EP 18: Rezo Kanovich - Portfolio Manager, Artisan Non-U.S. Small-Mid Growth Strategy

Triumph! What an honor it was to host the famed international investor Rezo Kanovich from the Artisan International Small Mid Growth Strategy.  Frontier has been a long-term investor with Rezo and Artisan, and I was shocked to have been able to interview such an icon of international investing.

We deconstruct the importance of security selection, the opportunities before us, the inefficiencies, and risk aspects of small stock investing.  After listening to this, you might be left pondering, who would index this space?

Buckle up, ear bud up, or grab the dog and go for a walk.  What a rare treat this interview is.

Transcript

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Welcome everybody to the podcast deconstructing Alpha. I'm your host Jeremy van Arkel with Frontier asset management. And today we have quite an interview lined up for us. We have reso coverage of artists and international small mid cap fund. reso has been a portfolio manager with artists and as well as Oppenheimer's International, small mid in his past. And he comes to us with quite a wealth of knowledge and experience in international investing. As many of you listeners might know, you know, international stocks have been fairly depressed or not in focus lately for investors. And we were in a situation where we have a very strong dollar, which opens up further opportunities for international investing. A lot of strategists are talking about how international markets have high expected returns. And so I thought we would go straight to who I believe to be one of the most experienced sources on international investing, and in particular, international small and mid cap investing, which is often overlooked area of opportunity. I think this podcast was extremely insightful. And what you're gonna get from this podcast is, is really sort of the, the, the essence of of managing a portfolio, which is really managing a portfolio of security by security, you know, they're not, you know, it's very hard to just call all securities, the same opportunities that are idiosyncratic, they do not all have equal upside and downside. And often, particularly in the international space, it is hard to uncover opportunities, and it takes deep understanding and deep intellectual property to really understand, you know, markets, and as well as the businesses and how they're interacting with the economy. And so I've really enjoyed this. Recording this podcast. reso has been somebody who has been great to follow. He is obviously pretty well known in the industry. I think it's an honor to have him on the podcast. And, and so I guess we'll just jump right into this. But before we do, please again, as a reminder, for our compliance, please stay on to the end of the podcast for important notes and disclosures about what we're going to talk about. And so without further ado, ladies and gentlemen, reso KOVITCH, artisan, international small mid cap fund reso. Welcome to the podcast. deconstructing alpha is such an honor to have you on here. I really appreciate you taking the time to be here.

02:46

Thank you very much, Jeremy, thank you for inviting me. And it's a real pleasure to have this opportunity to speak with you. And I look forward to our discussion.

02:54

Awesome. So this is super interesting time in markets. Obviously, there's a lot going on. So I'm glad we get to have this time. Where are you calling in from?

03:05

I'm calling in from our offices in New York. Both my team and I have been here full time for the last year.

03:11

I you traveling much? Or is is most of your meetings now occurring on Zoom still Are you out

03:18

and traveling quite a bit. We're fortunate both the companies have started trickling in here in person. And my team and I are traveling fairly extensively. My colleague and I, my colleague Samir and I just came back from a week of meetings in in Tel Aviv. My colleague, Matt and I just spent three weeks in Japan earlier this summer. We were in Scandinavia in the spring, and Paris in London earlier in the year,

03:48

we could probably have a whole separate podcast on the travel schedule of a international portfolio manager.

03:56

So I'll invite my wife. Yeah, there we go.

