Dennis Lynch on Global Portfolio Management (Podcast)

a firm within a firm at Morgan Stanley Investment Management. Uh. They run a ton of money, about a hundred thirty billion dollars and their track record, especially this year, has been pretty The Noodles the Growth Fund is up eight Discovery is up about a hundred percent. Their worst performers advantage it's only up fift. They run very interesting concentrated portfolios. Their entire approach is somewhat unique. They're not um like very many people. Uh. Maybe Will dan Hof for Bill

Miller run a similar style of investment management. To give you an idea of how outside the box this group thinks. Uh. They recently, by recently a year ago, they hired Michael Mobison to be the head of their research just for the group. Mike has been on the show a couple of times, and I just love the way he thinks, and any group that brings someone like him in obviously is not your traditional Wall Street stock picking um fund managers.

I found this conversation to be absolutely fascinating if you're all interested in how to build a portfolio, how to select stocks bottom up, why the buckets we use and phrases like small cap or value or growth can be so constraining and really harmful to performance. I believe you're gonna find this conversation to be absolutely fascinating. So, with no further ado, my conversation with Counterpoint Global at Morgan Stanley's Dennis Inch. This is Master's in Business with Barry

Ridholts on Bloomberg Radio. My special guest this week is Dennis Lynch. He is the head of Counterpoint Global at Morgan Stanley Investing Management. Running about forty four billion dollars, he has five separate funds. His group is responsible for advantage, growth, insight, discovery, and inception, the largest of which is about fifteen billion dollars and year to date is up about Dennis Lynch, Welcome to Bloomberg, Barry, thanks for having me. So let's

talk a little bit about Counterpoint Global. Everybody knows the name Morgan Stanley, but not everybody knows the name Counterpoint Global. What is the thinking behind a company within a company. I mean, I've been at Morgan Stanley, I think over twenty years and ever since the habit it would an investment manage meant they've followed the philosophy of trying to make sure they have a diverse group of thinkers and

small decision making teams. And I think that's a really healthy environment for trying to to do the hardest, one of the harder things out there, which is pete the market. So it's been a great environment for that. And in that context we've been able to build Counterpoint Global our group over the course really in a strong manner over the last sixteen years, with with the great resources we

also get from Morgan Stanley generally. So I think it's been a good combination of a good, big, big term philosophy from Morgan Stanley and and then allowing Counterpoint Global and the key members of the team to be very entrepreneurial in that context. So not to read too much into what you're saying, but you're giving me the impression that this is a model within Morgan Stanley, and there are a number of small entrepreneurial teams within investment management.

Is that right? Yes, that's been the model, and I think it's really healthy. I think there's been some good research that shows that, you know, strong decision making, particularly on the investment committee side of things, tends to occur when you're dealing with small groups of teams as opposed to kind of large bureaucracies. So I count five different funds that Counterpoint Global is running, Advantage, Growth, Insight, Discovery, and Inception. Are these all run as a group or

are there different managers for each? How do you guys structure this amongst yourselves? So believe it or not. Actually, UM Counterpoint Global in its totality is about nineteen products globally, which includes the portfolio management team in New York that I had, as well as the portfolio management team in Asia which my partner and co c i O Christian Hugh runs UM. And so in total we have nineteen products currently the hundred thirty billion in assets and UM

we probably own about two companies those globally. So despite the fact that sounds like a large number of products, we're very concentrated in each product and we're very picky about what we invest in. So it is a pretty small group of companies when you think globally. We basically, uh, you know, we run We have two lead managers in two different locations, and the portfolios are kind of informed by the insights of the entire team, and we go through the process kind of at the end of the

process to figure out what to go. We're based on how big a company is, where it's domiciled, etcetera. In other words, you identify a company you want to own and then figure out afterwards which funds, which product is the right fit for it. Yes, huh. That's very different than the typical mutual funds. Yeah, and I think it's a big different when I think about Counterpoint Global and how we're different. It is one of our big differences. You know. The people on our team aren't what we

call investors. They show up or wake up each day looking for the best ideas in their areas of expertise, but they're not trying to find the best large cap

growth healthcare companies. So if you're Jason Young is a world class health investor on the team, that's not how you're approaching your time spent in your day to day you're looking for great ideas within healthcare, and it just so happens given that we have US products, international global products, and ones that focus on different market caps and different parts of the overall products set, we have a we have a home for your idea and so I think

it is is one of the things that differentiates the team. So you went from being an analyst to being a portfolio manager. How challenging is it to go from analyzing a business to building an investment portfolio? What what was that transition? Like? Well, I think, you know, there are a lot of different personalities out there, and I think

it really depends on the person. You know. Actually, one thing we try to do from time to time every few years is the personality assistance for people on the team, just to promote a little bit of self awareness. It's always good to get get another view of kind of how you're hardwired, especially in times like this where we're

having extreme volatility. It's kind of nice and to remember that sometimes you're hardwired to react a certain way under durest and maybe that self awareness helps you make you more high quality decisions. But I guess in our case or in my case, um I've always you know, while I love details, and I certainly can be very detail oriented at times, I also love learning about a lot

of things. You know. I went to a liberal arts college, and so I have I really do enjoy the extra perspective of learning about a lot of different industries and sectors. So going from an expert or an analyst in one area to being an investor more broadly, I think kind of fit my personality specifically. But what we try to do on the team is is, you know, attract really unique people and then based on their personalities or end their passions, sort of let's enable them to do what

they do well. And so we've got all sorts of different types of doing playing different roles. In my case, I think given my uh a love for learning about a lot of things, the transition probably made more sense and was easier than for someone else. So I have read a lot about personality testing, and there seems to be two groups of thoughts on it. One is there's a lot of down and dirty, kind of oversimplified tests

and they're of no value whatsoever. And there's another group of thinking that says, hey, if you ask the right questions and you really dive deep enough, you can find things out about how people think, how they behave, and what type they fall into. So I'm gonna assume you guys aren't doing anything um down and dirty. You're really doing a serious dive into that sort of profiling of

various researchers and managers in the group we are. But you know, here's the thing about anything like this personality tests, UM, this sort of topic UM. You know, and we have got a great diversity of thinking on a team here. Some people think it isn't very useful, and some people

find it extraordinarily extraordinarily useful. I look at it as a as a low cost way of getting the team together in one place and spending time as a larger unit where we can you know, hopefully you know, bond and and share share a day where we're sometimes you've been making fun of each other for our differences. UM. But I think that it's the worst case for my vantage point. It helps the team uh culture. But you know, we have some people think this is very useful and

some people think it's useless. And I get both sides of that. You know, I actually used to think it was useless earlier in my life, and as I started to explore it, I found there there there to be some utility. So it really depends on the person. It's it's it's why we do it every few years. It's the worst case, it's a it's a cultural bonding thing, and best case, maybe people gain a little extrac off awareness. Huh.

