David Ashley, CFA, is Portfolio Manager and Managing Director of Thornburg Investment Management. He joined Thornburg as associate portfolio manager in 2011 and was named portfolio manager in 2019. Mr. Ashley earned a B.S. in finance and MBA from the University of Delaware in 2001.
Eve Lando is Portfolio Manager and Managing Director of Thornburg Investment Management. Ms. Lando joined Thornburg’s municipal team in 2019 as associate portfolio manager and was named portfolio manager in 2020.
Ms. Lando holds a B.A. in urban studies from Columbia University and a J.D. from Brooklyn Law School, with a concentration in business law studies. She has extensive experience in municipal bond research and analysis, with particular focus on deal structures and legal covenants.
These two portfolio managers are excited about their prospects for returns in the market and reveal several top picks in this 4,272 word interview, exclusive to the Wall Street Transcript.
“In terms of how we are approaching the market, we are positioning the portfolio. March was a pretty exciting period. We did a lot of interesting things in the portfolios.
We were one of the sole bidders during that week to week and a half in March, when there was no liquidity.
We were able to add some decent securities to the portfolios, so some Illinois general obligation bonds, which we weren’t heavy buyers of because of credit and valuation concerns, but during that period, we added around $30 million to Limited Term itself at 6% yields and $0.92 on the dollar.
Right now, those are valued at $1.12 to $1.13 for price. The valuation is under 3% now. We did that with Illinois, and we did it with a lot of high-grade credits, with nothing too long there, unfortunately, because everybody was selling the shorter higher-grade paper. We worked more on the one- to eight-year range.”
The COVID 19 pandemic has added many risk points:
“On the desk, as early as the start of the year, we started credit discussions on immediate or future impact of the epidemic on municipal credit.
In the beginning, we were talking about restrictions on air travel to Asia, as in declines in shipments, so we want to talk about U.S. sport sectors. We started projecting the impact of lower oil and gas prices on states that are oil-producing.
Realize there was a heavy toll on hospitals, with the surge of numbers of cases. Things were moving to emergency care that historically has a lower reimbursement cost. As more states and local governments went into complete lockdown, and more COVID-19 cases were reported here, we proceeded in expanding.
We started with what we call a worry list. Airports were on the list, and ports, hospitals and long-term care facilities.
Those were the most immediate group of credits that had immediately rising expenses and/or drastic drops in revenues.
Then, we added everything connected with the tourism industry, so we are talking about hotels, concert halls, museums and anything with direct links to the occupancy tax or ticket sales or appropriations for nonessential projects. Those made our worry list as well.
It is true that munis historically have very low default rates, but our market is also fragmented, so we have nearly 80,000 issuers operating through 50 different states, meaning that they are issuing debt using 50 different legal frameworks and regulations. In this situation, we are consumed with understanding the resiliency of revenue streams.”
The portfolio managers familiarity with their municipal bond issues is impressive:
“For MTA — Metropolitan Transportation Authority — we have pared back that position across portfolios but not completely.
We also did some swaps during the March period to reset book yields. But in terms of the Strategic Municipal fund, we had $5 million roll off on September 1 of this year. That weighting is going to go down organically, so we have not addressed that one since it is organically going to roll off.
Connecticut is also one of our larger positions in that fund, so two for the state of Connecticut and one University of Connecticut, which is wrapped by an assured guarantee, so no issues there with the credit per se, especially based off the book yields. We are comfortable holding a slight overweight to those positions.
Kentucky is a prepaid gas bond. Those are backed by corporate credits with Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), etc.
Those performed really well. When we first bought them back in 2018 and then 2019, we continue to rally so we are able to book those at really good yields. They sold off really hard during the March period.
During that period, we pared back some of prepaid gas just because of the downside performance that we didn’t like. Today, though, they rallied way back and are even tighter than they were before.”
Get the complete picture on municipal securities risks and opportunities by reading the entire 4,272 word interview with these two portfolio managers, exclusive to the Wall Street Transcript.
Jacques R. Elmaleh, CFA, is a Senior Portfolio Manager, the Director of Research and a Principal at The Colony Group. He brings over 20 years of experience working with clients as a portfolio manager and director of research specializing in growth, dividend income and international equity strategies.
