00:00:02
Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
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Speaker 2: Bloomberg Wealth is brought to you by Merrill. Get your whole financial picture and path forward with the bull at your back investing in Bob's risk. Merrill, Lynch, Pierce, Fenner and Smith, Incorporated is a registered broker dealer, registered Investment Advisor member SIPC, and a wholly owned subsidiary a Bank of America Corporation. You're listening to Bloomberg Wealth with me David Rubinstein. On today's show, I'm speaking with Sarah Kettterer, CEO and co founder of Causeway Capital Management.
00:00:38
Speaker 3: To be a value investor is to pay less and the business is ultimately worth.
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Speaker 1: I have learned so much.
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Speaker 3: I think I've made every mistake there is I've learned on the job in the last twenty three years. As long as clients are always a load star, then decisions become easy.
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Speaker 2: Sarah Ketterer buys stocks for a living, but she has no interest in buying Nvidia.
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Speaker 3: No, because the so much growth is already embedded in the valuation.
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Speaker 2: That's because Ketterer is a so called value investor. Her fifty billion dollar firm, Causeway Capital Management, focuses on researching stocks with prices lower than their intransit worth.
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Speaker 3: To be a value investor is to pay less, and the business is ultimately worth.
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Speaker 1: And we give every company about two years.
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Speaker 3: To show us what it can be worth, and then we assess what that price should be two years from now. And if the price two years from now should be considerably higher than it is today, the stock is likely undervalued.
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Speaker 2: Ketterer comes from a long line of Californians. Her father, John Hodgkiss, was a commissioner of the nineteen eighty four Los Angeles Olympics. He was also a well known value investor and had his own firm, Hodgkiss and Wiley. After getting her undergraduate degree at Stanford and her MBA at Dartmouth, Ketterer did a brief stint in investment banking in New York City before moving back to the West Coast and joining the family business.
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Speaker 3: Had started a database business. So I rang up my father and his business partner, George Willy and said do you need any data? And I'm not sure they did, but they were very kind and said we'll bring it out here to Los Angeles.
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Speaker 1: And we'll talk.
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Speaker 2: That's where she met Harry Hartford, with whom she would go on to found Causeway in two thousand and one. They had seven and a half million dollars when they opened their doors. Today, their one hundred person staff manages fifty billion dollars in assets.
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Speaker 3: Timing is everything, and we launched Causeway after the telecommunications, media and technology bubble burst. So this was two thousand and one and value investing was coming back, the style was coming back into favor.
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Speaker 2: And Ketterer doesn't seem to be slowing down anytime soon.
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Speaker 1: I'd like my legacy to be even greater employment. I want to employ more.
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Speaker 3: People who are in as I talked about that great career trajectory.
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Speaker 1: I'd like to have more clients who say, we.
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Speaker 3: Really appreciate the service you're providing us.
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Speaker 2: Explain to me what makes Causeway so distinctive. Why is it different than other money management firms. There's plenty of money management firms out there, is why is yours different?
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Speaker 3: Well, Causeway has from our beginning in two thousand and one believed in the combine a combination of fundamental and quantitative investing. And there are two different ways of doing investment research in the world of long only equities.
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Speaker 1: But you put the two together, and.
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Speaker 3: You get something that's better than just that narrow, sort of very discretionary subjective viewpoint, and then something better than the statistical absolutely.
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Speaker 2: What do you call that is called quant value or value?
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Speaker 3: Quantans are I talking to to the quants, I say it's quantamental. To the fundamental people, I say it's fundamental and quant.
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Speaker 2: So you're what's known in the business as a long only fund right, we are long only, and you're known as a value investor. What does it mean to be a value investor?
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Speaker 3: That is the one hundred million dollar question, because everybody defines it differently. We define it as for portfolios where we use a fundamental approach. So that's the analysis of financial statements, the interviews of company management, the assessment of the industry. To be a value investor is to pay less and the business is ultimately worth and we give every company about two years to show us what it can be worth, and then we assess what that price should be two years from now. And if the price two years from now should be considerably higher than it is today, the stock is likely undervalued.
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Speaker 2: Well well, late Charlie Munger said that he changed Warren Buffet's views on value investing. Initially, value investing in Warren Buffet's view was buying something really cheap, even if the company wasn't great, but it's cheap. And Munger said, no, buy good companies even it's a little more expensive, as long as it's not overly expensive. And Warren Buffett allegedly began to do that. So what do you do. Do you buy really not great companies but they're cheap, or do you buy good companies that are a little more expensive and call that value investing?
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Speaker 3: Those two in Ley Charlie Munger could simplify the most complicated of situations, But in a way, it's neither. They may be in good businesses, they may have very few competitors and maybe in oligopolies, or they may be in an industry that's rapidly growing. There could be reasons why you call them good, but something may stop that. They may have a lawsuit levied on them, or they may have a scandal, or they may have a poor CEO does a poor job of executing, and then they become bad and that's when we like them. So if they're good in most well most markets still be priced for good.
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Speaker 2: So I suppose somebody came to you and said, I have a good stock that's growing a lot. It's called Nvidia, and is that a value investment. You think that's a good value investment.
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Speaker 3: No, because the so much growth is already embedded in the valuation. So if Nvidia's in the building part of the technology cycle, then there's the delivery part, and then there's finally this where we put it all together, and AI is ever present in that last segment. Enterprises businesses will need to use AI and they have no idea how to many of them, so you could go out and find, for example, in info technology or technology services companies this Accenture or cap Gemini or some of the Leviathans. But as you move down the market cap spectrum like Cognizant or Fujitsu in Japan, or Concentrics or gen Packed, these companies are going to be advising their enterprise clients on how to deal with this once all the infrastructure is built, once enterprises have moved everything they have to the cloud, and they're ready to go. So there's value in this whole concept. The theme that's driving Nvidia has unearthed the whole raft of stocks that nobody cares about today, but they will in the future.
