The transcript from this week’s MiB: Matt Benkendorf, Vontobel Quality Growth, is below.
You can stream/download the full conversation, including the podcast extras on Apple iTunes, Overcast, Spotify, Google, Bloomberg, and Stitcher. All of our earlier podcasts on your favorite pod hosts can be found here.
~~~
VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have a special guest. His name is Matt Benkendorf, CIO of Vontobel Quality Growth which runs about $35 billion in equities. This is really a fascinating conversation about a very specific
way to manage equities that seems to differ from how a lot of different people approach investing. The group that Matt works with is specifically an active manager, he oversees six different areas including Asia, Global, European, US — and global means go
anywhere as well as emerging markets.
They have a very unique approach, a single team puts money to work in all those areas. A lot of firms do not operate that way. They have amassed quite an outstanding track record beating comparable firms and their benchmark for quite a long number of years.
And if you’re at all interested in how to manage assets, how to run a high conviction portfolio, how to think about a process for stock selection and risk management, then you are going to find this to be an absolutely fascinating conversation.
So with no further ado, my interview of Matt Benkendorf of Vontobel Quality Growth.
VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My special guest this week is Matt Benkendorf, he is the CIO of Vontobel Quality Growth, a $35 billion global growth equity boutique division of investment giant, Vontobel out of Switzerland. Matt joined the firm in 1999, he became deputy portfolio
manager in 2006, lead portfolio manager of the European equity strategy in 2008, and since 2012, he has been lead portfolio manager for US equity strategy, Matt Benkendorf, welcome to Bloomberg.
MATT BENKENDORF, CIO OF VONTOBEL QUALITY GROWTH: Thanks, Barry. Thanks for having me.
RITHOLTZ: Did I get your name right? I feel like I mispronounced it.
BENKENDORF: It’s a tough one but you got it right, there’s been many variations over the years but you got the best one there, I think.
RITHOLTZ: So Vontobel has been around since 1984, you joined the firm in 1999, how was your investment philosophy shaped by those years? That was quite a — era of equity investing.
BENKENDORF: Yes, you can say I was very much brought up and steeped within Vontobel, know I came to want to Vontobel out of undergraduate which is a little bit rare in this business. You know, I think if you even take a further step back and look at the longer
arc of my life, like, I’m sitting here today doing what I always want to do as a kid.
So the journey started a long time ago. I grow up in a family business. I was always interested in business, I always thought in terms of what works in business, what doesn’t, profitability. And then when I was a kid, I found the stock market to be an interesting
outlet for that, because…
RITHOLTZ: So as a kid, you from guessing your age is right, so you are talking about late 70s early 80s?
BENKENDORF: Exactly.
RITHOLTZ: So that was the beginning of what ended up being an 18 year bull market, How did that thousand percent down increase affect the way you look at equities?
BENKENDORF: You know, it’s interesting if you look at my upbringing, too, you know, my father was a farmer from New Jersey, had a landscaping business, we had a garden center in Northwestern New Jersey, so I wasn’t around the markets at all, it wasn’t something
we talked about all at home, I don’t know how I found it, I just sort of stumbled upon it once I got into high school, really, and that backdrop you know of what was going on and as you described, that wasn’t as close to me which is actually interesting in
that it was more about the process itself, it wasn’t the results, you know, it was the item of being able to invest in a business via a stock.
So I was actually disconnected which is kind of back to I think what ends up successful today, not focusing on that aspect of it, the forward thinking what the numbers, it’s the fundamentals, so it is a very fundamental basis to start with.
RITHOLTZ: So less of a stock market investor, more of a specific company that happens to be public investors, is that a fair assessment?
BENKENDORF: That’s exactly it. You know, as a kid and even now today you know, on my way up here to the studio, I just am wired that way that I’m always looking around at things wondering how they work and then generally looking at businesses and wondering
how they work.
And that kind of guest as you asked about the philosophy what we describe as quality growth today, it’s always breaking down businesses quantitatively and qualitatively into what makes certain ones great and what makes most businesses, quite frankly, average,
and why would you want to get out of bed in the morning? To sort of engage in something, what’s in it for you as an owner of the business?
RITHOLTZ: So coming into Midtown Manhattan today, it’s a lovely September morning, what did you notice? What caught your eye that you started thinking of in terms of, is this particular business doing well, what businesses aren’t doing well? I’ve noticed a
lot of the retail shops around Manhattan seem to be closing their doors.
BENKENDORF: Yes, yes now that’s the interesting thing when you get into this city and you realize in the sort of the commoditized nature of most of the businesses here, particularly restaurants, right? You just wonder, you drive up any the avenues, you wonder
how all these places stay in business, you know, what are the margins in certain areas of their business, what is it about certain locations that make them thrive?
So I see a lot of average, you know, businesses that I wonder you know what — why would you be in that business, not to denigrate the business by any means, but I’m only sort of ranking and contrasting. And I think of it in a lot of ways in terms of, you know,
even though my upbringing was in a different business, would you want to own this business? I think that is the foundation that people miss a lot in stocks and stock market investing when they think about purchasing something, you should really think about
in terms of know if I was born there had the good fortune to be in a wealthy family that came from generations of owning a business, is this the one business I would want to own, you know?
That would critically achieve the two goals you’re looking for — capital preservation over the long term and then an attractive rate of capital compounding. And I think when you scrutinize businesses at that higher level and think about it generationally,
that really helps you when you get down to even a short-term vehicle like the stock market because you then really dig down into what it is that as I said, makes you want to get out of bed in the morning and operate that business and that gets into basic things
that play out in financial analysis, cash flow, returns on invested capital, incremental returns on invested capital, why you want a strong balance sheet, aspects like that.
RITHOLTZ: So how do those factors play, and I should really be careful about the word factors, but how do they play into the philosophy of quote “quality growth”?
BENKENDORF: Yes, and it’s interesting, you know, we’ve been exercising this investment philosophy for 20 years now very consistently, and as I talk about it today, I always have to sort of smile and chuckle because 20 years ago, what we’re saying now on quality
and growth, they really weren’t a style by any means, they were in a box that now investors are sort of put in a little bit mimicking, and I think that’s important to recognize because one of the important lessons you learn in this business, too, is financial
products are sold and not bought.
So a lot of people use that nomenclature now because that’s what worked and it sells well. But I think when you peel back a layer of the onion, you find when talking to a number of managers who describe themselves either as growth or as in now a lot more describing themselves quality growth, there’s a big differentiation in terms of how people see businesses. What are they attracted to? An analogy I use a lot is business attraction or investment attraction is a lot like personal attraction, right? Individuals, we are attracted to certain other individuals with certain characteristics and it is very similar think in the investment world, those characteristics you’re asking about, right?
We tend to have an affinity and magnetized towards generally less cyclical businesses, those businesses are just more attractive to us on the margin, less capital intensity in general is something that sort we magnet towards you know, the free cash flow conversion, the stronger balance sheet, very basic principles, but at high standards.
I think that’s a differentiation as well, you know we — life is that you know full of as they are average people and average businesses, right, that is just the nature, there’s a lot of us and it’s a law of numbers, but when you crank up scrutiny to a much smaller subsegment of either highly successful people or highly successful businesses, there’s a great divergence, and that divergence quite frankly in today’s world has gotten even wider.
RITHOLTZ: Let’s talk a little bit about your process for selecting stocks. Are you purely bottoms up? Do you think about any other top-down sort of stuff? Tell us a little bit about how you approach stock selection?
BENKENDORF: I think this is also, what — it’s a common misnomer in investing that you know you have to get the top down right. You have to predict things. I think it is just general human nature. I think one of the greatest advantages in investing is typically behavior management.
RITHOLTZ: Of course.
BENKENDORF: That’s the key of it all really. The financial analysis, the investment philosophy we’re talking about today and that’ll describe is one piece but in also another powerful analogy I use in explaining it is investing is a lot like dieting, you know, a lot of people know the keys to living typically longer, healthier, happier life, right? What you should eat, what you shouldn’t eat, how you should exercise, and those elements, the key is discipline. And investing I think is very similar to that, it comes down to discipline, the roadmap is fairly clear and it’s been well out by Warren Buffett years ago.
And the roadmap really needs to be centered on the business, it’s all about the business how good is the business, how will that business grow and how is that sustainable how that business will grow? How will that business endure through economic cycles which you inherently will not be able to predict. So I think ignoring the top down while it is easier said than done is a key, so we do that, I think we really do when we think about businesses and as I mentioned earlier, businesses you would want to own, it sort of forces you.
We sort of have a private business owner, I would say somewhat private equity mentality but, we happen to be operating in the listed equity sphere which gives us a liquidity advantage, you know?
So it also allows us to own great businesses which we choose bottom-up but we can wake up every day and look at the screens and see what values the market as striking on those businesses and improve the quality of what own for our investors, which is something that a dynamic, a private investor can’t do, or a private equity investor can’t do as quickly.
RITHOLTZ: So let’s talk about the bottoms up approach. When you’re thinking about stock selection, how does that process begin? Are you screening things based on value, what — tell us what the process is like of ultimately saying we are going to buy this but not that.
BENKENDORF: Yes, I think the key is you start quant and you go then heavy qualitative after that, and I think …
RITHOLTZ: So what is the quant screen to begin with?
