Steven Romick on Portfolio Investments (Podcast)

asset managers was because of people like Steve Romick. You know, he's not on the cover of magazines, you don't see him on television all the time. But here's a guy running real money, a substantial amount of assets, with a fantastic long term track record, and he is not a household name. I think the average forget the average investor, the average professional probably doesn't know who Steve Romick is.

And that's too bad because folks like this really allow you to learn an important lesson about how to manage risk, how to take advantage of opportunities, what you should be thinking about as a portfolio manager, as an investor. Really just a fascinating guy with a really interesting history. I found our conversation to be really intriguing, and I think you will also so. With no further ado, First Specific Advisors Steve Romick. This is mesters in business with very

results on Bloomberg Radio. My special guest this week is Steve Romick. He is the managing partner of First Specific Advisors, a shot that runs over twenty six billion dollars in equity, fixed income, and alternative strategies. He was the Morning Star US Allocation Fund Manager of the Year. He also manages the eleven billion dollar f p A Crescent Fund, which he has been running sinceince inception in Steve Romick, Welcome to Bloomberg. Thank you, Barry. So let's go back to

the early days of your career. You began as an analyst in tell us what industry you were covering. I I started out as a generalist. I I actually started as a generalist to who knew nothing about everything. I was on my way to law school and I met a gentleman through my father, who decided that he wanted to bring somebody into his shop who didn't know anything

because he's he quoted it at the time. He was tired of unlearning NBAS and he put me up in his office, pushed a desk right up next to his and said, you're going to see what we know, how this works, and what we do. And he did every time we called a company. He had the Manethond with him,

and I learned, you know, early on. But the industry that I focused on to the greatest degree in the in my earliest years in the mid eighties, you know, where it was the bank and thrift industry, when there were you know, almost tripled the number of banks and thrifts the United States, and there was a massive assolidation trend that that he identified that was likely to occur,

which of course did occur. And he had me spending a lot of time, you know, analyzing these companies and inputting you know, hundreds of banks and thrifts into d base, something we don't really use today anymore. And spent a lot of time analyzing this businesses. And then I just took it from there and and continued you need that breath, and spent a lot of time looking, you know, at different parts of the capital structure as well to stressed

that and stressed that. In addition, so you mentioned d base, how different were the tools that you used in the nineteen eighties and the techniques that were mainstays in financial analysis then versus today. How radically has the world of analytical research changed? Well, I think that the the I don't know that the process is any different, but the tools that you can use to to get the information that one needs to make a robust decision, you know,

are are better. I mean, it's just it's just easier, you know, to get that information, which makes the world, you know, candidly more competitive today than it was was back then. Not only is there more money slashing around the system system, not only are there more people doing it, you know, but they can get that information a lot

more easily. I mean, back then I had to get on the phone and call a company and call them for local information, to get the the the phone number of the headquarters or whatever company's headquarters it was, and try and get in contact with investor relations, if there

even was an invest in relations department. More often than not, I was just trying to get in a hold of the somebody in the finance department to get them to send me an andy report and to to seek information on the competition, to seek information as relates to industry data. You know, it was just all much much harder to come by it. It required a lot more grount work just to get information. Now that information is available your

fingertip fingertips, you know, on the web. And in addition, you you have so many great resources that exist today for people looking at businesses. The world's become much smaller. You have podcasts like this, You've got Value Investors Club, vic et cetera. Interesting, So you're working as an analyst covering everything generally. How did you decide to become a

portfolio manager? And what was that transition? Like? I think that that's a great question because I think that everybody who is reasonably good at this and is confident in their capabilities it, at some point they want to to reach out and and touch the money themselves. List that,

I mean, somebody else make that an investment decision. So it started out with my my personal account inside of the firm and investing that and you know, finding some you know failure early to realize you know, my miss you know, what not to do. And then as I got better over time, I thought that that it was might be something that I want to do in terms

of manage and entire portfolio. As it began to really develop a philosophy as to how I'd like to to manage money, and I was very fortunate to have a mentor who helped pushed me in that direction and became one of my my early investors. Really intriguing. So you founded Crescent Management. How did you launch this business? How did you get it off the ground, Where did you

find clients? And what did the business look like in those early years when we started this, it was I had a partner at the time who both of us had worked for. Our mentor's name was James Nathan was by Jeff Nathan, and he he you know, basically arranged marriage where he decided that we'd be better off building our own business, and it was an opportunity for us. He allowed us to do that while we remained, as you know, consultative analysts for once of a better description

with his firm. So he could you know, have his cake and need it too, if you will. So it was it was mutually beneficial and early clients really came from his relationships. He could put us in business and I owed that, you know, all to him. We we didn't really have. We didn't have I mean, at that point in time, we you know, we launched with maybe it was I have to go back and think about many millions it was, but maybe it was ten million dollars in total between the separate accounts and and and

the mutual fund. And it gradually grew from there. When you launched, was it all equity, was it equity fist income or was it unconstrained and you know, including alternatives and non publicly traded options, it was it was unconstrained within the public security markets. So they did not include anything that was in the private sector, whether it be private credit or the odd private equity investment that we might make today. Uh, and today we would continue to

be largely public security investors. But philosophically, at that point in time, I liked the idea that I was able to invest money in a way that could deliver high risk ADJI becturies. I believe they could deliver high risk just it returns to my client based by investing across

the capital structure. We had come out of the you know, the was coming out of the recession at that point, in time and the Drexel Burnham blow up, and there was lots of opportunity in junk bond land, and I learned that I could get a way to return in the debt markets that was as good as the equity markets with with with more downside protection, and I could

use that as a tool in my portfolio. And if I could do that, I felt that are my clients would would benefit because the portfolio could deliver higher risk just to returns. And volatility is a is a measure of risk is I think a bit silly, and because it's just things can move around a lot, and the temperature outside today in Los Angeles does nothing, doesn't reflect what the temperature might be tomorrow. It's just gonna it's

gonna move around. So when it comes to investing, though, in the average person, this goes for many professional investors, I think of volatility does weigh on on them, and it does precipitate action. Stocks to go up a lot, they need to get in. They stocks to go down a lot, people will panic out. And this is I'm not making a universal statement, but it's it's all too often true. And I found in dealing with individual clients

a very It was very much true. And I felt that managing a product that could mute that which which was not the goal, It was just the byproduct of my of my process was was something that that could be a reasonable business. And clearly it became a reasonable business. When did Crescent become part of f p A and what was that transition? Like that was in and the transition was was actually a very difficult transition for for tragic reasons. I um my partner and I split up.