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Speaker 2: So you do some international investing and emerging market investment. So it seems like it's an oxymoron to say I'm a value investor in emerging markets, because emerging markets are Murray volatile. So explain how you can be a value investor in an emerging market.
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Speaker 1: I didn't want to add.
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Speaker 3: We also manage money globally, so we have global equities, but I think investing in a number of areas could be an oxymoron the emerging markets. The single largest country in the Emerging Market Index is China, and it has gone from being a powerhouse a growth to slowing considerably. The Chinese property market is weak, dragging the economy. The population's aging, which is also creating cost So emerging markets is a blend of fast growing India and slower growing China. But there's all ways value and we approach emerging markets with a quantitative investment research style, and that allows us to use both value and some growth, as well as other factors to identify outperforming stocks.
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Speaker 2: The theory of emerging market investing is that the rate of return will be higher because there's less competition, prices are lower, et cetera. But that theory has not been proven yet, has it. In other words, the rate of return risk adjusted for emerging markets investment is not that much better than develop market, is it?
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Speaker 1: Again talking about a broad index. I totally agree with you. It hasn't been better.
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Speaker 3: It had its run in the early part of the two thousands and right through the global financial crisis.
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Speaker 1: But ever since we became much more.
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Speaker 3: Financially accommodative in the developed world, and central bank balancees expanded and financial conditions became very loose. Emerging markets then had their own issues. I think that China really crested in twenty twenty one, which was the leading market in emerging market and now is suffering under the cloud of potential overregulation and communist party rule.
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Speaker 2: So today, when you're making investments, you've got about one hundred and thirty people in your firm something like that. Seven seven, okay, So do they come to you for every decision? Do you have to say yes, buy this stock or not buy this stock, or do you have a a delegation of approach where you don't have to approve every investment.
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Speaker 3: We have a very dispersed decision making and that was deliberate. When my co founder Harry Hartford and I set up a Causeway just in our minds long before we actually launched the firm. We didn't want to have a star system. We didn't want our investment results to depend on any one or two people, no matter what the strategy was, because there's too much business risk doing that. It's risky for clients and it's risky for the firm itself.
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Speaker 2: I suppose I say, I've heard about your company. I'd like to give it a chance. What kind of rate of return? What I expect I could get? I mean, you're doing emerging market and international and also domestic long only equity investments. Is that a seven percent eight rate of return? Business? Nine percent, ten percent, twelve percent? What do you think it is? An era of four five percent inflation?
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Speaker 1: Yeah, well, I think.
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Speaker 3: The four to five percent inflation might be more emerging markets. Otherwise we're all in serious trouble in the developed world. But the let's just take a four to five percent ten year government bond yield or maybe four might be more reasonable, and add an equity risk premium so that the premium is the for taking the risk of buying long only stocks publicly traded equities. How much more should the investor be paid? That's probably three or four percentage maybe four percentage points more so maybe out of public equities.
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Speaker 1: Anywhere in the world. If the if the.
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Speaker 3: Risk free rate is somewhere around four, should expect eight maybe nine percent per year from your equities. But that's just the index, and you pay us as the active manager to do better than that.
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Speaker 2: Well, let me ask you about that. There's a theory that you can't beat the markets. So some people have propagated the idea that the best thing to do with your money, if you're going to be inequities is buy an index fund, tiny little fee, and you are the market. Whatever the S and P five hundred is, or the doal, whatever the deal is, you're going to be that. Your theory is that you can beat the markets. And have you been able to beat the markets for the years that you've started the company? It's about twenty years ago.
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Speaker 3: Yeah, it's been twenty three years, and we don't beat our indices. So International has an international market index, Emerging has an emerging index, Global has the Global Index, and we don't.
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Speaker 1: Beat it every year.
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Speaker 3: I don't think we could given our investment style isn't in.
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Speaker 1: Favor every year, but we beat it.
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Speaker 3: Over market cycles, markets rise and fall we call a full market cycle.
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Speaker 1: We outperform these benchmarks.
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Speaker 2: So as I look at opportunities now that might be available for a long only investor in the United States and or around the world, what are some of the opportunities generically that you think are attractive. Not necessarily companies, but opportunities generically.
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Speaker 3: The entire non US region has been second class citizen versus the extraordinary US market. And think about non US developed as a value stock. The income just on average from stocks listed in Europe and even parts of Japan, not just the difend income, but.
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Speaker 1: The buybacks far exeed that of the US.
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Speaker 3: So I just can't tell you when I just keep moving to the US market and get concentrated in a few stocks. That leads to a great opportunity for investors to find mismanagement or situations where companies just need a nudge from institutional investors like Causeway to get them to improve their outcomes.
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Speaker 2: Let's talk about the beginning of your life and then how you came to start Causeway. So where were you born?
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Speaker 1: Pasadena, California.
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Speaker 2: Okay, and your father is a very famous investor. He was a very famous value investors. That's fair.
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Speaker 1: It's fair.
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Speaker 2: And he started some companies that were well known in the investment world. He did so, did he say I want my little girl to grow up to be an investor. No.
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Speaker 3: I went into undergraduate as a pre met so I had no idea that finance was in my future.