Brian Presti, CFA, is a Senior Portfolio Manager and the Director of Portfolio Strategy at The Colony Group. As the Director of Portfolio Strategy at The Colony Group, Mr. Presti assesses macroeconomic, financial market data and trends to determine appropriate investment opportunities and asset allocation.
In this 2,162 word interview, exclusively in the Wall Street Transcript, these two veteran professional investors look ahead to 2021 with some interesting observations on the market and top picks in their portfolio:
“We have always had three primary objectives that we want to help our clients achieve with sustainable investing: to have a positive societal/environmental impact, earn a competitive financial return while reducing risk and enable our clients to align their investments with their values.
Regarding this last objective, specifically, we strive to enable clients to target or impact specific issues that they feel the most passionate about.”
This investment philosophy has broad implications:
“From a portfolio design and implementation standpoint, our sustainable investments fall into two main categories. The first category is what we call “core sustainable funds.” These are broadly diversified funds that provide diversification both across and within different asset classes.
We have identified what we believe are appropriate investments in a wide range of asset classes, including domestic equities of all market capitalizations, international equities, both developed and emerging markets, as well as taxable and tax-exempt fixed income.
However, realizing that clients have specific passions or issues that they may want to tilt or impact within their portfolios, we also integrate thematic funds.
Thematic funds tend to be more targeted, concentrated funds that are investing in companies impacting a particular issue, whether that be the environment or women’s issues or water, just to name a few.
Integrating thematic funds allows us to customize each portfolio to align specifically with each client’s unique set of priorities and sustainable objectives.”
This leads to specific stock picks. One example:
“We will talk about the United Nations’ Sustainable Development Goals — SDGs — in more detail later, but an example of a company addressing an SDG is Brookfield Renewable Power (TSE:BRF-A). It addresses U.N. SDG number seven, which is affordable and clean energy.
Brookfield Renewable Power is a Canadian company whose goal is the decarbonization of the global electricity grid. They generate 57 terawatts annually through renewable sources exclusively, which avoids 27 million tons of CO2 emissions every year. This equals to the displacement of all the CO2 emissions generated by the city of London.”
Another example of sustainable investment picks:
“The United Nations has 17 Sustainable Development Goals that they have established as goals to make things better. These include no poverty, zero hunger, good health and well-being, quality education, gender equality, clean water and sanitation, affordable energy and clean energy, decent work and economic growth, industrial innovation and infrastructure, reduce inequalities, sustainable cities and communities, responsible consumption and production, climate action, life below water, life on land, peace, justice, and strong institutions and partnerships for the goals.
Nomad Foods (NYSE:NOMD) is an example of a company working on SDG number 12, which is responsible consumption and production. Additionally, they also contribute to SDGs life below water and life on land as well.
There are many companies, like Nomad, that address more than one sustainable development goal. Part of our research in synthesizing an investment thesis includes determining which goals are being addressed.”
Get the complete information on these and other stock picks from Jacques Elmaleh and Brian Presti by reading the entire 2,162 word interview, exclusively in the Wall Street Transcript.
Mason D. King, CFA, is a Principal of Luther King Capital Management. He joined the firm in 2004 and serves as a Portfolio Manager and Equity Analyst.
Prior to joining LKCM, Mr. King was an equity analyst at Hester Capital Management and a private equity investment analyst at Pacesetter Capital Group and Crates Thompson Capital. Mr. King graduated with a Bachelor of Arts in English literature from Princeton University and a Master of Business Administration from the University of Texas at Austin and also completed the TCU Ranch Management Program.
In this 3,788 word interview, exclusively with the Wall Street Transcript, Mr. King details his current top picks.
“The investment philosophy has been very consistent throughout the many decades of our existence, and really, it comes from fundamental bottom-up research into each company and industry.
Our analysts look for competitively advantaged companies with strong managements, with better-than-industry and better-than-broader-market growth prospects, with investment capital returns that also exceed not only our cost of capital but also their peers.
With strong managements, they can allocate the internal shareholders’ capital generated through earnings back into growth at these attractive rates of return.
It’s a pretty basic approach from that standpoint — invest in the company and invest in the management. Then, let them compound the capital with lowest frictional costs incurred with taxes by effective capital allocation and compounding in attractive marketplaces.”
One example of the global research by Luther King Capital Management:
“One that’s pretty interesting, and we’ve been invested in for a little over a year now, is Fluidra (BME:FDR). It’s a Spanish company.