He took separate accounts and I took the mut of fun and we brought the assets over two for Specific Advisors. I realized that I didn't want to deal with the back office. I didn't wanted to deal with the marketing. I just wanted to focus on investing and all the nuts and bolts of the business side of things. I wanted to leave to and organization that could have my back if you will, and and and provide that peace

of mind that I can just focus. And so I joined for Specific Advisors and I was friends with I had there were these this investment group that I was part of at the time through my again my mentor that were guys who were older guys I mean younger than I am now, who would sit down and and talk about businesses, investments every every couple of months, and they get together for a dinner and you have to bring your best idea and you chat about it, and they let me come and be a fly on the

wall because I clearly had nothing to add at that

one in time. And one of those gentlemen was Bob Rodriguez, who was portfolio manager at First Specific Advisors at the time, and we became friendly and I sought out, sought him out and others regularly to to bounce ideas off of and compare notes and different businesses, and and Bob knew I was looking to find a home and he was kind enough to to allow me in her discussions the First Specific Advisors, which was run by George Michlus at the time, who was a well known investor and featured

in John Train's book The Money Masters that volume one. And I spent a lot of time with George, who I knew perfectly through mutual friends, and it just seemed like a very very good fit. And I came into ft A and ninety six midn and and the early ninety six and ten days after I joined George Michlus was scheduled at dinner at my home that night and went cycling first and and uh had a bike accident and died. That is tragic and really just robbed you of the ability to work with him for all those

future years. So so it really kind of shows you just how random life can be. And and it ties into the question I was about to ask you, which is you've had one of the longest tenures in the mutual fund business. You've been running the FPA Cresting Funds since its inception. What is the secret to this longevity? Oh, I thank you. You have to enjoy what you do first and foremost, and and I do. I mean if I people ask me when I'm going to retire, and I have no plans to do that because I enjoy

coming to the office every day. I enjoy reading about businesses. I enjoy learning. I mean, this is a You're in a constant state of learning. The world is so different today than it was in the company and industries you know have have have evolved, and it forces you to to continue to to study and you you never perfect this. It's it's a it's a constant process of self improvement. And I've as I look around me, and I think that's what keeps me young. And so I've really have

no intention of stopping this in anytime since. So that's I think the first, you know, key to that longevity. And I think second is just that we happen to create a product that that, for better or worse, is different than the typical product. I mean, sometimes we will

look like the typical mutual fund. We will we will look very ordinary, you know, for sometimes longer periods of time, because there isn't a lot of opportunity and and say that in the debt market says there hasn't been over the last number of years because we've not been interested in and buying high old bond without the without the high part of the yield, because there hasn't been much yield. So we end up with just more inequities than we

have have historically. And so but we do have that opportunity, that flexibility to to operate with great breath, whether or not we we take advantage of it at all points in time or not, it's that opportunity does exist. I think that makes us a little bit different than than

the typical one. And it doesn't make us the right investment for for everyone, but we we've kind of come in each day, myself and my my partners in the fund now because one of the things that's also allowed me this longevity is to to have terrific partners in Brian Selmo and Mark Landecker, who are wonderful partners, and wonderful analysts and wonderful portfolio managers and and thoughtful and kind people with lots of integrity who make it fun

to to come in each day. And so having that kind of support around you, along with our analyst team and support of of of the organization for specific advisors, makes it, you know, makes it makes it enjoyable. Let's talk a little bit about what it was like managing all those assets in the midst of the worst pandemic in a century. UM heading into the end of you were running more than a third cash in the funds.

What was the thinking then, Well, we've always managed a fair amount of cash in the in the in the portfolio, and that takes pretty high it is. It was certainly above average, and it wasn't that we we identified the a recession is about to come as a result of a of a pandemic in the world would would literally stop in many in many industries. But it was really more a function of you know, cash being a byproduct of our investment products process. If we find an investment

we like, we buy it. If not, cash ens up as a residual. And we were more comfortable only more cash in the past than we are today because at a point in time cash yielded five percent back into the early two thousands and mid doos, and we have more concerned today being that that inflation might be perspectively higher given the amount of depth that's pennisuing, the amount of paper money that's been printed and cast would be

worth a lot less in an inflation or environment. So when we came into this recession and in in into the pandemic in early two thousand, we had that cash game just as a by product of that, and we thought we were actually more protected with the cash we were, But the investment part of the portfolio, you know, was you know, it was kind of lye hit pretty hard by the by the pandemic, that right, yeah, the but it was it was it was some of the businesses

that we owned were people you know throughout you know,

for dead for for a period of time. We owned companies like like A I G. That started the year at around fifty and at the end of two going into twenty, it peaked mid fifties and an intra day in the in the third fourth week of March when it's twenty, it was trading down at you know, under seventeen dollars a share with book value, you know, being up, you know, closer to where the price was at the beginning of the year, So huge, huge discount, and people

believed that, you know, the the company was clearly on its way out, you know of existence, and you know, we didn't believe that, and you know, we had took the opportunity to to increase our position. But it was still I mean it admittedly discomfiting at that point in time, not only for us because who likes to see their their stocks dropped up and dropped that much, but um

