Contrarian Quality at GQG Partners – Rajiv Jain (EP.505)

Rajiv Jain is the Chairman and CIO of GQG Partners, a global equity manager he founded in 2016 that has soared to $160 billion in assets, rebuffing the challenging decade for active managers. Our conversation covers Rajiv's path from trading in India to his long tenure at Vontobel and founding of GQG. We discuss the periodic crisis lessons that shaped his approach, his definition of quality, team dynamics, and portfolio construction to avoid losses. We then turn to Rajiv's contrarian views, including current significant positions in energy, utilities, steel, tobacco, and emerging markets, avoidance of hyperscalers and semiconductors, and nimbleness to change his mind. Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  The cumulative capex of all these mag companies in their histories, one and a half trillion dollars. Think about it. Now they're talking about three trillion in just three years. So these businesses created with not much capital. You're spending a trillion dollars a year and the revenue on AI talk about maybe 70, 80 billion. When Google went public, I remember it was 2004, they were worth 50 billion market cap, but they're generating 700 million of free cash flow. Very cash generated business. 20% plus operating margins. If you look at OpenAI, Anthropic, SpaceX, a whole different league. As the numbers start coming out, then the realization happened that how lopsided markets are and positioning. If you look at the profitability of the areas that they're growing is far lower. Half or more of revenue is coming from OpenAI slash Anthropic. How in the world OpenAI have invested trillion

• 0:44Speaker 00

  dollars when your revenue is maybe 20 billion? X dot AI, cash losses are give and take double legit billions, 12 to 15, and their capacity relation on the colossus was 11%. Now they're selling the capacity to Anthropic. Our view is that this is a powerful technology, but the economics are really bad and time is not a friend.

• 1:10Ted Seides?

  I'm Ted Seides and this is Capital Allocators. My guest on today's show is Rajiv Jain, the chairman and CIO of GQG Partners, a global equity manager he founded in 2016 that soared to 160 billion dollars in assets, rebuffing the challenging decade for active managers. Our conversation covers Rajiv's path from trading in India to his long tenure at Vontable and founding of GQG. We discussed the periodic crisis lessons that shaped his approach, his definition of quality, team dynamics, and portfolio construction to avoid losses. We

• 1:52Ted Seides?

  then turned to Rajiv's contrarian views, including current significant positions in energy, utilities, steel, tobacco, and emerging markets, avoidance of hyperscalers in semiconductors, and nimbleness to change his mind. Before we get going, for the first time since 1999, the Knicks are in the NBA Finals. 27 years sounds like a long time. My twins are 20, and that feels like a full lifetime of parenting. 27 years is also half of my life. Or if you're counting, a little bit less than half. But sometimes, it seems like just yesterday.

• 2:33Ted Seides?

  1999 was the year I graduated business school alongside some amazing past guests like Rodrigo Batar, Matt Boteen, Rodney Comages, Meredith Jenkins, David Lyon, Rick Heitzman, Alex Sasserdote, and Matt Spielman. When I see any of them, 27 years feels like yesterday. But there's another dynamic worth talking about. In nine years of doing the podcast, I've never once mentioned the Knicks. The Yankees roll off my tongue. But mentioning these Knicks now easily puts me in the bucket of a fair-weather fan. A fair-weather fan is one who only pays attention when their team is winning. And who doesn't love this team? They're up-tempo, team-oriented, and deep.

• 3:17Ted Seides?

  I'm hoping they pull off a victory, even if it means both my sons get their wish of being part of a raucous celebration. A fair-weather fan is often seen as momentum-driven and negative. But it's not always the case. There's no better place to be a fair-weather fan than of Capital Allocators. Thanks to our amazing guests, we get to be part of a winning team every week. So while you're watching the NBA Finals, or for all of next year's NBA season for that matter, why not tell the person next to you to join the bandwagon and become a fan of Capital Allocators? Thanks so much for spreading the word. Two important points to note. In the interview, Rajiv refers to journalists.

• 4:00Ted Seides?

  In this context, he's referring to former investigative journalists that GQG employs as non-traditional investment analysts as a part of its research team. Rajiv also states that GQG does not allow personal trading. More precisely, GQG does not permit single-stock investing, though employees may Personally invest in certain mutual funds, including GQG managed funds. Capital allocators is brought to you by AlphaSense. Every allocator sits at their desk for hours, preparing the work around investment decisions, getting up to speed on a new theme, prepping for the next investment committee meeting, and tracking what changes across an entire portfolio. AlphaSense just launched something built to help. It's called SuperAnalyst,

• 4:45Ted Seides?

  an always-on agent that works like a power user on your behalf. It draws on over 500 million premium sources, including broker research, expert transcripts, company filings, and earnings calls, and keeps working long after you've gone home for the day. Point SuperAnalyst at a theme, company, or market, and it learns the coverage universe so you can easily turn new insights into the briefs, models, and memos you'd otherwise build by hand. It was designed to work like an extension of your team, so it remembers your projects, follows your templates and processes, and links every output to its source so you can see where each conclusion came from. The best way to judge its quality is to give it a whirl.

• 5:30Ted Seides?

  Pick the research task on your desk before your next committee meeting and hand it to SuperAnalyst. Start a free trial at alphasense.com/capital and see what it has ready for you. Capital allocators is also brought to you by RidgeLine, the investment management platform built for firms who are rethinking how work gets done. You're at your desk looking at a line graph of your firm's growth. The line is moving sideways, linear growth, and you know exactly why. You're constrained by your operational bandwidth that's been the same for so long, it just feels like the cost of doing business. RidgeLine is built to change that line's trajectory, to be the inflection point

• 6:14Ted Seides?

  that takes your growth from incremental to accelerated with the team you already have in place. RidgeLine is the only AI-native investment management platform that brings together the front, middle, and back office with one set of data and powerful AI agents that automate away operational drudgery, so your talent can shift from managing old technology to materializing new ideas.

• 6:38Ted Seides?

  Ridgeline helps asset and wealth managers understand and improve their firm's growth trajectory. To see how your firm compares to 16,000 of your peers, visit ridgeline.ai/trajetory. If you file Form ADV, your firm is already there. Then talk to Ridgeline about how you can do more with the team you already have. Capital Allocators is also brought to you by Juniper Square, the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs that build the strongest and most durable relationships with LPs are the ones that have both strong returns and strong operations.

• 7:21Ted Seides?

  AI raises the stakes on operations and having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com/capitalallocators. Please enjoy my conversation with Rajiv Jain. Rajiv, thanks so much for doing this.

• 7:50Speaker 00

  Thanks for having me, Ted.

• 7:51Ted Seides?

  I'd love you to take me back on your early influences that got you involved in business.

• 7:56Speaker 00

  The earliest one was in high school. During one of the summers, the 80s, there was a lot of things to keep you busy. And I was in India. My dad was trying to keep me busy. In those days, you got physical certificates, stock certificates. He had this portfolio and a few names. You get a dividend in mail, check. Problem is sometimes it didn't come in, so how do you match? That's how I started tracking these things. I started trading in high school. Classic punting, basically. Not much thought, but trading.

• 8:24Ted Seides?

  How'd you go from that to learning what these things were behind the pieces of paper?

• 8:29Speaker 00

  In college, I got heavily engaged. Ended up doing my undergrad and grad fairly quickly. I was 20 when I'd done my masters. I was very busy in trading in college. You had to go physically to a broker. I remember everybody was maybe 55, 60. The broker said, I need to talk to a dad. What the hell are you doing here? Do you see people around you?

• 8:50Speaker 00

  That's when I started reading and learning the tricks of the trade.

• 8:53Ted Seides?

  What was the impetus for going through school that quickly?

• 8:57Speaker 00

  I was keen on getting into the business. It almost was a nuisance factor. I need to do this because otherwise nobody will hire me. So that was more the driver rather than anything else.

• 9:05Ted Seides?

  How'd you take that and turn it into a professional career?