BENKENDORF: The quant piece is key in that I think first where you should approach quant is first from an elimination standpoint …
RITHOLTZ: Negative screening.
BENKENDORF: When most people think of quant and screening, use the word screening typically it sort of has a connotation that you’re looking for something, when actually what you should be doing is eliminating things first and foremost. You want to really narrow the world down because, one there’s only so many hours in a day, there’s so much firepower you have or bring to bear in the research process, but also you want to just fish in a riper pond of opportunity, because that greatly reduces risk as well over the long run by eliminating as I described, average or lower quality businesses.
So is quant screened to begin with? It is not highly complicated, I’d say in terms of variables, you’re looking for returns on invested capital, returns on equity, stability and operating margin, strength of balance sheet, I think the basic variables are easy. You then though improve it by looking for levels of those variables.
So cranking up the scrutiny of the levels of variables you are willing to accept, but also then critically what — you use the track record, so you want clean track records as well and I think that’s glossed over, once again going back to this human element, right?
RITHOLTZ: And when you say track record, you’re not referring to the stock performance?
BENKENDORF: No.
RITHOLTZ: You are referring specifically to the performance of the underlying business?
BENKENDORF: Exactly, you want to start with businesses that have been great, that have proven to be great and are demonstrating that in numbers, and that’s what you’re looking for, you’re eliminating the poor numbers and you are critically looking for the clean track record of good numbers. Because that’s not a perfect predictor of future success.
It does get you over a one foot hurdle and points you in the right direction and makes your future-looking decision much higher probability, that shall be right about that.
So I think that that’s a big key, track record. And that’s where I’d say go back to this human element or behavioral aspect.
A lot of people don’t want to do that because of human tendency to try to want to be smart or smarter, we wanted to predict — what’s going to be great tomorrow that wasn’t great yesterday, right? But we try to start in a good place, things that have been great and then make an easier albeit still difficult decision of can they keep doing that?
RITHOLTZ: Let’s talk a little about high conviction. How does that come into play? You’ve gone through the negative screen, remove the names you are not interested in, now you’ve done the positive work and you’ve identified fundamentally what you like, how do you take that somewhat lengthy list I would imagine and reduce it down to a smaller, concentrated, high conviction list?
BENKENDORF: I think the sort of genesis of that is two things if I look back at you know, college. I sort of learned two things, one related to your question and one that comes before and I think one, the power of protecting capital and down markets and then being long though consistently through markets to participate and really be able to compound capital of the long-term — you know the classic numbers of you don’t want to miss out the biggest up days…
RITHOLTZ: Right.
BENKENDORF: By trying to time the market once again trying to get away from this top-down pitfall that most people fall into. So I learned that very valuable lesson about preservation but staying long for the market and you do that, I think the quality you can do that. And I think the second aspect then of it is risk management, you know you learned to throw out a lot of, unfortunately, what you learn in college about classic risk management because at the heart of your question about concentration, that’s really about risk management and that flies in the face of classic risk management theory, right?
Owning smaller pieces of more things to be diversified to be lower risk, actually, I think that’s completely wrong. What you want to do is more own more of less things but better things to reduce risk and that’s something we really capitalize on in our portfolios, just make sure we are concentrated with capital with much larger positions behind just inherently much better businesses, much more stable, predictable, higher economic return businesses, better cash flow profiles. If you put more money behind them, it is much lower risk than buying smaller slivers of relatively lower quality companies.
And then what goes hand-in-hand with that as you build that portfolio bottom-up, you end up looking what’s now called a new term that’s been coined more recently, benchmark agnostic or benchmark adifferent, you end up looking a whole lot different than the market by — as a byproduct of your concentration in bottom-up stockpicking which we are also finding adds a whole lot of value, too, in terms of delivering alpha and avoiding mistakes.
RITHOLTZ: So you have a lot of institutional investors, they are measured by a benchmark and I would imagine they have pressure to measure you by a benchmark, what are those conversations like when someone says hey you’re either beating or underperforming the benchmark. How do you explain, well, we’re kind indifferent to the benchmark. What are those conversations like?
BENKENDORF: Yes, this is — I think there are two keys to this, number one, and then since we’re in New York City, I’ll use a great Billy Joel quote you know when we spend a lot of time bringing our investors on board I say you know, “You might think we’re crazy, but we must — we just might be the lunatic you’re looking for” as the classic quote goes. Because you got to really see risk as we see it and it’s a binary thing.
Some people don’t buy into that, you know they can’t wrap their head around it or they just fundamentally don’t believe it, they believe more in the classic risk theory we’ve talked about. But if you can get people to buy into that and understand it and it really helps to show them the past success of utilizing a strategy like that, I think that’s step one.
Step two is your question’s right on point, you know, you’re managing people who all have constituents, and their constituents have constituents….
RITHOLTZ: Right.
BENKENDORF: That’s what made this business generally more complicated over time, more people watching with more visibility and more numbers, how would you. How do you explain things over the short term where benchmarking different can cause meaningful relative
underperformance, right? But that’s the price of admission, you know, that’s the price to be paid for great long-term outperformance, you have to absolutely underperform in certain shorter periods. And the key to that is education and communication, you know,
so is the buying and the client institutional or retail on the onset? So we are — we are the person they’re looking for, we are the match because of our strategy in terms of what we want to own, what we won’t own and how we view risk resonates with them.
And then once they are on board, you know I also say there’s two pieces of the job from an investing standpoint, one is to deliver the returns on paper which is important, but the second aspect which is equally as important is getting the client to realize those returns by staying on board with you for that journey.
And that’s why the client journey is very important to us and you manage that through a lot of transparency, a lot of open communication, a lot of handholding, that’s half of your job as an investment manager, you know not just to put the returns on the paper but to keep the person on the bus over that journey, and the key to that is less volatility typically.
It’s byproducts of a quality gross style whereby your downside capture protection is high, right? You preserve capital much better when things fall apart, recession comes about, and then also your overall volatility is dampened over time because your businesses are just better and they’re not subject to wild swings of volatility.
So if you can keep the ride less bumpy, you definitely have a much better chance of keeping your investor in their seat over the ride and then you can accomplish the two key features, the returns and having the client there at the endpoint.
RITHOLTZ: So let’s address that concept of client journey because I find that very fascinating, there have been a number of Dalbar studies and other studies that look at investor behavior. And the most common takeaway seems to be investors underperform their own investments. Meaning they will join the bus at the top of the hill and they’ll jump out at the first move down, but it might just be a little dip and then were back heading up the hill, meaning they buy high, they sell low, they don’t write it out for full cycle, they don’t give a manager an opportunity to demonstrate, hey if you buy into the philosophy, here is where you should end up over five or 10 years.
How do you deal with that client journey aspect? Is it just education and communication from the beginning or is that an ongoing issue that requires regular reinforcement?
BENKENDORF: I think it’s two things. One, the piece that you just mentioned latter, the communication, but one it’s via this investment philosophy and style, that’s critical and I’ll explain that.
Because at the heart of it is what you mentioned, these old studies, I actually haven’t seen the study in a while but I’m sure that the numbers are quite similar, those classic studies of U.S. mutual fund investors as you pointed out, the returns look great over the long-term on paper but most investors have never achieved those returns..
RITHOLTZ: Right.
BENKENDORF: Because of the dynamic you’re talking about. And quite frankly for average or lower quality businesses and often a benchmark, you might need to have a higher timing element, because those businesses can be mean reverting.
If you have a portfolio of lower quality businesses whether benchmark or an active manager with just lower quality businesses, your timing is very important, right?
The businesses themselves are going to be mean reverting in their economics.
If you’re the energy space, base materials….
RITHOLTZ: Yes.
BENKENDORF: Those are commodity industries and those commodity prices are going to fluctuate so you betters buy low and sell high to make your money. What we want to do alongside the communication is with higher-quality businesses that have these elements we talked about, less cyclicality, more durability, a real long tail or runway of growth not just one year but five, seven, 10, 15, 20, 25, 30, when you have those types of businesses, you really can hold through downturns.
It is a slight nuance to understand, right? It’s a fallacy to hold a really great business when a cycle turns because it is going to mean reverting, so the buy-and-hold strategy actually as it is sort of taught and sold, if you have the wrong businesses, it shouldn’t be applicable, actually, you are following the wrong approach.
But if you have great businesses where you can put your head on your pillow at night and look, not only are they not going out of business even in this recession for reasons that ABC, they are going to continue to grow their underlying earnings power, those type of businesses, one you can hold onto and sleep well, but two you should add to them because the market is starting to give you a gift there.
But in the mean reverting business that we are with, most businesses that most investors hold, by nature, they are averaging it better, buy low and sell high to make a return.
What we’re trying to capture is long-term earnings compounding. You know stock returns and earnings growth are correlated over the long term. Interestingly enough, stock returns and GDP growth aren’t very correlated over the long term, but if you get the business right and the earnings compounding right, and you own a portfolio in aggregate that has a collective weighted average rate of earnings compounding as attractive, that’s what your investment returns will be and that’s where you will add value.
RITHOLTZ: Let’s talk a little bit about the investment industry. It’s been going through a lot of changes. Your firm has been around since 1984, let’s discuss some of these changes. We will start with active management, it’s been a rough couple years, what
has for active, as a lot of the money flows have going towards passive indexing, what’s your experience been like over the past, let’s call it decade.
