Tales of a Top 1% Fund Manager

factor dead? And Sarah, before we start, I want to give a shout out to some of the listeners out there who have been providing valuable content for the for the program. Our longtime listener that character Twiggy Sunday on Twitter, He's contributed something for the Craziest Thing of the Week segment. He also predicted that I would win the Craziest Thing. I think I missed that part of his the show

that once again I will win. And you know that brilliant, You're brilliant, twig The listeners have confidence, uh in my ability to clearly it doesn't matter that I'm the sole judge of it. Also, but also Ellie Panamy, we really thank you for your amazing contributions to our Crazy Things ideas, and we will eventually get one of your favorite guests back on the show. We will, we will. H Ellie

or Eli or whatever his fake Twitter name is. H decided that the craziest thing he saw in markets would be like thirty year old picture of our colleague Chris Nag which, now I gonna say two listeners out there, if you're thinking about tweeting us embarrassing pictures of our colleagues, just take a minute, think twice about it, and then

absolutely go ahead and tweet them directly to us. And there's also probably a better chance that if you were to ask us a question or share a crazy thing, that will actually use your absolutely and sorry, remember, listeners can actually appear on the show if they call our special what Goes Up hotline whose number I chronically forget, so hopefully you have it handy. I have it handy

as always. It's six or six three two four three for nine zero, So feel free to give us a call, and if you do, we may even play your message on the show. But let's get right to it, and as you alluded to, we have a guest. UH and full disclosure. UH, this guy is actually a good friend of mine. But that's not why he's on the show. He's on the show because he has the reputation of pretty much a rock star, I would say as a stock picker, as you said he would he loves this,

he likes what he hears. But he was the head of the small cap team at JP Morgan Asset Management. UH for a while. The small cap equity fund under his leadership, as you said, Top one per Cent won the Lipper Award in two thousand and thirteen for the best fund over ten years. UH in the small cap category. Two thousand and nine, it won the same award UH

and small Caps for best fund over five years. And sorry, this is a guy whose brain I've been picking for years because we're both residents of the brainy borough of my touching. And typically my questions are like, Hey, what do you think of the market? Is it overvalued? How about bond yields? Are they going to go too high? What about growth versus value? Hey do you like small Catholic? You're asking me the wrong questions and his answer will always be Mike, I'm trying to coach my kids basketball

team here will you? Will you leave me a lot? But finally I'm excited that we can get him down to sit down and talk about his process of picking stocks. He since left JP Morgan and started his own separate account business. It's called Byron Place Capital Management. I encourage you to google it and check him out. His name is Glenn Garotsky. Glenn, welcome to the show. Thanks for having me. This is great to talk to people. Yeah,

Glenn's been hold up in his office stocks. He doesn't he doesn't get to see people too Offen Daylight and also joining the show this week, He's we welcome him back to the show. He's a guy who wrote for a newspaper for a long time that many listeners probably saw. It's the one with the very odd colored pages. I think Salmon Salmon the official name the Financial Times. It looks like it was printed on paper that was made from trees that only grow, like in a Doctor Seuss

book or something. But I had a great analogy. I haven't visited London and seen all how many Delhi newspapers are stole in business even today in London, It's got to be like three hundred I think so. At least the color allows it to stand out on the on the news stand, so I think that was a brilliant strategy. It's been it's been pink since eighteen so it wasn't

your idea. It was not. It wasn't around then. The most complaints the Financial Times ever had in one day while I worked there was on the centenary of When We Went Pink, when it was printed on white paper to emphasize how pink it normally looked, and so all these people from the city of London, you reading it for the shape, prices and stuff, freaked. It was almost impossible to the switchboard actually collapsed on various occasions. People were horrified that come out on white paper. This is

a true story. Indeed, I just told you that was it was. It was really, It was really impossible to get anything done that day. Anyway. That writer's name is John Author's that voice you just heard. And now he's no longer writing on the pink paper. He's writing on that brilliant amber and black of the of the Bloomberg terminals. Orange fancy. It's a much not pink and orange amber.

