00:00:14
Speaker 1: Welcome to Inside Active, a podcast about active managers that goes beyond soundbites and headlines and looks deeper into their processes, challenges, and philosophies in security selection. I'm David Cohn. I lead mutual fund and active research at Bloomberg Intelligence. Growth investing can sound relatively straightforward. Find companies that grow faster than the market and hold them as that growth compounds over time. But identifying durable growth is much harder in practice. Investors have to determine how long a company can sustain its growth how much of that opportunity is already reflected in its valuation, and what could cause the investment thesis to change. And that opportunity set doesn't necessarily have to be limited to the companies or sectors traditionally associated with growth. A flexible approach can look across industries and different types of businesses for companies with the potential to create value over the long term. So today, I wanted to explore how that works in practice, how growth opportunities are identified in research, how valuation and risk factor into security selection, how a portfolio is constructed around those ideas, and how Capital Group's multi-manager approach influences the process. Joining me to discuss that is Alan Wilson, a portfolio manager at Capital Group and principal investment officer of the Capital Group Growth ETF, ticker CGGR. Alan, thanks for joining me.
00:01:31
Speaker 2: Thanks for having me, Dave.
00:01:32
Speaker 1: So, Alan, when we think about, or when you think about growth investing, what does growth actually mean to you? You know, what characteristics tell you a company has the potential to compound value over a long period of time?
00:01:43
Speaker 2: So, first of all, you know, at Capital, one of the ways that I was always trained to think about this is that we're looking at growth of capital, growth of the investment, which many people often associate with. just great top line. But in fact, if you have a cyclical that's rebounding from washed out completely to being really enthusiastically looked at at the top of the cycle, you can get a lot of growth in capital. And I think if you look at our portfolio, one of the things you will see is a mixture of companies that have traditional growth characteristics from a top line perspective, but also there are these coiled springs waiting for a cycle to turn. And that's one of the things that's typically not in a typical growth index. But If to your question about one of the things, what are the things that you look for? Look, what you want is the company's current engine to have a long enough runway that it will pay for the price of getting in to own the company, right? And that depends on the industry. It depends on the opportunity. Sometimes you see long runways. Sometimes they're relatively short. But constructing a portfolio that's a balance of all those is what our system has really decided to do.
00:02:53
Speaker 1: Okay. And so, you know, CGGR is, you know, it pursues growth as an objective rather than, you know, adhering to a particular growth style, kind of as you mentioned. How does that distinction change the universe of companies you're willing to look at?
00:03:07
Speaker 2: So we look at everything. In fact, if you think about our investment process, we have a large general meeting or several large ones where we discuss all types of ideas. And you come away from that and put things in a different portfolio. So it almost is, imagine a bunch of restaurants that are going to a central restaurant. farmer's market to get ingredients. So it's not like we have, oh, we're going to have a growth meeting and just talk about those ideas. And so one of the things that happens is that you may hear an idea that traditionally one might not associate. It might be a cyclical, as I said, that's super depressed. You go, oh my God, I can see a double in this stock whenever the cycle turns. We tend to have a long horizon. In fact, I've compensated on a blend of my one year to eight year results. And so you can say, look, over an extended period of time, this cycle will turn when this happens. In fact, one of the places you can look at this now is housing, for example. Obviously, the housing market isn't robust, but I would be really surprised if over the course of my four-year visibility lens that you don't have a return. And then so my question is, do I have a company that can double that? And so that's where the idea of sourcing tends to come from and how they tend to come.
00:04:12
Speaker 1: Into the portfolio.
00:04:13
Speaker 2: The other thing, and then I'll be quiet for a second, The other thing that's interesting about the way we manage our portfolio is that there are several managers on this fund. It's the capital system, I think, as most of your listeners are probably familiar with. But if you have a bunch of complementary portfolio managers in terms of approach and a style of what appeals, and they all outperform over a cycle, the question is some might be hot or cold at different times. What you will tend to find is a spread of ideas that wind up in the portfolio as listing through the areas makes it feel attractive.
00:04:47
Speaker 1: Okay. And so you mentioned you're looking at, what, eight to 10 years? I think that's what you said.
00:04:51
Speaker 2: Well, I said my compensation window is one, three, five, and eight. There's probably more data than people want to have. But basically, it's the organization's inclination to try to have me to look out beyond just what's in the market today.
00:05:09
Speaker 1: Okay. So then what would give you the confidence that a growth you're seeing at a company is durable rather than just temporary? Or is it kind of with the different managers that kind of get spread out, you know, that risk?
00:05:19
Speaker 2: You know, it depends on the industry, right? There are some things. So for example, if you think about one of the things that can be so attractive about the medical and pharmaceutical area in particular, is that if you wind up solving a real problem and you have the patent protection, you can actually see quite a long runway for those types of solutions. Now, as people start to come to a cliff, right, as that starts to run out, that's when this, when this, uh, when the stocks tend to often weaken unless there's something as a follow-on behind it.
00:05:48
Speaker 1: But for example, about.
00:05:50
Speaker 2: Almost a quarter of my portfolio right now is in healthcare, drug-related types of stocks. We can come back later if you want as to why those might be particularly appealing. But that has a very different one way than something that may be more fashion-oriented, right? If you think about a company right now like Nike, that's largely a fashion business. And But that's also one that's extremely depressed right now. So that might be one of those coiled springs, but you just want that spring to pop up. That is not necessarily a buy it, hold it, set it, and forget it. So it really is very much business dependent.
00:06:26
Speaker 1: Okay. Yeah, one of the things with growth investing, I think a lot of folks are wondering just, you know, after what's been happening the last couple of years is just, you know, do valuations still count right now? And so I'm just curious. How does, you know, how important is valuation in your process? You know, what gives you kind of confidence you're not paying too much for a great business?
00:06:44
Speaker 2: Dave, valuation always counts, right?
00:06:46
Speaker 1: It always does, right?
00:06:47
Speaker 2: Look, there's some things that are so extraordinary that it's worth paying up for, but valuation always matters, right? You can pay too much for something extraordinary and you can, and there's also kind of a price at which everything is attractive. And so part of the judgment of portfolio construction and why it's great to have several different ears listening is that people can hear that equation and find value in very different places. I see the other thing that's really kind of interesting is to watch. I actually don't watch the index that much, but it's interesting to me periodically where I will watch stocks that go into and out of the various indices, right? So right now, caterpillars are quote-unquote growth stock, right? And the energy stocks are becoming quote-unquote growth stocks. Those were coil springs previously, right? They weren't considered growth that then did well as the cycle turned. And then, you know, they came into the indices.
00:07:44
Speaker 1: There's a debate.
00:07:44
Speaker 2: I think sometimes, in fact, the indices tend to bring those types of stocks in exactly when it's maturing. But, you know, that's an opportunity for an active manager if you're.
00:07:53
Speaker 1: Right on it. Yeah, definitely. So could you walk us through your... You know, your investment process, you know, walk me through how an idea typically enters your portfolio, where the research begins and, you know, what needs to happen before an interesting company becomes an actual investment in the portfolio. Sure. Okay.
