Adam Karr on Contrarian Investing

a portfolio manager at Fidelity for a while. His name is Alan Gray, and he went out and launched Alan Gray Limited in three eventually becoming South Africa's biggest private investment manager. They expanded in in nineteen nine to be more international, and that's when Orbis was created. The firm is really quite fascinating for so many reasons. Their track

record has been outstanding. Their fee structure is fairly unique in the industry, very much aligning client's interests with the firm and the employees of the firm's interest I know everybody sort of pays lip service to that. These guys really do that. You pay for alpha and nothing else, and if the firm underperforms its benchmark, you get refunds on your fees and then some It's really very very

unique and very interesting. In addition, their their structure. What Alan Gray did with his original shares is quite fascinating. All told, this is really quite an intriguing conversation. I think you're gonna find it quite interesting and unique in the world of investing. So, with no further ado, my conversation with Adam Carr of Orbits Investments. This is Masters in Business with very Ridholts on Bloomberg Radio. My special

guest this week is Adam Carr. He is the head of Orbis US and portfolio manager for Orbis Investments, a firm which runs about thirty two billion dollars in assets. The firm's flagship global equity strategy has outperformed its benchmark m s c I World Index. Since it'sption, Orbits brings a unique fee structure to clients who only pay when the firm out performs. Adam Carr, Welcome to Bloomberg. Very thank you, Thank you for having me. I'm looking forward

to it same here. So so let's let's start with your background before we work our way to Orbis. How did you first get interested investing? I read something that used to help your grandfather clean up banks at night, and you started reading docs that were lying around that led to an interest in finance. Give us a little background on that. I wish I was that precocious, UM. So taking it back, I first became captivated with the investing in middle school. I guess it was the late

seventies early eighties. I grew up in Illinois, the South suburbs of Chicago, and I spent a lot of time with my grandfather. He was a janitor and a caretaker for our local savings and loan and I used to go with him every night to help clean the bank UM and I would mot florid and dump out waste paper baskets. And there was this really interesting newspaper in the garbage UM that looked different than anything that we had at home, or school or anywhere else. And I

had these odd looking dot matrix photos on the cover. UM, and of course I was the Wall Street Journal, and I just was fascinated by looking at the paper trying to follow the stories. I can't say that I really understood it. I certainly wasn't reading bank documents, UM. But it was it was that that really started me and the journey of getting really interested in the market. On on Friday night, Um, we didn't have to go to

the bank because we could go on Saturday. And we used to watch Louis Rukaiser's Wall Street Week every Friday night. In the beginning, you know, I would just I did it because it was a way to spend time with my grandfather. But over time I really came to enjoy it, um. And I think that was really just the genesis for me getting quite interested in markets and companies. The fascinating thing about that period is the pace of Wall Street Week and the pace of Rukaiser was so different than

what we experienced today. Do you look back at that period as sort of a kindler, gentler era or was that just part of the inevitable evolution of finance? I mean, to be Ernest Perrea, I was nine or ten years old, so I can't say that I I could credit in contacts in full construct um, But it was just for whatever reason, it was just fascinating to me. Um. And UH really planted the seeds earnly. So so let's fast

forward a little bit to your current philosophy. Not that when you were nine years old you talk about having four core pillars of your beliefs, thinking like a business owner, contrarian, thinking, long term perspective, and being unconstrained. Tell us about those four and and how that belief system developed. Yeah, so, um, it's probably helpful. And I'll dive in on the pillars just to give a little bit of context on Orbits.

So Orbius is in its thirtieth year. We founded by a gentleman by the name of Alan Gray, South African. Um so what is Orbits were global equity specialists. Today we manage about thirty seven billion in a u M across the globe through a handful of long only, absolute return and multi asset strategies. Um Or of his Global Equity is our flagship strategy and it represents our total a UM. We're mostly institutional, with the exception of some retail and Australia in the UK. Our investment approach is

pretty simple. At the end of the day, UM we stribed to by assets at a meaningful discount to intrinsic value. UM. I think the key term there is intrinsic value. We're not deep value managers who simply buy didactically based on low price to book UM. We try to think much more holistically about the true value of each business as an owner UM, and we try to go after it when there's some kind of dislocation. UM. We've got a deep team of analysts about thirty five all around the

world in local markets. UM, and we're really of the mind that if you if you want to generate an outfit, you've got to go against the crowd and thinking act differently. Our strategies are equity strategies are all unconstrained, so they're gonna look very different to the benchmark, and we tend to run pretty concentrated. Our global strategy has got about sixty positions with our active share running over UM. Now, there's a couple of aspects about orbits that are pretty unique,

one of which is how we think about fees. All of our structures are performance based. UM. We can dive into that more deeply, but in a in a nutshell, we're contrary and intrinsic value equity managers now in terms of the pillars and how they interact. I think it's it's worthwhile to say, you know, sort of our d n A of who we are is deeply rooted in our founder UM and his view. This is going all the way back to South Africa when he first launched our sister firm is that if you want to generate

an alpha, you have to go against the crowd. UM. And I can still hear Allen to this day say, you know, if you want to be good, work hard, but if you want to be exceptional, you have to come at the problem completely differently. You got to you got to turn it on its head. UM. And so this really kind of informs the pillars, and I think of it kind of the way that Jim Collins talks about Flywheel, like there's no one silver bullet, it's the way that they interact together. UM. And so the first

is this concept of independent thinking. UM. You have to attract and retain highly independent minded people, people that love and relish having a view that's different to others. That's the heart and soul I think of of how we try to construct our model UM. And then two, you have to structure the firm and the values and the culture that rewards independent minded people like to do things that are different. You have to create a structure that

