry.
5:37 Barry Ritholtz? Huh, really interesting. And, and I noticed in your background, you spent some part of your undergraduate playing around in the psychology department. Tell us a little bit about the thinking there.
5:48 Speaker 03 Yeah, that's right. So I decided to become an economics major and a psychology minor. I always had this interest in just understanding how people think and what drives just people's reactions, emotions, behaviors. That was just always a side interest of mine. And in particular, as a psychology minor, I had an opportunity to work with a Columbia professor on an independent study, specifically focused on cognitive psychology.
6:14 Speaker 03 And I found that subsegment really interesting because we did studies on kind of decision-making biases, human biases, like loss aversion and other biases that impact otherwise what should be rational decisions and make them less than rational. And so doing that in college, that independent study, really opened my mind of, to what eventually I learned to be the behavioral economics and finance area, but I didn't even know what it was called or that that was an area back then. So the interest I have in psychology and economics became really interesting.
6:47 Barry Ritholtz? Very much so. The fascinating thing is, when I was in college, even when I was in grad school, there really wasn't any such thing as behavioral finance. But it was pretty clear economics had a fundamental flaw. Like, the base concept of humans as rational, profit-maximizing decision-makers, hey, that doesn't seem to be what happens in the real world.
7:09 Speaker 03 Yeah.
7:10 Barry Ritholtz? I think they've kind of squared that circle now.
7:12 Speaker 03 Absolutely.
7:13 Barry Ritholtz? Do you get to use any of your, the work of behavioral economics in your day job?
7:17 Speaker 03 Absolutely. So, as an investor, we constantly need to be aware of our own human biases, because we're humans, so we are prone to the risk of making irrational decisions as well. But it's also really interesting to think about how these biases, at the market level, really creates interesting opportunities, right? It's because of these biases that we have inefficiencies in the market that we can then exploit as active investors. So, if the markets were perfectly rational, arguably, there'd be no opportunities. So it's just interesting to think about, again, as an investor, how do you handicap your own biases? And we do that through several ways. For example, we use some quantitative tools and approaches to help offset those natural
8:02 Speaker 03 biases, but also thinking about, at the market level as a whole, as we think about the aggregate market participants, how we can exploit some of those biases to generate off them.
8:12 Barry Ritholtz? Really, really interesting. And to round out your background, you spent time at Alliance Bernstein, JP Morgan Asset Management, and Morgan Stanley. Were you at Morgan right heading into the financial crisis? Is that right?
8:25 Speaker 03 I was.
8:26 Barry Ritholtz? What was that right there?
8:27 Speaker 03 Yes. So that was a very fascinating experience. So I participated in an MBA fellowship program at Morgan Stanley. So when I resigned from JP Morgan to pursue my MBA at Harvard, I applied to and got accepted into Morgan Stanley's MBA fellowship within the investment bank. So that involved two years, full tuition paid for business school, as well as a summer internship within the investment bank. And so I'm an investor through and through, but I thought it was an interesting opportunity to look at the other side of the house and to join the sell side and kind of see how the other side operates, you know, from the inside. And so I decided to join the capital markets group. And specifically, I was part of the convertible debt group.
9:12 Barry Ritholtz? Oh, really?
9:12 Speaker 03 Which was interesting because I actually started my career at JP Morgan Asset Management in the high-yield and investment-grade credit research team. And then I moved on to the equities team afterwards. So it was kind of an interesting way to combine my debt and my equities experience. And I did a lot of options math, which I, that was interesting. And I just learned a tremendous amount. But it was the summer of 2008, as you can imagine, was a really interesting time, particularly for the convertible bond desk, because we were the busiest desk as other parts of the market were closed, literally shutting down. The convertible debt market was one of the last ones to remain open before September 2008.
9:53 Speaker 03 And so that summer, we ended up, I ended up working on about a billion dollars' worth of new issuance. So I actually got a chance to work on a lot of new convertible debt deals before that window closed. So it was just a really interesting timing and learning experience.
10:08 Barry Ritholtz? I have a vivid recollection of the summer of '08. And I remember saying to one of the traders I was working with, I just kind of channeled Robert Duvall from Apocalypse Now, where he turns to Martin Sheen and says, "You know, son, someday this war is going to be over." And because you were in the middle of just the craziest market experience you can have. And I wanted people to just... Remember what's going on now because this ain't ever happening again in your lifetime.
10:38 Speaker 03 Absolutely.
10:39 Barry Ritholtz? Like, I assume you had a very similar experience at Morgan Stanley. It had to be just bonkers.
10:45 Speaker 03 Yeah, it was just, literally, there were headlines coming out on a daily basis.
10:49 Barry Ritholtz? Tick by tick, every minute. It was, it was, it seemed like every, every time you turn around, there was some other insane news and it just built and built and snowballed.
10:58 Speaker 03 Absolutely. And, and so by the time I got back to Harvard in September of 08, right? I mean, obviously, the Lehman collapse occurred and really just the bottom fell out. And we're all kind of looking at each other saying, well, on the one hand, I guess it's good that we're in school as opposed to, you know, being on the street and having just been laid off. But I vividly remember later that year, the dean of Harvard Business School indicating to us that, comparing us, the class that graduated during the Great Depression. And his message was basically like, they turned out just fine eventually over time. And we were like, um, okay, well, this puts it into perspective.
11:41 Barry Ritholtz? Well, well, well, thanks for the cheerful, you know, halftime speech to get everybody enthusiastic. Hey, just think about it. The folks in the Great Depression, they turned out just fine.
11:54 Speaker 03 Yeah.
11:54 Barry Ritholtz? Oh, my God. Let's talk a little bit about International Finance Corporation. Tell us about the fund that you helped them establish.
12:03 Speaker 03 Yeah, so I graduated from HBS in summer of 2009. And I was fortunate enough to join the Grassroots Business Fund, which had been a division of the International Finance Corporation and literally spun out first half of 2008. So what was really unique about that is, is one of the few funds that actually had a fresh pool of capital to deploy.
12:26 Barry Ritholtz? Ah, so they weren't dealing with legacy things that were upside down?
12:29 Speaker 03 No, they were able to enter a pretty compelling time in terms of having fresh capital to deploy. And so that fund's focus is on businesses, small and medium-sized privately-held companies that not only have Good growth prospects and could generate healthy financial returns, but that are also providing economic opportunities to the base of the economic pyramid. So providing affordable goods and services to customers, incorporating individuals in supply chains and productive manners. So it was an impact oriented private equity, private credit fund.
13:04 Barry Ritholtz? And where was that focus? What geography did they focus in?
13:07 Speaker 03 So the focus was on emerging markets, more specifically Sub-Saharan Africa, Latin America, India and Southeast Asia.
13:15 Barry Ritholtz? So are you traveling all over the world to kick tires of these private companies? Or what's that like?
13:21 Speaker 03 Yeah, absolutely. So during my time there, I was probably employee number four or five. So I joined soon after the spin out to help really establish our investment processes as an independent entity, provide the game plan for where we're going to invest, and ultimately help recruit other investment professionals as we're building out the team, and ultimately investigate deals and structure deals and invest in portfolio companies. So my original focus was Sub-Saharan Africa. I did spend a summer between JP Morgan and HBS in Kenya, working with a microfinance organization. So I had some experience in Africa that was able to leverage for this role.