00:08:10
Speaker 2: And then just to set the context for your listeners out there, you know, I've been at Capital for over 30 years. Our average analyst, I think the tenure is something like 12 or 13. The typical PM tenure is, you know, in the high teams numbers. And so I say that because what you're having at these investment calls is a group of people who have worked together for at least a decade, over a decade, and we're getting together and just talking about what people have seen in the world. So that's that farmer's market I described of ideas that one is approaching. My own personal approach is that I think that if you can figure out what the world's going to look like, even in a hazy way, about three years out, investing becomes easy. A parable I tell all the time, there are only two stocks, one sold umbrellas and one sold sunglasses. And I told you it was going to rain for the next three years. I don't think you'd have any question as to which stock you wanted to hold. Conversely, if I told you that we're going to go into the world's worst drought, it's very clear to People don't typically know what the weather is, so they diversify and buy a little bit of each. I think with talented analysts, with a lot of context and conviction, and some other perspective, that you can kind of get some hazy views of what the world looks like. So I tend to walk in with sort of this, what do I think the world looks like? And then I'm listening for ideas that fit into that type of world. And that's the pathway for those to come into the portfolio.
00:09:40
Speaker 1: I'll hear them.
00:09:41
Speaker 2: I'll talk with the analyst. I'll talk with my other portfolio managers. I may well have visited them right at this point. Often it's sort of stocks that I've known for a while that have sort of come back into orbit, like comets coming by periodically as opposed to a brand new idea. But that's at least my own particular pathway. It is not especially. valuation sensitive. It's more, does the idea fit what I think the near future is going to look like?
00:10:07
Speaker 1: Is there anything that you spend a lot of time on, you know, trying to understand a company you think the market either misunderstands or isn't really looking far enough to appreciate?
00:10:18
Speaker 2: You know.
00:10:19
Speaker 1: Sure.
00:10:21
Speaker 2: But the thing is, it's different for each company, right? Like everyone wants some master key. So if you just look at this thing over here, it will always tell you the thing to look at. But for each company, which is, by the way, it's what makes the job interesting. It's what makes it compelling for me still after 35 years is because each question for each company is a different one. And then whether people can execute on it is a different one. And on top of all that, when you combine those difficulties, You know, God, if I'm great at this, I'm right three times out of five, you know? So it's just interesting enough to get someone to be, to kind of be that perpetual puzzle that is always interesting and never perfectly solved.
00:11:00
Speaker 1: Okay. What about management teams? You know, how important is that assessment? You know, is there something that tells you, you know, this could be agnostic to different companies or sectors, you know, or industries. Is there anything that tells you a management team can successfully reinvest capital and extend the company's growth opportunity?
00:11:18
Speaker 2: Look, it's very business dependent, right? If you've got a business that involves taking $ 10 bills and sticking them in a shredder, I don't know what the, I don't even know if I can find a management team that's going to be, you know, that can market the resulting paper good enough. Conversely, you know, there's some businesses that are so extraordinary.
00:11:38
Speaker 1: What is it?
00:11:38
Speaker 2: I think, I think Buffett was famous for, you want a business so good even an idiot could run it, but sooner or later one will, right? I mean, in fact, often some of my more interesting ideas are businesses that are doing well kind of in spite of themselves. That shows me the strength of the business, right? But the key really is, though, that you have the right manager's ethos, et cetera, with.
00:12:01
Speaker 1: The right industry. Sure, just in terms of, You know, when we think of growth, you know, some companies benefit from certain cycles, you know, versus other companies that see, you know, likely see growth over a longer term, you know, strong growth. Is there anything that, you know, separates those companies that see the longer term growth versus, you know, maybe a company that's just benefiting during different specific cycles?
00:12:25
Speaker 2: Look, a lot of it is just the environment. I think if, you know, what's interesting for listeners, just take NVIDIA, right? Everybody talks about, go back and look at NVIDIA's chart over time. Literally, what they've done is they've had these processors that are really good at doing multiple things at once. They did them for graphics. But there have been these different waves where the desire for those products, whether it's, oh my God, we're going to run really nice graphics on a computer, or oh my God, we're going to use this stuff to really solve cryptographic problems. So, oh my God, we're going to use this stuff to large language. But each time you saw this gigantic wave of people enthusiastically adopting that would crest and roll over.
00:13:04
Speaker 1: And so you would have these giant spikes.
00:13:06
Speaker 2: And people would debate when it was on the other side of those spikes whether NVIDIA was no longer a growth company. So really, in any business, it's just kind of the duration of what it is that you're providing. And by the way, no one has permanent duration, I guess is what I'm saying. So it's one of the reasons that I really think that it is important to think about this as growth of capital. as opposed to the growth in the revenues. Because almost every terrific investment has had some period when the revenues might have gone the other direction. People might have questioned whether it was growthy. Actually, it would be an interesting question. Has NVIDIA ever fallen out of the growth index? I would bet you it has, but I need to go back and validate that. But the point is, it's in the eye of the beholder at any given time. And our approach is sort of look through that and say, look, from where the stock is right now, from what's in front of them, do you think that the stock can grow from here. I will give you one example and be quiet for a second because we're on chips. So it was, I don't know, a couple of years ago, again, I got interested in Intel, right? Intel at the time was very clearly, you know, they were lagging, there were all these challenges. But at the end of the day, one of the things you observed is that if silicon is going to be the oil of the 21st century, a nation having its own supply is crucial. And there is no way that Nvidia, I'm sorry, excuse me, that Intel, is not going to be so important to the U.S. future that we're not going to find a way to make it work, right? And this was before there were signs. But at the time and at the price, there was nothing valued in. It was priced for death. And so the point is you didn't have to sort of see the roadmap in particular. You said the price is so inexpensive and these boundary assets are so important that there will be an intersection of that desirability that will make the stock change in terms of being more coveted and the valuation going up. And that's what I mean by you know, growth of capital.
00:15:01
Speaker 1: Okay. Now it's an interesting point. I think a lot of folks, especially in the media, just focus on revenue and earnings growth and that's kind of their definition. So it's definitely another way to look at it. How do you think about, you know, the competitiveness or a competitive advantage of a business? Is that something that you look at and, you know, how a company could protect or strengthen its, you know, ability to generate growth?
00:15:27
Speaker 2: You're always interested and focused on moats. I would say what is interesting is that over the course of my career, moats have typically gotten smaller. And the market's willingness to recognize a company has a moat, give it credit in its stock price for what that might create, and then anticipate the moat going away, That has gotten shorter and shorter over time. Look, the reason for those, I told you that capital has these one, three, five, eight. The reason for all those is those were supposed to be across full investment cycles, right? Sort of this whole arc. And now what you're seeing is a collapsing of at least in this current market environment, that's the market environment today in the fall of 2026, the journey from out of favor, oh, I think it's going to work, to this is how great it could be, it will work, oh, I'm going to run away from it now, that has gotten so much shorter, right? That is something that's almost dizzying. But the cycle is always the same, right? Is that moat gets competed away, it's the beauty of capitalism, and the question is, is there some enduring way to find additional moats?
00:16:39
Speaker 1: And those are the companies that are really extraordinary, by the way. Makes sense. Once you do have conviction in a company, and so I think this might be a little different compared to other managers, you know, with the capital group system, you know, and the different, the PMs, how do you determine position sizing? You know, once you have conviction, it's got, you know, the company is going to enter the fund. How do you figure that out in terms of how are you going to size it? You know, do you talk with the other PMs? No, I don't.
