January 28, 2025 • 48 mins
Founder and Manager of the Blue Whale Growth Fund Stephen Yiu joins this week to discuss the Big Tech selloff, his outlook for AI and where he’s investing now. Yiu, whose investment fund is backed by billionaire Peter Hargreaves, reduced its stakes in major US technology companies on concern over the costs of AI at the end of 2024. What did he see that other investors didn't? And where does he see opportunities now?
Plus, what Stephen is reading now: Lucky Loser: How Donald Trump Squandered His Father's Fortune and Created the Illusion of Success
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Welcome to Marin Talks Money, the podcast in which the
people who know the markets explain the markets. I'm Marin
Sumset Web. This week I'm speaking with Stephen You. Stephen
is the lead manager of the Blue Whell Growth Fund,
a long only and very concentrated global equity fund which
is the backing of British billionaire Peter Hargreave's Stephen started
his career as a fund manager at a Hargurish Landsdowne.
(00:39):
He's since then held positions at New Star, Artemis and
Nevsky Capital.
Speaker 3 (00:43):
Full disclosure.
Speaker 2 (00:44):
A few years ago I did do some paid work
with Blue Whale, but I have not been commostly involved
with the fund since twenty twenty three, so time has
passed since then and this week is nically the perfect
time to get Stephen on. First of all, the fund
has an excellent track record and annualized returns since law
j twenty seventeen of over fourteen percent a year. That's
against the return of more like five and a half
(01:05):
percent for UK based peers, so it's always good to
get someone on whose fund is actually performing very well.
It's also true that about a month ago, Blue Whals
started talking about reducing its stakes in some of the
big big US tech companies, including Microsoft and Meta, on
concerns about the costs of the capex of artificial intelligence.
So his holdings in Microsoft was, for example, cut to
(01:28):
about two percent of the porfolio from eight percent at
the beginning of last year. We'll talk a bit about that.
Now Blue Well is thought of as a tech investor
that may or not be fair. We're going to talk
about it. Stephen is increasingly less positive on the magnificent
seven tech stocks all round. We are speaking on Monday
this week, and his cautious attitude is looking to be
spot on. In this conversation we get more about Stephen's
(01:50):
thoughts on the tech giants while the fund has been
reducing that AI holding, and the deep seek upset, and
of course where he sees opportunity right now. Right the
way I've said that, it sounds like there's an awful
lot to get through and we haven't got days. We've
only got forty five minutes or so. So sorry about that, Stephen,
thank you.
Speaker 3 (02:06):
For joining us.
Speaker 2 (02:06):
You're going to have to talk fast, thank you. Marry right,
So let's start. I've talked a lot about the already
about the kind of things you hold in the founder
are perceived to hold in the fund. So why don't
we dial back a bit and talk about what you
see the funder is actually doing, how you invest, what
kind of stock you choose, what your valuation parameters are,
et cetera.
Speaker 3 (02:25):
So we've started a strategy back in September twenty seventeen,
so it's over seven years ago now. The objective at
a time was very simple is we want to launch
a high convection mandates investing into between twenty five and
thirty five stocks with a quality bias. So we like
high quality businesses, but at the same time to be
(02:47):
able to significantly outperform the markets, which would include the
passive tracker in today's context. And I think that has
what we have been doing. So I think on a
very high level that we actually would exclude low quality
businesses that we would deem as not sustainable highly intented,
and then the opposite of the spectrum would be company
(03:08):
with very strong balanced it, good management team, sustainable business model, etc.
But of course, I think if you look at what
has happened in the market with some other peers who
are running a very similar mandate, is that there has
been a bit of a deviation in performance terms over
the last couple of years. And so then when I
reflected back on what we are trying to achieve investor
(03:30):
on top of what I just outlined seven years ago,
is at the same time of not only investing into
high quality businesses, you would want to pick the winners
that the companies are actually able to capture more market
share or revenue or profit in a new environment. And
I think that's what we are set out to do.
Speaker 2 (03:50):
Okay, Can I take you back a little bit to
the definition of quality. One of the things you said
when you were talking about what makes a quality company
is having a sustainable business model. By that, do you
mean one that you believe will last for a long
time or do you mean sustainable in the sense of ESG.
Speaker 3 (04:07):
Sustainable more to do with the business model in itself.
I mean, we are not a ESG or high impact fund,
but we do deem ESG factors as a business consideration
or business and risk consideration. So what I'm referring to
is a sustainable business model in terms of recurring revenue
stream cash flow conversion that you're able to tap into
(04:28):
your customers with high switching costs, which means that then
it's not easy for them to move to a new
competitor to use something similar in term service or products.
So that is what we like or prefer to invest into.
Speaker 2 (04:42):
That kind of company, This kind of company with a
great balance sheet, with great cash flows, with great management,
with a sustainable business model, and one that you can
see continuing to generate profit growth out the out indefinitely.
That's automatically going to be expensive, right, So what are
the valuation parameters that you have?
Speaker 3 (05:00):
We build financial model for every single company we have
and then we would make sensible or conservative forecast in
terms of how much money we'll expect our company to
make in the next three to five years. So one
valuation metrics that we will look at is free cash
throw yield just for that. So it's how much free
cash throw the company would have generated in five three
(05:24):
to five years from today. And of course the way
that we access the quality of the business is the
sustainability of the free cast throw level of generation three
to five years from today, isn't it. It's not like
a one number that you get in five years time.
And then that number disappear in a six or seven years,
so that is not what a high quality business means.
(05:45):
A good company means that they can continue to deliver that.
But of course we do not have a crystal ball
so that you cannot just make a number to say, okay,
I think this company's going to do well ten years
from today. So you want to have a sensible time horizon,
which for us between three to five years. And at
the same time you will be able to track the
recent developments such as quarterly earnings invested day or when
(06:08):
the company announced their new guidance for this coming year
in terms of their plan, and then you can marry
that with your business analysis alongside the forecast that you
have made to determine whether the company is likely to
achieve those results. So that's what we do. But the
point that I want to make just to go back
on the quality spectrum of companies that we look at.
(06:31):
Obviously there's a price to pay as a starting point,
but I think what is really important as you can
probably worked out across different holdings that could be deemed
as good quality businesses that the performance potential or how
they have performed over time are very different so identifying
(06:51):
a good company or high contit businesses, the starting point is, like,
we do know that these companies are not going to disappear.
Speaker 2 (06:58):
So it's one of the things that I'm trying to
get at is, let's say you've bought a quality company.
It's great. Everyone else a company company is doing very well.
Is there a point when you look at it and
you go, it's still doing really well, but it's too expensive?
Of course, so what's the point which you go, well, actually,
it's now so expensive I can't have it in my
portfolio anymore. Or as a growth investor, does that point
(07:20):
never exist because you expect a good company to grow
into any valuation. You see where I'm going here with it.
Speaker 3 (07:25):
Yeah, we totally agree with you. That's always a price
for everything, right, even that for a high quality company,
let's say Nvida or Microsoft Amanthers, that's always a price.
So we do take that into account. So the way
that we look at it is two things. So one
is we make forecasts in terms of how much money
(07:46):
or prehe through our company is expected to deliver in
the next three to five years, and of course up
to three years. You can look at the market consensus numbers.
So what we want is our forecast to remain ahead
of the market expectation, which means that if we ended
up to be correct based on our analysis, that a
company would continue to beat expectations, right, And of course
(08:09):
that will be from time to time that the market
has caught up with our expectations and we are no
longer ahead of market expectation, and in that manner that
we would deem the shares to be overvalue within a
short time horizon, which is up to three years. Okay,
that's one which we do look at. Secondly, is about
the five year number, which we look at a single
(08:29):
valuation metric free CASHUW yield, just as for death in
five years time. And the way that we look at it,
obviously there's no market consensus to refer to, but we
were trying to adjust that number alongside the quality of
the business. Right, So if you're a good company, of
course there's a spectrum of good company versus better company,
(08:50):
high quality company, etc. And the price would be very
different from one to another. And I think in today's
context that's going back to Microsoft to make it a
bit simple, is that we believe that the quality of
the business for Microsoft is not improving from here, But
when you look at the business seven years ago when
(09:11):
they went through the digital transformation to make it a
cloud subscription model, that the quality of the business was
improving for a good period of time. But what is
changing now is when you look at the valuation of Microsoft,
let's say, using a five year three careful yield number,
in the next five years compare to previously, when we
look at Microsoft, that number is very much similar. So
(09:33):
Microsoft is trading at an all time high valuation compared
to when we first invested, But then the quality of
the business in our view, is deteriorating, so we think
the share is overly expensive. But we are not here
to suggest that Microsoft is going to disappear as a company, right,
so we are still going to use Microsoft continuously. But
(09:56):
when you look at the return on invested capitol profile
from Microsoft from here in the next five years, that
number is likely to come down rather than going up
from in our view, based on how much money they
have spent into artificial intelligence investment. So if I just
link it back to the context of NVIDA, I'm sure
we'll talk about some other stuff like deep seek later on.
(10:19):
But when you look at a very simple like pe
ratio one year forward consensus on Bloomberg number and Vida
and Microsoft is trading at the same level, which is
about thirty times earnings. But of course for Nvidia to
be able to sell you many more products, let's hope
that is going to continue that journey, and it is
higher than what Microsoft has been doing in terms of
(10:41):
the copilot. And of course the end customer for Nvida
would be coming from the free care throw generation of
Microsoft previously, so that number that free castrow has been
passed on to Nvidia's top line.
Speaker 2 (10:55):
Okay, so in part go back to what you were
saying at the beginning beginning of the answer to that question.
A lot of it is about wanting or needing the
rest of the market to have positive a positive surprise
relative to you.
Speaker 3 (11:06):
That's right. Yeah, So this very simplistic way that investors
should be thinking about is in order to do a
lot better than your peer group the markets, the ETF is,
you need to have a differentiated view on the outlook
of a company. And that's more likely to be correct
than wrong because it's very easy for anyone to have
(11:27):
a concharriant view. You can take a view on a
company on a market to be a contrariant for extended
period of time, and you're probably going to get carryouts
in terms of that view, because the market is right
most of the time. Right. So then in order to
do something different, which is in performance terms that you
need to deliver more than your competitis or the market,
(11:48):
you need to have a differential angle, and you need
to maintain the differential angle with the probability that diffreenshiond
angle is likely to be right, or maintain it to
be correct. And as long as there's still a decent gap,
then we think that's likely that the market is going
to follow us, and vice versa. If we end up
to be behind the market and we are likely to
(12:08):
be correct, and we would think the shares could be
expensive because the market is going to follow us, that
maybe there would be earnings vision downgrades on the other side.