14:01 Speaker 03 And so to answer your question, I spent probably three to four months out of the year on the ground. So I was based in DC as a member of the management team, but I would go for a month at a time, really working with the entrepreneurs that we had invested in, looking at diligence, working with partners, kicking the tires, as you said, which really provided a great experience to understand emerging markets on the ground and a lot of the nuances, particularly for smaller and medium sized companies.
14:30 Barry Ritholtz? And give us the timeframe. What years were you doing this? Because I want to put it into context of what was going on in the US at the time.
14:36 Speaker 03 Yeah, so I joined in August 2009, and I left to join Lyons Bernstein in late 2012.
14:43 Barry Ritholtz? So what were emerging markets like in that post-financial crisis period?
14:49 Speaker 03 Well, what was interesting is particularly for the segments of the markets the fund was focused on, which is really smaller, mid-cap, private equity and private credit. They were Pretty unaffected by the global financial crisis.
15:04 Barry Ritholtz? Makes sense.
15:05 Speaker 03 Because these are companies, and in some cases, countries, that were never really fully integrated into the global financial system. And so as the global financial markets were in a tailspin, they were actually very resilient. And so we had really attractive opportunities. For example, that was a time period where mobile banking and mobile payments was starting to emerge. We had a couple of investments in that arena. We had off-grid, clean energy investments. We had really interesting agribusiness and agro-processing companies, consumer product companies. So companies that really were targeting the local markets and customer bases and supply chains that just were not at all impacted by the global financial crisis.
15:48 Speaker 03 So to me, that was the definition of uncorrelated asset.
15:52 Barry Ritholtz? Yeah, to say, to say the very least. So it's interesting, the theme across all of your work, or most of your work, is emerging markets in frontier markets. What led you to that particular focus?
16:05 Speaker 03 Yeah, so when I was at JP Morgan, I was covering US tech stocks. I was a research associate on the buy side, working with senior analysts, looking at software.
16:17 Barry Ritholtz? Mid 2000s?
16:18 Speaker 03 Tech. Yeah, from basically 04 up until I went to business school, which was 07.
16:24 Barry Ritholtz? So the recovery following the dot-com implosion had already begun.
16:27 Speaker 03 It already started, yes.
16:28 Barry Ritholtz? Right, but we hadn't quite run into the bus of, oh, wait, don't know.
16:31 Speaker 03 Exactly. So basically, by the time, I mean, looking back, I left at the peak of the market. Obviously, I didn't perfectly time it, but when I was leaving, I remember.
16:40 Barry Ritholtz? Pretty close.
16:41 Speaker 03 I remember my colleagues telling me, well, why are you going to business school? That's going to be a waste of time. I mean, the markets are doing very well. Why, why are you doing this to your career? And let alone you're going to Africa to do microfinance, like, what's going on? They thought, I think they thought I had a quarter-life crisis. So again, hindsight's.
16:59 Barry Ritholtz? Quarter-life crisis, I love that.
17:01 Speaker 03 But hindsight's 2020, but, but what's interesting is, to answer your question about the pivot to emerging markets, what really drew me was a couple of things. So one is. The idea of being focused on less efficient part of the capital markets was very compelling. I tend to be the type of person that if everyone's going in route one, I want to go into route two, three and four. Just to kind of not be with the herd and to see what else is happening that people may be overlooking. And with large cap tech stocks, if the CEO is caught a cold, there'd be 20 sell side notes about the fact that the CEO caught a cold. It's very well covered markets. Whereas in emerging markets and particularly markets like Africa, they were just not really being talked about.
17:46 Speaker 03 And so I was very interested to look behind the hood, see what was happening and be in an arena where I could, I thought I could add more value and have more of an edge by doing research in areas that other people ignored. From a personal standpoint, my parents originally from Haiti. So I was born and raised in New York, but I'm first generation. And so there was a lot of conversations around the dinner table around why are poor countries poor? What could be done about it? Talks about economic development and the intersection with political reform and just how that affects developing countries more broadly. And so that was also from a personal standpoint, a really strong interest of mine that led me to want to pursue emerging markets.
18:28 Barry Ritholtz? So I'm hinting at a question that's going to come a little later. But my general sense is, you know, developed mature economies have fairly efficient markets. Very hard to generate alpha because markets are so efficient. I'm going to assume the same is not true in either EM and especially in frontier markets. What are your thoughts?
18:50 Speaker 03 That's, that's absolutely the case. And the data proves it out. So for example, if you look at the last 10 years of returns, the median active EM manager across style. So value growth in core has outperformed the benchmark or passive strategies over the last decade. That is not the case when you look at US large cap.
19:13 Barry Ritholtz? A hundred percent. In fact, I think the number is net of fees 10 years out. It's like 93% underperformed the benchmark in. In U.S., not even big cap, just U.S. period. It's it's pretty amazing.
19:26 Speaker 00 At K K R, we've spent fifty years understanding what matters to our clients and companies. From pioneering private equity to investing across credit, real assets, insurance and sports, K K R has built the experience to navigate complexity, the judgment to recognize opportunity, and the conviction to create lasting value. Because when people and institutions are counting on us, understanding what matters isn't just important, it's everything. K K R, understanding what matters. Visit K K R dot com slash what matters.
19:57 Speaker 01 This is the Bloomberg Tech Minute brought to you by Chat G P T. I'm Carol Muster. Millions of Americans are taking peptides, short strings of amino acids that can act as biological signals for cells. Peptides like insulin can occur naturally in the body, or they can be synthetically introduced to induce a biological process, as happens with semaglutide, the active ingredient in Ozempic. Now Bloomberg's Anika Inampudi reports peptides may be exploring their next frontier, the brain. People are taking peptides for mental clarity and cognitive benefits as alternatives to psychiatric medications and to gain a competitive edge or stave off the effects of aging. Both insulin and semaglutide are approved by the U.S. Food and Drug Administration.
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21:20 Barry Ritholtz? So let's talk a little bit about what you did before you joined, Ariel. You were at Alliance Bernstein, a very well-regarded firm, for about 10 years. And you managed a couple of different projects and funds. Tell us a little bit about your experiences at Alliance.
21:36 Speaker 03 Yeah, absolutely. So essentially, I decided to leave Grassroots Business Fund, really to be able to go back into the listed equity space and to join a larger investment platform. And so at the time that I was considering potential opportunities, I came across the team that I joined and the fact that they were interested in launching a frontier and small emerging markets equity fund, which really paired well with my experience in small and frontier funds. And so I joined in early 2013 and specifically joined initially to cover Sub-Saharan African stocks and also to help launch this new fund, which was called the Next 50 Emerging Markets
22:20 Speaker 03 Equity Strategy. And the idea was to have a fund that specifically focused on frontier and small emerging markets that were even less efficient, so one of the least efficient markets in an already inefficient part of the capital markets, which is emerging markets.
22:35 Barry Ritholtz? So let's just define some terms a little bit. I think the listeners know what developed markets are, or developed ex-U.S., which would be things like Europe and Japan. What's the difference between frontier funds and emerging markets? Like, how do you just define those two geographies?
