Welcome to Inside Active, a podcast about active managers that goes beyond sound bites and headlines and looks deeper into their processes, challenges and philosophies in security selection. I'm David Cohne, I lead mutual fund and active research at Bloomberg Intelligence. Today my co host is Laurent Duier, senior equity strategist at Bloomberg Intelligence. Laurent, thank you for joining me today.
Thanks for having me.
So.
You recently published a note on your outlook for Eurozone stocks. Can you give our listeners a little bit of an overview of you know, of that outlook.
Yeah. I think the outlook is going to be for all the time, and it's a second half because it relies mainly on the earnings rebound, which is predicated on lowery C be right, and also the fiscal stimulus coming from Germany. So far, European companies have been able to overcome the higher tariffs from the US through cost savings and reorganization of their supply chain. But I think we need to see stronger top line growth for earning growth
to reaccelerate. The fifteen percent tariff agreement recently announced is bring some clarity so it's a positive, but it remains headwind on volume growth, so European companies will have to work hard to deliver the double digit earning growth which is expected by the consensus for next year and very quickly.
If we look at valuation, European equities are treading on fifteen point five times forward earnings, so we see limited room for further multiple expansion except potentially for financial and industrials and positive earning supprise. So at this stage we think investors need to be more seduct giving European equities great.
Well, I'd love to hear what our guest thinks about your zone stocks, so I think it would be a great time to welcome our guests, Nate Vlardi to the podcast. Nate is a partner of Chtaqua Capital Management and a portfolio management or a portfolio manager on their strategies, including the Beard Shautaqua International Growth Fund, which has a ticker of cc WIX. Nate, thank you for joining us today.
Thank you David and Laurent. It's great to be here.
So we'd like to get your thoughts on you know, Laurent just was talking about the outlook for your zone. Are you seeing something similar.
Yes, I mean, particularly as Laurent said, in the European banks which have been you know, extremely strong performers, you know a year to date and perhaps you know over the last twelve months on you know, widening spreads, lending spreads and improving credit conditions in general in Europe.
Why don't we take a step back, because I'm sure our listeners would love to hear what a typical day is like for you.
We have a daily research meeting at ten o'clock and I spend most of my morning from the market open just to try to do all the maintenance research to get rid of it ready for that meeting. And you know, after that the day is free to focus on researching new stocks, doing client servicing. But when my son asked me what I do all day, it's primarily just reading stuff, just trying to stay on top of everything and reading as much as I can to try to find the edge out there in what we do.
Great.
So if we zero in on the international growth strategy, what is the process behind that in terms of how do companies make their way to the portfolio?
It starts with, you know, our investment philosophy and drives our process and an investment philosophy should answer two questions. You know, the first is what a market inefficiency are you trying to exploit? And the second is what's your
investment criteria? What are you looking for? And from our perspective, you know, we're trying to exploit time arbitrage and we're not the first manager to try to do that, but we believe, you know, our edge is that our people, investment process are parent and bared, and our place here in Boulder actually enable us to be long term as opposed to just.
Aspire to it.
So our people, you know, we have a focused team that's dedicated to deploying an investment process that tries to answer the question, you know, what could a company.
Look like five years from now.
We're concentrated on the long term fundamentals that drive wealth creation rather than on short term issues that drive share price volatility. I think it's important to say that about our parent. You know, you can't be long term unless you know you're the person that writes the check is
long term and bear it. As a private employee owned organization has a long track record of building asset management teams over decades, So you know, I can feel confident in you know, doing my job, keeping my long term perspective without you know, fear of being turfed out because of short term performance issues or failing to hit asset
gathering targets. And you know, an understated advantage I think we have just being in Boulder, away from the noise, enables us to keep our long term perspective and specifically what we're looking for in our companies.
You know, we're looking for three things.
Companies exposed to a durable, long term growth trend, you know, that possessed competitive advantages that enables them to capture the line share the profit pool created by that trend, and can be purchased at a reasonable valuation in the context of their growth outlook and competitive positioning. So you know that in a nutshell is our investment philosophy and process.
And so you mentioned growth themes. Are there certain secular growth themes that you're looking at right now?
Yeah, I think the growth themes out there, everyone's focused primarily on AI, you know, and the growth themes you know, most people focus on rising middle class or you know, digital transformation. That those themes are well known and well established in the marketplace, and we're no different than than trying to you know, participate in those themes. I think the value add isn't in identifying the theme itself. It's actually trying to identify the bottleneck company that's best position
to extract value from that trend. And and so that's where we focus most of our efforts on.
