Graham Wong: Yeah, I'll start with our belief. We believe in delivering consistent returns through deep research and critical analysis while also managing risk. There's been a few trends over the past 18 months that has really favored active.

Dispersion of stocks are up, single stock volatility is up and market is broadening out from the Mag 7. And there are reasons behind this, right? So big secular changes are happening. AI, the impact of AI is broadening out into the main economy. We think it's early in its adoption. Having lived through the dot-com bust, I tend to think about and compare it to the invention of the internet. And we actually think that AI will be bigger, at least from a profit perspective to the companies.

Other big secular changes are domestic policy changes like tariffs, onshoring, tax reform. These changes really have major impact on businesses processes to the extent that it might even change business models completely.

And lastly, geopolitical events, there are two ongoing wars that's changing, making impacts on the commodity markets and really changing how the supply chain flow is flowing.

We think that all these big headwinds and tailwinds really creates an environment where active will shine. So active managers like us will help investors not only pick the winners, but also avoid losers in the market.

Relative to our active peers, we're true bottom-up stock pickers. We don't make top-down macro or sector bets. We feel like there's enough opportunity to win simply by picking stocks. And because of this, we're relatively sector neutral. So, our risk profile tends to be lower than our peers.

Next, we define value differently than our peers. Our peers can be devalued, they can be quality at a reasonable price. We're true value investors. We strive to avoid value traps by understanding and forecasting ROIC of companies (return on invested capital of companies) while staying true to being a value investor.

So, how do we do this? We start with industry research. We spend a lot of time studying industry supply and demand, identifying positive and negative secular trends. Next, we spend a ton of time scrubbing the companies really hard, especially around the company's competitive position within an industry.

So, the goal of all this research is to help us find companies where we think the future return on invested capital is undervalued. So, you're going to hear me repeat ROIC a lot because that is our KPI on assessing companies.

The last thing I would point out is we really embrace cyclical investing. We feel like cyclical investing provides opportunities at any point of the cycle. We're constantly looking for industries and companies that are near a trough, are attractive, and are near an inflection on operating performance. So I'll give you a few examples here.

United Airlines, we bought in July ‘24 when the market was at peak fear of capacity growth, and they didn't believe the industry would have pricing discipline and capital discipline. We disagreed. We felt that the industry had consolidated enough and that airlines would be able to price. I often joke that if the airlines could price for oxygen, they would price for oxygen.

And then in banks, in March of 2023, there was the Silicon Valley Bank crisis where people were worried about liquidity at banks. I remember spending 70 hours studying banks and financials that one week, studying liquidity of banks and getting comfort to add to them.

And then going further back to COVID, coming out of COVID, we bought hotels and the food distributor, Cisco. I remember doing liquidity analysis where we were trying to figure out how long could the company survive with restaurants being completely closed. And the answer was 3 1/2 years based on our analysis. And so we took the side that restaurants would not be closed that long and we bought the stock.

And in all those examples, they turn out to be great investment opportunities for our clients.

We managed to a beta of 1. So we stay fully invested and we're not trying to time the market by being more or less risky. That leaves two major risks that we actively have to manage. One is factor risks, so factors such as size, momentum, leverage. There we have proprietary tools to identify and measure these risks. And think of it as checking to know what our blind spots are and making sure we don't have any unintended exposures.

That really leaves company-specific risk as the major risk, and that's obvious given our style of being stock pickers. So two important disciplines that we have. One is our reward to risk analysis that we do for every company that we look at. We start with the downside where we think about, can we quantify the downside? Is there enough information or is this a black box to we can say, hey, if we're wrong, this is how much we're going to lose. So we start with the downside.

And then on the upside, we look for something that gives us at least a three times reward risk. And we'll have a stock sample later on this. But our belief is if we built the portfolio up with a whole portfolio of stocks with limited downside, that would limit our company's specific risk.

And our second discipline is our sell discipline. We're constantly monitoring valuation and operating performance of our holdings. We sell when valuation is rich or exceeds our price target. And we also sell when operating performance is not tracking. Now this is really important, going back to value traps. We're not afraid of admitting to being wrong and selling when our thesis is not tracking.

In the growth benchmark, tech and industrials make up more than 50% of the index. Value is a lot more diversified across sectors. This means lower risk to the investor, and it also has more exposure to main street sectors like financials, real estate, materials.

Cyclically, as you know, value has done better against growth recently, and we think this will continue. This is driven by the broadening of the market that we talked about. Financials is a big part of the value indices. Lastly, I'll add this point too, growth stocks tend to have high expectations. That's just the nature of growth stocks. And therefore, we're always uncomfortable with them because we feel like there's higher downside risk when growth decelerates or misses expectations.