it certainly for our for our investor base. But the end of the day, we we understood that that many of these business we all it was just it was just a blip. It was the price at a point in time with fear you know hitting you know, hitting the market, and it wasn't the that these businesses weren't going to do well once we got through to the other side, and business is like a I G. You know, we're going to be fine, and it's it's it's businesses

like like Mary I. Businesses truly stopped. And we were buying you know, Marriott as as the stock was coming down, and you know, you buy a stock at eighty and then it goes you know, it goes into the sixties. You know, it's not the again, the most comfortable thing

to watch happen. But we're very confident that as we got through the pandemic, people once again would would travel, they would get on airplanes, they would go to hotels and and a company like Marriott, you know that is you know, more asset light than you know, some other hotel businesses would would perform, you know, quite well. So, you know, buying something at at sixty I'm sorry, at eighty, you know, as it as it dropped down, as it dropped down, um in another from there. You know, again,

as I said, it was discomforting. But at the same time, you look where it is today, where it's a hundred and forty plus. We clearly weren't wrong, but it took a market at that point in time, as it took a lot of those businesses down down with it. So we took advantage of the opportunity it is at that point in time and increased our invested exposure by about ten percentage points and pulled down some of that cash

you were referencing. So I don't want listeners to think this is hindsight bias or you know, after the fact,

re reinventing history. March there was an article in the New York Times by Jeff Sohmer Uh and remember this is deep into the collapse, about a week before the market bottomed, and he described getting a note from you saying you had begun to start buying stocks and felt that if even if markets fell further, you were going to continue to buy because you thought things had suddenly become very attractive price wise, and that you said you

were acting rationally and not bravely. Um, and you're looking at five to seven years. Tell us a little bit about the reaction to that Times column about you buying right into the teeth of the collapse. Reaction from whom, Barry, from whoever, from investors, from you know, any I found any time I see someone go against the dominant trends stake out a contrarian point. The general pushback is ranges from this guy is an idiot to this guy's crazy. Were you getting sort of hey, what are you doing?

From clients? We got, we got the spectrum, We got both right. I mean, but you've been doing this long enough and your track record is good enough that one would hope longstanding clients would say, I don't know, but I'm going to give you the benefit of the doubt because you've been right before. What what was the what

was the pushback? Like the the pushback from some people was your your portfolio took a mark We didn't expect it to take a mark um like it has, and so we're gonna go and, uh, give our money to somebody else. That was respect from some On the other hand, we had those investors who increase their their capital commitment, you know, to us and and decided that what we were doing was the right thing because they did by into the argument you just made that, Hey, with these

guys have been doing this a long time. They've lived through various cycles. They lived through the Internet bubble, they lived through the the you know, junk bond, you know, blow ups in in in in the early two thousand's when when the world comes were there and we're able to take advantage. They lived through the Great Financial Crisis and and they these guys know what they're doing. I'd rather them do it then then you know, somebody else. And so we did have you know, fortunately those people

as well. On the other hand, there was more of the former admitted lay than a lotter. You know, people send to vote with their feet. And this goes back to that volatility argument that people get, you know, get a little panicked at these points in times, and we just tried to be thoughtful and act rationally. And the end of the day, if we do the right thing,

the business will take care of itself. Whether it will be you know, whether we're smaller or were larger, it's not going to change what we do every day when we come in here. It's not gonna do and it's

not going to change our lives. So it's very important for us to always be mindful of what the world will look like five to seven years, you know, down the road, and make sure that we we have analyzed the businesses that we own or the assets were buying the bonds that were buying you know, well, such that we have invested with some kind of margin of safety, and we've tried to anticipate you know, downside. I mean downside, not just mark to market some might occur, wage are

far less important. But but really considering what the absolute downside is, what is that you know, what could really happen that could create a permanent impairment of capital. So before we get granular and really dive into what you were buying, I want to ask you what made you realize that the sell off in was a short term sell off and not the start of a more serious, longer term bear market. Was it valuation? Was it a variety of factors? You obviously had the right answer. What

was the thinking behind it? Oh? I didn't know. I mean, I mean, you know, just full disclosure. We had no idea it's gonna be shorter long. I mean, we I came to that article you're referencing in the New York Times. Was was you know, as you stated, you know, like we're thinking about where the world's gonna be down the road five to seven years. I didn't know how long

is it was gonna last? But if I invest trying to anticipate what's going to happen in the next you know, a few months, six months, year, or whatever the case may be. It's just it's gonna take my eye arm, you know, my off the ball, our team's eye off the ball, and not allow us to to to buy things that otherwise might buy we'd always find some reason

that that it might be a little bit cheaper. So so let me get specific, then, Um, since you were thinking five to seven years, what did you accumulate at the end of that first quarter in the beginning of the second quarter, what what specific sectors or stops. You know, we bought a number of businesses in the in the travel industry and including you know, Bookings, dot Com and Marriott. We bought businesses that were impacted you know by you know,

you know directly, you know, by COVID. We added to some of our financial services businesses you know, you know, a I G give us an example that we felt that would certainly get through you to the other side. And we added you know, businesses that that uh, you know last year that where where people were capitulating because the consumer is gonna be weak. Businesses like like richemonts

Um you know, for example. And then we we also took advantage of other businesses that were less cyclical, uh, that that had the the opportunity to to perform well regardless of what, you know, what the economy you know, was doing. But but we're just we're being negatively impacted, you know, by the market when they were throwing the baby out with the bathwater as well. So we own in the portfolio and their positions is that that you know, grew within the portfolio while we were when the market

was going down, companies like Facebook and Alphabet etcetera. And I know you like to run with a little bit of cash in the portfolio. Did you ever fully deploy that capital? Did you become fully invested? No? We we we didn't. We put the cap We we took ten points that you know, the capitol and put that to work and and the market rallied you know from there, and uh, we didn't you know, put it all to work.