Quite quite interesting. I find myself about halfway in the process that you already went through, going from poo pooing it too. All right, maybe it's worth exploring and who knows what what will come out of it. I was very disappointed when I initially took the Myers Briggs a long time ago, to find that I wasn't so unique after all. It was a lot more accurate than I expected to be. So that's what got me kind of moving in that direction. But reminds me of my favorite

scene in Money Python's Life of Brian. We're all individuals, everybody chance together, We're all different. It's pretty hilarious. It's awesome. So let's talk a little bit about growth investing in Obviously, the stay at home trade has been enormously profitable. Um, you're one of your biggest funds has is up almost a year to date. Uh, some of these stay at

home aims like Shopify and Zoom and Tulio. Were these in your portfolio pre covid or did you guys recognize, Hey, this is gonna be a long working remote scenario and we want to load up on the names that would benefit from that. Uh. These for the for the very most part, these are all holdings going into and they

were usually our performance at any given period time. It's more function of decisions we made a year or several years prior than it is kind of the moment sort of in the moment reaction to what's happening and obviously being an exceptional time. UM. So we did all these stocks that you're mentioning prior to UM. That was actually

a transition we made maybe a few years back. If you look maybe eight or ten years ago, you might have seen in our portfolio is a large, large stakes and companies like Amazon and Apple and Google and Facebook, and a few years back we were looking at the opportunity set and I think, you know, all good invest

things opportunities have driven. We thought there were some really interesting young companies in some of the areas that have benefited more recently, not just from COVID, but from secular growth. And so what I would say is we added things like some softwares of service and e commerce companies you know, two or three years ago, all of which fortunately benefited this year. And what I'd say there is, I think many of these companies offer you know, time and cost

efficiencies to their customers or their clients. And you know, at the time of general generally, in the time of crisis, you're going to see a more likelihood of faster adoption or people sort of looking more at the world from a blank sheet of paper standpoint, and more likely to do things that are different and change their behavior. In addition, so I think that's generally true, but you know, from

a luck standpoint. In addition, I think we were for relatively fortunate a tough time for everybody that some the specific needs that a pandemic required, like delivery and staying at home and UH and working and streaming from home, you know, certainly did were extra benefits that you know, much more luc driven than it was I think us reacting quickly to the environment or anything like that. So that raises an interesting question how much of these spectacular

gains for this group of companies. Is future growth being pulled forward to and how much is a permanent shift in the dynamic? Well, I think there's definitely some evidence of a few things. There's some evidence you've seen some of the fundamentals pulled forward for some of those companies, i e. Growth, faster growth than expected coming into this period. But as you're alluding to, you've also seen pretty dramatic outperformance of the companies in relation to the rest of

the market. So I think it's a combination of both forward UH fundamentals being pulled forward as well as potentially UH to a degree, future returns also being pulled forward UM. And so yeah, it's it's not we we still really like the portfolios today from a fundamental standpoint, but when you think about perspective returns from here, uh, you know, we're not as we're not expecting the high returns we've seen over the last ten to twenty years. That counterpoint global.

But I think that's really true of all asset classes with interest rates where they are, and especially real interest rates were possibly negative. It doesn't there aren't That doesn't seem to be a whole lot of great places to find new incremental investments so we're mostly happy staying the course, but we recognize by pulling some of those fundamentals end valuation expanding in the near term, you're not likely to see, you know, the return profiles we've been able to achieve historically.

We're recording this the day after the big fiser vaccine news came out effectiveness in a large study, and the market action was value stocks I think had their best day in uh at least five years. Tech didn't do nearly as well. Do we think this trade is going to be changing on a permanent basis or is this just a little bit of digestion as to what everybody thought was eventually going to come, namely some sort of vaccine,

some sort of return to normalcy. Yeah. I think you know, if you're a trader and you're really focused on, you know, the next few months or the next few weeks, or of shorter time arisings, then I think you're very, very interested in this kind of question, and you might be looking at market activity as a barometer for whether or not there's been a really dramatic there's certainly been a very dramatic short term impact to that news, whether or

not that sustained itself. You know, it's very hard to predict, and certainly we don't We don't have a strong view as to whether that will continue or not in the very short term. I think it's great news in general. I think the economy is going to be a lot bigger five to seven years from now, the sooner we get out of this uh. And you know, it's hard to sustain an economy through his fiscal stimulus and other

means UM. And that's not good for anybody, including the companies that have done you know, the small group of companies that have done really well this year. So I look at as a positive development. Having said that, it's also there's also a lot of unknowns and uncertainty. I think, um, you know, how fast we can get any any sort of functional vaccine um distributed and implemented. Uh, there are you know, other things that can also still still go

wrong in terms of mutations of the virus, etcetera. So

this is still a time of uncertainty. Usually when you see the sort of dramatic change and things, it's just what it does tell you is that how people might have been positioned in the short term are trying to make short term profits and so obviously this suggests that some people were you know, there's there's these stocks have become popular in the short term, and that um, you know, the people that need to protect their short term gains were think in terms of those smaller increments of time

are going to you know, have have a problem. You know, I think even at the end of last year, for example, you know, our stocks weren't doing to some of the stocks have done so well this year, We're doing terribly in relation to the market in the fourth quarter, and when we didn't do as badly in the initial draw down um posts the COVID occurring, let's say in March April.

