Plenty of companies that were telling the market they were future leaders, are now trying to tell the market they’re currently solvent.
How do you sift through the marketing spin and identify the true gems?
James Abela & Maroun Younes are the co-portfolio managers of Fidelity’s Global Future Leaders fund and give us their perspectives on how they define Future Global Leaders.
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welcome to another episode of equity mates a podcast that follows our journey of investing whether you're an absolute
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beginner or approaching Warren Buffett's status our aim is to help break down your barriers from beginning to Dividend
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my name is Bryce and as always I'm joined by My Equity buddy Ren how are you going I'm very good Bryce I am
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excited for this episode you often tell me that you're a global a future Global leader and we've got two fund managers
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that want to invest in future global leaders so I'm excited for you to convince them that you're worth
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investing in yeah so luckily the episode is nothing about that Ren but it is about global Future Leaders and where it
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is our pleasure to welcome back to equity mates for the second time jamesabella and maroon Eunice uh to the
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studio welcome boys thank you thanks guys thanks for having us back so James and maroon uh if you
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remember them uh joined us in October last year they are both co-portfolio managers of Fidelity's Global Future
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Leaders fund and uh thank you to Fidelity for sponsoring this episode and a reminder that Ren and I are not
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experts we're not Financial professionals we're here just learning like you guys but luckily James and
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maroon are experts so we're going to be unpacking all things uh Global Future Leaders uh small caps you name it in
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this episode so let's get stuck in yeah now James and maroon before we get to uh I guess your fund and what you're saying
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in markets today we want to start with a bit of a game uh we're calling it this or that because we're not creative enough to come up with anything better
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um we'll we'll throw out two um two choices we want to know which you'd
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prefer and I guess we just want to get a sense of your investing Styles so uh James why don't we start with you
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passive or active well definitely active for our world
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that's the quick answer but yeah that I mean the key reason is just that couple of percent above the index over decades
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can mean a massive massive difference and we see it with people that we admire ourselves
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um and yeah the in the index is I guess a cheaper way to play it but that extra couple of percent or even you know two
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three percent a year compounded can make a massive difference to someone's retirement um uh maroon speaking of people you admire
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not sure if either of these are in that camp for you but uh Warren Buffett or Kathy Wood
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I would definitely have to say Warren Buffett why is that uh look I I think he's been able to do
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um really good things for a long period of time um he's demonstrated that you know he can he can generate returns to different
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Market cycles and he's basically been doing it for decades so he's not a one-trick pony he's not only proven in
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you know one certain time period I think is sort of withstood the test of time now that's an interesting one because
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Kathy Wood would definitely say she invests in future global leaders so we'll we'll come we'll come back to that
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one uh but James United States or the rest of the world where would you rather
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invest yeah we're definitely us uh all of it's based on the return on capital of the US
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market is just very strong it's a very sophisticated Market it's a very high return Market it has a lot of like
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um opportunity so a lot of them you know do different states in the US and then just kind of take over the world once
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they've conquered the US um so yeah we find the US incredibly attractive about 66 million percent of
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the funders in the US today um and the rest of the world has you know proven to be just more challenging
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overall so um whether it's regulation or return or Market structures or management quality or governance we end
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up firing the US overall all right maroon tough one here uh Bitcoin or gold
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[Laughter] um the guy with gold at this point in time
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um the lesser of doing yeah look I I think both started off intending to be currencies and then
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they've both sort of morphed into effectively being scores of value more than anything else yeah
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um but gold has been you know a time-tested store of value for 6 000
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years whereas Bitcoin has sort of been around for about you know 15 odd years so
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um we're yet to sort of see Bitcoin handle crisis act as a proper flight to
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Safety in terms of store of value so we'll have to go through a full Market cycle with a with a nasty recession I
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think just to sort of see if Bitcoin can prove itself as a as a genuine store of value uh you know or a digital form of
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gold and then uh last one why don't we open it up to the floor and get both of your
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thoughts uh for the passive parts of your portfolio I know you guys are both
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active managers but when you're talking passive equal weighted or market cap weighted indexes
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Yeah we actually go market cap equal weighted so equal weighted all the way because for us even the largest