Speaker 2 (12:17):
Yeah, And this is easier said than done, of course,
And as you say, the market is more often right
than wrong. And so if you're going to run a
portfolio like this really has to be a concentrated portfolio.
So twenty five, twenty six, twenty seven, that's the amount
of companies you can realistically find that will fit inside
these parameters.
Speaker 3 (12:34):
That's right. And the other points that I want to
just illustrate to the audience that this is very important
in today's context is obviously the market is very efficient.
Everyone have access to the same level of information. In
order to have this differential angle, you need to do
something original. You need to make it very deep dive
in a way that you have outwork your competitors or
(12:58):
the market audience. So the way that we translate that
at Blue Well is there are five of us on
the investment team. Okay, that doesn't sound like a lot
of people, right, but when you marry that with the
number of stocks that we have in the fund, which
on average twenty five, then you're saying that we're saying
that that's on average an individual covering five companies. So
(13:18):
Eve and a professional full time workers is covering five
companies for the entire year, versus another individual who might
be covering ten or fifteen or more and maybe not
full time two because you have a day job. Then
the level of research that we could put behind the
scene to understand what the company is trying to do
(13:39):
or whether we have a friendship angle, I think the
chance of that happening is higher. We're not an expert
on anything, right. If you ask me about the stocks
that's outside the fun that probably cannot have a proper conversation.
But for the stocks that we end up having invested,
then yes, I think we could claim to be an
expert just because we have spent a lot more time
when you're very full in terms of that resource.
Speaker 2 (14:02):
So one of the things that has happened as a
result of the way that you invest is that you
have ended up quite a heavy tech investor. And as
I said at the beginning, a lot of people when
they hear Blue Whale, they think tech. They think of
you as a tech investor. At one of your biggest
tech areas has.
Speaker 3 (14:16):
Been in A and AI.
Speaker 2 (14:17):
You know, you and I have talked a lot about
your position in video before, and let's go back then
to Microsoft to matter to why you've been selling out
for some of these docks but staying in video.
Speaker 3 (14:29):
So just on a fray high level that we we
we would still say that we are global fund but
with a tech bias. And if I look back to
the last seven years that our tech exposure has been
fairly consistent. I would say just about forty percent throughout
that journey. But what has been interesting within that exposure
(14:49):
was that the composition of that mix was very different
seven years ago compared to now. So seven years ago,
before the pandemic, we were heavily exposed to digital transformation
opportunities and since then we have moved on and since
twenty twenty two or twenty twenty three, we have switched
those exposure into artificial intelligence, which is the hot topic
(15:12):
over the last few years. And of course we have
done very very well on the bank of that. But
when you look at it very high level, yes, over
the course of last seven years, we did have a
bias to technology company. I think the points that I
want to make is is when I try to look
back on what happened over the last seven years, I've
done a bit of analysis myself. Look at all the
companies that's been listed in the stock market, whether they
(15:35):
are American companies, British companies, European, Chinese or Indian companies
that over the last seven years, the market share winners
in terms of the world revenue shares has been American companies.
I think people would have what worked out even without
these studies. But at the same time, if you look
at which part of the North American company have got
(15:55):
the most share in terms of the dollar or time
that we're spending with them now, would be the big
tech companies. And then what is it at the expense
of the expense of some traditional business model that are
more maybe high street facing, not in the digital world.
And hence, I think, as far as we are concerned,
(16:15):
that we like companies or sectors that can capture a
larger share of the world GDP or when we say,
maybe a larger share of our dollars spend or our wallets,
or maybe from an enterprise perspective, where do they invest
their money into. And so we are very pramatic whether
those companies would end up to be technology company, which
has been the case for the last seven years, but
(16:37):
then it might not be the case in the next
seven years. So then if you ask me to go
back in time, would I have done a lot better
by launching a technology fund. I think, looking at the
stock pick that we ended up with, like, I think
that performance would be even more exceptional than what we
have achieved for the Blue Out Growth Fund, which is
a global mandate But the one thing that I'm not
(16:58):
changing is I don't want to be fixated on technology
because as far as a global investor or fund is concerned,
that we want to be able to navigate a market environment.
But today that is where you want to be, which
is technology.
Speaker 2 (17:14):
Okay, So let's talk then about technology, and let's talk
about AI in particular. We're talking, as I said in
the beginning, we're talking on Monday and over the weekend.
There's all this information has come out about deep Seek
with the Chinese AI product and how it can it
can now well do everything with a cheaper kind of chip.
So it represents a genuine threat to everyone else who
(17:35):
spent billions and billions of cathecs on developing AI products
to suddenly find that this exists. Right, So we see
as we're speaking, we've seen the video of ten eleven percent,
and we're seeing the tech across the board beginning to
come off. So do you see this Have you looked
at it in particularly? Do you see this as as
(17:55):
a threat to the big tech company in the US.
Do you think it's a bit overblown or does it
justify your view that you need to get out of
the companies that have been spending huge months on AI.
Speaker 3 (18:10):
So we are a true believer in how geners AI
is going to change the world, whether it's on a
consumer basis or in the enterprise professional basis. So deep
Sea have actually reinforced our view that this is happening.
So what deep Sea has managed to do in terms
of breakthrough that it actually solved two things that has
(18:32):
been the bottleneck of the AI industry. The first thing
is the price or the course of training models of
doing AI. And you might record the same. Ottoman, the
co founder of open ai, recently make a comment a
few weeks ago saying that the chat GPT version that
charged you two hundred dollars a month that he's seeing
(18:53):
a lot of demand, but they are actually lost making
even by charging you two hundred dollars a month to
use it. So asked us, no doubt that there's many
more things that AI can do. But then the question
is what is the price that you want to pay
for that. So ef that subscription is two thousand dollars
a month, you might not be paying for that. But
(19:13):
there's no doubt that there's enough use cases that people
want to embrace AI. In terms of the day to day.
So what Deep Seak had managed to do is they
managed to use some very dated and video technology to
put use a very similar output to what check GBT
has done. After they have spent billions and billions of
(19:35):
dollars investing into that, and on the back of that
is the big tech company so far in the US
in particular, they have a monopoly to drive AI applications
because the entry ticket, or the barrier to entry is
whether you have the billions to spend on Nvidia GPU.
If you don't have access to the GPU compute, you
(19:56):
cannot develop any AI application, right. So what Deepsea have
managed to do is I think they have started a
revolution for the startup AI company globally that anyone with
no access to billions of investment can start to work
on some air application. The other bottleneck which deep Sea
have managed to solve, I think is energy demand. As
(20:20):
far as the current energy infrastructure is concerned, that is
not capable to handle what is yet to come from
the AI world, right and hence when you look at
the big tech companies, they have been spending money now
exploring the new clear energy. But of course nuclear is
not just not the end answer because it does take
a long time and you need to public get a
(20:40):
permission to build it, so it's not going to solve
anything immanent. So what Deep Sea can managed to do
is to optimize the software or the AI algorithm that
they no longer need as much EPU compute, which means
energy demand or energy intensity for the use cases that
we have so far to date could be could be
(21:00):
replicated with lower energy supply. So it's actually very helpful
in terms of development.
Speaker 2 (21:06):
So what we have here now is the possibility of
an AI model which is much cheaper and much less
energy intensive than previous assumptions.
Speaker 3 (21:16):
That's right.
Speaker 2 (21:17):
It's a big positive supply shock to the global economy surely,
so that will take us a big step further down
towards the productivity boom that we've all been waiting for
for decades now. So this is actually as a huge
and disruptive supply change.
Speaker 3 (21:35):
Yeah, that's right. Yeah, So basically it has leveled the
playing field, that is, more startup AI companies is able
to join the raise to be more creative innovative. At
the same time, it's lower the price or the cost
to run certain air applications.
Speaker 2 (21:52):
So if you look big picture, then that should mean
less inflation, more productivity. It's yet another wave of deflation
coming out of China, I think.
Speaker 3 (22:00):
But a very high level that is of our view
even before this week, is like AI is very defationary
over time, right, like in terms of increasing productivity, in
terms of maybe having fewer headcounts in certain more maundane
kind of operations like back office or maybe some customer
service function. So I think over time, a lot of
(22:22):
things that we're doing today could be done by AI.
But of course the question is like how long does
it take? Right, Even that it's so expensive to invest
in the AI as a starting point and to be
able to come up the applications that work, and then
you then end up you need to have the customers
happy to pay for this at the same time, right,
So that I think there's a lot of box to take.
But then by lowering the course, I think it does
(22:45):
open up a lot of opportunities. When analogy I want
to make on this is if you look at the
smartphone ecosystem, right, let's say the app store on iPhone
or Android when it first launched, you probably have like
maybe fifty two hundred apps, but over time when as
the platform become more level and in a way that
is making more accessible to any software developers app developers.
(23:07):
Now you have a few million apps in your app store,
which we don't even know all of them, and the
number of applications of use cases that you can do
on your smartphone is a lot more and hence the penetration.
It's not just Apple is winning, right, Apple is only
a small player in the market. You have a lot
of entry level smartphone that can do most of the stuff.
(23:27):
So this is what is going to be very helpful
from the AI adoption penetration kind of conversation going forward.
So what deep Seak has done is accelerating the adoption
and penetration of AI.
Speaker 2 (23:41):
Okay, and so what does that mean for your portfolio?
What does that mean for Nvideo in particular, because we've
talked about you selling down other companies, possibly one sort
of overinvested in AI and you think that weakens them
long term. But in Video, you've maintained your holdings in
you haven't wanted to get out of that at all.
What does this news mean for them?
Speaker 3 (24:00):
So we've seen the AI domain. We are still a
pro AI infrastructure company. So a companies who are on
the receiving and so including NVIDA and Broadcom for example,
both of them in our top ten. And the way
that to think about is of obviously our view has
not changed yet. I mean, it doesn't mean that we
might not change that meal in time, but our view
has not changed that by freeing up some of the
(24:21):
GPU capability. Let's say if you assume that all the
big tech companies the utilization of all the GPU they
have got in house is one hundred percent, so they
basically they utilize everything they have got and hence they
need to continue to order more GPU going forward, right,
whether it's from NVIDA or working with Broadcom to do
(24:42):
in house GPU. Okay, what deep Seat have managed to
suggest is maybe there a certain level of optimization you
can do to free up some existing capacity. Right, So
rather than one hundred percent utilization, maybe the number is
like fifty percent utilization, So you suddenly have like a
fifty percent free up capacity you can work on other
AI applications or development that you might not need to
(25:03):
then order more GPU from NVDA or Broadcom. Right, So
that is the narrative happening in today's market. Our view
is a bit different. Our view is that sure, okay,
that is fine. If everyone is trying to take a
step back to say, oh, actually we can take it
easy now because our competitor have got capacity free up.