22:54 Speaker 03 Yeah, that's a great question. A lot of times, the lines can be blurred and countries could go from one to the other and back. So we use the MSCI benchmark definition. So they have specific criteria on differentiating between what's in the emerging markets benchmark and what's in the dedicated frontier benchmark. So parameters around, for example, liquidity, market mechanisms, and other criteria, depth of the markets, that will determine what's emerging and what's frontier. But I think the broader sense that we focus on is really, again, around the This notion of efficiency or lack thereof. And opportunities and markets in which we can get an edge through active management.
23:38 Speaker 03 And I would say the benefits of the inefficiencies in emerging markets are that much more magnified for frontier markets. But there are review cycles in which countries get upgraded to emerging markets or downgraded to frontier markets, depending on how some of those market characteristics evolve.
23:56 Barry Ritholtz? So, so let's, let's put some specific geographies to test. Where does China fall into this? Is it still considered emerging? Not quite developed? What about South Korea?
24:08 Speaker 03 That's a great question. So, South Korea for the MSCI definition is emerging.
24:12 Barry Ritholtz? Isn't that kind of crazy?
24:12 Speaker 03 Others would argue it should be developed.
24:14 Barry Ritholtz? I mean, South Korea, if Japan is obviously a developed nation.
24:19 Speaker 03 Yeah.
24:19 Barry Ritholtz? Is South Korea all that far behind Japan in terms of their maturity of their markets?
24:24 Speaker 03 So there's, I guess there's two parameters there. So one is, you know, from the economic standpoint, if you look at economic characteristics and criteria, that's one layer within which to categorize countries between developed and emerging. The other is really around just how the equity markets function.
24:42 Barry Ritholtz? The depth of it, the liquidity.
24:43 Speaker 03 In terms of depth, liquidity, market rules and other criteria that will then cause another layer of differentiation between emerging and developed and frontier.
24:56 Barry Ritholtz? So when I think about, let's say, the Middle East, you have Egypt, you have Saudi Arabia, you have Dubai and Qatar and, and the Emirates. Are these all still considered emerging?
25:09 Speaker 03 Yes, they are. So they're, they're, except Egypt, for example, would be categorized as frontier.
25:14 Barry Ritholtz? Oh, really?
25:15 Speaker 03 Yes, but Saudi is emerging.
25:17 Barry Ritholtz? Right.
25:17 Speaker 03 So.
25:18 Barry Ritholtz? Because you think, again, you think of Saudi as like a fairly develop, I mean, granted, it's a kingdom and a lot of, there's a lot of poverty as well as a lot of wealth there.
25:26 Speaker 03 Yeah. Yeah. And so I think for us, the way we think about it for our emerging market strategy is we have the ability to invest across emerging and frontier markets.
25:37 Barry Ritholtz? So it doesn't matter what we label them?
25:39 Speaker 03 Exactly. We do have a limit on what percentage of the portfolio could be in what's classified as frontier. But ultimately, we're looking across all of these markets. I mean, there's 50-plus countries in the emerging markets world that have listed equity markets. So that's a big pool to draw upon. And ultimately, we're looking for the 60 stocks that we think have the best upside potential, taking into account liquidity and other parameters of risk.
26:07 Barry Ritholtz? So I was going to ask about the structural differences between emerging markets and frontier markets, but it sounds like it's a pretty technical definition. So let me go to what you just referenced in terms of selecting stocks. Do you approach that process from a top-down, country-by-country basis? Is it a bottom-up analysis, company by company, or a little bit of both?
26:32 Speaker 03 So we're bottoms-up investors. At the end of the day, we're picking stocks. If you look at our sources of active risk, about 50% to 60% of that consistently is from idiosyncratic or stock-specific drivers. That being said, and just to put that in context, country would contribute about 10% to 15%. That being said, neighborhood matters, particularly in emerging markets. And so we cannot disentangle top-down considerations from our bottoms-up analysis because as we determine what discount rate to discount the free cash flows of a specific company, we need to think about the risk premium of that country, how the sovereign yields are likely to unfold, what are the currency risks?
27:17 Speaker 03 As we think about the growth potential of a specific stock, we need to put that in the context of the growth potential of that country. And so these top-down considerations are ultimately really critical to consider as we look at specific individual stock opportunities. So like real estate, neighborhood matters. And it also helps determine where we lean into or out of in terms of where we place our focus. We want to make sure that we have an alignment of interests, particularly as minority shareholders. That alignment is not just relevant to the specific stocks in terms of the management teams and the equity holders or the majority shareholders of the companies we invest in. We also think about alignment at the country level. What is the government looking to achieve? How is that evolving?
28:02 Speaker 03 How is that changing? And our very simplistic criteria is to not get in the way. If there's a country where we think the economic direction is moving in the wrong direction and where there's not that alignment with what the government's looking to achieve, we don't need to be invested in that country. There's other places for us to fish.
28:22 Barry Ritholtz? So I look around the world and I think about the various hotspots. I mean, hold aside Russia, which has essentially become uninvestable. But Argentina and Venezuela went through their issues and Turkey obviously had some problems and to say nothing of what's going on in the Middle East. Do you have to have boots on the ground? Do you have to actually go visit these countries and get a sense of, hey, the headlines are overblown? Or, hey, this could be potentially worse than we realize? How often are you traveling to different places to get a feel for risk factors there?
28:58 Speaker 03 Absolutely. So we travel quite often. So our team, just to talk about our team structure, six of us have been working together, have moved from Alliance Bernstein to Ariel. And our team has been working together for over a decade, so no less than 12 years specifically. And throughout that time, even though we're based in New York, we understand the importance of visiting all the different countries we're actively invested in. And so to that point, for example, last year I spent in aggregate four weeks in China to really not only meet with the management teams of listed companies, but to meet with their competitors, privately held and publicly
29:40 Speaker 03 held, to meet with local contacts, to meet with domestic investors, to meet with, you know, other key contacts and players, where you can get more insights by having a face-to-face conversation oftentimes than you may be able to get on Zoom or even via text. And even doing site visits, right? Going to the malls, visiting real estate sites, going to the auto manufacturing plants, visiting battery plants, really gives you a more concrete sense of what is occurring. And to your point, what is beneath the headlines and what the market could be missing?
30:17 Barry Ritholtz? Really, really interesting. You know, I haven't brought up China partly because it feels like China has become sort of uninvestable to outside companies because of their A shares and their foreign B shares. I'm curious, as a professional EM investor, how do you look at the opportunity and risks in China? Can we have a legitimate, fair investment in China, given the way things are structured? Or how do you, how do you think about China?