00:17:07
Speaker 2: I mean, well, I always talk to the other PMs, but I don't use it for it to influence my convictions. So, so the, the, This is what can often take a while for people to really get used to with our system. The size that a stock winds up being in the portfolio is really a residual of the number of portfolio managers who are enthusiastic about this. There's not some top-down thing. So I'm going to go back to this metaphor of the farmer's market, what I'm torturing. Imagine We have seven restaurants are going and they're cooking different stuff, right? They have different things, but look, they all love fresh ingredients. They come to this farmer's markets. It's the best stuff in the world, but they're going to go back and they'll have slightly different menus, right? And a couple of may have egg dishes, but they won't all have omelets, right? And so, but there isn't someone that goes, okay, we're going to all coordinate. We're all going to go in and buy potatoes, right? Or we're all going to coordinate. We're all going in and buy peaches. What happens is someone says, you know what? I think people are really in the mood for healthy stuff. And so, There's the healthy restaurant and it's getting those types of ingredients. You've got the other that says, you know, I'm really into breakfast food. And so what winds up populating the aggregate portfolio when you put that all together, right? If you sum all these seven restaurants up and say, oh, how many eggs are in that collection of restaurants or how many fruits? It was a result of those individual decisions, not necessarily some overarching coordination. So with that as sort of the laying out of how things work, then My own personal sizing is based on.
00:18:39
Speaker 1: Several things.
00:18:40
Speaker 2: One, how well I think this idea fits with what my view of what the future is going to look like. Am I getting a great price for it? Do I think there's some durability? Do I think what needs to happen if I'm wrong? For example, some stocks are hard to buy, trade very thin. Look, you're never certain you're 100% right. So I need to make sure that if I'm wrong, can I actually get out and move on and make sure that I correct accordingly? And so those things all go in to create what the size is.
00:19:16
Speaker 1: What doesn't go.
00:19:17
Speaker 2: In is me saying, oh, the restaurant association, i.e. the index, has this percentage of eggs in there. And so that's what I do. Sometimes it's much bigger. Sometimes it's smaller. To me, it's just about the opportunity.
00:19:31
Speaker 1: Okay. Do you think the multi-manager structure allows individual managers to take more conviction in their best ideas than if they were responsible for the whole portfolio? A thousand percent.
00:19:43
Speaker 2: Right.
00:19:43
Speaker 1: There are things that I do.
00:19:45
Speaker 2: So, if you look right now, I've got three or four positions that are sort of between eight to 12%. Those are, I have occasionally, once or twice in my career, I've gotten something as high as 20% when I had a very high conviction that the runway was strong. There wasn't much, you know, there wasn't much sign that things were abating. But if I were doing the whole thing, I would not do that.
00:20:11
Speaker 1: I wouldn't do that.
00:20:12
Speaker 2: The other thing, this system, because there are some other industries I should probably have exposure to, right? I typically only hold between 25 and 35 holdings. A healthy portfolio often will have exposure to some other industries. There's some things that I don't really get, quote unquote, right? I don't get financials, right? So I typically don't invest in those areas. It's not because they're all good ideas. It's just I don't have any edge in terms of when I cast my lens on the world three years out, I don't see any difference.
00:20:40
Speaker 1: It's all fog to me.
00:20:41
Speaker 2: So one of the things this allows, this system, is I can really focus on just the stuff that I know well or that I think I know well and hold it in the size that I think makes overall sense.
00:20:52
Speaker 1: For the portfolio.
00:20:54
Speaker 2: Okay.
00:20:55
Speaker 1: Um, actually while we're, we're on the topic, I, you know, I think a lot of people are familiar with the multi-manager system, but can you kind of just go a little bit in depth of how it works in practice? You know, other teams, they might kind of share ideas and things, you know, you mentioned having meetings and talking about things. Is there a specific process that goes into how it's all structured? Yep.
00:21:14
Speaker 2: I think, I think what I often find is when we describe this people, I know how this works and you overlay your existing, um, uh, view. And, but Sierra, let, let me, let me just, hit it straight on. Each manager has, so here, there are seven managers in CDGR, okay? Each one has, and the key to the multiple manager system, right? This system only works if you have seven people who over a long term can outperform And most importantly, they have different ways of going about things. If we were all seven intellectual clones, what's the difference, right? You're all going to sort of go with the same thing. So the hardest thing about this, look, it's hard to find one person that can outperform over a cycle. Having a team of seven really is sort of the gift of a place like Capital. And having people that have worked here for such a long period of time, you've had a chance to test that. So the first thing that sounds easy, but it's actually quite hard, is finding seven outperformers. And then we put them together in a way of You know, how are they different and complementary? That's one of the roles of the PIO to think about, you know, that you have these different complementary skills. And then the other thing that's super important is that we agree on the objective of the fund. We agree on certain rules, like for this one, for example, my market cap's below $ 8 billion. You have to have some level of U.S. sales or exposure, even if it's not necessarily U.S.
00:22:35
Speaker 1: Domicile.
00:22:36
Speaker 2: A name like Nintendo or ASML.
00:22:37
Speaker 1: Might be an example.
00:22:38
Speaker 2: But we agree on the base rules. And then with that agreement, you can go out and construct your portfolio however you'd like. There isn't sort of some, Dave, I think one thing, you think the other. Now we have to debate it. My portfolio slice is what I want it to be. Yours is what yours wants to be. And that last part is super important because one of the challenges is that, at least for me and I find for many of my peers, often our analytical sides have figured out what we want to do or what makes sense. before our verbal sides catch up, right? And so often, you know, there's famous, I have colleagues who say, look, I can't tell you how I know, I just know, right? And what's happened is over decades, you realize, oh yeah, this person, their ability to explain it and persuade just hasn't gotten there yet. So that lets those stocks get into the portfolio, and that's one of the real strengths of it. So at any given time, when you look at these seven slices or the seven restaurants I described, What's on that menu is exactly what that manager wants at that particular time. It's not based on somebody else vetoing, right? The good news is that the quality of the ingredients was sourced by that farmer's market they all shop from, which is our analyst's wisdom and their ideas. So that is what's in aggregate creates this overall menu for people to eat from. In the great food court that is CDGR. Maybe that's what we should do. We should open a food court. Anyway, but that's the... That's the process. That's the capital system. That's how the multiple managers all work together or work together to build a portfolio.
00:24:11
Speaker 1: Okay. No, that's a great explanation. Definitely. You know, I had an idea, but I think that definitely will help our listeners as well kind of understand how it works. If we go back to your, you know, your portfolio specifically, how do you approach risk? Is there kind of a process, you know, you look at in terms of, you know, I mean, with growth, you know, it's, you know, You're making assumptions on the futures. So what do you kind of look at as a risk system?
00:24:37
Speaker 2: Yeah, so there's several things. Let's talk about, first of all, there's some embedded guardrails, right? So there are limits we have just as a firm in terms of how much a fund can have in an industry, how big a particular holding can be. There are all those types of limitations that are there as aggregate guardrails, aggregate fencing. As I personally work within that fencing, Look, I am always aware that there are.
00:25:02
Speaker 1: No facts about the future.
00:25:04
Speaker 2: And as much as my conviction is high on something, I am anticipating a future outcome and this future journey. And so I always have to, I always have, okay, there's a chance that I'm not right on this. So make sure that things are either sized appropriately or I realize what I'm looking for if I want to unwind. And that's, to me, an important part of making sure I get, quote unquote, those risks taken care of. There's the risk that you don't really understand the business and the industry. That one, I don't feel very concerned about, knock on wood, because our analysts are so extraordinary and have such long-term context, right? When we tend to miss things, it tends not to be a fundamental thing. It may be, by the way, like the big debate right now. I think the understanding what happens with sort of AI stocks and the fundamentals and what the trajectory is, if things keep doubling, that's all very easy to to sort of parse through. I think the unknowns about how society is going to respond with pushing back on data center construction, possible regulations, what happens if these accidents cause things, those things, those are sort of these great unknowns. But you have to size based on the combination of your knowns, your unknowns, and it I know I'm not being very precise here, but it is a bit of an art form, but it's an art form that I practice within an aggregate structure that says, Alan, you can't have any industry be bigger than 30% of your portfolio, or Alan, you can't have any holding any larger than 40% of your portfolio. Again, that's my own particular slice. The aggregate fund has its own aggregate rules that it won't go over.