We do have that too. Let's slow down the development
of AI and not to invest more in the GPU.
(25:27):
If everyone is doing that, that's fine, which is not
the case. People are going to utilize more of the
free up capacity to develop more things. I mean the
stuff that AI use. Cases that we have been talking
today or most people have access to. Well, talk about
GPT technology, which is like a searching algorithm of some
model giving you a very strict answer quickly correcting your
(25:49):
emails suggesting a few things going on. But what we
haven't talked about, which is very new now is happening.
It's called AI agents. AI agent means this agent would
actually help you to do things. So instead of speaking
to the BA British Airway chat board saying, oh my
flight got canceled? Can you help me to do the refund?
Where do I go? And then they give you all
(26:10):
the answer is that no, no.
Speaker 2 (26:11):
They don't give you the answer. They don't give you
the answer. Okay, it doesn't happen you know nothing about
the BA chat boards.
Speaker 3 (26:19):
That's worse then, But what is happening if BA is
smart enough, Like when when this AI agent comes along,
is the AI agent itself not only able to answer
your question, but at the same time it's going to
fix it for you in the backhand. Right when I
talk about a agent, it would need to be ambent
themed within the backcand system of British Airway, not just
on the surface chatting with you on some random queries.
(26:40):
It's going to link up to the back end and hence,
like whan I say, okay, my flight got tencel, can
A get refund done for you? Like you get the
payment straight away? Just talk about to the AI agent.
So that journey has not even started, right, So what
I'm trying to say here is like there's many many
more use cases that we have not yet come to use,
and any free up capacity would would basically accelerate those
(27:02):
development without like basically saturating the utilization to date. And
I think everyone is raising to do that. And the
other thing which is very important if you look at
what deep Sea have said, or maybe some of the
comments on Twitter have been trying to tackle is like
those GPU they have got it is not enough to
go forward. They managed to utilize a very limited data
(27:26):
number of GPU to get to where they got to.
But that is not the end story. That's not the
end story that China no longer any GPU, because I
would imagine if tomorrow that Trump decided or actually we
want to become friends with China again, we would let
you have as many GPU as you want from Nvida,
I would best that China is going to spend the
biggest amount of money to buy up the entire GPU
(27:48):
stock in order to take AI to the next level. Right,
So what Deepsea have achieved is is a big breakthrough
in terms of the success in optimizing the algorithm that
some it seems like maybe the Western company have not
managed to do so. But it doesn't change the narrative
that AI is still changing the world. That's there a
lot more things that you need to do you can
(28:10):
do with AI. And of course in order to perform
the training on AI, you need to have the GPU compute.
Speaker 2 (28:17):
Yeah. Interestingly, I'm looking looking at the antlers putting out
almost immediate comments on this business today on Monday, As
I say, I seeing all sorts of things from you
know this, this will lead to a huge capex unwined
and a mild recession in the US and an unwinding
of equity inflows into the US and eventually a week
a dollar. That's all a bit ott from from what
(28:39):
you're saying. You don't think antles should be allowed to
write instant responses, do you?
Speaker 3 (28:46):
No? I think I think the thing with the deep
sea breakthrough is I think that's going to be more
data point that we will get from some of the
big tech companies. You probably want to hear from them, right,
because like I said, I I suggest that, Okay, they're
going to free up some capacity, but what is that number? Right?
If you say to me they can free apply fifty
percent off the capacity, that's a lot. That's a big number.
(29:06):
If they can free up like twenty percent of the capacity,
that's not a lot. So then I think there's still
a debate in terms of what is happening. But the
other thing, I just want to throw it out there
because we're going to hear from matter to was a
second berd On Friday, a few days ago before the
deepsick announcement. Friday, he announced or pre announced the capital
expenditure for twenty twenty five. So that number has gone
(29:28):
up from fifty something trillion dollars expected for twenty twenty
five into the range of more than sixty billion, fifty
billion dollars to sixty billion dollars, So that number's gone
up by over ten billion dollars. And I would imagine
he actually was connected, right, Like he's not like he's
going to hear the same news on Deepsey as you
and I just reading on, hon said Bloomberg Channel. So
(29:49):
by him doing that just being a bit speculative, was
that he already know what this means for them. They
already have worked out that Okay, we can maybe copy
some of the the optimization algorithm that deep Seat have
introduced because it's open source, but then they still need
more GPU to do more things. So I think that's
very interesting. But we will probably hear more from them
(30:10):
this week because they're going to report their results.
Speaker 2 (30:13):
Okay, more on that later. So you're hanging onto Nvidia,
and presumably you're hanging on to your other investments in
the AI infrastructure area too. Say Vertive is another one
in your top ten, which they do cooling infrastructure right
for data centers.
Speaker 3 (30:27):
That's right. Yeah, I mean things are quite fluid, right,
So at the moment, we're not selling. I think that's
a starting moment. But we'll get more clarity as this
week goes on. I think we need a few more
data points to suggest whether our thesis might have changed
from on that perspective.
Speaker 2 (30:45):
Yeah, and I'm interested. You know, you mentioned earlier something
I was going to ask you about energy, and in
particular about nuclear. You know, if you're very very pro AI,
very pro data centers, AI infrastructure, et cetera, et cetera,
does that make you want to lean into holding anything
in the nuclear energy sector?
Speaker 3 (31:04):
Not currently, I think just from maybe a public equity
investor perspective, there's just not many of these companies around, right.
If you ended up finding a company that have some
exposure to nuclear that probably have other stuff that you
don't want to own, which is a typical maybe like
a utilities company, they have like a nuclear operation or
(31:24):
some nuclear plants, so you don't get a pure play
in terms of nuclear, right, And of course, then whether
we would end up investing into uranium, which we couldn't,
then there's more of a very different game to play.
Speaker 2 (31:36):
Okay, So let's move on then and look at some
other parts of the portfolio, some other sectors and themes
that I know you're interested in. And one of the
ones that always pops out to me when I look
at your portfolio is what you like to call gaming,
and I like to call gambling flutter for flutter for example, gaming,
I think a bit of an euphemism here. It's outright gambling, right,
(31:56):
But you think that sports gambling in the US is
an area that you are exposed to and you have
great hopes for, right.
Speaker 3 (32:05):
Yeah, So this is a very good illustration of what
we're trying to achieve without twenty five companies, right, because
the way that you do it is not only you
find a good company or a high quality business model,
and at the same time you want this company to
capture new market share from someone else. So as far
(32:27):
as US sports gaming or US gambling is concerned, sports
gambling is concerned, that is a completely new opportunity since
the US started to legalize sports gaming state by state
a few years ago. So at the moment, when you
look at the market segment in the US, it's only
about fifty percent of the state or population would have
(32:48):
access and at the same time it's a two players market,
which is we like that in a way there's a
jo operly. So in the US it's between Futter's subarank
of Venduo versus DraftKings, which is a US listed company,
and these two company they control over eighty percent of
the market share, so they are very big companies. That's
(33:08):
still a few more small players out there, but then
they do get an economy of scale. But what we
really like in a way to think about this, so
between these two companies, their top line is about twenty
billion dollars. So these are the money that they would
be be keeping after they pay out all the winnings. Right.
So then the question to ask is that where does
(33:29):
these twenty billions come from? Right, because a few years
ago the number was zero. Right. It's either the consumer
in the US have spent less money with a restaurant,
gone bought a fewer things from Amazon, or maybe gone
fewer times to cinema or some other discretion spending. So
this is what we really like in a way that
is idiosyncratic, that is not depending on Trump. It's not
(33:51):
depending on the war in Ukraine or the Middle East.
It's about American consumers shifting away some of the spending
they're already doing to the creational sports gaming or sports
scambling or like whatever you want to call it. But
it's a new market for them. And of course, the
other thing that we know which is very positive is
(34:11):
the American sports market is multiple times bigger than the
rest of the world sports market to start as a
starting point, so we know that they love their sports. Secondly,
the GDP per capital as the American consumers, they're a
lot wealthier than the rest of the world. So when
you put these two things together and then you have
a new opportunity to capture some of the spending, then
(34:33):
you know that this is going to be very igo
syncratic and could be very positive. When you put all
all these things together, then you you know that they
it's likely more likely that they would do well. The
only thing that they I would say it's a head
wind or heard though, is the text coming from the
States because like when the state decided or actually this
(34:54):
is very profitable, or maybe you get this esg angle
that I don't want you to do too much. They
probably would increase the tax. But what we would say,
this is a win win situation, right, because the only
reason a state would decide to legalize sports gaming is
because they want more income, So they probably don't want
to kill the industry otherwise than they might as well
not to have legalized it in the first place.
Speaker 2 (35:14):
Yeah, I see that that makes sense. You mentioned in
your in your remarks there that this is an industry
that isn't threatened by President Trump. Does his election change
anything for you when you look at your portfolio or
even you're you're so bottom up so stock specific, but
is there anything in Trump's plans that changes the way
(35:36):
you look at your portfolio or any the specific companies
inside it.
Speaker 3 (35:40):
Yeah, so not so much on a maybe a stop
by on a bottom level, just because when we were
running into election, we were very much indifferent in terms
of whether har Is or Trump is going to win,
so we were not positioned either way. And since then
we probably haven't actually got a lot benefit on the
back of Trump being elected, because I think that's a
feel policy that is probably going to benefit more from
(36:02):
the stocks that we don't currently exposure to. I think
what is interesting or what we are likely to get
in this coming four years is, firstly, I think the
headline Trump kind of driven volatility in the market is
going to be a lot high in terms of headline risk,
so then he's going to make a lot of comments
about different sectors or companies, and the shares is probably
(36:23):
going to move according to that comments. I think that
it plays in the strength of a high conviction active
investors who are actually doing some work behind the scenes
to assess whether some of these are just a rumor, speculation,
or some of that is going to get translated in
proper terms in terms of impact. So I think that's one. Secondly,
I think that's probably more of a macro debate, which
(36:45):
we're not an expert of, but of course we follow
the dynamics. Is whether Trump's policy is going to be
a lot more inflationary, which means interest rate is going
to stay high for longer, or maybe it would even
go out from here rather than coming down. So I
think that's more of a macro positioning in terms of
valuation in terms of whether money should be coming out
(37:06):
from equities to fixing income and all that, but not
so much on a bottom up company perspective, and not.
Speaker 2 (37:12):
Much you can do about money moving out of equities
into fixed income is that given what your fund does. Okay,
what else is in the in the fund that we
haven't discussed that do you think would be interesting?