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Speaker 2: And what happened like technology or chemistry.
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Speaker 3: Yeah, No, it wasn't just spinning out of organic chemistry. He was taking economics.
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Speaker 1: Yeah.
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Speaker 3: I had the most extraordinary professor, Michael Boskin, who at the time was the.
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Speaker 2: Well he became the head of Council of Economic Advisors, the Bush exactly.
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Speaker 1: And that was a clock like this is for me.
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Speaker 2: So you told your father you're not going to medical school, You're going to be an investor.
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Speaker 3: He said what he said, just finished college, please, and then we'll talk. But I had why I went into methment banking, and that turned out, at least from my perspective, to be a poor fit for my skill set, too transactional. And I was really interested in something where I could dive in and spend a lot of time thinking about underlying companies.
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Speaker 2: So after you graduated from Stanford, did you do some investment banking for a while?
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Speaker 3: I did corporate finance for two years at a firm called Dean Witter, which is long gone hard to find.
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Speaker 2: And then you go to business school afterwards, or I did, and you went to TALK at Dartmouth. Well, I mean, Talk's a great school. It's a wonderful school. Dartmouth is wonderful, but it's a long way from California. So how come you went all the way east?
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Speaker 3: I only applied to East Coast graduate schools because I.
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Speaker 1: Needed to get out of California.
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Speaker 3: Just part of the California is wonderful, but it can be a little insular, and there was so much more to learn.
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Speaker 2: When you graduated, did you say I'm going back to California? What did you do then?
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Speaker 1: No?
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Speaker 3: I took my first job here in New York City for another firm that doesn't exist any longer, Banker's Trust Company.
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Speaker 2: So when did you say I'm going to start my own firm. I'm sure of some of these other people.
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Speaker 3: I had started a database business, recognizing that I was using I had some non US transactions I was working on and the data was scarce. It was hard to get information on non US companies that was as good as you could find for US. So I left and founded one. And then I needed I needed customers. So I rang up my father and his business partner, George Wiley, and said, you need any data? And I'm not sure they did, but they were very kind and said we'll bring it out here to Los Angeles and we'll talk.
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Speaker 2: Well, your father started a firm with his partner, Hotchkisson Wiley. Your father was John Hodget business and then he ultimately sold that firm to Mary Lynch, MARYL. Lynch. And then were you at the firm when he sold it?
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Speaker 1: I was.
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Speaker 2: And then he said, well, now the firm is sold, you can stay or you can go. What did he say?
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Speaker 1: He said, good luck, that's right. He was on and urn out.
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Speaker 3: So he was being paid over time over the next several years for his ownership stake, and I went on in an employment contract. But when my employment contract ended that Maryland, nobody renewed it. So, knowing that I was a free bird, I started to plan this idea of causeway that was the.
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Speaker 2: That was the where did the causeway come from?
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Speaker 1: My business partner Harry Hartford.
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Speaker 3: He's Irish and it comes from the Giant's Causeway, which is this fifty million year old array of basalt columns in northern Ireland that leads out to the outer My partner, Harry Hartford, he came from the Bank of Ireland. I met him on the phone in nineteen ninety four and it was like a wicked storm. I mean the weather was so bad where he lived in Dublin, and I said, you'll like it in Los Angeles.
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Speaker 2: So you started the firm with any money? How much money did you have to get started?
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Speaker 3: We had what Harry and I had saved our cooo who remains our COO today. Gracie Familia, another woman in leadership at Cousway.
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Speaker 1: She pitched in.
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Speaker 3: We went out and found external capital because I couldn't get any money out of my family, none, not even a penny, So that was another good luck.
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Speaker 1: You're on your own, kid, And she went.
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Speaker 2: Out, how much money did you have when you started open the doors?
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Speaker 1: We opened with seven and seven and a half million.
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Speaker 2: Dollars seven a half million dollars, okay.
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Speaker 3: With twenty four people, and we lost money for three years.
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Speaker 1: So we had.
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Speaker 3: External capital who took twenty percent of the business and they were.
00:17:42
Speaker 2: Anxious, now you have fifty billion. Yes see, how did you go from seven and a half million to fifty billion? Was it? You must have a good rate of return? So what enabled you to grow the firm?
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Speaker 3: Largely the We had just built an incredible team. It's always about the people, especially in asset management.
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Speaker 2: So you would go out and raise the money. Was that part of your job to raise the money?
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Speaker 1: Initially it was I took a lot of red eyes.
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Speaker 3: I had three young kids at home and I was on airplanes constantly.
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Speaker 2: So you've got raising the money and you're telling people your track records good. And then were you surprised it went short of much like this in terms of raising money. You've got a fair amount of money, fifty billion on our management. It's not bad.
00:18:22
Speaker 1: Yeah. Timing is everything.
00:18:23
Speaker 3: And we launched Causeway after the telecommunications, media and technology bubble burst. So this was two thousand and one and value investing was coming back. The style was coming back into favor, so we had the wind at our backs. We had so many clients who were under index to value and wanted value and were interested in non US Now.
00:18:43
Speaker 2: In seven eight, there was a gigantic financial price in the United States, known to some as the Great Procession. What happened to your business? Then?
00:18:52
Speaker 3: Our assets under management halved, so we shrunk precipitously, and at the time Harry Hartford and I had taken out loans to buy out our seat investor. So it was perilous and it was really nerve wracking. It was one of many I'd call significant bumps in the road along the way to fifty billion.
00:19:13
Speaker 2: Who owns the firm? Now?