BENKENDORF: Yes, I think — first our investment experience has been very good, you know, owning great businesses that grow faster than the benchmark that are durable, predictable, has worked and will continue to work, we’re highly confident of that. The industry
though, I think one, I always have a sort of split personality on this in that you know, I can’t and I don’t think I should defend most active managers, right? Because I think the numbers are what they are, I think a lot of active managers and most don’t add value quite frankly.
So the carnage that goes on and what should be a meritocracy of an industry is absolutely proper and correct…
RITHOLTZ: Carnage, you used the word carnage.
BENKENDORF: Yes, look, it’s an industry that’s probably had like a lot of other industries, a long comeuppance.
RITHOLTZ: Right, for sure.
BENKENDORF: We’ve seen you know all the other class industries hollowed out by either tech or new iterations, right? But this industry, it took a while to get to it…
RITHOLTZ: Right.
BENKENDORF: You know, there’s a lot of honey there and it took a while to people to focusing on it and start squeezing, but it’s there.
RITHOLTZ: A lot of complacency for decades.
BENKENDORF: Absolutely. So that’s coming and if you are, you know, average or lower quality like the businesses we look at, you just — you should be on the playing field, right?
So that part I think is due and proper and there is no defense for that, right? You have to add value, and the great thing about this is a performance-oriented business just like sports, but unlike sports, actually, we play the game every day, and our score is there every day and over the long term.
So if you can’t deliver, you shouldn’t be there, that’s one part.
But two, the passive side, there’s two elements data that are driving it and one I think is a little more questionable. One, lower cost of technology certainly has helped, right?
RITHOLTZ: No doubt…
BENKENDORF: ETFs, different vehicles, there has been good innovation there, you know as Volcker said, you know, the best innovation of the finance industry has been the ATM only, probably technology’s really helped….
RITHOLTZ: Right.
BENKENDORF: … with investment products, too, for a vehicle to get passive even cheaper, that’s good.
I think the other thing though people need to be a little bit cautious about when they look at this huge swing we’ve had to passive over the last decade roughly has been monetary policy. Right? I always ask – when you look at a business, even I — often ask either my members of my team or ask myself.
With this business, through all your analysis, if I could ask you or give you access to just the answer to one question that would really help you with this business when you look forward, what would it be? Try to synthesize and boil things down into a list of things you would like to know but maybe can’t because they’re unpredictable but try to get to the crux of the matter, what’s the most important issue that will help this business or drive its future growth or success.
I think when you look at the overall investing landscape, you can ask yourself that similar question about monetary policy, right?
If I was going to give you the access to a magic lamp with just one wish, right? And it would help you to set the landscape investing wise for the next decade, you know, if I had that crystal ball, I’d probably ask the genie, you know what’s monetary policy
for the next…
RITHOLTZ: What’s the fed funds rate 10 years from now.
BENKENDORF: That’s a pretty powerful variable you can compound and build a whole lot of decisions around, right? And look at the backdrop we’ve had. We had a Fed policy that was at zero with absolute visibility and certainty of where it wasn’t going for so
long…
RITHOLTZ: For decades.
BENKENDORF: That’s a pretty good backdrop for passive, I think, you know ….
RITHOLTZ: I would imagine.
BENKENDORF: Now that we’ve had some at least uncertainty and volatility and what I would call normalcy back in monetary policy, and some people might differ with that opinion but I think it’s actually what should be normal, is it going up?
RITHOLTZ: Moving towards normal anyway at the very least.
BENKENDORF: Well, I think people think on normal, I think I’ve to be careful on two terms, normal terms of where the rate should be but I’m talking about normal more in terms of you should know exactly where it’s going, there should be a little bit of uncertainty, is it going up, down, staying the same, a little bit of uncertainty, not 100 percent probability, right?
I think that’s kind of normal. That goes back to Bernanke during the financial crisis saying the way we will stabilize this is to give people enough guidance that they become comfortable that there is a liquidity backstop.
However that certainty seems to have carried forward far beyond the crisis. I totally agree with the concept, hey, a little uncertainty is not a bad thing when it comes to monetary policy.
BENKENDORF: Yes, and I think good for us which we kind of agree on that, you’re — starting to hear some murmurs of that, people are going to talk about this, is maybe the fed talking a little bit too much, right?
RITHOLTZ: Right.
BENKENDORF: I think that should be a part of the conversation now a little bit, you know they went to the strategy you know a while ago more of transparency and maybe less transparency is a little bit healthier for risk…
RITHOLTZ: Sure.
BENKENDORF: And risk in the markets. I actually, you know I differ on this may be generally with my opinion too on Powell, I think Powell is doing a great job quite frankly, I think there’s a lot of criticism of him but if you step back is probably the right guy at the right point in time for the job in terms of his background. We always wanted to sort of pragmatic, business-oriented guy…
RITHOLTZ: Correct.
BENKENDORF: We sort of clamored for it versus…
RITHOLTZ: Non-economist.
BENKENDORF: And then it’s like life, and then you finally get what you want and everybody changes their mind.
RITHOLTZ: I’ll take it a step further, I think you can make the argument that this could very well be the single best appointment from the Trump administration.
BENKENDORF: All right, no, I think there’s a lot of credibility in that, you know, definitely, I think Powell, you know, as the other quote I like to share, I think he is trying to do the impossible for the ungrateful, right?
RITHOLTZ: (LAUGHTER).
BENKENDORF: And you’re going to — he’s going to get a whole lot of criticism …
RITHOLTZ: No matter what he does.
BENKENDORF: No matter what. But I respect you know, the steadfastness, he’s following through, he is doing what he said, maybe he could dial back communication but I’m not here to micro manage but I think he’s doing the best to get us back to normalcy which
is very hard, right?
RITHOLTZ: Getting off that emergency footing is — it has taken much longer than anyone could’ve expected.
BENKENDORF: And it’s not just monetary policy, right? I think the world we live in today is much as you know the hypersensitivity of the news cycle and the mediums of delivering news have made it, I actually think what we are in is a normal world right now, right?
RITHOLTZ: Right.
BENKENDORF: The world is supposed to be uncertain, we’re supposed to have geopolitical issues…
RITHOLTZ: Exactly.
BENKENDORF: Even physical conflict, right? Monetary policy uncertainty, difficulty for businesses, that’s what the world largely been like for a long period of time, we’re just adjusting and adapting out of an abnormal period which is why people are kicking and screaming a little bit more.
RITHOLTZ: So let me bring this back to the active versus passive question, the thing that I find astonishing over the past decade is that there are a whole slew of funds I can think of one — two at Fidelity, I could think of without naming fund names or managers whatever, there is a run of funds that I have watched shoot the lights out for a decade and they’re still seeing outflows, that’s sort of hard to reconcile.
BENKENDORF: Yes, I think that’s the one part that I think as I mentioned, technology is going to bring about cheaper vehicles as there’s been a tremendously difficult asset allocation questions, people have had to you know answer as well as you have an aging population and you have to shift towards fixed-income, you have actually the wrong time, you want those sorts of coupons and yields in fixed income as the assets are shifting that way.
So I think that that’s a bit of the element, I think you are seeing explained there in that, even if you’ve done a good job, you’re still seeing outflows because of this greater asset allocation equation going on outside of…
RITHOLTZ: But I don’t mean equity to fixed income, you’re seeing outflows from outperforming equity net of fees, even after fees towards passive, I’m kind of perplexed by that.
BENKENDORF: Yes.
RITHOLTZ: It’s a baby with the bathwater sort of thing.
BENKENDORF: Yes, you know, I think there’s probably a little bit of element of that, I think you know they also may be slightly underappreciated thing too that I always have to remind myself and point out to people sometimes as if we actually do our job for
our clients, they are going to take all their money because that’s the job…
BENKENDORF: Our job is to take their money from point A to point B and then they take it off from you, right? But they don’t do it because you didn’t do your job or they are unhappy with you, it’s because you actually accomplish the goal and there you actually should take some great satisfaction.
You know, we’ve had some clients like that — particular you know in the last couple of years where they’ve made now — they’ve reached their goals in terms of their pension fund you know targeted returns and now they need to shift an asset allocation to a different mode or a different time horizon or fitting their liability — you know match now, and we’ve just done our job.
So thank you very much, we’ve delivered what we had to do. So you’re going to always get a constant element of that too even with great managers I think, losing money.
RITHOLTZ: So along those lines, I know some people are focused on demographics as an input into markets, I don’t know if I’ve been especially persuaded by it, but some people really buy into that thesis, do you think this generational shift into retirement from equities to fixed income is going to have an impact on the market overall or is it just all built-in and people are stressing over that shift — generational shift way too much?
BENKENDORF: I think as people were a little bit hypersensitive into near-term issues, and I think sort of the more things change, the more they stay the same in the long run, I am not hypersensitive to the huge shift there and in fact even if you look at your options, I think, as an investor and – or maybe I will sound a little bit biased as an equity guy, I’m actually happy I’m an equity investor and not a fixed income investor right now because I think that’s a hard job.