It is a small-cap name and is the smallest name in our portfolio but is one that we’ve been particularly excited about. It has been well-positioned from a growth-in-a-cycle standpoint in this environment, and that’s because they are one of the largest providers of pool equipment and chemicals into the global market.
The company went through a merger with Zodiac in 2018. It was a Spanish company, and Zodiac was a U.S. company.
This created a global leader in pool supplies. Some of the brands they have are Jandy and Polaris. And this puts them in a great position to capitalize on what we’re seeing in the pool industry today.”
Another example illustrates the value based, bottom up research of Mason King:
“Another one is CSL (ASX:CSL), and it is a blood plasma and fractionation company that is based in Australia. This is a little bit different in that it is actually an oligopoly.
During a rationalization of the industry that occurred about 20 years ago, many of the blood collection and even fractionation companies failed. Correspondingly, there was a global consolidation within the industry to three remaining companies that control nearly 100% of the capacity.
With that discipline came better visibility and consistency in returns.
They manage their supply through both company-owned donation sites as well as sourcing blood plasma from external sites in order to have some diversification in their sourcing.
They bring that blood in and basically fractionate the blood, separating out all the proteins and effectively marketing those proteins to health care needs throughout the world. Albumin is a big product that comes out of that; that market continues to grow. CSL is dominant in that refined product.
There are many treatments and vaccines that are dependent upon these blood proteins. As long as we continue to suffer certain ailments and as long as we continue to treat them with existing blood proteins, then they’ll continue to have a market.
CSL has been a consistent grower through the years. They also have a lot of revenues within the United States as well as tapping into a growing Chinese market.
There are no domestic Chinese competitors at this point in time, principally due to the health standards and safety standards of CSL and the other two competitors, which are significantly higher than what exists in China today. Not to say that they can’t get there, but there’s higher confidence in the existing participants right now.”
Get all the details on this pick and many others by reading the entire 3,788 word interview with Mason King, exclusively in the Wall Street Transcript.
Brian Boyle, President and Portfolio Manager of Boyle Capital, has been in the investment industry since 2000.
Prior to founding Boyle Capital in 2004, he was a portfolio manager for DCM. He has managed a broad number of mandates, including high net worth individuals, institutional pension plans, private funds and a public mutual fund.
Over the past decade, Mr. Boyle has generated attractive returns by employing a deep-value concentrated approach to investment selection. He holds a B.S. in finance and economics from the University of Northern Iowa, where he graduated summa cum laude.
In this 3,945 word interview, exclusively in the Wall Street Transcript, Mr. Boyle discusses his investment philosophy and current top picks.
“Our general investment philosophy is based on value principles, and that is a word that is very subjective because value means different things to different people.
Ultimately, we’re looking to get an investment at a discount to what we believe the value of it is. We do not come into it with some preconceived notion of what a business should be trading for but rather look at the investment opportunity in the context of what is available today, and to the extent that we can find things that are trading at a level that we believe compensates us for the risk involved and we understand it, then we’re willing to allocate capital to it.
We would be considered more concentrated as well, so not only are we value managers, but we tend to run more focused portfolios, where we do not subscribe to the Noah’s Ark theory where two of everything is better.”
The universe of stock picks that conform to these principles has narrowed in recent years:
“Things that have very high quality and high certainty of cash flow — so your Microsofts (NASDAQ:MSFT) of the world, your Apples (NASDAQ:AAPL) of the world — have been crowded out.
People have piled into those things and have taken them to valuations where, regardless of how those businesses perform over the next decade, and they most likely will perform just fine, we think the investment returns from those businesses over the next decade are going to be lackluster given where valuations are at.
If you go through history, you will find periods of time where that has been the case: Walmart (NYSE:WMT) in the early 1990s, Microsoft in the late 1990s/early 2000s are two good examples of great businesses that performed just fine, yet investors didn’t perform that well because the expectations that were embedded in those share prices were so unrealistic that the stocks had to consolidate.
When we look at the big names today that everybody knows and likes, the Facebooks (NASDAQ:FB), Amazons (NASDAQ:AMZN), Googles (NASDAQ:GOOG), Apples of the world — great businesses, but we do think the future returns from those are likely to be more muted.”