You know, in hindsight, obviously you know you were one wishes they had, but you know, we didn't know how long that opportunities and exists. We wanted to make sure we continue the ability to buy down, no doubt about it. What else were you doing to manage the portfolio through the course of the pandemic, meaning how are you approaching dealing with clients, dealing with buying opportunities, considering risk? How did the pandemic affect the way you thought about running

the funds. We had lots of conversations, you know about this and and internally amongst my partners and probably the

most grounded of the three of us. I would give a hat tip to my partner Mark Landecker, who really was the most centered of us, because I'm not gonna tell you that it wasn't disconcerting watching you know, these the stock prices dropped, you know, as I did, even after having lived through you know, multiple multiple downturns, and we they left, you know, more of the speaking of clients to me, which you know I had the history with them and allowed them to to do a greater

degree focus more on on on the portfolio and not have the static from from having clients whisper in your ear. You know, you're the portfolio is going down. I'm scared. You know, what are we going to do? What are you going to do? What am I going to do? It it insulates them from hearing the this reactions of the investors, and so I took more of that on on the front line. And because you have to to be a good investor, you really do have to have, as we discussed, that longer term focus and and find

ways to to minimize the static in your life. And so that's that's how we operated together. You know, the three of us really intriguing. So given the big run up from from before the drop from February, we're up about from the Nader, We're up about se Are you still as fully invested as you were last year? How are you looking at the markets today after after this recovery. Well, there's no question that things have gotten price here. But every time you put coupital to work, kept to ask

yourself or even maintain your exposure. You know, what's like could have happen over the next five to seven years of these businesses, of these assets that we own and are thought process is continues to always be focused on on looking out down the road. And if one starts with that, yeah we have we we then have to end with what is the alternative Today's where are we

end up? Including what if you bonds don't offer much of an alternative, and you're not getting any kind of you know, yield there we kind of think about as more as return free risk. Uh, the high yield part of the market, or the investment grade part of the corporate debt market just isn't isn't attractive, and you know,

we wish it was. We took between a little bit of capital work, you know, in the space last year, but the opportunity to exists you know, for very long and and so much of that corporate debt is not only lower yielding, but it's also also um relatively. We covenant to to a lot of that debt of debt, so more of the leverage tilts towards the to the

borrower and away from the lender. And so we don't we look today in that same situation because yields are lower still, and it begs the question, and I think that's a fair question, why we would you be as invested, were slightly less invested, in fairness, But that's more noise in the portfolio, you know, than we were you know, last year this time. But why do we stay invested? Because again, the alternative isn't great and we think that we're going to get good rates of return over the

next number of years. You know, from this portfolio of assets that we own. That doesn't mean that they're not going to stocks aren't going to trade down in the interim.

They very well might. But when we look at the way the government has has has printed you know, money, governments or sovereigns have printed money, and you know, and and as I pointed out earlier, just the amount of depth that's been created, we just think that you know, you could be you could talk towards an environment where it's more inflationary and rates can remain lower for longer because the government imperative is to keep them as low as as that interest expense as low as it can be,

which means keeping rates as low as possible. At any point in time. You know, the system can you know, governments can lose control of it. But we consider what the alternatives are. Stocks still make more sense. Now we are finding more opportunities outside the United States, and we think that there's better opportunity and businesses that are domiciled,

you know, on for foreign surres. And so our portfolio of equities has tilted in the last couple of years more overseas than it has been or has ever been historically in the position size of about doubled for a few years back for for that which we've on outside of the US, and and now percent of our portfolio is domiciled elsewhere. Let's talk a little bit about that

Crescent Funds. It has been ranked as the best risk adjusted returns of all allocation mutual funds with at least a billion dollars in assets under management among those managed by the same manager since inception, which I would imagine is a fairly exclusive club. Are you familiar all with who else is similarly situated to you in terms of running a fund since inception and actually running a billion or more dollars? I'm not. Actually, I don't really pay

a lot of attention to to that. So so I want to go over the funds objectives, which is to quote, generate equity like returns over the long term while taking less risk than the market and avoiding permanent impairment of capital. Hey, everybody wants to do this. You're one of the few who actually have. Tell us how you manage to accomplish that. Well, we invest across the capital structure with this goal of delivering attractive risk of just returns on stock stress and distress,

corporate bonds and private credit, occasional preferred stock, etcetera. When it comes to stock, X will own both the more commercial and the evergreens. That is, they you know, a commercial, call them the dollar bills trig into discounts. And those companies whose businesses should you know, on the other hand, that are more evergreen, that businesses should be solidly better at decade from now. It's really a function of price and risk reward that will dictate which direction we go

uh for these evergreens versus these more commercial opportunities. But we try every day to try to know the better businesses in the world and own them. Should the average trade down for one reason or another, we'll be there too to pick them up. And what we also own these lesser quality but still growing businesses if their stock

prices offer attractive upside relative to the downside. And then you know, we have our dead investments where we all we care about is getting our principle backing maturity, but you know, also generated in equity return along the way that really speaks, you know, to more to our philosophy. And then and then our our process is guided by by thoughtful research of the underlying opportunity as we as we really try to ascertain the value of the business

or the asset. And that's kind of by a lot of reading, many conversations with the management competitors, industry experts and so forth. And then you know, we'll go about and build our our financial models. And our models don't you know, suggest what you know, what might happen in the coming quarter or even in two thousand two, but

over the next few years. We want to have a view as to what the business might look like in a low base and high case, and we want the investment in that business, that equity to to that we're gonna be buying in that business to be attractive in the base case and have that upside optionality on the in the high case and and not you know, get