allows them to do that. One of the things that we do, all of our analysts manage their own paper portfolios, and so that it's quite different than a lot of shops. And I not picking on any shop, but in many places the analysts will, you know, in air quotes, pitch names to pms um for us. The analysts are putting

forward what they would buy themselves and be accountable for objectively. UM. And it's interesting because when I talk about this in recruiting to prospective analysts, you can see some of some some analysts are really drawn to that. You can see them lean in, they're excited about it, and some lean back and like oh um, and you can tell that

it it kind of intimidates them. And the point there is that it's it's it's a self reinforcing system that attracts people to us and helps us retain the individuals that are most aligned with that. And then is let's let me jump in right over here U before we

get to the other pillars. I recall reading an article about you and the firm some time ago, um maybe it was and Barons, where one of the analysts was pitching Nike, which was rolling out this new fangled direct to consumer Nike dot Com idea and pitched to everybody in the firm, all called in from around the world, and was fairly savaged in in various critiques and counter arguments and pushback, but ultimately the firm ends up buying half a billion dollars worth worth of Nike, which has

been a giant home run ever since. Um. Is that typical for the process? Is that how that usually runs? Yes, So that's a I mean, that's a great example there in the sense that you know any firms and again not a critique, but many firms will manage their portfolios on a committee basis, UM. And our beliefs is that the best decision, particularly contrarian decisions, are not made by committees. They're made by individuals have done the work and have

a conviction and they're willing to be accountable for those decisions. UM. Now, we obviously don't put people in positions to move capital for clients right away. It's based on a demonstrative track record. But our capital allocators have demonstrated those track records. UM. And it's not a committee decision. And so in the Nike situation, it was a very contentious investment committee. UM. And in fact, you know myself and the analyst, UM, I would say we're on one side relative to the

rest of the investment team. And the core issue there. I mean, nobody would would dispute that Nike is a great company and has great content and it's very creative and great athletes. But they were making a big pivot to go online and go direct, and the key question, the burning question, was will that be better and more profitable for Nike going forward. In our thesis was that in cutting out wholesale, you eliminate that margin and they'll

be able to retain it. And there's a lot of other reasons why we think it's going to be better. I thought it was going to be better, but it was a very contentious issue. Um. We had the investment committee great discussion and debate. I mean, there were points raised that we step back and spend time on. But at the end of the day, as a portfolio manager, that I made a decision to take a position, UM, And that's the core premise of how we invest, of

allowing individuals to express themselves where they have conviction. So that raises a second, somewhat related issue as to the difference between traditional value. You you very disdainily mentioned price to book, which has done quite poorly the past I don't know twenty years. Um, certainly the past that cade. But you keep bringing up intrinsic value, and I'm wondering how much of that intrinsic value allows that definition allows you to embrace more of a posture that includes some

out of favor growth stocks for sure. So, UM, I think we we've got a thirty year track record. If you look across those thirty years, it's across many different cycles and market environments growth value UM. And we by far we tend to do best in you know, classic value markets. UM. I think where we differ from our peers, however, is that we we do okay in growth markets. UM. And why is that? We're not didactic? Um? First of all,

what is value? We're not didactic around what value is in the sense that it's a it's a hard parameter around price to book or a specific pe metric above which we won't buy. What we really think about holistically is the business, the quality of the business, the durability of the cash flows, the ability of those cash flows

to grow over time, the mode UM. And then we look at the price and we go after situations when we see a meaningful gap excuse me between those two UM, that's what we are as a manager, and I think you know, everybody likes to put you in a box, um, Morning Star, others. And the way we like to say it is our dot moves around, you know, don't put us in any one box. The dot moves around. And I think it's because the areas of the market that are offering the most value move around over time, UM.

And that's something that we've always lived to UM and hopefully has been beneficial for our clients over time. So so you get to run the US segment of what what is a global portfolio. Obviously, the US market has been pretty dramatically out performing the rest of the world, not just in but pretty much since the end of the financial crisis and in oh nine. How long do you think this relative outperformance of US versus overseas is

going to last? Are we ever going to see any form of mean reversion or have things aligned in such a way that hey, this could go on for who knows how long? Yeah? Um, sixty four thousand. Another question, I mean, to your point, Beer, I think you know, the returns in the US, which is where I live and breathe, have been sensational relative and historic context into SMP since two thousand nine is compounded at the nasdas compounded at two to three x the long term and

seven to average UM. In some ways, it's surprising, in some ways not UM, and I'm not studied it empirically, so ticket with a grain of stalt, but you know, in speculating some of the drivers. I mean, I think the most dominant force in the market globally and in the US over the past decades been monetary intervention. UM has truly been unprecedented and by and large, and I'm sure others would would disagree, but I would say leadership for Nankee Yell and now pow UM has been pretty constructive.

So I think that's been the context within which this has been enabled UM. But there's really been an insatiable appetite for growth, non cyclical growth, secular growth UM. And if you look at the market structure today, what do you see. I mean, the top five companies now six if you include Testla in there, in SMP, or of the of the SMP, which by historical standards is now quite concentrated, there's now over fifty stocks that traded more

than ten times revenues UM. And that's just in the SMP and there's all kinds of stocks outside of it, like Snowflake and Door to Ash and Zoom that traded pretty heavy multiples UM. And so it's been underpinned by exceptional revenue and earnings growth and exceptional UM multiple expansion UM. And it's been that mix that's created this this cocktail combined with lower taxes and lower regulation and following wage burden UM, that's created a pretty powerful cocktail UM. So