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index position in our universe is around 50 basis points which is really small relative to say the Australia Market or
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most other markets in the world the top 10 tend to dominate you know 50 60 percent
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um in our Universal top 10 is about three or four percent maybe it's five when they get concentrated but so we
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definitely do go um I mean so we think absolutes we think absolute so when we have a position we
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start at you know basically one percent two percent three percent um things have risen to four percent
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um in absolute terms um and yeah the market weight is just uh you know it's the index so we're
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definitely equal weight favored and that's how we sort of see the world um as well at an opportunity set um
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now a lot has changed since we last spoke to you in October last year um so we'll we'll crack into that in a
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moment but before we do for those that haven't uh listened to that episode are you able to remind us about the Future
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Leaders fund starting with I guess defining what is a future leader and what does that mean for your investable
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universe yeah I mean basically a future leader for us is
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um a long-term attractive high quality business you know we want to invest in
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businesses that compound over a long period of time so we look for businesses that can can sort of grow that not
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necessarily have to be high growth but you know steady sort of growth of a long period of time um they you know have good margin
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generate lots of free cash really good um rates of return that's a sort of key metric for us ideally we want them you
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know to possess good strong balance sheets so they can withstand different stresses and really be run by very
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capable um you know managers and management teams so yeah the sorts of businesses that we Define as Future Leaders and
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they're the sorts of businesses that we want to partner up with um you know over a long period of time so we've got a filtering process that we go through to
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kind of end up with those there's four thousand socks in the universe a thousand in our index and we're looking
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for the top one or two percent so what Marine said there that's what we're trying to look for and we're trying to get to the top one or two percent which
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is which is speak it's a big step process but um that that's critical now
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maroon I made I made a joke in the uh in the game at the start that Kathy Wood would also say she invests in future
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global leaders and it would be maybe helpful for us to understand how you think differently to Kathy Wood and
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maybe juxtapose you know some of your top Holdings against some of hers because I I imagine that they're quite
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different while she's got you know Zoom DocuSign teledoc and Tesla what what are
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some of the companies that come to mind when you're thinking um future global leaders
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yeah look at that look I think for us um Future Leaders you know can can take
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place in any industry they don't necessarily have to be a technology driven business you can be a a future
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leader in a very Niche industrial segment for example like let's say you make like a very Niche sensor that gets
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used by Airlines or gets used by OEM manufacturers for cars Etc and you
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dominate that industry and you do it really well and you earn really good rates of return and generate good
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margins so it's not necessarily a technology driven business um you could be
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um innovating in in a particular service stream or something like that so I think
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if you just look at technology and Technology driven businesses then then sort of I think that's sort of where you
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end up with sort of where Kathy is um we tend to be a bit broader in in our
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definition of global Future Leaders in that they could be dominant businesses you know it could be a consumer brand
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for example um so some of the companies um Montclair for example they do Luxury Winter Wear
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so if you've ever heard of Canadian goose for example they're sort of like a higher end version of even Canadian
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goose and and they sell um thick bomber jackets for four or five thousand dollars and you know the
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emerging middle class particularly in Asia um uh and China they go crazy over that because that for them is a symbol of
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status it's a symbol that you it's an aspiration you know you've made it um and so for us that's a business
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that's growing over long term but it's not really doing anything fancy in terms of new you know technology or or saving
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the Universe um but it still is a global future leader in our eyes so I think that's sort of the key difference in terms of
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of you know how we Define it more broadly and I think Kathy is just sort of looking a lot um narrower and a lot more specialized
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in sort of the um the Technologies and what we look for we tend to probably
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place a bit more emphasis I would say on the hearing now I think Kathy's sort of looking further out 10 years from now we
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generally have been avoiding concept stocks or loss making stocks we actually want businesses that have an existing
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proven business model and that you know can continue to grow in in the future not just sort of pinning everything on
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the future and sort of you know the the revolution of the future I guess it's a it's a novel concept existing proven