And are there I guess any characteristics you're looking at, Like, is it you know, focused on revenue growth or earnings growth or ear any type of metrics.
Yeah, it starts with revenue growth.
I mean, we do look at earnings growth and free cash flow growth, but sometimes you know, revenue growth tends to be the most stable and.
The most sustainable.
You know, sometimes when you look at companies that have impressive earnings growth that's driven by margin expansion, sometimes at margin expansion will eventually hit a ceiling and so it's not as sustainable as if we can identify a company with a long growth runway where you can see the revenues growing at a steady pace and if you get
margin expansion on top of that, that's a bonus. So we tend to focus more on top line growth initially, and then you know, if there is an earnings component to it through margin expansion.
I think that's a bonus on top great.
I know Lawren's got a bunch of questions you wants to ask, but I just want to ask quickly. You know you mentioned reasonable valuation. How do you determine that?
Yeah, I mean reasonable.
I mean we leave you valuation not in terms of, you know, what's the right multiple for a particular stock, or putting a bunch of numbers into a model and get to a price target and see if there's a difference between you know, what our valuation is and what
the stock is trading at. I mean, we think of valuation more in terms of trying to separate fundamentals from expectations that are embedded in the share price at a particular point, and expectations not consensus forecasts and a company's ability to beat it in the short term, but more over the long term fundamentals you know, over a longer term period than say consensus which runs three years out, and you know, if they're we look for opportunities where
there's a gap between you know, our assessment of the fundamentals and the expectations embedded in the share price, and where we see those opportunities, we act and you know, take advantage of those you know, gaps in I think people have called it the past, the variant perception between ourselves and the market. But from a quantification point of view, that's how we think about valuation.
So Nate, I would like to investigate a little bit more about some of those investment opportunities, especially first in Europe. In which sectors or which investment theme do you think could be interesting in Europe, especially where you think valuation are at the reason reasonable price.
You know, in Europe, I mean, we have tended to focus on companies in the medical pharmaceutical space and also in the commercial aerospace industry and then pharmaceuticals. We like the long term prospects of Novo Nordisk despite all of the issues that you see playing in the near term share price. We think it's misunderstood from a you know, particularly from a growth outlook perspective, given the markets just tends to think of weight loss drugs as a winner
take all market. But yet Novo Nordisk has in the market is more than big enough to support multiple players, and the market tends to be focused on what is happening in the US, where we believe Novo Nordisk has very large competitive advantages in distribution, particularly outside the US.
It's not just about the drug. You need to be able to market.
It, distribute it and manufacture it at scale. And in those aspects Novo we still have strong advantages.
In Europe.
As you mentioned, I'm in defense spending has been really the hottest team a theme as in the beginning of the year.
Do you have any specific view on that.
Some of the companies have rallied very strongly, but it seems that the addressable market are going to increase fit significantly over the next three to five years. So do you think it could still be an opportunity or most of the grossest price team.
It's a good question.
I mean, even within our holding in Saffron, they're twenty percent of the revenues are defense related, and in particular they called out their exposure to the defense, electronics and space portion of their business, which they expect to double over the next five years, so very strong growth outlook. We don't have exposure to the pure play European defense companies, so I'm hesitant to call out any specific companies, but I guess at a very high level, I think I.
Can point you to two things.
One is, you know, over history, your US defense the big US defense prime contractors have traded at significant premiums to European defense players.
That has completely reversed.
In fact, the historical premium, even at the peaks, now lies with the European companies. And then also you know, from a just you know, simple valuation, playing around with the valuations. If if you look at the market caps of some of the big European companies, they're you know, you know, slightly below or equal to that of their
US counterparts. But yet the you know, US defense contractors revenue base is much larger, So there's a lot of you know, in terms of your comment about there's a lot of growth being factored in, you know, that seems to be the case, just in terms of simple you know, EVA revenues or market cap, the revenue type of comparisons.
I guess the last thing I would add also is, you know, US defense companies tend to be good at executing at scale in terms of the size of the contracts, and you know, if European companies defense companies get similar sized contracts, I would say the jury is still out on their ability to turn that potential revenue opportunity into profits, similar to US companies. So those were you know, just some general comments on defense, you know, as we look at.
It, I mean, moving further east, I mean, if we look at Asia xtrapen, I mean, which checkters or country do you think looks the most promising And maybe a more specific question on China. Last year there were a lot of questions if China was going to see a rebounding gross and if it was becoming an investible what are I mean also your views on the China growth opportunities, but overall in Asia example, and where do you think the growth opportunities are.