03:59

So can you remind our listeners here what your role is at artisan

04:05

so I'm a portfolio manager of the non US Small mid cap growth strategy. At artists and partners and alongside my team, I conduct fundamental company research across a broad range of companies around the world. Our portfolio is a collection of idiosyncratic investments, diversified across geographies, industries, and we tend to be thematic, in our approach. We tend to be long term investors in high quality businesses, and we look to acquire them at contrarian valuations. As good as long term investors our turnover in a portfolio is typically around 20%. If it's helpful, I can give our listeners a little bit of my background and talk all about my team. Yeah, that would be fantastic. Yeah, so my team and I have joined here in October of 2018. I have a Over two decades of investment experience. Prior to artisan, I managed a similar strategy to Oppenheimer funds where I spent 13 years and before that I worked as an m&a banker and management consultant. I graduated from the Wharton School you can and completed my master's degree in International Economics and Finance at Brandeis University. I grew up in Tbilisi, Republic of Georgia. And when the USSR collapsed, I went to Israel to study physics at the Hebrew University in Jerusalem, before joining my family in the US, I think my personal experiences are only interesting to the extent that multiple abrupt changes including the breakup of the empire, civil war, to immigrations, 911 pandemic, and various other market dislocations have shaped my investment philosophy and have taught me about measured risk taking and importance of resilience. My team includes four research analysts, two of whom joined me from Oppenheimer funds. Three of my analysts have worked with me for many years and have generalist research responsibilities. The fourth individual who joined us in December of last year, I've known for the last six, seven years, and she focuses on healthcare, particularly in a highly specialized biotech space. Maybe a word about our team culture, it emphasizes long term orientation, both in stocks and in people, intellectual curiosity, immigrant greed, and collegiality, it's generally a very nice environment.

06:30

So that background is, um, unbelievably interesting. It must lend itself to these kinds of environments, right. So obviously, we're in this environment, now we have a bit of trauma in the marketplace. But compared to sort of what you've seen unfold, in different countries and in your travels in in your history, this, this is, this is probably just par for the course.

06:55

It is, unfortunately, a little bit par for the course. But, you know, it's obviously a little bit different every time. But what never change is kind of a firm belief, in that it's important to be on the right side of history, and history and progress continues. It's important to be associated with high quality people, as high quality people and high quality companies tend to drive opportunity and emerged stronger on the other side of any kind of crisis. And it's also reinforces our belief that in any kind of crisis, it's important to keep your head down and focus on a bottom up, rather than be obsessed with a headline. And in general, it's my belief that this crisis, as in several others, will bring a lot of opportunities to people who are willing to be patient take a strategic view towards valuing high quality businesses. And for $1 based investor, it's a pretty interesting time to be thinking about the company's a world class franchises, given the massive sell off in the markets as well as appreciation of the dollar visa vie visa vie the basket of currencies, where a lot of these world class companies are domiciled so, so we tend to focus on the opportunity set.

08:19

Yeah, so that sounds like you tend to look forward. So if we're looking forward here as as investors on, you know, for investment advisors, and for RAs and for people to build portfolios of managers, you know, international small cap stocks and small to mid cap stocks and, and, you know, international growth opportunities. They've, they've tended to be strong performance in the past. But when we, when we look out into the space right now, it to us, it looks like attractive valuations, it looks like prices are are pretty low. And then when we talk to people about international small cap investing, it feels like it's sort of a non event to a lot of people it feels like it's being left out of the portfolio pie and it feels like it's under allocated to do you get the feeling that that people are missing opportunity by not not allocating to international small and mid cap opportunities.