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proven business models you guys aren't in on the main stocks
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all over the top 10 because that's yeah I mean our top 10 like we've got top 10
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Holdings in um stuff like energy Insurance um technology uh consumer so really your
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sort of widespread um Healthcare we've got a couple names in healthcare so it really is sort of widespread
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um summer sort of household name some uh sort of more B2B players um but it's business to business yeah
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sorry business business but but they're all all very good at what they do so we're almost a year since we last
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spoken there's no question that plenty has changed uh over that past 12 months
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so how how would you sum up the year that has been and I guess from the point
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of view of the top 10 Holdings how some of those companies held up how have you been managing the portfolio
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yeah no it's a really big change so the last 12 months a lot has changed I guess we could say the last sort of rut the
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situation now is very different than the last 10 years so a very significant compounding effect of the current challenges Rising inflation Rising
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interest rates uh lower Market liquidity lower valuations much higher investor skepticism tighter labor markets
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um much you know Global pressures from higher expectations in like ESG environmental social governance
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behaviors within organization um so it's been a very volatile period for for the world to just absorb all
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those Concepts in their head and markets um it's been very volatile so the top 10
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actually have probably hasn't even changed that much the last 12 months it really hasn't moved
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um the companies that we own are still doing quite well was Marin mentioned we've got technology companies energy companies consumer companies
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um and some Industrials that have done you know still done quite well but all those conditions have put extreme pressure on margins
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um we can touch on later sort of how we can about the portfolio but it's really the market structure you've got to think
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about because whether the companies that you want can hold all those pressures in
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their businesses and actually maintain margins actually comes down to the ecosystem that they operate in and if
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that ecosystem is highly competitive and it can't hold the margins there's a lot
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of profit warnings already coming from Europe and now just starting in America but Europe in particular because of the
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energy crisis and the cost of living crisis but as these pressures intensify over the next 12 months the market
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structures and ecosystems that companies operate is what you've really got to think about and that's I think where
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this environment is actually very different to 12 months ago but you know it's also very different to what it was
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over the last decade because rates have gone up significantly so the sort of hurdles on companies
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um and what they have to sort of yeah jump over in order to make their margins and maintain margins is is is really
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high compared to what it was 12 months ago and all those covert conditions which was free money and huge
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government support um a lot of that's gone so yeah companies are very much faced with the
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ecosystem they operate how much their companies or how much of their product is loved how much does the businesses
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that they're supplying to need them how critical is that application um if it's not Mission critical and it's
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not huge customer love in terms of I need to have this product as an aspiration
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you know they're under a lot of pressure I guess in Broad Strokes there's sort of
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three options that you have as fund managers in a downturn you can go to
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cash you can sell some positions and go to cash you can turn defensive and you know invest in different positions or go
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short the market or you can you know I guess hold strong and uh you know keep
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buying more or stick to your original positions how have you guys thought about navigating this the last 12 months and I
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guess which bucket would you put yourselves in
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look it's probably a combination of all of them I think if you sort of just rely on one or the other
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um you're sort of not utilizing all the tools so um you know we we do Focus predominantly
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on on quality business models um you know high quality franchises uh James said you know generally businesses
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that have um good pricing power for example um so that means if it's fears about
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inflation which we've sort of had these businesses can sort of hold um some of their some of their margin if it's fears
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around recession again if you're providing a product or service that's necessary for your customers rather than
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sort of a nice to have then then your revenues tend to be stickier so I think if you gravitate towards quality as a
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starting point um it gives you some of that defensive characteristics that you look for in
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down markets and so you're already positioned there without even needing to
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sort of sell and sort of go defensive anyway because those businesses themselves exhibit some some other
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inherent defensiveness anyway um in in their own business model so that's half that's a half of our