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Speaker 3: We are one hundred percent employee owned and one board member who's a former portfolio manager who's retired.
00:19:21
Speaker 2: What is the biggest challenge you have? Is it getting more money, getting sure the returns are good, figure out what's going on the geopolitical situation? What is the biggest challenge you have today?
00:19:31
Speaker 3: It's always retaining the talent, making sure that the people we have think about in at least in our business.
00:19:38
Speaker 1: It's just layers of succession.
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Speaker 3: There's the senior generation I'm a part of, and there's the generation beneath that, the one beneath that ensuring every individual, no matter the area of causing in which he or she works, is on a path, a career path that's satisfying and one where that.
00:19:56
Speaker 1: In visual continue to contribute and is motivated.
00:20:03
Speaker 2: So do you get tired on people asking you what it's like to be a woman owned firm and a woman CEO and a money management area. I assume you get tired of that. But what is your non tired answer to that question?
00:20:16
Speaker 1: Times have changed and they've improved.
00:20:18
Speaker 3: We have a pipeline of incredibly talented women coming into research that never, even ten years ago, didn't exist. So some of them call me a pioneer, which makes me feel ancient, which they're absolutely right. But in the eighties and the nineties it wasn't easy being a woman in finance. I'll have to close doors, but no longer.
00:20:38
Speaker 2: So what's the best investment advice you've ever received? I assume your father probably gave you some, or maybe Charlie Munger or other people like that. What's the best investment advice you ever got?
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Speaker 3: Well, all my mentors were men, A mentor aptly named and.
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Speaker 1: Often it was.
00:20:56
Speaker 3: And these aphorism are as good today as they were decades ago, which is, don't fall in love with your stocks. Remember, if you can just think beyond the market short term viewpoint, you can if you can be patient, you can see a reasonable return. Never neglect income. Like, I don't know if I could rank these there are so many of them.
00:21:15
Speaker 2: What do you think the most common mistake that investors make is it's selling too soon or buying too soon. What's the most common mistake in your observation that investors typically make.
00:21:24
Speaker 3: Well, even institutional investors, who I think should know better. They project the present into the future. They extrapolate. So when an investment style with a great team like Causeway, where all the talent is intact, turns down, they panic. And when we do everything in our power to explain to them, as we would our mutual fund investors, this is a time when we're doubling down.
00:21:51
Speaker 1: We're buying more of these stocks that have underperformed because we have conviction in them. So you should think the same of us.
00:21:56
Speaker 2: So if I come to you and say I have one hundred thousand dollar dollars, I don't know what to do with it, what would you recommend I do with one hundred thousand dollars. That's suppose I'm a middle class person. I've saved up some money I've got one hundred thousand dollars. I don't want to lose it, but I had to get more than a Treasury bill rate of return. What should I do with my one hundred thousand?
00:22:13
Speaker 3: My answer would depend on when you want to retire, do you have any major expenditures.
00:22:17
Speaker 1: You're going to put kids through school, So.
00:22:19
Speaker 3: Knowing when you need the money is very That determines because if you need it sooner than later, equities can be volatile, and cash now pays five plus percent in the US, that might be a place to put whatever you need in the next two years.
00:22:34
Speaker 2: So let me ask you today, you look back on your career, do you think that you have fulfilled what you wanted to do? Build your own money manager firm? What's your ambition now? You're still very young by my standards, so would you like to build it into a bigger company than you have or do something different professionally? What is your professional goal now?
00:22:52
Speaker 3: I'd like my legacy to be even greater employment. I want to employ more people who are in as I talked about that.
00:22:58
Speaker 1: Great career trajectory.
00:23:00
Speaker 3: I'd like to have more clients who say, we really appreciate the service you're providing us, and that's just going to take more time and effort. This idea of bringing more fundamental and quantitative investing together more closely to get a better outcome.
00:23:15
Speaker 1: There's just more work to do to get there.
00:23:18
Speaker 2: But you still enjoy what you're doing. Yes, what have you learned about yourself as a leader? So you went into this company started it about twenty years ago. You had not owned a company and run it one yourself. You've been in money management now that you've been a leader for twenty years or so, what have you learned about yourself that you may be surprised you?
00:23:40
Speaker 1: I have learned so much.
00:23:41
Speaker 3: I think I've made every mistake there is I've learned on the job in the last twenty three years. But one of the biggest lessons that I've taken away is don't underestimate the need to collaborate, even though I'm convinced I know the answer, bringing others along and making sure that they have bought in and they take.
00:24:00
Speaker 1: Ownership of the solution that I'd like to implement.
00:24:05
Speaker 2: Thanks for listening to my conversation with Couseway's CEO and co founder Sarah Ketterer. Hear more conversations like this. Head to bloomberg dot com or YouTube for the latest episodes of Bloomberg Wealth. I'm David Rubinstein, and this is Bloomberg
Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
00:00:06
Speaker 2: Bloomberg Wealth is brought to you by Merrill. Get your whole financial picture and path forward with the bull at your back investing in Bob's risk. Merrill, Lynch, Pierce, Fenner and Smith, Incorporated is a registered broker dealer, registered Investment Advisor member SIPC, and a wholly owned subsidiary a Bank of America Corporation. You're listening to Bloomberg Wealth with me David Rubinstein. On today's show, I'm speaking with Sarah Kettterer, CEO and co founder of Causeway Capital Management.
00:00:38
Speaker 3: To be a value investor is to pay less and the business is ultimately worth.
00:00:43
Speaker 1: I have learned so much.