I think part of that had to do with, you know, some of the people that are short term orions that didn't own our stocks at that point because their relative momentum was pretty terrible at the end of last year. So this is not the fun part of being a long term investor, because you know, we're we're all human

and you're gonna experience these kinds of times. But how we think about the decision making, how we're you know, kind of making our choices, it's more of a three to five year thing, and it requires being being able to zoom out from time to time and recognize that the rest of the market's going to focus on short term reactions, sometimes more than you'd like. So so let's

briefly discuss that short term reaction. Back in February and March, in a very short period of time, I want to say, five or six weeks, the SMP five hundred was down thirty. You're running some pretty high, high beta names and a lot of volatility. How do you manage around a draw down like that? Is it merely you know, the cost of admission if you're going to own some of these um high flying names. That's pretty interesting, right because you as you as you use the word beta, which is

obviously the modern portfolio you know, proxy for risk. And one would have guessed that if, if, if you're you had a higher than average beta profile in your portfolio, that if the market was going to have the drawdown it did earlier in the year, that these stocks or those stocks would do worse, and it actually wanted up

being the opposite, which is pretty amazing. But I think what shows you is the limitations of quantifying risk in that way or really, you know something we love quantifying things right, but sometimes it really only tells us so much and we can kind of overly that oversimplification can lead to overconfidence. So uh, meanwhile, now you have the opposite happening, where um, you know, you have good news and these companies going going near the direction at least temporarily.

So um, you know, I guess how we think about drawhounds are? You know? They are part of investing in general. No matter what you do, you're going to have. Any successful investment over time that's publicly traded usually has some draw down period, and we've lived through so many of

them over the last few decades. I mean, I can remember vividly having a large position in Facebook after they had come public and having this dot go down at a time when I believe the market was up pretty significantly, and that was a very challenging time. And the way we think about risk generally is not really beta. It's more about company specific fundamentals and exposures, and we're trying to make sure we build a portfolio that has you know, um,

exposure to all parts of the economy. So it's not one big bet, but from time to time on a company specific basis and even sometimes on a short term correlated basis. With a group of companies, you can have these drawn outs and there, and they're painful. And I think it's why Warren Buffetto says, you know, it's not really about how smart you are investing, it's more about

your temperament. This is these are the time frames where you kind of learn a lot about a team and um, you know, whether they can handle that, and also your clients and there has to be a nice, uh you know, hopefully symbiotic relationship where your clients understand that that's a part of the equation that you're going to experience them

from time to time. So while we would love to have with them, um, at the same time, I think it is a part of any any successful investment in the public market that you're going to have these kind of really dramatic swings. And the way we think about is not really trying to figure out things like beta or whether some companies are currently correlating that because that

maybe don't have real fundamental correlation long term. We think about it more on a company specific level and making sure we believe in those companies, the people running them, the skin in the game of the people running them hopefully there's a lot often mostly in our case, a lot of equity ownership of the management teams. And then just thinking first principles are we are we betting on one big thing or not? And sometimes everyone else thinks

you're betting on one thing. But my guess is when we look back in five years, many of the companies that are being grouped and some of these artificial classifications like work from home or or you know, fang or you know the four horsemen, these types of things that you know are used from time a time to discuss markets. If you look later on, you know, five, three or five ten years later, often the outcomes are very different

on the company's specific level. And part of our job is to be able to communicate that with our clients when we live through periods like this. So last question in this area you mentioned not everything can be quantified. How much of the success of these portfolios of the past few years is driven by quantitative analytics and how much of it is more qualitative insights into the potential

of the underlying business. You know, definitely I put most of it in that second category, which is, you know, certainly, so much of our time is spent on numbers in the industry when we do our research, um. But at the end of the day, I think that this is more of an insight business and creative business and and looking at the world differently or looking at an idea differently than the rest of the world and try and understand what that is as part of the process. So

I think we're much more qualitatively driven. That doesn't mean we're anti quant you know. I think a good cult investment culture is constantly thinking about you know, um alternatives and not being closed minded, but being open. Uh. I do think generally the problem with quantitative or algorithmic or you know, kind of very specific rule fund based investing is that the markets are complex, adaptive systems that change

over time. So the idea that while it's appealing at a human and emotional level, that there might be some secret formula that always works or works for extended period of time. I I generally think that's a bad thought, given that, like the markets today are so different even than they were three to five years ago in terms of the level of passive investing or the number of hedge funds, where the types of companies in the markets that comprise the markets, you know, so it's very hard

to think in those terms. It doesn't mean quantitatives can't be a useful tool in some ways, maybe in helping us can doct our research, but generally we're set up more in the judgment business and the qualitative assessment business. And I think that that, given the nature of markets, that you have to have that as part of your DNA. So, Dennis, let's talk a little bit about being an active manager and being a manager that's running a concentrated portfolio. It's

been pretty tough for active managers the past decade. How have you been able to stand out um from from the move to towards passive. Well, I think, you know, if you think about the investment industry, it's it's it's become, over time, maybe as a mature industry, very compartmentalized, and so most people have a very specific area that they're focused on, maybe it's small cap growth or international large

cap value. So I think to some degree that's a bit of a trap, and people get Lewis perspective in being so compartmentalized in their knowledge. So I think one thing we've done, and we talked about this upfront, is as a team. We're structured in a way that the investors you know, spend their time looking for great ideas, regardless of those that at the end objective of those

kinds of compartments. And I think that that additional perspective is valuable and useful when we look at the opportunity set. It gives us a different perspectives. The fact that you know, Sam Shinani, who's a world class and internet investor, can look at small cap companies that could disrupt large cap companies, are large cap or non US companies that can hurt the small cap companies. I think it's something that not all teams share and I think is a huge competitive

advantage from a structural standpoint. I think also, you know, we look at great I think really good investing over a long period of time is opportunities set driven. And that's how we kind of define ourselves. UM. We don't think in terms of that sort of the value growth and some of the sort of the standard snowmenclature. UM because because as we said before, the markets continue to evolve.