Speaker 3 (37:24):
So I want to suggest another very controversial stock, which
is Philip Morris, that has done very well for.
Speaker 2 (37:32):
Us gambling and smoking.
Speaker 3 (37:34):
I don't know, and can I have to stop branding.
Speaker 2 (37:37):
This podcast as an ESG podcast at this rate?
Speaker 3 (37:40):
So the way I want to reason for Phil Morris
to just to have a very quick discussion was so
it's a new stock for us. I mean, we've only
been holding it for over a year or so, so
we haven't got it since the beginning of the fun
back in seventeen. But what we really like about a
company is a good company to start with, right, the margin,
the return of investor capital pro while I mean sustainable,
(38:02):
the business model on a very high level. We all
like that. But what have changed for us, which I
think is the important part, is when you look at
phil Morris as a business today, fifty percent of the
business is in non traditional cigarettes products. So the fifty
percent is the one that is probably the more relatively
healthier way of consuming nicotine. Okay, we can have a
(38:22):
debate on whate.
Speaker 2 (38:23):
But we can have debates because anyone there's a lot
of conversation about when you say non traditionally you're talking
about vaping, right.
Speaker 3 (38:30):
I'm talking about heat not burnt and also nicotine pouches
by Swedish Match, so not vaping, so they don't do vaping,
so they don't say okay, they don't do vraping, so
that's not what we're after. But it's more nicotine pouches.
They have this product called e cores which they use
heat not burnt technology to smoke a cigarette, but not
(38:50):
basically making it combustible, so they use the heating technology
is slightly complicated, but they pioneered that more than ten
years ago and their market leader in a few markets globally.
So basically the view that we took is obviously okay nicotine.
We can debate whether nicotine is good for anyone, but
to us, it's more of a choice. It's like alcohol,
like maybe it's not good, but people should have a
(39:12):
way to consume the product they want to consume. But
of course, from a company perspective or from the regulator perspective,
is we want them to be consuming a healthier manner,
right or less damaging manner anyway, it's better that you
don't consume any of this stuff.
Speaker 2 (39:28):
We're going to take AI. We can stop justifying it now.
Speaker 3 (39:31):
It's okay.
Speaker 2 (39:33):
Agree with you or not agree with you.
Speaker 3 (39:34):
Ye yeah, no no. So the point that I want
trying to make is, like, so fifty percent of the
business now is in a non traditional secret world, which
is growing very fast because people are adopting a healthier
way to consume nicotine. And secondly, the reason we like
it is because since they spin out from l Threa
back in two thousand and eight, Feeling Moris businesses anywhere
but the US, but recently because of the icos product,
(39:55):
the heat not burn technology, which is the healthier version
of a smoking a compassible cigarette is they got the
permission from the FDA in the US to market the
product back to the US. So this is a completely
new market for them. Right. So the way that you
think about we think about Film Morris is that this
company have been going around for it has been around
for years and been doing what we've been doing, but
(40:15):
there's a bit of a transitioning going on to start with,
which is growing a lot quicker than a traditional business.
At the same time, they have been on the back
of this, they've got the license to go back to
the US to take market share from your lives of
Elktrea or some other company that have been only in
the US for a long time. So that is very idiosyncratic.
And the reason I want to outline flutter in Phil
(40:36):
Morris is just to showcase that we're not just a
tech fund, that we do have some other opportunities that
are very different to your AI conversation.
Speaker 2 (40:44):
Then how you define tech, I guess I mean that
you know, heat not burned stuff. That's a bit techy,
isn't it. I want to take you back to something
that we talked briefly about earlier, the role of an
active fund. And obviously the active industry has been shrinking
and shrinking and shrinking as a basis to do the
industry as a whole over the last decade or so.
And most people will now listen to what we're saying
(41:05):
and saying, well, yeah, he's done all right, but in
the main passive is better. Do you see there's any
any danger in that or any I mean, we've been
talking you and I and the other active fund managers
who I talked to for years now about how it's
going to turn around, and you know that the active
fund will have a great resurgence, particularly anyone who invests
in the way that you do, in a very concentrated,
high active share way that you know that your day
(41:27):
will come again.
Speaker 3 (41:29):
Do you see.
Speaker 2 (41:29):
Signs of that over over the next decade or is
it really just going to keep shrinking.
Speaker 3 (41:35):
We are shrinking as the industry as we speak at
that journey is going to continue for another good few years.
I think I think that the debates this is very interesting,
right in a way that all the time, if the
majority of money in the market, which is not the
case today, I think today is about fifty to fifty split,
but let's give you another five years and then passive
would become like seventy to eighty percent of the market
(41:56):
in terms of flows or a um that you would
actually make them market less efficient because it's a lot
easier to compete with a passive driven market. Right if
you ask me to compete with another active investors, I
mean we're having a podcast here, I'm sure like that
another team of people would be doing a lot of
work on investment opportunities. So then it's and also at
(42:19):
the same time, it's a lot harder to work out
what they're trying to do or how they're doing it.
But when you're trying to compete with passive, this is
my point that I'm trying to make. It's very easy
to be the passive. It's a lot more difficult to
be an active investor because you don't know what they're doing,
you don't know the resources they have, you don't know
the information they have. To be the passive, you only
(42:40):
need to work out they the top fifteen or twenty
companies that are very big, and then you take an
active view on why you're not owning them because you
have something better. Right Like, if you're think you have
something better than your Max seven, feel free do not
own them. Just make sure that you deliver the same
level return of those Macs seven. But if you haven't
(43:00):
got as good of a company to do the same thing,
just own them. Or if you can own them more
in size like we have, then you outperform the market. Right.
So then I don't understand or this is the I
think the reason why the industry is dying a little bit.
I think that's a bit of legacy before the rise
of the ETF that there's many more funds. Right, you
(43:22):
have different fund manager with a different investment philosophy, different
way of operating, and then they're trying to sell you
their approach. Oh, we are value manager, we are growth manager,
we are quality manager, we're a UK manager. They're trying
to sell you the approach and we are not going
to deviate from an investment philosophy. And of course I
think that was a period of time that it did work.
But over time actually the markets worked out that the
(43:44):
ETF can replicate a lot of diffactored in itself, where
there's a quality basket of stocks, value stocks or growthy stocks.
So then I think there's a lot of low quality
in a way, a value for money proposition from an
active manager funds perspect active that it could disappear, right
if everyone is similar to what we're trying to achieve,
(44:05):
which I do feel we do have a cohort of
outperforming active managers that are trying to deliver more value
for investors, and I think the money would come back
to the active because when everyone els have got passive,
everyone is getting the same return. So then you want
to be differentiator. I want to be wealthier than my
neighbor or my colleague, and then so I probably want
(44:26):
to have a bit of active. But at the moment
it's very difficult for people to differentiate a good active
funds versus bad active funds. I think that's at the
moment you just don't want to have any active Why
don't we just go everything in the passive? But I
think over time people worked out actually I want something different,
I want something better, And hopefully we will still be
(44:46):
here to join that conversation.
Speaker 2 (44:50):
And hopefully too it will become clear to active managers
if they want to survive long term, they need to
take leave out of your book and at least be
a concentrated active manager, a real active manager, we might
put it as opposed to an active manager who knocks
around the benchmark hoping for the best. There are two
more quick things I wanted to ask you about. I
know that you're not a crypto investor, but I did
(45:12):
just want to ask you briefly about bitcoin.
Speaker 3 (45:14):
Do you ever look at it?
Speaker 2 (45:15):
And we've seen it come down today, we're talking again,
I repeat on Monday, and as video and as the
nasdack have come down quite a bit, so has bitcoin
followed do you see it just as a non asset
class that is simply correlated to techtocs in the US,
or do you see it as something more special.
Speaker 3 (45:32):
I think the way for people to think about bigcod
I'm sure people would have a lot of people have
made a lot of money from the crypto, is that
it's about the use cases. So from our perspective, the
reason that we are not we firstly, we can't invest
into bigcoin as far as the strategies concerned. But even
personally I'm not an investor in bigcoin, the reason only
being is that I don't see too much of a
(45:53):
use cases, so then it become more of a speculative
as a class. I can see the argument. Why is
that some sort of like digital goal In a way
that you want to protect your money away from the
US dollar or what the central banks are doing, you
probably don't want to have too much sterlings. Maybe you
can have a bit of a big con on that note,
But then it's all about the use cases. Right If
(46:14):
you tell me in the next five years that bigcoon
is going to be used in supermarkets in our day
to day or maybe some of our our pay or
bonus are going to pack get pain bigcoon. Then yeah,
maybe there's an argument to we make that you can
justify why the crypto is training at a certain level.
But before then, which at the moment we're still not
seeing any of this, then it's become more of a
(46:34):
speculative as a class, which then is a very different playbook.
Right Like, if if you know that speculative, then the
way that you try to make money will be more
short term rather than you take a long term view
to thing. Okay, why do I buy a hoe and
thinking that become will go up in a high level.
Speaker 2 (46:51):
Okay, so you're not going to be launching a blue whale.
Speaker 3 (46:53):
Coin if if there's demand, like we probably want to
like Trump did, right, Yeah, I was wondering that's worth
like ten billion, right.
Speaker 2 (47:02):
So I was thinking that we could have a new
way to judge our podcast. You know, the moment, we
just look at how many people listen to them. But
a much more effective and immediate way might be to
simply launch a meme coin for every single podcast and
see which one reached the highest price. Then we would
know who had been our most popular guest without even
(47:23):
having to bother to look at the start at the statistics.
That's right, I'll suggest network producer at the end. I'm
sure she's all over it, Stephen. Final question, what are
you reading at the moment? What's the book on your
bedside table?
Speaker 3 (47:35):
Oh? Actually, I've just started that, but I'm reading a
book on Trump. I can't remember the name of the book,
but it just came out, and so I'm just trying
to learn about what we're dealing with in the next
four years and then guess i'm inside in terms of
Trump's upbringing and his exposure.
Speaker 2 (47:53):
Okay, excellent. Thank you. I'm going to ask you to
email us the name of that book so that we
can put it into our show notes, because we would
like that very much. We like to know what everyone's reading.
Thank you, and so I think that that's probably it.
I've spent far too long asking these questions, but thank
you so much for explaining deep seek and it's impact
to us. I think that's a very important thing to
know about. Thank you for listening to this week's Marin
(48:18):
Talks Money. If you like our show, rate review, and
subscribe wherever you listen to podcasts, and keep sending questions
or comments to Merin Money at Bloomberg dot nat. You
can also follow me and John on Twitter or x
I'm at merin sw and John is John Underscore Steppech
Stephen Are you on Twitter?