the most important question is where too from there? UM? Where to from here? And UM. You know, by historical constructs, spreads are quite wide, UM, quite wide. And you know, we don't make forecast and there's not a prediction as to when it will turn or why it'll turn UM, but we're of the beliefs that that will and should normalize in time UM. And I think sympatistically that's around the fact that it's unsustainable for the market to compound

at that rate UM. And when you look back, looked at orbits is history go all the way back to you. I think Japan was something like of the World Index, and we had zero exposure to Japan on the view that that was extreme and grossly over valued. You go to two thousand Um. You know, there was an area of the market technology and we were on the other side of that and Tobaccos whatnot. Um. And and you look at today and those spreads are just as wide, if not wider. And we do, as we said today

we have a pretty meanful underway to the US. I think the US is now sixty five sixty six of the World index and we are about half that in our global strategy. UM. So we're on the other side of that. UM. And it's interesting because, UM, you know, when you look at it, when you look at the data and you think about it, it seems like, you know, it's clear what one should think about doing. But when you're in the moment and it's been painful in getting there,

it's hard to do. And I think that really speaks to the behavioral side of investing, which is one of the aspects of investing that it's always attracted me the most, is that it's most difficult when you're in those moments. And I think now it is one of those times. Huh, quite quite intriguing. Last s and about these topics. So you run the US segment of what is a global investment company? What is your day to day job, like, what what is your actual title? What are you responsible for?

Are you running the team? Are you running the portfolio? Tell us exactly, UM, what what your job entails? Sure? So UM, I've been investing for about five years of public and private markets, last eighteen years at ORBITS. I joined Orvice in two thousand and two, and so today I'm responsible for the US efforts of the firm UM in. Our US team is is based in San Francisco. I'm one of the five capital allocators UM or PMS for the flagship global strategy. So I'm the PM for the

U S strategy. That's my day to day, which is a lot of reading and a lot of interacting with my investment team UM in terms of sourcing and thinking about ideas. I also sit on our global Management Committee, which i've done for it's about fifteen years UM. But I think at the core, you know, I started as an analyst as a generalist in Bermuda, which is where the firm's headquartered UM and today I do the same thing.

I picked up a lot of other responsibilities along the way, but first and foremost, you know, we're bottoms of fundamental stock pickers. As analysts understanding businesses. And that's what I've been the majority of my time doing. Huh, quite fascinating. You only take a fee when your funds outperform your benchmark, and not only that, you return fees when you underperform. Explain the genesis of this and how it works in

the real world. So genesis, UM, And to do that, I'm just going to tie you back quickly buried to the kind of the four pillars to round that out. So pillar one people independent minded, to structure give them a space to be independent minded and express themselves. And the third pillar is around alignment UM. Is to seek aligned clients in a way that our incentives are truly aligned. UM. And then the forest pillar is to structure the firm's ownership to promote putting us in a position to take

a long term view and differentiated actions. And just on that last point, you know, the firm is privately held, our founder vested interest into a charitable trust, so that charitable trust uniquely will own orbits in perpetuity UM. And significant to that is it allows us to take actions that are longer term and they're differentiated. And that that relates to the fees and I'll tie it so specifically on the fees UM. The genesis goes all the way

back to the beginning in the core value around alignment. UM, we've only had performance fees in the history of the firm. Our original fee, if you go back to was a base fee of a hundred and fifty basis points, with a hundred basis points fulcrumkee up and down fully symmetrical. UM. There are structures evolved UM as the markets evolved and I think improved. So let me let me touch on

the principles of any and I'll talk specifically. So in the perfect world, the client wouldn't pay any fees until they redeemed, at which time they would just pay based on the value that you added. UM. Obviously that's impractical because managers need to pay bills. But the principle of alignment around that is the key to our approach UM, and so we try to do that in two ways. The first is just management staff co invest in the same vehicles with the same fees and were the largest investor.

And the second is that all of our fees of performance based fully metrical and we refund the fees when we underperform, so they only pay a fee if we're add anxiety and to the best example is what we call our zero based THEE option, which is for institutional clients of size and so they pay no base fee and they only pay a performance fee if we deliver alpha UM, and on that alpha the sharing ratios two thirds to the clients and one third to us as

the manager UM. If we subsequently underperform, then those fees are refunded UM and they go into a trust account which fits there for the client in future. UM. It's important to think about the incentives there, because we you know, our incentives or not to grow a u M. We don't survive unless we generate alpha and add value UM. Which isn't to say that we can guarantee that we will do such. We can say that we'll fully align and we feel the pain when we don't deliver UM.

What's interesting about this is we first introduced this respundable fee structure in two thousand and four UM, and I think you care to say that clients were pretty skeptical UM of the structure. I think there was a lot of questions around, you know, well, why would you do this? There must be some kind of got you in here. UM, this just has to be better for you and UM. But I think now we've had well over a decade of of history with the structure thing viewers speak to clients. UM,

it's been it's been a wonderful alignment vehicle. UM. What we've seen in practices that when we go through periods of underperformance, which we inevitably do, UM, clients are reluctant to redeem because they've got fees sitting in that UM reserve account. And number one, it dampens that relative underperformance because you have those fees being credited back into You see an asset there and you're reluctant to crystallize it

because you know it's there. Now for us as a manager, that ideal, because it means that we don't have lock ups or any restrictions that the clients are speaking with us is exactly the time when it's most critical for us as a manager, such that we're not fighting redemptions at that time when we have a draw down and allows us to lean into those positions UM when potentially it's most attractive to do so. And so that's UH, it's been a very powerful alignment between us and our clients.