00:26:48
Speaker 1: Okay. What about your sell discipline? Is it more of, finding better opportunities or are there times when your original thesis breaks down at some point?
00:26:58
Speaker 2: Story changes lead, right? And the story could change for a couple of reasons. Story could be, look, people didn't appreciate the coil spring. The cycle has happened. People appreciate it. The coil has sprung. Okay, time to sell. It could be, I thought you were going to do X. X didn't happen. It doesn't look like in the foreseeable distance that it's going to happen.
00:27:20
Speaker 1: Time to sell.
00:27:21
Speaker 2: It could be any number of things, but the short answer is story, change, leave. What is typically not the case, at least for me, I don't tend to use valuation signals as the key to sell because often some of my best ideas, some of the best performing investments have gone much farther than I might have expected. One, because the engine ran longer than I thought or the market's willingness to pay was higher than I thought, but two, But the point is, it tends to not be a valuation signal for me. It's a, the reason that I bought it has changed. Maybe for good reasons, maybe for bad. But reason changes leave.
00:28:00
Speaker 1: Okay. You know, the fund has a lot of flexibility to invest outside the traditional universe of companies might, you know, people might associate with growth investing. And, you know, you mentioned healthcare a little bit earlier, but are there areas where you're finding opportunities today that might surprise someone only looking at a conventional growth index?
00:28:17
Speaker 2: Well, you know, so what's interesting to me now is the things, if you go back and look at the things that were in the fund two or three years ago that weren't in the growth index that are now in, right? So a lot of these, so, and that's, by the way, that's one of the things that's very rewarding. But, you know, one of our managers, I told you we have these seven restaurants, but one of the restaurateurs is just a very cautious person when it comes to thinking about the monetary system, what's going to happen with the dollar. And he's in, and so, and so he's always got a growth portfolio that has a lot of tangible things associated with it, right? They can be commodity related. They could be gold streamers, right?
00:29:02
Speaker 1: They, right.
00:29:02
Speaker 2: You don't typically think of those, but, but those are really terrific capital appreciation, cap appreciation ideas. At least they have been, uh, when, when, when this person bought them, um, uh, you know, he was buying gold long before the thing got hot, right? So, so that was one of those things that, where the capital appreciation was there and present. One of the things he has been looking at and holds a lot of is performance food group, which is, okay, I mean, it's a sort of a steady Eddie, you know, it's like, but, but he would argue, look, you know, food outside the home is growing at 5%. These guys have compounded areas at 16%. This is a business that that is consolidating. So it's, I guess what I would say is it might be considered quote unquote growth, but it is far from sexy, right? People think people right now equate growth with sexy, right? And often there's a lot of real hidden value in the unsexy, plodding along, steady Eddie, it's going to do well. And so that would be one that, at least when I have one. So the other thing we do, I said, you know, is that we walk around other people's restaurants, right? And I look at, what's that doing in there, right? Because that's the, and so, okay, I see what you're doing. I see where you're doing. It makes sense to me. Okay.
00:30:15
Speaker 1: No, it makes a lot of sense. You know, one other question I wanted to just ask about growth index is we all know how, you know, heavily influenced they are now by a relatively small group of very large companies. Do you think that concentration makes the environment more challenging for active growth managers, or do you think it just creates more opportunities elsewhere?
00:30:33
Speaker 2: I think it creates more opportunity. I think the question is whether you have a client base who will give you the time to appreciate the opportunity, right? So I can't tell you what and when, but I can soften tell you what, right? And so typically if you look at a portfolio, if you just take the Russell and you look at sort of two or three holdings, making up these gigantic parts of the, by the way, these aren't bad companies, right?
00:31:02
Speaker 1: They're fantastic.
00:31:02
Speaker 2: But, but should, but should really like, you know, half your money be in four or five, right? And so if I guess, I guess I would say this, if you didn't have time to do your own work, right? And therefore, you just said, look, I need to keep it simple because my day job is doing X. So yeah, if most of my money is in NVIDIA and Apple and whatever the top ones are, okay, got it. You're not going to have great harm. But if you said by the same token, I've got a place that has, in this fund, seven portfolio managers, probably 40 analysts across the spectrum of things. And all they do every day is to go and look for mispriced opportunities where there's a lot of capital appreciation. Yeah, give me some of those, right? Well, there's not room to have those giant positions if you have all this other neat and interesting stuff. So I understand the way we've gotten to this level of concentration, but I think that is exactly the opportunity for us because while all the money sloshed into those, it has left some other things that are quite attractive mispriced.
00:32:04
Speaker 1: Okay. No, I definitely agree with that. We're seeing kind of this huge resurgence in investors loving active at the same time this concentration is happening. And so I think it's kind of a cool storm to watch. And so I have just one more question I wanted to ask before I let you go. You know, when you kind of look at the market today, do you see any disconnect between what investors are focused on in the near term and, you know, growth opportunities that could matter much more over the next, you know, several years? So, okay, I'm going to answer your question. I'm going to tell you why it's hard for me to answer.
00:32:35
Speaker 2: I need to, you know, one of the ways, it's hard for me to keep my perfect pitch in if I'm in a place where there's a bunch of people singing a bunch of other tunes, right?
00:32:46
Speaker 1: I'm trying to stay on pitch.
00:32:47
Speaker 2: And so I don't spend a lot of time listening to the other singers outside the world, right? I know my singers internally.
00:32:53
Speaker 1: I know them. I've calibrated.
00:32:54
Speaker 2: We've sung together for decades. I know what that means. But, you know, I don't sit and watch, oh my God, this has gone on TV screaming about this or this lady screaming about that. So one, I'm always a little wary that I don't necessarily understand what other words, what folks are looking for. I guess I would say the following. you know, as we sit here in September, there's a lot of damage being done to physical infrastructure, right? In terms of oil infrastructure, the demands we have on creating power for this magical system, like the physical world moves a lot more slowly than the technological world, right? And so when people say, oh my God, you know, if you think this model is smart, wait till the one, two generations is better. And all you need is sort of, you know, 10 times the power. That little, the physical world, I think people are just now starting to pay attention to the idea that it may not be as easy to, Mike Tyson, everyone has a plan to get punched in the mouth. Here, the punch in the mouth is the constraint of the physical world, right? I think if you're looking at what's happening with the energy infrastructure right now, this thing in Iran will end. The question is once it ends, do you have almost a decade worth of reconfiguration that has to happen? The types of companies that are in front of that are going to be really terrific investments. The types of companies that are going to have a almost decade-long headwind because their input chain has a lot more kinks in it than they used to have, that's another opportunity. So I would say If you say, what am I sniffing around a lot right now? It's those types of things because I think those might well be the next coil springs because physical infrastructure also typically isn't a sexy thing that growth funds hold.
00:34:44
Speaker 1: Makes a lot of sense. Unfortunately, we need to end here, but this was great, Alan. Thank you so much for joining me today. Dave, thank you so much for having me. I also want to thank our listeners. If you liked the episode, please share it, subscribe, and leave a review. And if you'd like to see more of our research on the terminal, go to BIFundGo.com. for U.S. Fund and Active Research. Until our next episode, this is David Cohn with Inside Active.
