This video was conducted in English.
Subtitles and transcripts are available in both English and French, by clicking directly on the CC icon. Click on the settings gear icon or the YouTube icon for more language and subtitle options.
Transcript:
John: Hello, I’m with Danesh Rohiten from IIA Clarington. Are you finding the world a little harder to navigate with Trump being at the helm of the United States of America?
Danesh: So, you know what’s interesting? I’ll tell you. I think the world is moving faster than it has before. So, I think dynamic for equity markets because what would be, and I’ll use Coca-Cola as a classic example.
John: No pun intended, right?
Danesh: Sorry.
John: No pun intended as a classic.
Danesh: I didn’t even think about that. So like Coca-Cola and that whole dynamic as the company evolved. I’m excluding the part where there was co in the drug in the actual uh the post Coca-Cola era is where
John: We might have to beat that out.
Danesh: Yeah. Oh. Oh, sorry. Oh, boy. Um but there, you know, there was basically a hundred years where Coca-Cola: the product didn’t really change, hence the classic. They tried new Coke, they tried vanilla Coke. The biggest innovation Coca-Cola has done has been Coca-Cola freestyle where you blend these flavors together in their brand portfolios. So at its core, it was sugary soda water with a distribution network that reaches the world. That is a hundred-year competitive advantage John, that still is largely relevant today. But we’re in a different world today because a lot of the other industries that aren’t sugary soda water which is also going through its own dynamic with GLP1’s your think of your ozempics, your Marjaros of the world that’s also facing real disruption in a way that we haven’t seen in a very long time but take the other 99% of companies. The world is changing in a faster cadence than before. So, I don’t actually think Trump gets a lot of airtime and I think that actually misses the broader point. It’s not necessarily that the US political scene is more chaotic than it has been before.
I don’t actually know if that’s true and I don’t know that the world is actually more chaotic today than it has been for the last 10, 15, 20 years. I think what’s changed a little bit is that it’s becoming more apparent that the velocity of change and the amplitude of the noise is picking up and that’s something where maybe we might have had a full global psychosis a little bit where we felt like history was slowing down, nothing’s going on when all these tensions were bubbling up between the US and China, I think they’ve been competing with each other for a very long time. It’s kind of becoming a little bit more obvious now. I think it’s becoming a little bit more obvious now that Russia has imperialistic ambitions and Europe is waking up to that.
So Germany went from building and sending 5,000 helmets to Ukraine to basically ramping up defense spending to the same level as the Cold War era. So a lot of this I think is you know a little bit of the psychosis and the veil being lifted if you will. But I think the bigger story, beyond geopolitics and the guy in orange at the White House fundamentally comes down to the pace of innovation: is accelerating again in a way that we haven’t seen in a while. And that means historically industries that where you like the 100-year soda, even that is changing because pharmaceuticals are tackling obesity and consumption rates.
That’s the physical world. The digital world is moving faster too. So, sorry for the long ramble, but I think it’s the velocity and the amplitude I think is far more important than any of the call of the headlines of the day today.
John: So, I’m also somebody who maybe not necessarily would be liked down in the states, but I do use ESG and talk about ESG quite a bit. Do you do any overlay of environmental, social or governance factors in your investment process?
Danesh: Yeah, we do and we do it and I think I’ll be a little bit more specific in my remarks, we’re not exclusionary. So we don’t take the approach because part of once again our journey is: our core philosophy is delivering you the best returns we can and then we have to leave and we leave ourselves the flexibility. So we don’t have exclusions except for cluster munitions which is really a very narrow exclusion to be perfectly frank with you. What we do do is we basically haircut on a on a sliding scale as it relates to companies that have poor ESG scores with the environmental and the governance being the most important two facets of that because the social can have a bit more call it ambiguity to it and we want to be as empirical where we can. So we lean a little bit heavier on the E, a little bit heavier on the G, but it is about a sliding discount. So to put it into practical terms for you, it’s a very simple math, if it’s a 10% total return that we expect over the next three years, but this company that we believe has a basically a three-year margin of safety of 30%. We actually haircut that IRR based on what their ESG scores are.
And that way it is empirical, consistent and penalizes companies that have a poor track record and a poor history with it because and the thought process behind it, is basically what it comes down to is if you’re um if you’re doing adverse things for the environment and you have adverse governance, it’s going to manifest itself in other ways and other capacities. And that’s really where we focus.
So that’s how I would say we build it into our process where it’s a 10% IRRa that goes down to a 7% IRR and a 6% IRR if you’re truly in the worst of the worst. And that is a pretty material discount. And what that means is your process naturally tilts the portfolio towards higher rated companies on an ESG basis. And that and what that hopefully means for us from a portfolio basis is that we have fewer adverse shocks as it relates to a lawsuit, some toxicology issues, things like that, or poor governance where management does things that are sub-optimal.
John: That’s a lot of interesting stuff. So, I’m gonna actually throw out one last idea here. What differentiates you from your peers?