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portfolio is currently what we consider to be quality um and the rest is other cyclicals
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defensives um special situations value stocks yeah yeah yes so I think that was sort of
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like a key thing for us the other thing um that has sort of been uh really helpful for us is again sort of you know
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going back to inflation and inflation fears probably start at the surface about 12 months ago
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um because we have a valuation discipline at that point in time energy was an area probably about 18 months ago
15:47
that we were attracted to because energy has sort of been left behind if you sort of remember um you know there was also other covert
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winners and it was stuff like zoom and DocuSign and Peloton and all those things sort of went crazy and there was a whole bunch of
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um you know I guess old economy areas such as energy which which had sort of been left behind and they didn't get
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caught up in any of the the the the the meme stock Mania so energy was one that
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we were attracted to uh because it's sort of been left behind and and um yeah there was really good pockets of
16:17
value there and so we started to build up a position in that probably 18 months ago and then inflation fees started to
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pick up maybe 12 months ago and that was positive for inflation and then and then you had sort of Russia invading Ukraine
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and all the sanctions on Russia you know um by the Western World and Russia is a big exporter of energy and that's sort
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of given energy another shot in the arm so um we were also sort of uh you know fortuitous to sort of have that energy
16:41
position there um so we we haven't really had to do a whole lot uh in terms of like wholesale
16:47
chopping and changing I think we've sort of largely stuck to our core but part of our core I think gives us
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that inherent protection Anyway by by focusing both on on
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um Quality businesses and also having like a a robust valuation discipline and
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not you know paying up for um the best stories
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um you know and paying whatever multiple the the market is putting on but rather sort of going back and saying how much
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do we think this is worth it might be a great story but how much do we think this is worth and if it's trading you
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know for less than what we think it's worth then we'll buy in and if it's trading at you know much higher valuation than what we think it's worth
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then we'll sort of leave it alone even if it has the sexiest story out there if only I was in on the energy trade 12
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months ago yeah we bought a stock called
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it actually making money when we bought it and the analyst said to us you know over the
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next two years they're going to release trains as in like a whole you know a stream of LNG
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um and the LNG price here went vertical um and that stock has has gone up you know sort of two two to three times over
17:57
the last 18 months and that's been phenomenal and you know I was reading about them recently and like they're
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exporting a lot of LNG to Europe to try to solve the European gas issues and um they've become a critical part of you
18:10
know the solution of that of that now so um yeah red energy has been been great in it like Marine said it was a very
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forgotten sector so we thought it was value um and now it's yeah probably more momentumy but it's still very very cheap
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um as a business as a sector so we're still we're still overweight still still like it so you'll take a value I'm interested in
18:30
that comment where you said you bought it when it wasn't making any money and um just where that kind of fits into the
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process of finding and uncovering these gems there's been plenty of businesses
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over the last 10 years of who have been telling us that you know they are Future Leaders putting a lot of Spin and and
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now they're trying to tell us that they're all solvent and it's all good so um yeah just kind of wondering how you
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do look through that sort of marketing spin Identify some of the true gems
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um yeah yeah I'll just touch it on engineer is really like looking out two to three
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years which was the release of the LNG gas uh maroon can touch on a lot of the tech ones because we dodged a lot of a
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lot of trouble in Tech that which was really a cool stuff that was loss making and crazy sort of sales valuations
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um but specifically on on energy and other sort of Industrials which were really cheap we just looked at what was
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happening over the next two years valuations are very attractive analysts were really positive internally they
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knew what the Outlook was and we you know we did move into them and that was energy and some Industrials but yeah
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maroon can sort of talk about the tech ones which there's a lot of sort of dodging dodging those and not owning them because a lot of them were yeah
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great stories that traded on sales multiples but we didn't own a lot of them right yeah so I look I think the
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key for us is really it comes back to our process and we have a very sort of robust and diligent process that we
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always follow um and so we sort of look at various different aspects we look at businesses
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you know through multiple pillars there's three of them there's one that's a viability which is effectively more sort of the here and the now so the
20:04
margins the return profiles you know how viable is the business another pillar is the sustainability which is you know how
20:10
sustainable are these going forward um so you could be earning really high margins today really good returns
20:17
um but you see a wall of competition coming on into your space and so you sort of look out and you go these