But Glenn, let's let's start with you because you know, as Sarah alluded to, uh, I feel like the whole factor investing and and Passive's has has really just taken over the investing landscape. However, you've still manage you're still managing year to year to pick stocks that beat the market. Um, so walk us through your your process. I know you start with a screen of stocks, uh, and your current strategy is all caps, so you'll you have some stocks million in market cap to up to Facebook and up

to Microsoft. Yeah, up at one point four trillion down to a hundred million in market cap. So and happy to have Microsoft and the portfolio, I guess for sure. I mean that that's really where the market has been rewarding, you know, sustainable cash flow, and that's really but what's been working in this market, in this whole economic recovery that's you know, eleven years into the making right now.

But there's a lot of value in small cap so and it's under you know, undercovered, and that creates a lot of opportunity for guys like me who you know, feel very comfortable meeting with these companies and talking to these management teams and understanding their businesses. Having in all caps strategy to me, sounds uh intimidating, just because it's such a big universe. So walk us through, Like, I know, you run some screens, what sort of price to free

cash flow? What's what's your process for sort of narrowing down this massive universe. So, first of if, I started as a microcap analyst, so I looked at companies less than a couple hundred million in equity market capitalization, and then I moved to small cap and mid caps, and to me, I just wanted to look at more companies. I never wanted to limit myself, so I've always was itching to do all caps and look at everything under

the sun. So um, you know, because my I'm I look at myself as a business analyst first, and the securities analysts analysts that ultimately is an equity analyst and trying to decipher what a business is worth and what the equity of that business is worth. So the way I start is, you know, my my rule of investing that supersedes everything and I never forget is that when I'm buying a style, I'm buying an equity ownership stake

in a business. And I never forget that rule. So I'm always looking to invest in companies that have a sustainable competitive advantage, that are run by management teams who have a track record of success and are good stewarts of capital. And you want to buy these businesses in the stock market at a discount to their intrinsic values, so when they're undervalued. So it's all about looking for good businesses that are run by competent people and buying

them at the right price. And you know again, you know, so in the US stock market, you know, let's just take the Russell three thousand if there's you know, there's more than three thousand stocks. But um, I do run screens. I try to. I mean, um kind of a financial nerd and a business nerd, and I like to look at everything under the sun and look at as many business as I as I can. And but I have to run screens just to focus my you know, where

I need to focus. So I do run static screens that like you said that, like let's say a price to free cash flows screen or that are that are valuation sensitive, but they tend have to change much. So I look for what I call inflection points screens where I'll look for businesses where there maybe there's insider buying, or there's a management change, or there's you know, a company is doing a spinoff or change in operating momentum.

Those are the screens that generate kind of something interesting because a lot of these times catalyst some type of catalyst to make me take a second look at a business I've might you know, I've been doing this for you know, fifteen twenty years that you know, so to make me look at a business again a second time. And like I said, you know, your stock picks are

are handily beating the market. Uh so, so the strategy, uh the inception was in like early two thousand and sixteen, right February sixteen sixteen, and so the equity your equity picks are up a thirty percent since then, smps up. But the unusual thing about your strategy, at least one of the ones you run, is you don't go all in. You like to keep a really healthy cash balance as much as say forty UM. So what you end up with is very good risk adjusted returns a sharp ratio

of like one point six um, but very conservative. So walk us through kind of how you uh manage cash because you know you'll flex between as much as fifty percent cash at some points, kind of waiting for the dip. Is it as simple as that. Uh? Yeah. Unfortunately people may look at it and say, I've I've been wrong, right,

I've had a high cash percentage. It's up over right now. Uh. The reality is, when I first started this, so you know, I worked at JP Morgan Asset Management for a long time and I ran mutual funds there, and this was in the beginning. This was kind of a glorified family office, and I was managing my own money, and I wanted to manage it the way I thought was the right way to manage money, where you're not always say, hey, you need to be in equities, you need you know,

you know. So I wanted to have good risk adjustive returns. And the reality is, I hate to lose money. I mean, but I also understand that you have to take risk in order to make money. But I love the idea of having capital there that's there when the opportunity arises. And you know, I look at the portfolio from the bottom up, each stock on its own merit and its own risk reward, and I look at it from the top down is to you know, is it a good time? But I mean really comes from the bottom up, and