It's a complex adaptive system, so that the behaviors and ideas you had twenty years ago might no longer be kind of leading to success today. And when I think about my own career, I went to Columbia Business School, and I was got the chance to learn a lot about things like return to invest the capital and free cash flow yield. This is back, you know, back in nineteen to late ninety nineties, and when I got into the investment industry, I was surprised how little people who

were focused on those metrics. This is probably around the time when Joel Greenblatt wrote wrote a book like things called a Little Book that Beats the Market about those kind of variables are O, I C and free cash flow. And I think for quite some time, being more focused on that than sort of say earnings and P multiples was sort of an interesting way of of looking at

the opportunities in the market differently than other people. When I then, you know, when I think about of our experience halfway through the twenty years, having some success with companies like Amazon and Facebook before they had reported earnings, um, you know, I led us to tontinue to be opening the idea that you know, investings through the income statement

can be a good idea. And more recently, I think there's a little more recognition that investing today on the corporate level is happening more from a into things like an intangil assets relative to tangible assets, and so that can lead to things like lack of earnings, but not necessarily bad decision making at the corporate level or something

bad about the business. So that openness and and and a willingness to look at the different opportunities out there also has let us more recently some of the companies that have succeeded more recently UM. So I think overall the team as an open mindset UM, but also we're constantly trying to understand where the best ideas are today in the market's given the fact we have a global mandate. And I think it's the perspective plus that openness that

hopefully leads to an environment where we can succeed. So you you're echoing some of the thoughts I've heard from people like Will dan Off at Fidelity, or Bill Miller formerly of Like Mason now with his own shop, as well as Joel Greenblatt who have said, if you're just looking at PE ratios, you're missing a lot of the pictures.

Is that something UM that has evolved over the past twenty years have there been a group of people who recognize that and basically profited from it while a lot of people were stuck in the old dynamic or or my overstating that, well, I definitely think to an extent that is true that, um, you know, if you define yourself so narrowly in any business, but in particular in this business, as you know, a low pe investor or high pe investor, or a low price and sales, or

if you if you sort of identified too much as one variable and you're not open to thinking about how the actual economic circumstances in reality might affect those variables. And and I intangible capital being more valuable and those investments than they have been historically and more important and more necessary than I think it's just important enough to anchor on. I can't you know, buy something because of one variable. I mean the reality is uh, real life

is more complex than that. And looking at a lot of different vantage points I think can help you understand the situation more fully. And in this case, um, I think what you're saying has some validity because sometimes people

just to keep k it's it's easy. We all got to get through our days, and it's a lot easier to live with rules of thumb or that either you identify with the tribe or you identify with an approach and and just stick to that, and it is to kind of I think, try to think beyond some of those things and explore the ideas that might be the

drivers behind them. So we've mostly been discussing the factors and decision making behind selecting a stock, but a number of studies have discovered that the bigger challenges identifying when to sell a stock. That seems to be where all the profits are made, and it also seems to be where all the mistakes are made. How do you determine when to sell something that's been in your portfolio either for a short time and it looks like you're wrong, or for a longer time and it's gone as far

as you might think it might go. Well, yeah, there's several reasons will sell. I mean the first that comes to mind is diversification. Sometimes part of the portfolio just gets too big, and that we need to think about that to some degree on an now I'm talking primarily on an individual company specific name basis that we don't want to have too much exposure to one idea at

some point, no matter how strong it's been. UM. That then we also might sell because we think the risk reward is no longer as compelling as other ideas that we're looking at. So that would be under the evaluation UM bucket of selling. UM. There, I think it's important to an important distinction. Like you you mentioned earlier around

you know, ease and such. You know what we're really looking at when I say evaluation is what's the market cap today and based on our analysis over the next five and ten years, where can the market cap be? Not necessarily un multiple UM, because I think people sort of conflate that day. When you hear the word valuation, it usually means what someone really means is a short term multiple. And again that's a simplification. It's not really giving you a full picture of the potential of a company.

In my mind, UM, And finally we'll sell because the thesis changes, right so that we're we're constantly focused on competitive the competitive landscape that our companies are operating in and monitoring that you know, every second of the day, and from time to time, you know, threats will emerge for our companies that are competitive and it might be from a company that's disruptive and young, and then most people aren't following it, or it could be from an

existing company trying to follow some sort of bumbling type of approach. UM, but we will closely watch how that's changing. And that might be a variable that hasn't shown up at in the company's u results, but that we're starting to anticipate that the uniqueness of the company and their competitive bantages. And what we thought was let's talk a little bit about how you construct portfolios and what they look like. And and one of the first questions I

have to ask is you have fairly concentrated portfolios. How do you know what's too concentrated? How do you figure out how to size various positions? Sure, well, look, I think there are only so many great ideas globally, right, and so I think UM and as I've mentioned, you know, we're opportunities at driven. So you're right, today we're fairly concentrated in relation to what you might expect generally within

the mutual fund industry. UM. But right now, or at least in the last few years, we thought there were just a unique group of companies that warranted taking a larger position and maybe slightly more concentration given our conviction in their competitive advantage and the opportunity that they have in front of them. UM. I also think though, that it's it's bad to be dogmatic, and you can have another environment or an opportunity set where you want to

own some more names. The word more names make the cut, and that might affect the waitings that you are gonna allocate to all the names that you currently already own or want to continue to own. So we generally, though, are going to be more active and different than the market by our DNA. And I think a big part

of our culture is a willingness to be different. It's, you know, you don't want to just be a contrarian in life, As I think Jeff Bezos has said, it's you know, being a contrarian is usually wrong, but when you know, but but the big ideas and the big kind of gains in life occur when you are willing to be a little bit outside or away from the crowd or against the crowd, and you have to have

that in your DNA. But in terms of our general thought around sizing, generally, when we have a core position that we think really fits all of our criteria, Uh, you know, it's usually going to be a tune a half or three and a half percent of the portfolio type of allocation of costs initially. Um occasionally we'll have ideas that are a little more speculative but have maybe

some binary components done. Things like biotech might fit there, or there's some limitation, but the upsides significant enough for