09:11

I cannot specifically talks about the way people allocate, it's obviously individual decisions and people construct thoughtful models, etc. But in speaking with investors in the space, I am struck with how many people think about the space as, quote unquote, risk on and we tend to think that that's kind of a fairly simplistic view of the world and perhaps wrong. This has led our strategy. In the more than three years, I've been here and artisan to outperform whether or not it's the large cap, ephah index or the sun or the EM index, but really, I think the opportunity stems from from the asset class, because you know, we're super passionate about about the space we invest but it's it's it's tremendously large, it's poorly understood. It's not. It represents an abundant source of ideas. And we primarily think of this space as as a hunting ground to find small companies before they become large companies, you know, future global three industry leaders. And we don't tend to overly focus on style boxes, or geographies, you know, some top down criteria that people use to classify these companies, but rather, you know, try to identify small companies on their journey of becoming large. I think, I think if I give a couple of examples of companies that we tend to kind of invest in, you know, maybe we'll highlight will highlight the way we tend to think about the world and the way opportunities presented themselves. So a large investor for me over investment for me over time has been a company Switzerland based company called Lonza. We found this company a decade ago, it was completely misunderstood. It was priced as a cyclical chemicals company, and few people appreciated lawns as potential to become a leader in bio processing, and a leading company that provides outsourced manufacturing services for best in class pharma companies. It's a business that enjoys industry leadership, highly recurring consumable revenues, pricing, power, long term contracts, and meaningful modes in a business because its processes are patent protected, and are also included in regulatory filings by authorities such as FDA and other health authorities worldwide. So over the last decade, because of the productivity gains in the space, and because of the growth in the industry, this company has grown to 40 billion market cap from $4 billion market cap when we invest in it, and most people don't need to look at the cyclical opportunity in this space. Another example, is an Israel based company called nice systems, which today is the largest holding a portfolio. This is the company that evolved from largely a conglomerate, a hardware based conglomerate focused on contact centers, and sort of a hodgepodge of artificial intelligence technologies that were interesting, interesting at a time, but poorly applied. And today, it's a leading enterprise software company, and you know, on the top right center of the competitive landscape, and is a leading company in terms of robotic process automation, and analytical products for customer interactions. But we believe that the opportunity for this company is just beginning to materialize, the company has been consistently run with 20% Plus margins, and generates cash flow, which they invested in r&d, the business today is an excellent financial and competitive position has $1.4 billion in cash on its balance sheet, that generates $500 million in free cash flow from a blue chip customer base, and has high visibility for for low teens growth. And that, by the way, is a real growth, because its pricing is largely indexed for inflation, which is sort of an interesting point in current times. And that's in stark contrast to many unprofitable competitors. In its space will focus on high churn customers amassed a lot of debt, and failed to invest in r&d. And, you know, while everybody tended to reward you know, every company in the space on a price to sell multiple for any kind of growth, so people didn't have to particularly differentiate. So, so the reason I have given these examples is because I want to give the listeners a sense of the quality of the franchises that we invest in and, and these are not some fly by night companies, these are leading companies in the space, you know, majority of our companies, you know, have have have leading market shares in the space, leading technology. They, they tend to innovate in r&d, they tend to, they tend to innovate in their go to market strategies. And, and, and, and just because there are small companies, that doesn't mean that they're particularly risky, in fact, in fact,

14:14

the you know, the, the theme I get from many of the managers that I interview is that we quickly delve into some of the stocks that you own some of the businesses that you own the individual names and and you know, a lot of the marketplace a lot of the news a lot of the media likes to talk about big themes and and they sort of brush over this idea of individual security selection and each security matters. But what I get from this, you know, what I believe to be many of the most successful investment managers is that it's all about the businesses one by one, right and so, you know, this is sort of the all the all added values bottom up, you know, and if you want to talk about news items, or whatever you talk top down and and so if if this if we're dealing with Such a huge space here, right? We're talking about international small and mid cap companies that are outside of the United States can be domiciled in almost any country. And just there must be 1000s of stocks to choose from, you know, why would you know, why would people index this space? You know, obviously, indexing is sort of taking over the world here. You know, you just mentioned two stocks that are a 10 bagger and a six bagger. And it seems that if you just were to average the whole space across some sort of index, that where the lines of the holdings of what you own is just defined by an index provider, that you would be giving it to me, it would feel like you're really giving up opportunity. So how do you feel about indexing this space? Are there problems here? Or, or is this a space where there is a lot of potential for added value?