00:00:44
Speaker 3: I think I've made every mistake there is I've learned on the job in the last twenty three years. As long as clients are always a load star, then decisions become easy.
00:01:04
Speaker 2: Sarah Ketterer buys stocks for a living, but she has no interest in buying Nvidia.
00:01:09
Speaker 3: No, because the so much growth is already embedded in the valuation.
00:01:14
Speaker 2: That's because Ketterer is a so called value investor. Her fifty billion dollar firm, Causeway Capital Management, focuses on researching stocks with prices lower than their intransit worth.
00:01:25
Speaker 3: To be a value investor is to pay less, and the business is ultimately worth.
00:01:31
Speaker 1: And we give every company about two years.
00:01:34
Speaker 3: To show us what it can be worth, and then we assess what that price should be two years from now. And if the price two years from now should be considerably higher than it is today, the stock is likely undervalued.
00:01:47
Speaker 2: Ketterer comes from a long line of Californians. Her father, John Hodgkiss, was a commissioner of the nineteen eighty four Los Angeles Olympics. He was also a well known value investor and had his own firm, Hodgkiss and Wiley. After getting her undergraduate degree at Stanford and her MBA at Dartmouth, Ketterer did a brief stint in investment banking in New York City before moving back to the West Coast and joining the family business.
00:02:11
Speaker 3: Had started a database business. So I rang up my father and his business partner, George Willy and said do you need any data? And I'm not sure they did, but they were very kind and said we'll bring it out here to Los Angeles.
00:02:22
Speaker 1: And we'll talk.
00:02:23
Speaker 2: That's where she met Harry Hartford, with whom she would go on to found Causeway in two thousand and one. They had seven and a half million dollars when they opened their doors. Today, their one hundred person staff manages fifty billion dollars in assets.
00:02:36
Speaker 3: Timing is everything, and we launched Causeway after the telecommunications, media and technology bubble burst. So this was two thousand and one and value investing was coming back, the style was coming back into favor.
00:02:49
Speaker 2: And Ketterer doesn't seem to be slowing down anytime soon.
00:02:52
Speaker 1: I'd like my legacy to be even greater employment. I want to employ more.
00:02:56
Speaker 3: People who are in as I talked about that great career trajectory.
00:03:00
Speaker 1: I'd like to have more clients who say, we.
00:03:03
Speaker 3: Really appreciate the service you're providing us.
00:03:08
Speaker 2: Explain to me what makes Causeway so distinctive. Why is it different than other money management firms. There's plenty of money management firms out there, is why is yours different?
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Speaker 3: Well, Causeway has from our beginning in two thousand and one believed in the combine a combination of fundamental and quantitative investing. And there are two different ways of doing investment research in the world of long only equities.
00:03:32
Speaker 1: But you put the two together, and.
00:03:34
Speaker 3: You get something that's better than just that narrow, sort of very discretionary subjective viewpoint, and then something better than the statistical absolutely.
00:03:45
Speaker 2: What do you call that is called quant value or value?
00:03:48
Speaker 3: Quantans are I talking to to the quants, I say it's quantamental. To the fundamental people, I say it's fundamental and quant.
00:03:55
Speaker 2: So you're what's known in the business as a long only fund right, we are long only, and you're known as a value investor. What does it mean to be a value investor?
00:04:06
Speaker 3: That is the one hundred million dollar question, because everybody defines it differently. We define it as for portfolios where we use a fundamental approach. So that's the analysis of financial statements, the interviews of company management, the assessment of the industry. To be a value investor is to pay less and the business is ultimately worth and we give every company about two years to show us what it can be worth, and then we assess what that price should be two years from now. And if the price two years from now should be considerably higher than it is today, the stock is likely undervalued.
00:04:42
Speaker 2: Well well, late Charlie Munger said that he changed Warren Buffet's views on value investing. Initially, value investing in Warren Buffet's view was buying something really cheap, even if the company wasn't great, but it's cheap. And Munger said, no, buy good companies even it's a little more expensive, as long as it's not overly expensive. And Warren Buffett allegedly began to do that. So what do you do. Do you buy really not great companies but they're cheap, or do you buy good companies that are a little more expensive and call that value investing?
00:05:10
Speaker 3: Those two in Ley Charlie Munger could simplify the most complicated of situations, But in a way, it's neither. They may be in good businesses, they may have very few competitors and maybe in oligopolies, or they may be in an industry that's rapidly growing. There could be reasons why you call them good, but something may stop that. They may have a lawsuit levied on them, or they may have a scandal, or they may have a poor CEO does a poor job of executing, and then they become bad and that's when we like them. So if they're good in most well most markets still be priced for good.
00:05:49
Speaker 2: So I suppose somebody came to you and said, I have a good stock that's growing a lot. It's called Nvidia, and is that a value investment. You think that's a good value investment.
00:06:01
Speaker 3: No, because the so much growth is already embedded in the valuation. So if Nvidia's in the building part of the technology cycle, then there's the delivery part, and then there's finally this where we put it all together, and AI is ever present in that last segment. Enterprises businesses will need to use AI and they have no idea how to many of them, so you could go out and find, for example, in info technology or technology services companies this Accenture or cap Gemini or some of the Leviathans. But as you move down the market cap spectrum like Cognizant or Fujitsu in Japan, or Concentrics or gen Packed, these companies are going to be advising their enterprise clients on how to deal with this once all the infrastructure is built, once enterprises have moved everything they have to the cloud, and they're ready to go. So there's value in this whole concept. The theme that's driving Nvidia has unearthed the whole raft of stocks that nobody cares about today, but they will in the future.