I want to have that cash available to all. Right, now is a great time to buy businesses are on sale. I mean, I don't see that right now, you know. I mean you could go back in February six team was a great time. Unfortunately, the market came back so fast right there, and I didn't get all that cash to work. Uh, but I'm happy if if the market is gonna be up twenty. I used to have this dilemma when I worked at on a mutual fund and

there was a small cap mutual fund. It was like and I'd have this argument with my analysts team all the time, and it was like, Okay, the market's up and you're up. You know, not good for my career necessarily, right, I'm not generating alpha or the markets up? Are the markets down and I'm down? I look like a hero from a relative perspective. That never sat right with me, right, Like, you know, I don't like to lose money, right, I mean, but you know, in the financial crisis, I look like

a hero even though I lost. You know, I don't know what the numbers were, but I lost or something. I look better relative to everybody else and you know the reality is I hated the idea of playing this relative game always so, so it's certainly been hard to find an opportunity to put money to work. Even this past week you have the SMP, the NADS at the Dow all hitting fresh record highs. John, I want to come to you because this is all in the phase. Uh.

We have a spreading coronavirus. Um. Ubs was out saying that the most compelling bowl case right now is that there is no credible bear case at the moment. What do you say to align like that that? Because I've heard it a couple of times this week. The market keeps going up because there's no reason to be bearish, even when I think a couple of people would argue

against that. Huh. I can think of a few reasons at that being said, I've been very good at coming up with reasons to be bearish for the last ten years, and they all seemed like really good, elegant, uh, you know, logical points, and they weren't totally right. Um. Coronavirus could yet really mess things up, um. And it's not necessarily it doesn't need to be the second Black Death. It

doesn't need to be Spanish flu. It just needs to close down Chinese industry for long enough to put out people's calculations, people's expectations that they have been relying on. In particular, given the parlace state of Europe. You the Yeah, there is no country in the world that is more exposed to China amazingly than Germany. In many ways, Germany's manufacturing is in has been showing serious signs of decline.

And then after that you call it craziest. Apparently it's very charming that I refer to it as the maddest and that I see in the markets. Um. Anyway, don't if you if you look at if you look at the US market, canes bringing British greater. My aid said that the market, the markets can stay irrational longer than you can stay solvent, which is very true. Uh. And markets can be overpriced and they can still get more overpriced, So you should never try to time the market based

on valuation. That said, price to sales is not um it's one of the simplest, most straightforward, least manipulable numbers out there. And on a price to sales basis, the SMP has actually caught up with the top in two thousands. This isn't We don't have to have arguments about Schiller's cape, which is actually nowhere near as expensive as it was

in two thousands. Um. This is a good, straightforward indicator that suggests that, unless it doesn't even require the economy to slow down, if American companies get a little less good at absolutely squeezing every last inch of every cent of profit out of their sales, they are going to look terribly overpriced. Um. So there were a few reasons to be buried there, right. And oh and Bernie, I mean Larry David. Just I can't do a Larry David level impersonation of Bernie. It's only a few months. For

some reason, for some reason, people took Elizabeth Warren very seriously. Uh. And so when we had the season of people announcing their previews for which, like Christmas, comes earlier every year, so it was before Thanksgiving, people were terrified of her. Um. She doesn't call herself a socialist, she calls herself a capitalist. Bernie is now looking stronger than Elizabeth Warren ever did. And he calls himself a socialist, which is not market friendly.

It's markets to capitalist. Let's get into some of these names in your protafolio because I love looking at uh different managers portfolios and oftentime you're like, wait, you sure that you look at it and you're like, you're sure this isn't an index fund. You do not make mistake with Glenn's picks, which is what I love. You know, I'm gonna skip over sort of the you know, the Microsoft United Health and I'm gonna quiz maybe we'll quiz authors on a fees heard of some of these same

waiting as Facebook one point seven percent habit restaurants. Okay, all right, so they just they just got bought by Young Brands. Okay, so uh they're in a very very big way. Uh but what what Yeah, so the same thing is called young Brands. So I first saw them in November four team when the I p oed and it kind of was at the same time Shake Shack

came public. And they're these guys are a strong a competitor in California to there in Santa Barbara, California and compete with um uh in Halburger of course, who's the dominant player there. And and they have you know, I knew the CEO. His name's Rust Bendl. He ran this company called Mimi's Cafe. When they were private, I met with them, and so they came public. They had great unit of economics. It's they fifty burger. But what what

they do. Everything's fresh, high quality food. What they do differently is they they're kind of more so they'll have a good female presence. They they'll have good seared ahi tuna and salads, and so it was a differentiated concept. And so the stock took off, and you know, an I p oed in the mid teens and went up like just like shake Shack when everybody wanted their own restaurant stocks. Uh, And a lot of these companies came public and it went, you know, went into the forties.