Speaker 3 (48:35):
Tory X Stephen you my name yep.
Speaker 2 (48:38):
The show is produced by Samasadia Moses and sound designed
by Blake Maples, and the executive producer is Brendan Francis
Newnham Special thanks to Stephen You
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:18):
Welcome to Marin Talks Money, the podcast in which the
people who know the markets explain the markets. I'm Marin
Sumset Web. This week I'm speaking with Stephen You. Stephen
is the lead manager of the Blue Whell Growth Fund,
a long only and very concentrated global equity fund which
is the backing of British billionaire Peter Hargreave's Stephen started
his career as a fund manager at a Hargurish Landsdowne.
(00:39):
He's since then held positions at New Star, Artemis and
Nevsky Capital.
Speaker 3 (00:43):
Full disclosure.
Speaker 2 (00:44):
A few years ago I did do some paid work
with Blue Whale, but I have not been commostly involved
with the fund since twenty twenty three, so time has
passed since then and this week is nically the perfect
time to get Stephen on. First of all, the fund
has an excellent track record and annualized returns since law
j twenty seventeen of over fourteen percent a year. That's
against the return of more like five and a half
(01:05):
percent for UK based peers, so it's always good to
get someone on whose fund is actually performing very well.
It's also true that about a month ago, Blue Whals
started talking about reducing its stakes in some of the
big big US tech companies, including Microsoft and Meta, on
concerns about the costs of the capex of artificial intelligence.
So his holdings in Microsoft was, for example, cut to
(01:28):
about two percent of the porfolio from eight percent at
the beginning of last year. We'll talk a bit about that.
Now Blue Well is thought of as a tech investor
that may or not be fair. We're going to talk
about it. Stephen is increasingly less positive on the magnificent
seven tech stocks all round. We are speaking on Monday
this week, and his cautious attitude is looking to be
spot on. In this conversation we get more about Stephen's
(01:50):
thoughts on the tech giants while the fund has been
reducing that AI holding, and the deep seek upset, and
of course where he sees opportunity right now. Right the
way I've said that, it sounds like there's an awful
lot to get through and we haven't got days. We've
only got forty five minutes or so. So sorry about that, Stephen,
thank you.
Speaker 3 (02:06):
For joining us.
Speaker 2 (02:06):
You're going to have to talk fast, thank you. Marry right,
So let's start. I've talked a lot about the already
about the kind of things you hold in the founder
are perceived to hold in the fund. So why don't
we dial back a bit and talk about what you
see the funder is actually doing, how you invest, what
kind of stock you choose, what your valuation parameters are,
et cetera.
Speaker 3 (02:25):
So we've started a strategy back in September twenty seventeen,
so it's over seven years ago now. The objective at
a time was very simple is we want to launch
a high convection mandates investing into between twenty five and
thirty five stocks with a quality bias. So we like
high quality businesses, but at the same time to be
(02:47):
able to significantly outperform the markets, which would include the
passive tracker in today's context. And I think that has
what we have been doing. So I think on a
very high level that we actually would exclude low quality
businesses that we would deem as not sustainable highly intented,
and then the opposite of the spectrum would be company
(03:08):
with very strong balanced it, good management team, sustainable business model, etc.
But of course, I think if you look at what
has happened in the market with some other peers who
are running a very similar mandate, is that there has
been a bit of a deviation in performance terms over
the last couple of years. And so then when I
reflected back on what we are trying to achieve investor
(03:30):
on top of what I just outlined seven years ago,
is at the same time of not only investing into
high quality businesses, you would want to pick the winners
that the companies are actually able to capture more market
share or revenue or profit in a new environment. And
I think that's what we are set out to do.
Speaker 2 (03:50):
Okay, Can I take you back a little bit to
the definition of quality. One of the things you said
when you were talking about what makes a quality company
is having a sustainable business model. By that, do you
mean one that you believe will last for a long
time or do you mean sustainable in the sense of ESG.
Speaker 3 (04:07):
Sustainable more to do with the business model in itself.
I mean, we are not a ESG or high impact fund,
but we do deem ESG factors as a business consideration
or business and risk consideration. So what I'm referring to
is a sustainable business model in terms of recurring revenue
stream cash flow conversion that you're able to tap into
(04:28):
your customers with high switching costs, which means that then
it's not easy for them to move to a new
competitor to use something similar in term service or products.
So that is what we like or prefer to invest into.
Speaker 2 (04:42):
That kind of company, This kind of company with a
great balance sheet, with great cash flows, with great management,
with a sustainable business model, and one that you can
see continuing to generate profit growth out the out indefinitely.
That's automatically going to be expensive, right, So what are
the valuation parameters that you have?
Speaker 3 (05:00):
We build financial model for every single company we have
and then we would make sensible or conservative forecast in
terms of how much money we'll expect our company to
make in the next three to five years. So one
valuation metrics that we will look at is free cash
throw yield just for that. So it's how much free
cash throw the company would have generated in five three
(05:24):
to five years from today. And of course the way
that we access the quality of the business is the
sustainability of the free cast throw level of generation three
to five years from today, isn't it. It's not like
a one number that you get in five years time.
And then that number disappear in a six or seven years,
so that is not what a high quality business means.
(05:45):
A good company means that they can continue to deliver that.
But of course we do not have a crystal ball
so that you cannot just make a number to say, okay,
I think this company's going to do well ten years
from today. So you want to have a sensible time horizon,
which for us between three to five years. And at
the same time you will be able to track the
recent developments such as quarterly earnings invested day or when
(06:08):
the company announced their new guidance for this coming year
in terms of their plan, and then you can marry
that with your business analysis alongside the forecast that you
have made to determine whether the company is likely to
achieve those results. So that's what we do. But the
point that I want to make just to go back
on the quality spectrum of companies that we look at.
(06:31):
Obviously there's a price to pay as a starting point,
but I think what is really important as you can
probably worked out across different holdings that could be deemed
as good quality businesses that the performance potential or how
they have performed over time are very different so identifying
(06:51):
a good company or high contit businesses, the starting point is, like,
we do know that these companies are not going to disappear.
Speaker 2 (06:58):
So it's one of the things that I'm trying to
get at is, let's say you've bought a quality company.
It's great. Everyone else a company company is doing very well.
Is there a point when you look at it and
you go, it's still doing really well, but it's too expensive?
Of course, so what's the point which you go, well, actually,
it's now so expensive I can't have it in my
portfolio anymore. Or as a growth investor, does that point
(07:20):
never exist because you expect a good company to grow
into any valuation. You see where I'm going here with it.
Speaker 3 (07:25):
Yeah, we totally agree with you. That's always a price
for everything, right, even that for a high quality company,
let's say Nvida or Microsoft Amanthers, that's always a price.
So we do take that into account. So the way
that we look at it is two things. So one
is we make forecasts in terms of how much money
(07:46):
or prehe through our company is expected to deliver in
the next three to five years, and of course up
to three years. You can look at the market consensus numbers.
So what we want is our forecast to remain ahead
of the market expectation, which means that if we ended
up to be correct based on our analysis, that a
company would continue to beat expectations, right, And of course
(08:09):
that will be from time to time that the market
has caught up with our expectations and we are no
longer ahead of market expectation, and in that manner that
we would deem the shares to be overvalue within a
short time horizon, which is up to three years. Okay,
that's one which we do look at. Secondly, is about
the five year number, which we look at a single
(08:29):
valuation metric free CASHUW yield, just as for death in
five years time. And the way that we look at it,
obviously there's no market consensus to refer to, but we
were trying to adjust that number alongside the quality of
the business. Right, So if you're a good company, of
course there's a spectrum of good company versus better company,
(08:50):
high quality company, etc. And the price would be very
different from one to another. And I think in today's
context that's going back to Microsoft to make it a
bit simple, is that we believe that the quality of
the business for Microsoft is not improving from here, But
when you look at the business seven years ago when
(09:11):
they went through the digital transformation to make it a
cloud subscription model, that the quality of the business was
improving for a good period of time. But what is
changing now is when you look at the valuation of Microsoft,
let's say, using a five year three careful yield number,
in the next five years compare to previously, when we
look at Microsoft, that number is very much similar. So
(09:33):
Microsoft is trading at an all time high valuation compared
to when we first invested, But then the quality of
the business in our view, is deteriorating, so we think
the share is overly expensive. But we are not here
to suggest that Microsoft is going to disappear as a company, right,
so we are still going to use Microsoft continuously. But
(09:56):
when you look at the return on invested capitol profile
from Microsoft from here in the next five years, that
number is likely to come down rather than going up
from in our view, based on how much money they
have spent into artificial intelligence investment. So if I just
link it back to the context of NVIDA, I'm sure
we'll talk about some other stuff like deep seek later on.
(10:19):
But when you look at a very simple like pe
ratio one year forward consensus on Bloomberg number and Vida
and Microsoft is trading at the same level, which is
about thirty times earnings. But of course for Nvidia to
be able to sell you many more products, let's hope
that is going to continue that journey, and it is
higher than what Microsoft has been doing in terms of
(10:41):
the copilot. And of course the end customer for Nvida
would be coming from the free care throw generation of
Microsoft previously, so that number that free castrow has been
passed on to Nvidia's top line.
Speaker 2 (10:55):
Okay, so in part go back to what you were
saying at the beginning beginning of the answer to that question.
A lot of it is about wanting or needing the
rest of the market to have positive a positive surprise
relative to you.
Speaker 3 (11:06):
That's right. Yeah, So this very simplistic way that investors
should be thinking about is in order to do a
lot better than your peer group the markets, the ETF is,
you need to have a differentiated view on the outlook
of a company. And that's more likely to be correct
than wrong because it's very easy for anyone to have
(11:27):
a concharriant view. You can take a view on a
company on a market to be a contrariant for extended
period of time, and you're probably going to get carryouts
in terms of that view, because the market is right
most of the time. Right. So then in order to
do something different, which is in performance terms that you
need to deliver more than your competitis or the market,
(11:48):
you need to have a differential angle, and you need
to maintain the differential angle with the probability that diffreenshiond
angle is likely to be right, or maintain it to
be correct. And as long as there's still a decent gap,
then we think that's likely that the market is going
to follow us, and vice versa. If we end up
to be behind the market and we are likely to
(12:08):
be correct, and we would think the shares could be
expensive because the market is going to follow us, that
maybe there would be earnings vision downgrades on the other side.
Speaker 2 (12:17):
Yeah, And this is easier said than done, of course,
And as you say, the market is more often right
than wrong. And so if you're going to run a
portfolio like this really has to be a concentrated portfolio.
So twenty five, twenty six, twenty seven, that's the amount
of companies you can realistically find that will fit inside
these parameters.