And one of the things that we we measure ourselves on, which I think doesn't get talked about enough in the industry is the behavioral penalty UM. And you can look at a manager with phenomenal track record UM, but what did the clients actually realized? And oftentimes that gap is quite why we obsess over fees and the lowest cost fees. But if you look at the actual data, the behavioral

penalty blows away. In many cases the relative difference that you see UM in terms of wear manager strike fees, and what we've seen in practice over the past decade plus is that that behavioral gap has to come down considerably, which is act is directly tied to what we're trying to do in terms of our premise UM. So it's something that we've we've been very pleased with. Now I guess the other side of it is, you know, why

why don't more people do it? But before we get to why more people don't do that, I want to make sure I fully get the details of the fault

on fee. So institutional account I'm gonna assume a hundred million and up no base fee meaning no annual fee, so you outperform in a given year, and you take some of your fee, which is based on the alpha that's generated, and that goes into a trust that sits and waits for the eventual under performance and is then used to reimburse some of clients losses or or at least client under performance. Am I getting that more or

less right? Yeah? Directionally, so UM two fees. So our ourdo base which is for institutional accounts above a hundred million, no base fee, a two thirds one third sharing ratio, and then we have our core which is for clients less than that institutional clients UM base fee, management fee with sharing ratio UM. Now use that as an example going forward. So we we generate alpha, it goes into

what we call our reserve account. From that reserve account, it doesn't flow out to us as a manager until we accrue more than three of N a V in the reserve account, and once it goes above that threshold, it can flow out to us at a ratio at at a rate of one per annum um. So we're building up the reserve account before anything goes to us

as the manager. That reserve account is actually invested reinvested in the funds, and so that that's what it shits in in the reserve account, and then in periods of underperformance, that underperformance at the same sharing ratio in this case is credited back to the nav of the client. The other thing that's important to mention here is that the client fee is the sorry. The fee is bespoke to the individual client and their experienced from inception, so they're

not taking on the characteristics of the pool. It's specific to their individual experience. Makes sense. It's set up as an SMA, not as a fund. Is that what you're saying. It's a pooled vehicle, but the fee is got individual to them. I got it. It's very specific. So my firm we build quarterly and it's like a big deal. We're recording this the first week of the new year.

Sometime this week. We're running uh different billings at Fidelity tuab A TD on clients and and it's a whole process to do you guys assess performance fees twice a month. How complicated is that? And what's the thinking behind that sort of performance fee assessment? What are the advantages and

disadvantages of that? So we strike twice a month or when the client transacts um so it's an either or, and the reasoning and benefit is the see is is individual and to bespoke to the client, that's that's what it brings them UM. And you can imagine from a client perspective, there's you know, there's a lot of value in that UM. I think the disadvantage from a firm perspective is I think what you are alluding to is there's a there's an operational burden and complexity behind that UM.

And when we launched this, going back to two thousand and four, you know, it was a meaningful investment operationally in capital to build out the infrastructure to to be able to support it. Quite interesting. So I first learned of you guys, and you in particular via a Wall Street Journal article written by Jason's Wage that was one of the first UM mainstream pieces really delving into the details of the fault room fee. And we're in our i A so we can't really do the same sort

of UM symmetrical fee sharing that you guys do. The complications make it all about impossible. But but we were very much inspired by what you do it and created UM what we call milestone rewards, which is simply if you're an individual investor and you exhibit good behavior, meaning you complete your financial planning, you do an annual update, and you don't dabble with I don't like emerging market,

so I'm gonna jettison that from my portfolio. UM, unbeknownst us to us on a random sort of thing, will end up dropping people's fees. After three years of good behavior, Hey, you've learned. We've helped to teach you the right way to do this, and now you're you're exhibiting better behavior. And besides, most of the heavy lifting is really in the first couple of years, so we'll we'll reduce UM your fees. So that was our response to your media coverage.

What sort of response did you get to that media coverage? What did clients say, and what did press effective clients have to say. It's interesting from a client perspective because it's UM. You know, it's complex. So I think if you are an agent and you have to go and represent it to the board, it's it's viewed as complex and different UM. And you know, we know the appetite for those UM. The the clients that have been with us and have experienced it, I think tend to be

our greatest advocates UM. And in a way this speaks a little bit to one of the points I mentioned earlier around the pillars is that it creates a bit of a self reinforcing mechanism. UM. What I mean by that is that clients that sort of intuitive intuitively understand this UM and can appreciate the bend if it's are drawn to us UM, whereas others aren't UM. And so we're not being shopped for the lowest fee, but for the best alignment UM, and and that works for us.

We're not trying to be everything to everybody. And that sort of self selection aspect, I think is something that we've seen play out in practice. And then if you just look at the numbers in terms of the behavioral penalty over time, UM, I think you know that speaking to it objectively, be curious Berry, since you mentioned you know your own actions, what have you seen from your clients and what kind of have you seen a difference? Do you look at the behavioral penalty side, what has

it done in your business? So it's done a couple of things. UM. One is, Hey, the whole industry is under fee pressure. UM. And like you, I'm a student of behavioral finance, and so rather than nearly lower fee is and get no behavioral result out of it, we try to craft a fee reduction program that you know, we make a big deal about telling prospective clients about it and reminding clients regularly, Hey, you have to you have to do your annual review, you have to you know,

do your financial plan. We want to cut your fees fift but you got to check these boxes. And so it's more than just competing on price, because you know, I'm not I don't want to compete with Vanguard who's gonna or black Rock who's gonna. Who's going to compete with their four BIP funds. We use both of their

funds because they're so inexpensive. But instead we want to do what we can to create I mean, I I'm not a fan of all the cutesy versions of Alpha tax, Alpha Advisor, Alpha Behavioral Alpha, but but there is something to the accept that if you can get people to think about their investments in a way that helps lead to better behavior, ultimately that's going to have as big an impact as anything else you can possibly do. So net net, it's been a giant positive even though it's