20:23
margins and returns are not sustainable you know five years into the future or it could be the other way around where
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you're not earning a whole lot now for whatever reason maybe you're reinvesting quite a lot right now but
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you can sort of see that you know those those numbers so um the viability is sort of looking more at the Here and Now sustainability is
20:40
sort of looking at that profile over the next few years and then credibility really is sort of like our conviction in
20:47
management teams and and accounts and things like that so the process I think for us weeds out a lot of a lot of those
20:54
things because you could be doing something that's super cool today but again if it's not if there's no
21:02
competitive Advantage if there's no sort of unique angle to what you do that's going to protect you in the future it's
21:09
very hard for us to buy in so you know Peloton for example it's like right yeah Peloton I mean look it was a novel
21:15
concept for example But ultimately it is um a hyped up home exercise routine
21:22
right um and it is jazzed up with sort of like an iPad and you know you you can do all
21:27
different sort of biking circuits and and all sorts of different things but ultimately it is um you know a a home workout session
21:35
um so firstly it's very easy to get into right you know lots of people have been doing sort of home workout sessions
21:42
whether it's sort of you know aerobics or sort of you know a Shadow Boxing or or anything of that nature there's
21:49
different ways of being able to exercise at home the other thing as well is exercising at home was elevated during
21:55
covert because you couldn't actually go out um you know in a more normalized post covert World sure there'll be a lot of
22:01
exercise at home but it's probably not going to be as elevated and as height and as you know when everyone seven
22:06
billion people were locked down in their homes pretty much all around the world at one point in time so being able to
22:12
look out and sort of look at the business model and and how they make money and and say is there something
22:18
unique about these guys or can they be competed the way can can other um you know home stationary bike
22:25
manufacturers get into this Market absolutely can others you know generate a lot of hype and a lot of marketing
22:30
spin around um you know how unique their service offering is absolutely and so for us
22:36
something like that just didn't look like it was genuinely sustainable um going forward and so I I think again
22:42
it sort of comes back to the process and and just being able to see just how
22:47
defensible those those sorts of business models are yeah so definitely we've seen like those days of sort of Storytelling
22:53
and narratives narratives and momentum clusters that trade on big sales multiples performing well and getting a
23:00
lot of Market support so really high valuations they could raise money overnight those sort of days you know
23:06
really are behind us and now like and what we do as a Marines of the island we
23:11
look at cash flows and look at profits we look at sustainable margins can they manage the cycle can they access and
23:16
price debt very reasonably and we look at all of those really closely and we looked at a lot of these Tech bubble sort of stocks that happened
23:24
during covert or work from home covered bubbles um and concept stocks that just didn't
23:30
make money but sounded really really good and we're absolutely booming um two years ago and our view is as we move
23:36
through to 2023 a lot of these pressures that we've talked about in terms of costs
23:42
um are going to start to flow through so into the consumer into corporates into margins and that's why you need to be I
23:49
think even more diligent today um than normal because this is a very it's it's going to be a pretty
23:55
challenging likely six to 12 months um and yeah stories and narratives and
24:01
little momentum clusters are not the things you want to be chasing yeah going back to that Peloton example
24:07
I think if there's one lesson I've taken from 2022 it's that I will never invest
24:12
in Fitness well I didn't I was about to say it again but I haven't invested in Fitness but Peloton and f45 two of the
24:20
most hyped up stocks in the past few years and uh and now we're saying
24:25
there's a bit of noise around uh Facebook's VR Fitness experience and they're trying to acquire a company
24:31
that's a leader in VR Fitness and there's a bit of hype that you're starting to see in that Community around
24:37
the uh Fitness being the use case for VR after gaming it's going to be like the next big use case I'm staying away I've
24:45
learned 2022 has taught me don't invest in Fitness because it's all just fads yeah yeah it is hard like it's the
24:53
barriers to entry are just so small like we look we've looked a Peloton like twice and we spent like half an hour on
24:59
it um looked at it in detail we debated it amongst ourselves it looked the competition and the competition came
25:05
Amazon um you know a lot of different competitors
25:10
um and if the bat yeah the barriers are low like eventually you will get competed away so um but yeah Fitness has
25:16
been and we looked at f45 as well that was sort of pitched to us and we thought okay we'll have a look and um
25:22
yeah you're right it's been this has been really tough like and it's globally
25:28
globally Fitness has been really tough no one's really kind of cracked that market
25:33
um to make it really competitive yeah um and make it a sustainable margin so
25:38
it's not an easy one so if we can just go back to your um I guess your framework for for looking at stocks uh
25:46
viability sustainability credibility I really like uh how succinct that is and
25:52
then so once a company passes those three I guess threshold tests or
25:57
whatever you call them it's then it then uh you were speaking before maroon about uh valuation discipline and uh only you
26:05
know energy came up on your screen 18 months ago because uh the companies that had passed those three tests were also
26:12
looking cheap so I guess the question is if energy came up on your screen 18 months ago and we've seen what happened
26:18
to energy since what's the sector that's coming off on your screen today
26:24
yeah look there's there's probably not a a sector in general that's that's that's screening uh right now
26:32
um we we are looking for specific things and I think it's just the function of I think where we are in the macro right
26:37
now so it's it's less about the valuation per se and it's more about just navigating what we think might be
26:44
you know a very tricky and and vulnerable window over the next six to
26:49
12 months um so you know it all really stems from I guess from inflation
26:55
um and central banks around the world particularly in the US um you know they're they're very firm about sort of um bringing inflation back
27:02
under control um and and all the recent commentary is that uh particularly in the FED they're
27:09
willing to tolerate some economic pain to sort of um bring inflation under control so that
27:15
sort of brings about two things that that we're looking for one is businesses that can
27:20
um protect uh their I guess margins and and profits during inflationary periods
27:27
and the second thing is businesses that can be resilient during uh you know soft
27:32
Economic Times so they're the things that we're really looking for now as opposed to sort of just looking for something that's necessarily cheap so I