too badly in the low case. So we really try and create these these these boundaries, these governors as we look at each of the individual investments in the portfolio. So I'm trying to figure out how to describe your style of investing, and it's it's pretty challenging. I'm looking and some of the holdings in in your top ten. So you have Alphabet and Facebook on the one hand, but on the other hand you mentioned a I G and City Group. Is this value as this growth. It's

it's pretty hard to put you into a style box. Yeah, I think that there's a problem with style boxes because the we don't make a great distinction between growth and value. Show me the growth investor that argues what they bought is in a value. But but then also you can just stick a company that trades it forty times earnings, but if it's growing thirty percent a year for the next five years and into that five year period, it's

with trading ten eleven times earnings and there about. So to us, value investing is just to invest with an appropriate margin of safety, buying a business or an asset at a discount. In the past that that margin of safety might have meant protection you came from the balance sheet and the more in the most traditional Graham and Dotty and you know kind of definition you know, buying

blow book value, blow net networking capital. You know, the business might have not earning assets, it could be monetized, et cetera. Today it you know, for us more luckly means the protection you know that that has to come

from the quality of the business. You can get sucked into what you think is a margin of safety because the you've got these you know, what appears to be a strong wood bay, You've got you know, hidden assets, but the business isn't good at the end of the day, the you're you're you're probably gonna have a challenge, I mean takes here as an example, there are a lot of value investors who owned it believing that management could turn the business around, but if not, they were protected

by lots of great real estate as well some powerful brands like ken More Incraftment. However, as we now know, management wasn't successful and much of their great asset base was mortgage or sold off. With that count what was then reinvested back in the business. And then you know when it's the time that it came to a point in time where people realized ex posts that that they

were they were burning the timber from the house. So to us in a traditional value investments, you know are are you know, often mediocostolical businesses that were temporary out of favor and offered to message the opportunity to return to more normal own earnings. But many of those businesses have been disrupted by new technologies and and didn't offer

the margin of safety they once did. So we're very mindful of whatever we own, it really does have to be growing, doesn't have to have have go go growth. We own a couple of cement companies that are global franchises that that we think cements are going to be here for a long long time. Now. They're not you know, go go growth businesses, certainly, but you know, those are businesses that we think that that offered attractive risk of just returns over the over the next number of years.

And you mentioned you know, Google and Facebook, but even those investments were initiated at points in time when there was bad news surrounding them. Google back in two thousand and eleven, when there was feared that they're advertising you know, business was going to be impaired, which is bulk of the revenues, because we impaired because of a recession as the world was beginning to unwine, as as as what was happening in Cyprus was infecting you know, Europe, in Greece,

you know the rest of Europe. Uh and UM the stock traded and the stock traded down. Facebook traded down a few years back because of the Cambridge analytical scandal and people were worried about about it. It's business prospects and it's not about it, you know, entry into into two very good you know, businesses that we've owned ever since. So you mentioned you buy some non public distress debt. Are you purchasing anything on the non public side of equities?

So yes, we do. We do own um some privates in the portfolio, but they're very small because we're public fund and we're responsible for returning capital to our investors when they when they wanted back. But on occasion, we make investments in certain private investments opportunities, um you know, Epic Games is an example. We also have various private credit UH in the positions in the portfolio that we've

made over the years. In the last decade, we've put you know, eight hundred million or so out you know in UH in private credit that have delivered returns of you know, give or take to the fund. And these are secured first lean asset based loans that you know, are something different than not a lot of mutual funds. Do Again, I don't want to suggest that this is

that these are the engines in the portfolio. These are our investments that that end up on the periphery again because of the of their i liquid nature and and the fact that we are a public fund. So last question about the funds. You're located in Los Angeles. A lot of what you're covering seems to originate on the East Coast, in New York or in Silicon Valley. How does being located in l A affects your worldview? I've never really thought about l A affecting my my world

view until you just ask that question. I do think at you know, just in general, the world has gotten has gotten smaller because of the information it's available your finger and tips, so, you know, across the internet. Uh, and that certainly has made it easier. But living in Los Angeles, I don't know has affected my my world view too to any great degree. I don't know if I would think differently if I was, you know, living

in Chicago or New York. I haven't really thought about it bearer to be honest, of how that's my view has been impacted by living here. Hey, that's a fair answer. I'm just trying to get a sense of your philosophy and and how where you're situated might somehow filter into it. So we talked a little bit about fixed income and especially in the high yield world where you're taking a

lot of risk for almost no reward. What do you think about the state of inflation here that seems to have been a giant topic the past couple of months. Does this affect the way you invest i noticed you guys don't really make much of inflation forecast. What's the

impact of inflation on your thought process? We think that with the way the stewards of of of of capital at the sovereign level have been acting in the last number of years, really took great degree since the Great Financial Crisis, there is there is this financial alchemy that's going on that people hope that that that the academics that have it all figured out, that they're going to get engineer this soft landing and and and be able to control the inflation in a way that and drive

growth at the same time. That is going to all end perfectly, And it thinks tend not to be quite so perfect out there in the world, and and the we've learned to expect the unexpected, and we don't know what is going to happen. We don't know whether they'll be inflation or how much inflation there might end up being. We think that there's reasonable prospects of it, you know, certainly, but you might there be a deflationary path to inflation.

That could be the way we get there. Where the where the knee jerk responses to continue to to print more, borrow more, and in stimulate, stimulate with a with a wanton disregard for for the future ramifications of what it might mean to feed our currencies, you know, or or

or the economies, or or inflation down the road. But looking for that near term bump as these policy makers and academics are really thinking about what's happening right now, is they as they seek to be re elected or reappointed. So we don't know what's going to happen, but we create a range of outcomes, and we think that as we look at them, it's more appropriate to be more invested than not if you're looking out where the world's going to be, you know, five ten years since. So

that raises really interesting issue. You refer to the response from the fiscal response from governments and the monetary response from central banks. Are they in the process of changing what bear markets are gonna look like going forward. And what I mean by that is, have investors learned to anticipate fiscal and monetary stimulus. I think the world is certainly trying to do that. We hear at first specific advisors. No,

we can't anticipate. We just try and create a portfolio that's robust to multiple outcomes, that doesn't go too hard one direction or another, believing that that we really have the capability of identifying what the macro environment will look a look like perspectively, there's just way too many moving parts.