Speaker 1: Welcome to Inside Active, a podcast about active managers that goes beyond soundbites and headlines and looks deeper into their processes, challenges, and philosophies in security selection. I'm David Cohn. I lead mutual fund and active research at Bloomberg Intelligence. Growth investing can sound relatively straightforward. Find companies that grow faster than the market and hold them as that growth compounds over time. But identifying durable growth is much harder in practice. Investors have to determine how long a company can sustain its growth how much of that opportunity is already reflected in its valuation, and what could cause the investment thesis to change. And that opportunity set doesn't necessarily have to be limited to the companies or sectors traditionally associated with growth. A flexible approach can look across industries and different types of businesses for companies with the potential to create value over the long term. So today, I wanted to explore how that works in practice, how growth opportunities are identified in research, how valuation and risk factor into security selection, how a portfolio is constructed around those ideas, and how Capital Group's multi-manager approach influences the process. Joining me to discuss that is Alan Wilson, a portfolio manager at Capital Group and principal investment officer of the Capital Group Growth ETF, ticker CGGR. Alan, thanks for joining me.
00:01:31
Speaker 2: Thanks for having me, Dave.
00:01:32
Speaker 1: So, Alan, when we think about, or when you think about growth investing, what does growth actually mean to you? You know, what characteristics tell you a company has the potential to compound value over a long period of time?
00:01:43
Speaker 2: So, first of all, you know, at Capital, one of the ways that I was always trained to think about this is that we're looking at growth of capital, growth of the investment, which many people often associate with. just great top line. But in fact, if you have a cyclical that's rebounding from washed out completely to being really enthusiastically looked at at the top of the cycle, you can get a lot of growth in capital. And I think if you look at our portfolio, one of the things you will see is a mixture of companies that have traditional growth characteristics from a top line perspective, but also there are these coiled springs waiting for a cycle to turn. And that's one of the things that's typically not in a typical growth index. But If to your question about one of the things, what are the things that you look for? Look, what you want is the company's current engine to have a long enough runway that it will pay for the price of getting in to own the company, right? And that depends on the industry. It depends on the opportunity. Sometimes you see long runways. Sometimes they're relatively short. But constructing a portfolio that's a balance of all those is what our system has really decided to do.
00:02:53
Speaker 1: Okay. And so, you know, CGGR is, you know, it pursues growth as an objective rather than, you know, adhering to a particular growth style, kind of as you mentioned. How does that distinction change the universe of companies you're willing to look at?
00:03:07
Speaker 2: So we look at everything. In fact, if you think about our investment process, we have a large general meeting or several large ones where we discuss all types of ideas. And you come away from that and put things in a different portfolio. So it almost is, imagine a bunch of restaurants that are going to a central restaurant. farmer's market to get ingredients. So it's not like we have, oh, we're going to have a growth meeting and just talk about those ideas. And so one of the things that happens is that you may hear an idea that traditionally one might not associate. It might be a cyclical, as I said, that's super depressed. You go, oh my God, I can see a double in this stock whenever the cycle turns. We tend to have a long horizon. In fact, I've compensated on a blend of my one year to eight year results. And so you can say, look, over an extended period of time, this cycle will turn when this happens. In fact, one of the places you can look at this now is housing, for example. Obviously, the housing market isn't robust, but I would be really surprised if over the course of my four-year visibility lens that you don't have a return. And then so my question is, do I have a company that can double that? And so that's where the idea of sourcing tends to come from and how they tend to come.
00:04:12
Speaker 1: Into the portfolio.
00:04:13
Speaker 2: The other thing, and then I'll be quiet for a second, The other thing that's interesting about the way we manage our portfolio is that there are several managers on this fund. It's the capital system, I think, as most of your listeners are probably familiar with. But if you have a bunch of complementary portfolio managers in terms of approach and a style of what appeals, and they all outperform over a cycle, the question is some might be hot or cold at different times. What you will tend to find is a spread of ideas that wind up in the portfolio as listing through the areas makes it feel attractive.
00:04:47
Speaker 1: Okay. And so you mentioned you're looking at, what, eight to 10 years? I think that's what you said.
00:04:51
Speaker 2: Well, I said my compensation window is one, three, five, and eight. There's probably more data than people want to have. But basically, it's the organization's inclination to try to have me to look out beyond just what's in the market today.
00:05:09
Speaker 1: Okay. So then what would give you the confidence that a growth you're seeing at a company is durable rather than just temporary? Or is it kind of with the different managers that kind of get spread out, you know, that risk?
00:05:19
Speaker 2: You know, it depends on the industry, right? There are some things. So for example, if you think about one of the things that can be so attractive about the medical and pharmaceutical area in particular, is that if you wind up solving a real problem and you have the patent protection, you can actually see quite a long runway for those types of solutions. Now, as people start to come to a cliff, right, as that starts to run out, that's when this, when this, uh, when the stocks tend to often weaken unless there's something as a follow-on behind it.
00:05:48
Speaker 1: But for example, about.
00:05:50
Speaker 2: Almost a quarter of my portfolio right now is in healthcare, drug-related types of stocks. We can come back later if you want as to why those might be particularly appealing. But that has a very different one way than something that may be more fashion-oriented, right? If you think about a company right now like Nike, that's largely a fashion business. And But that's also one that's extremely depressed right now. So that might be one of those coiled springs, but you just want that spring to pop up. That is not necessarily a buy it, hold it, set it, and forget it. So it really is very much business dependent.
00:06:26
Speaker 1: Okay. Yeah, one of the things with growth investing, I think a lot of folks are wondering just, you know, after what's been happening the last couple of years is just, you know, do valuations still count right now? And so I'm just curious. How does, you know, how important is valuation in your process? You know, what gives you kind of confidence you're not paying too much for a great business?
00:06:44
Speaker 2: Dave, valuation always counts, right?
00:06:46
Speaker 1: It always does, right?
00:06:47
Speaker 2: Look, there's some things that are so extraordinary that it's worth paying up for, but valuation always matters, right? You can pay too much for something extraordinary and you can, and there's also kind of a price at which everything is attractive. And so part of the judgment of portfolio construction and why it's great to have several different ears listening is that people can hear that equation and find value in very different places. I see the other thing that's really kind of interesting is to watch. I actually don't watch the index that much, but it's interesting to me periodically where I will watch stocks that go into and out of the various indices, right? So right now, caterpillars are quote-unquote growth stock, right? And the energy stocks are becoming quote-unquote growth stocks. Those were coil springs previously, right? They weren't considered growth that then did well as the cycle turned. And then, you know, they came into the indices.
00:07:44
Speaker 1: There's a debate.
00:07:44
Speaker 2: I think sometimes, in fact, the indices tend to bring those types of stocks in exactly when it's maturing. But, you know, that's an opportunity for an active manager if you're.
00:07:53
Speaker 1: Right on it. Yeah, definitely. So could you walk us through your... You know, your investment process, you know, walk me through how an idea typically enters your portfolio, where the research begins and, you know, what needs to happen before an interesting company becomes an actual investment in the portfolio. Sure. Okay.