• 9:08Speaker 00

  There was no industry as such in India at that point. I was in Delhi, working for an export oriented firm, doing the paperwork for them. Which was an interesting experience because if you're doing documents for exports, you learn the drudgery of what proper paperwork means. I'm there dealing with dozens and dozens of bill of lading. You can't have any mistake and you fill out precisely. And the bank may reject for any given reason. Which was one of the biggest learning experiences. You forget as an analyst is that things have to be a little more precise manner than simply putting in a model. Or you grow at 15 person next five years and we all live happily ever after. That's when I thought about coming to US because there was no real industry at that point in India.

• 9:46Ted Seides?

  What was your first break?

• 9:48Speaker 00

  The first break was after I graduated from university in Miami. I didn't know anybody in New York in the industry. Nobody in my family had come here to US. In fact, that's your second time I sat on a plane when I came to US. I picked up the CFA directory and started cold calling people. I used to call senior people because I thought middle aged folks have no time for this. I was seeing a 24, 25 year old kid. Was to Malcolm Klinger at Swiss Bank Corporation, CIO. He picked up the call and he said, nobody calls me. So what's your story?

• 10:19Speaker 00

  I said, I'm seeking advice. He said, okay, come over, I'll meet you. He said, okay, there might be an opportunity. So that's for the first break. But I called literally, I would call hundreds of people.

• 10:28Ted Seides?

  What gave you the tenacity to do that?

• 10:31Speaker 00

  It's hard to say. When I'm pushed in the corner, I get more fighting spirit. It was difficult. You had to buy a fax machine. You talk to people, anybody somewhat interested, I'd have a spreadsheet to say interested. Chase up next, not interested, root, don't point, calling again. Difficult circumstances force you into that position. You just need a little bit of grit to keep pushing.

• 10:52Ted Seides?

  What was your first role in the industry?

• 10:54Speaker 00

  It was a classic buy set analyst, doing modeling, calling up companies to get the end report because there was no internet, no email in those days. Kind of basic blocking and tackling stuff, then building model and recommending stocks.

• 11:06Ted Seides?

  What was your path from there to learning how to invest?

• 11:09Speaker 00

  I've always been a very active investor personally. I'd read enough by that to literally anything, everything on investing I would read, even during college. I knew enough lingo. Now you appreciate you didn't really know much, but you knew the lingo. I was there for a couple of years. Then there was this opportunity. One of my bosses left and went to Montebel. And he said, you want to come over, which I thought was interesting in a context of it was much smaller for him, nobody knew the place, three people on investment side and 15 total. What I learned once I went there was they didn't even have a trader. It was learning while on the job. I became a portfolio manager fairly early in 94, within two and a half years, small pool, to be clear.

• 11:46Ted Seides?

  How would you describe your style back then?

• 11:50Speaker 00

  It's evolved multiple times because I did not know where to start. I had a little bit of quantitative inclination. My feeling is that you're always good to have some guardrails so it keeps you out of stupid stuff. I started with building quant screens, what literature was around then. There was one element which I was going on, which was top down models. I was to vouch for that, how wonderful those models are, what are the best countries and look at the best stocks quantitatively, Martin Zweig, Net Davis type of stuff. Then came 96, 97, Asian crisis. I was co-managing EM Fund. What I found was the top down didn't work. The reason why it was okay performance wise was because the bottom of the balance sheet kept me alive. Fundamentals were fine, but the top down didn't work at all. I became a hundred percent bottom of investor after that.

• 12:33Speaker 00

  One crisis after the other, as I've evolved over the years, it's become. Where top down is a risk management tool and we use it heavily. It's a switch off, not switch on. It should help you reduce risk, but not add risk. In other words, if Chinese growth is good, inflation is good. You don't buy China because of that. You still need valuations and corporate earnings. If there's a macro event, the war is a big one. Maybe you want to be careful about the risk. If interest rates are going up, inflation is going up. What are the implications of that? Back test it, see if there's any empirical evidence. We do have a heavy reliance on that quantitative element. If you don't understand that basic math, you'll be a roadkill. I have a strong belief in that.

• 13:14Ted Seides?

  Once you had that lens, what did you found you gravitated to bottom up?

• 13:19Speaker 00

  In the late 90s, because it came from the quantitative side, what works and doesn't work. The classic stuff, Buffett and Peter Lynch, you sort of grasp that that bottom up understanding of business does matter. That becomes the core of it. The top down element became heavy to nothing to maybe it should be a risk off rather than on and off switch.

• 13:38Ted Seides?

  That trajectory at Von Tobal, you start with 15 people. Some years later, it's much bigger than that. What was your path along the way?

• 13:47Speaker 00

  I became a portfolio manager for emerging markets in 1997. Then co-managed for others in 1997. The timing goes interesting because this was Jan 1997. As you know, Asian crisis was six months later. Which by the way, for some reason, I always had that interesting view of starting because when I joined Von Tobal as a co PM for emerging market, that was October 31st, 1994. A month and a half later, there was tequila crisis. I didn't really know what the hell was going on because the banks melted, they disappeared and we had exposure. Then came the dot com bubble. We didn't fare well on some of the international and global book EM did better. My boss left after the dot com bubble burst. I became CIO in January 2002 and quickly 75% of clients fired us.

• 14:32Speaker 00

  The quantitative came to my rescue in a way that what fundamentally quantitative look attractive. I remember 2002, we ended up making a big bet on South Korea because there were so many of these companies selling five times earnings, like cosmetic companies and Amore Pacific and Lotte Construction, Lotte Chilson in beverages, because it took four or five years after the Asian crisis and the earnings had come through, the businesses had restructured, but they were very cheap. They were these kind of bets, but the business went down from a billion, billion and a half to almost 250, 300 million dollars.

• 15:00Ted Seides?

  What did you think at that point in time? Your boss leaves, assets are flooding out, probably doesn't look very good.

• 15:07Speaker 00

  That's an understatement because most of the clients said, how long will it take to mend the ship? I remember one specific client out of Pennsylvania, that was the 70% remaining assets. So there was an important meeting. Peter asked me, how much time do you need? I said, a year and a half, two years. He said, look, we don't have that much time. You probably have six months. I've always had this issue that if push in the corner, my view is that let's see if there's something and roll up the sleeves and get more active in, that fighting spirits always keeps me going. It was a challenging period.

• 15:34Ted Seides?

  What did you do in the subsequent couple of years to resurrect the ship?

• 15:37Speaker 00

  It's interesting because of the emerging market and Far East, like Japan were the two products at that point. This is the early days of the Asian bull market. They had reasonably good performance, which I was running going into that. So we got a lot of traction in those after I became the PM. Almost two thirds of business in the next couple of years was Asia emerging markets, particularly Asia. Asia was more than half our book. That sort of gave the ability to basically pay the bills. Some of the clients would joke around that you have more products than analysts. There were two analysts and we had to restructure the team because we couldn't afford the prior ones. I remember one instance where we had shortlisted a couple of people to replace and one of the other folks who were involved in the hiring process said, who would you hire between two? I said, answer is simple,

• 16:19Speaker 00

  who's the cheaper one? Because that was a reality, gave us the first leg of growth. That gave the first base. Public goods came from European clients, banks, et cetera, your fund to fund business. Then institutions came later in US. Then slowly the rationale took hold as the performance turned around in global. There was one product after the other, which had different cycles.

• 16:39Ted Seides?

  From 2002 to 2016, somewhere along the way, you hit 2008. What happened in that particularly difficult period of time?

• 16:47Speaker 00

  You always learn from mistakes. We had significant banking exposure from 2002, Feininger, Freddie Mac, AIG. In Europe, Anglo Irish Bank, Northern Rock, large positions. I got nervous in early 2007, so we had exited all our banking exposure and financial exposure. However, we had a lot of energies, very bullish on energy and commodity. The whole thesis about decoupling didn't connect the dots at all. Come September, markets sold off almost double digits post Lehman. Within two weeks, it had fully recovered. I had too much energy exposure and that became disaster because that melted by October. I remember Sholomaja was down more than half in matter of like weeks. I've used it at the end of the day. Relative is fine in an up market, but over the long run, if you don't have absolute returns, nobody needs you. You don't pay bills with a relative performance.