27:40
think for us first and foremost is finding those characteristics or businesses that exhibit those
27:45
characteristics that we think will be good places to navigate the next sort of six to nine months and so
27:51
um again a lot of it is very company specific but I'd say one area that we did go into
27:58
probably about six to nine months ago was Insurance um we sort of built up a position in
28:04
insurance and there's a couple of reasons why I think insurance they operate on their own cycle which is
28:10
independent of the economic cycle um so uh insurers when they receive like if if you're a property insurer and and
28:17
you go through a flood season for example like what we just had you know along the east coast Last Summer
28:24
what the insurers do is actually reprice upwards their premiums for the following year to sort of make back some of those
28:30
losses so you have these cycles that usually go for about two or three years in each Direction in in insurance and
28:36
hardening is sort of when um insurance premiums are going up and and uh and and we've been sort of seeing
28:42
that so you've got um premiums that are going up independent of the economic cycle and
28:48
insurance is not something by the way that you can just stop having just because you know um you're not being
28:53
paid a bonus right like your house needs to be insured um you know life insurance if you're a
28:58
business um you need to have insurance to be able to operate so if you're ever news are down 10 you're still going to insure
29:03
your business anyway because it's you know it's just the cost of doing business so it's very sticky
29:09
um it's independent of the economic cycle and it's been going up the other thing about insurers is they
29:14
collect your money up front so you think about you know you you pay for your home and contents or your car insurance you
29:20
pay the premium up front the company gets that and basically um they're liable to pay you out you
29:26
know any course over the next 12 months um if you make a claim so basically they've received your money up front
29:31
they have free reign to do whatever they want with that money for the next 12 months uh 12 months because it's
29:37
technically a liability for them a contingent liability it's unearned income that sits on their balance sheet and only when that policy let's say 12
29:44
months only when that policy expires that it generally becomes theirs now what they do with that is they usually
29:51
invest in very short-term uh fixed income securities so usually like three
29:56
months or six months or 12 months fixed income securities two years ago three years ago they were
30:01
they were getting very little by way of yields on those Investments right because interest rates are quite low now
30:07
interest rates are going up and and so you know people like insurers who invest in sort of um short dated
30:13
um fixed income um now can earn money on that premium that you pay for them in advance 12
30:19
months in advance they can earn some extra money on that they weren't earning two years ago so they've got
30:24
um more money coming in Via their premium prices going up they've got more money coming in Via their Investments
30:30
um and it's a very sticking resilient business and they generate a lot of free cash so that was an area for us that we
30:35
found quite attractive um and we sort of bought a few names in that space um and it's it's actually done quite
30:42
well for us um over the past sort of six months or so but outside of that it's really hard
30:47
to sort of categorize and say one sector is sort of the one that's you know flashing for us that this is sort of where we need to be right now super
30:54
interesting so um Maroney mentioned the sort of the next six to nine months and
31:01
um a few of the the macro headwinds that we're facing into no doubt inflation it
31:06
seems to be a little bit more persistent than the market would would like interest rates looks like they're going
31:11
to be raised at a rate again that the market is a bit uncomfortable with fear of recession plenty going on
31:18
um what do you what do you guys see as as the risks moving forward from a macro point of view what are you paying
31:24
closest attention to if you kind of had to choose one or two
31:30
uh yeah because I think there is so high in increasing I think um like I said it
31:36
all comes down to inflation I think inflation was the the the uh or fear of inflation was the first thing that
31:41
surfaced probably about 12 months ago um interest rates started to all yield started to pick up on the back of that
31:47
market you know expecting interest rates to go up uh and then central banks have been very aggressive in in pushing up
31:54
interest rates and and not only aggressive in their actions but also aggressive in their wording like you know what I'm referencing there there
32:00
was a Jackson Hole speech a couple of weeks ago by the U.S fed where basically um uh the chairman said that they're
32:06
willing to tolerate an increase in unemployment and you know a a softening of the economy to sort of achieve
32:13
um their inflation objectives so you've got unemployment at three and a half percent um who knows what they willing to
32:19
tolerate but you know five or six percent um you know sounds reasonable
32:24
um if you sort of use that language so they're basically okay with unemployment picking up another you know
32:31
um 50 from where it is today from three and a half to five and a bit I would say
32:37
um because they really want to fight inflation um and so I think the best outcome the
32:42
most ideal outcome is is what's sort of often referred to as a soft Landing where you raise interest rates high
32:49
enough that you cool inflation and then economic growth slows down but it stays
32:54
positive you know so it goes from say plus four to plus two or plus one but it stays positive and that's that's what's
33:00
known as soft Landing um the alternative is a hard Landing where you raise interest rates so high that actually economic growth turns
33:06
negative and we enter a recession um and then you know unemployment goes up and corporate bankruptcies go up and
33:12
mortgage default rates go up and everything that's nasty goes up and the concerning thing about that is we don't
33:18
really have a good track record because I think over the last 60 or so years 70 years we've only engineered about two or
33:26
three if I'm not mistaken soft Landings and we've had a whole lot more by the way of hard Landings and and control to
33:33
control inflation and there was another I sort of read the other day where inflation has never gone above five
33:39
percent and and being tamed without a recession and you know inflation in the US now is sort of running with an eight
33:45
handle so if we're able to tame inflation without a recession it'll be the first time I guess of the last
33:51
hundred years so when you look at that and you go the odds are not in our favor of being able to sort of pull this off
33:57
without you know causing all the pain um we may but yeah you know the odds just just aren't there so I think for us
34:04
that's why um you know things about resilient businesses and businesses that
34:10
can protect themselves during inflation and been such a prominent feature of what we're looking for over the past
34:16
um I guess six to 12 months it's it's because like we look out there and we sort of see this looming uh we don't
34:22
like the look and smell of it and so we're just trying to uh you know make sure that we get set up from now that if