us to want it to make a small allocation. In that case, we'll own things that even in the in the small small as like a fifty basis point increment, because you know, what I would call that is, you know, betting small to win big, where you're you're not risking much, but it is still it's kind of worth it in the context of the overall portfolio because the upside is so great and you know, I think more broadly away from even the funds we managed, like you know, somebody

might put bitcoin into that category. You know, as a personal investment, you know amount that you're willing to sort of take a risk that this is going to zero, but you're opening up your overall portfoiliy of some big upside potential and maybe even potential that can help you know, at a time of crisis. You know, it's something that's anti fragile or that can benefit from disorder while the rest of your portfolio is going down is always appealing. So the bottom line is, you know, we have our

core position size. As I mentioned, we think a little bit about speculative value and speculation um and binary outcomes and manage that risk by with sizing the port of those ideas properly. I think there really aren't any bad ideas in life. I mean, obviously you could probably you could probably come up with a really bad idea, but just it's really about sizing. You know, if you bet, you bet one penny out of a dollar, you know you really can only lose. You really haven't lost much

if you lose. So it's really about sizing, not you know, And sizing is a function of our conviction and the quality idea, right And and obviously anytime you have an opportunity for really asymmetrical risk reward bed you can do that with one yes, And it really depends on you and personality. Right. Some people might think once a sense too much or not enough. And for us, at least for our farms, that's that's usually more of a fifty

cents out of a dollar fifty basis points. Gotcha. So, so you mentioned Jeff Bezos and Amazon dot Com, But I'm curious about your process. How what brings you to names like Amazon and Shopify and Slack and Zoom and moderner. Not specifically the work from home theme, but what was the pre approach that led you to these companies? Is it growth? Is it is a growth at a reasonable price? Is it um the unique winner? Take all companies with a moat around their business? What what's the thinking that

leads you here? I mean, those are some actually good, good, good stabs at it. I think our ideas tend to emerge from all the all the activities of the people on the team. We've been lucky to have people on the team for you know, I think I think we've had very little turnover over the last sixteen years. So

we're proud of that. And part of the benefit of them being in one place for a long period of time as they get developed really stable and contact networks with an industry, companies, corporate world, the investment world, etcetera. So we always have ideas. They tend to emerge from our research and our daily activities. But You're right where there are certain things we're looking for. It's not from screening for high growth rates or something of that nature.

It's more certain characteristics jump out at us, like inside ownership. Like a lot of these cases that you just mentioned, or at least many of them, you have. You know, the founder or the person in charge has a large equity stake, a lot of skin in the game. So that's always really interesting to us when you have somebody who's not just you know, um in the CEO and and managing a business, but really someone who acts like an owner. Similarly, for us, you know, our team has

a lot of ownership of our products. I mentioned you know, we have a large, large number of products across the platform. I have to personally have money and every one of them. I don't think you should start a product unless you think it can succeed in or you're willing to put direct investment in. In addition, I think what's great is Morgan Stanley, through it's deferred compensation program, UH forces you, whether you like it or not, or to put at

least you're deferred pay into the products you manage. Our team tends to put over so for me, you know, we're putting our skin in the game every day in the products we're managing for our clients at Counterpoint Global, and we're looking for companies that do the same thing that our owner operators, not just people that are caretakers of something that's already been built, and not not to disparage some of those situations, but I think the more

interesting component is trying to find that identify cultures that act like owners like we do. And I think that that's really appealing. And when you can combine that with high growth potential and big you know, addressable market's, obviously that's even more appealing. So much of your process sounds very much bottoms up stock picking, fundamental analysis of different companies, businesses. How much do you pay attention to what's going on

in the world top down? I don't get the sense that you're hanging on every FED release or every uh, you know, macro economic release like I s M or um international deficit or do you guys factor top down into your process very much? So? UM, Yeah, we're mostly focused at what people would call bottom ups and making company specific investments. UM. Because few things that come to mind when you ask that question. I mean one is I think I'd be remiss and anybody would be interested

for all asset classes in general. But the fact that we've had a tail in behind the you know, a lot of pretty much every asset class over the last thirty years with interest rates kind of going from where they hadn't been to they are today. And that's partly something that sort of lifts all acts classes to some

degree and probably does help companies on the margin. More intellectually, you can understand that if you did that have high growth in the future and where the values on the come as opposed to something that's like right today current currently, there is some something that might be more of a hard asset. So I think interest rates obviously matter. The problem is we don't know what they're gonna do, you know, and so um, you know, are they going to go up?

Are they going to go down? And if they do, you know why. We don't know what circumstances might lead to that those things happening, or why the stas might do what it does. So I think given that we know our mindset is that's some of that's so unknowable, that's better to focus on specifics that you can control. UM and in the process. When we look at our companies and play around with the sensitivities of what they could be worth, we obviously need to cost the capital.

We need an alternative to look at, and that includes other companies and asset classes, including the rest free rate um. We've try it over time to not give a whole lot of benefit to the fact that interest rates are as low as they are today, and generally we don't. But you know, when I play around the sensitivity is of values the companies, it is a consideration because it's also possible to stay where they are. So it's a probably a long winded way of saying, you know, we're

not that focused on the macro. It does matter in the sense that things like interest rates represent fundamental alternatives and cost of capital, and they the consideration and how you think about company valuation, whether you like it or not, having a strong view about what's going to happen in

those uh to those variables. Though I think it's some people might do that, well, it's not a part of our DNA, and I think that the only problem with that thought process is that you know, if if you think interest rates are going up and you're gonna build a portfolio around that thought. If you're wrong, you've got to change your whole portfolio. And what we try to do is collect unique companies that have exposure to many

different end markets. Ultimately that can be hopefully a lot bigger, and the market caps are today in excess of hopefully the alternatives and let some of the rest of that all play outs. And really, you know, it's control what you can control. And it just fits the way we think about the world, which is more individual judgments as opposed to kind of larger It takes on asset classes and things of that nature, which I think aren't that

use to us or not that useful. If you tell me the markets over valued and aggregate, it doesn't help me make a decision about the one company I'm looking at. It might be really undervalued, right It actually might hurt you to think the markets over value ten years ago. And so you know, I think the markets over value right now. So I'm not going to buy Amazon, even

though I'm interested. So if anything, sometimes I think the discourse and the industry around these aggregate notions of you know, high cost mutual funds are bad, or you know, the markets over valued, or like in hindsight, those things are always obvious, but it almost hurts your ability to make individual decisions. So again, we're really focused on the individual

company decisions. Quite quite interesting. So as long as we're discussing decision making and the thought process behind the selection, let's talk about someone you brought in recently to be the head of concilient Research at Counterpoint Global, Michael Mobison. How significant is that role and how closely do you work with him? Look, we've known Michael for a long time.