• 17:32Speaker 00

  In a bull market, everybody thinks of relative. But if you want a long-term survival, you need an absolute orientation. That was an unhappy setup because I recognized the financial issues, but didn't connect the dots on the energy side. That how significant impact would be across everywhere else. But okay, we obviously lost a lot of assets and we continued to grow from there on. It was a huge lesson in terms of how it'll ripple through. For example, if you look at Tare, one thing is fascinating is that cyclical parts of markets have done the best. I wouldn't have predicted that Caterpillar would be selling at higher multiples than Intu surgical. Abbott Lab is selling at 14 times earnings and SAP is 14, 15 times earnings. And you have Siemens at 28 times earnings.

• 18:16Speaker 00

  Rising inflation, on top of that, you have the biggest oil crisis almost ever. How much do you want to connect the dots? You could be very early, it's better to be early than try to time it. Once things find a catalyst, it happens. If you're running any size and scale, you won't be able to exit in timely manner.

• 18:33Ted Seides?

  How did the various challenging times impact how you adapted thinking about managing the portfolio?

• 18:40Speaker 00

  You want to make sure that there's enough diversity of thinking in the team. You never want a team that agrees with the hundred percent. Huge mistake because it simply will cheerlead you. That allows you to at least have the other diverse, in my opinion. It's the uncomfortable other. The biggest lesson in 2008 was there are plenty of articles in the press about mortgage crisis. I remember there's a Businessweek article, how toxic is a mortgage a year and a half before the crisis happened? It's the cover of Businessweek. There are plenty of articles of mortgage bubble. Wall Street was in complete la la land. AIG went under and the lesson was, let's talk to the analysts or journalists who are predicting this, which was the starting point of hiring journalists. Now we have an equal amount of journalists and traditional analysts.

• 19:24Speaker 00

  Their job is to take the opposite view by default. Journalists are pretty good at that. I learned a lot hanging out with journalists. Half the team is journalists who basically criticize everything we do. And their compensation is structured that way. Otherwise, if you structure the comp where they agree, it's wonderful, it works. Guess what will happen? They'll agree with you. You want to structure the compensation where actually by default, they cannot agree with you. They're simply measured based on their calls over the long run. That was the biggest lesson. And since 2010, in months hold or here, we hired a group of people who essentially take the opposite side. By the way, it makes everybody very uncomfortable still to this day. If you're bullish on a name and the other side says, these are the negatives. They would operate in context of former employees or regulators, former regulators.

• 20:08Ted Seides?

  As you rebuilt this from these difficult times, what led you to leave and start GQG?

• 20:14Speaker 00

  You learn a lot in living through one crisis after the other. I didn't think that way, but I feel that way more now that I was fortunate. I learned, lived through a lot of crises in early days. If you're running a US book in 90s, it was one base speed till 2000 came along. Even emerging in 90s, it's a one disaster after the other. 94 tequila crisis, and there was a mini Brazilian crisis in 95, then Turkish crisis, then Russian collapse, Asian crisis, one after the other. You learn a lot. I built the team there. Business was fine, but there's always the desire to do something different. Number one is, what would I do to build something afresh? It was not motivated by money. Nothing wrong with that. Can I do different, something better? I'm a classic stock junkie. People ask me about hobbies. I don't have any hobbies. I don't golf, never had a boat.

• 20:58Speaker 00

  It's just a lot of fun. It's a puzzle. Can we do something afresh with a clean slate? Because when we start a class, say, what would you do different? And I said, these are the positives that I would keep, but these are the negatives that I will try to address.

• 21:11Ted Seides?

  What were those?

• 21:12Speaker 00

  Positive were fine, right? In terms of our core structure of the process. But for example, if you look at on the team side, I built out the team afresh, young folks and trained them. Well, there was one negative of that. If the team has grown just with you, they're gonna think like you. What are the chances somebody who's lived with you 15 years is gonna disagree with you? None. So when we launched, I said, if you're gonna hire, that's why I don't want to hire the same team again. First of all, I want to preserve their business because I felt like I built a cathedral, I don't want to burn it down. From a client perspective, it's a little bit unfair because why should clients be impacted? A lot of clients actually thanked me, they said like it was poorly separation. So their business did fine for multiple years. I did tell my successor there, you'll kick my ass or I'll kick your ass, but it'll be fun competing. I don't want to bring anybody else.

• 21:57Speaker 00

  The team side, when we hired, we hired a lot of folks from the long short world. Particularly folks who had experience 10, 15 years. Why? Because I thought, what is the chance they will agree with me? None. First, they're coming from a hedge fund world. Number two is their 10, 15 years experience. That was one of the biggest differences. Second thing was, we don't allow any personal trading here. Everybody has significant skin in the game. And I understand people have sometimes different views. I've had almost all of my network, our value GQG, in the products that clients would consume. Same exact vehicles. There were a bunch of other things in terms of alignment, how we thought about fees. For example, fees, I think what's the biggest problem in hedge funds is they charge too much. There's only so much juice in the game.

• 22:38Speaker 00

  These are the efficient market. These are not like 70s Buffett can do whatever sitting reading Moody's manual and pick up stock two times earnings. Those are long gone. Fees should be below median because that ultimately impacts the net performance, which is what determines whether we survive or don't survive. Focus on performance only and do everything to enhance performance. And that means lower the fees because it's very hard to cut down fees later on because the organization is structured that way. It's kind of like a Costco model. Manage with lower income rather than having the income where you can't cut it afterwards. On the team side, which was the biggest change in terms of structuring the team, I'll give another example. The journalists, what I found was that They were super helpful, but once you left the country, you need cultural context.

• 23:21Speaker 00

  You can't have an American journalist cover Brazil or China. We need to make sure we hire to cover those markets too. Somebody who has left, who has lived there, but have a American true independent journalism. A lot of these countries don't have independent journalism. So you're getting kind of nuanced stuff. But I think the big thing was building the team afresh, massive alignment, no personal trading, keep the cost low and keep the team small. The last and most separation of management of the business versus managing the investments. Because I was co-CEO at Vantol at the end, and CEO is a different job. I'm fortunate to have somebody of Tim's caliber. I love to say that I have 20 people reporting to me and he has 220. So he runs the whole business, which I think is an important part of just to make sure. So those are some of the lessons.

• 24:06Ted Seides?

  So you named the firm GQG, Global Quality Growth. What does quality mean to you as an investor?

• 24:13Speaker 00

  Quality is barriers to entry. If you look at this building here, there's no real barriers to entry. The restaurant across the street can be taken down when new hires can come. But if this building was on the beach here, there are no commercial office space in Fort Lauderdale on the beach. That'll be extremely valuable. So it becomes a high barrier to entry business. We are happy to own anything which has high barriers to entry. It could be steel in Europe. Cyclicality is not bad quality. Every business can have somewhat cyclicality. You go through regular cycles. In our opinion, barriers to entry is what truly differentiates what can you earn over the return capital over the full cycle. The second part of quality is it should be forward-looking quality, not backward-looking quality. If you look at the energy business,

• 24:57Speaker 00

  it has become far higher barrier to business than it used to be. If you look at the pipelines, how long does it take to get any approvals? You don't have to go into Keystone, but any other pipeline. It's a much higher barrier to business than it used to be. The tolls can last a lot longer than it used to be. Whereas if you look at software, the barriers to entry, generally speaking, are very low. Semiconductor industry, the barriers to entry are getting lower, not higher. Chinese are coming in a very aggressive way, including into semi-cap site, equipment site, memory site, they're ramping up capacity. That's a far lower barrier to business than what people think. One of the big lessons I'm investing is if Chinese are a competitor, be very careful because they will overproduce and kill you.

• 25:39Ted Seides?