RITHOLTZ: 1.7 percent isn’t appealing to you
BENKENDORF: That is very hard job, so call me lazy but I just think I have an easier job right now as an equity investor versus a fixed income investor.
RITHOLTZ: To be fair, they have had a really easy 30 years and now that seems to be coming to its end.
BENKENDORF: Yes.
RITHOLTZ: Whereas equity investors have had a little more challenging couple of decades with between the dotcom and the financial crisis, I would say be that the roles are now starting to reverse.
BENKENDORF: No, I agree. That’s the – so maybe yes, now it’s time for them to pay little bit of a price of admission, right? And us to have a little easier time. But if you look at the two against each other to your question of whether people will or should continue to shift out of equities. I mean if you look at the prospect in the right equity strategy still, the yield even you’re getting there on a coupon if you have real cash flow and real excess cash flow to distribute to your owners of the business, your shareholders, you know, you can get growth which gives you some inflation protection plus a coupon. You know, I think equities are still very compelling and that is why actually, when people ask me about the market now, recently, my word for the market, you know, where I was a bit more concerned at the beginning of year is I think this market has potential.
And I use that word very carefully, because it is the word deliberately, I think he used to describe often a bad sports team or an unruly child. Right? Here’s all these bad things you see but hey, this kid’s got potential, right? I think the markets a little bit like that in a lot of the issues are correctable that we’re concerned about or weighing down economics or geopolitics or you know, in the way of monetary policy, so people should be a little bit careful on the equity side to not swing too far in sentiment, particularly, too far negative because this market could have a lot of potential when you look at what you can buy, what you pay, and what you get still when you pay for it in terms of the couponing growth and still quite attractive and then particularly when you start to look at some your alternatives for your capital.
RITHOLTZ: Let’s talk about markets today a little bit, you mentioned earlier equities have potential, where do you think we are in the overall equity cycle and does that impact the way you construct a portfolio?
BENKENDORF: Yes, I think, now we’re digging into the trillion dollar question, right?
RITHOLTZ: Right.
BENKENDORF: Where’s the world going?
You know and I not to dodge it in classic faction but you know we want to build a portfolio where I don’t need to know the answer to the question, number one, I think that’s the key to investment success, not having to answer these trillion dollar questions and you can, remarkably, you can invest that way …
RITHOLTZ: Right.
BENKENDORF: Without having to need to know that answer, but putting that aside and just sort of …
RITHOLTZ: Which by the way is arguably unknowable.
BENKENDORF: Yes, exactly, unknown, knowns or however the Rumsfeld quote goes, but I think if you step back, you know, honestly in terms of looking at the data and the facts, you know the economic cycle, you know, has still good underpinnings if we look the fundamentals of the US economy, but we got to say we’re later stage than earlier stage, right?
I think just having some context of where you are is the only thing you can kind of get down to if you are top-down, and I think even that can help though as well, and that — I say that to it in that you’ve seen the sliver of fits and started around the market and in this concern of well, people shift out of growth to value again.
We’ve also — we talked a little about fixed income, equity and passive active but there’s also in his other battle going on are raging between styles, and growth and value and value that had a long period of success and is now been in the doldrums, and people are just waiting with baited breath for this big rotation back.
And the problem there I have to your sort of where are we in the cycle question is the only place where you find a bit of relative cheapness becomes a lot more measure at risk in terms of cyclicality. So if you want to wade into those waters here, you better know the answer to the question you’re asking me.
Because that’s the danger in investing, when you look at a PE that might look relatively cheaper but the E disappears, so actually you thought you underpaid but you ended up overpaying because your E wasn’t predictable and disappeared, which is also a big piece of the risk you want to mitigate with better quality businesses.
As a starting point, as long as you know where the E is or should roughly be, you can actually can start to strike a more appropriate approximation of what that business is worth. But when the E is uncertain, you got to know where you are in the cycle. And as I said in context, you have to think we’re later rather than earlier.
RITHOLTZ: So if you can identify a company with a predictable, reliable E, a reliable earning stream, does that company demands a premium as an investor? Is it a higher valuation for that earning stream?
BENKENDORF: Yes, I think that’s you know, the other human nature element we capitalize on and I think people need to capitalize on, right? We’re — as people, we’re sort of generally a bit cheap, right? We’re always looking for a deal….
RITHOLTZ: Right.
BENKENDORF: That’s why sales work, signs work…
RITHOLTZ: Sure.
BENKENDORF: Advertising works, deal, deal, deal, X percent off, it’s like a magnet, right? We are attracted to that, that’s human nature. And what you miss in that when you take that behavior aspect to the finance world and to investing is the reality that you get what you pay for in life. Very much so in investing.
So to your question, yes, you should pay more for a better business with a longer tail of earnings growth because also one problem we have in investing in the finance world is we’re — as many smart people are in this industry and as sophisticated as the industry is, it’s actually still pretty rudimentary when we look at important things like valuation, right?
People often are looking at PE simplistically, PE1 or FY1P out one year, there is a real lack of imagination, right?
RITHOLTZ: Right.
BENKENDORF: In that analysis, right? Because the earnings where they are in five years should would be what really matters, where they are in 10 years should be what really matters rights? So if you are myopically stuck in this world where you are looking at current PE or even just FY1 or FY 2 PE, you’re really missing the forest for the trees there.
You need that E five and 10 years out and that’s where quote unquote paying up for it are paying more for it today actually is delivering you a lot of inherent investment value because that embedded value is out in the tail, the tail of the growth of the business and the sustainability of the business.
RITHOLTZ: So in other words, you’re a long-term investor is what you’re saying here.
BENKENDORF: It’s one of the only advantages you can have, right? It is the basics and when we stick to the basics and look call us, you know, say maybe we have a lack of imagination because like all great things and often great businesses, great fortunes, right? We stole it from someone else. We took it from Warren Buffett, right? We took the playbook and we just try to apply discipline with a great team and a stable team to that, I think that’s where you add a lot of value too, and continuity, knowledge is cumulative, having a great team intact for long period of time, all buying in, buying into the investor religion, being disciplined, you have to be long-term to your question.
It’s the one basic advantage you need to exercise yet we live in a world and in investment construct where everything is happening to fight that, right? Everything is trying to break you down …
RITHOLTZ: Faster, faster, faster…
BENKENDORF: From the long-term, right? And that’s also why won’t people look about — talk about investing today, has it gotten harder or easier? Actually the dynamics are quite similar, once again, the more they change, the more they stay the same, the environment has probably gotten more volatile and more violent so the advantage of buy and hold or patience is as prevalent I think as it ever was.
RITHOLTZ: I think the distractions are greater today and faster today than ever before. But I have to ask you a question that you alluded to with predictions. And I’m not asking you to make a prediction, I am asking you how do you as a portfolio manager deal with what seems like a never ending stream of geopolitical events occurring in real-time?
So earlier in the fall, we had the impeachment inquiry begin in the house representatives, you had the Brexit slash UK Supreme Court, 11 to 0, repudiate Boris Johnson, you’ve been a global investor, a European investor, now a US investor, do you look at or even think about these geopolitical events or are they just background noise that do not affect the E 5 years out?
BENKENDORF: And I think there’s two pieces, you know, one you really do as we talked a lot about, have to be just focused on the business, business, business. But on the other hand, you do have to have a pulse, a finger on the pulse, you know, of the market and where they are at because that’s what can bring you greater opportunity, right? Understanding what the general feeling of sentiment is and where that’s detached from real long-term reality.
So you do as a portfolio manager and as investor, I think have to have your hand in both of those buckets, right? The most important one though still being get the business right.
And the key to managing as you said and we’ve done it quite successfully, fortunately all this as I called earlier, to this return to normalcy and volatility, uncertainty with tariffs and trades and political shifts, you know, the best way we’ve been prepared for that is having businesses that wouldn’t be largely affected by that sort of shocked people sometimes, yes, you can do that actually. You know, you can have businesses that are much less affected by the macro, much less affected by the geopolitics, much better and less affected by shifts in disruption in certain industries, that’s been your best game plan over the last couple of years versus trying to predict the next Tweet and where tariffs are going or the next outcome of the next election, right?
That has been your road to success. But having your finger on the pulse as I mentioned though, does help when you realize people are getting a bit manic about it, you know, we are we are people and we get frenzied and we get manic.
So if you do follow this and we do, you know, you follow closely, I read three newspapers a day, I think you have to keep your finger in the flow of how public sentiment is moving because you can use that to your advantage back in the investment world, even with quality companies taking advantage of excessive pessimism or optimism.
RITHOLTZ: What about something that started regionally and now is looking like it might become global, something like negative interest rates? Japan has had them for a while, they seem to be now expanding in Europe, there are literally trillions of dollars with a negative coupon, can this come to the United States?
Do you worry about whether or not this will have an impact on your portfolio.
BENKENDORF: Yes, I’m much more worried longer-term about binary events, you know, than I need to because our style day-to-day or cyclical events, and there’s two I worry about. One, I think, there is no such thing as a free lunch in this — these experiments and exaggeration and extremism in monetary policy, they have a payback, right?
We all kind of have an idea of what it could be but we won’t guess it exactly and will probably miss out on the magnitude of it, but there will be a payback for the negative interest rate environment, right? There is no free lunch on that.
RITHOLTZ: What is that payback going to be?