Speaker 3 (12:34):
That's right. And the other points that I want to
just illustrate to the audience that this is very important
in today's context is obviously the market is very efficient.
Everyone have access to the same level of information. In
order to have this differential angle, you need to do
something original. You need to make it very deep dive
in a way that you have outwork your competitors or
(12:58):
the market audience. So the way that we translate that
at Blue Well is there are five of us on
the investment team. Okay, that doesn't sound like a lot
of people, right, but when you marry that with the
number of stocks that we have in the fund, which
on average twenty five, then you're saying that we're saying
that that's on average an individual covering five companies. So
(13:18):
Eve and a professional full time workers is covering five
companies for the entire year, versus another individual who might
be covering ten or fifteen or more and maybe not
full time two because you have a day job. Then
the level of research that we could put behind the
scene to understand what the company is trying to do
(13:39):
or whether we have a friendship angle, I think the
chance of that happening is higher. We're not an expert
on anything, right. If you ask me about the stocks
that's outside the fun that probably cannot have a proper conversation.
But for the stocks that we end up having invested,
then yes, I think we could claim to be an
expert just because we have spent a lot more time
when you're very full in terms of that resource.
Speaker 2 (14:02):
So one of the things that has happened as a
result of the way that you invest is that you
have ended up quite a heavy tech investor. And as
I said at the beginning, a lot of people when
they hear Blue Whale, they think tech. They think of
you as a tech investor. At one of your biggest
tech areas has.
Speaker 3 (14:16):
Been in A and AI.
Speaker 2 (14:17):
You know, you and I have talked a lot about
your position in video before, and let's go back then
to Microsoft to matter to why you've been selling out
for some of these docks but staying in video.
Speaker 3 (14:29):
So just on a fray high level that we we
we would still say that we are global fund but
with a tech bias. And if I look back to
the last seven years that our tech exposure has been
fairly consistent. I would say just about forty percent throughout
that journey. But what has been interesting within that exposure
(14:49):
was that the composition of that mix was very different
seven years ago compared to now. So seven years ago,
before the pandemic, we were heavily exposed to digital transformation
opportunities and since then we have moved on and since
twenty twenty two or twenty twenty three, we have switched
those exposure into artificial intelligence, which is the hot topic
(15:12):
over the last few years. And of course we have
done very very well on the bank of that. But
when you look at it very high level, yes, over
the course of last seven years, we did have a
bias to technology company. I think the points that I
want to make is is when I try to look
back on what happened over the last seven years, I've
done a bit of analysis myself. Look at all the
companies that's been listed in the stock market, whether they
(15:35):
are American companies, British companies, European, Chinese or Indian companies
that over the last seven years, the market share winners
in terms of the world revenue shares has been American companies.
I think people would have what worked out even without
these studies. But at the same time, if you look
at which part of the North American company have got
(15:55):
the most share in terms of the dollar or time
that we're spending with them now, would be the big
tech companies. And then what is it at the expense
of the expense of some traditional business model that are
more maybe high street facing, not in the digital world.
And hence, I think, as far as we are concerned,
(16:15):
that we like companies or sectors that can capture a
larger share of the world GDP or when we say,
maybe a larger share of our dollars spend or our wallets,
or maybe from an enterprise perspective, where do they invest
their money into. And so we are very pramatic whether
those companies would end up to be technology company, which
has been the case for the last seven years, but
(16:37):
then it might not be the case in the next
seven years. So then if you ask me to go
back in time, would I have done a lot better
by launching a technology fund. I think, looking at the
stock pick that we ended up with, like, I think
that performance would be even more exceptional than what we
have achieved for the Blue Out Growth Fund, which is
a global mandate But the one thing that I'm not
(16:58):
changing is I don't want to be fixated on technology
because as far as a global investor or fund is concerned,
that we want to be able to navigate a market environment.
But today that is where you want to be, which
is technology.
Speaker 2 (17:14):
Okay, So let's talk then about technology, and let's talk
about AI in particular. We're talking, as I said in
the beginning, we're talking on Monday and over the weekend.
There's all this information has come out about deep Seek
with the Chinese AI product and how it can it
can now well do everything with a cheaper kind of chip.
So it represents a genuine threat to everyone else who
(17:35):
spent billions and billions of cathecs on developing AI products
to suddenly find that this exists. Right, So we see
as we're speaking, we've seen the video of ten eleven percent,
and we're seeing the tech across the board beginning to
come off. So do you see this Have you looked
at it in particularly? Do you see this as as
(17:55):
a threat to the big tech company in the US.
Do you think it's a bit overblown or does it
justify your view that you need to get out of
the companies that have been spending huge months on AI.
Speaker 3 (18:10):
So we are a true believer in how geners AI
is going to change the world, whether it's on a
consumer basis or in the enterprise professional basis. So deep
Sea have actually reinforced our view that this is happening.
So what deep Sea has managed to do in terms
of breakthrough that it actually solved two things that has
(18:32):
been the bottleneck of the AI industry. The first thing
is the price or the course of training models of
doing AI. And you might record the same. Ottoman, the
co founder of open ai, recently make a comment a
few weeks ago saying that the chat GPT version that
charged you two hundred dollars a month that he's seeing
(18:53):
a lot of demand, but they are actually lost making
even by charging you two hundred dollars a month to
use it. So asked us, no doubt that there's many
more things that AI can do. But then the question
is what is the price that you want to pay
for that. So ef that subscription is two thousand dollars
a month, you might not be paying for that. But
(19:13):
there's no doubt that there's enough use cases that people
want to embrace AI. In terms of the day to day.
So what Deep Seak had managed to do is they
managed to use some very dated and video technology to
put use a very similar output to what check GBT
has done. After they have spent billions and billions of
(19:35):
dollars investing into that, and on the back of that
is the big tech company so far in the US
in particular, they have a monopoly to drive AI applications
because the entry ticket, or the barrier to entry is
whether you have the billions to spend on Nvidia GPU.
If you don't have access to the GPU compute, you
(19:56):
cannot develop any AI application, right. So what Deepsea have
managed to do is I think they have started a
revolution for the startup AI company globally that anyone with
no access to billions of investment can start to work
on some air application. The other bottleneck which deep Sea
have managed to solve, I think is energy demand. As
(20:20):
far as the current energy infrastructure is concerned, that is
not capable to handle what is yet to come from
the AI world, right and hence when you look at
the big tech companies, they have been spending money now
exploring the new clear energy. But of course nuclear is
not just not the end answer because it does take
a long time and you need to public get a
(20:40):
permission to build it, so it's not going to solve
anything immanent. So what Deep Sea can managed to do
is to optimize the software or the AI algorithm that
they no longer need as much EPU compute, which means
energy demand or energy intensity for the use cases that
we have so far to date could be could be
(21:00):
replicated with lower energy supply. So it's actually very helpful
in terms of development.
Speaker 2 (21:06):
So what we have here now is the possibility of
an AI model which is much cheaper and much less
energy intensive than previous assumptions.
Speaker 3 (21:16):
That's right.
Speaker 2 (21:17):
It's a big positive supply shock to the global economy surely,
so that will take us a big step further down
towards the productivity boom that we've all been waiting for
for decades now. So this is actually as a huge
and disruptive supply change.
Speaker 3 (21:35):
Yeah, that's right. Yeah, So basically it has leveled the
playing field, that is, more startup AI companies is able
to join the raise to be more creative innovative. At
the same time, it's lower the price or the cost
to run certain air applications.
Speaker 2 (21:52):
So if you look big picture, then that should mean
less inflation, more productivity. It's yet another wave of deflation
coming out of China, I think.
Speaker 3 (22:00):
But a very high level that is of our view
even before this week, is like AI is very defationary
over time, right, like in terms of increasing productivity, in
terms of maybe having fewer headcounts in certain more maundane
kind of operations like back office or maybe some customer
service function. So I think over time, a lot of
(22:22):
things that we're doing today could be done by AI.
But of course the question is like how long does
it take? Right, Even that it's so expensive to invest
in the AI as a starting point and to be
able to come up the applications that work, and then
you then end up you need to have the customers
happy to pay for this at the same time, right,
So that I think there's a lot of box to take.
But then by lowering the course, I think it does
(22:45):
open up a lot of opportunities. When analogy I want
to make on this is if you look at the
smartphone ecosystem, right, let's say the app store on iPhone
or Android when it first launched, you probably have like
maybe fifty two hundred apps, but over time when as
the platform become more level and in a way that
is making more accessible to any software developers app developers.
(23:07):
Now you have a few million apps in your app store,
which we don't even know all of them, and the
number of applications of use cases that you can do
on your smartphone is a lot more and hence the penetration.
It's not just Apple is winning, right, Apple is only
a small player in the market. You have a lot
of entry level smartphone that can do most of the stuff.
(23:27):
So this is what is going to be very helpful
from the AI adoption penetration kind of conversation going forward.
So what deep Seak has done is accelerating the adoption
and penetration of AI.
Speaker 2 (23:41):
Okay, and so what does that mean for your portfolio?
What does that mean for Nvideo in particular, because we've
talked about you selling down other companies, possibly one sort
of overinvested in AI and you think that weakens them
long term. But in Video, you've maintained your holdings in
you haven't wanted to get out of that at all.
What does this news mean for them?
Speaker 3 (24:00):
So we've seen the AI domain. We are still a
pro AI infrastructure company. So a companies who are on
the receiving and so including NVIDA and Broadcom for example,
both of them in our top ten. And the way
that to think about is of obviously our view has
not changed yet. I mean, it doesn't mean that we
might not change that meal in time, but our view
has not changed that by freeing up some of the
(24:21):
GPU capability. Let's say if you assume that all the
big tech companies the utilization of all the GPU they
have got in house is one hundred percent, so they
basically they utilize everything they have got and hence they
need to continue to order more GPU going forward, right,
whether it's from NVIDA or working with Broadcom to do
(24:42):
in house GPU. Okay, what deep Seat have managed to
suggest is maybe there a certain level of optimization you
can do to free up some existing capacity. Right, So
rather than one hundred percent utilization, maybe the number is
like fifty percent utilization, So you suddenly have like a
fifty percent free up capacity you can work on other
AI applications or development that you might not need to
(25:03):
then order more GPU from NVDA or Broadcom. Right, So
that is the narrative happening in today's market. Our view
is a bit different. Our view is that sure, okay,
that is fine. If everyone is trying to take a
step back to say, oh, actually we can take it
easy now because our competitor have got capacity free up.
We do have that too. Let's slow down the development
of AI and not to invest more in the GPU.