34:29
something um sort of breaks I guess in the near future we're sort of set for that rather
34:34
than sort of scrambling um you know behind the eight ball and and and and trying to get set you know
34:39
at that point in time so between us I've been talking about the words persistency and consistency so at the moment
34:46
basically a growth certainty and yield are becoming scarce again so I think
34:51
there's a premium that's going to come into the market where if you can provide growth certainty and yield then that's
34:57
going to be okay um but when we think about picking stocks it's all about the persistency the persistency of
35:04
um of the return profile can you hold it basically and that's what yeah we talk
35:09
about ourselves whenever we buy something new or whenever we're reassessing the portfolio um we're thinking about those words
35:15
persistency consistency visibility um and that's really where you know that
35:20
sort of strength and a big chunk of the portfolio in half its quality um and then the rest of them we want to
35:27
make sure they still have those attributes of Murray mentioned before so uh when we talk about macro we often
35:35
talk about Glo like we talk we talk about it globally and that makes sense because the economy is so interconnected
35:41
and globalized and you know we all look to Jackson Hole and we all look to the U.S federal reserve and and what they're
35:48
saying and what they're doing but um we are also seeing I guess uh some more
35:54
localized issues we're seeing Europe face into an energy crisis we're saying China face into a property and mortgage
36:02
debt crisis um honor I guess Regional level or or even on a like a sector by sector
36:09
industry by industry level is there anything that you've just put uh any countries or any industries that you've
36:14
just put a black line through and you said for the next 18 months we're not touching this we'll come back to it when
36:20
things start to improve [Music]
36:25
yeah I mean there's a few um I would say less country and and more
36:34
um specific areas so I I think you know uh yields going up rates going up that's
36:40
that's putting pressure on valuation so you don't want exposure to businesses where a lot of the valuation resides in
36:45
the future so you know what's known as long duration so anything that's loss making or anything that's super expensive you
36:52
know 50 60 70 times PE um we're trying to stay away from because they're very very sensitive to
36:58
Tiny changes you know tiny increases interest rates um but you know that they've come off a long way over the past six or nine
37:04
months but I don't think we're completely out of the woods yet um in terms of you know that vulnerability to interest rate so we're really trying to
37:09
stay clear um from that um we're trying to stay clear you know
37:15
as James said earlier about businesses that are sort of in like very um uh super competitive or commoditized
37:22
Industries where they have no pricing power for example because you know we sort of see inflation we see the
37:27
pressures that are that are gonna um business is going to have to face on their margins and if you're one of you
37:33
know 10 000 different me too providers that do the exact same thing then they're not going to be able to put
37:38
through pricing um we want businesses that are very unique in what they do and that can sort of get inflation
37:44
protection um and then we're staying away I guess also from businesses that are
37:50
heavily uh leveraged um a because if we do enter a recession having a lot of depth in the balance
37:57
sheet decreases your chances of surviving uh and B um you know increase funding costs and
38:02
and these businesses that have a lot of debt are going to face um you know pressures to their to their bottom line
38:08
via VIA increased um debt costs so I think these are areas that we're really trying to stay away from
38:14
um uh you know and so rather than looking at it by sector or by geography we're looking for attributes that we
38:20
really don't want at this point in time and and ruling businesses out um you know but based on that and and
38:26
also businesses that are very cyclical right because they're exposed to the economy so anything that's heavily cyclical
38:32
um where if economic growth goes down these go go down even further um again we're trying to stay away from
38:38
them really looking for businesses that are uh I guess stickier or more resilient they're definitely like what
38:44
you mentioned like Europe we have lower exposure the us we have a lot of exposure Japan may have a very very low
38:49
level of exposure because the Roes are very low um overall so
38:54
um yeah Europe we are very cautious I think European recession is something that the markets basically thinking is
39:01
quite certain for next year um and consumer weakness globally is something that people think is pretty
39:06
much given so they're definitely things that we think therefore I think what do you go to as maroon mentioned something
39:12
unique but also things that there's a high element of trust so if it's in engineering or Healthcare or privacy or
39:20
Finance if there's an element of trust and respect and aspiration
39:27
like whatever happens in geopolitics or the market or inflation those things are
39:34
still going to need to be there right they don't move human desire for trust and respect and aspiration still exist
39:42
in our heads and it's still a desire and especially if you need a product like insurance
39:48
or engineering or Healthcare the trust element is something that takes decades
39:53
to build and it can't be manufactured or it can't be competed away it takes many
39:59
many decades so for us that's kind of where we've gone to so most of the top 10 they either produce them something
40:05
that's quite unique all they've got a business where there's an element of trust whether it's a small component in a big process a small share of wallet in
40:12
a big process or something that's aspirational so I think if you think about sort of where you don't want to go
40:18
it almost tells you where you do want to go um so I think that that's sort of the
40:23
you know there's there's two sides to it and I think that's that's sort of where we've gone onto because there's so much
40:29
that I guess there's a lot that you don't want to own in this market and in this environment that is very very
40:36
pressuring for companies um so therefore yeah the ones that you want to own it's probably a smaller
40:41
opportunity set than the normal over the next 12 months um and but if those can can hold their
40:47
own um then it's you know really exciting to own those stocks well speaking of where you do want to go and where you don't
40:53
want to go uh I think to close out the episode it would be great to hear where you both are going and if you could
40:59
perhaps provide one company each that is a good demonstration of everything that
41:05
we've kind of discussed today uh in terms of your investing universe and and the companies that are really exciting
41:12
you at the moment so um maroon maybe maybe start with you if there's one company that uh yeah you
41:18
could let us know that'd be awesome yeah um so I'll one company I'll sort of put
41:25
forward today is called Arista Arista networks they make um Network switches which for those that don't know if you
41:32
have like different you know devices connected in a network so let's say you're at work and you know everyone's
41:37