I watched it. I was intrigued by the concept of the valuation was ridiculous. And then as the restaurant stocks went out of favor, it collapsed. I mean it was in the single digits. They were still executing, and it got, you know, close to replacement value on a you know, a business that generates you know, their their union economics are returns on invested capital. So it got really attractive to me, and I started to take a position and ultimately. You know, I was hoping for a higher price than

what they got taken out for. I was hoping this would get into the twenties, but it got taken out at fourteen by young brands. One more before we get to the craziest things. I think this one would be interest to our listeners who are are actually in the money management business. Diamond Hill Investment Group. Uh one point three waiting and your portfolio is never more than like thirty stocks, right usually, yeah, it's right now, right now,

I'm at twenty. But tell us about Diamond Hill Investment Group, because I mean, I feel like asset management firms are somewhat uh radioactive to a lot of investors these days. The the active managers. What do you see about this stock? Right? Nobody wants to own active managers right now? So Diamond Hill. They're in Columbus, Ohio, mostly equities, uh, large cap value. You know. Um, I followed them for a long time. Uh. We owned it actually in our small cap portfolios when

I was at JP Morgan. It got really expensive. They've done very very well, and it's twenty two billion in assets under management now. Uh, And it got really cheap, right, And I took a second look at it. I saw they hired a new CEO, Heather Brilliant from morning Star UM, and there was insider buying, and I took a look, and I'm like, it's six points seven times enterprise value

to notepad. Now, I've run an investment management business. This is a really good, well run company that's an active manager. But it's not like they're charging egregious fees. The average fee sixty basis points. Uh. They have a long term track record. I would love telling this business if I if this was in the private markets and I could buy it for seven times, you know, and they have a pristine balance sheet, I'd own it all day and just waited out. Now, I don't know what's that's That's

the beauty of the stock market. There's this volatility, and you know, if you have an idea of what you think of business is worth. Um, there's a lot of opportunity. And you just waited out. For those who've been waiting around lists for the craziest thing we saw in markets, it's time for your payoff, Sarah. I'm not as confident as I usually am in mine. You were in confident

last week either, Yeah, I don't think. I think I still won though, didn't I Because you say that, I think if there was a popular vote here, I'm not sure that. You right, do I get one vote or I mean you you get a supervoter? Yeah? All right, let's let's start with that character, Twiggy Sunday, who the craziest thing he saw in markets this week? I think John Author's as a British Red Sox fan, you'll appreciate that he noticed that Keith Richards gave up smoking, and

he he thought that might have some market implications. In fact, I looked, I look at al Tree's share price. It's down like double digits since the middle of January. So I think I think Twiggy might I might one this week. Yeah, so that that's a good one. But I'll start with mine because I'm not I'm not as proud as of this one. But I saw a story, I think it was CBS. Someone sold a single parking space. So we're talking about the real estate, the parking space real estate

market in San Francisco. Uh, Clenn, what would you pay for a parking space in a touch in New Jersey? I pay fifty five a month on the touching Parking Authority actually the treasurer of the So you hear in San Francisco, what would you pay in services? I have? I've seen the articles eight hundreds to own a parking space and month. I think that's just no way more. Yeah, but John Arthur's what would you pay for it to

have a car in San Francisco? Okay? So much to avoid having to drive in San Francisco negative negative interest, negative hundred grand for parking space in San Francisco. How much could you buy? Is there anywhere within the city of San Francisco you could buy a studio apartment for a hundred grand? Absolutely not? Right, absolutely not. Maybe it's not totally a relative basis. Maybe it's not totally completely

clinically insane. Right, And the way people live in San Francisco, they might just pull a van up in that space and live there. You know, it happens, it happens. Yeah, alright, Sarah, can you top a hundred thousand dollar parking space? Um?

