The Gordon Asset Management Podcast welcomes Samantha Lau to the show. Samantha is , Co-Chief Investment Officer for Small and SMID Cap Growth Equities at Alliance Bernstein. On the podcast Todd Zempel and Samantha discuss the process she and her team employ which has resulted in substantial outperformance in her investment strategies. For more information about Samantha or Alliance Bernstein, please visit https://www.alliancebernstein.com/
The Gordon Asset Management Podcast welcomes Samantha Lau to the show. Samantha is , Co-Chief Investment Officer for Small and SMID Cap Growth Equities at Alliance Bernstein. On the podcast Todd Zempel and Samantha discuss the process she and her team employ which has resulted in substantial outperformance in her investment strategies. For more information about Samantha or Alliance Bernstein, please visit https://www.alliancebernstein.com/
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Todd Zempel 0:20
Ladies and gentlemen, welcome to another edition of the Gordon Asset Management podcast. This is your host, Todd Zempel. And today we have a very special edition of the podcast we have a very, very special guest Samantha Lau Samantha is co chief CIO for small and mid cap growth equities for Alliance Bernstein. Smith is an absolute Rockstar in Wall Street. She has a track record like none other. We're very honored to have you today. Samantha, welcome to the show.
Samantha Lau 0:55
Thank you for having me today.
Todd Zempel 0:57
It's an absolute pleasure. Thanks for joining us. Samantha, just for our listeners. Can you provide a little background on yourself and describe your role within alliancebernstein?
Samantha Lau 1:07
Oh, absolutely. So I started at Goldman Sachs right after college as a research associate on the sell side. So I knew I wanted to be on the investment side of things. So I moved to the buy side about three years later, Atlanta at a boutique growth shop right here in Manhattan. And that's when I started following the technology sector in 1997. So I could say I've been through a few market cycles. And since joining a B in 1999, I have continued to focus on small cap growth. So in addition to being the CO CIO of the overall strategy, I'm responsible for sourcing all technology ideas, I live and breathe small cap every day. There's never a dull moment. And currently, we run two portfolios, small cap growth, and discovery grows using an identical process. It's just a different benchmark. So AB discovery growth skews a little bit larger in market cap because the benchmark is the Russell 2500 growth. Whereas the small cap Growth Fund uses the Russell 2000 growth as its benchmark. And the two together we have built it into a 15 billion yuan business. And in 2020, our strategy was awarded by Lipper as the best small cap Growth Fund based on a 10 year performance. We're quite proud of that.
Todd Zempel 2:28
Very nice, very nice and yeah, absolutely. And that's a reason why you why we wanted you on the show is you are an absolute Rockstar, you know, looking at your numbers, specifically within the small cap growth strategy. Last year, that fund was up over 50% beat The beat the index by over 19%, you look at trailing performance in that fund, just absolutely smoke the index by all measures. So that's why we wanted to have you on the show. We have many clients that use your fund, and have been very happy about the performance. So to take a step back, can you walk us through your process in selecting the actual securities that go into those funds?
Samantha Lau 3:20
Yes, yes. investable universe is clearly very large and very dynamic and volatile. So to be able to deliver that kind of consistent result, you must have a very disciplined and repeatable process. And ours has been battle tested for over 20 years because that's how long we've been and alliancebernstein. It is unique because we incorporate a combination of bottom up fundamental research with a quantitative overlay. So on the front end, we have a variety of screens, we first want to narrow down a universe to a bunch of companies that meet our growth, liquidity and quality criteria. And then the team which currently consists of five sector specialists, we're then going to go to work and dive into the fundamentals.
So with growth investors, we tend to be drawn to large market opportunities. We always prefer to stick with the winners who are gaining share in these growing markets, there should also be a defensible moat, so that when they become bigger, they should be able to expand margins command pricing power as they reach economies of scale. So after we identify these fundamentally sound candidates, we then look at our current model. So our proprietary quant model is a critical part of this process. Strong fundamental momentum, which is what we're looking for, tends to manifest itself into a bunch of quantifiable attributes that we can capture and analyze. So these attributes include positive earnings surprise of earnings revision of revenue revision and strong price momentum because Companies that grew up faster than anyone expects tend to be pretty good stocks. So after we've done both the fundamental work, and the quantitative work, the stocks that score in the top 30%, in terms of their combined rankings are then eligible for purchase for the portfolio, in combination is a two prong process ensures that not only do we have fundamental conviction on these companies, but it's also been confirmed by that quantitative signal. So the benefit of having a quant model is that it has no emotions, it helps remove some of the investor biases, from time to time can get in the way.