it's definitely like you, it's an administrative UM project. There's a whole lot of organizational alpha that goes behind this. There's just a lot of moving parts, and it took us a couple of years to really polish that up and and get it well. We've only been doing it for I don't know, I want to say four or five years. You guys are a decade and a half into it, so I have to think that you have pretty much worked all the bugs out that that might have appeared in the early days. What what sort of

issues arose when you first rolled this out. I mean, when we first rolled it out, you know, it's sort of I'm a graduating a little bit, but it was on a cricket UM. What's interesting, as you said, is you know, the industries evolved quite a bit, and it's going to need to continue to evolve, and so I think the the appetite for this kind of discussion UM

has changed pretty meaningfully. UM. And you know, we feel good about it because this is something we've done for a decade plus and we've done all the operational stuff.

But there's another side of this too, which is think about it from the firm's perspective and from the partnership in that, you know, it makes for a much more volatile earning strength UM and we had to go through, you know, a multi year period where we were reserving on our own balance sheet by distributing less than we would otherwise do so that we could build up reserves to manage the volatility that would come to the firm because of this structure UM and many years to do

that another form of investment outside of just the operational side. We have that in place now, but you know that's that's not for every firm is going to want to do that, UM and so it'll be interesting to see how the industry evolves over time, because it even if you want to do it as a firm, I think doing it in practice is a non trivial initiative, to say the very least. So you describe yourself as a contrarian value investment manager. Was certainly a outlier of a

year in so many ways. How do you describe where we are in the market cycle? What do you think is going on in that battle between value and growth? So I'm I'm reminded of the Jesse Livermore quote UM in reminiscence of the stock operator where one of his customers asked, you know, what should I do and he looks at him, He's like, well, you know, it's a bowl market. UM, and I feel like, you know, kind

of like the music is playing for sure. UM, it's uh, it's it's been quite robust, surprisingly so I mean I UM. I think also of the Templeton line, where you know, boat markets start on pessimism, go to skepticism, mature on optimism, and diere in euphoria. I wouldn't say that we're in euphoria right now, but we're approaching UM and they're they're

definitely some speculative signs. UM. I think if you look at what's happening in this back market, if you look at the I p O market, because it's a cover story and Barons a couple of weeks ago around the I p O frenzy, if you look at the level of retail engagement, UM margin, debt levels, the robin Hood tribe UM. I mentioned earlier the number of stocks that are trading in the SMP above ten times revenue, and then look at some of the company's recently Snowflake and

Zoom and Pelican. Um. There's definitely some speculative elements UM today that I see relative to my time as an investor. While it being said, I think you know, now is a incredibly exciting time to be a fundamental active investor. UM. You know, we as an active investor, you you live for dispersion, UM, and the dispersion in the market is is pretty wide by all accounts. UM. I I hate getting drawn into the value versus growth because I think

it it oversimplifies a lot. But kind of any way you go at it, UM, you know, the gap between kind of one side of the market that the you know, the growth of secular growth winners, the defensive growth names story stocks like tesla UM, and then everything else on the other side, any any company that's got some perceived degree of uncertainty or cyclicality. There hasn't been a real

bit or appetite for until recently. And if you look at the gap between those two sides of the market, you know, it's just it's is wide as it's been in some time, UM, perhaps ever. And UM, you know that creates interesting opportunities. UM. It's not a call. You know, evaluations are horrible timing mechanisms, UM, but they are very telling with regard to future returns. UM. And I think the side of the market, the winners that have really been bit up, I think the expectations in those stocks

are are pretty full. UM. And I think there's an opportunity for them too to disappoint. And when they turn. If you look back historically, when it turns, it tends to be reasonably sharp. UM. And I mentioned, you know, going back to thirty year track record of orbists Japan and the nineties UM, early two thousand's UM. And now is another of those times. UM. The opportunity to lean

in on the other side looks looks pretty compelling. Now it's difficult to do because you you're underperforming and you're lagging, and what he wants to tell you that you've missed the boat and when you're crazy and the world's changed. UM. But that's exactly why those opportunities exist UM. Over time, UM And I think we're starting to see, you know,

there's some interesting signs recently. UM. You know, if you look at saying them relative to the S and p UM, it's not rolled over, but it's started to tow plateau. It's not leading you know, our our founder used to always say, look at the lead steers, the market bulls. The bulls are losing steam. Um, they're not demonstrating the leadership they have in the past. You look at the Russell two thousands of broader based index well tip, the s and p UM. You're seeing the same thing on

a relative basis. So there's some interesting signs recently. All that's just it's not a forecast that we're going to roll over. Um. But you know, these things don't UM go forever. I'm of the belief that there are cycles to markets. All the things that you're seeing now, like value is dead, um. These are the characteristics UH and elements that you see at these late stages in the cycle. UM. And I think they're on the other side. You know, the move the most crowded trade the last ten twenty

years has been the move to passive investing indexation. UM. These industries have gotten very concentrated. There's you know, there's risk embedded in them. UM. You look at the concentration in those stocks, you look at the cross holdings UM of individual stocks across those indusices and ets. You have

a turn there. UM. It could be quite powerful UM, and so as an investor, when you look forward, and most importantly is looking forward, I think having some exposure on the other side is is is warranted makes a lot of sense. You mentioned the Russell two thousand, which, for I don't know, the first three quarters of dramatically under performed all of the momentum and big cap growth. But the last couple of months of SO are a