  How do you marry the notion of quality is barriers to entry in something like energy, which is also notoriously cyclical?

• 25:47Speaker 00

  Depending on the assets. Some of these are irreplaceable assets. If you have a big footprint in Brazil like Petrobras, those are not replaceable assets. They are profitable at 75, 80 dollar oil with a decent production growth of 2% to 3%. You can't replicate those assets. Energy and commodities are particularly are those where it doesn't matter till it matters. If you're one millibar short, that's the only thing you think of. You don't think of semiconductor that way. There's lower barrier to entry business too. In shale, there are a bunch of companies which don't have that high quality assets. Shale depletes very rapidly, toward 20 to 30%. So not everything would be high barrier to entry.

• 26:31Speaker 00

  The businesses that have long enough tail of producing and low enough cost could be attractive proposition versus something which is like software. If you look at it, how many companies have survived in software business over 30 plus years? Microsoft is an exception and maybe Oracle. It's a lower barrier to business. Semiconductors used to be, in our opinion, it is not as high quality it used to be because everybody is getting into the game.

• 26:56Ted Seides?

  How does management factor into your assessment? If you go back, the energy industry, even if you have an irreplaceable asset, there's a big price fluctuation. And in the boom times, you have to trust management to reinvest capital the right way, which has created all these booms and busts over time.

• 27:14Speaker 00

  Over the years, you've begun to appreciate how difficult it is to assess management quality. I probably meet a lot less management than I used to because I found that I'm not very good at it. You thought were very good, but you're riding the tailwind. Let the record talk, others meet. So we have started to differentiate again. And you don't want to have everybody in the same meeting and everybody in the same Kool-Aid. If I'm not bad, then chances I'll be more critical. When people say, oh, I met the CEO and, oh, he's so wonderful. Okay, that should be the base. If he's a good salesperson, you probably should be in agreement with whatever the CEO was saying. Management quality matters, but at the end of the day, numbers should still be the defining factor.

• 27:54Ted Seides?

  What are some of the areas where you've gravitated to as quality growth that other people might not put names in the same bucket?

• 28:04Speaker 00

  There's a longer list of them. It's fascinating about semiconductors, who would have predicted that the whole industry would be 1230% forward revenue. In 2022, we wrote a paper, is software the new shale? In last month, we put almost $10 billion to work in software. If you look at from the lens of what are the barriers to entry and is the outlook improving? If you look at steel, steel has become much more high barrier to entry business everywhere. Try set up a new steel plant in Europe, good luck. Coal, very difficult. You won't get approval. Your grandkids might get approval. We are truly equal opportunity investor. Almost everything is fair game unless there are client restrictions, depending on the barriers to entry forward quality. Today, for example, in 12 months now, we have almost nothing in semiconductors. We have almost nothing in tech.

• 28:47Speaker 00

  In last month or so, we began to get excited about enterprise software. Everybody feels that the HR system would be vibe coded. Good luck with that. Significant energy exposure from time to time. And for 10 years, we didn't have any exposure for energy. Very opportunistic in that context in terms of, because the barriers to entry, some areas are actually going up and some areas are actually gone down dramatically. If you look at capital cycles, it tells you where the longer return should be. So we let it drive that.

• 29:16Ted Seides?

  There are few people with a moniker of quality growth that aren't invested in some way in some subset of the MAG7 today. Would love to hear your rationale for moving away from that in the last couple of years and what has been the golden age for AI.

• 29:33Speaker 00

  It's been painful last 12 months. We had significant exposure over the years. Nvidia has been the Single biggest winner in GQG's history in terms of absolute profits. The problem we see is that the Mac 7 exception is Apple. I'm meeting the Waterloo. Number one, they're forced to invest in CapEx when they never had to. Google last quarter had $10 billion free cash flow, clean. That's it. That's without the share buyback, by the way. They used to buy 50, 60 billion dollars. That's out of window. They have no free cash to buy. The CapEx is running at higher pace than the cloud revenue. And cloud is a very low quality business now. There are 200 plus new cloud providers. I'm coming now as a business owner.

• 30:16Speaker 00

  We have checked prices and we have begun to shift to other public cloud because it's cheaper. Everybody has two clouds. Public cloud is 90% plus penetrated for large enterprises. Some people say 17, 18% which Amazon says, I don't know what number they're looking at. If you look at developed markets, who's not on cloud? The second thing is the CapEx is going through the roof. There is no free cash flow. So the business quality is going lower, but you're forced to invest in CapEx. Number three is that if you look at the advertising driven model, you're running close to saturation. So you talk to, for example, a couple of largest consumer staple companies in last few weeks. And they said, look, our digital advertising is almost 95, 100% penetrated. We're not going to increase. In fact, we're going to shift to point of sales more, like more more type stuff, advertising. This trend has lasted a long time.

• 31:00Speaker 00

  Digital is almost 75% plus of the total advertising pool. These companies are 90% plus of that. And I don't think it's going to go to 100. Massive CapEx, no free cash flow, free cash flow multiples are like 100 times plus. The stock-based compensation, a huge issue. So they have to buy back stock. If you look at Nmedia, it's reported, the clean free cash flow was $25 billion. How do we get to that? Well, they invested $25 billion in new startups and other investments. Instead of CapEx, that is their CapEx. Nvidia invests in over fifty plus of their customers in the last six, nine months. Nothing wrong with that, but the free cash flow is a lot lower. It's a fantastic company with great management. That's a classic. He's a true visionary.

• 31:45Speaker 00

  There's no question about it. And we're even big fans of Nvidia. However, the free cash flow is now going down because you are forced to spend this money to keep the demand going.

• 31:55Ted Seides?

  How do you think about the potential for return on those CapEx investments?

• 31:59Speaker 00

  It has to be lower than what people think. Because if you look at the tokens, they're currently, everybody's bleeding. If you look at the pricing on GPU rentals, it's barely covers the cost of GPUs, by the way, let alone everything else. And everything else has gone up too. The returns will be good, but you have no pricing power, which is completely opposite what used to be the case. Apple is a unique animal, so let's leave Apple aside. But if you look at the returns on these, it has to be lower because before they were capital light businesses, not compute heavy. If you look at Google, if they had not changed the depreciation policy, the margin would be high, single digits, operating margin. The margin went from seven, eight percent, twenty-three percent after they changed depreciation policy three years ago.

• 32:41Speaker 00

  The question is, now this is debated, how long they last, who knows? These are far lower return on capital businesses. And Amazon, for example, their return on AI data centers is far lower. On one side, you're getting maturity on their core businesses. On the other side, you're getting to much more capital intensive business. The cumulative CapEx of all these mag companies in their history is one and a half trillion dollars. Think about it. Now they're talking about three trillion in just three years. So these businesses are created with not much capital. You're spending a trillion dollars a year and the revenue on AI talk about maybe seventy, eighty billion? That's the revenue. When Google went public, I remember it was two thousand four, they were worth fifty billion market cap. But they're generating seven hundred million of free cash flow.

• 33:26Speaker 00

  Very cash generated business. Twenty percent plus operating margins. If you look at OpenAI, Anthropic, SpaceX, a whole different league. As the numbers start coming out, then the realization happened that how lopsided markets are and positioning. If you look at the profitability of the areas that they're growing is far lower. Half or more of revenue is coming from OpenAI slash Anthropic. How in the world OpenAI have invested trillion dollars when your revenue is maybe twenty billion? X dot AI, cash losses are given to double-digit billions, twelve to fifteen. And their capacity relation on their colossus was eleven percent. Now they're selling the capacity to Anthropic.

• 34:05Speaker 00

  Our view is that this is a powerful technology, but the economics are really bad. And time is not a friend. So if you're trading here, different matter. But the economics are not good economics.

• 34:18Ted Seides?

  Under the idea of making sure you have diversity of thought on the team. That's a sufficiently contrarian thought for a quality growth investor. I imagine you have some people on the team that don't agree with that main thesis. What's the dialogue like inside?