The search for value has some odd conclusions:
“The original terms of the 2008 agreement were that the taxpayers would agree to put funds into Fannie and Freddie — ultimately, they extended a line of credit that equaled $400 billion, $200 billion each — and for any outstanding balance the Treasury received a 10% dividend on any outstanding balance. Treasury also received warrants entitling them to 79.9% of the companies for a nominal amount.
From 2008 to 2012, the companies needed capital to deal with losses that they had on paper. The companies were generating sufficient cash flow; however, they were having to take reserves for what they anticipated future losses to be, and as a result of those accounting losses, they needed to draw down on the Treasury lines of credit.
In 2012, on a Friday afternoon in August, the Obama Administration through Treasury Secretary Geithner at the time and the Acting Director of the FHFA, Fannie and Freddie’s
The next quarter, Fannie and Freddie
There’s a saying that the wheels of justice grind slowly, but they do grind exceedingly fine, and we are seeing that at play in these cases. As we have this conversation here on the 15th of October, the end game for all of this is starting to come into focus because the Trump Administration put out a memo last spring directing the Treasury Secretary to come up with a plan for reforming the housing finance system in the United States.
Fannie and Freddie
The Trump Administration came out with this memo last March, and the hallmark of the memo was to end the conservatorships of Fannie and Freddie. That kicked off what has been a series of steps by the regulator, Mark Calabria, who came into his role as Director of Fannie and Freddie last April. That series of steps has involved them starting to build capital at the entities and taking steps to hire financial advisers.
They both have hired their own financial advisers. Fannie has hired Morgan Stanley (NYSE:MS). Freddie has hired JPMorgan (NYSE:JPM). Ultimately in an effort to put them in a position to get out of conservatorship.
They cannot get out of conservatorship until they build up their capital, and they cannot build up capital until the outstanding litigation is resolved. In July of this last summer, the Supreme Court decided to take up the cases of Fannie and Freddie, and those cases are scheduled for December 9.
Based on a case that was ruled in the prior term having to do with a single-director agency, the odds are very high in our view that the Director of Fannie and Freddie, the FHFA, will be ruled unconstitutional as a result of the structure that’s in place.
We also think that this ruling, based on Supreme Court precedent, will afford backward-looking relief, which would ultimately vacate the sweeping of profits illegally by the entities, which is ultimately what the lawsuits are trying to accomplish.
All of that is to say that post the election, in a couple of weeks, the Trump Administration, should they win, will have roughly a month to make a decision as to what they want to do with this situation.
They could settle the cases with the shareholders and not allow it to go to the Supreme Court, or they could allow the case to go to the Supreme Court, which takes away from them some of the control of the path forward.
Should the case go to the Supreme Court and the government wins, they’ve effectively cut off their ability to go out and raise capital because the Supreme Court would have blessed the taking of property. Should they lose, they’ll end up exactly where they would end up on a settlement.
However, they would have spent another nine-plus months going through the courts, and who knows what the equity markets, the real estate markets would look like at that time, and what the attractiveness and the appetite for a Fannie and Freddie offering might look like at that particular time.
We have an investment — and we’ve continued to add over the last couple of years, including not too long ago around current levels — in the junior preferred shares of Fannie and Freddie. The junior preferred shares at one time would have been the senior preferred stock in the capital stack. However, when the government infused capital into Fannie and Freddie back in 2008, they infused it into the newly created security, the senior preferred stock.
In order to facilitate a capital raise, the Treasury will have to recognize that it’s been fully repaid on its original investment, and once that’s done, the book equity of Fannie and Freddie would fully cover the junior preferred shares.
That would potentially mean the securities that we own trading around $9 today would arguably be worth $25 a share at some point over the next couple of years as the capital-raising process unfolds, so it’s a highly attractive investment near term.
The opportunity is available because of the uncertainty around the government’s treatment of their investment but also obviously the election, which is less than three weeks away here. The election outcome has some people sitting back waiting for the outcome to play out.
If Trump loses, we still anticipate that the actions taken by the current administration will move on, and we would expect in a lame-duck period that they would execute on the amendment to the underlying agreement that would still put this in a permanent spot.
There will certainly be a lot more clarity in the next three weeks. Our belief is, regardless of the outcome, by the end of the year, the necessary actions will be taken that will put this in a permanent spot, and that’s why we have made this our largest investment today.”