00:08:10
Speaker 2: And then just to set the context for your listeners out there, you know, I've been at Capital for over 30 years. Our average analyst, I think the tenure is something like 12 or 13. The typical PM tenure is, you know, in the high teams numbers. And so I say that because what you're having at these investment calls is a group of people who have worked together for at least a decade, over a decade, and we're getting together and just talking about what people have seen in the world. So that's that farmer's market I described of ideas that one is approaching. My own personal approach is that I think that if you can figure out what the world's going to look like, even in a hazy way, about three years out, investing becomes easy. A parable I tell all the time, there are only two stocks, one sold umbrellas and one sold sunglasses. And I told you it was going to rain for the next three years. I don't think you'd have any question as to which stock you wanted to hold. Conversely, if I told you that we're going to go into the world's worst drought, it's very clear to People don't typically know what the weather is, so they diversify and buy a little bit of each. I think with talented analysts, with a lot of context and conviction, and some other perspective, that you can kind of get some hazy views of what the world looks like. So I tend to walk in with sort of this, what do I think the world looks like? And then I'm listening for ideas that fit into that type of world. And that's the pathway for those to come into the portfolio.
00:09:40
Speaker 1: I'll hear them.
00:09:41
Speaker 2: I'll talk with the analyst. I'll talk with my other portfolio managers. I may well have visited them right at this point. Often it's sort of stocks that I've known for a while that have sort of come back into orbit, like comets coming by periodically as opposed to a brand new idea. But that's at least my own particular pathway. It is not especially. valuation sensitive. It's more, does the idea fit what I think the near future is going to look like?
00:10:07
Speaker 1: Is there anything that you spend a lot of time on, you know, trying to understand a company you think the market either misunderstands or isn't really looking far enough to appreciate?
00:10:18
Speaker 2: You know.
00:10:19
Speaker 1: Sure.
00:10:21
Speaker 2: But the thing is, it's different for each company, right? Like everyone wants some master key. So if you just look at this thing over here, it will always tell you the thing to look at. But for each company, which is, by the way, it's what makes the job interesting. It's what makes it compelling for me still after 35 years is because each question for each company is a different one. And then whether people can execute on it is a different one. And on top of all that, when you combine those difficulties, You know, God, if I'm great at this, I'm right three times out of five, you know? So it's just interesting enough to get someone to be, to kind of be that perpetual puzzle that is always interesting and never perfectly solved.
00:11:00
Speaker 1: Okay. What about management teams? You know, how important is that assessment? You know, is there something that tells you, you know, this could be agnostic to different companies or sectors, you know, or industries. Is there anything that tells you a management team can successfully reinvest capital and extend the company's growth opportunity?
00:11:18
Speaker 2: Look, it's very business dependent, right? If you've got a business that involves taking $ 10 bills and sticking them in a shredder, I don't know what the, I don't even know if I can find a management team that's going to be, you know, that can market the resulting paper good enough. Conversely, you know, there's some businesses that are so extraordinary.
00:11:38
Speaker 1: What is it?
00:11:38
Speaker 2: I think, I think Buffett was famous for, you want a business so good even an idiot could run it, but sooner or later one will, right? I mean, in fact, often some of my more interesting ideas are businesses that are doing well kind of in spite of themselves. That shows me the strength of the business, right? But the key really is, though, that you have the right manager's ethos, et cetera, with.
00:12:01
Speaker 1: The right industry. Sure, just in terms of, You know, when we think of growth, you know, some companies benefit from certain cycles, you know, versus other companies that see, you know, likely see growth over a longer term, you know, strong growth. Is there anything that, you know, separates those companies that see the longer term growth versus, you know, maybe a company that's just benefiting during different specific cycles?
00:12:25
Speaker 2: Look, a lot of it is just the environment. I think if, you know, what's interesting for listeners, just take NVIDIA, right? Everybody talks about, go back and look at NVIDIA's chart over time. Literally, what they've done is they've had these processors that are really good at doing multiple things at once. They did them for graphics. But there have been these different waves where the desire for those products, whether it's, oh my God, we're going to run really nice graphics on a computer, or oh my God, we're going to use this stuff to really solve cryptographic problems. So, oh my God, we're going to use this stuff to large language. But each time you saw this gigantic wave of people enthusiastically adopting that would crest and roll over.
00:13:04
Speaker 1: And so you would have these giant spikes.
00:13:06
Speaker 2: And people would debate when it was on the other side of those spikes whether NVIDIA was no longer a growth company. So really, in any business, it's just kind of the duration of what it is that you're providing. And by the way, no one has permanent duration, I guess is what I'm saying. So it's one of the reasons that I really think that it is important to think about this as growth of capital. as opposed to the growth in the revenues. Because almost every terrific investment has had some period when the revenues might have gone the other direction. People might have questioned whether it was growthy. Actually, it would be an interesting question. Has NVIDIA ever fallen out of the growth index? I would bet you it has, but I need to go back and validate that. But the point is, it's in the eye of the beholder at any given time. And our approach is sort of look through that and say, look, from where the stock is right now, from what's in front of them, do you think that the stock can grow from here. I will give you one example and be quiet for a second because we're on chips. So it was, I don't know, a couple of years ago, again, I got interested in Intel, right? Intel at the time was very clearly, you know, they were lagging, there were all these challenges. But at the end of the day, one of the things you observed is that if silicon is going to be the oil of the 21st century, a nation having its own supply is crucial. And there is no way that Nvidia, I'm sorry, excuse me, that Intel, is not going to be so important to the U.S. future that we're not going to find a way to make it work, right? And this was before there were signs. But at the time and at the price, there was nothing valued in. It was priced for death. And so the point is you didn't have to sort of see the roadmap in particular. You said the price is so inexpensive and these boundary assets are so important that there will be an intersection of that desirability that will make the stock change in terms of being more coveted and the valuation going up. And that's what I mean by you know, growth of capital.
00:15:01
Speaker 1: Okay. Now it's an interesting point. I think a lot of folks, especially in the media, just focus on revenue and earnings growth and that's kind of their definition. So it's definitely another way to look at it. How do you think about, you know, the competitiveness or a competitive advantage of a business? Is that something that you look at and, you know, how a company could protect or strengthen its, you know, ability to generate growth?
00:15:27
Speaker 2: You're always interested and focused on moats. I would say what is interesting is that over the course of my career, moats have typically gotten smaller. And the market's willingness to recognize a company has a moat, give it credit in its stock price for what that might create, and then anticipate the moat going away, That has gotten shorter and shorter over time. Look, the reason for those, I told you that capital has these one, three, five, eight. The reason for all those is those were supposed to be across full investment cycles, right? Sort of this whole arc. And now what you're seeing is a collapsing of at least in this current market environment, that's the market environment today in the fall of 2026, the journey from out of favor, oh, I think it's going to work, to this is how great it could be, it will work, oh, I'm going to run away from it now, that has gotten so much shorter, right? That is something that's almost dizzying. But the cycle is always the same, right? Is that moat gets competed away, it's the beauty of capitalism, and the question is, is there some enduring way to find additional moats?
00:16:39
Speaker 1: And those are the companies that are really extraordinary, by the way. Makes sense. Once you do have conviction in a company, and so I think this might be a little different compared to other managers, you know, with the capital group system, you know, and the different, the PMs, how do you determine position sizing? You know, once you have conviction, it's got, you know, the company is going to enter the fund. How do you figure that out in terms of how are you going to size it? You know, do you talk with the other PMs? No, I don't.