Yeah, we're a lot we're bottoms up investors, so you know, at the end of the day, we're investing in companies, not countries. So in some respects our views on the country as irrelevant as long as the franchise that we're buying, you know, meets our requirements of you know, having strong growth, a strong growth outlook, and competitive advantages to turn that
growth into into value. And you know, in terms of you know, Asia, you know, we have tended to find our financials exposure you know in Asia, you know, relative to Europe, in Europe, we feel European bank as a as a group are relatively you know low system loan growth UH and relatively undifferentiated, whereas in Asia we have found you know, system loan growth being in the high
single digits UH. And the companies that we've tended to focus on our companies that are advantaged in some specialized niche you know, like a bank Rocky Yacht in Indonesia, which is a specialist UH and dominates the microfinance industry in Indonesia.
You know.
Our other holding in Southeast Asia, you know, is uh C Limited, which you know will benefit from increased penetration of e commerce UH and it has it has a strong business model. It's been able to fend off increasing Chinese competition, you know. And speaking of China, I mean we are invested in China, and our exposure there has been focused on you know, domes, stick plays and also
in the healthcare space. You know, those are two areas where the Chinese government seems to be focused on the long term one in terms of trying to reorient their economy to more consumption based and also healthcare delivery or improving healthcare delivery is a priority for the government.
So it has been a.
Controversial area from an from an investment point of view, but you know, you need to be able to you know, the risks. From our view, we're being more than compensated for the risks of investing in China by sort of the by both the valuations and also the quality of companies that we are finding there. And you know that explains our you know, market weight to China, which is actually somewhat of an outlier amongst some active managers, you.
Know, if we're talking about China, I just wanted to ask about tariffs just a little bit. You know, you mentioned your process is you know, long term in nature, but has it been affected at all by tariffs? You know, whether it's just you know, the assumptions you're making about the individual companies, is that kind of like made a big change and things, you know in general.
I mean, are the way we're framing tariffs is that it's a growth shock to the global economy. I mean, I think the emerging consensus view is that tariffs will ultimately be stagflationary in the to the US economy, you know, want and increases the probability of recession, and you will probably put upward pressure on prices, and you know, from a growth you know, as a US is a significant
net contributor to global growth. I mean that ultimately is going to result in you know, lower, lower go global growth, so hence the the growth shock.
And you know.
We we actually think, you know, what we try to do is, you know, find companies that have characteristics that enable them to do better in most future states of the world. And I guess what that means is, you know, we're just looking for companies that can pull more levers
to grow even in tough environments. And we expect our companies because they're advantaged because they're conservatively financed, to emerge on the other side of tariffs, stronger relative to their competition, and particularly in their ability to pass through any tariff impacts because their products, you know, they have a pricing power and their products are mission critical in many respects.
Okay, you know, I also do want to ask about the portfolio. You've got a pretty high conviction portfolio. How do you wait positions?
Yeah, it's a very good question.
You know, I've been around portfolio teams that where the conversation starts, you know, when we talk about waitings you know, all the default position is if something's working, you know, don't don't mess with it, or you know, I or the conversation starts, I feel.
Like, you know, this is the right time for company X.
I think we take a more disciplined approach to how we approach waitings and it's something that we call our VR process internally, and that stands for you know, revenue growth, valuation and return on investor capital. And the way that it works is we force rank our companies based on revenue growth, forward looking valuation metric and return on investor capital as those are the quantitative proxies for the three things that we require in our companies, growth, attractive price,
and competitive advantage. And you can imagine what moves companies up and down those rankings in the short term or
changes in valuation or share price. And you know, I don't want to give the impression that we're mechanically rebalancing our portfolio to uh, you know, a quantitative tool, because we're not the value out of the r VR, you know, first of all, is to highlight disconnects between you know, a company's actual weight in the portfolio and it's our you know, it's quantitative ranking, and there are probably good
reasons for that disconnect to exist. But if we can't resolve that disconnect, you know, we'll take profits in one area and redeploy proceeds to to better risk reward opportunities within the portfolio.
And you know, the other value out of the r VR.
For us is just to have a objective starting point to start that discussion about how do we orient the portfolio to best capture you know, risk award.
Opportunities based on what we're seeing in the market.
I think overall, i'd make the comment that, you know, our long term objective is to have the thirty best international businesses in our portfolio at all times, but over shorter term periods you can imagine, you know, our challenge is to ensure that our companies are held at the right weights to best balance risk award and by having a discipline framework around you know, waitings is I think a part of our process that helps differentiates us and has enabled us to both you know, drive returns and
up markets and protect on the downside in tougher markets.