So, I talked about value versus growth. Now let's talk about market cap. We like mid-caps. We think mid-caps are a good balance between the higher risk small-caps and also has higher potential than large-caps just because mid-caps are less market efficient than the larg-cap box. I also point out that there are actually a lot of industry leaders that are mid-caps. So for example, the largest home builder is DR Horton. The largest airline is Delta Airlines. The largest trucking company is JB Hunt. These are all mid-cap companies. And so we feel like there's a lot of opportunity to own good companies that are mid-caps.

So we like the mid-cap box. We think TMVE is a fund that can help clients gain value exposure and also participate in the broadening beyond the largest growth names.

I think a lot of investors think I want exposure to AI, so I should be in a growth portfolio. The reality has been the opposite. Over the past year, value has been growth across small-, mid-, and large-cap, and by a fairly wide margin, especially in mid-caps.

I think the nuance people are missing is that even though growth owns a lot more tech, I think in growth, tech is 30% and in value is about 10% roughly. The growth benchmark is far more concentrated in software and services industries that are at risk of being disrupted by AI. And this isn't true simply in the tech sector. In financials, for example, the growth index also has a lot more asset-like industries like fintech, whereas value has banks and insurance. And as you know, those are more capital intensive businesses. They're also more heavily regulated, which really lowers the risk to AI being a disruption or AI disrupting that business.

Lastly, in industrials, growth has staffing and consulting firms, asset light industries, whereas value has more asset in heavy industries like transportation and machinery companies.

So, the stock example that I want to talk about is Flowserve. It's a company that we've looked at and bought in July of 2023. It's a pumps and valves company. And the company at the time was down due to negative sentiment around energy transition, green energy. And we disagreed. We thought that energy demand would have to stay high for longer to help build out this infrastructure and that it would take many years.

So, cyclically, we saw an opportunity because we observed that many of their end markets had underspent depreciation for many years. So, their customers, Flowserve’s customers, are due for an investment cycle. And their customers are, for example, refiners, chemical plants, and other energy infrastructure companies.

So, we looked into, after that, we looked into why the company was struggling with its margins and returns. So obviously being in the weaker part of the cycle, the end markets were weak. But beyond that, we spoke with customers to do our channel checks. What we found out was while the company really has strong products and a great brand, customers were frustrated with the support they were getting and they were, for example, really frustrated with the time it takes to get replacement parts. So, what was happening is while Flowserve has great products and they were making the equipment sell, when the aftermarket parts needs to be serviced or replaced, they were losing the higher margin businesses to their competitors.

So, then our next step was, hey, let's check with the company to see what they're doing about this. And so we arranged a call with management and we learned that they were clearly aware of this and they had a restructuring plan in place to deal with this. And that's great to hear, right?

So, then we move on to our upside downside analysis that we talked about earlier. On the downside for Flowserve, we analyze it on a basis of, hey, if they had to liquidate their assets, what would it be worth? And the downside was about 18%. And then on the upside, we were getting five times reward risk if we're right that ROIC (return on invested capital) for them could get from 7%, a cyclical low, to 15%. And we believed it and we bought the stock.

Once we bought it, we tracked the thesis. And the KPI here is the aftermarket attachment rate, going back to what we discussed earlier. And what we saw was they started to win back that aftermarket business, which led to margins going higher from there. So, this is a good example of how we use our proprietary research. We do our upside downside analysis to find attractive good companies to own.

The market is stretch in many areas in terms of valuation. But we're still finding opportunities in many areas away from where the momentum has been. So, some examples, we own a couple of high-end consumer names, LVMH and L'Oreal. We own them because we find that sentiment is very negative, mostly because of the Middle East conflict and high energy prices.

We actually think the K-shaped economy will continue and that the high-end consumer will stay healthier. We also constantly look at neglected corners of the market. And right now we're looking at which areas are being neglected by being a potential beneficiary of adopting AI.

So, an example would be property and casualty insurance. We think that using AI could help companies underwrite faster and also perform claims processing faster and better. So, AIG is the name that we identified. They are pioneers in terms of spending on AI and technology very early in terms of the spending. And we think that AI would really help their business a ton. And I'll throw you one more.

We like Best Buy. It's a recent buy. I'll just cover two thesis points here. One, we believe we're in front of a replacement cycle for consumer electronics, given it's been six years since the COVID-driven purchases for work from home. Secondly, Best Buy tends to do well when we have innovation. So, not just with the new AI-enabled products. Actually, for the first time since 2013, when we had the OLED technology, there's actually new innovation in TVs with the RGB technology. You should go check it out in the store. I did. RGB technology really improves the resolution and clarity in very bright rooms. So, we think there's going to be a strong TV replacement cycle, which will help Best Buy.