BENKENDORF: You know I think in the bond market, it’s going to be very difficult because you know this is often where we don’t sort of see around the corner, right? We’re focused on the near-term goals. A major central banking goal, right is to spur inflation, right? And let’s, you know, if God forbid they are successful in that, you are going to decimate coupon investors, right?
RITHOLTZ: Right. Sure.
BENKENDORF: So in order to achieve their goal, they are actually going to cause the great damage at the end of the day. So I think that is clearly still the problem, you know there is this tendency and I know it’s sort of been like the you know, screaming fire in a crowded movie theater for a while, fear of inflation, fear of inflation, fear of inflation. I can’t tell you when it’s going to happen, but I can tell you there’s great effort to do it and there are tools to really do it if you want to go to extreme ends.
So that will end up in a poor pay back, I think, for investors who are in negative yielding securities, I think that’s a problem.
The other issue I think aside from that in the interest rate backdrop is what we’re facing in terms of I call it the sort of Balkanization of the world. You know what we see playing out in geopolitics is not about tariffs, it’s not about a current account deficit, you know has wider ramifications, if we continue, we’re sort of pushing this world, and I’m not saying continue in terms of a political sense of it being right or wrong but just the path we are on generally speaking which I think doesn’t have to do with just one president or one administration.
RITHOLTZ: Meaning deglobalization or something more specific …
BENKENDORF: Not necessarily a total deglobalization but you split the world into two spheres, there will be the US Western sphere and there will be the Chinese sphere, right?
People will have to make a choice or countries have to make a choice which sandbox you want to play in, right? The rules are going to be different in the two different sandboxes which is where the tension is today, right? The US and the Lighthizers are saying, “Look, you’re in our sandbox, there’s rules to playing in our sandbox and you haven’t been following the rules” you know “we let you go for a while, but now you need to follow the rules or you got to get out of the sandbox.”
RITHOLTZ: Right.
BENKENDORF: As the extreme sort of outcome.
And the outcome as I said, the extreme result could be a Balkanization where they say “look, we will get out of your sandbox, who wants to come in our sandbox?” You know, and then you have this whole ecosystem around Asia where it becomes a bigger issue like Taiwan, they are in a pickle, right which sandbox are you in there? South Korea, which sandbox are you in there?
RITHOLTZ: Right.
BENKENDORF: That’s alongside interest rates, that’s — these are both longer-term issues clearly but those are longer-term binary issues, that if anything worry me a little bit, right? It makes the world a bit more complicated, it makes the success or collective success a lot of us could’ve had a lot harder to achieve, it’s very disruptive, and the downside is I said mostly is we just miss out on what we could’ve had, you know, in a collective world. But look, it is life, it is what it is, I’m not passing judgment whether it’s good or bad at either, you know, I think it’s just the reality and that’s investing what we have to deal with reality.
Not hopes and dreams, hope isn’t a strategy as they say, we got to deal with reality, and the reality is we’re fracturing.
RITHOLTZ: So let’s talk about strategies since you mentioned that. Vontobel has six broad investment strategies, what areas do you focus on within those six and how much of this is global, European, Asian, and US or more specifically different approaches by each style?
BENKENDORF: This is where we’re actually a little bit unique, you know, it’s hard to say unique and different in the asset management industry, you got portfolio managers, analyst, products, it seems pretty homogenous, right?
But our team is sort of rare and unique in that the same team manages those six strategies, you know not just myself sitting at the head of it, I have a collective group of really talented individuals who support all these products simultaneously and as analyst, and there’s a lot of investment value in that, having the same analyst work on a US equity fund and an emerging markets equity fund, and it’s a way we’ve been doing it for two decades.
RITHOLTZ: Same skill sets can apply anywhere in the world.
BENKENDORF: And the businesses compete across geographies, surprise, surprise right? And analyzing a fundamental business of whether it’s a great business, an average or a poor quality business, perspective is the key to that, right? Life is all about perspective
and investing is about perspective too.
As the old saying goes also, to a man with a hammer everything looks like a nail…
RITHOLTZ: Right/
BENKENDORF: So you don’t want to pigeonhole people, right? You need them to see a lot of nails, you need to see broad perspective, so being global in structure as analyst really helps the scrutinization of what’s a great business. Because we can look at one
in Indonesia and we can look at one in Ohio and try to figure out what are the nuts and bolts that make these great businesses and then we’re totally agnostic to where it is because we have a group of portfolios where that name will then try to compete to
get entrance into.
And all of our portfolios from a regional basis, our competitions for capital, our universe eliminates, it creates a smaller pond, out of the pond comes a smaller subsegment of names, out of those names we build regional portfolios.
The best of those investment opportunities compete up the pyramid up to the top to our global portfolio, so it is not just an amalgamation of the geographic portfolios, but it is the best of the best of those names competing for each other and having the proper
risk diversification alongside what the businesses do, where they do it, so the fundamental risk is contained and managed.
RITHOLTZ: That’s absolutely fascinating, the one question I have to ask about that, are there any particular geographic regions around the world that you find are either misunderstood by investors or for reasons that aren’t especially clear, significantly underinvested
when you look around the world?
BENKENDORF: I think the emerging markets is the class quite frankly and you know I have been actually talking to some clients recently about this, I’m going to bring up a name, you might know the name (Elmer Wheeler), I don’t know if you’ve ever…
RITHOLTZ: Vaguely familiar.
BENKENDORF: He’s around the 1930s and the depression….
RITHOLTZ: Okay.
BENKENDORF: He was a newspaper reporter, near and dear to your heart and he was fired in the depression as a newspaper reporter because his boss that I don’t need any reporters anymore, I need salespeople.
And then Elmer Wheeler you know as a pragmatic guy said, all right, I am going to be a great salesperson and he coined the term that the sort of a lot of us know today’s old-fashioned marketing term, “don’t l sell the steak, sell the sizzle.”
RITHOLTZ: Sure.
BENKENDORF: Right. And it’s because of a classic you think about how marketing has evolved, the classic far, right, “don’t sell the steak, sell the sizzle.” and I think the misunderstanding to your question on emerging markets is largely because there’s been a lot of sizzle sold. You know, emerging markets has a great sizzle story…
RITHOLTZ: Right.
BENKENDORF: People consume less of this and will consume more of that, you know they’re these poor people will get richer you know, all these elements, it’s a great ….
RITHOLTZ: Loss valuation.
BENKENDORF: Right.
RITHOLTZ: On top of everything else even with the new expensive world.
BENKENDORF: It plays right into it and I think that’s been fundamentally wrong in that …
RITHOLTZ: Really?
BENKENDORF: Not that emerging markets aren’t attractive but it should be about the steak of emerging markets in that you should go to emerging markets and you really should because there are great businesses there, forget the sizzle story and let’s also take the fact into consideration that if you bought the sizzle story which it be if you sort of played out in a number in GDP growth, right, the emerging markets take out China and India for the last two decades, basically their composition or percentage of global GDP has been flat, so you haven’t seen the sizzle sizzle sizzle story out of India and China.
So if you bought the sizzle, you’ve been disappointed, good news as I mentioned earlier is GDP growth is necessary correlated with stock returns, so if you got the steak right, if you got the great businesses right, and what’s unique and misunderstood about emerging markets I think is there’s actually steak there you can’t get in the developed markets, there’s actually businesses and business models you can’t get back in the developed markets and that to me is why you should be in emerging markets. It should be about the businesses as all investing I think should be as we’ve talked about today.
So go to emerging markets for the steak not the sizzle, go there because there’s great businesses you can get in the S&P 500 or you can’t get elsewhere. I think that’s a big misunderstanding still.
RITHOLTZ: Quite fascinating, can you stick around a little bit? I have a few more questions for you.
BENKENDORF: Absolutely.
RITHOLTZ: We have been speaking with Matt Benkendorf, CIO of Vontobel Quality Growth. If you enjoy this conversation, be sure and come back for the podcast extras we keep the tape rolling and continue discussing all things quality growth.
You can find that at Apple iTunes, Google podcast, Stitcher, Spotify, where ever your finer podcasts are sold.
We love your comments, feedback, and suggestions, write to us at MIBPodcast@Bloomberg.net, be sure to give us a review on Apple iTunes, you can check out my weekly column on Bloomberg.com, sign up for my daily reads at Ritholtz.com, follow me on Twitter @Ritholtz.
I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.
Welcome to the podcast!
Matt, thank you so much for doing this. I have to tell you I find your approach and what Vontobel Quality Growth does to be kind of unique and interesting, I know everybody thinks they’re unique but really the approach you guys take especially with a single investment committee investing all around the world, Europe, Asia, global, and US, that’s kind of rare. How has the structure worked out in terms of your various funds performances?
BENKENDORF: Yes, I think, you know, two keys there, we’re quite proud of our results, right? And we’re quite proud, one, in what we’ve achieved in terms of annualized outperformance of a couple hundred basis points across different geographies, so that the style and philosophy has achieved alpha generation in places like Europe and the US and emerging markets and global equity simultaneously. That’s …
RITHOLTZ: Unusual.
BENKENDORF: Often may be surprising, right? One mousetrap does work … Actually, you don’t need a different emerging markets mouse trap which is also I think a bit of a fallacy sometimes. You don’t need a different mouse trap for this market, you need one good style approach, you just need discipline then and a good
team.