Todd Zempel 5:43
Yeah, that makes a lot of sense. You know, and when I picture myself in your shoes, right, so you're sitting there in Manhattan, you have all this analysis in front of you. Is it difficult to find opportunities that meets all your criteria? Or are there a wealth of opportunities, and it's just a matter of picking the best ones?
Samantha Lau 6:11
In small cap, there's no shortage of opportunities. Everything is relative. In a world that we live in, there's so much change and change is accelerating. And as a small cap growth manager, we always have to be on our toes. Right? I sometimes use surfing as the analogy. Not that I know how. But it's like a wave. You gotta go with it. You see a big one jump onto the bigger one, when it crashes, get off the way.
Todd Zempel 6:39
That's, interesting you make that comment? I know that in 2019, Barron's did an article right up on you. And in that article, you said that the number one rule is to never sell half a position. And if you think is something is wrong, exit and revisit. You know, when I look for opportunities, these individual stocks that I buy Personally, I have a very difficult time selling you know, I do all this work, I find the right stock, I buy it, and then I fall in love with it. So explain your methodology and your thought on on exiting and and in and fully committing to these positions.
Samantha Lau 7:22
Right, right. Smaller cap companies are still rather immature. They may stumble because of internal execution, or maybe new competition surfaces. What derails a growth stock is usually a negative change in the underlying thesis is not because you were wrong, something changed. Now, they're usually the yellow flags that precede a complete meltdown. Now, not all yellow flags are fluorescent in color, they go blink, blink blink for you to get out. To win a little change in the armor. You often say to yourself, oh, maybe we'll make the position a little smaller, so it wouldn't hurt as much. Let's see how it goes. But if you think about it, if you're nervous enough to want to sell have just in case, you might as well just be honest with yourself and reassess the entire situation.
Unknown Speaker 8:13
A very simple smell test is, if you didn't own it yesterday, would you buy it today? And so companies that experienced short term setbacks, like competition and execution issues, like I mentioned, they very rarely recover within three months. That is why there's zero correlation in earnings revision. If you see one estimate cut, there's usually another one in three months, and usually another one in a subsequent quarter. That's why it's called the cockroach theory, right? There's never just one, we are much better off eliminating that opportunity cost, and then finding something else that's timely. So in terms of the emotions, right, so that's why there's the current model, the current model would have picked up that negative revision and say, Wait, hold on a second, the consummate, the quantitative signal is no longer confirming your fundamental thesis, what is the disconnect? And that's why it brings no emotion to the table, and we must as managers reassess the situation. It is called confirmation bias. So when you think about biases, it is because we so desperately want to be right. We spent all their time coming up with the original thesis, we may not be able to incorporate new information that is actually material to the integrity of that thesis. You want to dismiss negative information. People only want to hear what they want to hear. So being honest with yourself is very difficult thing to do sometimes, and which is why you need a team of professionals sit around the table and debate as such. If there is a thesis violation, we exit and revisit. Hence, rule number one will always be rule number one
Todd Zempel 10:02
Yeah, that's great. I appreciate your insight there. You know, one of the things that we're seeing more and more of is the popularity of these thematic type investments thematic ETFs innovation easier. That's that's sort of the hot thing right now. You know, as a as a manager that fits within an asset class, what are your thoughts on that type of thematic investing? And is there a place for that within your work more asset class driven portfolio?
Samantha Lau 10:40
Yes, innovation has been a theme for small and mid cap growth for decades. Innovation is great. It drives productivity gains, it helps us do things faster and better than before, it helps us stay stronger GDP grows for longer. So high r&d spend is always a long term positive for the economy. So when you think about small cap growth, a lot of times we may be creating new markets. But sometimes we're just disrupting existing markets in in terms of how do you do something in a better way, faster and cheaper. So innovation is here to stay. If you want to have an innovation fund in your portfolio, that's great. But remember, that is a satellite portfolio, it comes with a different risk profile, because they all tend to be very high growth stocks, that may have the valuation a little bit detached from the fundamentals. In the short term. We're living in a very low interest rate environment. So people get very excited about longer term opportunities, because you are able to lengthen your horizon, given very low discount rates. That scenario may change from time to time, if we have a taper tantrum, because the economy is strong, and the Fed eventually normalizes interest rates, you may see multiple contraction. So I think there should be a risk budget for something like these thematic funds, but you have to be aware of the risk that comes with it.