He's in fact, when I was at business school, I was exposed to some of his great content and great you know thinking um uh at Columbia, and uh, you know, we've always respected a lot of what he has to offer. And uh, you know, in fact, when he was on the South Side, he would he would kind of guest star in our in our team meetings at least a few times a year because he wanted to know what

was kind of going on in his mind. And and and I think reading Michael's research and being a part of it now it's kind of like eating your Reati's it really how you know, you prepare for making good decisions, you know, and and thinking and thinking about thinking and and I think that that there's a lot of utility there.

Um when I think back over time. For as an example, actually, you know, I think when Michael was at like Mason with Bill Miller, they had Bill had particularly was had a pieces about Amazon which wound up being you know, one of the only things that matters over the last twenty years and equity markets, and they had this whole concept around how Amazon was being looked at as or kind of misclassified. People were looking as a retailer and

it was really a logistics company. And Michael, I think you should talk about that is you know, um, you know, misclassification or looking at um, you know, circumstances versus attributes. You know, there's sort of the mistakes we make as as decision makers. We got to put something into a bucket in order to compare it to things. But sometimes that initial decisions wrong and when it is, that can lead to this a pretty big misperception. So this is

the kind of stuff that you know, Michael's about. It really fits the intellectual curiosity, which is a big part of that. You know, the team and a lot of people talk about intellectual curiosity and talent development. I think bringing Michael in just is a real natural thing for us to do given what we're about. And already you know, it's you know, a year into it, we're seeing great benefits.

You know, Mike's Michael is also a great coach for people or earlier in their careers um to to just become not just good analysts, but good thinkers and decision makers. And he's rebooted our our book club. We've had some great authors in so it's knowing the team DNA and what Michael does. It's a very it was a very natural thing. We were happy to have the opportunity to

do it. And concerning research is basically the idea that you know, exploring ideas not just in the day to day financial world, but in other domains can lead you to you know, maybe coming up with good decision models or rules of some or help you think differently about some of the things that are occurring in the financial world. And you know, Michael had a long history doing that. First first Boston and so and he called his piece Concilient,

the Concilian Observer. So we just said, well, why don't we just reboot that because it was so great, and so we hope to continue to benefit from his insights and share them with people in the community as well. Yeah, that that was definitely a good hire and I see him as a very good fit into what you guys do. You you mentioned Bill Miller. Bill Miller has brought up what he sees as a problem in part of the active world of investing, and it's what he describes as

closet index ers and low active share. I think his active share is pretty much in the nineties. I'm gonna guess your active share across the big funds are gonna be pretty close, right. You don't really seem to look very much like any of the indexes out there. Yeah, we have a wide range of products, but you're we're in the eighties and some of the nineties, So it just depends on each one. And then part of that really is about the ben smarks. Some of them are

super concentrated, so that can affect those metrics. But yeah, we're we're we're at the extreme similarly to what you just characterized. Yeah, and we really haven't spent much time delving into valuations, and I want to ask you a very big picture question. We've seen valuations creep up not just over the past thirty years of falling interest rate, but over the past go back to World War Two.

Valuations have continued to rise since then. How much of this has been a significant undervaluation of the economies of scale of technology and how digital can grow with far less needed capital and labor. Yeah, I think it's a

good point. You know, we talked earlier about how markets can change over time, and that's why rules of some are you know, sometimes useful for a periods of time, but how they know often and can become actually, they can become a problem, right, they can becomes just like expertise, it's useful and when the world is not changing too quickly, but if there is a change over time, expertise can

become a real problem. You know, you suddenly a you know, I have to jettis in your way of thinking and learn new things, and most people are often hesitant to do that. I think the constituencies in the market today and you know, meaning the earnings or the cash flow that sort of backs up ultimately the valuation of what's

called the market. Even though I don't love talking in aggregate frankly, but there's no question that it's driven more from a more of a capital light UM vantage point than maybe when you look back over time and the history of markets and there are times when railroads and you know, so certainly today's market is very different and the earnings of it, maybe the quality of those earnings

might be different, and they're puts in takes. To be fair, I don't want it could be a very long discussion, but I think that, you know, I think that is a very I think this full concept that of tangible versus intangible UM and Michael has actually written about that a bit and was fairly focused on as we speak, Michael Mogson is something that um, most people haven't appreciated enough probably um uh that you know, earnings UM and in the way companies make investments have had changed and

that has that definitely affects some of these rules of thumb that maybe people have thought about for many years. So, you know, again, the last thing I'll stay here though, I'm reacting to the question which is really kind of about the market, and I think you always have to be a little careful about market aggregate discussion because again, our DNA and what we're focused on is company investing

and finding those unique situations. And if you get too if you spend too much of your time on on the aggregation of trends, where the aggregate trends and predicting them and discussing them, I think it's a little bit gets you off track, at least from what it does for us, from what our what our core mission is quite quite interesting. So you mentioned the aggregate. Let's let's get a little more granular and drilled down into at

least those five funds. I love the names of these Advantage, Growth, Insight, discovering, and inception. I mean kudos to whoever was putting putting those titles together. Um, they ranged. The smallest one is about half a billion, the biggest one is almost fifteen billion, and they've all done super well this year. Advantage up more than fifty percent, growth up over eight Inside is almost eighty eight percent, Discovery is Inception is what are