RITHOLTZ: How rare is that approach where one team is doing US and the same team is doing emerging market and Asia and Europe and global investing from the same group of analysts?
BENKENDORF: I think it was extremely rare two decades ago, I think more of started to move that way a little bit in more recent years, probably the last five or seven years just because businesses have launched and then they have launched simultaneous products
so they’ve just sort of …
(Crosstalk)
RITHOLTZ: And technology has to have made it easier to sit in the US and be global as opposed to the old days where boots on the ground were required.
BENKENDORF: Yes, absolutely and as you know businesses have developed now and those analysts found this false wall between you know, the Asian tech analyst and the US tech analyst to be a little bit lower than the wall used to seem, I think that’s lead people towards our model. But i think, I still think the model is more rare, I think it does add a lot of value for investors at the end of the day particularly as I always have to be careful with our investment philosophy. You know, I think that is something people often misunderstood, misunderstand rather, you know they can find something that works but certain things that work, work in the right situation, right? And that people often try to take that what works and put it in the wrong situation and they wonder why it failed.
RITHOLTZ: Right.
BENKENDORF: So when you are very narrow and restrictive in what you’re trying to look at in which you are only willing to ever buy. You know, when you think about risk the way we think about it, when you think knowledge is cumulative, when you have longer-term holding periods, when you have lower turnover, right? You can really then do this successfully with one team.
You know, we have across all of our portfolios over 160 odd names, right? And the turnover of names annually is maybe 20 percent 25 percent, so with a team of 21, you don’t need a whole lot of new idea generation, we do have good new idea generation, you do have to sell and harvest names, we have evaluation sensitivity and a strict valuation approach so you do have to replace names that do reach fair value.
But the process and the philosophy is what enables us to have success on a global basis with this structure. I don’t know if that necessarily would work for people who are more benchmark-oriented, right?
RITHOLTZ: Right.
BENKENDORF: They just want to plus or minus the benchmark weight and country and sector, they might need a whole lot more people. And they might need to be a little more focused from a strategic standpoint on certain products. I don’t know, it is not my you know, approach, but I think for us, it works very well.
RITHOLTZ: So 160 names, constantly surfacing new names, how do you make the determination? So we went — earlier, we went over negative screen, get rid of stuff you want to look at, a handful of fundamental bottoms up approach to narrow your list, and I’m assuming that the top of that list is still a pretty big grouping, how do you make the determination this is the best idea of that group because it feels like some of that is quantitative but a lot of it is subjective and a little squishy.
BENKENDORF: Yes, there’s two elements. I think one that’s often underappreciated when people think about what you buy and they often think of it very much in a clean slate approach, right?
But one is perspective once again in that we have a live portfolio and that live portfolio isn’t of an organic organism, right?
RITHOLTZ: Right.
BENKENDORF: It is an accumulation of thousands of decisions already that have been built upon each other, why we own what we own today and what size is a consequence of millions of interacting things.
So that I think is important to understand as your litmus test or starting point.
RITHOLTZ: Meaning the new idea has to be a fit relative — you don’t want excess concentration geographically sector whatever, or how does the existing portfolio help decide what the next idea that comes in is?
BENKENDORF: That’s – what you mentioned is the latter, I would mention before that though, the key determinant is this new idea or business, how is it better than what we already own? That’s the first litmus test.
RITHOLTZ: Right.
BENKENDORF: We’ve accumulated over time via several decisions, this group of concentration of these businesses that we like for these reasons. So now, when we evaluate this next business there, how is it better than the weaker links in the current portfolio in terms of their relative lower quality versus the highest quality names in the portfolio?
That is a litmus test, it’s very important to the long-term investment journey, you know holding yourself to get over that hurdle over time, I think that’s one piece, first.
And then the other pieces as you point out then is okay, if you hold that first hard crew test there were you got to replace the name if it’s going to gain entrance, right? Maybe sometimes it is not about replacement, this business is equally as good as a name we already own but it offers something else from a risk dynamic, which is nice.
And that’s where we think about risk very fundamentally. I think there’s way too much focus on the Greek letters as I call them, the betas, the standard deviations, et cetera, I think they’re a byproduct or they fall out of a good risk management process and approach, they’re not the starting point.
The starting point of a good risk management approach is fundamental good old-fashioned risk management. What is the business? What drives the business? What are the economics of the business? What does it do? Where does it do it?
Forget the statistics, first. That, and then the accumulation of several businesses together as you own them having, if you can get there, some idiosyncratic drivers, right?
Equally good businesses but what drives this horse is different from what drives this horse over here. That’s great risk management, if you can achieve that over time.
So in your question, you know, the decision to get into the portfolios, you need to upgrade the quality of the portfolio if you do it, or two, hand-in-hand with that, how do you improve the fundamental risk dynamics of the portfolio by giving your investors a collective group of businesses which is still growing attractively, still durable and predictable, but maybe has a slightly different idiosyncratic driver whereby you do have some diversification benefits.
RITHOLTZ: So I’m going to ask you a question, I suspect I know the answer but I’m compelled to ask it anyway.
Most investors have a tendency to swap out something that is just suffering a temporary price setback, not necessarily a decrease in business quality for whatever the shiny new thing of the day happens to be. How do you avoid that sort of process where something maybe is just you know underperforming for a quarter or two, but there’s nothing wrong with the fundamental business, and yet here comes the pretty new thing. How do you avoid that temptation?
BENKENDORF: I think one element is certainly human temperament, right? I think that’s the skill that you add as a portfolio manager on top of being a good analyst over time, it’s temperament, temperament comes with experience but temperament is somewhat chemically wired in you as a being as you said, you know, that tendency to not jump for the next shiny object.
You have to have a temperament for that or at least develop a good temperament for that and I think as you described properly, a lot of times particularly with great businesses, you need a little bit of patience, right?
Even the greatest businesses with even as Buffet has described them, the widest moats face threats. There’s people always trying to sack the castle, you know, and cross the moat of the best businesses with the biggest moats. And you can’t be too hypersensitive to that over time. You have to realize that what seems like a crack on the wall of your castle, when you get a cloth and start to wipe it, it’s just a blemish, right?
RITHOLTZ: Right.
BENKENDORF: And it wipes away. So I think you do need to balance great sound decision-making with good temperament and patience, perspective, experience and also some innate chemical composition helps with that. But the other piece then you got to appreciate is your own limitations, too, right? And where you can fall into these classic pitfalls.
So you do have to know yourself, too, as an investor and their, one element that also makes us different a little bit as a team, and as a firm, we know with all these good things I just talked about, the single biggest risk with our style, over time, is complacency. With patience, patience can easily be synonymous us with complacency sometimes also. So what we’ve done very successfully to combat the complacency which is the single biggest investment risk with great businesses, complacency is we have three members of our 21 member investment team that are former investigative journalists….
RITHOLTZ: Really?
BENKENDORF: They’re not classic investment analysts, they are not your classic MBAs or come out of consultancy or business, they don’t have sector coverage, they don’t have stock responsibility, they don’t pick stocks, value stocks, they are there to fight complacency, they are there — as a former Steve journalist from the from New York …
RITHOLTZ: Go find trouble.
BENKENDORF: It’s like, I always use the analogy here, too, it’s like if you’re getting married and you wanted the dossier on your spouse before you got married.
RITHOLTZ: Right.
BENKENDORF: You want to know everything, just you want to face it, accept it, you know kind of that’s kind of where we want to be as investors, right? We want to know everything bad about the business large or small and then the success in investing then ultimate comes with calibrating the sensitivity to those large and small negative aspects, but every business like every person has some negative things to be learned or gleaned.
The key as an investor is just to make sure you know them, make sure you know all available information.
RITHOLTZ: So you have three people looking at all the individual names in the portfolio or the possible adds to the portfolio or both?
BENKENDORF: Constantly challenging from a devil’s advocacy position, weaknesses in our businesses, when anything new comes up digging deeper and into those issues and ferreting out the real facts of the matter, so we can accumulate and least determine our own — you know, our own view of the issue rather than just read the headline of the issue which someone else built upon their own facts.
RITHOLTZ: Right.
BENKENDORF: So they are factfinders, they are devil’s advocates, they are there to challenge us day-to-day, they are to challenge even great businesses over the long term. And then very specifically where they’ve also been able to help us a lot is looking into narrower issues with the business which might not be negative, could be positive, but a fundamental analyst maybe when they prioritize their time, it could be smaller yet important but we can dedicate a journalist to dig deeper on a singular issue rather than the analyst you know get mired down in the fog of war in this one small issue while they accumulate the bigger, broader picture of the underlying company.
That’s where they can add a lot of value, too.
RITHOLTZ: So here’s the question and really it’s how do you deal with this. It’s very tempting to get sucked in by some of the negative narratives. They seem to be much more resonant emotionally…
BENKENDORF: It’s what sells. (Inaudible) too right?
RITHOLTZ: They are compelling, you know, someone wrote a piece some time ago and I don’t want to quote the wrong author about when the Wright brothers did their first flight, there was no newspaper story, no one paid attention …
BENKENDORF: Yes, yes.