30:48 Speaker 03 So we think the opportunity in China today is meaningful. Largest country weight in our portfolio. It's about 30% of our portfolio today. And we think that the opportunities are very attractive. I think there's a couple of reasons for that. And by the way, we didn't always have such a large weight in China. For many years, we were underweight China. But we moved to an overweight position last year, in large part because from a bottoms-up standpoint, we're seeing companies that started trading at single-digit multiples, so six to eight times forward PE, that can generate double-digit earnings growth, and that are returning more capital to shareholders, that are actually improving their capital allocation
31:33 Speaker 03 for the first time in decades, that is not being reflected in valuations. From a top-down standpoint, even though the macroeconomic situation in China is challenged, we're not debating that, for us, we're less interested in the absolute level and more in the second derivative. So for example, for the real estate sector, what is the directionality of inventories? There's still too much inventory, but is it going up or is it going down? And we're seeing evidence of inventories declining. Just as an example, new starts have declined over 65% from the peak. So even though demand has declined, new starts has declined even further. In the latest data, we're seeing for secondary prices and primary prices...
32:20 Speaker 03 They're still in decline, but the level of decline is lower than it had been. So we think the evidence indicates that when looking at cycles, looking at that second derivative tends to be more correlated with how equity prices perform as opposed to focusing just on the absolute levels.
32:36 Barry Ritholtz? Really, really interesting. You know, you, you mentioned you were underweight China for a while. When we look at the returns dating back to, I don't know, I want to say the early 90s, hasn't really distinguished itself despite incredibly rapid economic growth, which really raises an interesting question. Do we invest in emerging market countries because their economies are growing? Or do we invest in those countries because their companies are generating growth and profits at a, at a rapid clip?
33:08 Speaker 03 I think that's a really critical point, specifically with China. So as you pointed out, if you look at the, the history over decades, despite very strong GDP growth, EPS growth lagged that GDP growth, partly because of management decision-making, equity issuance, and capital allocation decisions. We're starting to see the reverse now happen where GDP growth is slowing and it's never going to match what the GDP growth has been like for the last decade. But EPS growth is going to actually exceed that GDP growth because of some of the behaviors I mentioned of a steep acceleration in share repurchases, more judicious use of capital,
33:52 Speaker 03 exiting non-core businesses, redeploying that in higher incremental returns generating ventures. And so the relationship between EPS growth and GDP growth, in many cases, there's a strong correlation, but in other cases, you really need to pay attention to the company's specific drivers for that EPS growth and free capital generation because that's ultimately what determines share price moves, not overall GDP growth.
34:17 Barry Ritholtz? Really fascinating. What about the risk? I have a vivid recollection of a couple of years ago when some of the senior executives at big tech companies fell into disfavor from the
34:30 Barry Ritholtz? Let's be blunt, the Central Communist Planning Group. And folks disappeared for a while. The head of Tencent, the head of Alibaba, the head of a couple of other companies just suddenly disappeared, or at least temporarily. How much of a risk is there when you're investing in China that you don't know what the Chinese government is going to do? And to be fair, hey, I have no idea what the American government's going to do either. But it seems to be a very specific risk that's foreign to American investors.
35:03 Speaker 03 Yeah, and I think that goes back to this idea of trying to understand the incentive structures of the government, having a view on what they're looking to achieve and not getting in the way. So to use the example of the tech crackdown, and I'll extend that to also the education sector crackdown that preceded it. Xi Jinping had been, I would argue, pretty clear on some of the issues he had with private sector, with private education, with how tech companies had evolved, and the role, the disproportionate role they were playing in the economy, and the relationship with
35:44 Speaker 03 merchants, and ultimately, some of the concerns around common prosperity, or that going against the common prosperity agenda. And so I think there was that tension already in place. It was a surprise about how the government decided to go about resolving that tension. But the tension was there. And so I would argue, based on our framework of really trying to understand what are the problems the government's looking to solve, and lean into the companies that could be solutions to those problems, as opposed to the companies that are viewed as obstacles to solving those problems, is a way to reduce the risk from regulatory intervention.
36:29 Barry Ritholtz? So you want to align your investments with things that the central planners are in favor with. And so when you're investing with a company that also has the backing of the government, you're much less likely to have those sort of kind of surprising one-off risks that we saw a few years ago. Fair?
36:46 Speaker 03 Yeah, and I think, just going to the big tech companies today. They are now proactively managing how they engage with merchants and making sure, for example, that the split of value is, I would argue, more favorable to merchants today than it was during the period of the crackdowns. There's also an element of making sure that the entrepreneurs are not outshining party officials. And so there's a lot of different elements that are being explicitly taken into account that one needs to be aware of as we think about, again, what are those potential risk and pressure points? How do we mitigate them?
37:30 Speaker 03 And ultimately, we're looking to build a 60-stock portfolio across 20-plus different markets. So we don't have to be in all countries, and we certainly don't have to be in all sectors if we think that that misalignment exists.
37:42 Barry Ritholtz? So, final question about this topic now. You know, pretty much the past decade, everybody lagged what the US did. And I've been hearing lots of people throwing the towels and saying, hey, if you can't beat them, join them. Is now the wrong time to capitulate? Is now the wrong time to give up on emerging markets and frontiers? Tell us what opportunities are out there looking forward.
38:06 Speaker 03 Absolutely. So if you look at the history of EM equity performance relative to US equities performance, there's a clear pattern over the last couple of decades of very long cycles of outperformance and underperformance. And clearly, we're in a very long cycle of over a decade of EM, and quite frankly, anything outside the US, underperforming the US. The reason why I think now is the wrong time to capitulate is for a couple of reasons. One is, if you think about EM equity valuations versus the S&P, the EM index is trading at, you know, 10 to 11 times forward PE. The S&P is above 20 times.
38:50 Speaker 03 So the discounts from a price-to-book standpoint is over 60%. Price-to-earnings, about 40% discount. That's the widest discount we've seen ever. But key valuations are a necessary but not sufficient condition for an opportunity to be attractive, right? You also want to see what is the catalyst to that valuation discount closing? And we see several of those catalysts in emerging markets. One is emerging markets earnings this year and for the next few years are expected to accelerate. EPS growth, for some of the reasons I mentioned earlier, is expected to accelerate and be higher than the arguably lofty EPS growth expectations out of the US.
39:32 Speaker 03 And that's driven by not only economic drivers, but also fundamental company-specific drivers. I think the other standpoint to think about is in terms of flows. The US dollar is at close to 20-year highs. In a period where the US deficit running at 6%, arguably is going to widen, at a period where rate policy is TBD, our thesis is not premised on the US dollar massively weakening, but we think that there's increasing probabilities of dollar weakness, given the starting point that we're in. And that, from a flow standpoint, should be an additional upside driver to flows into emerging markets.
40:17 Barry Ritholtz? Really, really interesting.
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41:43 Barry Ritholtz? So after a decade at Alliance Bernstein, you landed Ariel about a year ago. Tell us what that transition was like from, what's a giant investment house to something that's a little more of a boutique?
41:56 Speaker 03 Yeah, absolutely. So Ariel was seeking to launch a dedicated emerging market equity strategy. Ariel has a 40-plus-year history of value investing in equity markets, starting in the small and mid-cap segments in the US. The firm launched in international and global strategies about 12 years ago. And so emerging markets was actually a natural extension as Ariel focuses on investing in the less efficient parts of global capital markets. Because as you imagine, US small cap is also relatively less efficient compared, you know, in the context of the US equity markets.