• 34:32Speaker 00

  It's been hotly debated and the debate has been around a few different things. Number one is the cloud. The data isn't there. Is that runway still there or not? Now we're getting more clarity that more than half of the backlog, hence probably the revenue too, is coming from basically Anthropic slash OpenAI. If you look at Google and Microsoft is more than half OpenAI. Amazon is more than half. So they invest with OpenAI, but they essentially give them compute credits, which are then utilized at Amazon. We don't know for sure, but that's what we believe is going on. The debate has been around how durable is that? And can this become a profitable business? The third is around as the pricing of tokens begin to go up, which it has. Does the demand sustain? Because the whole issue of compute shortage, kind of a non-starter.

• 35:16Speaker 00

  If Starbucks starts selling coffee at twenty-five cents, there'll be shortage of Starbucks coffee. When you're underpricing everything, if you look at Corviva and Nebbia's, they're bleeding heavily. That means they're not covering their cost. The real test of shortages is when you price appropriately. It's a capitalistic system. So when you subsidize something, there will be shortage. There should be shortage. Those are things that there will be a lot of debate on. But I don't think so. There's that much debate on longer term. A, from a technology perspective, also in context of that, would it end tomorrow or the last two more years?

• 35:48Ted Seides?

  How do you think about when you might re-enter some of those names?

• 35:52Speaker 00

  We exited 2021 extremely underweight technology. Our view was that industry was overrunning, if you look at semiconductor, et cetera. That turned out to be the right call. We re-entered as we saw the impact of ChatGPT in early days. So in 2023, we started entering some of these names again. So we had no issues getting back into these names. The question is, is there a true killer app? Number two is, would enterprise truly shift to AI? Everybody's trying it. But trying it doesn't mean there's a true killer app. Because the real problem of hallucinations, that is not a small issue. These are probabilistic systems, that hence the call, language models. In an enterprise world, you can't use a probabilistic system. As I think it was Lloyd Blankfein, an article in Fortune.

• 36:37Speaker 00

  He said at Goldman, they were on parallel systems for years because these are real numbers. You can't say, oh, it may be 80%. And they're still running at 80, 85%. You can't get to that. And we have a whole team on that. And we still find the same thing. It is not as tight, even on the programming side, finding a lot of hallucination problem. You have to sell a lot of guardrails to make sure you get to it. You're not a believer that it's going to destroy the world as much as folks are saying. If you look at the enterprise software, the companies are going fine. They try to sell and position themselves as AI. I get that to appease Wall Street. Last quarter of 2021, we wrote about Adobe specifically, which is funny now because that's kind of like a poster child of disruption. And we were simply talking about valuations at 50 times earnings or something. And here we are.

• 37:22Speaker 00

  It's on a clean adjusted basis, 10x earnings and the business growing double digits. When we do any total work, most of the enterprise say we can't get rid of this. Cause there's regulatory issues, there's compliance issues, there's SOX issues. If somebody can lose their license, if there's a problem, for example, if you're an architect, you have no choice, you have to use Autodesk products in the narrow niche. You can't vibe code that stuff and say it's out there in public domain. There's a benefit of hype because it allows you to raise cheap capital to the system. But as an investor, you don't have to own them. It's painful, but the lesson always is you're better off leaving early if you're running a size because it's hard to exit on the other side. Particularly when there's so much of concentration, not only in public equities, private equity,

• 38:04Speaker 00

  private credit, you name it, every which way it's lumped us together. Our view is that the risk is far greater, but there's also opened up opportunities in other areas which are absurdly cheap for growing businesses.

• 38:17Ted Seides?

  What else you seeing you're excited about?

• 38:19Speaker 00

  I think energy is a fantastic space because even if Hormuz opens tomorrow, it's gonna take some time. If you look at Qatar, they've already said that 20% of thereabouts of their LNG facilities are down, they'll take three to five years to fix them. That means that you can buy companies at double digit free cash flow yield at 75, 80 dollar oil. We don't see how it goes back to 70 and stays there. We don't need 150 dollar oil. At 110, 120 dollar oil, you're looking at 15 to 20% free cash flow yields. There are no managers who wants to increase capacity. It has nothing to do with the outcome of the war, but even if you assume their opens tomorrow, most of the models are still assuming 75 bucks. The physical is trading at 110, 120. We talked to so many oil companies, said our realizations are running 10 to 20 dollars

• 39:03Speaker 00

  in a lot of cases above what is trading in the futures market. If you look at jet fuel in Singapore, it's consistently traded at 150 dollars. Somebody's gonna make a lot of money.

• 39:12Ted Seides?

  What are some of the other areas you're excited about?

• 39:14Speaker 00

  Utilities, not simply because of the AI, but the world has woefully under invested in power infrastructure. Unregulated ones, they've done very well. We used to own them, we don't own them. But the regulated utilities, we've got Brazil, US, Europe, Asia, everybody excluding China has under invested. The demand continues surprise on the upside. You're getting 6 to 8%, some cases 9, 10%. You can buy utility in the US, but they'll be giving you five to 10 year visibility. Of eight to 10% EPS growth. That's faster than S and P. Last decade, S and P grew at 8%. And that was a very good period. I'm probably excluding the recent spike in memory prices leading to S and P earnings upgrades. That won't last. Memories as cyclical as they come.

• 39:59Speaker 00

  Every cycle, people say, oh, this time is different. But look at the Chinese plans and the price demand destruction that's already beginning to take hold. If you can buy 17, 18 times with a 3, 3.5% dividend yield, you can compound double digits. For a company that has highly visible 8% EPS growth.

• 40:17Ted Seides?

  When you're looking at places where the market's not necessarily agreeing with what you're seeing, what's an example where you've done that and made a mistake?

• 40:27Speaker 00

  In summer of 2022, we started buying semiconductors. And we had no exposures. I felt like, great job. And we walk on water. In October, this whole thing heated up between US and China. The restrictions and the stocks went free fall. They got very nervous. We sold out. We must have sold literally at the lows. So we booked loss and sold out. It was 10, 15% the book was not, nothing. Semiconductors were not liked at that point. We went against that and we booked a loss. And turned out this was weeks before the chat GPT came along and these talks took off. So we went back into them in March, April, and said, no, no, no, the data is turning. So we need to go back in. That's one. The second one probably would be that I've not been a big fan of airlines. We own a few here and there, nothing major at all in a long time.

• 41:12Speaker 00

  We start buying airlines in December of 2019. And like few percentage points of the company level. I remember one of our analysts who covers China, she said, oh, there's this virus in China, which is spreading and it's dismissive. Then it spread a little more in Asia. I said, look, what if this like SARS? So we started cutting back and we had to book our loss because it was going to turn in November, December. In January, I said, I don't know how bad this is. Who knew this is gonna be? We cut our losses quickly on the airlines, Delta specifically. We bought energy and airlines because oil stocks, we had not owned for 10 plus years. At that point, they had begun to show well on screens. The cash cost gone down from 100 breakeven to 30, some of these names, they're selling attractive valuations. Little there, no, that was literally six of them later, oil would be negative.

• 41:58Speaker 00

  So you cut all loss, but that allowed us to flip around quickly in late 2020, early 21, because you've already done the work. There is a benefit because you only learn if you own a stock. We can talk whole day about how wonderful the businesses, but once you own it and once you're underworn in that name, it sharpens your thinking quickly.

• 42:14Ted Seides?

  How do you counter the difficult behavioral biases that come from endowment effect of things when you own the name, sell it? And then that ability to flip and come back in?

• 42:25Speaker 00

  Some of this learned behavior in terms of not anchoring to your past as much. If I look at my long-term record, there's not an area that I've not lost money in. You name it, every area. Over time, you also learn that there's a benefit of if you lost money before, you probably were an analyst now on that name. It becomes ingrained over time, so I don't have an issue flipping around at all. If I look at the long-term track record, I used to have a higher hit rate. The reason if you consciously try to lower the hit rate in last decade or so, in GQG particularly, versus Vantol. Even in Vantol, you begin to change that. The reason was because when you have a high hit rate, the problem is you have a high bar on what comes in. So you also miss a lot of multi-bagger for that reason. They actually lowered the hit rate because then you have a small position. You know, it is not, doesn't check all the box and everything.