RITHOLTZ: The guys are (inaudible) around with flight, what? Is this going to become some real industry? It was like a 10 years before anyone really took notice. Positive stories sort of fall by the wayside because it requires some imagination, here’s how this could change the world. Negative stories, it’s a genuine existential threat to yourself, it’s a risk — we’re wired to respond to negative threats in a much more robust manner than we are to respond to positive incentives or so it seems sometimes.
How do you avoid that, hey all this negative stuff is so easily emotionally compelling, let’s just get rid of this junk.
BENKENDORF: Yes, I think experience, you know experience working in this way with the structure of a team with these individuals has been very important, it’s been a learning curve from the beginning so it is an idea at the beginning of how they could fit really well with how we invest in the idea was very simple, right?
One, given that period, you go back you know, 10 15 years ago, the carnage in the news industry had already started …
RITHOLTZ: Right.
BENKENDORF: So you had really great smart people there in where the industry was being affected by technology and they were now available so to speak, number one. Number two, what reporters clearly do very well and in their job is to find the subject they often maybe know nothing about and figure it out, you know ….
RITHOLTZ: Right.
BENKENDORF: Start the building blocks of what makes it tick to figure out whether to– not to skip ahead to your end point, whether a story is good or bad or just what the story is, number one. So that was a great analytical skill.
And the other one that’s most underappreciated I think where you actually find a differentiation between good, or bad, or better or worse analysts is everybody can be smart, everybody can find facts, everybody can then maybe even put the story together but can you actually then spit it out and regurgitate it so someone can do something with the information, and that’s, I think something that investors struggle with too, and really smart people sometimes struggle with.
All right, they just know so much, and they can put it together in their own mind but they either are in the position to make a decision or they can make a decision because they just can’t spit it out and newspaper reporters, obviously that’s their job, right? They need to put it into a sellable fashion which means it’s articulate and you need that articulation to be able make a decision and know what you’re dealing with.
RITHOLTZ: So I know of a couple hedge funds that do something very similar, describe Vontobel’s structure, how are you from — investors, are they SMAs, are they funds, how are they putting dollars to work with your firm.
BENKENDORF: Our business is roughly a mix I would say of half-half, you know between the more institutional-oriented investors and then more retail and more oriented investors. And in that world, we’re a manufacturer of an investor product or style approach discipline, we deliver an investment product, and then our partner who in the US is Virtus Investment Advisers, they are the distributor of the product to the end retail investor.
So we’re removed from them but we helped — hold them along the journey.
RITHOLTZ: So the retail investor, are they buying SMA, separately managed accounts or are they buying mutual funds?
BENKENDORF: They’re generally buying mutual funds, you know, we have — we actually as a firm, in a well-developed firm, we have the whole suite of structures…
RITHOLTZ: right.
BENKENDORF: And products for an investor, so we can manage sub-advised accounts, we can sub-advice mutual funds, we can manage mutual funds and we have basically half-half our business. And then also I would cut our business also again another half-half, North America US focused and international. We have quite a global business.
RITHOLTZ: Right, the parent company Switzerland-based, is that right?
BENKENDORF: Yes.
RITHOLTZ: And they’ve been around quite a long time. My assumption is institutions tend to be a direct investments not through a fund vehicle… Is that accurate?
BENKENDORF: Yes, typically, they want to be registered locally and they want to — an account that maybe sometimes has some customization that they might need.
RITHOLTZ: Sure.
BENKENDORF: We don’t and won’t accept a lot of customization, we need to be able to do what we promised we could deliver…
RITHOLTZ: Right.
BENKENDORF: And I think this business is about integrity, it’s saying what you’re going to do and then sticking to it, you know, and doing what you mean — you mean to set out upon. I think integrity is very, very important.
So our clients, we need to make sure we can deliver with integrity the philosophy process that they bought into, they saw the results for but sometimes at the institutional level, maybe there’s a nuance where there’s a market, they can’t be in for an institutional reason et cetera. Sometimes, we can we can allow that.
RITHOLTZ: Quite interesting. I want to get to my favorite questions sort of our speed round that we ask all of our guests, feel free to answer these as long or short as you like.
Tell us the first car you ever owned, year, make, and model.
BENKENDORF: Yes, as I said I grew up from a farming family in a landscaping business so my first car, not surprisingly, was a Chevy pickup truck, I got my license in New Jersey at 15 because I got a farmer’s license because we had a farm, so to speak, and I drove around town with the name of our business and phone number plastered on the side which could be a good or bad thing depending on how you are driving or where you are driving.
RITHOLTZ: What’s the most important thing that people don’t know about you?
BENKENDORF: Boy, look I’m a person who cares a lot about other people, half of my job has been managing money and half of my job is been managing people and I really do care about the success of my people. And I’m not saying that sort of a — in a way to promote myself, it’s admittedly what makes me feel good, you know?
People do things for self-motivation …
RITHOLTZ: Sure.
BENKENDORF: And I really do take a tremendous amount of personal satisfaction in the success and others I’ve taken great lengths over the last 3 to 4 years to build a deeper broader team, to build real lead capable portfolio managers, I think we should have a team for our investors where we’re all redundant, I think that’s a better situation for our investor.
So I think maybe …
RITHOLTZ: Not a star system where there is one person in the headlines, everybody else is working behind the scenes.
BENKENDORF: I think it’s suboptimal for your clients, you know, and I think it’s suboptimal for retaining great people longer term, because why do most of us change jobs is because we need opportunity. You know financial is important, right? But people are people and they want self you know achievement and I take a lot of satisfaction in that half of my job of really, I really smile and I really feel good when I see the accomplishment and achievement of others and I’m saying that, like I said, not in a self promotional way, in a selfish way, it’s what makes me feel good.
RITHOLTZ: Let’s talk about mentors. Who were your mentors who helped guide your career along?
BENKENDORF: Look, there’s been several, I think, you know, you have to go back to your childhood clearly you know, as most people do, their parents, you know I grew up in one of the traits I try to push once again today is just that the idea of hard work, you know, as I said we had a small business, we had a business where we dug our hands in the dirt, we work seven days a week.
Work ethic is extremely important to me and my father in that way and my mother were very important, you know, we worked when we were out of school, I was at work after school or at work on the weekend Saturday and Sunday, and I think hard work that old puritanical work ethic you know is very important to me.
So for a mentorship, definitely my father instilling that in me, and then from the investment side which is key to know to where I am today after that or subsequent to that, you know, there’s been a litany of people I think a lot of it has been read to start with too, you know one of the great piece of advice my co-manager on our US equity product, Ed Walzak, gave me early in my career was to read a lot of these Money Masters books, right?
Even if wasn’t just equities, read how other people invest, how they make money, you know, whether in fixed income, whether commodities, whether equities because also the key to long-term successful investing is finding something that fits for you and maybe it’s in equities, maybe it’s fixed income, maybe in equities, it’s value, it’s not growth, but a key to success is finding what fits for you so reading a lot about how other people invest, how they think probably you know the nature of what your podcast audience is, I think that’s all — it’s very important that were you can drive mentor ship from in a lot of ways.
You know how reading and in learning from how they think, but then you know the obvious key instruments in my life have been a lot of the investment professionals around me at the firm. You know it’s my team and colleagues today, it’s the Ed Walzaks, the Hendry Schlegels who is a founding father of our firm, it’s our former colleague Rajiv Jain, it’s a number of people at our firm that have helped build me from this kid who came out of the, you know, University in 1999 and has built his way you know like Michael J Fox did in “Secret to my success” from the mailroom to the top.
You know, I literally started at the bottom, I started trade processing and settlement and I worked my way through the organization and along that journey, to your question, there’s been people at every stage that help me you know, that have really helped me in certain aspects of you know, I’ve now put together.
RITHOLTZ: You mentioned reading.
Tell us some of your favorite books be they investing related, nonfiction, fiction what you like to read?
BENKENDORF: You know I’m boring in a way in that I like to read nonfiction, I like history a lot …
RITHOLTZ: Give us some titles.
BENKENDORF: I like, and it’s funny the books you end up with you know sometimes you wonder how you ended up there but the current book I’m reading is a biography of FDR from Jean Smith and it’s a really good piece of perspective as you read about that time period and relate it to the time period today because I think a lot of investment success also and why I read history is this element of perspective, getting out of the frenzy and flurry and feeling of this is also different and also wild of today to looking back at the way things have been and were.
And I think FDR’s period is actually quite interesting, right?
RITHOLTZ: Sure.
BENKENDORF: I mean you look at what was going on the geopolitical stage, you look at geopolitical missteps, you mentioned earlier terms of how in terms of a cabinet committee nomination by Trump, but you look what past cabinets were filled with, right? The cronyism and the lack of experience and capability or poor capability have some perspective that over time you know, I’m not making indictment on and on a political you know a party or group, but it’s pervasive everywhere, right? So just have that perspective of how decisions in history have played out may be in the short term seemingly difficult or scary or risky.
But as Buffett also pointed out too from that period, you know, as he first started investing in the 40s, right? Who would’ve ever invested in the environment in the face of you know carnage in the South Pacific with World War Irving, right? But it was the time to invest…
RITHOLTZ: Must be a great time to…
(Crosstalk)
BENKENDORF: Yes, for the long-term, it’s always a good time to invest but you got to have perspective then and sent i– and sort of dampen your sensitivity through experience that this stuff we all see and read and hear about today, it has a lot of rhythm to what happened even you know in the 30s and 40s for one example.