42:38 Speaker 03 Our team had an opportunity to join to help build the emerging markets business at Ariel. And it's a really extremely exciting opportunity. As I mentioned, our team has been working together for no less than a decade. We've had an investment process, an investment style that has been deployed for decades. And to me personally, it was really exciting to have the opportunity to be an intrapreneur.
43:05 Speaker 03 And to really launch a new business with the backing of such an established and well-respected platform like Ariel. And I had been following Ariel and John Rogers and Melody Hobson since my analyst days at JP Morgan. So I was particularly excited to join a firm, just given their really strong track record and reputation.
43:27 Barry Ritholtz? And one of the things I find interesting about Ariel is the insignia of the firm, which is a turtle holding a trophy. And like the sash says, slow and steady wins the race. What does that say about their philosophy of investing and their emphasis on long-term goals?
43:46 Speaker 03 Well, that's one of the many elements that made joining Ariel so incredibly attractive. First of all, in terms of their investment philosophy, it really is across all of the investment strategies at Ariel, having a fundamental bottoms-up, value-oriented style that really thinks about the long term. So we're not looking to call quarters. We're really thinking about the longer-term trajectory of a business and owning businesses that are trading at meaningful discounts to their intrinsic value. We're able to look at that longer-term horizon and take advantage of market dislocations that often focus too much on short-term noise as opposed to long-term trajectory.
44:29 Speaker 03 And we take advantage of that discrepancy. But it not only reflects how they invest, it also reflects how Ariel thinks about building the business and growing the business. So we were strategy number four at Ariel. This firm started in the early 80s, so you could say that Ariel's adding a new strategy once a decade.
44:49 Barry Ritholtz? Right.
44:50 Speaker 03 That's very different than other firms, particularly larger asset management firms, where there's often pressure to add more and more new strategies in a much more diversified fashion. And so I think the focus on value investing, the discipline to really just focus on expanding and adding strategies where it's a fit with the culture and the investment philosophy of the firm, is really attractive. And for us as a new team, their longer-term horizon is also attractive because they're thinking about emerging markets in the long haul. They're not saying, okay, we need this to work after six months. They're thinking about building this business from a longer term horizon, which again, as a team, was extremely attractive for us.
45:35 Barry Ritholtz? If you go to the website today, it specifically says active patience.
45:41 Speaker 03 Yes.
45:41 Barry Ritholtz? So a new strategy once a decade. That seems fairly patient approach to investing. What was it like rolling out their fourth strategy?
45:53 Speaker 03 It's been incredible. I think going in, we clearly had high expectations going in, or else we wouldn't have made the move. But our experience, there's been a lot of upside surprise, to use the term of an investor, relative to the already high original expectation. So it's been incredible. I think the support we've received from the organization has been phenomenal. And again, I'm talking about from the leadership on throughout the organization. Because ultimately, we are the fourth strategy. We're not one of 200 strategies. And so what also makes it a very exciting opportunity, and it really scratches my entrepreneurial itch, is that we're really able to have a meaningful impact on the firm.
46:38 Speaker 03 We're not a drop in the bucket. So if we succeed, which I know we will, we can really move the needle. And that has a lot of impact. And that does an incredible amount to increase level of motivation.
46:55 Barry Ritholtz? One of the strategies that you guys manage is Emerging Markets Value X China. Tell us a little bit about that strategy.
47:04 Speaker 03 Yeah, so what's interesting is the impetus for launching that strategy, which we launched a month after our Emerging Markets Value strategy, was because several allocators indicated that they had an interest in an X China strategy, not because they don't want to invest in China.
47:22 Speaker 03 But because they already have dedicated China allocations. China is a very large and inefficient market where allocators, some allocators decide to invest in local managers and have dedicated China allocations. For, so for those managers, some of them have decided, you know what? I want my global emerging markets equities manager to focus on everything else outside of China to not necessarily double up my China exposure. But it is not, to date, has not been a reflection of a desire to not invest in China.
47:57 Barry Ritholtz? So we've talked about lots of different parts of the world. The one area we haven't spoken about is India, which has had some pretty good, pretty robust performance over the past few years. Give us an update. What's going on in India? How attractive is that? Has that gotten ahead of itself? Share your thoughts on, on the subcontinent of India.
48:16 Speaker 03 Yeah, absolutely. So India has been the standout outperformer within emerging markets. And I think that it's a market that will continue to have a strong economic growth outlook. That started with the rise to power of Modi, who implemented a number of reforms that really helped unlock economic growth. We see the growth being powered by infrastructure investments, which will unleash some productivity improvement by consumer, by credit growth. So there's a lot to like with the India economic story. The challenge is that we think that's already priced in to the equity markets. So the market trades above 20x forward P/E.
48:57 Barry Ritholtz? It's not cheap at all.
48:57 Speaker 03 We think it's priced to perfection. And so for us as value investors, we prefer to invest in a market like Southeast Asia, which has similarly attractive economic growth, 6% to 7% real GDP growth over the next few years. At a fraction of the multiple. You know, markets like Vietnam and Philippines are trading at 10 to 11 times 4GE.
49:20 Barry Ritholtz? That's what I was going to specifically ask. So it's Vietnam, it's Philippines, any other countries?
49:25 Speaker 03 And Indonesia, yeah. And we think it's a really interesting time in the emerging markets universe because we think it's one of the few opportunities I've seen in the last few decades where you don't have to choose between value and growth. You can get growth at extremely compelling valuations. India is not one of those markets, in our opinion, but there are plenty of markets that fit that criteria.
49:47 Barry Ritholtz? So help me understand how you guys come up with a way of weighting the various geographies you're exposed to. We've talked about the Middle East, South America, various parts of Asia. Is it a function of the specific companies that you find in each region? Or do you approach it, hey, I think we should have some Southeast Asia and try and ramp that up to X percent? How does that balance out?
50:14 Speaker 03 Yeah, so it's really a bottoms up approach. So ultimately, we're looking for stocks that we think can deliver meaningful upside. So today, for example, we're not going to invest in a new opportunity that doesn't give us at least 30% absolute upside in dollar terms. That's the, we think there's just a lot of really great opportunities in the markets. And so we start with that bottoms up approach where we're looking for those opportunities that can deliver that. And our investment philosophy is really anchored around value with a catalyst. So we're value investors. Valuations and price matter, but it's not the only criteria. We also want to make sure that we're focused on companies where there's a stabilization
50:58 Speaker 03 and an inflection point at hand in the underlying business momentum. And we think that discipline, focusing on value with a catalyst, helps make sure we're focused on the value opportunities as opposed to the value traps. And so with that lens in mind, we're picking stocks that meet that criteria. And ultimately, as I mentioned, we can lean into or maybe put higher focus on countries where we think the top-down environment is fruitful.
51:28 Speaker 03 And lean out of countries that are, we think, heading in the wrong direction. But ultimately, the country overweights and underweights are really driven by that stock selection approach.
51:39 Barry Ritholtz? Huh, really interesting. You know, I read this data point on Ariel that I had to ask about because it's so interesting. Employees and board members own almost 95% of the firm. What does this mean to you as an employee? And what does it mean to your clients?