the differences of these five UM funds? Is that US versus overseas? Is its small versus large? Or are those buckets just not relevant? Oh no, so you know, um, ultimately, so it's a great question because I talked about how the team, you know, I think a differentiated for us is that we're investors first, and this sort of category

stuff happens at the end of the process. And I think most of the industry is start off with a product or a category and build a team around it, and obviously their strength and a week could be strength and weaknesses to both those strategies. I think in a world where most people are compartmentalized, it's better to have some perspective because you're you're kind of going against the grain and maybe picking up things that that they that

they can't um. In terms of these individual products, inception is our small cap product. And so ultimately, when we find companies that have market caps in the range of the general of the Russell one thousand growth small cap arena, that's the home for which we can take with which we can take advantage of. Hopefully those those insights are ideas discoveries really more of a mid cap growth strategy UM in the sense of the market cap range. And by the way, both are us and the ones we're

discussing here all us as well et centric. And then where large cap is where growth sorry excuse me, growth is a large cap growth strategy by market cap, and and so is advantage. But the only difference there is

that we do too we have two different constraints. Growth can own whatever it wants in terms of opportunities set whereas advantage from a competitive advantage standpoint, when we look at why a company is unique, like is it network effect or scale or switching costs or brand or you know these the designations we look at there we stay away from intellectual property driven UM, technology driven competitive advantages in advantage and we we tend to own companies a

little bit later in their life, not in the early part of their life cycle. So it's a different variation for that product of of our large cap growth thinking UM. But at the end of the day, and as you say with the names, I mean the names were really what we want to do is not be the large cap growth fund or small cap growth fund. I think

great investing is. You know, you have to define yourself to a degree, but if you limit yourself through these designations, you're doing a disservice the people that have allocaded your money. Because you know, if I take a real big step back and about the industry, you know, the real goal is to beat the an alternative, and the alternative is really probably the SMP five hundred. And you know, if you're really good at doing is part of that world

that still doesn't beat the SMP five hundred. And you haven't given yourself enough flexibility to do that, then at some point your asset class is not that useful or might be considered you know, uh, null and void or not not worth pursuing. So what we try to do is name the funds um in ways that are indicative of the team culture but also aren't in the half tendencies.

Like I said, these buckets at the end of the process, the conventional consultant thinking, but where there's still more flexibility in running inception than there is if I call this we called small cap grows because there are more constraints with that naming from a forty Act legal standpoint. And so leave yourself flexible, be who you I didn't know who you are in this business, but you've got to leave enough flexibility to evolve. And I think that's hopefully

something culture we've been able to achieve. But part of that is even what you know the name of your funds or even the name of your team. So counterpoint global the idea behind counterpoints simply there's two actually two meanings.

One is counterpoint is often used thought of as the other side of the argument, you know, and so it connotes that willingness to be different, not always contrarian, because that I think that you're very wrong, but you have to be willing to stick your neck out in order to succeed. That's from time to time. So that's that's the symbols in there. But the other meaning in music

is counterpoint. Well, counterpoint in music is when you take unique melodies or voices and when you get that are sound great on their own, but when you layer them together, you get, you know, a situation where the the outcome, the output of better than the some of the parts.

So like in a musical, and usually each character has its own theme, and at some point at the end of the first act or or the final act, those themes kind of intermit mingle musically at some point and you're kind of like wow, the audience feel like wow, that's amazing um or like you know, she's leaving home by the Beatles, or I've got a feeling by the Beatles.

These are cases where they're multiple melodies happening that stand alone, but so hopefully from a team standpoint that whether it's our ideas that we can put into different products where they fit, or whether it's the people or the way we can combine our products, hopefully there's a benefit of counterpoint, which is creating something that exceeds to some of the parts. Huh,

quite quite fascinating. I know I only have you for a certain limited amount of time, so I want to jump to my favorite questions that I asked all of our guests and see what see what's going on in your life these days. Let's start out with streaming. Tell us what you're watching either on Netflix or Amazon or anything you happen to be listening to on podcast. What's keeping you entertained during this period of work from home? Um, the series I just finished and I blew right through it.

I thought it was not super well known, I think,

but might have flown under the radars. It's called Halt and Catch Fire and it's available on Netflix, and it's kind of like a Madman version of the gaming world, the video gaming world in the eighties, and how that that environment went from the eighties and what was happening with you know, the ataris of the world and and and all the early Pecs and uh and then and then the evolution of that up until sort of the the advent of the Internet, and you follow these characters

um through that journey. So it's really interesting to watch the progression, you know. It's I think it's really well done from an entertainment standpoint, but it also happens to fit, you know, things were interested in in terms of how technologies evolved over time. My wife and I are also enjoying Ted Lasso on Apple Plus so good. I just I just read it was renewed for a second season, which I'm thrilled to be good. It's awesome. It's funny

you mentioned mad Men. I missed that when the first time it went around, and my wife and I had just started streaming it a few weeks ago, and I had to find someone who lived through that year to say, hey, how hyperbolic and exaggerated is this? And the consensus seems to be, no, that's pretty much how it was like, which is kind of shocking. It's literally a different universe, you know, than than where we are today. But now we enjoyed mad Men too. It's it's a there's some

really great stuff in there. Tell us about some of your early mentors who helped to shape your career, well, you know, I was, I mean very lucky. Um. You know, my dad has always been a great influence. Um, he was an investor as well. He has had his own firm for many years. But just and what we do is very different than what he did back then, and

partly that his opportunities that driven. But really my dad was has always been a really great role model in terms of how he handled himself and how he you know, it's very thoughtful and he finds you know, he's really able to find the positives and other people, which has really been valuable for me. Um, you know in my life in terms of specifically in investing as well. Certainly

helped me there as well. But that when I think more specifically to my career, Um, you know, I took a class at Columbia Business School with a guy named John Griffin who used to be the president Tiger the hedge fund and had his own head fund, Blue Ridge Capital, for a long time. And you know, if you take and happened to me in his first class, which is

very lucky that he taught. First class he taught and he you know, if you leave his class, and you haven't gotten passionate about investing afterward, then you probably shouldn't be in the field. So John has just had a great way of communicating passion and and and sort of establishing what it takes to to to make it in the business. I think. So that was a really he's been a real valuable person for me. Um. And then you know, there are a lot of people in the