15:56

Now, I think that, you know, there's clearly a lot of potential for added value in this space, and we clearly are huge believers in active management, the portfolio's active share is 97% versus the benchmark, which is the MSCI All Country World, ex us made, and 40% of the portfolio is not in the neck, on a personal level, is I can tell you that I pay zero attention to the index. And, and and, and there are a couple of reasons for that. One, is the reason that you've mentioned that the space is vast, there's 5000 companies, I think, that are classified as an international small companies and a lot of people will point out to, to the idea of kind of analyst coverage, and, you know, that there's, you know, 10 times more small companies and large companies and the sell side coverage on average is, you know, four times less than that, but and that clearly, you know, creates opportunity for discovery. And we'll talk about that, you know, our process and travel and discovery. And, you know, the fact that we find these most amazing companies and in kind of, you know, fairly kind of remote off the beaten place type spaces in the world. But but the other the bigger idea why I think that indexing is, is is not helpful in a space is, you know, having met several 100 companies a year, you know, for over a decade doing this, I can tell you that, you know, kind of 95% of the companies in the space are not particularly interesting. And that's to be kind of kind, it's difficult, people think that going to this space is homogenous with opportunity. And that's not entirely true. It's hard being a small company, vast majority of them stay small forever, or disappear. They face large, powerful competitors often operate in regulated industries, small companies frequently don't have resources to invest in r&d, they're at risk of being acquired, they cannot retain the right leadership talent and, and drive organizations to the next level. They're slaves in somebody else's value chain, et cetera. And so, and so, as a rule, you know, most of these companies, you know, are not are not so promising. However, there are a select few, you know, that are led by highly driven and capable people, they have intellectual property, they have strong brands, and they can build sustainable, sustainable winner. So, so our approach is very much kind of exclusionary approach, you know, involves kissing a lot of frogs, and finding a select few companies, that then we tend to that we think of worth owning for a long time, that have an opportunity to become large, as opposed to, as opposed to kind of invest in large swaths of these companies or think of this space as trading opportunities. That's why That's why I think, you know, I think indexing, you know, doesn't work for us and, and the companies that we end up with are meaningfully strong companies. CyberArk, a leading privileged access management and cybersecurity company, you know, is a truly leading company in this space. convatec is a leader in highly consolidated Company, a market for four continents care, as Bill has a 70% market share in H vac systems in Japan, you know, modernizing buildings for, you know, next generation, climate control, et cetera. Just just just to kind of a handful of names to give you a sense of kind of quality and leadership of the opportunity set. And there are a few of these companies, you know, you need to associate yourself with it's not enough to find kind of a good industry position. You know, governance is very important dynamic dimension of what we do, we tend to buy these businesses, you know, for five years on average, and it's very important, you know, the kind of the, the governance characteristics of these businesses become truly wasn't for us, this is not merely a label, you know, kind of the stewardship of these companies, and kept allocation, you know, tend to make a lot of difference. As you mentioned, we count on his management teams to steward these companies through a variety of crises and emerge stronger and allocate capital wisely bid COVID dislocation bid, you know, be the recessions, inflationary environment, etc. So, so getting to know people and trusting, you know, management's that, you know, that are good enough to drive these businesses through turbulent times, you know, is also something I think the index doesn't do. And so these are just some of the, you know, what not to mention kind of leverage dynamic and, you know, the portfolio is largely debt free. And it's designed like that, and, and also kind of steering it towards geographies where people have redress, you know, is also an important characteristic of I think active management versus versus, versus indexing. But that's, that's our view of the world,

21:05

the will the audience is hearing it here. And, you know, it is, it is, you know, investment management, and selecting securities that, ultimately are going to perform better at a business level, and which hopefully leads to better performance at the stock price is not a homogenous thing, you can't just say, Well, I just think that all of Europe is going to perform well, right there. You know, the European market is made up of companies competing against each other, right. So for every winner, there's a loser. And so there has to be, really this emphasis on bottom up one security at a time. And some people win big and some people don't, as you mentioned, I just want to highlight that, as you mentioned, a lot of companies just stay small, and they don't respond at all, and you don't want to own all those, you just want to own the ones that are going to perform well. And it's very difficult, time consuming, labor intensive to find those companies and understand them better. And so I think a lot of times with this is how I kind of sum up this index, arguing argument. And, and I guess I'll kind of close with this on indexing, and then we can move on. But but the, you know, the s&p 500 is a high quality index, it's pretty homogenous companies, and they're all large cap, and it's probably a hard index to outperform. But that doesn't mean that all other index czar outperform right. So when you take these multi market multisector, multi company indexes of 1000s of securities, it's not the same, right. And I think people are using a linear logic. And so for me international investing, particularly International, small and mid would be an area where security selection, I mean, just thinking logically would make a lot of difference. So let's move on. So, so speaking of that, you know, I think a lot of investors here in the US in their portfolios do allocate to international large cap, but probably not so much international, small. And if they do they do allocate international small, they allocate a fraction of the proportion that they allocate to international large. And so is the, you know, is the opportunity for higher expected returns higher alpha, more diversification, is it better in the small to mid cap space than the large cap space? In your experience? Are the investment opportunities more robust?