Maybe not. But there was a great story by our hedge fund reporters here at Bloomberg, and the headline was five hedge fund heads made more than one billion dollars each last year But the part that I really found interest interesting was that if you look at the returns of their funds last year, three of the five all lagged the S and P five hundred by at least

ten percent, essentially. So the idea that you can make a billion dollars and you don't you don't have to do to the two is more powerful than the twenty. And I guess all right, Clennon, I know I to about our craziest thing. I hope you can't prepare it. I know you're a Philadelphia seventy Sixers and we have a Celtics fan here too. I see the red sox around John's neck. So well, I'm gonna touch on somebody

that you both know. Uh. The Sixers big offseason signing Al Horford, who's one of the most underrated NBA players for a long long time, right, but you know he's real value investor. Thirty three years old, Sixers paid are paying him twenty eight million dollars a year. The Sixers have underperformed a little bit this year, They've just made him the backup center. This week, as I was I was watching the Sixers Clippers game, which is Sixers one,

and I'm a Sixers fan too. Full disclosure. Uh, that to me was ridiculous, twenty eight million dollars for a backup center. And then I have one more, which is my nerdy this is more nerdy finance guy. Alright, I own Apple full disclosure. Okay, I've owned it for a for a long time. And the value, you know, what's in interesting. So it's earning season right now. So Apple reported their fiscal Q one that ends at twelve thirty one. So I was on their conference call doing my work.

I notebooks, right, yeah, and I was looking at the numbers compared to two years ago. And so Apple, this just shows what interest rates have done, and there's perception. Apple's business has probably gotten better from two years ago from a perception standpoint, now that air pods are doing pretty well and they have more of a service business, so you could argue their business models a little better. But operating income in this quarter twenty five point five

six nine billion dollars. Okay, at twelve two years ago same time they did twenty six point to seven four billion dollars in operating income. More operating income, Apple's operating income is down over two years. Enterprise value of Apple right now one point three six billion enterprise value back then at one point three six trillion. Yeah, sorry, uh, enterprise value you know on that quarter after that quarter six billion. So the enterprise value has doubled and they're

making the same amount of money. Now they've done share by back and stuff like that, so you can choose the EPs and stuff, but even just the yeah, I mean, I mean I I look at it from an enterprise value and no bad standpoint, so you can take out the cash. Yeah, I went from twenty basically doubled their multiple y. But Mike, I think we might be crowning a new winner. All right, all right, we'll give it to well we got to hear. But John will give

us the maddest thing here. This is, this is something I picked up in a in a in a column yesterday. I spent years of my life, literally years of my life, checking first thing in the morning, what the spread of Greek bonus of a German boots was, naturally and amazing

to relate. We have now got to the points where the bread of Greek bonds over German bunts is back where it was before the Greek election in October two thousand and nine, when the new Prime minister got in, he discovered that there was a hole in the accounts and that Greece had been understating its deficit. And it's when he announced that that the full Eurozone crisis starts. And apparently it's safe to go back in the water now because at long, long last Greece, the Greek crisis.

If you believe the bond market is over. That your headline on that car and I loved it was it was like the European siren deck crisis is over, which kind of reminded me of like Bush on the aircraft carrier with the mission accomplished banner behind him that so hopefully you have better luck with the problem with the problem with this is is because that was written I was edited by Matthew Brook, who is also British. There's so many people assumed that we actually mean what we say.

We think we're obviously in cheek and um, yes, I've had one or two I actually had one or two very strange tweets by right wing Italian politicians about this, trying to get to the bottom of But but anyway, there were there we go. I find the market has convinced itself that the entire existential crisis over the euro is now over. And as I said at the outset, I actually think there are many many it's changed and it's now more about the center than the periphery. But

I would not be too relaxed. Well, you know, the euro Zone. The spread is one thing, but just the Greek tenure yield loner is like less than one percent. If we see Greek yes ten year yields go negative, I don't know what I think I'm gonna We need to pay to the privilege of lending money to Greece. Yes, that would be quite That would be is on the craziest. With that said, Glenn and John, thank you so much for coming on the show today. Thank you fe what

goes up. We'll be back next week. Until then, you can find us on the Bloomberg Terminal website and app or wherever you get your podcasts. We love it if you took the time to rate and review the show on Apple podcast so more listeners can find us. And you can find us on Twitter. Follow me at at Sarah Ponzack, Mike is at Reagan Anonymous, John Authors is at John Author's and of course you can also follow Bloomberg Podcasts. At Podcasts, What Goes Up is produced by

topur Foreheads. The head of Bloomberg podcast is Frances Phillip. Thanks for listening, See you next time. FO