Get more investment ideas by reading the entire 3,945 word interview with Mr. Boyle, exclusively in the Wall Street Transcript.
John Buckingham is Principal and Portfolio Manager of Kovitz. Mr. Buckingham joined AFAM Capital in 1987 and Kovitz in 2018 as part of the Kovitz acquisition of AFAM.
He has more than 30 years of investment management experience and serves as Editor of The Prudent Speculator, which has been a trusted newsletter for over 40 years. Mr. Buckingham chairs the AFAM investment committee, leading a team that performs comprehensive investment research and financial market analysis.
In this 6,387 word interview, exclusively in the Wall Street Transcript, Mr. Buckingham stays true to his investing philosophy:
“Benjamin Graham says, when shopping for stocks, choose them the way you would buy groceries, not the way you would buy perfume.
Unfortunately, these days, we’re in an environment where investors are fascinated or fixated on stories, on companies that appear to be able to grow significantly, especially given the pandemic, and they’re paying little attention to the price they pay for those stocks.
We saw the euphoria around the Tesla (NASDAQ:TSLA) stock split, and somehow people thought that because it was cheaper in price, it was worth more, and so the stock was bid up significantly by a lot of investors, even though a stock split doesn’t alter the pie, if you will. It’s still worth the same. It should be worth the same.
I would imagine, given that many value investors have closed up shop, we’re one of the few that are left that have been disciplined, consistent and patient in implementing our strategy. ”
The Buckingham portfolio is biased towards dividend payers:
“We want to buy quality companies, we want to buy them at reasonable prices, and we want to be patient with them and milk the dividend income.
I didn’t mention dividends yet, but if you look at Fama-French data going all the way back to the 1920s, dividend-paying stocks have outperformed non-dividend-paying stocks by over 1 percentage point per annum. And by the way, they’ve done so with lower volatility.
Investors are always looking for higher returns and lower risk, if risk is defined as volatility, and market history shows that dividend payers give you the holy grail, so to speak, which is higher returns and lower risk or lower volatility.
So we do like dividend payers, and especially in the environment today, where interest rates are extraordinarily low, dividend payers make a whole lot of sense to us.”
One example of a current Buckingham pick is Nordstrom:
“For those who are willing to be maybe a little more speculative, we also recently bought Nordstrom (NYSE:JWN), which is the department store giant…in looking at Nordstrom, we think it is a name that discounts a tremendous amount of bad news.
It doesn’t discount bankruptcy, of course, but it discounts a lot of negatives that we do not think are going to materialize, so we feel we’ve got a margin of safety.
But again, it is a very volatile stock, as it has been going up and down 3% every day it seems.”
To get all of John Buckingham’s picks and the detailed analysis underlying the decisions to buy them, read the entire 6,387 word interview, exclusively in the Wall Street Transcript.
Stephen Bonnyman is Co-Head, North American Equity Research and Portfolio Manager of AGF Investments Inc.’s Canadian and global resources portfolios.
Working closely with the AGF research teams, Mr. Bonnyman focuses on identifying resource companies with solid balance sheets, advantaged cost structures, attractive valuations or unrecognized growth. Mr. Bonnyman is a member of the AGF Asset Allocation Committee, or AAC, which is comprised of senior portfolio managers who are responsible for various regions and asset classes.
In this 2,856 word interview, exclusively in the Wall Street Transcript, Mr. Bonnyman explains the philosophy underlying his portfolio management:
“This fund had some challenges because we had a couple of industries that were heavily impacted by COVID. An example of that would be the energy space, which has had a bit of a double whammy. One, a large contraction in demand resulting from the COVID-19 pandemic globally.
And secondly, the massive acceleration in the renewables theme, which has started to treat the fossil fuel industry as if it was completely dead in the water, which we don’t think is entirely the case. But that would be one very real example.
Another within our investable space would be real estate, where concerns are obviously in place as to whether the work-from-home and the COVID structures that we’ve put in place to cope are going to be longer-lasting, change the nature of how we interact and how we utilize our real estate space.”
A sector shift has been apparent in 2020:
“Right now, our largest overweights would be in utilities. And that’s a reflection of two parts. One, the interest rate structure that reflects utilities. And secondly, the bulk of that exposure exists within the renewable schemes, so names like NextEra (NYSE:NEE), Boralex (OTCMKTS:BRLXF), NPI (TSE:NPI), where we’re looking at specific themes.