got different sort of computers and they're all connected at work and they can all sort of share files and work on similar files in the back end there's a
41:44
piece of Hardware called Network switches where they're all sort of plugged into that and that sort of facilitates the transfer of data from
41:50
one computer to another within Network um they're a leader in that they uh
41:55
there's you know two other big players in there Cisco and Juniper along with Arista
42:01
um where Arista is growing quite a lot in is in the cloud space if you sort of think about data centers where all the
42:07
clouds are hosted there's lots of different devices sort of talking to each other there arista's two biggest
42:12
customers uh Facebook and Microsoft um you know so Microsoft has got Azure so you know you can sort of use Azure was
42:19
like a competitor Amazon AWS so you can sort of host all of your if you're a small SME you can host all of your
42:25
network on the cloud you can use someone like um you know a Microsoft Facebook obviously you're hosting all of their
42:31
content right all the videos all the photos um they they sort of need to host that on their Cloud They Don't Really offer
42:38
as a third-party solution but they're the two because customers um obviously cloud is is growing um you
42:45
know strongly and we'll sort of continue to grow so the industry itself is got that nice um growth Tailwind behind it a risk that
42:52
I think is increased its revenues uh 15 fold over the last decade so it's you
42:59
know it's it's it's grown like a weed we we continue to expect that it should be
43:04
able to grow um you know low double digit growth rates um you know for the next few years going forward generate really good
43:11
margins really good returns sort of north of 20 return Equity generates uh
43:16
free cash and they they use that to sort of fun BuyBacks and the management team is is well well regarded so the
43:24
co-founder of Arista he co-founded a company called Sun Microsystems which
43:29
was brought out by Oracle many years ago for a few billion dollars he co-founded a company called um Granite Systems
43:35
which was bought out by Cisco he was one of the First Investors in Google he actually gave the the Google Founders
43:43
um Larry Page and Sergey Brin hundred thousand dollar check himself personally he was one of the First Investors in
43:50
that so he's he's got this legendary status within Silicon Valley
43:55
um the CEO uh you know similar thing she she she's had a decorated career at AMD
44:00
at Fairchild she was at Cisco um and she's been there for 15 years so uh they
44:06
have a very well regarded management team so I think it sort of ticks all those boxes long-term quality compounder
44:12
does really well dominates its segment uh you know it's growing nicely good
44:17
margins so there's nothing not to like about Arista yeah I've just I I've just
44:23
Googled the company while you were talking about it it's up 30 this year which is rare to see company up in the
44:28
in the past 12 months um for people playing along at home uh trading in New York stock ticker a-n-e-t uh remember to
44:37
do your own research um and you know make your own investment decisions but fascinating company I
44:43
hadn't heard of um and one that I'll definitely do more research on so uh James maroon has set
44:50
the bar pretty high there uh do you do you have a uh you have a company that
44:55
comes to mind yes it's a little bit it's very stable as well and really
45:01
um fascinating also the big thing is a long-term quality compounder like Arista a very obviously different world but
45:07
it's an insurance one that we've spoken about on on this episode um it's Arthur J Gallagher code ajg us
45:14
um it is an insurance business provides Insurance broking Consulting um third-party settlement claims and
45:20
admin to basically a lot of companies all around the world um it's also very ethical like this is
45:26
one of the top 100 most ethical companies in the world um it's a real sort of one of these what we call a beautiful compounder has
45:33
really strong returns um strong sustainability really strong processes Market structures it's like
45:39
admired and respected as one of an insurance companies in the world um credibility is also very high as I
45:45
mentioned in terms of the accounts and management um and this is it a voted one of the top
45:51
100 most ethical companies and what are the most desirable places sort of to work so um yeah Arthur J Gallagher is one and
45:57
we've spoke about insurance I was the financials analyst for Australia in the in the great the financial crisis in 09
46:03
and um and during that period worked out that insurance companies make three margins one is the insurance margins one
46:10
is return on shareholders funds and one is returned on on what's called tech tech reserves
46:15
um and when you're making the triple benefit of that upswing in terms of the upcycle in Insurance
46:21
um these stocks are really really good places to be so um the the capital I guess is being sort of removed out of
46:28
the system in terms of capital liquidity so hedge funds A lot of them are removing Capital out of the insurance
46:34
system that when you've got Rising declining rates or cheap money a lot of
46:39
capital goes into the insurance industry but now the price of risk and the price of capital and the attitude towards risk
46:47
um is definitely becoming a lot harder and that that's why the insurance industry is going through that hardening
46:53
cycle but the benefit of rising rates is they get the better return turn on shareholders funds better return on Tech
46:59
reserves um and this this business is is a distributor um of insurance as well so you're
47:05
getting all of these sort of positive Tailwinds um that you're getting from the industry perspective as well so yeah we like it
47:12
it's in our top 10 um but it's you know in a great part of the cycle um but yeah a great long-term compounder
47:20
love it well maroon and James it's been an absolute pleasure chatting this afternoon we we can't uh leave the call
47:27
though without letting everyone know the exciting news that you'll both be appearing live in person at finfest here
47:35
in Sydney on October the 15th sharing all your wisdom on all things Future Leaders so we're excited we're actually
47:43
facilitating that uh conversation oh so that's when you convince these guys that
47:49
you're a yeah 25 minute pitch session from me so on the main stage steak main stage
47:57
um which we're really pumped about mid-afternoon I think so everyone's going to be nice and lubricated it's
48:02
going to be fun but it's uh if you haven't got your tickets and you'd like to uh come and
48:08
meet James and maroon in person and have a chat to them and get them get to uh
48:14
many stock tips from them off record then uh you know the place equitymates.com finfest but uh chance
48:21
it's been an absolute pleasure as always we always take so much information from um from you in these conversations and
48:27
I'm sure the equity mates Community have as well and uh we look forward to catching up with you in a couple weeks
48:33
time great thank you very much we're super excited for that and thanks for having us again guys yeah always a pleasure
48:39
thanks guys we we should also say that if you can't wait until the 15th of October to hear more from James and
48:45
at go to fidelity.com it's more information on their fund and
48:51
uh more information that they've written as well nice well plenty of chains and more on content
48:57
thanks guys
Portfolio Manager, Fidelity Future Leaders strategies
Portfolio Manager, Fidelity Global Future Leaders strategies