00:17:07
Speaker 2: I mean, well, I always talk to the other PMs, but I don't use it for it to influence my convictions. So, so the, the, This is what can often take a while for people to really get used to with our system. The size that a stock winds up being in the portfolio is really a residual of the number of portfolio managers who are enthusiastic about this. There's not some top-down thing. So I'm going to go back to this metaphor of the farmer's market, what I'm torturing. Imagine We have seven restaurants are going and they're cooking different stuff, right? They have different things, but look, they all love fresh ingredients. They come to this farmer's markets. It's the best stuff in the world, but they're going to go back and they'll have slightly different menus, right? And a couple of may have egg dishes, but they won't all have omelets, right? And so, but there isn't someone that goes, okay, we're going to all coordinate. We're all going to go in and buy potatoes, right? Or we're all going to coordinate. We're all going in and buy peaches. What happens is someone says, you know what? I think people are really in the mood for healthy stuff. And so, There's the healthy restaurant and it's getting those types of ingredients. You've got the other that says, you know, I'm really into breakfast food. And so what winds up populating the aggregate portfolio when you put that all together, right? If you sum all these seven restaurants up and say, oh, how many eggs are in that collection of restaurants or how many fruits? It was a result of those individual decisions, not necessarily some overarching coordination. So with that as sort of the laying out of how things work, then My own personal sizing is based on.
00:18:39
Speaker 1: Several things.
00:18:40
Speaker 2: One, how well I think this idea fits with what my view of what the future is going to look like. Am I getting a great price for it? Do I think there's some durability? Do I think what needs to happen if I'm wrong? For example, some stocks are hard to buy, trade very thin. Look, you're never certain you're 100% right. So I need to make sure that if I'm wrong, can I actually get out and move on and make sure that I correct accordingly? And so those things all go in to create what the size is.
00:19:16
Speaker 1: What doesn't go.
00:19:17
Speaker 2: In is me saying, oh, the restaurant association, i.e. the index, has this percentage of eggs in there. And so that's what I do. Sometimes it's much bigger. Sometimes it's smaller. To me, it's just about the opportunity.
00:19:31
Speaker 1: Okay. Do you think the multi-manager structure allows individual managers to take more conviction in their best ideas than if they were responsible for the whole portfolio? A thousand percent.
00:19:43
Speaker 2: Right.
00:19:43
Speaker 1: There are things that I do.
00:19:45
Speaker 2: So, if you look right now, I've got three or four positions that are sort of between eight to 12%. Those are, I have occasionally, once or twice in my career, I've gotten something as high as 20% when I had a very high conviction that the runway was strong. There wasn't much, you know, there wasn't much sign that things were abating. But if I were doing the whole thing, I would not do that.
00:20:11
Speaker 1: I wouldn't do that.
00:20:12
Speaker 2: The other thing, this system, because there are some other industries I should probably have exposure to, right? I typically only hold between 25 and 35 holdings. A healthy portfolio often will have exposure to some other industries. There's some things that I don't really get, quote unquote, right? I don't get financials, right? So I typically don't invest in those areas. It's not because they're all good ideas. It's just I don't have any edge in terms of when I cast my lens on the world three years out, I don't see any difference.
00:20:40
Speaker 1: It's all fog to me.
00:20:41
Speaker 2: So one of the things this allows, this system, is I can really focus on just the stuff that I know well or that I think I know well and hold it in the size that I think makes overall sense.
00:20:52
Speaker 1: For the portfolio.
00:20:54
Speaker 2: Okay.
00:20:55
Speaker 1: Um, actually while we're, we're on the topic, I, you know, I think a lot of people are familiar with the multi-manager system, but can you kind of just go a little bit in depth of how it works in practice? You know, other teams, they might kind of share ideas and things, you know, you mentioned having meetings and talking about things. Is there a specific process that goes into how it's all structured? Yep.
00:21:14
Speaker 2: I think, I think what I often find is when we describe this people, I know how this works and you overlay your existing, um, uh, view. And, but Sierra, let, let me, let me just, hit it straight on. Each manager has, so here, there are seven managers in CDGR, okay? Each one has, and the key to the multiple manager system, right? This system only works if you have seven people who over a long term can outperform And most importantly, they have different ways of going about things. If we were all seven intellectual clones, what's the difference, right? You're all going to sort of go with the same thing. So the hardest thing about this, look, it's hard to find one person that can outperform over a cycle. Having a team of seven really is sort of the gift of a place like Capital. And having people that have worked here for such a long period of time, you've had a chance to test that. So the first thing that sounds easy, but it's actually quite hard, is finding seven outperformers. And then we put them together in a way of You know, how are they different and complementary? That's one of the roles of the PIO to think about, you know, that you have these different complementary skills. And then the other thing that's super important is that we agree on the objective of the fund. We agree on certain rules, like for this one, for example, my market cap's below $ 8 billion. You have to have some level of U.S. sales or exposure, even if it's not necessarily U.S.
00:22:35
Speaker 1: Domicile.
00:22:36
Speaker 2: A name like Nintendo or ASML.
00:22:37
Speaker 1: Might be an example.
00:22:38
Speaker 2: But we agree on the base rules. And then with that agreement, you can go out and construct your portfolio however you'd like. There isn't sort of some, Dave, I think one thing, you think the other. Now we have to debate it. My portfolio slice is what I want it to be. Yours is what yours wants to be. And that last part is super important because one of the challenges is that, at least for me and I find for many of my peers, often our analytical sides have figured out what we want to do or what makes sense. before our verbal sides catch up, right? And so often, you know, there's famous, I have colleagues who say, look, I can't tell you how I know, I just know, right? And what's happened is over decades, you realize, oh yeah, this person, their ability to explain it and persuade just hasn't gotten there yet. So that lets those stocks get into the portfolio, and that's one of the real strengths of it. So at any given time, when you look at these seven slices or the seven restaurants I described, What's on that menu is exactly what that manager wants at that particular time. It's not based on somebody else vetoing, right? The good news is that the quality of the ingredients was sourced by that farmer's market they all shop from, which is our analyst's wisdom and their ideas. So that is what's in aggregate creates this overall menu for people to eat from. In the great food court that is CDGR. Maybe that's what we should do. We should open a food court. Anyway, but that's the... That's the process. That's the capital system. That's how the multiple managers all work together or work together to build a portfolio.
00:24:11
Speaker 1: Okay. No, that's a great explanation. Definitely. You know, I had an idea, but I think that definitely will help our listeners as well kind of understand how it works. If we go back to your, you know, your portfolio specifically, how do you approach risk? Is there kind of a process, you know, you look at in terms of, you know, I mean, with growth, you know, it's, you know, You're making assumptions on the futures. So what do you kind of look at as a risk system?
00:24:37
Speaker 2: Yeah, so there's several things. Let's talk about, first of all, there's some embedded guardrails, right? So there are limits we have just as a firm in terms of how much a fund can have in an industry, how big a particular holding can be. There are all those types of limitations that are there as aggregate guardrails, aggregate fencing. As I personally work within that fencing, Look, I am always aware that there are.
00:25:02
Speaker 1: No facts about the future.
00:25:04
Speaker 2: And as much as my conviction is high on something, I am anticipating a future outcome and this future journey. And so I always have to, I always have, okay, there's a chance that I'm not right on this. So make sure that things are either sized appropriately or I realize what I'm looking for if I want to unwind. And that's, to me, an important part of making sure I get, quote unquote, those risks taken care of. There's the risk that you don't really understand the business and the industry. That one, I don't feel very concerned about, knock on wood, because our analysts are so extraordinary and have such long-term context, right? When we tend to miss things, it tends not to be a fundamental thing. It may be, by the way, like the big debate right now. I think the understanding what happens with sort of AI stocks and the fundamentals and what the trajectory is, if things keep doubling, that's all very easy to to sort of parse through. I think the unknowns about how society is going to respond with pushing back on data center construction, possible regulations, what happens if these accidents cause things, those things, those are sort of these great unknowns. But you have to size based on the combination of your knowns, your unknowns, and it I know I'm not being very precise here, but it is a bit of an art form, but it's an art form that I practice within an aggregate structure that says, Alan, you can't have any industry be bigger than 30% of your portfolio, or Alan, you can't have any holding any larger than 40% of your portfolio. Again, that's my own particular slice. The aggregate fund has its own aggregate rules that it won't go over.