A related question, as a startpicker, do you think that market concentrate is becoming an issue for international liquities, and if it is the case, I mean, how do you manage your portfolio in order to outperform the market which is just driven by a few names.
Yeah, it's a it's an interesting question, and it reminds me of of if you'd allow me to tell a little story. I have a good friend of mine that manages, or he used to manage a US large.
Cap growth portfolio.
And you know, I called him one day after seeing his numbers and called to congratulate him on what wonderful numbers that he put up, and he basically told me thanks, but no thanks. You know, it doesn't mean anything when your top deacyle and the benchmark is right behind you. And it was because the mag seven was driving most of the benchmark performance. I think, fortunately for international investors,
we're nowhere near that level of concentration. If you count, if you consider the US to be concentrated, I think top ten names in the S and P five hundred are almost at forty percent of the index by weight, whereas if you look at the Aqui Xus index, which
is what we're benchmark too, it's only at eleven. So you know, from that perspective, we're comforted in the sense that there's still a lot of scope for stock pickers to add value without having to resort to closet indexing the top ten positions in the benchmark.
Okay, I would like to bounce on one of your earlier comments about European l scale, where pharmaceutical names like Novo Nordisk or sogsk Astrasenika are trading on very low multiples. I mean, given the underperformance of those names, how do you manage I would say, position which are losing money in your portfolio? Often keeping your losers could be a
major source of under performance. So how do you assess losing market positions and how do you decide to add up to your existing position compared to say, no, we made a bad choice and so we exceed the position.
How do you manage to be stread up?
Yeah, I you know, selling is a lot harder than buying.
I think you know that is that is definitely true, especially when humans are involved, because there's a lot of emotion built up in there, and you know, for us, you know, it's an all hands on deck approach whenever we do have an underperformer, and the way that we monitor that one is if a company has a very sudden draw down, it automatically goes into review, or if it shows up consistently in the underperformers or detractors lists for several months or quarters, it goes into an automatic
review for us, you know, and you when I say all hands on deck, I mean myself and my two other Code portfolio managers, Hi ching Lee and Jesse Flores get together and we try.
To re underwrite the position.
And you know, we try to separate is it a cyclical factor or is it a secular factor? And you know, the cyclical factors hopefully, if we've done our job right, we've anticipated all companies go through cycles.
And you know, if the if the.
Fundamentals are peaking, we would have been trimming and vice versa. The harder part is determining, you know, is it a secular issue? And you know, the easiest person to lie to is yourself. So one of the things that we implement here is that we keep a thesis book. So it's a basically a one pager on every company that we own that you know, basically reminds us what are the reasons that we buy it? And the and the the biggest destructive thing in portfolio management is to allow
thesis drift. And so when we refer to this document, you know, if any one of those tenants of the reasons why we sold it, you know no longer is true, it's you know, we take.
Action decisively and usually it's sold.
So but it's you know, the hard part is really trying to separate is it temporary or is it structural? But I think the thesis having you know, writing down your investment thesis and trying to stay true to it and not making excuses for it for a particular company, be relatively unemotional and move on because you know, our investable universe is you know, theoretically five thousand stocks.
We have a portfolio of thirty.
So every position in the portfolio is there, you know, at you know, at our discretion, and if it no longer fits uh, and we can find a better one, we'll do so.
So I actually got a somewhat related question. You know, we talked about the risk return you're comparing the different companies as well as you know, cutting losses. Is there anything else to drive cell decisions? You know, for instance, say you find another company and you know you're starting
to get above the thirty. You know what would is it mainly just the risk return you're looking at if you're kind of you know, finding another company you think would be a great fit for the portfolio, but you still love the thesis of other companies in the portfolio.
Yeah, and that's actually the biggest barrier to our portfolio, to getting into our portfolio, is you know, does you know so okay, great idea meets all of our criteria, what do we kick out? So you know, you know, make the case. You know, this is us talking amongst ourselves. Make the case for why this new idea is better
than the least best company already in the portfolio. And you know that's what we try to we I always tell our clients or potential clients that, you know, when do you sell Schautauqua, when do you sell our fund? And it's when we get to you know, we go from thirty names in the portfolio to forty, and that just means we're diluting ourselves. So there's nothing magical what
we have about thirty names in the portfolio. But it's trying to have that discipline about you know, these are our best ideas and if we're going to kick if we're going to put something in, it has to be better, you know, like I said, than the least best company in our portfolio.
Among those best names.
I mean, do you have any AI related investment at this point in time?
And where are they?
Yeah?