Where are we underweight at the moment? We are underweight real estate. Obviously, the challenges facing the market right now have not played out. And I think we’ve got to look at how many of these survived through this structure.”
Mr. Bonnyman sees an immediate opportunity in silver investing:
“I might add, SilverCrest, we own in a large part because of its valuation. This, in our eyes, was one of the most exciting exploration plays available within our sort of investable framework.
And we’ve been invested in the company for quite a long time since it emerged as a junior exploration company. So while we like silver, our ownership of SilverCrest is based more upon the exploration and development capability of the company than necessarily on its underlying commodities.
To answer your question directly, yes, we do like silver. The silver market is a combination of gold and an industrial metal. It’s sometimes referred to as gold on steroids.
As we get through the election, as we start to emerge from the pandemic, industrial demand for silver will accelerate and increase. And we think it has, in fact, a higher return potential than gold as a raw metal from this point forward.”
To get the complete interview with Mr. Bonnyman, read the entire 2,856 word interview, exclusively in the Wall Street Transcript.
David Corris, CFA, is the Head of Disciplined Equities and Portfolio Manager, Disciplined Equities at BMO Global Asset Management.
Mr. Corris heads the BMO Disciplined Equity Team and is responsible for equity portfolio management and research. He joined the company in 2008. Mr. Corris began his investment management career in 1999 and was a quantitative equity portfolio manager/researcher at Northern Trust Global Investments and a quantitative equity research analyst at Citigroup Asset Management.
He holds an MBA from Harvard Business School and a B.S. in mathematics and quantitative economics from the University of Wisconsin.
In this 2,426 word interview, exclusively with the Wall Street Transcript, Mr. Corris sees some investment opportunities at hand.
“…We think that for investors with a moderate time frame, small-cap value is best positioned in the current market. Large-cap growth has been leading the market for the last couple of years, and small-cap value has underperformed significantly.
Our research shows that typically small-cap and value strategies outperform coming out of recessions. And what’s really interesting this year is that although the market has rebounded fully since the beginning of the year, small-cap value has still continued to lag large growth, not only on the way down but also on the way back up.”
The political process provides portfolio picks:
“I can give you a few names that tie into both the Democratic and Republican exposures. Two areas where we are overweight right now are industrials and materials.
I mentioned infrastructure would probably benefit on the Democratic side.
One name we like there is U.S. Concrete (NASDAQ:USCR), which is a leading producer of concrete, selling into commercial, industrial and residential channels. They should be a beneficiary of infrastructure stimulus, and they are a large national player.
Another example is MYR Group (NASDAQ:MYRG). They provide specialized electrical infrastructure to U.S. electric utilities. And so as utility spending increases, as they upgrade or fortify the grid, we would expect MYR Group to benefit from that.
I also mentioned renewable energy. An example in that space would be Renewable Energy Group (NASDAQ:REGI).
Renewable Energy Group is the leader in producing renewable diesel. They’re very profitable, a company with a strong balance sheet, and they’re looking to expand into additional renewable markets.
We would note that you typically don’t find a lot of small-cap value clean energy names, but we think this is a name that not only is attractive on its own merits but also thematically as the market continues to embrace ESG and responsible investing.
On the Republican side, I’d mention banks because they tend to be a large weight in the small-cap value benchmark; however, a lot of our peers typically underweight them because they tend to be less liquid.
One of the things that we’ve always built into our strategy is tight liquidity control, which allows us to build baskets of stocks to make sure that we get exposures to large parts of the benchmark that may have liquidity challenges, and banks would be a good example of that.
We own a number of banks, ranging from Cathay General (NASDAQ:CATY) to Wintrust (NASDAQ:WTFC), First Merchants Corporation (NASDAQ:FRME) and Zions (NASDAQ:ZION), all of which help ensure that we have adequate bank exposure in the event that the banks recover from here.”
Get more of Mr. Corris’ portfolio reasoning by reading the entire 2,426 word interview, exclusively with the Wall Street Transcript.
Christopher Tsai is President and Chief Investment Officer of Tsai Capital Corporation, a value-oriented investment management firm focused on the long-term growth and preservation of capital. He founded the company in 1997 and is Chairperson of the firm’s advisory committee.