• 43:10Speaker 00

  Yeah, that's wonderful, but you also would miss the best ideas the one way, there's more doubt. That means if I have doubt, the world has doubt too. So if you lower the hit rate, that means you're also taking more chances. It's that early-stage investing. If you're an angel investor, there's much more risk, but you'll probably have your home runs, multi-bagger's potential. The payoff would be greater, but you can't have a large position in that. Look at software today, we feel that it's a very intriguing area, these established businesses. But 10, 12 times earnings and folks feel they're completely going out of business. There's no sign of that, not only that they're growing 20% in some cases and you can't get rid of them even if you wanted to. We have some of the software companies, I would love to get rid of them. The users hate them, but they keep raising prices. We try to train analysts.

• 43:53Speaker 00

  If you feel the data points are changing, bring it up. You can always go back in, which is why we only operate in large liquid names. We make too many mistakes, allows us to change our mind.

• 44:02Ted Seides?

  When you have as wide of a lens as you could on what constitutes quality that gets you excited, how do you filter into what you want to spend your time looking at?

• 44:13Speaker 00

  First of all, we don't have any specialists, even in the traditional analyst pool, which is a classic buy side and the non-traditional, non-traditional journalists, basically. And they go wherever. On the traditional side, I'm not a big fan of specialists because specialists at major inflection points are usually wrong. If you're not able to compare, you don't know what good or bad is. Our view is we look at multiple screens. There's a heavy quant element to that. How do we get double-digit expected on high, single-digit or double-digit? Nine to 11% is my rule of thumb. If you do the math, which is what we did in Adobe at 50 times earnings. If it five years out multiple is 20 times and be growing at 15%, you're not going to make any money. Now it's a double-digit free cash flow yield at 10 times earnings.

• 44:57Speaker 00

  If you know multiple expansion, you're going to compound at 10, 11%. And business probably would be around. We invest in tobacco in a big way. Cigarette volume has been declining at 7, 8% in US. And guess for last five years, Altria has outperformed Meta. I think now Microsoft and Amazon last five years. The cash generation matters. We go wherever we feel we can get high single, low double-digit cumulative return, even if the multiples sort of come down to historical normalized levels. That's why we don't own any US banks. If you're a large Wall Street money center banks, they're all trading at some of the highest valuations on a price to book or price to revenue in some 25 years.

• 45:34Ted Seides?

  Each of these things you talked about sounds far more contrarian than consensus. I'm curious how you've worked with the people on your team to get them to think differently from others.

• 45:49Speaker 00

  I don't like contrarism as such. I joke around that contrarian is the deer that gets hunted first.

• 45:56Speaker 00

  It's overrated, but at extremes, you have to lean away. I think for the team, the number of ways you could do it, but one of the ways that are useful for me is allow people to make mistakes, allow people to have different views from you. Usually there's a tendency to do clamping down the different views. If folks feel that you're comfortable with airing different views or almost promoting is like, yeah, yeah, that's fine. Let's flip the whole argument. Over time, people become comfortable. We don't try to criticize investment mistakes. Most time you can see it. So we don't penalize too much. As long as you recognize and change your mind of whatever different way. You don't want to speed up people simply because they're an investment or something. I do enough investment mistakes on my own.

• 46:40Speaker 00

  If you accept how they think, particularly if they're thinking differently, I think it brings the different opinion. Otherwise they won't because people learn quickly by observing. It doesn't matter what I say, they'll observe.

• 46:51Ted Seides?

  I would love to hear what you go through in your analysis to get conviction in something that the market is telling you is quite different from your view.

• 47:01Speaker 00

  In a decision-making perspective, we have a team of four portfolio managers. I have equal vote. I don't have an X T super vote. I have a veto, but I'd really use that veto. We don't need consensus. One PM likes it and the analysts like it, it could be in the name. Obviously we have to voice our concerns and gets documented. So we track anything and everything. Tim would know how's my stock picking been last 12, 18 months versus others. So a lot of transparency in the system. What we try to see is who has a good record in that specific area. For example, somebody be very good at Spanish banks, but for some reason have very bad record in Brazilian banks or US banks. There's a difference. We track that everything and we spend a lot of time and effort building up the whole system. And we keep refining that. Then it's just the debates. We debate, debate and more debate.

• 47:46Speaker 00

  Is every PM operates like a full-time analyst, including me? The analyst has equal weight and we debate the hell out of every name and then see what's the weight of evidence and what the journalists are saying. The journalists are extremely bearish on the AI stuff. Their view is there are a lot of similarities with the mortgage crisis in terms of the amount of leverage involved, even more bearish than traditional analysts. And they talk to grassroots, complete grassroots. So we just debate it out and see, okay, this makes sense to have this name and this name. It's all one-on-one conversations. There's only one meeting we have a week. I'm not a big fan of having these big meetings. So pick up the phone, call me, and I call them.

• 48:20Ted Seides?

  How do you go about making decisions?

• 48:21Speaker 00

  At the PM we meet, then we hash out what makes sense, doesn't make sense, or on phone call. So 2pm may say we're completely out on this name. And the other two may decide, okay, we both love this name and the analysts love this name. So it'll get tracked based on their positioning. It'll be this size in the book.

• 48:38Ted Seides?

  How do you figure out those position sizes?

• 48:40Speaker 00

  This is the cemented process part, what you talked about is. The sizing should be based on how a credit analyst would think. You can't have very large position in monoline business which operates a very narrow niche. Can't do it. So if you think about how does S and P would give AAA? It would never give AAA to an ENP company. Just can't. No diversity of their asset base, geographically, business lines. But Exxon can get AAA. So the small company or even a large company with monoline can never be a large position. The top sizing always has to be, as a credit analyst will look at it, can it be AAA? So it is not based on purely on the conviction, but much more on stability of the business.

• 49:25Speaker 00

  So you don't blow up. Everything you try to do is just don't blow up. What is not acceptable is market down 40 and we're down 43, we outperform. It's like, no, we think more like long short in a way. We can have very large position Exxon. We can't have Oxy, which we really like, but we can't have a same size position because Oxy is much more narrow operation, much more risk.

• 49:47Ted Seides?

  How does the concept of thinking like a hedge fund, that more absolute than relative return, play its way into how you manage the portfolio?

• 49:57Speaker 00

  We do cut losses quickly. Shorting is difficult to make money off, but it's of good discipline. In the long only world, and I operate long only world, is to become lazy. This business fine, long term, we'll all be okay. Because you can always find facts that support your opinion at that point. If the market is telling you you're wrong, you gotta think about it. If you look at last 12 months, RV has been, yes, we have underperformed.

• 50:20Speaker 00

  Across all the books and I've run before more than this over my career. So there's not the first rodeo as a side, but we haven't lost money. So we still compound in mid teens, real crisis when you start losing money in down markets. Cause you need to be able to compound at a higher base. It should permeate everything to reduce the risk of a blow up. Take more relative risk, which we do. We don't try to take a lot of absolute risk.

• 50:42Ted Seides?

  How concentrated the portfolios?

• 50:44Speaker 00

  There's a long tail, but if you look at the US book is typically around thirty, thirty five names. The top ten would make up just about half of the book. That's true for global and others too.

• 50:55Ted Seides?

  We'd love your perspective on emerging markets where you started out.

• 50:59Speaker 00

  I'm probably one of the longest surviving managers now because I became copium in nineteen ninety four. So it's thirty plus years. Emerging markets are a massive category which is underappreciated. The indices are completely lopsided. I mean, the four names now make up almost third of the index. If you look at emerging market index, that's like a leveraged version of semiconductor. You would not have twenty percent in memory names in US. But you do have that in emerging market index. This is fascinating what's happening. Otherwise, if you look at some of these markets, they become large economies on their own. If you look at Brazil is larger than Italy. These are huge systems now. So there's a more G seven focused, but the action in the other markets.