Danesh: Time horizon. I think a lot of what we’re doing is to really build for the long haul, build the trust for the long haul while also having the, call it the, I think that the term is neuroplasticity: to have the flexibility to keep our minds open to change. So I think what our team brings to the conversation is that I’m actually one of the older members of the team. So I’m 36 years old. Actually that’s not true. My colleague Oliver is 36 as well but two months older than me. So the average age of the team is just over 30 years old. And I think the important point with that is we have an experience such that we’ve seen different cycles, different environments, different factor rallies.
So I’ve seen different mini crises before including the GFC. So I have called it the calluses and the scar tissue that comes with those learnings while also having the intellectual flexibility because I’m still young enough to participate and have, and be influenced by the younger generations where we can see where those trends are going to.
So what is going on in the world today is basically a bridging out where a lot of portfolio managers are in their 50s and they could tell you stories from the 80s. I’m a portfolio manager of the 2010s that has the memory and the lessons from the 2010s, but also the flexibility to understand and know how quickly the world is changing and have the ability to change our mind. And that’s how the team we like the team age cohort as it is. And it gives us that neuroplasticity to react to new and that faster velocity of change without being stuck in our ways while still also having the humility and the memory to know that when things go wrong. This is the playbook for what we do.
John: So, one of the things that I’ve always heard in the past is: history always repeats itself and that markets have a tendency to repeat themselves as well. How would that lay on top of what you just said?
Danesh: I think we are seeing some, depending on where, how, where you shake out, is something between the early stages of the ’90s with the internet. Or the late stages of the ’90s with the internet. And that’s the big that’s the big question mark because if you’re in the early stages of the internet there’s a lot of incremental change that happened to the world and if you think that we’re in later stages then the valuation started to get a little bit frothy and that started to wind itself down. So, I think that is really what’s going on here today is: I don’t – and you know what’s interesting, because it’s actually – we’re talking about Alex just a bit earlier before we started to record.
Alex actually asked me the question last year, about a year and a half ago now about just where we are in the AI conversation and I would have told you that we’re a bit more later innings. I actually don’t know if I think that’s the case anymore. I think we might be a little bit earlier in this conversation and I think that there’s a lot of different use cases that are going to start manifesting itself that we are going to see as the costs come down – and this is not just to say go buy a huge AI basket by any mech because there’s a lot of nuance that gets into it what’s training what’s inference Jeban’s paradox all there’s a lot of you know a whole rabbit hole that would take another hour for the discussion but what I would tell you is I think we are moving into period where a lot of industries are going to see a lot of disruption and it’s going to start with software. It’s going to start with the fastest moving areas.
But something that we haven’t seen in a very long time is the very people intensive repetitive task industries such as and I hope this doesn’t come across the wrong way. The healthcare industry and the education industry are going to see a uniquely high level of disruption because having a personal tutor for $20 a month is a such a collapse of the cost curve that there’s no question an application layer is going to be built on top of that and education is going to be ubiquitous, coding is going to be ubiquitous and the health care sector is going to see faster evolution from the call it the roughly creaky path that we’ve had for a a very long time.
And I think that’s just some of the obvious use cases. But right now, where it’s basically Microsoft is firing its own coders because AI is generating the code just as good and making the remaining 90% – 80% of the coders more efficient. But I think that’s going to change and I think that means that there’s more legs here. But I think that’s going to come in big waves and big changes. So this is not a you know buy an Nvidia and park it for 20 years conversation. This is really to tell you that the pace of innovation and the pace of productivity growth after going, basically in a very call it a 1% compound average growth rate for the last 25 years after the internet boom, has, I think we’re going to start seeing a reacceleration.
And maybe I’ll leave you with this one quote that I think really sums it up with what Peter Teal, his venture capital fund, has this quote which is at, I think it’s at the front of their door. “We were promised the Jetsons and all we got was 155 characters.” And I think that really sums up, you know, if you ask someone in the 1970s what the world in 2025 would look like today, they wouldn’t tell you that they’d be driving on the same roads that were built in the 1970s. They would tell you that they’d be flying in cars by now, not Twitter or Facebook and social media. So the internet boom was very concentrated. I don’t know if the AI boom is going to be as concentrated and I think that’s generally speaking a good thing and a productivity increase for all of society, but that doesn’t mean there’s a uniform distribution of those returns.
John: Exactly. A new revolution
Danesh: With its booms and busts to boot, right?
John: Yes, exactly. Just like any other uh thing that goes on in history. Events are events. Danesh, I want to thank you for taking the time to meet with me today. I continue to enjoy getting my reports and how we do and how we do for our clients. Have yourself a great day.
Danesh: Thank you, John. Take care.
Investment Disclaimer:
The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This newsletter, video and/or podcast was written, designed and produced by John A. Leroux, an Investment Funds Advisor with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc.
The information contained in this article comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities. Mutual Funds are offered through Investia Financial Services Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.