(25:27):
If everyone is doing that, that's fine, which is not
the case. People are going to utilize more of the
free up capacity to develop more things. I mean the
stuff that AI use. Cases that we have been talking
today or most people have access to. Well, talk about
GPT technology, which is like a searching algorithm of some
model giving you a very strict answer quickly correcting your
(25:49):
emails suggesting a few things going on. But what we
haven't talked about, which is very new now is happening.
It's called AI agents. AI agent means this agent would
actually help you to do things. So instead of speaking
to the BA British Airway chat board saying, oh my
flight got canceled? Can you help me to do the refund?
Where do I go? And then they give you all
(26:10):
the answer is that no, no.
Speaker 2 (26:11):
They don't give you the answer. They don't give you
the answer. Okay, it doesn't happen you know nothing about
the BA chat boards.
Speaker 3 (26:19):
That's worse then, But what is happening if BA is
smart enough, Like when when this AI agent comes along,
is the AI agent itself not only able to answer
your question, but at the same time it's going to
fix it for you in the backhand. Right when I
talk about a agent, it would need to be ambent
themed within the backcand system of British Airway, not just
on the surface chatting with you on some random queries.
(26:40):
It's going to link up to the back end and hence,
like whan I say, okay, my flight got tencel, can
A get refund done for you? Like you get the
payment straight away? Just talk about to the AI agent.
So that journey has not even started, right, So what
I'm trying to say here is like there's many many
more use cases that we have not yet come to use,
and any free up capacity would would basically accelerate those
(27:02):
development without like basically saturating the utilization to date. And
I think everyone is raising to do that. And the
other thing which is very important if you look at
what deep Sea have said, or maybe some of the
comments on Twitter have been trying to tackle is like
those GPU they have got it is not enough to
go forward. They managed to utilize a very limited data
(27:26):
number of GPU to get to where they got to.
But that is not the end story. That's not the
end story that China no longer any GPU, because I
would imagine if tomorrow that Trump decided or actually we
want to become friends with China again, we would let
you have as many GPU as you want from Nvida,
I would best that China is going to spend the
biggest amount of money to buy up the entire GPU
(27:48):
stock in order to take AI to the next level. Right,
So what Deepsea have achieved is is a big breakthrough
in terms of the success in optimizing the algorithm that
some it seems like maybe the Western company have not
managed to do so. But it doesn't change the narrative
that AI is still changing the world. That's there a
lot more things that you need to do you can
(28:10):
do with AI. And of course in order to perform
the training on AI, you need to have the GPU compute.
Speaker 2 (28:17):
Yeah. Interestingly, I'm looking looking at the antlers putting out
almost immediate comments on this business today on Monday, As
I say, I seeing all sorts of things from you
know this, this will lead to a huge capex unwined
and a mild recession in the US and an unwinding
of equity inflows into the US and eventually a week
a dollar. That's all a bit ott from from what
(28:39):
you're saying. You don't think antles should be allowed to
write instant responses, do you?
Speaker 3 (28:46):
No? I think I think the thing with the deep
sea breakthrough is I think that's going to be more
data point that we will get from some of the
big tech companies. You probably want to hear from them, right,
because like I said, I I suggest that, Okay, they're
going to free up some capacity, but what is that number? Right?
If you say to me they can free apply fifty
percent off the capacity, that's a lot. That's a big number.
(29:06):
If they can free up like twenty percent of the capacity,
that's not a lot. So then I think there's still
a debate in terms of what is happening. But the
other thing, I just want to throw it out there
because we're going to hear from matter to was a
second berd On Friday, a few days ago before the
deepsick announcement. Friday, he announced or pre announced the capital
expenditure for twenty twenty five. So that number has gone
(29:28):
up from fifty something trillion dollars expected for twenty twenty
five into the range of more than sixty billion, fifty
billion dollars to sixty billion dollars, So that number's gone
up by over ten billion dollars. And I would imagine
he actually was connected, right, Like he's not like he's
going to hear the same news on Deepsey as you
and I just reading on, hon said Bloomberg Channel. So
(29:49):
by him doing that just being a bit speculative, was
that he already know what this means for them. They
already have worked out that Okay, we can maybe copy
some of the the optimization algorithm that deep Seat have
introduced because it's open source, but then they still need
more GPU to do more things. So I think that's
very interesting. But we will probably hear more from them
(30:10):
this week because they're going to report their results.
Speaker 2 (30:13):
Okay, more on that later. So you're hanging onto Nvidia,
and presumably you're hanging on to your other investments in
the AI infrastructure area too. Say Vertive is another one
in your top ten, which they do cooling infrastructure right
for data centers.
Speaker 3 (30:27):
That's right. Yeah, I mean things are quite fluid, right,
So at the moment, we're not selling. I think that's
a starting moment. But we'll get more clarity as this
week goes on. I think we need a few more
data points to suggest whether our thesis might have changed
from on that perspective.
Speaker 2 (30:45):
Yeah, and I'm interested. You know, you mentioned earlier something
I was going to ask you about energy, and in
particular about nuclear. You know, if you're very very pro AI,
very pro data centers, AI infrastructure, et cetera, et cetera,
does that make you want to lean into holding anything
in the nuclear energy sector?
Speaker 3 (31:04):
Not currently, I think just from maybe a public equity
investor perspective, there's just not many of these companies around, right.
If you ended up finding a company that have some
exposure to nuclear that probably have other stuff that you
don't want to own, which is a typical maybe like
a utilities company, they have like a nuclear operation or
(31:24):
some nuclear plants, so you don't get a pure play
in terms of nuclear, right, And of course, then whether
we would end up investing into uranium, which we couldn't,
then there's more of a very different game to play.
Speaker 2 (31:36):
Okay, So let's move on then and look at some
other parts of the portfolio, some other sectors and themes
that I know you're interested in. And one of the
ones that always pops out to me when I look
at your portfolio is what you like to call gaming,
and I like to call gambling flutter for flutter for example, gaming,
I think a bit of an euphemism here. It's outright gambling, right,
(31:56):
But you think that sports gambling in the US is
an area that you are exposed to and you have
great hopes for, right.
Speaker 3 (32:05):
Yeah, So this is a very good illustration of what
we're trying to achieve without twenty five companies, right, because
the way that you do it is not only you
find a good company or a high quality business model,
and at the same time you want this company to
capture new market share from someone else. So as far
(32:27):
as US sports gaming or US gambling is concerned, sports
gambling is concerned, that is a completely new opportunity since
the US started to legalize sports gaming state by state
a few years ago. So at the moment, when you
look at the market segment in the US, it's only
about fifty percent of the state or population would have
(32:48):
access and at the same time it's a two players market,
which is we like that in a way there's a
jo operly. So in the US it's between Futter's subarank
of Venduo versus DraftKings, which is a US listed company,
and these two company they control over eighty percent of
the market share, so they are very big companies. That's
(33:08):
still a few more small players out there, but then
they do get an economy of scale. But what we
really like in a way to think about this, so
between these two companies, their top line is about twenty
billion dollars. So these are the money that they would
be be keeping after they pay out all the winnings. Right.
So then the question to ask is that where does
(33:29):
these twenty billions come from? Right, because a few years
ago the number was zero. Right. It's either the consumer
in the US have spent less money with a restaurant,
gone bought a fewer things from Amazon, or maybe gone
fewer times to cinema or some other discretion spending. So
this is what we really like in a way that
is idiosyncratic, that is not depending on Trump. It's not
(33:51):
depending on the war in Ukraine or the Middle East.
It's about American consumers shifting away some of the spending
they're already doing to the creational sports gaming or sports
scambling or like whatever you want to call it. But
it's a new market for them. And of course, the
other thing that we know which is very positive is
(34:11):
the American sports market is multiple times bigger than the
rest of the world sports market to start as a
starting point, so we know that they love their sports. Secondly,
the GDP per capital as the American consumers, they're a
lot wealthier than the rest of the world. So when
you put these two things together and then you have
a new opportunity to capture some of the spending, then
(34:33):
you know that this is going to be very igo
syncratic and could be very positive. When you put all
all these things together, then you you know that they
it's likely more likely that they would do well. The
only thing that they I would say it's a head
wind or heard though, is the text coming from the
States because like when the state decided or actually this
(34:54):
is very profitable, or maybe you get this esg angle
that I don't want you to do too much. They
probably would increase the tax. But what we would say,
this is a win win situation, right, because the only
reason a state would decide to legalize sports gaming is
because they want more income, So they probably don't want
to kill the industry otherwise than they might as well
not to have legalized it in the first place.
Speaker 2 (35:14):
Yeah, I see that that makes sense. You mentioned in
your in your remarks there that this is an industry
that isn't threatened by President Trump. Does his election change
anything for you when you look at your portfolio or
even you're you're so bottom up so stock specific, but
is there anything in Trump's plans that changes the way
(35:36):
you look at your portfolio or any the specific companies
inside it.
Speaker 3 (35:40):
Yeah, so not so much on a maybe a stop
by on a bottom level, just because when we were
running into election, we were very much indifferent in terms
of whether har Is or Trump is going to win,
so we were not positioned either way. And since then
we probably haven't actually got a lot benefit on the
back of Trump being elected, because I think that's a
feel policy that is probably going to benefit more from
(36:02):
the stocks that we don't currently exposure to. I think
what is interesting or what we are likely to get
in this coming four years is, firstly, I think the
headline Trump kind of driven volatility in the market is
going to be a lot high in terms of headline risk,
so then he's going to make a lot of comments
about different sectors or companies, and the shares is probably
(36:23):
going to move according to that comments. I think that
it plays in the strength of a high conviction active
investors who are actually doing some work behind the scenes
to assess whether some of these are just a rumor, speculation,
or some of that is going to get translated in
proper terms in terms of impact. So I think that's one. Secondly,
I think that's probably more of a macro debate, which
(36:45):
we're not an expert of, but of course we follow
the dynamics. Is whether Trump's policy is going to be
a lot more inflationary, which means interest rate is going
to stay high for longer, or maybe it would even
go out from here rather than coming down. So I
think that's more of a macro positioning in terms of
valuation in terms of whether money should be coming out
(37:06):
from equities to fixing income and all that, but not
so much on a bottom up company perspective, and not.
Speaker 2 (37:12):
Much you can do about money moving out of equities
into fixed income is that given what your fund does. Okay,
what else is in the in the fund that we
haven't discussed that do you think would be interesting?
Speaker 3 (37:24):
So I want to suggest another very controversial stock, which
is Philip Morris, that has done very well for.
Speaker 2 (37:32):
Us gambling and smoking.
Speaker 3 (37:34):
I don't know, and can I have to stop branding.