And if you put me in a room with the with with John Maynard Keynes, I'm gonna, you know, come out of you know Kinsian economists, right, I'm gonna be a believer, you know, same with you To put me in there with a monitorist the supply side or you know who or whatever, it's just there's these guys have all the arguments down and and I'm just not, you know, well versed enough, and I don't believe that that anybody

really has that capability. And in fact, if you were to go back and and look at at the projections made by economists for just the coming year for what GDP was going to be. They're they're rarely rights. Somebody gets it right, but nobody's right consistently, and sometimes they're they're wildly wrong. And you look at at people like Alan Greenspan, who didn't think that we were, you know, in a recession in the early you know, in the early part of the those you know, or or Bernankey this,

they didn't expect the great financial quss. These things weren't anticipated, and so we don't hang our hat on on listening to them or trying to anticipate what might be a lot of things might be, more things might be than will be. And so we just try and put our heads down and and believe that that you know what down down the road that you know, Google is still

gonna be a good business. And we're not paying even today at current prices that you know, if you adjust for the cash you you you adjust for their non earning assets, their moonshots, and and the stock is not so horribly expensive. It certainly isn't as cheap as it was on an adjusted basis. We bought it back in eleven. It was in the early early low rather teams multiple adjusted earnings, but these are companies where comfortable owning you

know through this. So that's kind of interesting. What what other investment opportunities today are you excited about? You mentioned overseas, Is that x US developed? Is that emerging markets? What is catching your eye in the present environment? You know, we we it it's more it's more developed economies. Of there's some emerging markets in and it's not any one company or one industry you know specifically, there's just uh, there's a host of different you know businesses that we own,

you know outside the United States. There's some businesses that we own you know inside the US that are less economically sensitive as well that that that make their way into into the portfolio that are again give an example of a more commercial opportunity. We've owned for you know since last year. Um and it didn't go down because of the pandemic. It went down for for idiosyncratic reasons. It's a I don't want any time I mentioned idea, I don't want it to suggest this is like our

favorite idea or the only idea. This is just to be meant to be emblematic of of of of philosophy and process. But we own you know, first Energy which is a pure play regulated transmission distribution utility with one of the largest networks in the US, I mean six million customers across five stay. It's you know, starting Ohio

and kind of moving east towards the mid Atlantic. Now it's core utility business is better than average, which means which does you know you can be determined as a higher than average you know r OE, it's got um more regulated transmission distribution stance is rather than the more risky business of non regulated independent power production. And for the most part they're in regulatorily friendly states with lower

than average competition. So we also you know, looking like the utility industry just just as an idea, just as a as a construct, because we think there should be underlying demand for increased transmission and grid modernization over the next number of years. So but you know, the utility industry is is you know, the index trades about times earning,

you know thereabouts. But this company, you know, last year, you know, they have got some bad news and Q you know, First Energy got caught up in a brimary scan that alleged you know, illegal campaign contributions following around sixty million dollars to the former Ohio Speaker of the House, in the hopes of passing a bill that provided some you know, subsidies for nuclear business. You know that isn't

if they don't even own anymore. And as a result, you know, you know what, you know, how the government might or in the regulators might come at them. It causes stock to drop by almost half from the February high, and that cleaned off about thirteen billion dollars of market value.

And if you were to adjust it for the declining utility index because that had gone down, you know at that point of about eight percent as well along with the the um you know, coming down with the pandemic, that would just basically means about ten to eleven billion dollars of value you know, was taken out adjusted for the decline in those utility indicries. And so we are workers really centered on two things like one, how good is the business and to you know, what what the

penalties be. And so we the work that we did, you know, on the business and common conversations with competitors, industry experts and utility unless give us a comfort level that the business was advertising as good as we thought it was. And that with respect to the the fine that was likely to occur, we felt it would end

up being manageable. So there are federal sentencing guidelines that are fairly you know, formula formulaic, and so we used history as a precedent and looking at lots of different of fines have been paid in the past, and there's a base cave fine, and then there is a a culpability multiple that gets attached to that. So we did as we triangulated these these other fines and and and the multiple kind of looked at that maybe they find into being someplace a hundred and fifty to four million dollars.

I remember I just said that the business and declined thirteen billion, maybe ten to eleven billion adjusted, you know, relative to futility index. So even in a ast case scenario of a billion dollars, it's still, you know, just one tenth of what the stock price declined that that had been been seen by its shareholders. UM are born by its shareholders, and so we felt pretty comfortable UM that the adjusting for our base case fines and and the stock trading back to a market multiple in the

next couple of years. Again looking down the road that buying the business at eleven times earnings with a five percent dividing yield was pretty attractive relative to the the utility index that was training at nine twenty times earnings with with a just a few percent you know, dividing yields.

And so as you got through the scandal, we thought the stock that was trading in the high twenties, you know, could end up being you know, trading in some place in the you know, in the low forties to low fifties. And what's it looked like today? I mean, the same story still applies. Is still in the midst of this. The stock price has moved up, you know, from the high twenties to the higher thirties, and the the opportunity

still exists for that same upside. Nothing's really changed there in the in the process of of working through the you know, the whatever's gonna happen regulatorily or with the fines, we just don't know where it stands. You know, today we're not going to know two we know, but as we looked down the road, we it's going to be settled.