• 51:41Speaker 00

  If you look at from a G twenty versus G seven is shifted away to G thirteen. And not just China, but India, it's a almost four and a half trillion dollar GDP. It's a large system, Indonesia, large system. And some of the larger banks in Indonesia are larger than European banks now. Nobody talks about them anymore, but there's a lot of action. If you take a long term view, there's quite attractive set of stuff. Very bullish in Brazil. I mean, can still find names like Itau is still seventy eight times earning the seven percent dividend deal. And that's the only bank I know, which has not earned fifteen percent real return equity for thirty years. I don't know about any other bank, family owned. It's almost a hundred billion market cap. It's not a micro cap. So you still find these kind of opportunities. Petrobras, which we owned in a big way in last five years.

• 52:27Speaker 00

  When we bought it was thirty five percent dividend deal. It today is twelve percent dividend deal as seventy five dollar oil. It's six times earnings. Why would you own Samsung, which is as classic as it gets? Now, everybody's ramping up capacity. They never ring a bell in semiconductor industry. And China is adding capacity in a big way. Just to be clear, in August, everybody thought there's a massive glut. Since six months ago, from massive glut to we sold out for years. We'll find out. There are a lot of stuff in emerging markets, which is quite interesting. Outside of these tech world. There's a real alpha opportunity and absolute compounding. That can take place in emerging markets.

• 53:02Ted Seides?

  What's changed in how you think about investing from your early days in the business?

• 53:09Speaker 00

  The biggest thing is that you begin to appreciate how little you know. You become humbler because the conviction level actually goes down. I begin to appreciate a lot more of having, making sure the folks are constantly poking holes and have different opinion and debate. That's a must. If you want to survive, anybody in the business, if you can internally, that's part of risk management. If you ask me, that's probably the biggest realization. Avoid deep ideologies. We've had a big exposure to AI, maybe we'll have it again. The valuations don't make any sense. Plus, there are far better risk return opportunities. Exxon is almost similar market cap as AMD. Depending on the oil prices, this year they generate probably 50 billion in clean free cash flow. AMD will be lucky if they generate nine.

• 53:54Speaker 00

  I'm sure it's going to change the world. But this is capital to nine and 50. That assumes oil at 75 bucks, not 120 bucks. At 120 bucks, be careful AMD. AMD is a fantastic business management and everything else. But the math is just not working in some of these. We're dogmatic about the math rather than dogmatic about our views as such. But with the forward quality, deep embedded ideologies is what is the most dangerous. As to think that big teams and super specialists is what is needed and they'll do better. 180 degree opposite view. We are total PM slash in, everybody included, like 17. And we're earning 160 billion dollars. We want some turnover. Stability is fine, but you want some turnover. You want fresh thinking from time to time. Small teams is where alpha is going to be.

• 54:39Speaker 00

  No PM should outsource of a super specialist. It's a bad idea if you have too many specialists. Large teams, it's just not conducive to good alphas.

• 54:48Ted Seides?

  You mentioned being 160 billion today, 10 years in from launching this.

• 54:54Ted Seides?

  I'd love to learn about how you did that. In a world where active management, generally speaking, has been under pressure to go from a new launch to significant scale in such a short period of time.

• 55:06Speaker 00

  It's been a complete surprise. People used to ask me, I said, we have enough cash to survive for three to four years. So who knew? A few things that have helped us quite a bit. We do have a fairly performance-oriented culture. There's quite a bit of passion everywhere you look at. We spent quite a bit of time building distribution, which is to Tim's credit, from Australia to Europe to other places, because the whole notion that we have great track record and people will come, that doesn't work that well. A lot of money managers don't have client servicing aspect in that. We bend over back buttons from a client servicing perspective. That's just part of what we do. All of these have probably helped besides the performance and core ethos of alignment, et cetera. The absolute orientation, it doesn't appeal to everybody.

• 55:48Speaker 00

  We don't launch multiple products, four core products, same process, same team. It's tight-knit group. All those things have helped. It's hard to say what exactly worked.

• 55:57Ted Seides?

  I'd love you to take me through what that distribution path looked like.

• 56:04Speaker 00

  We got a lot of support from consultants. I was pleasantly surprised because a lot of them had not unwritten before Von Tobal. They were the early adopters, particularly endowments, foundations. And some of the consultants got new clients, not the former clients. That built the business initially. Then our wholesale slash retail business took over. If you look at historically over my career, the periods of crisis have helped propelled us to the next level because that helps us differentiate. COVID helped us quite a bit because we navigated COVID, okay? The differentiated positioning allowed us to stand out from the crowd from time to time. There was a lot of client servicing. That is essentially the ingredient of can the clients reach out and talk to us? Talk to me? I do that all the time.

• 56:49Speaker 00

  Within months, some of the young analysts would have client meetings. Why? Because it forced them to learn this is who we are servicing. It's not something sitting on a high horse and we outperform and that's wonderful. And when the performance is not good, they get beaten up. That's part of the learning that they need to have too.

• 57:04Ted Seides?

  Somewhere along the way, you decided to go public. Love to hear that story and the benefits and drawbacks.

• 57:09Speaker 00

  The obvious negatives of going public, but I thought when you're in private partnership, there's one tool missing of having a good structure in terms of compensation. If you look at the negatives of larger listed pairs, it's because there's a little inside ownership, so you held hostage to. Whatever the flavor is in Wall Street. That is not true in our case. Seventy five percent known by insiders. Number one. Number two is that it gave us a effective tools for structuring compensation. Because if you look at long only world. One of the drawbacks of having private partnership is the senior partners who are the rainmakers don't leave. How do you feel new blood? Because the income goes to zero as soon as you. Parties of all right. And you can structure different ways. But this allows us to have our cake and eat it too. Because if somebody leaves, they take their equity, they can sell it to market if they want to or not.

• 57:54Speaker 00

  In the meantime, it allows the structure composition so many meaningful ways. So transition to the next generation. If we have to transition equity, next generation is easy to structure this way. So I thought it solved a lot of different things. Why Australia? It funny because we had a good familiarity with Australia. Some of the earliest clients came from Australia. They were the same institutions. One of the reasons was they only report twice a year. I said, that'll be a lot less work. It's going over here now. But I actually like that. Quarterly reporting doesn't do much good. Transparency is fine, but it multiplies the work. Six month reporting is good enough, in my opinion. And I'm talking about as an investor. Because most of the world had six months anyway. Australia made it easy because we knew a lot of client base. Who were also possible investors. So we listed in twenty twenty one.

• 58:35Ted Seides?

  How has that gone relative to your expectations?

• 58:37Speaker 00

  It's done its job. Because it gave us a currency. Stock will do what it'll do. But what we didn't want to do was give a lot of equity. At every level. Senior level, yes, but not at younger levels or folks who just joined the company. Because you don't want everybody looking at stock price. Cash, which is cash. We were pretty thoughtful in terms of not making equity oriented. Then if the stock price goes down, then we say, oh, what's happening in the business? It shouldn't move the needle. It has been super helpful in structuring compensations over the long run.

• 59:07Ted Seides?

  How have you thought about the benefits and drawbacks of the size of your asset base managing capital?

• 59:15Speaker 00

  First of all, size is always an anchor. There's no reason to believe otherwise. However, we have a wide open space.

• 59:22Speaker 00

  If you look at the peers' underperformance, it wasn't because we couldn't move. It's a conscious decision to not own tech. It's not we ended up being underperforming. There's a big difference. It's a conscious decision to avoid semiconductors after being very big. Forty percent plus was tech not that long ago. So size is always an anchor, but it's ability to find right spots. And we operate in large cap space. These are large liquid names. Mostly growth managers would not operate with that sort of wide landscape. Question is, are we moving enough on right space where the alpha opportunity is? If you've narrowly pegged in one area, you just can't outperform the full cycles. Because what if this is like seventies? What if you get a ten year bull market in energy in commodities? You have no game left. There was a big hedge fund boom in the late sixties.