Prior to forming Tsai Capital, he was an equity analyst at Bear, Stearns & Co. Inc., John A. Levin & Co., Inc. and Gabelli Asset Management. Mr. Tsai has been profiled in numerous financial publications including Barron’s, Bloomberg, Financial Planning, Investment Advisor magazine, The Wall Street Transcript and Wealth Management magazine, and has been interviewed by Bloomberg Radio, China Money Network, Fox Business Network, MOI Global, Nasdaq and Yahoo Finance Live.
In this 3,211 word interview, exclusively in the Wall Street Transcript, Mr. Tsai explores the world of long term investing:
“Our focus has been really on two main objectives, compounding capital over the long term and the preservation of our clients’ capital.
What I think separates Tsai Capital from the vast majority of other managers is our key disciplines: One of them being a focus on concentration rather than broad diversification, and the other being a truly long-term mindset.
For us, the ideal business is a business that we can own indefinitely, and we go into an investment with that mindset.”
This investment philosophy leads to a very selective stock picking process:
“What’s a compounder? We define a compounder as a high-quality company that has a durable competitive advantage and can reinvest capital at high rates of return over a long duration.
These kinds of businesses are often very difficult to buy at reasonable valuations because everybody else knows that they are superior businesses. We do our research upfront, often several years in advance of actually making an acquisition. We’re extremely patient. If we can’t find anything to buy, so be it; we’ll hold cash.”
It sometimes leads to some counterintuitive results:
February and March were particularly rough months for the vast majority of companies, including one business that we have increasingly admired over the past few years.
In February and in March, Tesla (NASDAQ:TSLA) sold off substantially after having run up in the previous months. That was our opportunity. We had done a lot of work on the business prior to February, so we were in a position to act decisively when most of Wall Street was going the other way and selling the stock.
I mentioned that we like businesses that we can own indefinitely, businesses that can compound capital and reinvest profits at high rates of return over a long duration. Tesla fits very much into that category. And when we bought it, I think it was very cheap.
So why Tesla? My late father, who was an investor in his own right, was great at identifying long-term trends. He learned from my grandmother, Ruth, who was the only woman to trade shares on the Shanghai Stock Exchange during World War II, the importance of positioning yourself with the wind at your back.
And the wind here is the long-term trend toward electrification of both passenger and commercial vehicles.”
Get the rest of Mr. Tsai’s Tesla valuation and many more interesting stock picks by reading the entire 3,211 word interview, exclusively in the Wall Street Transcript.
Brian Yacktman is Chief Investment Officer, Portfolio Manager of YCG Enhanced Fund and Founding Partner of YCG, LLC. Mr. Yacktman has served as Chief Investment Officer and Portfolio Manager since the inception of the fund.
Elliott Savage is Portfolio Manager of YCG Enhanced Fund and Partner of YCG, LLC. Mr. Savage has served as Portfolio Manager since the inception of the fund. Prior to joining YCG in 2012, Mr. Savage was a senior analyst at Highside Capital Management, a multibillion-dollar long/short equity hedge fund located in Dallas, Texas.
In this 4,470 word interview, exclusively in the Wall Street Transcript, Mr. Yacktman and Mr. Savage detail their investing philosophy and explore many of their top stock picks.
“What we are really after are businesses that, in a world of competition and innovation, continually earn a high return on their tangible assets or owner’s equity over long periods of time.
Competition and innovation step in and drive down pricing. We are looking for businesses where, regardless of the competition that may come their way, there is something unique or special about them, and this allows them to maintain pricing power in the face of competition and innovation. We find that most often among businesses that exhibit some form of network economics.”
The network effect is a key component of the investing thesis:
“A lot of industries are shrinking and becoming smaller portions of GDP over time. That is going to create a headwind to your pricing power.
In contrast, take the advertising industry. If your competitor’s advertising a lot, you need to advertise a lot. Therefore, what you see is, advertising has maintained its share of GDP at about, let’s just say, 1% of GDP over time.
Then, if you can find businesses that maintain pricing power, like Google (NASDAQ:GOOG) or Facebook (NASDAQ:FB), due to their network effects, that allows them to essentially become a toll taker on global advertising.
Another example would be insurance brokerages where the insurance industry has maintained its share of GDP over time, more or less. It almost looks like a sine or cosine wave, as insurance premiums harden and soften over time, but it has maintained its share more or less over time.
