In this episode of the Praemium Investment Leaders podcast, host Damian Cilmi talks with Peter Bates, Portfolio Manager of the Global Select Equity Strategy at T. Rowe Price. They delve into the importance of humility in investing and how Peter's early career experiences shaped his investment philosophy. They discuss the role of conviction and acknowledging mistakes, balancing stock picking with macro bets, the case for mid-caps, and the significance of compant management in successful investments. Join them as they explore the lessons Peter has learned from his journey in the world of investing and how humility plays a crucial role in navigating the unpredictable market.
Praemium Limited is the issuer of the Investment Leaders and Advice Leaders podcasts. These podcasts are for information purposes only and aren't tailored to individual financial situations and do not contain financial advice. Views expressed by presenters may not align with Praemium's and nothing in this podcast should be seen as an endorsement or recommendation of the product or strategy. For more information about Praemium, including our disclosure documents, please visit our website.
We recommend that individuals seek professional financial advice before taking action.
In this episode of the Praemium Investment Leaders podcast, host Damian Cilmi talks with Peter Bates, Portfolio Manager of the Global Select Equity Strategy at T. Rowe Price. They delve into the importance of humility in investing and how Peter's early career experiences shaped his investment philosophy. They discuss the role of conviction and acknowledging mistakes, balancing stock picking with macro bets, the case for mid-caps, and the significance of compant management in successful investments. Join them as they explore the lessons Peter has learned from his journey in the world of investing and how humility plays a crucial role in navigating the unpredictable market.
Praemium Limited is the issuer of the Investment Leaders and Advice Leaders podcasts. These podcasts are for information purposes only and aren't tailored to individual financial situations and do not contain financial advice. Views expressed by presenters may not align with Praemium's and nothing in this podcast should be seen as an endorsement or recommendation of the product or strategy. For more information about Praemium, including our disclosure documents, please visit our website.
We recommend that individuals seek professional financial advice before taking action.
Welcome listeners to the Premium Investment Series podcast. I'm your host, damian Chilmi, head of Investment Managers and Governors at Premium, one of Australia's fastest growing investment platforms. Today we have the great pleasure to be joined by Peter Bates from T-Roe Price, who joins us from the Baltimore Head Office. Today we're going to talk about how experience shapes us and how it can shape an investment philosophy and an approach. We'll tie this into an update on global equities and talk about the American economy, about Peter. Peter is the portfolio manager of the Global Equity Select Strategy in the International Equity Division. He's been with T-Roe Price for over 17 years and the Vice President of T-Roe Price Group and Executive Vice President of T-Roe Price International.
Speaker 2:Finally, a little about T-Roe Price. The Group was founded in Baltimore and Maryland in 1937 by Thomas Rowe Price Jr with a firm pioneering growth style equity investing. The Group is listed on the New York Stock Exchange, has investment staff in over 16 countries and has worldwide funds under management of Australian $1.8 trillion. Peter, welcome to the show and welcome to Australia. Thank you, it's great to be here. Good Melbourne, turn the weather on for you as well. I imagine a lot warmer than Baltimore this time of year.
Speaker 1:It is. I think I need to make this an annual visit.
Speaker 2:Let's do it and come back to the show again. We would love to have you. We were talking at the start about how history shapes us. I love this pointer because I think it's really true for all of us, let alone from an investing perspective. Let's talk about you, your history and how it shaped you. What were some of the early lessons you learned in your career that informed your investment philosophy and specifically, how that fit in with T-Roe Price?
Speaker 1:Sure, it's been a long time. I've got gray hair now. When I started at T-Roe, frankly, I think I probably started with false arrogance. You think you're ready, you just graduate from business school. You think you're smart, you're going to work hard, you're going to add value. I started in 04 and I started in a bull market. That's a good time to start. I think we all know you don't really know what you know until you have a tough market.
Speaker 1:I had a good start to my career picked up a bunch of industrial companies, had some good ratings was making impact, as people can recall, back in 2007, really not unlike today we had an inverted yield curve. There was a lot of cracks in the economy around some prime mortgage and consumer borrowing and the housing cycle. I think we've never really had a recession in the US without having a housing recession. Just with the work I was doing and the stuff I was seeing, I'm like, oh man, this is terrible, we're going to have a recession. I downgraded a bunch of stocks and I really positioned the assets that I controlled at the time in very conservative holdings. That was early 2007. If you just go back and say, well, what happened throughout 2007,? We basically didn't have a recession. Some of the macro data actually started to improve and get better through 2007.
Speaker 1:My subsector of industrials went up about 25%. Because I was so conservatively positioned with my investments I couldn't keep up. I think my stocks were up like 15 or 20%, underperforming by 500 or 1,000 basis points. At the time I'd been at the firm two, three years into my third year and I didn't have a good review. It's like we can only make money if we perform for our clients. That means we have to beat the market. As an employee within that system, I can only make more money and grow if I'm beating the market within the funds that I control. My review was disappointing and I think it was very humbling to be so wrong. Frankly, when you're wrong, you can do two things. You can ignore it and say oh, I'm not wrong, it just hasn't happened yet. We just need more time.
Speaker 1:The market's wrong as well, you can be stubborn or you can soul search and be like, ah, what could I have done better? The thing that I really learned from it and if you carry the lesson, the markets really didn't crack until summer of 08. I was feeling pressure at the end of 07 and then through early 08. Frankly, it was stressful. I had three kids and I'm like man, I need to make this work.