00:07:10
Speaker 2: So you do some international investing and emerging market investment. So it seems like it's an oxymoron to say I'm a value investor in emerging markets, because emerging markets are Murray volatile. So explain how you can be a value investor in an emerging market.
00:07:25
Speaker 1: I didn't want to add.
00:07:26
Speaker 3: We also manage money globally, so we have global equities, but I think investing in a number of areas could be an oxymoron the emerging markets. The single largest country in the Emerging Market Index is China, and it has gone from being a powerhouse a growth to slowing considerably. The Chinese property market is weak, dragging the economy. The population's aging, which is also creating cost So emerging markets is a blend of fast growing India and slower growing China. But there's all ways value and we approach emerging markets with a quantitative investment research style, and that allows us to use both value and some growth, as well as other factors to identify outperforming stocks.
00:08:14
Speaker 2: The theory of emerging market investing is that the rate of return will be higher because there's less competition, prices are lower, et cetera. But that theory has not been proven yet, has it. In other words, the rate of return risk adjusted for emerging markets investment is not that much better than develop market, is it?
00:08:32
Speaker 1: Again talking about a broad index. I totally agree with you. It hasn't been better.
00:08:36
Speaker 3: It had its run in the early part of the two thousands and right through the global financial crisis.
00:08:41
Speaker 1: But ever since we became much more.
00:08:43
Speaker 3: Financially accommodative in the developed world, and central bank balancees expanded and financial conditions became very loose. Emerging markets then had their own issues. I think that China really crested in twenty twenty one, which was the leading market in emerging market and now is suffering under the cloud of potential overregulation and communist party rule.
00:09:08
Speaker 2: So today, when you're making investments, you've got about one hundred and thirty people in your firm something like that. Seven seven, okay, So do they come to you for every decision? Do you have to say yes, buy this stock or not buy this stock, or do you have a a delegation of approach where you don't have to approve every investment.
00:09:26
Speaker 3: We have a very dispersed decision making and that was deliberate. When my co founder Harry Hartford and I set up a Causeway just in our minds long before we actually launched the firm. We didn't want to have a star system. We didn't want our investment results to depend on any one or two people, no matter what the strategy was, because there's too much business risk doing that. It's risky for clients and it's risky for the firm itself.
00:09:50
Speaker 2: I suppose I say, I've heard about your company. I'd like to give it a chance. What kind of rate of return? What I expect I could get? I mean, you're doing emerging market and international and also domestic long only equity investments. Is that a seven percent eight rate of return? Business? Nine percent, ten percent, twelve percent? What do you think it is? An era of four five percent inflation?
00:10:14
Speaker 1: Yeah, well, I think.
00:10:16
Speaker 3: The four to five percent inflation might be more emerging markets. Otherwise we're all in serious trouble in the developed world. But the let's just take a four to five percent ten year government bond yield or maybe four might be more reasonable, and add an equity risk premium so that the premium is the for taking the risk of buying long only stocks publicly traded equities. How much more should the investor be paid? That's probably three or four percentage maybe four percentage points more so maybe out of public equities.
00:10:49
Speaker 1: Anywhere in the world. If the if the.
00:10:52
Speaker 3: Risk free rate is somewhere around four, should expect eight maybe nine percent per year from your equities. But that's just the index, and you pay us as the active manager to do better than that.
00:11:03
Speaker 2: Well, let me ask you about that. There's a theory that you can't beat the markets. So some people have propagated the idea that the best thing to do with your money, if you're going to be inequities is buy an index fund, tiny little fee, and you are the market. Whatever the S and P five hundred is, or the doal, whatever the deal is, you're going to be that. Your theory is that you can beat the markets. And have you been able to beat the markets for the years that you've started the company? It's about twenty years ago.
00:11:27
Speaker 3: Yeah, it's been twenty three years, and we don't beat our indices. So International has an international market index, Emerging has an emerging index, Global has the Global Index, and we don't.
00:11:38
Speaker 1: Beat it every year.
00:11:39
Speaker 3: I don't think we could given our investment style isn't in.
00:11:43
Speaker 1: Favor every year, but we beat it.
00:11:46
Speaker 3: Over market cycles, markets rise and fall we call a full market cycle.
00:11:51
Speaker 1: We outperform these benchmarks.
00:11:53
Speaker 2: So as I look at opportunities now that might be available for a long only investor in the United States and or around the world, what are some of the opportunities generically that you think are attractive. Not necessarily companies, but opportunities generically.
00:12:09
Speaker 3: The entire non US region has been second class citizen versus the extraordinary US market. And think about non US developed as a value stock. The income just on average from stocks listed in Europe and even parts of Japan, not just the difend income, but.
00:12:30
Speaker 1: The buybacks far exeed that of the US.
00:12:34
Speaker 3: So I just can't tell you when I just keep moving to the US market and get concentrated in a few stocks. That leads to a great opportunity for investors to find mismanagement or situations where companies just need a nudge from institutional investors like Causeway to get them to improve their outcomes.
00:12:58
Speaker 2: Let's talk about the beginning of your life and then how you came to start Causeway. So where were you born?
00:13:04
Speaker 1: Pasadena, California.
00:13:06
Speaker 2: Okay, and your father is a very famous investor. He was a very famous value investors. That's fair.
00:13:13
Speaker 1: It's fair.
00:13:14
Speaker 2: And he started some companies that were well known in the investment world. He did so, did he say I want my little girl to grow up to be an investor. No.