51:55 Speaker 03 So just as I, as an investor, focus on alignment of interest with the companies I'm investing in and with the countries we're investing in, I think our clients are equally asking similar questions of what is the alignment of interest with the investment managers I do business with? And so with that statistic, it's very clear that at Ariel, there is that strong level of alignment. Not only do the Ariel employees, a majority of Ariel employees' compensation is tied
52:33 Speaker 03 to stock, it's also tied to the performance of the strategies you're responsible for managing. So we're eating our cooking.
52:45 Speaker 03 And at a firm level, because it's such a focused firm, when I own shares in Ariel, as a portfolio manager in the emerging markets division, I can move the needle of that broader Ariel share price in a way that is hard to do when you're at a $600 billion or $1 trillion asset management firm, where if you get equity in that company, your contribution just mathematically is a lot lower.
53:14 Barry Ritholtz? And historically, you were at Alliance Bernstein, you were at JP Morgan, you were at Morgan Stanley, you could shoot the lights out, it's not going to impact the bottom line all that much because they're just such behemoths.
53:25 Speaker 03 Exactly. So it's just a different structure and a different model. But I think with this model, and I see it with our team. It's clear, we've always been an extremely hardworking diligent motivated team, but it got kicked up a thousand notches when joining Ariel. And so it's just incredible case study in what strong alignment of interests can do in terms of just shaping your day to day behavior and how you interact at work and ultimately how aligned you are with the clients you're investing money for.
54:00 Barry Ritholtz? I think I have an interview coming up at Future Proof Citywide Miami with Melody Hobson, who you work with. She's a legend in the industry. What's it like to work with Melody?
54:11 Speaker 03 She's incredible. As I mentioned, I've been following her since I was a junior analyst at JP Morgan Asset Management. Getting to work with her and John Rogers has been just unbelievable and incredible. And one thing I think about Melody is that she is really funny, very down to earth. I mean, I was surprised how down to earth she is and just very passionate and diligent about her work. And so the fact that she is out there actively advocating for and fundraising for our emerging market strategy, I'm just so incredibly grateful for.
54:55 Speaker 03 But it just shows that level of focus and dedication and the fact that Melody can do that because we are a firm that is focused and not trying to be all things to all people. So that's just been a really incredible and inspiring experience.
55:10 Barry Ritholtz? And let me throw you a little bit of a curve ball before we get to our favorite questions. You serve on the board of directors of the Small Enterprise Assistance Fund. Tell us a little bit about what that impact fund does.
55:23 Speaker 03 Yeah, absolutely. So I recently stepped off of the board, but I had been on the board for a number of years. And the CEIF Fund is an impact investing fund that actually I had a chance to co-invest with and work alongside when I was at Grassroots Business Fund. So it's a fund I'm very familiar with that really focuses. On private equity investing among small and mid-sized companies as a tool of grassroots bottoms up economic development.
55:51 Barry Ritholtz? So impact not merely looking to generate a return solely, you want to actually.
55:57 Speaker 03 Looking at both, yeah. So what I guess we would call a double bottom line.
56:01 Barry Ritholtz? Right.
56:01 Speaker 03 Fund. Exactly. So the the fund has experience from China to Tanzania to Peru to to Ukraine. I mean, they've worked in, they've worked not only in emerging and frontier markets, but I would call horizon markets, which are kind of the level, I guess, below frontier markets. They've worked in really challenging but interesting places. And so it's a fund that even though I recently stepped off the board after a number of years, I have a tremendous amount of respect for the work that they do.
56:34 Barry Ritholtz? Huh, really, really interesting. All right, let's jump to our favorite questions that we ask all of our guests. Starting with, what's keeping you entertained these days? What are you watching or listening to?
56:45 Speaker 03 So it's interesting. I I tend to, in terms of streaming and TV, I tend to lean towards dystopian scripted dramas. So think Squid Game, Black Mirror, Three Body Problem. I love those shows.
57:00 Barry Ritholtz? I love Three Body Problem.
57:02 Speaker 03 It's incredible.
57:03 Barry Ritholtz? Did you start the new season?
57:04 Speaker 03 I did not, because now I'm on Squid Game. Oh, yeah, I did start Squid Game version two.
57:08 Barry Ritholtz? I just saw the preview for it.
57:10 Speaker 03 It's it's incre- I love it. I love it. It has mixed reviews. It has, the second season has mixed reviews, but I I'm really enjoying it so far.
57:19 Speaker 03 So that I would say is my core. But I also really enjoy Below Deck. So.
57:24 Barry Ritholtz? Below Deck? What is Below Deck? Oh, you mean the Star Trek animated?
57:27 Speaker 03 No, no, Below Deck is literally a reality show on Bravo. It's the only reality show that I watch, but it's basically about crew that work on yachts.
57:40 Barry Ritholtz? Okay.
57:40 Speaker 03 And what I love about the show, it's, I mean, it's a typical reality show where there's drama and all this other stuff. But what I love about it is because they're actually working. There's a lot of kind of managerial lessons of leadership, the relationship between the captain and the boatswain, the relationship between different departments, like the interior versus the exterior of the boat, hiring and firing decisions. There's a lot there that I find to be absolutely fascinating. And beyond that, there in mega yachts in incredible locations around the world. So
58:15 Barry Ritholtz? It looks great, I bet.
58:17 Speaker 03 I think Harvard could do a case study on it at some point, but it's, it's a fun show.
58:21 Barry Ritholtz? I'm gonna, I'm gonna drop a footnote with you on Squid Games. Do you know the background of the guy who wrote Squid Games?
58:30 Speaker 03 No.
58:31 Barry Ritholtz? So there was a Wall Street Journal article, like, right in the early part of the pandemic, when Squid Games had blown up. It turns out that this guy had been trying to sell the script for Squid Games for a decade.
58:44 Speaker 03 Wow.
58:45 Barry Ritholtz? And could everybody, this is crazy, a competition for money where people die, this is, nobody would believe this, this is too crazy. And Netflix, as they tend to do, they just buy stuff en masse and then go through the process of seeing what they can develop. Like, they, they don't just buy something from Fred over there. It's like, let's just scoop up all this and see what we can find. And at one point in time, the guy who wrote it, who developed it, had to sell his laptop because he was that broke. And it just goes to show you, like, nobody wanted anything to do with this. And it's the single most successful show in the history of Netflix. It's just, it's just wild.
59:28 Speaker 03 And it's, it's fascinating to me, too, because it's also just part of this surge of Korean, the globalization of Korean culture, right? Whether it's K-pop, in movies, television, even food, cosmetics. So it's really interesting to think, to put Squid Games in the context of this huge resurgence in Korean culture globalization, which quite frankly, I think people wouldn't have predicted, you know, a decade ago. So it's really interesting.
59:56 Barry Ritholtz? I think Netflix just spent another billion dollars over the past three years since Squid Game, buying more South Korean product, which is, which is pretty, pretty amazing.
1:00:07 Speaker 03 Yeah.
1:00:07 Barry Ritholtz? Next question. Tell us about your mentors who helped shape your career.