pretty robust catchup, especially for small cap value. What does that tell you, I think it's a bit to the point. I mean you just let's go back. Let's backtrack for two thousands. I mean, coming into the year January early February, UM, you know, there was a view of accelerating growth UM, and you you were seeing that in the small caps UM, and then COVID hit UH, and we had a very meaningful draw down UM. And then more recently the last three months and certainly most recently with news of the

vaccine UM, you you started to see that recovery. And I think it's there's an expectation looking forward of UM, you know, cyclical recovery UH, and in particular those names that were disproportionately hit, just the smaller companies UM through the COVID drawdowns. So I think you're you're seeing that manifestation if you look at you know, the existing positioning um, you know, it's so lopsided that you know it could

have We'll see where things go from here. Obviously they've actually news more recently it's not been that encouraging, but we try to take a longer term view. We'll see where it goes from here. But it could, you know, it could have a decent way to go. I mean, that's certainly what the data would tell you. Quite interesting. So let's talk about the ORBITS Global Equity Funds. Since

that has crushed its benchmark. How have you guys managed to accomplish this in an era of relative underperformance by value? And what is your role at ORBITS Global Equity Funds? So, I mean, going back to inception, it's been across many cycles and we are proud of that track record, but it's been I mean, let's be clear, Berrier, it's been a difficult decade the last ten years for us, and you know we haven't performed the level of expectations that

we that we hold out for ourselves. I think if you look back in history, and that's across you know, a number of different mark and environments. You know, we tend to do best in what would be our quotes value market and we kind of hang in there in the growth market. So that's exactly what you've seen kind of this last three five seven years, certainly relative to our value peers, I mean our value peers, peer value peers.

Have you gotten really punished during this? And I think the difference there for us is that when I touched on this a little bit earlier, is we're intrinsic value, So we're not we're not didactically going after just a little price to book. We have a more much more holistic view of what we think value is and we go after those gaps and that can be you know, a dirty industrial company, or it can be it could

be a technology or internet based company. UM. And that's allowed us to be more flexible over time, but they're also tend to be bigger periods. And I mentioned this if you go back to Japan in the index, it's just important is what you don't own. We did known anything in Japan and then in two thousand's and I think today would be similar UM in that you know, it's been painful getting here. We have a pretty meaningful underway to the US as we sit today, and we'll

see where it goes from here. But you know, when those when those pockets turn, when they get to those extremities like we see now, they tend to be pretty fruitful. And that's one of the reasons that you know, I'm pretty constructive as we look forward again, not not calling the timing, you know, because it's not what we do, but you know, based on where we're at now and how our position, I think, you know it could be

could be meaningful. So you you hit upon something that I want to address because I'm intrigued by the concept you mentioned. As a contrarian, You're you're constantly looking for things the crowd has overlooked. But one of the things we tend to notice over longer market cycles is that the crowd tends to be right much of the time. It's at those major turning points with a crowd completely

loses their minds and gets it totally wrong. But what are the challenges of being a contrarian When you're leaning into the winds and you know it's an uphill battle most of the time, how do you manage around that? Yeah, so I think you're exactly right, and I would just observe that now is one of those times that all of those behavioral characteristics are in play. You know, the the chorus is calling for it's dead, it's over. UM. I still believe in cycles. UM. The price evaluations don't matter.

I still believe in price evaluations, not as a timing mechanism, but fundamentally. UM. I believe it's unlikely and unsustainable that returns will continue to compound it. I don't see any reason why structurally it should have changed or shift from kind of the long term cross that goal returns and seven. Yet the popular chorus is on the other side of that. UM. And so all of the behavioral elements are in play today. UM. In terms of how you manage it, I think it

it starts with yourself as an individual, as a decision maker. UM. I think one of the most difficult things in this business is knowing yourself and managing yourself, particularly in those situations when you know you're underperforming in a position or in a portfolio, and you look wrong and other people are telling you you're wrong. UM. Clients might be hackling you and telling you are wrong. UM. And how do you make decisions in that situation is one of the

most important characteristics so of what we do UM. And then the other side of it is, you know, you want to try to put in place things that allow you to stay true to your process UM. And that gets to the elements that I was touching on a little bit in terms of the kind of people you put in your team, the kind of culture that you create, UM, how you manage your day to day, what do you look at and importantly the kind of clients that you have,

what what expectations do they have for you? And then lastly your own ownership structure, and I touched on that a little bit. Those are all things that you can try to put in place structurally to allow you to be in a position to make the best decisions when behaviorally it's most difficult. And to clarify, are you guys long only or long short Our main strategy, Our flagship is long only because it's one thing to be long and wrong as the market goes up, or to be

long and underperformed. But I can't imagine what sort of agony it would be to be short Tesla as it goes up. Six there's contrain is UM. And and then there's just that that that's a type of pain that that it's hard, hard to imagine. UM. But let's stick with the bottoms up stock picking because a lot of what we're discussing is very much the macro environment. You mentioned monetary policy, we talked about COVID. There are so many broad macro issues. How do you, guys, UM think

about the macro situation? It seems unavoidable at least in is macro part of your process if you're bottoms up stock picker or do you have to try not to think about what's going on in the broader sense? Yeah? I think. I mean the short answer is you have to write, are you we're not we're bottoms up fundamental stock pickers were owning businesses in their cash flows. That being said, UM, you have to have an eye to

the context that you're in. I think one of the things very clear going back to two thousand seven, two and eight, UM, you know, the value tribe got crushed buying financials at increasingly lower price to book multiples into a macro environment that was not conducive. UM. And I think if you were only looking at the company and didn't have construct for the context. Um, you got punished. Um. And we were not immune to that to be clear. Um. But there's an important lesson in there and that you