• 1:00:06Speaker 00

  Most of them didn't survive in the seventies because the game was on electronics and tech world and fifty fifty. That didn't survive. Our view is that we need to have enough tools in the toolkit. Because the question is, do you want to move? And maybe you make the wrong moves, but do you have the ability and the willingness to move?

• 1:00:20Ted Seides?

  Where do you want to take it all from here?

• 1:00:22Speaker 00

  Long-term vision is only one thing kick ass performance. That's what makes this fun. We want to attract people who are passionate about investing. If we deliver that, I think we will find. If we don't deliver that, we have no reason to exist. This is the only business where you don't need an average. Somebody needs an average phone. Somebody needs an average car. You do not need an average manager. Vanguard is happy to do it for you for two basement. It's above average anyway. If you can't deliver above average performance, it's not needed. It should permeate everywhere. Everything you do is simply on performance. It's exciting because you're setting up an environment where you know the long terms will not be good. Maybe one year is good, two years, but the math is very powerful. The longer you go out, the return profile from these valuations and where interest rates are.

• 1:01:08Speaker 00

  And people forget in two thousand and ten, you started with ten times earnings. From twenty five times earnings, maybe thirty, depending on what values you look at two thousand, two thousand and ten, you lost two thirds of Microsoft. It's getting into fertile ground because everybody owns the same stuff from index to private equity, private credit, mostly hedge funds too. Private world is worse in a way. If you look at the valuation of some of those, and I'll give you the example of Figma, which was hotly contested asset. Adobe wanted it. If you look at the chart, it gone straight line down. Eighty, ninety percent decline once it listed. SpaceX is wonderful, but eighteen billion revenue and five billion loss. The value sheet about one hundred trillion dollars is more power to you.

• 1:01:46Ted Seides?

  When you're having conversations with your clients and have a view so different from the market that for at least a period of time now hasn't been in sync with what's been moving, where do you feel the pressures from those conversations, both on you and the organization?

• 1:02:01Speaker 00

  There's no question that stress builds up. And maybe the stress is not a bad thing sometimes. You need a little bit of stress. Vast majority of our clients understand what they're buying into and it's our job to ensure that they understand that we do take a lot of risk. We try not to take absolute risk. In last six odd months, we've had some redemptions. We still had net new money last year, for ninth year. But we don't measure success by asset growth. When we went public, in my first letter as the largest shareholder of the company, I specifically wrote two things. We will never have AUM targets and we never have margin targets. So that nobody's confused. You can grow in the short run by doing other things, but you also start reducing the alpha

• 1:02:45Speaker 00

  opportunity in terms of how people think and behave. It's my job to make sure that we stick to our core ethos, which is why are we doing what we're doing? That somebody's retirement is at stake. Somebody's kids are not going to college. I'll tell you a story. There was a firm I knew. I went to see them in 2003 and they wouldn't let me go up to the fifth floor. I said, like, I can go up. They said, no, no, you have to wait. They said, armed guards. I asked the guard, why do you armed guards? He said, doing the dot com, they lost so much money, they get death threats. There's an element of not blowing up somebody's retirement. As long as we stick to that, we're fine. We'll have asset outflows, inflows, all of that. That's ebb and flow of any business. There's cycles in everything. Hopefully we attract the right kind of clients who think about it the same way. And we should be able to explain what we do too. That binds the organization together.

• 1:03:29Speaker 00

  Quite a bit of camaraderie in terms of fighting spirits because this is why we're doing what we're doing. This is what we feel the markets are missing. This is what we've done and this is why we'll do okay. If the bad times do happen, flip side is we'll underperform. Underperform is less of a problem than losing your shirt. The odds are stacking up of when cyclical businesses are selling at valuations which are even difficult sustained from compounders. If I go back to dot com, the biggest lesson was some of the biggest losses that came in my book were the names that were cyclicals and we paid higher multiples on peak margins. I remember Japanese names which went from five percent operating margin to 25% margin and we paid 50 times earnings for that. Guess what?

• 1:04:14Speaker 00

  They went back to five percent margins and market wanted to pay eight, nine times for that. You lose a shirt. There's a laundry list of names which are selling at high multiples. Good businesses, but they're cyclical and the cycle is always there.

• 1:04:26Ted Seides?

  My chief, I want to make sure I get a chance to ask you a couple of closing questions. Before we get to the closing questions, I want to tell you about one of our strategic investments. We've made a few and each are working on a product or service we think will be valuable to our community. One is Oldwell Labs or OWL. OWL is the very best software I've seen for allocators to find and track managers. And I've seen a lot of them. Trust me, it'll be worth the look. There's a link in the show notes so you can learn more. And here are those closing questions. What was your first paid job and what did you learn from it?

• 1:05:01Speaker 00

  My first paid job was working for a textile company which used to export to New Delhi. I used to help doing the export documentation. Oh boy, that is drudgery because you have dozens of documents and this is India. So complexity increases. But I think just sitting down, filling out the documents, taking it to the bank and who criticizes you. There's a lot to be learned from doing those early days versus doing something which is exciting. Obviously I hated it then, just to be clear. Trying to implement that in some of the early folks who come here, making sure they go through a little bit of drudgery. It's just a context of how the world operates. It's not simply build a model of 20% growth forever and we all happily live it after.

• 1:05:38Ted Seides?

  What's one thing you find interesting about you that most people don't know?

• 1:05:43Speaker 00

  I'm happy to seek counsel of almost anybody. I do feel that folks usually underappreciate wisdom that comes with age. For example, I talked to my dad, who's eighty seven, at least two to three times a week. He doesn't understand a business for some of the obvious stuff. He gets it with age. For example, he was completely unhappy with me starting this business. Why would you start that? Perfect job, perfect, everything, good record. Why would you do that? So we don't agree all the time, but there's quite a bit of set about senior counsel. I would highly recommend anybody to talk to somebody who has some gray hair. Some things you only learn with age, you do not learn with anything else.

• 1:06:18Ted Seides?

  What's your biggest investment pet peeve?

• 1:06:21Speaker 00

  Dogmatism, deep ideologies. Growth will always work. Cheap being always work. Deep ideologies are dangerous. I try to avoid those people because I know they'll convince me with facts, right? Because they know all the facts. So you've got to be careful. We try not to hire folks who are dogmatic. One thing is we like folks to say, oh, you know what? This way I'm wrong and I change my mind. Year in review, we always ask, okay, what are the areas where you change your mind? Obviously, it's a good thing to say change your mind and make money. Admitting mistakes, this is where I change my mind. It's critical for long-term survival.

• 1:06:53Ted Seides?

  Harjeet, last one. How's your life turned out differently from how you expected it to?

• 1:06:58Speaker 00

  I've been extremely fortunate. I didn't expect that. Not just financially, but I get to paint the picture the way I wanted. Even at Von Soval, I had freedom to paint the picture. I enjoy this game. To be able to do something that you truly enjoy and have fun with, it's quite a privilege. It comes with the trials and tribulations, frustrations and underperformance and all of that. It comes with the territory, but if there was no stress, life would be too dull. If there's nothing that pushes you, it's actually not a good life. Because your failures would define you ultimately in terms of making strife or something. I feel very fortunate that I've had the ability to do this, which I truly enjoy and spend the time with, which is unusual and uncommon. So I'm grateful that I had that ability. Wouldn't have predicted in a million years.

• 1:07:38Ted Seides?

  Harjeet, thanks so much for spending the time. We appreciate it.

• 1:07:41Speaker 00

  Thank you. It was great fun.

• 1:07:43Ted Seides?

  Thanks for listening to the show. If you like what you heard, hop on our website at capitalallocators.com, where you can access past shows, join our mailing list and sign up for premium content. Have a good one and see you next time.

• 1:07:58Speaker 02

  All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions in securities discussed on this podcast.