00:13:22
Speaker 3: I went into undergraduate as a pre met so I had no idea that finance was in my future.
00:13:29
Speaker 2: And what happened like technology or chemistry.
00:13:31
Speaker 3: Yeah, No, it wasn't just spinning out of organic chemistry. He was taking economics.
00:13:36
Speaker 1: Yeah.
00:13:36
Speaker 3: I had the most extraordinary professor, Michael Boskin, who at the time was the.
00:13:41
Speaker 2: Well he became the head of Council of Economic Advisors, the Bush exactly.
00:13:45
Speaker 1: And that was a clock like this is for me.
00:13:48
Speaker 2: So you told your father you're not going to medical school, You're going to be an investor.
00:13:52
Speaker 3: He said what he said, just finished college, please, and then we'll talk. But I had why I went into methment banking, and that turned out, at least from my perspective, to be a poor fit for my skill set, too transactional. And I was really interested in something where I could dive in and spend a lot of time thinking about underlying companies.
00:14:15
Speaker 2: So after you graduated from Stanford, did you do some investment banking for a while?
00:14:20
Speaker 3: I did corporate finance for two years at a firm called Dean Witter, which is long gone hard to find.
00:14:26
Speaker 2: And then you go to business school afterwards, or I did, and you went to TALK at Dartmouth. Well, I mean, Talk's a great school. It's a wonderful school. Dartmouth is wonderful, but it's a long way from California. So how come you went all the way east?
00:14:40
Speaker 3: I only applied to East Coast graduate schools because I.
00:14:44
Speaker 1: Needed to get out of California.
00:14:46
Speaker 3: Just part of the California is wonderful, but it can be a little insular, and there was so much more to learn.
00:14:54
Speaker 2: When you graduated, did you say I'm going back to California? What did you do then?
00:14:59
Speaker 1: No?
00:14:59
Speaker 3: I took my first job here in New York City for another firm that doesn't exist any longer, Banker's Trust Company.
00:15:04
Speaker 2: So when did you say I'm going to start my own firm. I'm sure of some of these other people.
00:15:08
Speaker 3: I had started a database business, recognizing that I was using I had some non US transactions I was working on and the data was scarce. It was hard to get information on non US companies that was as good as you could find for US. So I left and founded one. And then I needed I needed customers. So I rang up my father and his business partner, George Wiley, and said, you need any data? And I'm not sure they did, but they were very kind and said we'll bring it out here to Los Angeles and we'll talk.
00:15:38
Speaker 2: Well, your father started a firm with his partner, Hotchkisson Wiley. Your father was John Hodget business and then he ultimately sold that firm to Mary Lynch, MARYL. Lynch. And then were you at the firm when he sold it?
00:15:51
Speaker 1: I was.
00:15:52
Speaker 2: And then he said, well, now the firm is sold, you can stay or you can go. What did he say?
00:15:57
Speaker 1: He said, good luck, that's right. He was on and urn out.
00:16:01
Speaker 3: So he was being paid over time over the next several years for his ownership stake, and I went on in an employment contract. But when my employment contract ended that Maryland, nobody renewed it. So, knowing that I was a free bird, I started to plan this idea of causeway that was the.
00:16:22
Speaker 2: That was the where did the causeway come from?
00:16:25
Speaker 1: My business partner Harry Hartford.
00:16:27
Speaker 3: He's Irish and it comes from the Giant's Causeway, which is this fifty million year old array of basalt columns in northern Ireland that leads out to the outer My partner, Harry Hartford, he came from the Bank of Ireland. I met him on the phone in nineteen ninety four and it was like a wicked storm. I mean the weather was so bad where he lived in Dublin, and I said, you'll like it in Los Angeles.
00:16:54
Speaker 2: So you started the firm with any money? How much money did you have to get started?
00:16:59
Speaker 3: We had what Harry and I had saved our cooo who remains our COO today. Gracie Familia, another woman in leadership at Cousway.
00:17:09
Speaker 1: She pitched in.
00:17:11
Speaker 3: We went out and found external capital because I couldn't get any money out of my family, none, not even a penny, So that was another good luck.
00:17:20
Speaker 1: You're on your own, kid, And she went.
00:17:22
Speaker 2: Out, how much money did you have when you started open the doors?
00:17:26
Speaker 1: We opened with seven and seven and a half million.
00:17:29
Speaker 2: Dollars seven a half million dollars, okay.
00:17:31
Speaker 3: With twenty four people, and we lost money for three years.
00:17:35
Speaker 1: So we had.
00:17:36
Speaker 3: External capital who took twenty percent of the business and they were.
00:17:42
Speaker 2: Anxious, now you have fifty billion. Yes see, how did you go from seven and a half million to fifty billion? Was it? You must have a good rate of return? So what enabled you to grow the firm?
00:17:54
Speaker 3: Largely the We had just built an incredible team. It's always about the people, especially in asset management.
00:18:01
Speaker 2: So you would go out and raise the money. Was that part of your job to raise the money?
00:18:05
Speaker 1: Initially it was I took a lot of red eyes.
00:18:07
Speaker 3: I had three young kids at home and I was on airplanes constantly.
00:18:12
Speaker 2: So you've got raising the money and you're telling people your track records good. And then were you surprised it went short of much like this in terms of raising money. You've got a fair amount of money, fifty billion on our management. It's not bad.
00:18:22
Speaker 1: Yeah. Timing is everything.