Speaker 2 (37:37):
This podcast as an ESG podcast at this rate?
Speaker 3 (37:40):
So the way I want to reason for Phil Morris
to just to have a very quick discussion was so
it's a new stock for us. I mean, we've only
been holding it for over a year or so, so
we haven't got it since the beginning of the fun
back in seventeen. But what we really like about a
company is a good company to start with, right, the margin,
the return of investor capital pro while I mean sustainable,
(38:02):
the business model on a very high level. We all
like that. But what have changed for us, which I
think is the important part, is when you look at
phil Morris as a business today, fifty percent of the
business is in non traditional cigarettes products. So the fifty
percent is the one that is probably the more relatively
healthier way of consuming nicotine. Okay, we can have a
(38:22):
debate on whate.
Speaker 2 (38:23):
But we can have debates because anyone there's a lot
of conversation about when you say non traditionally you're talking
about vaping, right.
Speaker 3 (38:30):
I'm talking about heat not burnt and also nicotine pouches
by Swedish Match, so not vaping, so they don't do vaping,
so they don't say okay, they don't do vraping, so
that's not what we're after. But it's more nicotine pouches.
They have this product called e cores which they use
heat not burnt technology to smoke a cigarette, but not
(38:50):
basically making it combustible, so they use the heating technology
is slightly complicated, but they pioneered that more than ten
years ago and their market leader in a few markets globally.
So basically the view that we took is obviously okay nicotine.
We can debate whether nicotine is good for anyone, but
to us, it's more of a choice. It's like alcohol,
like maybe it's not good, but people should have a
(39:12):
way to consume the product they want to consume. But
of course, from a company perspective or from the regulator perspective,
is we want them to be consuming a healthier manner,
right or less damaging manner anyway, it's better that you
don't consume any of this stuff.
Speaker 2 (39:28):
We're going to take AI. We can stop justifying it now.
Speaker 3 (39:31):
It's okay.
Speaker 2 (39:33):
Agree with you or not agree with you.
Speaker 3 (39:34):
Ye yeah, no no. So the point that I want
trying to make is, like, so fifty percent of the
business now is in a non traditional secret world, which
is growing very fast because people are adopting a healthier
way to consume nicotine. And secondly, the reason we like
it is because since they spin out from l Threa
back in two thousand and eight, Feeling Moris businesses anywhere
but the US, but recently because of the icos product,
(39:55):
the heat not burn technology, which is the healthier version
of a smoking a compassible cigarette is they got the
permission from the FDA in the US to market the
product back to the US. So this is a completely
new market for them. Right. So the way that you
think about we think about Film Morris is that this
company have been going around for it has been around
for years and been doing what we've been doing, but
(40:15):
there's a bit of a transitioning going on to start with,
which is growing a lot quicker than a traditional business.
At the same time, they have been on the back
of this, they've got the license to go back to
the US to take market share from your lives of
Elktrea or some other company that have been only in
the US for a long time. So that is very idiosyncratic.
And the reason I want to outline flutter in Phil
(40:36):
Morris is just to showcase that we're not just a
tech fund, that we do have some other opportunities that
are very different to your AI conversation.
Speaker 2 (40:44):
Then how you define tech, I guess I mean that
you know, heat not burned stuff. That's a bit techy,
isn't it. I want to take you back to something
that we talked briefly about earlier, the role of an
active fund. And obviously the active industry has been shrinking
and shrinking and shrinking as a basis to do the
industry as a whole over the last decade or so.
And most people will now listen to what we're saying
(41:05):
and saying, well, yeah, he's done all right, but in
the main passive is better. Do you see there's any
any danger in that or any I mean, we've been
talking you and I and the other active fund managers
who I talked to for years now about how it's
going to turn around, and you know that the active
fund will have a great resurgence, particularly anyone who invests
in the way that you do, in a very concentrated,
high active share way that you know that your day
(41:27):
will come again.
Speaker 3 (41:29):
Do you see.
Speaker 2 (41:29):
Signs of that over over the next decade or is
it really just going to keep shrinking.
Speaker 3 (41:35):
We are shrinking as the industry as we speak at
that journey is going to continue for another good few years.
I think I think that the debates this is very interesting,
right in a way that all the time, if the
majority of money in the market, which is not the
case today, I think today is about fifty to fifty split,
but let's give you another five years and then passive
would become like seventy to eighty percent of the market
(41:56):
in terms of flows or a um that you would
actually make them market less efficient because it's a lot
easier to compete with a passive driven market. Right if
you ask me to compete with another active investors, I
mean we're having a podcast here, I'm sure like that
another team of people would be doing a lot of
work on investment opportunities. So then it's and also at
(42:19):
the same time, it's a lot harder to work out
what they're trying to do or how they're doing it.
But when you're trying to compete with passive, this is
my point that I'm trying to make. It's very easy
to be the passive. It's a lot more difficult to
be an active investor because you don't know what they're doing,
you don't know the resources they have, you don't know
the information they have. To be the passive, you only
(42:40):
need to work out they the top fifteen or twenty
companies that are very big, and then you take an
active view on why you're not owning them because you
have something better. Right Like, if you're think you have
something better than your Max seven, feel free do not
own them. Just make sure that you deliver the same
level return of those Macs seven. But if you haven't
(43:00):
got as good of a company to do the same thing,
just own them. Or if you can own them more
in size like we have, then you outperform the market. Right.
So then I don't understand or this is the I
think the reason why the industry is dying a little bit.
I think that's a bit of legacy before the rise
of the ETF that there's many more funds. Right, you
(43:22):
have different fund manager with a different investment philosophy, different
way of operating, and then they're trying to sell you
their approach. Oh, we are value manager, we are growth manager,
we are quality manager, we're a UK manager. They're trying
to sell you the approach and we are not going
to deviate from an investment philosophy. And of course I
think that was a period of time that it did work.
But over time actually the markets worked out that the
(43:44):
ETF can replicate a lot of diffactored in itself, where
there's a quality basket of stocks, value stocks or growthy stocks.
So then I think there's a lot of low quality
in a way, a value for money proposition from an
active manager funds perspect active that it could disappear, right
if everyone is similar to what we're trying to achieve,
(44:05):
which I do feel we do have a cohort of
outperforming active managers that are trying to deliver more value
for investors, and I think the money would come back
to the active because when everyone els have got passive,
everyone is getting the same return. So then you want
to be differentiator. I want to be wealthier than my
neighbor or my colleague, and then so I probably want
(44:26):
to have a bit of active. But at the moment
it's very difficult for people to differentiate a good active
funds versus bad active funds. I think that's at the
moment you just don't want to have any active Why
don't we just go everything in the passive? But I
think over time people worked out actually I want something different,
I want something better, And hopefully we will still be
(44:46):
here to join that conversation.
Speaker 2 (44:50):
And hopefully too it will become clear to active managers
if they want to survive long term, they need to
take leave out of your book and at least be
a concentrated active manager, a real active manager, we might
put it as opposed to an active manager who knocks
around the benchmark hoping for the best. There are two
more quick things I wanted to ask you about. I
know that you're not a crypto investor, but I did
(45:12):
just want to ask you briefly about bitcoin.
Speaker 3 (45:14):
Do you ever look at it?
Speaker 2 (45:15):
And we've seen it come down today, we're talking again,
I repeat on Monday, and as video and as the
nasdack have come down quite a bit, so has bitcoin
followed do you see it just as a non asset
class that is simply correlated to techtocs in the US,
or do you see it as something more special.
Speaker 3 (45:32):
I think the way for people to think about bigcod
I'm sure people would have a lot of people have
made a lot of money from the crypto, is that
it's about the use cases. So from our perspective, the
reason that we are not we firstly, we can't invest
into bigcoin as far as the strategies concerned. But even
personally I'm not an investor in bigcoin, the reason only
being is that I don't see too much of a
(45:53):
use cases, so then it become more of a speculative
as a class. I can see the argument. Why is
that some sort of like digital goal In a way
that you want to protect your money away from the
US dollar or what the central banks are doing, you
probably don't want to have too much sterlings. Maybe you
can have a bit of a big con on that note,
But then it's all about the use cases. Right If
(46:14):
you tell me in the next five years that bigcoon
is going to be used in supermarkets in our day
to day or maybe some of our our pay or
bonus are going to pack get pain bigcoon. Then yeah,
maybe there's an argument to we make that you can
justify why the crypto is training at a certain level.
But before then, which at the moment we're still not
seeing any of this, then it's become more of a
(46:34):
speculative as a class, which then is a very different playbook.
Right Like, if if you know that speculative, then the
way that you try to make money will be more
short term rather than you take a long term view
to thing. Okay, why do I buy a hoe and
thinking that become will go up in a high level.
Speaker 2 (46:51):
Okay, so you're not going to be launching a blue whale.
Speaker 3 (46:53):
Coin if if there's demand, like we probably want to
like Trump did, right, Yeah, I was wondering that's worth
like ten billion, right.
Speaker 2 (47:02):
So I was thinking that we could have a new
way to judge our podcast. You know, the moment, we
just look at how many people listen to them. But
a much more effective and immediate way might be to
simply launch a meme coin for every single podcast and
see which one reached the highest price. Then we would
know who had been our most popular guest without even
(47:23):
having to bother to look at the start at the statistics.
That's right, I'll suggest network producer at the end. I'm
sure she's all over it, Stephen. Final question, what are
you reading at the moment? What's the book on your
bedside table?
Speaker 3 (47:35):
Oh? Actually, I've just started that, but I'm reading a
book on Trump. I can't remember the name of the book,
but it just came out, and so I'm just trying
to learn about what we're dealing with in the next
four years and then guess i'm inside in terms of
Trump's upbringing and his exposure.
Speaker 2 (47:53):
Okay, excellent. Thank you. I'm going to ask you to
email us the name of that book so that we
can put it into our show notes, because we would
like that very much. We like to know what everyone's reading.
Thank you, and so I think that that's probably it.
I've spent far too long asking these questions, but thank
you so much for explaining deep seek and it's impact
to us. I think that's a very important thing to
know about. Thank you for listening to this week's Marin
(48:18):
Talks Money. If you like our show, rate review, and
subscribe wherever you listen to podcasts, and keep sending questions
or comments to Merin Money at Bloomberg dot nat. You
can also follow me and John on Twitter or x
I'm at merin sw and John is John Underscore Steppech
Stephen Are you on Twitter?
Speaker 3 (48:35):
Tory X Stephen you my name yep.
Speaker 2 (48:38):
The show is produced by Samasadia Moses and sound designed
by Blake Maples, and the executive producer is Brendan Francis
Newnham Special thanks to Stephen You
Host
Merryn Somerset Webb
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