1:00:12 Speaker 03 So I've been tremendously lucky that over the course of my career, I've had incredible mentors and also sponsors. And I like to put the point on the sponsors piece because I like to think that mentors, you know, get you into the building, but sponsors put you on the express elevator to the top. And so they're the ones who are pounding the table for you when you're not there. And so I've been lucky to have incredible, you know, relationships in both dimensions. People I'd call out specifically, I mean, there's a lot, there are a lot of people who've been very helpful. But I would say, if I think about my JP Morgan days, you know, particularly, you know, earlier on at JP Morgan, individuals like Kay Herr, who, you know, was an equities analyst.
1:00:57 Speaker 03 Now he's actually in fixed income at JP Morgan Asset Management. He really, when I was just a college student that didn't know anything about investment management, really took me under her wing and, and really encouraged me to actually pursue credit research before equity research because there's no opening in equity research. And she said, you know what, credit research, I know that's not what you want to do right now, but this will help you build the skill set that you will need in equity research in terms of assessing companies, et cetera. And I'm so glad she gave me that advice because that really was the starting point of my career in securities analysis. You know, other individuals include Professor Andre Perold,
1:01:39 Speaker 03 who was my finance professor at HBS, who I'm still in touch with. He's been a really great advisor and mentor to me and really has helped counsel me through, you know, different stages of my career. And again, I feel bad because there's a lot of people I'm not naming, but there's just been, you know,
1:01:56 Barry Ritholtz? It's like the Golden Globe speeches.
1:01:57 Speaker 03 I know. I want to thank everyone, but I've just been very fortunate to have incredible mentors still in my life. And I just hope that I can pay it forward for that next generation. And in the process of mentoring, kind of more junior talent to, again, try to pay it forward.
1:02:13 Barry Ritholtz? Let's talk about books. What are some of your favorites? What are you reading right now?
1:02:17 Speaker 03 So I just finished The Obstacle is the Way.
1:02:20 Barry Ritholtz? Ryan Holiday?
1:02:20 Speaker 03 Ryan Holiday, yeah. That really, I found to be an incredible book because it essentially talks about how obstacles, challenges, problems are not things to be avoided, but embraced and sought after, which seems very counterintuitive because we're constantly trying to optimize our professional and personal lives to, you know, avoid stumbling blocks. And this is saying, no, embrace the stumbling blocks because that's ultimately how you learn. And for me in particular, as a recovering perfectionist, it really resonated with me to kind of hear that message. And I actually find myself referring back to it in my personal and professional life that, you know what, the obstacles are a good thing and you learn from them and that's how you become stronger.
1:03:05 Speaker 03 And, and he just points to so many different examples from history, philosophy, current events, that really ties and brings to life that concept. So it's a book I really, really enjoyed. And what I'm reading right now, I'm kind of 25% of the way in, is On Heheping, written by Kevin Rudd, who's a former Australian ambassador, who has decades of experience living and working with China, with politicians in China. I read The Avoidable War, which was an incredible book that talked about, you know, US-China relations and the outlook for that. On Heheping specifically focuses on Heheping thought and how, what's the basis for that
1:03:47 Speaker 03 thought, what's the basis for the thinking, what are the incentives and how those could evolve. And my friends who work and are based in China, different, different individuals separately have told me that he's probably the top Westerner who has the best understanding of Chinese, Chinese politics today and of China. And so I take their word for it, that he, he has a lot of good insights.
1:04:12 Barry Ritholtz? Huh, really, really kind of interesting. As a side note, I am not a perfectionist, but I have noticed, we've all heard the expression, don't let the perfect be the enemy of the good.
1:04:24 Speaker 03 Yes, yes.
1:04:24 Barry Ritholtz? I could tell you from my personal experience, it doesn't matter if you're shopping for a house or anytime you're making a consumer choice.
1:04:34 Barry Ritholtz? I have a tendency to go down a rabbit hole.
1:04:37 Speaker 03 Yep.
1:04:37 Barry Ritholtz? And let the perfect be the enemy of the good. And it's been a process to kind of learn how to get around that.
1:04:45 Speaker 03 Yes.
1:04:46 Barry Ritholtz? How did you learn how to manage? And by the way, I am not a perfectionist. I'm a just get it done.
1:04:52 Speaker 03 Yeah, yeah.
1:04:53 Barry Ritholtz? Doesn't matter.
1:04:54 Speaker 03 Yeah.
1:04:54 Barry Ritholtz? If it's not perfect, we'll fix it later.
1:04:56 Speaker 03 Yeah.
1:04:57 Barry Ritholtz? In most things, but in like that sort of big consumer.
1:05:01 Speaker 03 Mm hmm.
1:05:01 Barry Ritholtz? Choice, the perfect has always been the enemy of the good for me. And I look back at choices I made and like, gee, you know, I should have done that house, which has appreciated more than. Because you don't end up in a perfect house. And what you sometimes give up. So I'm curious, how did you manage that personally?
1:05:21 Speaker 03 I am still managing it. So I'm still.
1:05:23 Barry Ritholtz? Well, you're always gonna be.
1:05:24 Speaker 03 I'm always working on it. And so, I mean, it's actually interesting talking about real estate. I mean, as a side note, my husband and I have been talking, we live in Brooklyn now. We've been talking about moving closer to our kid's school, which is on the Upper East Side. To optimize the commute, et cetera, et cetera. We've been talking about this for maybe six years now.
1:05:44 Barry Ritholtz? Right. Watching prices just go up and up and up.
1:05:46 Speaker 03 To your point, well, I want this and we want that. And this is like our perfect dream home and it needs to be two blocks away from the school. And so this is literally an active conversation now as we enter 2025. Like at some point, we just need to do it. It's not going to be perfect. And so for me, I think in terms of opportunity cost, right? So what are we giving up by not doing this now?
1:06:10 Barry Ritholtz? Right.
1:06:11 Speaker 03 And which is what you alluded to as well in terms of pricing, appreciation, et cetera. And also just understanding that there is no perfect anything. It's trade offs.
1:06:22 Barry Ritholtz? So you're 100% right. I have a quick, funny story to share. Couple of years ago, I'm trying to remember if it was pre or post pandemic. No, I think it was right after the pandemic. I gave a presentation to the International Luxury Real Estate Alliance and it was in Aspen, Colorado. So it's beautiful there and, you know, and it's a few hundred real estate agents and each of them represent the highest performing realtor in their town. And it's not, you know, Podunk. It's, it's Vail and it's Nashville and it's New York and it's Seattle and it's London.
1:07:01 Barry Ritholtz? It's just crazy, the sort of, sort of like top real estate producers all around the world. And we're having, you know, there's a bunch, the dinner that night are a bunch of separate tables of six or eight. And there's a, an older woman from Palm Beach, Florida, ritzy part of Florida. And, uh, she, she takes a phone call and she's like, I apologize, I have to take this. She's gone for 30 seconds, she comes back and she goes, oh, deal is done. Oh, what'd you sell? Palm Beach on the, on the water, a hundred and 10 million dollars.
1:07:37 Speaker 03 What?