23:26

So, so generally, you know, I tend to avoid such comparisons with other strategies or other funds, etc. In this case, I perhaps bring a little bit of perspective to this question, because the first six years of my career in investment management were spent on the large cap growth fund. And I think the learning there was that in order to win and beat one of these harder indices to be that you're talking about. One has to be you know, quiet, concentrated, and super contrary, the difference with our world is, you know, what we found amazingly kind of refreshing what I found amazingly rewarding when I started seriously looking at this space, is that the opportunity set is so rich in our traveller world, and we have an opportunity to you know, invest in Carl Zeiss Meditec when you know it's emerging on its journey from a small medical microscope company into a leader in atomic surgery. You know, we have an opportunity to invest in Swedish orphan by veteran which is a holding today in a portfolio of specialty pharmaceutical companies Sweden, which has a you know, which will be launching two important drugs one and respiratory syncytial virus and other one and haemophilia and potential to to kind of benefit from from a very large market opportunities. You have an opportunity to invest in You know, a company like wolfspeed were, you know, which is, which is a power semiconductor company along with a Japanese company called ROM, which are revolutionizing the electric vehicle industry with power semiconductors being a very important component, high value bottles above a bottleneck in that value chain, and broad emergence in power semiconductors, you have opportunity to invest in software space, you know, particularly in geographies, like Japan, for example, where the industry is being restructured away from kind of custom created software, you know, for Japan, Inc, done by system integrators to best in class cloud software created by, by by leading global companies, you know, we've talked about companies like as Bill and and believe or perhaps, which are contributing to greater energy efficiency of the buildings company like cornea digital, which is, which is revolutionizing the the on demand, textile printing for the global apparel industry. And so what we're able to do is to create this highly diversified portfolio of idiosyncratic ideas. And again, while I typically avoid comparisons, you know, I would, again, challenge people that tend to think about the space as kind of a risk on environment of fly by night companies, you know, this is a portfolio of high quality businesses, highly diversified, thoughtfully constructed, with with kind of meaningful attention to, you know, valuation metrics, returns on capital, cash flow generation, and valuation discipline, so, so that's as far as I'm gonna go with kind of comparing myself out of people.

26:58

Yeah, so, you know, when you talk about these businesses, it strikes me as it would be so difficult for somebody to replicate such a portfolio without the experience, the on the ground, the history, the IP, the knowledge that you have built up over the years, you and your team and everything, because a lot of the names I don't know, and I, I don't even know, if I know what some of those companies do. And so often, those videos, idiosyncratic opportunities are with businesses that people don't quite understand. And, and or they don't understand them as extensively as, say, a specialist. And that's what creates, I guess, the, the pricing and information gap that creates opportunity. And, you know, when you're dealing with, you know, I guess is, you know, dealing with larger cap companies that people feel more safe with, you know, they, you know, a business that's mature, that's in an industry that's mature, that's well understood that has, has hundreds of analysts covering it really doesn't intuitively feel like it has upside to me, where a business a it feels like almost it's all downside, right? And you can, you can only upset people, and we're a business that is undiscovered, maybe misunderstood, performing exceptionally well, but people don't quite understand it. That, to me intuitively, sounds like where the opportunities lie one by one, again, one by one bottom up and hard to find places. And so I really respect that. So speaking of that, you know, a lot of times, you know, our side of the table here, you know, when investors just kind of brush over big ideas and things they kind of, they kind of cut the world up into emerging versus developed. Right. And they might say that a business that is located in a developed nation has a different opportunity center or a different sort of characteristic in terms of risk or safety than a business that's domiciled in an emerging market, right. And so, so these index providers and have kind of, kind of arbitrarily drawn these lines of this is an emerging market and this is a developed market, you know, those lines in the sand or are they still relevant? Or is it more again, you just finding those great businesses?