Todd Zempel 12:12
Right, and many people are saying the valuations are indeed stretched right now. But we're absolutely in this unusually low interest rate type environment where real rates potentially negative depending on the day you look at it. What are your thoughts on valuations in general.
Samantha Lau 12:31
So as a growth investor, valuation is always an art, not a science. Stocks don't blow up because they expensive, stocks, blah, because something fundamentally has changed. Now, a lowly value stock is not necessarily cheap, because it can be a value trap. But on the other side of the coin, a highly value stock is not necessarily expensive, because the future potential has not been fully priced in, which is why valuation has expanded in this low rate environment. For the most part, if these companies execute, and they have a large market opportunity, they will not look as expensive in hindsight. Now, having said all that, I don't want you to think that it is not important, because like I said, fundamentals and valuation can become detached from time to time, when people become overly excited, and over discount the opportunity. Now that multiples have expanded so much since mid of last year, in anticipation of the reopening. We want to be more careful, the tie has lifted all boats. So as a manager, I want to make sure that given the already high earnings and revenue multiples 2021 will be a earnings driven year, not another multiple driven year. That means companies will have to deliver strongly expected results in order to to differentiate themselves. The ones that offer the most upside in revenue and earnings revisions will be rewarded. And that's our job to find them.
Todd Zempel 14:11
That's interesting. You know, I when we start talking valuation, I instantly go back to my days in college. And I remember back in 2000 2000 2001, some sometime around then I remember in my finance classes, the finance Professor always used Amazon as the poster child for a stock with just a uncanny valuation. And in reality, if I just would have thrown a couple $100 in it back then I'd probably be worth a lot more money now. So your points on value valuation absolutely makes sense when talking about growth oriented companies. Now, Samantha question for you. So this year we've seen just an unprecedent Press an unprecedented amount of fiscal and monetary response due to the COVID crisis. Do these macro type moves impact positioning within the fund?
Samantha Lau 15:15
Our strategies are always primarily bottom up driven. Macro inputs are part of the mosaic. But ultimately each individual position is there because we believe the company can fundamentally outperform the peer group and the market. Now, that said, interest rates, discount rates, inflation, consumer savings rates, risk appetite, they're all relevant data points, we need to be aware of them. The stimulus is actually still working its way through the economy. And we've only begun to feel the velocity of that money supply. Right, you look at the extra savings that you've had in the past nine months, you're not eating as much, you haven't been on that many vacations, right? That creates tremendous pent up demand down the road. We've already seen some of that in housing, home improvement, and at some point Travel and Leisure will recover. So that's a little bit of a top down view, to inform where we spend our time in identifying the next cohort of ideas. Another very important input is GDP. So currently, the bulge bracket firms have forecasted 2021 to be a 5% type year plus or minus. If we get another round of stimulus, even if it's not 1.9 trillion, even if it's just half of that, we could see a scenario where GDP growth six to 7% in the United States in 2021. That is something we have not seen in over 15 years. If that's the case, then we'll have to tweak the portfolio a bit further toward companies that will disproportionately benefit from a strong macro tailwind, and possibly away from what we call the steady Eddy ideas like consumer staples and reads.
Todd Zempel 17:03
Interesting now from a macro perspective, within Alliance Bernstein, I'd imagine you guys have a whole separate team of folks that just focus on the macro, is that correct?
Samantha Lau 17:18
Our fixed income division has a very strong economics team.
Todd Zempel 17:24
And I'm always curious about how you know, within these larger organizations, how is that information shared amongst these large teams, many, many people? And many, many people with very strong opinions, I'm sure as well.
Samantha Lau 17:40
Yes, that is true. But our economists, he writes a lot of blogs, you actually welcome to come to our alliancebernstein.com website. And you see him opine on the economy quite often is very informative. I mean, there's a very collaborative firm in alliancebernstein has that perfect combination of being not too small, so we have to scale and breadth of coverage. But we're not so large that we don't know one another and cannot have a conversation. It's a bit more challenging in the corporate world. But, you know, we have functioned perfectly seamlessly and zoom. So it's been very collaborative.
Todd Zempel 18:19
That's good to hear. So I'm curious. So are you still in Manhattan? Or are you doing zoom meetings from from the beach somewhere?
Samantha Lau 18:29
Now we've been in Manhattan, because my kids actually have some in person schools. My son's actually back five days a week I'm very happy about.
Todd Zempel 18:39
I can imagine.