So I read a lot of biographies like …
RITHOLTZ: So FDR is one, give us another but a book or biography.
BENKENDORF: The other one you know that I like, unfortunately, this is like, and like sports teams and they were unpopular them become popular …
RITHOLTZ: Right.
BENKENDORF: You know, Chernow Hamilton biography was awesome, right?
Hamilton is now this global sensation because of the — deserve its success, right, of the play but Hamilton you know is a character that I long before all this recent success had a lot of admiration for in his contribution to our country which people now I’m proud am glad they broadly learn more about, but that’s obviously a great biography.
I try to read a lot of president, you know, the sort of presidents I think you learn a lot about if you get into the genre…
RITHOLTZ: But before you move off of Hamilton, I have to say there aren’t a lot of authors that you could say — yes, just grab any Chernow book, it will be great, he’s one of those authors that anything he’s written is just spectacular.
BENKENDORF: Fantastic, too? You know the Jobs’ book was great right, Isaacson…
RITHOLTZ: Yes.
BENKENDORF: There are certain authors, right? What they write is just always great but I tend to read about people and history and in periods, too, so it’s not just always people you know I read finished a book on the Crusades, you know, certain periods of history …
RITHOLTZ: What’s the name of the book?
BENKENDORF: That is gosh, now I can’t remember the name of that one, you got me tongue tied there…
RITHOLTZ: The book I had — Jim Chanos recommended was “A World Lit Only by Fire” which covers that sort of Crusades Enlightenment era and it’s just mind boggling.
BENKENDORF: And I think visually and I can picture the book now on my table and sitting there after I finished it, I will have to come back to you with the name of it …
RITHOLTZ: Okay.
BENKENDORF: It wasn’t that specific one but also you know I am not looking for carnage when I read about it, the 30s and 40s and in the Crusades, but…
RITHOLTZ: But there are lessons to be learned.
BENKENDORF: There are tremendous lessons to be learned longer-term and that’s why I think reading is important, you know, unfortunately, I think you know first of all radio versus TV is important as a medium because you have more time …
RITHOLTZ: Right.
BENKENDORF: To be thoughtful and reading is time to be thoughtful and we all need a little bit more of that than 130 characters or whatever …
RITHOLTZ: We are up to 280 on Twitter.
If you ever get a chance to see Walter Isaacson speak in public, I believe it was the TD event, their annual conference in June, they had Isaacson speak and I read the Jobs book and I have — I forget what is most recent book was on innovators or inventors or whatever it was, I haven’t gotten to it yet, but he is a fascinating person doing exactly what you’re describing, taking the biography of people from today and using history as a context to show, I think you said this earlier, the more things change the more it remains the same.
BENKENDORF: That’s the crucial lesson we all need to hold onto through all the turmoil we see every day on the news, right? That’s why — and why is that? Because we’re people, right? We’re people and we talk about certain elements, we’re people, we’re animals, we have animalistic nature in certain ways too, where we like the negative and in and we just need to step back and appreciate that, I think, at the end of the day.
And I like to read also a — pick up in my books leadership, right, which is also something we wonder about the world today …
RITHOLTZ: Sure.
BENKENDORF: Why we need collective leadership really, we’re a maybe in a vacuum here were looking for real clear leadership because historically, there are times where leadership mattered a lot. So I think reading about that’s interesting.
RITHOLTZ: Tell us about a time you failed and what you learned from the experience?
BENKENDORF: Yes, you know when it comes to failure, I have obviously all the classic pitfalls in investing you know, you we all sell too early, even great businesses we do because we have some valuation sensitivity on top of that, you know, on the other side of the coin, you often hold on too long. But you know I think the greater failure is I hone in on more personal failures you know not they know not in interpersonal relationships speaking up or stepping up you know both in family or friends or things like that, you know not to get too specific, but those are the failures that I think you hold a little bit closer, and those are ones that are more important to learn from because I think the investment ones, they are critical and you do learn from what they are.
The obvious ones I think, the real failures we all need to focus on and I do are ones where you’ve fallen short personally, and we all need to do better job.
RITHOLTZ: What do you do for fun? What you do when you’re not reading biographies or are in the office?
BENKENDORF: Yes, you know, I am a University of Denver alumni, so I ski, you know, I like to ski certainly I love the mountains, I’m a mountain person even though I live in Fort Lauderdale Florida which is a little bit funny, but I get a little best of both worlds there in that way I can live in and the warm and go skiing in the winter…
RITHOLTZ: You could waterski if you like…
BENKENDORF: I can waterski, I guess that’s one way to get it out of my system, the hills are a little lower there though. So I do like to ski, look I’m a family person, you know, so I have two young kids, quality of life is important for me too, we work hard, we work seven days a week but I think you need to balance at and keep you know faith and family and all those elements very, very close to your life, they’re important, community is important.
RITHOLTZ: So let’s talk about the industry, what you most optimistic about, what are you most pessimistic about in the investing industry?
BENKENDORF: I think you got to be optimistic that you know and despite all the noise and change you know, success in investing still comes back to the same playbook, you know, and if you can be disciplined around this. So that excites me, right?
Where other industries have gotten hollowed out and they are fundamentally different right? If you’re a taxi driver and you’re competing against Uber, your business is different, right? If you’re a restaurant and deliveries come in and delivery after business is different, our businesses had a lot of technological change and influence and people talk about AI in the snap, but I’m actually quite excited and that we have an employable skill still here …
RITHOLTZ: Right.
BENKENDORF: That’s kind of nice, right? We still have some value-added to bring even as much as things have changed, so I’m really quite excited about that.
You know I am sort of you know if I get any negative at all and downtrodden, it is sort of around the sort of fissures, you know where and as I mentioned very briefly, you know, community is important to me, we were supposedly living in an age where technology was enhancing community and in creating a greater community, but in fact I think what people are hopefully and seeing and recognizing is we’re actually seeing a fracturing of community you know because of maybe technology, perversely…
RITHOLTZ: Social media and all that.
BENKENDORF: So that scares me, right? Because, you know politics are politics, economics are economics but you know strong communities’ very important and locally and on a political stage as well. So I’m a bit negative on that.
You know, I know though over the long term as we said has never paid to be a pessimist as Buffet also said I believe you know, investing is an optimist game and you have to be that and it’s been the right way to be, so you don’t want to be too near-term pessimistic but you know near-term, you get a little bit down and as you see this you know this key element of life fracturing a bit.
RITHOLTZ: Interesting.
So a recent college graduate comes to you and is looking for advice about a career in finance, what would you tell them?
BENKENDORF: I’d say a lot of things we talked about I’ll have to point them towards the podcast but I think you need to find the investment philosophy that works for you, number one, because there are a million roads to heaven, you got to pick the right one
for you and the investing world, you know I have a mousetrap that works for me and my team and our firm in our temperament and our skill set and our investors critically.
So you got to find the right path for you, I think reading and perspective is critical, being a little less sensitive, being a little bit patient, I think those are the basic things you tell them the work on, you know, be a voracious reader and that you know as we talked about, there is a good future, you still have an employable skill set you know, I think the human element is going to continue to create opportunity, continue to drive most people to make mistakes, that’s just a lot of numbers and you can stand there ready to capitalize upon them in an and make money but critically preserve capital, you know preserve, one, compound, number two.
RITHOLTZ: And our final question, what you know about the world of investing today that you wish you knew 20 years ago or so when you were first starting out?
BENKENDORF: Yes, it’s a good one, what would I want to know 20 years ago today? You know aside from the generic things I would leave to it to general investment success, you know you’d want to know how complicated the business is outside of just the investing aspect and the analytical aspect right, I think it’s why it’s important for people and it was helpful in my own background as I mentioned my past, to know how the plumbing works, right?
The plumbing is becoming even more important, you know how markets trade, how trade settlement works, how that those elements work, I think that’s 20 years ago, that was something that wasn’t — it’s not taught in school you know you don’t learn about the plumbing you try to get a job, go to graduate school cannot be an analyst to be successful investor, you sort of skip ahead.
So I think that’s an important aspect, do you want to really know with investing or anything have that foundation of how things work first where generally, people have a tendency to want to jump ahead and solve the problems, you know, or go to the headline of the issue without backing down and understanding the plumbing.
So I think that’s the advice I would’ve known — want to know more of the plumbing and I think we’ve done a decent job preparing for that and I think were ahead of that certainly where we are today because that’s another key element we didn’t even get into today, you know, the mechanics and plumbing of the markets and where we are now versus were used to be and that interaction with investing is going to be more important.
RITHOLTZ: Quite interesting.
Matt, thank you for being so generous with your time. We have been speaking with Matt Benkendorf, CIO of Vontobel Quality Growth.
If you enjoy this conversation, well be sure and look up an inch or down an inch on Apple iTunes and you could see any of the previous 260 or so of these we’ve had over the past 5 plus years.
We love your comments, feedback, and suggestions. Write to us at MIBPodcast@Bloomberg.net, be sure and give us a review on Apple iTunes.
I would be remiss if I did not thank the crack staff that helps put these conversations together each week, Karoline O’Brien is my audio engineer, Michael Batnick is my head of research. I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.