Just like I argued before that people would travel again, people would stay in hotels again, and Marriott, you know, would not have an occupancy that was was was going to be, you know, close to zero for a period of time. You're gonna end up with a more normal environment, you know, for First Energy you know, you know, and and in all its markets in Ohio, Pennsylvania, you know, etcetera. That's really intriguing. So marginal safety clearly a key part

of your investment approach. I'm gonna assume nothing in change that philosophy. So that leads me to the question, what is your takeaway him your experience during the pandemic? What's the lesson that investors should have learned last year? Investors?

You know, every time you know they should learn this, it says, it's the lat same lesson, right is thinking what the world looks like down the road, Not what dom I look like in the next six months, three months, even a year or two, but what's it like down the road. I mean, if you're buying a business, you should care about it twice the day you buy it in the day you sell it. So if you're not going to sell that business for five ten years, why do you care if the stock is up or down

in the next couple No doubt about that. Our last question of this segment. I want to throw you a little bit of a curve ball. I asked you earlier about l A. I was kind of surprised to learn your surfer. Tell us a little bit about that hobby. Oh, I've got lots of hobbies. I'm you know, I'm a I'm a I'm a jack of many trades and master of none. I'm I. I enjoy it Like I swam competitively through college. I've always enjoyed, you know, the water. I enjoy swimming in a pool, enjoy him in the ocean.

And and I never I used to lifeguard the beach. There's a summer job when I was in college, and and and learn to surf. And as I said, I'm not very good. But it's nothing like being out there in the water and a dolphins swimming around you. It's pretty. It's pretty peaceful. And to you know, pick up a wave and and maybe have a dolphin writing it with you, which has happened on just one occasion of my life.

But I keep trying to trying to repeat that is is a pretty um you know, beautiful you know, spiritual experience. For me, I find it incredibly peaceful, and I spend more time now, you know, um surfing behind a boat, you know, and on a lake because I don't have to compete for waves. And that's been you know, it's just a lot of fun. I don't know if you've seen the videos of all the young Great Whites that like to go surfing with surfers in a very um,

non aggressive way. Apparently it's different when they're larger or and older, but when they're young, they seem to be pretty chill. Some of the videos I've seen on YouTube taken from drones are just astonishing. Oh yeah, there they really are, and there and they are. It's it's disconcerting, you know. And if they I'll all compete in in ocean, you know, swim races, uh, you know, once or twice

a year. And I remember once watching one of those drone videos of a Great White kind of underneath the underneath the crowd of swimmers, you know, kind of off the South Bay her most in Manhattan Beach and a race, and I'm I just thought to myself, I'm like that, I don't know what I would do myself. I just try to push that out of my mind. I don't care if it's a big great white or a small great white. Berry great white is a great white, I'm not gonna be real thrilled to see. I'm gonna i'm

gonna push back against you on that. If if the choice is a big great white or a small great white, I'm gonna go with the small, younger one. They really seem to be so. By the way, if if people are still listening at this point, go to YouTube, Google this. It's astonishing. They're not like a hundred yards away, They're inches away there. It's almost like their dolphins playing with the swimmers and surfers. It's really amazing to see. But that said, you know, it's a little frightening if you're

out there on a regular basis. Barry, I'm gonna go on record is saying that I'm not going to spend a lot of time determining how big that great white is. Okay, that's that's fair enough. Let me um, I know I only have you for a certain amount of time. Let me jump to some of my favorite questions that we ask all of our guests that are not surfing related, and and start with tell us what you're streaming these days? Give us your favorite Netflix or Amazon Prime or or

even podcast you're listening to. I don't. I don't actually listen to a lot of podcasts. They don't do a lot of streaming other than what you know, more more entertainment related to streaming. I tend to when I'm in the gym working out, and you know, on my stationary bike could do a lot of cycling, you know. I I tend to, you know, throw on a documentary and and something that with subtitles and and just kind of I watch it and it could be on a host

of different topics. I love music and and and frequently it ends up being something related related to that. I spend more time, you know, you know, reading nonfiction um and and try and really drive a lot of throughput there to the best of my ability, I said, the best of my ability. Of some books just end up being a little bit a little bit denser than others. And I find myself sometimes, you know, struggling through to to get onto the next book. So we're gonna come

back to books in a minute. But now I want to ask you tell us about your mentors who helped

shape your career. Well, the one person really, you know, shaped my career, I mentioned earlier is is James Nathan goes by Jeff and he was my my first boss, and he's the one who entered uced me to a lot of people, you know, early on when I was just starting out my early twenties, where I was able to sit down with you know, his good friend, you know, Lee Cooperman and asked him questions and learn from learn from him, and and have him, you know, be at

the Tilodine Annual Meeting, introduced Henry Singleton and have dinner with him afterwards, and talked about experience investing in Tilodine you know, back in the day, and that that really was incredibly educational. And then I remember once he he had me, we drove down to Laguna Beach to visit a guy who I had never heard of. I just couldn't google somebody back then. And and again I hadn't been in the business that long at this point in time.

And I sit down at the lobby bar of the ritz Ritz Hotel in down in in Laguna Beach and there's a guy who shows up with an ascot and it seemed like Paisley pajama bottoms, and it was it was I've never seen anybody dressed like that, and it was Sir John Templeton, and I was able to have tea with you know, Sir John Templeton and listened to his life experiences and talking about investing and to be thrown into that kind of a world at at a at a very young age, is is um made me

incredibly you know, made me recognize its incredibly fortunate to say the very least. I want to circle back to something that you mentioned in in my earlier question, which is you said you tend to listen to music related or watch music related um streaming. You you want to give us any examples. I mean, I'll listen. I'm gonna listen to like I mean, on a podcast, listen to the something called song exploder. So I love I love the I love the the etymology of the song I like.