you have to have an eye to the context. Um. You know, we don't have strategists in the house, we don't have economists. We're not making forecasts on GDP or anything of that nature, which we don't believe in. But you do have to have a construct of the environment which you're in. What I what I say to the team is, you know, you could have a great house in a bad neighborhood and it doesn't matter how good that house is. Sharre in a bad neighborhood, and so

you have to understand what neighborhood you're in. And a specific example for me where I've gotten really you know, penalized, is you know, had a very stock specific pieces in an oil and gas company, US oil and gas company and called Apache. It was stock specific and idiots and credit that I really believed in. And a number of

those elements have played out. But it's in the context of an energy space and a w T I is at ninety versus thirty, It doesn't matter what the company's specific videos and credit factors are you have to have a view to the context. That's a that's a very specific example, but I think it it covers across the board, and I think that's how we as teams, how we interrogate and think UM to make sure that we have

an eye to the context. We were just discussing the exact same thing with despite for the past four years having the most pro coal presidents in history, it didn't matter which coal company you own, UM, The question was was it ugly or uglier? So I totally get the even a good house in a bad neighborhood isn't isn't going to help you. But sticking with the macro issue, you mentioned monetary policy and you also mentioned valuation. Let's

let's tie all three of those together. How responsible is today's effectively zero interest rate lower for longer policy affecting today's relatively high historical valuations. I mean it's you can't. I can't quantify it empirically, verybody you. I mean, when you're your history rate of zero UM and arguably your real rate is negative, that will influence UM in a

non trivial way. How you price cash flow streams UM and we've seen that UM and to the point on context, I think one of the things I've been more critical of myself is not being more fully cognizant of that at the environment to my analogy before the neighborhood over the past decade and so it's it's been a meaningful driver. The more interesting question as investors is where are we today and what does the future look like from where we sit today? And I try to spend more time

thinking about about that. But quite interesting, and we talked about ownership and thinking like an owner. I want to have you clarify something about Alan um Gray. So when when he launched Alan Gray Limited in he was a former Fidelity manager and Alan Gray became South Africa's biggest private investment manager. You mentioned he put his equity stake in orbits and a trust and that's now perpetual. What is the is that the entire ownership structure or our

employees also owners of the firm. UM employees are owners of the firm UM and so Allan uh put his in his family, UM put his entire interest into a charitable trust which will be held is the controlling shareholder in perpetuity UM. I think there are a couple of elements to this. One is just I mean, it's a phenomenal thing what he's done, and I think it gives a degree of purpose to what I do in my own work, knowing UM that there's a set of beneficiaries

behind that in terms of what we do. But from a business standpoint, I think it's interesting on a couple

of levels. First is, you know, the issue of succession investment firms is a pretty storied track record, UM if you look at how investment firms managed continuity over time, and he did it in a way that was really it was very thoughtful but quite seamless UM to manage the long term continuity of the firm and the leadership UM employees are owners of the firm UM and have a meaningful stake and the combination of the family and executives and and staff with the largest investors in the fund,

which gets back to thinking investing like an owner UM. But it also allows us to make decisions that are driven by what we believe in for the long term. You know, I couldn't imagine running an investment firm that was publicly traded that had quarterly subjectives UM, and so you take something like our fee structure and refundable fee reserves. UM. You know that that's a difficult decision. It's not without

consequence for the firm, the partnership. But having a structure like ours allows you to take those kind of long term decisions, UM, which allows you and reinforces you to take those decisions that are contrary in to what most other people might be doing, and at times that the most difficult. UM. And so it's uh, it's a it's a powerful reinforcing mechanism, if that makes sense. Totally does

quite interesting. I know I only have you for a finite amount of time, so let me jump to our five favorite questions that we ask all of our guests, starting with what are you streaming these days? Give us your favorite Netflix or Amazon Prime shows or or podcasts. What what's keeping you entertained during lockdown? You show we have more time during COVID times. UM. So when I mentioned uh, Matflix is unorthodox um the story of a young girl at the civic routs in Brooklyn, and just

I just really love the story. I thought the lead characters just terrifically well portrayed. UM. Guilty Pleasure, um, the Jinx the life and death of David Durstum just as the one who loves to study human behavior, what motivates people. Just a fascinating character study. And I'm not giving anything away, but the last kind of seconds of the series is just priceless. UM. Just wait for it. It's really good. UM.

I love documentaries. UM American Factory. I'll mentioning which one the oscar Um story of Chinese billionaire open Factory GM abandoned GM Factory in Ohio. UM. Pretty thought provoking, UM documentary by Eva du Verney. UM. I think you know, really zeroing in on the history of racial inequity in the US and specific remination's prison system. UM. I think you know in our times and what's been going on in this country. There's a real message there. UM. And

then from podcast present Company included included Verry. UM. I enjoy Shane Parish and the Knowledge Project quite a bit. Yeah, that's that's a great part. I'm a fan. Tell us about some of your early mentors who helped guide your career and bring you to where you are today. So I have to just start with my grandfather. UM, it's really my hero. UM. He you know, just the value of hard work and generosity. Um. You talked about growing up under his wing, and a lot of who I

am today is cultivated by him. UM. I also mentioned to other UM individuals there's a program called Sponsors for Educational Opportunity, which focuses on UM first generation, low income kids of color, gets them to Wall Street. And so when I was nineteen, when I was in college, I got an opportunity to go work at d l J UM Bill Donaldson, Mufkin and Jenrette. And it was because

of his program, Sponsors for Educational Opportunity. And one of the individuals there's a general named Saban Street who ran their venture capital group which is called Sprout UM. And at the time, SEO was just starting to build out with kids outside of the Ivy League. And Saban came to Chicago when he met me, and not only did he check me to the program, but he said, you know, I want you to work at my firm at d l J. And just he was just a great mentor