And then, these insurance brokerages, due to their strong networks and sticky relationships, maintain their pricing power on global insurance activity. It is almost like these businesses have built-in growth that’s indexed to GDP plus.”
One drag on the portfolio has been their banking bets, although this may mean an opportunity for new investors:
“Our concern has been, should you have interest rate or inflation surprises to the upside, then those valuation multiples are going to compress pretty rapidly, and we wanted to have something that could act as a hedge in the portfolio against that, and what’s beautiful about the banking industry — so we’re speaking of the three largest U.S. depositors: JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), with Wells Fargo being sort of the contrarian piece, as well as Charles Schwab (NYSE:SCHW), the largest discount brokerage — is these businesses are leveraged to rising interest rates.
In contrast to almost all of the other businesses, their earning power would actually increase because we are so close to the zero-bound that it is squeezing their profits. As their profitability increases, likely what would happen is, the multiples that investors are willing to pay for those businesses would also expand, again, in contrast to almost all of the other businesses. So you could get a double benefit to help hedge against the compression you are experiencing in other businesses.
But unfortunately, as anyone can tell, due to coronavirus, interest rates have dropped to zero and may actually go into negative territory, which is an extra negative to them, as well as the fear of bad loans and how this will all shake out.
It has been a real drag on the portfolio, and had we exited that portion of the portfolio, we would have looked like geniuses, but we recognize that part of having a hedge in your portfolio means that it won’t always work and sometimes can actually be a detractor, and that’s what’s happened in this instance.”
Get the full detail on all the portfolio hits and misses from this 4,470 word interview with Mr. Yacktman and Mr. Savage exclusively in the Wall Street Transcript.
Brian Yacktman, Chief Investment Officer, Portfolio Manager & Founding Partner
Elliott Savage, Portfolio Manager & Partner
email: info@ycgfunds.com
Stephen J. Fauer, CFA, is Pinnacle Capital Management Chief Investment Officer and Principal Portfolio Manager. He has served in these roles since Pinnacle Capital Management’s founding in 2006, overseeing all separately managed and mutual fund portfolios totaling in excess of $100 million in assets.
In this 3,031 word interview, exclusively in the Wall Street Transcript, Mr. Fauer takes investors through the top picks in his publicly traded portfolio and reveals some interesting details that demonstrate their upside:
“Right now, in terms of sectors, we have a bit of what I’ll call “surviving retail” — those companies that will do well going forward that have survived this COVID downturn. We have Dick’s Sporting Goods (NYSE:DKS). We have Walmart (NYSE:WMT). We have CVS (NYSE:CVS).
We also like the telcos. We think 5G is going to be a big thing, not necessarily in terms of handsets in the next year or two, but long term.
We’re very much long-term investors for our clients. We’re not trying to catch the latest hot trend. We’re not trying to figure out who’s going to pick up 5 percentage points of market share in the chip business in the next three months. We don’t try to do that, as we think that’s too hard. You can’t beat the market on knowledge, but we think we can over time beat it with perspective.”
Stephen Fauer also sees other overlooked large cap names that will benefit from a 2nd wave of COVID austerity:
“We also have a couple of the food companies because people still have to eat. We own Mondelez (NASDAQ:MDLZ); they’ve got snacks and candies and a few other things there. We’ve got Kellogg (NYSE:K).
I think people eating at home, that’s going to be a long-term trend. Eating at home, you’re more likely to eat cereal. We’ve owned Unilever (NYSE:UL) for quite some time.
We used to own United Technologies. With its break up, we own all three pieces — Raytheon (NYSE:RTX), Otis (NYSE:OTIS) and Carrier (NYSE:CARR) — but we actually think Carrier over the long term is the best of the three sectors. We really like that stock.
I think one of the things that’s coming out of COVID is that, first of all, air filtering systems are going to be important.
I don’t think it’ll stop once there’s some kind of treatment or vaccine. Also, there’s going to be a movement — and it’s already been well-documented — out of the major cities, more into the suburbs. That means different kinds of building. I think that will benefit them over the long run. So that’s another one of our holdings that we very much like.”
Get more of these stock picks and additional details by reading the entire Stephen Fauer 3,031 word interview, exclusively in the Wall Street Transcript.