Samantha Lau 18:41
So we're here. And I would love to see New York come back to at least 80% of what it used to be by the end of 2021. We need people to come back.
Todd Zempel 18:50
Yeah. Well, I always have fun when I go there. And I'm hoping that it reopens soon. So we can all all enjoy a little bit of fun. Now moving on just general thoughts on the US economy. What are the potential challenges and potential opportunities that you see on the horizon for the economy as a whole at this point.
Samantha Lau 19:17
Like I said, if the economy accelerates from here, and get to five to 6% GDP growth, it really is a game changer, because it hasn't happened in so long. So clearly, I'm quite constructive on the outlook. And it's not just because of the stimulus. The pandemic has sparked a change in how companies think about the supply chain, how much buffer inventory they may need, how to keep the customers engaged and maintain a strong brand when no one is leaving the house. So everybody is going to continue to invest in the infrastructure, especially in information technology, so that they can be more adaptable. digital transformation has actually accelerated for companies of all sizes. So in software, cybersecurity networking, there are going to continue to benefit. On the hardware side, we're going to begin to see some onshoring of manufacturing. You know, we've shifted a ton of manufacturing to overseas locations in the past 20 years. If that tide turns, we're going to be providing a lot more higher paying jobs for the middle class. For example, Taiwan semiconductor is building one of the most state of the art semiconductor fab in Arizona, because the US customers are demanding it. So it's all very exciting.
Todd Zempel 20:37
Yeah, we definitely live in a very exciting time. It your points are very well received. I just think about our small firm and the changes we've made in the past year. You know, doing most meetings via zoom and online and bolstering cybersecurity efforts and the whole nine yards. And I don't see us going backwards at any point soon.
Samantha Lau 21:02
In terms of challenges, we have plenty. You always have to be balanced in how you think about the world.
Todd Zempel 21:12
Otherwise you go crazy, right?
Unknown Speaker 21:13
Yes. But that's why there are corrections from time to time, right. So our national debt will likely be larger than our annual GDP for the first time in history. So that's a little concerning. So at some point, we need to start lowering our twin deficit, unemployment may stay elevated until we fully resume normal economic activity. So the role of the vaccine is very important. We do currently have a very vibrant stock market maybe a little bit too vibrant. And that's good for consumer sentiment, but it will correct at some point because it always does. The most important thing for any investor is to stay invested and maintain a portfolio that suits their needs. So small cap growth is always a must have allocation.
Unknown Speaker 22:04
Absolutely. A diversified portfolio. That's what we recommend. And that's what's been proven to work best over time.
Samantha Lau 22:12
Don't try and time it.
Unknown Speaker 22:14
Yeah. It's easy to what we refer to as a technical term, blow your leg off by accident when you're trying to time the market.
Unknown Speaker 22:23
Well, because it's always the best time to get in when is seems the scariest, when everybody says it's a no brainer is time to take some profits.
Todd Zempel 22:34
And it feels like we're at that stage.
Samantha Lau 22:37
Okay, I don't know, I try not to make market predictions because timing is impossible, which is why you want to rebalance. If growth have worked too well, for you in your portfolio in 2020, it's okay to rebalance a little bit back to value. If the economy is indeed strong and unexpected, there will be a period in which value could perform quite well, you just have to have the right manager because active management is extremely important. In this environment. There are clear winners and losers do not buy an ETF.
Todd Zempel 23:12
I couldn't agree more in this environment. Active active management makes a lot of sense to us. And to me personally. And you know, looking at, again, your track record in small cap growth, specifically, handily beating the index of pretty much any period you look at it's it's pretty amazing what you've done. And again, it's, it's great that you joined us today, the clients and friends of our firm that use your funds, I think will really enjoy the information that you shared with us today. So on that note, just a parting note, if clients friends, the firm of ours are thinking about small cap growth or thinking about your fun, what are some parting thoughts you'd like to leave with those folks?
Samantha Lau 24:05
I would say if you have a small cap growth allocation, you should also consider a small cap value on location and rebalance from time to time. And once you decide how much in small cap total is appropriate for your needs, stick with it. Don't touch it. I said
Unknown Speaker 24:25
great advice. Well Samantha. Again, thank you so much for joining us today. And folks, if you'd like more information about alliancebernstein small cap growth strategy, please don't hesitate to visit the website like alliancebernstein.com or give us a call and we're happy to point you in the right direction. So folks, that'll do it for today. Thank you and thanks Samantha.
Samantha Lau 24:50
Thank you, Todd. It's nice to catch up.
Unknown Speaker 24:54
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