industry I admire. We talked about Bill melt Miller and his willingness to be different, um and uh, you talked about well dan Off and who I'm friendly with, and I really you know, I think he's been been unbelievable over the course of his career. It's on the to touch base with him on things. Other people like Ron Baron I admire mostly from far. I think he's been really good at what he does. And Um, Henry ellen Bogg used to be a tro now he runs Durable

is another person. Bailey Gifford as a organization. James Anderson has also been great. So sometimes the mentorship happened just by you know, sometimes being friendly with but also in addition just you know, kind of learn think from people from far and some of those people have been influential for me. Quite interesting. Tell us what you're reading, What are some of your all time favorite books, and what

are you reading currently? Sure, so my favorite all time book probably might be It's probably The Art of Learning, which is by a guy named Josh Waitskin, who um was, uh, you know, the subject of the movie Searching for Bobby Fisher, which is about the young chess prodigy who might be the next great chess player from the United States, and the books about what it was like to be him during that time frame and his journey as a chess player and eventually went on to be I think the

tai Chi push has Champion of the World, which was a whole different domain where he excelled in addition to chess, and um, yeah, but really, I'd say the heart of the book is about this idea of having a growth mindset versus a fixed mindset, the idea that you be willing to fail and try new things and learn from it as opposed to getting to arapped up in your current identity and having that limit your ability to learn as a person. Um. And you know, I certainly know

what that's like. I think probably most people if they think about themselves will can find themselves doing a lot of fixed mindset things. So just the concept of trying to trying to be somewhere open to new things and and aerate and at the learning stoff I was really for me. It was actually a really big help to me in my life. And I probably read that about fifteen years back, but I highly recommended UM. We we're

currently reading. Frankly, I don't read a lot of books as much as I used to do because there's so much material investment related that I like to read. But you know, we do have a put the book club that Michael rebooted at for our team, Michael Mosison. Uh. This year we just had two people and the first one was guy named Michael Kern's who is the um uh you know, actually is a consultant or sorry adviser

for Morgan Stanley. But he wrote a book called The Ethical Algorithm, and it's it's really about the pluses and minuses of algorithm and you know where they can be strong and benefit us, you know, uh in society, and how they can be harmful. And I thought that that's a really that was great framing and good good uh,

A good topic for the team. But then you know, we also had David Epstein come in and wrote Range and Range is kind of the other side of the Malcolm Gladwell argument about ten thousand hours equals expertise or mastery.

It's more about cases where people don't declare what they're going to do till a little bit later in life, like Roger Federer and tennis as an example, and instead of like the Tiger Woods models, you know, and playing literally playing golf right right out of the crib and really interesting thinking they're around, um, you know the benefits of you know, having broader perspective before you get too narrow, and that resonates us with our team to based on

some of the things we've talked about today, just having that being able to cultivate perspective in a world where there's a lot of expertise. Our whole industry is based around that for teeth, so I think often what's missing is you know, being able to connect things between areas of expertise, and hopefully that's one place where set up to do that as a team. Really interesting. What sort of advice would you give to a recent college grad

who was interested in a career in asset management. UM. Most actually very similar to what we just talked about previous and the previous question. But you know, most jobs start off, you know, in that sort of expert you know, you're given a very specific task and I think that, um, you know, that's just the nature of how the system is set up. And you follow a sector or an industry.

I mean when I was at JP Morgan on the South Side, just got to follow e MP companies, companies that explore produced for energy, energy and oil and gas excuse me. And so you know, it's great to dive in and become an expert, and there's a lot of values like in that learning process. But to degree you can compliment that with broadening your your learning and not just be so narrow when I think there can be benefits to kind of pursuing that. And today in today's world,

there's so many sources for for doing that. You know, you can use stuff like Twitter to your advantage, or there's these ways if you want to be a learning machine, you can you can find internet resources that will really throw a lot of interesting stuff at you and hopefully round out your perspective. If you've really been put into a narrow position, So that would be my first instinct. Huh.

Quite quite interesting. And our final question, what do you know about the world of investing today that you wish you knew thirty years ago when you were first starting out? Probably every everybody learns in math class or at some point in their life, you know, compound annual growth, you know, and you can see when you're doing it that it's a powerful thing. But I think, you know, as I've got,

you know, further on in my life. Uh, you know, and I think we tried to it's certainly professionally, but in many ways in my life try you try to take advantage of those, you know, the developing habits that will lead to good things down the road, and making investments today it I'll benefit you later, like But I would say I wish I had had an even greater

appreciation of that earlier in my life. I mean, somebody like Warren Buffetted, the real great investors, I would say, you know, probably really get that very early in life. And he's somebody who's just started young, and that time

is such an advantage. So just that just a really great, you know, even better awareness of those that concept in hindsight, Uh, is something that I always try to highlight the younger people because while I knew that a little bit mathematically, I probably didn't didn't focus on how that can really benefit you, whether it's financially or whether it's even habit formation and what it leads to down the road. It might be your health or some skill you want to develop.

So so i'd say companding your growth and really taking that to heart and making it part of your your DNA. Thank you, Dennis for being so generous with your time. We have been speaking with Dennis Lynch, head of Morgan Stanley's Counterpoint Global. If you enjoy this conversation, be sure and check out all of our previous such discussions. We have almost four hundred. You can find those at Apple iTunes, Spotify, Stitcher,

wherever you feed your podcast fix. We love your comments, feedback in suggestions right to us at m IB podcast at Bloomberg dot net. Give us a review at Apple iTunes. You can sign up for our free daily reads that's at Rid Halts dot com. Check out my weekly column at Bloomberg dot com slash Opinion. Follow me on Twitter at Rit Halts. I would be remiss if I did not thank the team who helps put these conversations together each week. Michael Boyle is my producer slash booker. Maroufle

is my audio engineer. Atica Albron is our project manager. Michael Batnick is my head of research. I'm Barry Results. You've been listening to Masters in Business on Bloomberg Radio