to me then big believer in me. UM when I questioned myself, UM, just a phenomenal individuals whom a junct professor at Colombia, and not just me, but so many people he's influenced. Um have been uh, phenomenal inspiration for me. Quite interesting. Let's talk about everybody's favorite question books, what are you reading now? Or tell us about some of your favorites. So one thing I mentioned before going specifically

to books, just on the question of mentors. This flungs in the category of something that I believe that maybe a lot of other people don't, is that I feel like I have a lot of mentors who are individuals that I've never met. What I mean by that is books like books have always been mentors to me. I think you can you can read about somebody and really come to understand them, um and actually never have met them,

and you understand how they think. And you when you understand how they think, you can ask yourself in the same way that you will go see a mentor and say, you know, I'm having a challenge with this, or how would you think about this? But just ask yourself, well, what would they say? And oftentimes you can answer the question for yourself. Uh. And So there's been so many individuals that I consider mentors who I've never met, um,

but have been cultivated through books. UM. And so I say that just to say, the universe of potential mentors, I think is so much bigger than a lot of people acknowledge. And when I give credit to now to the concept of books, the actual physical book that I've probably gifted more than any other is The Art of Learning UM by Josh Waitskin UM. He Josh chess prodigy. I think he was the UM. He is the character

for searching for Bobby Fisher. And the thing that I really strikes me I love about it is just he Josh is all about pursuing excellence UM. And he's done it in chess and push hands and boiling, which is he obsesses on the craft and process of becoming world class at something UM. And I personally a geek out on process UM and trying to, you know, just push

and beat on your craft. And Josh articulates that he's so thoughtful and how you think about that and break it down UM, And just many many lessons in there. The other book I would mention UM that I really enjoyed I read this summer UM is Maria kina Kova The biggest bluff How I learned to pay attention and master myself. So Marie is very interesting UM. True story. She got her PhD in behavioral psychology at Colombia, studying under Walter Michelle Um. I think it's for the Marshmallow test.

And she'd never played poker before, and the book is about her learning to play poker um and actually doing it quite well. And you know, there's the aspect of playing the cards the probabilities, which I think is a lot like investing. Is just playing the probabilities and minutes playing the players playing the cards, which is all so

like investing the behavioral side um. And there's just a lot of takeaways in her book, which is focused on poker, but for me, around investing and managing yourself and the power of paying attention. What sort of advice would you give to a recent college grad who was interested in a career in finance as a portfolio manager or an analyst. There's a there's a book I read a couple of years ago called Excellent Sheep The miss Education of American

Elite by William Dershowitz, professor at Yale UM. And what he really draws on is, as just belied a little bit in the title, is like, you know, as a professor at Yale, seeing these incredible young people, the brightest minds, UM,

but they've just been on this treadmill. UM. You know that perfect test scores and great grades and were just on this treadmill of continuing it in air quotes demonstrate excellence, but maybe lost a little bit in terms of how to think creatively and critically and the real purpose behind

what they're doing. And in some ways that resonates with me in terms of what you're seeing UM in young people like these phenomenal people, but they haven't had a ton of adversity and UM really thinking deeply about what it is they want to do and why they want to do it UM, and less about the treadmill and the brand UM and the external affirmation, but for what

they want to do UM. And so my advice to a young person would be around that UM and specifically if they're looking to go and invest in management and be pretty similar to the same thing that I would take somebody you know in college or high school. It's like, don't go for UM. You know what you want to go for is the best professor. It doesn't matter what the name of the course is, but you know, find

an exceptional professor. UM. There's magic in that and the same thing when thinking about you know, taking your first step is find a phenomenal individual that you connect with and work for them. It doesn't matter what the brand is. Everybody's drawn to the best brand UM or what they think is most coveted. But find a phenomenal individual. Forget

about the brand and all of the treatments around it. UM. Work for that individual, and I think what you'll take away from that will be so much deeper than UM just going for that that external validation good advice UM. And our final question, what do you know about the world of investing today? You wish you knew years ago

when you were first ramping up. So you know, I started my investment career in the private I saw doing distress turnaround investing UM, and when I started my public market investing career, I was all about that, you know, hard assets, downside cash flow. And I think what I have learned over time and you've seen this revolution and other investors, is really the importance of human capital and

culture than people UM. And you know, I think the phenomenal companies that really compound over time have something about their human capital and their culture UM that is unique, distinctive enduring, not always, but enduring and allows them to compound in a way that is much more meaningful than buying that cigar butt. And so I think what I wish I would have focused on earlier was was that element um rather than just looking for the cigar butts?

Quite quite interesting. Thanks Adam for being so generous with your time. We have been speaking with Adam Carr. He is the head of Orbis US and portfolio manager at the thirty seven billion dollar Orbits Investment International firm. If you enjoy this conversation, well, be sure and check out any of our previous three and ninety or so such interviews that we've had over the past. Is it six years?

Oh my goodness, that's a long time. You can find that at iTunes, Spotify, wherever you feed your podcast fixed. We love your comments, feedback and suggestions right to us at M I B Podcast at Bloomberg dot net. Give us a review at Apple iTunes. You can sign up for my Daily Reads at rid Holtz dot com. They're free. They'll show up in your mailbox every day at seven am. Check out my weekly column at Bloomberg dot com Slash Opinion.

Follow me on Twitter at rit Holts. I would be remiss if I did not thank the craft staff that helps put these converse stations together each week. Maroufal is my audio engineer. Michael Boyle is my producer. A tick of Valbron is our project manager. Michael Batnick is my head of research. I'm Barry Results. You've been listening to Master's in Business on Bloomberg Radio