You know, reading the Wall Street Journal, uh, you know column that it really breaks down the forgot what the title of that column is. It comes a typically yeah, um, if you like if you like songsploder, um, have you played with? It's on YouTube something called Polyphonic No, what's that? So it's just a guy who puts videos up discussing sort of the musicology of specific songs and bands and artists,

and you might find it kind of fascinating. If you're an all intrigued by why John Bonham of Zeppelin instead of tracking the bass player tracked the lead guitarist and what that did to their music and a whole bunch of other crazy stuff like that, then you're gonna then I'm also incited to being a frustrating surfer. I'm also a frustrated guitarist. Alright, So you're gonna get a You're gonna have a huge kick out of this polyphonic on

you on YouTube. So now let's talk about everybody's favorite question. What are your some of your favorite books? What are

you reading right now? Well, I have I mentioned the you know times struggling to get through books and and the reason and it says it's fresh in my mind because sitting on my night table and I'm about three carters away through it is is Walter Rysenson's book Gene Editor and Jennifer DOWDNA and it's just it's it's a little bit dense because you really try and as I'm really trying to understand the Yeah, I have a whole list of books that are tied to two healthcare UM

and health tech medtech and in the history of of biotech, and I'm just trying to get up again a better understanding of that is an industry. And so I really enjoy reading nonfiction to try and inform my view of the world. So that's one that I'm reading now. But

um it's called a Codebreaker. And but I I read a lot of these books that that try and inform my view, and it include like The Outsiders by William Fordbike which is you know, eight you know CEO profiles that include you know, John Malone and Henry Singleton, Tom Murphy of Caps City has warm off it and it really just you know, reading about these people and what they what they've what they accomplished historically in their businesses and helps some form of view as I speak to

managements today. I you know, one of my favorite books of all time, it really is run Turnout's Book to War Brooks, because it's an expansive history of of finance and of a couple of world wars and and a a Jewish family that uh, you know made its way from Germany to England to the United States. And I find that you know, incredibly interesting as well. And sometimes you you you you you you read the books or I read the books and I kind of you know,

what did I learned? What are my takeaways? And you know, like I read Twilight in the Desert twenty years ago and they had the belief that from reading Matt Simmons book that that that we're going to have a problem with uh of providing energy to the world with with because fossil fuels were harder to come by as it relates to oil specifically, and you know, like clearly that didn't come the past. We you know, a couple of things of happened since and as you have to you know,

be willing to to adapt. I mean, we had obviously a big increase in renewables, but you also had the you know, the oil sands and and tight shelp informations that have created a lot more oil out there than than people have expected. Meanwhile, you have falso had the rise of you that we have the rise of electric vehicles and such that that are going to put a crimp in future demand. So if you have to adapt in you know, um to two changes in the world.

And spent a lot of time reading about health tech, you know, which includes this at medtech and biotech, because I believe that some of the great businesses you know, unfortunately will be creative the next twenty years. We're going to come out of that. We mapped the human genom twenty years ago, but it was like identifying the parts to a car. For the last couple of decades, we've we've trying to figure out how those and how the parts of the car work individually and and in integrated fashion.

And just now we're really beginning to see some of the fruits of that, and we're gonna see a lot more in the future. Really really interesting. What sort of advice would you give to a recent college grad who

was interested in pursuing a career in asset management. I I think that I would say the same thing I've I've related earners in terms of having that that longer term view and whatever you do, whatever decision you make, make sure that you're making the decisions with a kind of a five to ten year you know, seven to ten you're rolling you know timeframe. It's going to allow

you to make better decisions today. It's going to you know, you're gonna be more willing to absorb some of the bumps in the road, you know today, if you understand that, you're gonna be better off in the future, in the future for it. And I would say in addition, you know, do something you enjoy and make sure you're good at it and work really hard. Um. The the last thing I would probably leave somebody with is is um is

do well by doing good. If I think that one of the things we realize, you know today, in in in the world, that it's not an uncomplicated place. There's a lot of people who have who have been mistreated, you know, over the years, and we can we can try and make the world a little bit better. So if you can do that while you're investing, you know,

all the better still. And our final question, what do you know about the world of investing today that you wish you knew when you were first getting started back in the nineties. Yeah, I really wish i'd better anticipated the world of disruptive change. The technological innovation that has taken places has up beend to the economics of so

many different industries. And whether it be online retail you know, which has changed the economics of brick and mortar retail or streaming video content and video and demand destroying video rental and forever changing movie theaters. Um or single cell genomics that have developed on the back of of having mapped the human gentlemen, creating new therapeutics, you know, outmoding what's been accepted today, to or renewable energy solutions that

are gradually displacing fossil fuels. Now we've we've successfully avoided most of the disrupted industries. But that's like growing that. You know that our boat didn't sink, it's not supposed to sink. We would have enhanced our performance. Have we been more willing to pay up at least a multiple turner two to own some of the better businesses in the world whose paradigms are are more winner take all

our winner take most. So we didn't buy Amazon. We we thought we were doing pretty good by by not by selling our retail out you know, more than a decade ago. But we just didn't buy you know, Amazon, even though we looked at it. We just didn't look at it closely enough. And that has to solidly go into the mistake bucket. So that's what I wish I knew thirty years ago. Really quite fascinating. Steve, thank you for being so generous with your time. We have been

speaking with Steve Remick. He is the managing partner of First Specific Advisors and asset manager running uh over twenty six billion dollars in various assets. If you enjoy this conversation, check out any of our prior four hundred such interviews. You can find those wherever you feed your podcast fix iTunes, Spotify, Google Podcasts, etcetera. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. You can sign up for my daily reading list at

Rid Halts dot com. Check out my weekly column at Bloomberg dot com slash Opinion. Follow me on Twitter at Rid Halts. I would be remiss if I did not thank the crack team that helps put these conversations together each week. Tim Harrow is my audio engineer, Latika val Brond is my project manager. Paris Walt is my producer. Michael Batnick is my head of research. I'm Barry Rihlts. You've been listening to Master's in Business on Bloomberg Radio.