00:18:23
Speaker 3: And we launched Causeway after the telecommunications, media and technology bubble burst. So this was two thousand and one and value investing was coming back. The style was coming back into favor, so we had the wind at our backs. We had so many clients who were under index to value and wanted value and were interested in non US Now.
00:18:43
Speaker 2: In seven eight, there was a gigantic financial price in the United States, known to some as the Great Procession. What happened to your business? Then?
00:18:52
Speaker 3: Our assets under management halved, so we shrunk precipitously, and at the time Harry Hartford and I had taken out loans to buy out our seat investor. So it was perilous and it was really nerve wracking. It was one of many I'd call significant bumps in the road along the way to fifty billion.
00:19:13
Speaker 2: Who owns the firm? Now?
00:19:15
Speaker 3: We are one hundred percent employee owned and one board member who's a former portfolio manager who's retired.
00:19:21
Speaker 2: What is the biggest challenge you have? Is it getting more money, getting sure the returns are good, figure out what's going on the geopolitical situation? What is the biggest challenge you have today?
00:19:31
Speaker 3: It's always retaining the talent, making sure that the people we have think about in at least in our business.
00:19:38
Speaker 1: It's just layers of succession.
00:19:40
Speaker 3: There's the senior generation I'm a part of, and there's the generation beneath that, the one beneath that ensuring every individual, no matter the area of causing in which he or she works, is on a path, a career path that's satisfying and one where that.
00:19:56
Speaker 1: In visual continue to contribute and is motivated.
00:20:03
Speaker 2: So do you get tired on people asking you what it's like to be a woman owned firm and a woman CEO and a money management area. I assume you get tired of that. But what is your non tired answer to that question?
00:20:16
Speaker 1: Times have changed and they've improved.
00:20:18
Speaker 3: We have a pipeline of incredibly talented women coming into research that never, even ten years ago, didn't exist. So some of them call me a pioneer, which makes me feel ancient, which they're absolutely right. But in the eighties and the nineties it wasn't easy being a woman in finance. I'll have to close doors, but no longer.
00:20:38
Speaker 2: So what's the best investment advice you've ever received? I assume your father probably gave you some, or maybe Charlie Munger or other people like that. What's the best investment advice you ever got?
00:20:48
Speaker 3: Well, all my mentors were men, A mentor aptly named and.
00:20:54
Speaker 1: Often it was.
00:20:56
Speaker 3: And these aphorism are as good today as they were decades ago, which is, don't fall in love with your stocks. Remember, if you can just think beyond the market short term viewpoint, you can if you can be patient, you can see a reasonable return. Never neglect income. Like, I don't know if I could rank these there are so many of them.
00:21:15
Speaker 2: What do you think the most common mistake that investors make is it's selling too soon or buying too soon. What's the most common mistake in your observation that investors typically make.
00:21:24
Speaker 3: Well, even institutional investors, who I think should know better. They project the present into the future. They extrapolate. So when an investment style with a great team like Causeway, where all the talent is intact, turns down, they panic. And when we do everything in our power to explain to them, as we would our mutual fund investors, this is a time when we're doubling down.
00:21:51
Speaker 1: We're buying more of these stocks that have underperformed because we have conviction in them. So you should think the same of us.
00:21:56
Speaker 2: So if I come to you and say I have one hundred thousand dollar dollars, I don't know what to do with it, what would you recommend I do with one hundred thousand dollars. That's suppose I'm a middle class person. I've saved up some money I've got one hundred thousand dollars. I don't want to lose it, but I had to get more than a Treasury bill rate of return. What should I do with my one hundred thousand?
00:22:13
Speaker 3: My answer would depend on when you want to retire, do you have any major expenditures.
00:22:17
Speaker 1: You're going to put kids through school, So.
00:22:19
Speaker 3: Knowing when you need the money is very That determines because if you need it sooner than later, equities can be volatile, and cash now pays five plus percent in the US, that might be a place to put whatever you need in the next two years.
00:22:34
Speaker 2: So let me ask you today, you look back on your career, do you think that you have fulfilled what you wanted to do? Build your own money manager firm? What's your ambition now? You're still very young by my standards, so would you like to build it into a bigger company than you have or do something different professionally? What is your professional goal now?
00:22:52
Speaker 3: I'd like my legacy to be even greater employment. I want to employ more people who are in as I talked about that.
00:22:58
Speaker 1: Great career trajectory.
00:23:00
Speaker 3: I'd like to have more clients who say, we really appreciate the service you're providing us, and that's just going to take more time and effort. This idea of bringing more fundamental and quantitative investing together more closely to get a better outcome.
00:23:15
Speaker 1: There's just more work to do to get there.
00:23:18
Speaker 2: But you still enjoy what you're doing. Yes, what have you learned about yourself as a leader? So you went into this company started it about twenty years ago. You had not owned a company and run it one yourself. You've been in money management now that you've been a leader for twenty years or so, what have you learned about yourself that you may be surprised you?
00:23:40
Speaker 1: I have learned so much.
00:23:41
Speaker 3: I think I've made every mistake there is I've learned on the job in the last twenty three years. But one of the biggest lessons that I've taken away is don't underestimate the need to collaborate, even though I'm convinced I know the answer, bringing others along and making sure that they have bought in and they take.
00:24:00
Speaker 1: Ownership of the solution that I'd like to implement.
00:24:05
Speaker 2: Thanks for listening to my conversation with Couseway's CEO and co founder Sarah Ketterer. Hear more conversations like this. Head to bloomberg dot com or YouTube for the latest episodes of Bloomberg Wealth. I'm David Rubinstein, and this is Bloomberg