00:26:48
Speaker 1: Okay. What about your sell discipline? Is it more of, finding better opportunities or are there times when your original thesis breaks down at some point?
00:26:58
Speaker 2: Story changes lead, right? And the story could change for a couple of reasons. Story could be, look, people didn't appreciate the coil spring. The cycle has happened. People appreciate it. The coil has sprung. Okay, time to sell. It could be, I thought you were going to do X. X didn't happen. It doesn't look like in the foreseeable distance that it's going to happen.
00:27:20
Speaker 1: Time to sell.
00:27:21
Speaker 2: It could be any number of things, but the short answer is story, change, leave. What is typically not the case, at least for me, I don't tend to use valuation signals as the key to sell because often some of my best ideas, some of the best performing investments have gone much farther than I might have expected. One, because the engine ran longer than I thought or the market's willingness to pay was higher than I thought, but two, But the point is, it tends to not be a valuation signal for me. It's a, the reason that I bought it has changed. Maybe for good reasons, maybe for bad. But reason changes leave.
00:28:00
Speaker 1: Okay. You know, the fund has a lot of flexibility to invest outside the traditional universe of companies might, you know, people might associate with growth investing. And, you know, you mentioned healthcare a little bit earlier, but are there areas where you're finding opportunities today that might surprise someone only looking at a conventional growth index?
00:28:17
Speaker 2: Well, you know, so what's interesting to me now is the things, if you go back and look at the things that were in the fund two or three years ago that weren't in the growth index that are now in, right? So a lot of these, so, and that's, by the way, that's one of the things that's very rewarding. But, you know, one of our managers, I told you we have these seven restaurants, but one of the restaurateurs is just a very cautious person when it comes to thinking about the monetary system, what's going to happen with the dollar. And he's in, and so, and so he's always got a growth portfolio that has a lot of tangible things associated with it, right? They can be commodity related. They could be gold streamers, right?
00:29:02
Speaker 1: They, right.
00:29:02
Speaker 2: You don't typically think of those, but, but those are really terrific capital appreciation, cap appreciation ideas. At least they have been, uh, when, when, when this person bought them, um, uh, you know, he was buying gold long before the thing got hot, right? So, so that was one of those things that, where the capital appreciation was there and present. One of the things he has been looking at and holds a lot of is performance food group, which is, okay, I mean, it's a sort of a steady Eddie, you know, it's like, but, but he would argue, look, you know, food outside the home is growing at 5%. These guys have compounded areas at 16%. This is a business that that is consolidating. So it's, I guess what I would say is it might be considered quote unquote growth, but it is far from sexy, right? People think people right now equate growth with sexy, right? And often there's a lot of real hidden value in the unsexy, plodding along, steady Eddie, it's going to do well. And so that would be one that, at least when I have one. So the other thing we do, I said, you know, is that we walk around other people's restaurants, right? And I look at, what's that doing in there, right? Because that's the, and so, okay, I see what you're doing. I see where you're doing. It makes sense to me. Okay.
00:30:15
Speaker 1: No, it makes a lot of sense. You know, one other question I wanted to just ask about growth index is we all know how, you know, heavily influenced they are now by a relatively small group of very large companies. Do you think that concentration makes the environment more challenging for active growth managers, or do you think it just creates more opportunities elsewhere?
00:30:33
Speaker 2: I think it creates more opportunity. I think the question is whether you have a client base who will give you the time to appreciate the opportunity, right? So I can't tell you what and when, but I can soften tell you what, right? And so typically if you look at a portfolio, if you just take the Russell and you look at sort of two or three holdings, making up these gigantic parts of the, by the way, these aren't bad companies, right?
00:31:02
Speaker 1: They're fantastic.
00:31:02
Speaker 2: But, but should, but should really like, you know, half your money be in four or five, right? And so if I guess, I guess I would say this, if you didn't have time to do your own work, right? And therefore, you just said, look, I need to keep it simple because my day job is doing X. So yeah, if most of my money is in NVIDIA and Apple and whatever the top ones are, okay, got it. You're not going to have great harm. But if you said by the same token, I've got a place that has, in this fund, seven portfolio managers, probably 40 analysts across the spectrum of things. And all they do every day is to go and look for mispriced opportunities where there's a lot of capital appreciation. Yeah, give me some of those, right? Well, there's not room to have those giant positions if you have all this other neat and interesting stuff. So I understand the way we've gotten to this level of concentration, but I think that is exactly the opportunity for us because while all the money sloshed into those, it has left some other things that are quite attractive mispriced.
00:32:04
Speaker 1: Okay. No, I definitely agree with that. We're seeing kind of this huge resurgence in investors loving active at the same time this concentration is happening. And so I think it's kind of a cool storm to watch. And so I have just one more question I wanted to ask before I let you go. You know, when you kind of look at the market today, do you see any disconnect between what investors are focused on in the near term and, you know, growth opportunities that could matter much more over the next, you know, several years? So, okay, I'm going to answer your question. I'm going to tell you why it's hard for me to answer.
00:32:35
Speaker 2: I need to, you know, one of the ways, it's hard for me to keep my perfect pitch in if I'm in a place where there's a bunch of people singing a bunch of other tunes, right?
00:32:46
Speaker 1: I'm trying to stay on pitch.
00:32:47
Speaker 2: And so I don't spend a lot of time listening to the other singers outside the world, right? I know my singers internally.
00:32:53
Speaker 1: I know them. I've calibrated.
00:32:54
Speaker 2: We've sung together for decades. I know what that means. But, you know, I don't sit and watch, oh my God, this has gone on TV screaming about this or this lady screaming about that. So one, I'm always a little wary that I don't necessarily understand what other words, what folks are looking for. I guess I would say the following. you know, as we sit here in September, there's a lot of damage being done to physical infrastructure, right? In terms of oil infrastructure, the demands we have on creating power for this magical system, like the physical world moves a lot more slowly than the technological world, right? And so when people say, oh my God, you know, if you think this model is smart, wait till the one, two generations is better. And all you need is sort of, you know, 10 times the power. That little, the physical world, I think people are just now starting to pay attention to the idea that it may not be as easy to, Mike Tyson, everyone has a plan to get punched in the mouth. Here, the punch in the mouth is the constraint of the physical world, right? I think if you're looking at what's happening with the energy infrastructure right now, this thing in Iran will end. The question is once it ends, do you have almost a decade worth of reconfiguration that has to happen? The types of companies that are in front of that are going to be really terrific investments. The types of companies that are going to have a almost decade-long headwind because their input chain has a lot more kinks in it than they used to have, that's another opportunity. So I would say If you say, what am I sniffing around a lot right now? It's those types of things because I think those might well be the next coil springs because physical infrastructure also typically isn't a sexy thing that growth funds hold.
00:34:44
Speaker 1: Makes a lot of sense. Unfortunately, we need to end here, but this was great, Alan. Thank you so much for joining me today. Dave, thank you so much for having me. I also want to thank our listeners. If you liked the episode, please share it, subscribe, and leave a review. And if you'd like to see more of our research on the terminal, go to BIFundGo.com. for U.S. Fund and Active Research. Until our next episode, this is David Cohn with Inside Active.