We we, you know, we are AI related investments can be boiled down to TSMC and ASML, and you know that seems like, wow, that's you know, nice AI play, But we've actually owned those two companies for over fifteen years in our portfolio. Just that I would say, a wildly different weights, but continuously they've been in our portfolio because I mean, they are the bottle land I mentioned
we're looking for bottleneck companies. They're the bottleneck companies, not just for AI but pretty much every major technological development you know, over the last fifteen years. And you know, ASML, I would say, is the quintessential example of a bottleneck company because you know, it has a virtual monopoly you know, in the equipment that makes semiconductors faster and you know, while consume less power. So yes, there would be no AI without ASML, but there also wouldn't have been any
smartphones at the end of the day. And that same goes for TSMC. The other you know AI related play that we have is are holding in Brookfield Renewable Corp.
Uh.
You know, power is increasingly becoming the critical bottleneck for growth for data centers, you know, not just in the US, but around the world.
And as a you.
Know, Brookfield Develops is a large scale operator and developer of you know, clean power projects around the world, so that ranges from quick to market wind and solar to UH. They have strong positions in nuclear, hydro and battery UH and so by being able to offer a broad range of a technology clean power technologies UH, you know, not only at scale, they've been able to you know, count amongst their customer base the eight out of the ten largest clean power buyers you know in the world are
their customers. And you know, most recently they've signed long term you know, power supply framework agreements with Google and Microsoft. So that's a testament to their ability to be the partner of choice for hyperscalers in terms of providing their clean power generation needs. So they help solve the critical bottleneck in the AI space, and you know, have been a key part in our portfolio as.
Well among investors over the past two or three years. One market, as I would say, generated investors' interests, which is Japan because people see some structural shift with the return of inflation management being much more sholder friendly than they used to be in the past. I mean, would you share the view and do you think there are good growth or investment opportunities in Japan?
Absolutely? Uh.
You know, I was fortunate enough to go to Japan earlier in the year to you know, visit companies as well as attended investor conference and you know the you know, based on the attendance and diversity of investor types at the conference, I would say the excitement is palpable, you know about Japan in terms of the investment opportunity there from a you know, from a top down perspective, I mean, if you look at Japan, the scope for improvement is
actually pretty large. You know, the average ROE in Japan is somewhere in the eight to nine percent, twelve percent in Europe, seventeen in the US. So the value unlock opportunity is definitely there. And you know, the the institutions in Japan are moving, you know, starting with Prime Minister Abe, they've definitely put forward you know, there's been improvements in corporate governance and the way that they're approaching shareholders, and.
You do see that.
So the market narrative is very positive, you know, and from an economic standpoint, we've gone from deflation to reflation as well, so you know, lots of positive things to
look for in Japan. I think the issue for us, as more bottoms up investors is translating you know, what is a positive top down narrative into actional, actionable bottoms up implementation in our portfolio, and you know, where we've been able to do that has actually been you know, in the factory automation space, specifically in terms of chaos sym fanic you know, which play into the you know, an overarching theme of deglobalization and reshoring, which given the
labor cost differentials, would not will not be possible without significant investments in automation, where those two companies are the clear leader.
You know.
We also have benefited in some of our Japanese holdings, you know, in terms of activist activity, but as a long only investor, that's not our focus. We think of sort of the value unlock opportunities from the standpoint of increased shareholder returns to be a you know, a free embedded option in a lot of our Japanese holdings at the moment, just one.
Follow a question on that. Do you think that company disclosure are still lacking in Japanese companies compared to what we can see in Europe and in the US, and it could be an impediment to make wise investment decisions.
No, I you know, a lot of Japanese companies report on an i FRS basis. Now I think the you know, the majority of companies that are reporting on under US I mean Japanese gap is very small.
So from an accounting.
Perspective, it's it's understandable, you know, again, going to this investor conference and perhaps thinking about you know, interactions with Japanese companies versus the past.
You know, they're much more they feel much.
More open from an investor relations standpoint, and you know, perhaps the biggest change, at least from my perspective, is the presence of actual English speaking investor relations people, which you know, almost never happened in the past. So the language barrier, whether intentional or not, you know, was you know, was better with Chapan these days.
Well, this is great. I really enjoyed this. Nate, thank you so much for joining us.
Appreciate your time. Thank you very much for having me and Laurent.
Thank you for joining me as my coach today. Thanks and I want to thank you for listening. If you liked the episode, please subscribe and leave us a review. Also, if you'd like to see more of our research, go to BI fund go or b I stocks s t o X for US equities, b I S t o x E for European equities, and b I S s t o x A excuse me for Asia Pacific equities. On the Bloomberg Terminal Until our next episode, This is David Cone with the Inside Active