29:23

Yeah, so that approach is, is very much oriented towards the kind of holistic approach towards the world view of things to say kind of from a from a kind of a principle perspective. The portfolio is about 6% allocated currently to the emerging market, but there's no particular dogma, that's anti em, or probably, you know, we tend to travel extensively around the world and the belief is that as international investor, one cannot be a tourist, you know, in those markets and, you know, appear they're only as good You know, when you're, you know, cheap on some sort of a screen, etc, you know, these markets require constant presence, connections, interactions, et cetera, understanding of companies, you know, in historical perspective, etc. So we do tend to, you know, travel to India, China, Brazil, etc. Second of all, I have some reservations about people, putting all these emerging markets into the same basket, because the dynamics and, you know, Turkey versus Poland versus South Africa versus Brazil, you know, or Russia, the extremes are completely different. And it's not entirely clear that China is an emerging market, etc. So, so, so I am a big, I'm a big proponent of, you know, understanding countries and companies, specifically in the context of what's going on. The third thing I'd like to say is that, you know, given the state of, you know, information travel and connectivity of the world today, typically, when small companies emerge into a larger companies, the worthwhile companies, they tend to address global opportunities, you know, and these tend to be the ones that are interesting, whether or not it's, you know, Argentine, IT services providers, or, you know, healthcare providers in Thailand, etc, you know, they interesting opportunities are global. And so one kind of has to study that the reason that the portfolio is not full of such opportunities in emerging markets, is because we tend to be quite selective, and we have a very high bar for quality of these businesses. And as I mentioned, a lot of the companies in those markets in particular tend to be regulated, capital intensive, cyclical, etc. And once an amazing business kind of emerges, it tends to be valued at a premium. And we frequently find that we get a comparable business at a lower valuation in a developed market. But that's not always the case. You know, sometimes they present, sometimes there's opportunities that, that present themselves, you know, some of the examples of emerging markets, businesses, we own today in our portfolio, include our leading railroad in Brazil, connecting the agricultural north north of the country with the southern ports, which benefits meaningfully from improvements in in productivity, both in the agricultural productivity of the country, as well as kind of the logistic efficiency. We own an integrated HMO slash hospital system in Brazil, which, you know, is cost efficiently delivering private health care to the Brazilian population, and tends to be kind of a winning model, sort of modeled after Kaiser Permanente in the US, a Brazilian company called Happy vida, we have selected investments in biotechnology companies in China, you know, it's interesting to observe that, you know, over my experience or my years of experience of following the space, you know, many Chinese companies have made a made a journey from from being service companies to the to serving the US pharma industry, to then being copycat companies, to now being innovator companies. So a company called a legend biotechnology is has actually licensed the drug from multiple myeloma to Johnson and Johnson, which j&j markets and a drug called garvik. Tea, and targets $5 billion in sales. And that drug originated entirely within kind of a Chinese biotechnology company. So the nature of innovation is global, one has to carefully think about governance characteristics, and redress, etc, as I mentioned, but but we again tend to, you know, tend to have a nuanced approach to the world.

33:44

All right. Let's get to the questions. I think everybody wants to know, right, so right now we're sitting here in the market place where US stocks down approximately 25% growth stocks not performing very well, international stocks down about 30%. We've got this inflation scare and what and I'm going to add my take on the current theme going on in the market is it's universal pessimism. I, I can't I don't think I've ever experienced in my career, such universal pessimism on the outlook of stocks, and so in, in your history of managing portfolios, you know, and I know this is kind of a broad statement, but do you feel that your portfolio of businesses that you own is undervalued? Do you feel like this is a good opportunity? Or do you feel like inflation and higher interest rates are going to wreck the world for an indefinite amount of time? And that's a big question. So it's