1:07:37 Barry Ritholtz? And I say, a hundred and 10 million dollars? That house has to be perfect. And I'll never forget her response. She's like, meh. I'm like, wait a second. A hundred and 10 million dollars? What are you talking about? And she goes, well, it's a part of Palm Beach I like, but I don't love. Three blocks in either direction I like better. It's a bulkhead, not a sandy beach. You go two doors over and it's sandy beach. They have a dock, but it's not a deep water. Like she starts clicking stuff off. And I'm like, do you mean to tell me that, not that I have a hundred and 10 million dollars, but if I did, the house I'm buying is really a series of compromises?
1:08:18 Barry Ritholtz? And she said, every house at every price point is a compromise.
1:08:23 Speaker 03 That's very true.
1:08:24 Barry Ritholtz? How insane, but you would think at a certain point.
1:08:27 Speaker 03 Right. Like it needs to nail most of the requests.
1:08:30 Barry Ritholtz? Right. And it's like, but she'd like clicked off like, wait, a hundred and 10 and you don't love it? She's like, eh, it's all right. I'm like, come on, you gotta be, I'm sure there are lots of houses that most. Would say, you know, for $5 million, I would love that.
1:08:44 Speaker 03 Yeah, yeah, yeah.
1:08:45 Barry Ritholtz? And at 20 times that amount, it's like, she was just so, now granted, she's been doing real estate in Palm Beach for 40 years. She's seen everything.
1:08:55 Speaker 03 Right.
1:08:55 Barry Ritholtz? But still to just kind of shrug and say, eh, you know, it's all right.
1:08:59 Speaker 03 That's.
1:09:00 Barry Ritholtz? Mind blowing. So.
1:09:01 Speaker 03 That puts in perspective.
1:09:02 Barry Ritholtz? And that's kind of what, you know, whenever I'm like, I like this place.
1:09:07 Speaker 03 Right.
1:09:07 Barry Ritholtz? But it doesn't have this and this and this. It's like, well, it's $107 million than the meh place, cheaper than the meh place in Palm Beach.
1:09:16 Speaker 03 Right.
1:09:16 Barry Ritholtz? So deal with some trade offs.
1:09:18 Speaker 03 Right, trade offs, exactly. And like, what do you prioritize? Because you're not going to get everything.
1:09:21 Barry Ritholtz? Right, that's right.
1:09:22 Speaker 03 So what are we trying to solve for?
1:09:24 Barry Ritholtz? So what, once you adapt the attitude that, right, I'm never going to get everything. What's the bigger priority? Hey, I don't really love this kitchen.
1:09:34 Speaker 03 Yeah.
1:09:34 Barry Ritholtz? And I, you know, the where the driveway comes in, meh, I don't love that. But you could always change, if it bothers you that much, you can eventually change it. But it's shocking that even at that price point.
1:09:47 Speaker 03 That is.
1:09:48 Barry Ritholtz? There's some trade offs. That has stayed with me for forever. That, I mean, it's only been a couple of years, but it's stayed with me because when the perfect is the enemy of the good.
1:09:59 Speaker 03 Yeah, exactly.
1:10:00 Barry Ritholtz? At what point, what, at what point is it perfect?
1:10:03 Speaker 03 Yes.
1:10:04 Barry Ritholtz? If it's not perfect at $100 million.
1:10:05 Speaker 03 Yes.
1:10:06 Barry Ritholtz? Well, I think you have to give up the idea.
1:10:08 Speaker 03 Exactly.
1:10:09 Barry Ritholtz? But that, that's been an issue that I've always kind of wrestled with. And the sooner you accept, it's always a series of trade offs.
1:10:16 Speaker 03 Yeah.
1:10:16 Barry Ritholtz? If you are. But that's an absolutely true story and it stayed with me to this day. All right, our last two questions. What sort of advice would you give to a recent college grad who is interested in a career in either investing or emerging markets and, and value?
1:10:33 Speaker 03 Yeah, so I think it relates to what we're just talking about, about not being a perfectionist, because as an investor, you are knocking out of the park if you're right 60% of the time. Even that's a high level, right? You're going to be wrong a lot. And particularly in listed equities, unlike when I was doing private equity, private credit, where there wasn't a mark to market every single minute. You know whether you're adding or detracting value on a real time basis. And so letting go of the idea that, and I think sometimes young people feel this pressure when they start in this business that, you know, I need to get it right 100% of the time.
1:11:17 Speaker 03 And that leads to a lot of risk aversion as a result because they're afraid of making a mistake. They're afraid of making the wrong call and that could help stymie decision making and decisiveness. I try to tell people who are starting this business, you need to let go of that and just kind of understand you will be wrong. Ideally, you want to be right slightly more times than you're wrong. And when you're right, ideally, the upside is greater than the downside when you're wrong. But that's the game we're trying to play. We're not shooting for 100%. So I would say that's the biggest piece of advice. I would say the other broader advice is to, as someone put it earlier in my career, you know, lead
1:11:58 Speaker 03 with a yes. And so if there's projects that come up, if there's new opportunities, not over analyzing or overthinking, well, am I 100% ready to do this? Just say yes, and then you'll figure it out. And I think that's where you grow. That's where you learn. That's where you can really stretch yourself and kind of step out of your comfort zone, particularly in emerging markets where there's a lot required to kind of step out of comfort zones in terms of cultural differences, in terms of, you know, other dynamics, just being comfortable or embracing that. And yeah.
1:12:34 Barry Ritholtz? Really, really interesting. And our final question, what do you know about the world of investing today you wish you knew 20 or so years ago when you were first starting out?
1:12:44 Speaker 03 I would say that the concept of, it goes back to the importance of the mosaic theory and particularly in less efficient markets like emerging markets, you know, all the data is not going to come in a neat package. And so needing to be creative with how you get information, it's almost like being a detective in some ways. How do you get information? How do you piece, how do you put the pieces of the puzzle together? How do you think outside of the box? Because oftentimes, I think when, you know, when I was in school,
1:13:25 Speaker 03 You have an agenda, a textbook, you're learning things, you're doing the test, you get an A+, and then you kind of move on, right? In the world of investing, it's just so much more nebulous. And so it just requires you to stretch and have more creativity than just expecting things to come at you in a cleaner fashion, which, to be honest, was my experience in US large-cap tech investing, where data was abundant and widely available and much more efficient. But even with that type of investing, I think, thinking more along this, being creative and putting the mosaic together more proactively is probably a lesson that I would want to
1:14:09 Speaker 03 tell myself, my 20-year-old self.
1:14:12 Barry Ritholtz? Really interesting. Thank you, Christine, for being so generous with your time. We have been speaking with Christine Phillpotts of Ariel Investments, where she is a portfolio manager for emerging market value strategies. If you enjoy this conversation, well, be sure and check out any of our more than 500 previous discussions we've had over the past decade. You can find those at iTunes, Spotify, Bloomberg YouTube, wherever you find your favorite podcasts. And be sure and check out my new book, How Not to Invest: The Bad Ideas, Numbers, and Behaviors That Destroys Wealth, publishing on March 18. I would be remiss if I did not thank the crack team that helps put these conversations
1:14:56 Barry Ritholtz? together each week. Sarah Livzie is my audio engineer. Anna Luke is my producer. Sean Russo is my head of research. Sage Baumann is the head of podcasts at Bloomberg. I'm Barry Rizzo. You've been listening to Masters in Business on Bloomberg Radio.
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