34:44

a big question. There are a few things I'd like to unpack. And please remind me if I don't answer several of them, but that's fine. I'd like to I'd like to address your question about inflation and interest rates. Your question about Ngata Matt, Matt. manifestations of those are perhaps not entirely uniform around the world. And that's maybe interesting to think about, and maybe your question about valuations. And then, and then we'll talk a little bit about our, our approach to valuing this company and maybe my personal feelings about the portfolio, maybe this is a good place to say that, you know, I've been buying the Fund recently, as well since the beginning of the year. And while I don't pride myself on my market timing abilities, I think that the general kind of baggy for us to invest to buy a stock is to try to double our shareholders money over five years. And and I feel that based on that basis, you know, I feel highly confident about the current valuation backdrop, but let's delve into let's delve into those issues, kind of deeper on the inflation and interest rates. So inflation is top of mind and has been top of mind. And there are several ways we think about protecting against inflation. Top of Mind is pricing power, every company was scrutinized on their ability to, to exercise pricing power. And a big theme in a portfolio is this idea of companies occupying high value bottleneck positions in their value chains. And examples of such companies include, you know, flow control companies, for example, industrial space, if you make, you know, valves, compressors, pumps, etc, you know, as opposed to pipes that are commodities, you tend to exercise pricing, because you're a small component of the overall system. And if something breaks, things blow up, if you're a compressor company, so you tend to price if you're a cybersecurity company, you get to exercise pricing, if your industrial distributor, or chemicals distributor where availability of things, you know, on that 24 hour basis is super important to your processes, you get to price, you get to exercise power, pricing power, if you're a consumer ingredients company responsible for a flavor of ice cream, you know, at a big CPG company, and if you know impossible to replace, but if you made excipients, for the pharmaceutical industry or, you know, expensive biotech processes, you know, you get to exercise pricing power, you know, if you're a nice systems, you know, you get to index for inflation, etc. And so that has always been the case for us. And we aggressively monitor the portfolio on the topic of their ability to exercise pricing power. As far as interest rates are concerned, we're happy to report so far with minor exceptions, that companies in general have reported strong earnings. And, and have been able to best prices. There's there's concerns, as you mentioned, and people are being broadly bearish, about about the impending recession, and whether or not the demand will will will suffer. And we don't have a crystal ball. But we do emphasize resilience in a portfolio. On the topic of interest rates, as I mentioned, the portfolio is largely debt free, or as minor component of debt. So rising interest rates so far has have had zero impact on the p&l of our businesses, as the discount rates, you know, with which the world tends to value these businesses has risen, with the interest expense of this company of our portfolio has not meaningfully changed, or their earnings power. As far as the discount rate is concerned, the portfolio, as I mentioned, is highly skewed towards high quality, high return capital businesses. And the interesting thing about a higher return capital is that when cost of capital rises, the economic value added or the spread between the high return the return of capital and the cost of capital is, you know, a lot more intact in a high quality business than it is in a in a lower quality company. And the market seems to be

39:06

not, you know, entirely, you know, making that distinction in a short term. And so, and so there's a lot of kind of wheat from the chaff dynamic that's present in the marketplace. You know, I've mentioned nice systems and we've done sort of a case study of, you know, that versus bunch of other tech companies that have been, you know, where the valuations have been have been decimated, you know, similarly will warn people about specs, and memes, thoughts, because everything was going to be cured tomorrow to similarly throwing, you know, all these companies out with the bathwater, so, so the nuanced approach, you know, is what's important to your point, you know, is looking at these companies one by one, and understanding you know, whether or not this is a business The US that has a strong balance sheet, whether or not it's an environment competitively, that benefits from its competitors getting weaker, whether or not it's it's benefiting perhaps from a weaker exchange rate and making itself a bit more export competitive, and, you know, etc. So, in our opinion, you know, the opportunity set is is meaningful. Again, we're not, you know, we're not promising, you know, extraordinary returns tomorrow for anyone. But we think that based on my years of experience, and based on a doggy, on a bogey of kind of trying to try to double your money over five years, we think there's quite a reasonable opportunity set.

40:43

That's an excellent answer. I think there's so much in there. But I think one of the points you made, I mean, again, not all stocks are the same, not all businesses are the same, they're not all gonna react to interest rates and inflation in the same way. But I think the thing that's kind of lost here is that stocks of businesses can have pricing power. And if the economy stays as strong as it actually is, businesses can pass through some of this inflation. And, and then sooner or later, the inflation may not be as much of a problem as it is today. So all right. So that was a fantastic answer. That was really probably the question. I just wanted to ask this whole podcast. So I'm sorry for taking so much of your time to ask all those other questions. But, but it really is, you know, an interesting time, I think that you have provided such this, when I made this podcast, what I had in mind was exactly what just happened here today, what which is, which is, you know, talking to experts, people who've spent dedicated their lives to security selection into, into understanding these businesses and to try to help investors, you know, earn more money, and, and to shine a light on them and to show the nuances and to show the deep intellectual property and the experience, and then just the knowledge of how you know how to build a portfolio and how different that is often than people think it is. So I think, I think that's about all the questions I have for today. Now, before we sign off, I always ask our, our guest, is there anything you would like to leave us with? Is there anything we missed out on? Is there any point you'd like to emphasize, or a point you'd like to maybe reiterate, before we sign off

42:39

here, maybe maybe I'll, I'll add a point about going to the overall risk, disposition and risk management of the portfolio. We've made that point earlier on, but it's, it's perhaps important to reiterate, you know, as excited we are about each individual name in a portfolio, and they're truly companies that are, you know, positioned or set out to revolutionize the world and it's very excited to get about, about each one of them, you know, we tend to, you know, as a function of my background, we tend to dos that with a very healthy dose of humility. And, and the portfolio is quite flat. As I said, we have, you know, very few positions exceeding 3%, we tend not to have them as a matter of fact, and we try to create a set of idiosyncratic ideas, hopefully, as well, it's impossible to create a completely uncorrelated dynamic to the macro to the macro circumstance, but, you know, we try to position our portfolio in a way from a prevailing macro dynamic, you know, a company called amble which is developing a disposable endoscopes and you know, its success or failure is going to be largely independent, you know, of, of the of the Canada global GDP development, you know, we have a company called, you know, coordinate, which is, as I mentioned, developing kind of revolutionising on demand, textile manufacturing, you know, very kind of product specific. Dynamic, you know, and, and, you know, there are many others. And so, what we try to do is to, is to manage for risk, create idiosyncrasy, and convexity in a portfolio. And the only other point I'd like to emphasize, as this is that this is a long term oriented portfolio. We take a five year view on our businesses. And this duration tends to align with portfolio turnover, which in normal market conditions runs about 20%. in markets like today's where there's multiple contraction and meaningful depreciation of most currencies, versus the US dollar, we're seeing more opportunities to purchase work last franchises on sale. So our turnover has ticked higher, but still remains below 30%. You know, we take a five year view on these companies and we'd like to, we'd like we'd like to match that duration with, you know, with with the view of our shareholders. And, and we think very carefully about risk as probability of permanent loss. But volatility is our friend. And if you're patient, and if you're in high quality companies run by smart people, we believe you will emerge better off on the other side.

45:36

It's a, that's a great point. And to reiterate, you know what you said earlier, just because it's called International small does not mean it's any more risky than any other equity asset class, because it is all idiosyncratic. It is the actual businesses, and how they respond to things. And so. So, let's hope that we're closer to the end of this trauma that we're experiencing here in the marketplace. It sounds like, it sounds like the portfolio is positioned. Well. And, um, you know, this has been really enlightening for me. And it's been, again, just exactly the type of emphasis that I had in mind when I made this podcast is just to really, you know, shine a light on your, what is now turning out to be your life's work, right. And so I really appreciate you taking this time to share with us, I really appreciate you going to work and managing the portfolio and being part of our team for our clients. And, and I guess I should say this here is that I'm pretty excited about the opportunity set here. Throw my cards on the table to where

46:53

we are working very hard for our shareholders. We're proud of what we do. We really enjoy our work. So thank you very much for your questions.

47:02

Thank you very much. And we'll probably have to follow up with another podcast and I really appreciate your time. And we'll be in touch. Thanks. Thank you.

47:14

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