Speaker 1:As I'm soul searching, through that process, I came to the realization that, man, I've made such a big macro bet that none of my work matters. That was just very humbling because I was working like 60 hours a week, almost no reward, let's say yeah, and it's like, why am I working so hard when I've basically just bet on a recession? And that was also just very frustrating and really kind of somewhat scary because if you look, you know we have a recession like once every 10 years and so I don't know, it was just very nerve wracking, let's say, and I really feel like I got bailed out and we did have a recession and a lot of stocks corrected, but that was really back half of 2008.
Speaker 1:Back half of 2008.
Speaker 2:Yeah, so you were like 12 months early, 18 months early. That point I was 18 months early?
Speaker 1:Yeah, but what if I was, let's say, instead of being 18 months early, if I was 24 or 30 months early, my career might not have survived. Yeah, yeah, right. And I think I learned the lesson that I think we have to balance our conviction with the acknowledgement that we might be wrong. And you have to make sure that, with the bets that you're making, you have the risk controlled enough so that you have the time arbitrage to allow your bet to play off. And I could have handled that situation better by still positioning myself conservatively but not being so aggressive towards it, and what that would have done is it would have given me the ability to.
Speaker 1:I mentioned in 2007, a lot of stocks rallied like 30%. Well, I was already all in on our recession, so I didn't have anything to sell after a bunch of stuff went up 30%. So I really took away from that that. My value add in the market and the way I add value to the firm and our firm's clients is I pick stocks and I pick stocks that have good risk return. I don't make macro bets, and I think there are some firms and some people who can't make macro bets, and when you do, you're going to make a lot or lose a lot, but that's just not what I do and that's not my value add and I really just kind of learned from that experience and adjusted my process. And I still make bets, but I don't want to make bets that are so one sided that only one bet drives everything else.
Speaker 2:We'll get onto the process part of it but I just want to touch on a point and as much as you could say, looking at your peers, what's the temptation for a portfolio manager when you're chasing, when you're underperforming, Because you can watch people and because you're in their heads, you know what they're thinking. What are the temptations when you're kind of 5% behind, 10% behind and like you're rolling for a year now was starting to come under threat?
Speaker 1:Yeah, that's a great question and I'll kind of take it back to Q1 of 22. So I've been fortunate to I've been at T-Row into my 18th year, coming up into my 19th year here in about six months, but you get established and you have good numbers and then the pressure around any one six month period or 12 month period goes away because you have, like, good five year numbers or good 10 year numbers. And when I started a new job within T-Row to launch the global select portfolio which I did on December 29th 2020, I effectively restarted my track record and so all the good things that I'd done at T-Row over the prior 16 years had gone away and, frankly, it felt like it kind of made me young again because I'm like man, I feel like I'm back on the treadmill again and, frankly, it's invigorating. But I had a great first year. I'll perform my benchmark by two or 3% and the benchmark was up like 20 something percent. So it was a really strong year and I kept up with what I felt was good risk adjusted investments.
Speaker 1:And then Q1, 22 hits and we have the massive spike in rates, which was not entirely a surprise. But what was a surprise is the war and when the war hit commodities and commodity inflation I think took is almost like throwing logs on a fire Because there was already some brewing inflation. And there is this debate is it temporary or is it structural in long term? And I'd say I was in the temporary camp and with the war and just the dysfunction around energy supplies and whatnot that the war caused, that's like dumping a bunch of pine needles on a fire of inflation. And even though I had outperformed my benchmark by maybe 300 basis points my first year within the first quarter, at one point I was down 300 or 400 basis points and I'm like, oh man, and I was kind of facing that decision of oof, I'm wrong sided, what do I do? And there's soul searching, right, and you reevaluate your thesis. I think you have to admit where you're wrong In that situation. I admitted I was wrong around the kind of temporary inflation view and I did make some changes in the portfolio to give myself more commodity material exposure.
Speaker 1:But some stocks. When I kind of re-underwrote the thesis I looked at it and I said you know what? The stock might not be working now because of the temporary things that are happening, but I still believe in this company's ability to grow and compound value, and I don't feel like I need to do anything with this one. I can sit tight or I can sell something else to buy more, right. And so you know, it's not like I changed 100% of the portfolio, but I probably changed 20% of the portfolio, which I think is a lot in any given period.
Speaker 1:And you know, if you, I'd say Jelene, my turnover is, let's say, 30 to 50%, with half being caused by new names, half being caused by kind of just waiting positions as risk returns change as stocks move. But in 2022, my turnover was 65% and I definitely had to admit some mistakes and make some changes. So I think there's a balance right. So part of it is you can't be stubborn. I think you have to admit mistakes, but if you never show conviction and you don't know when to kind of hold your ground and defend positions, you're always chasing your tail, and so I wish I could show you a math equation of this is how you handle it, but it just doesn't work that way. But that's where I do believe I have a process, I do believe I know how to analyze risk return and you know. So I kind of rely on that process.
Speaker 2:That could be a topic for another discussion about the psyche of the investor as well what in the head that makes them so?
Speaker 1:I'm going to. So I'm going to. I'm actually here with my wife. We're fortunate that our kids are out of the house in college and whatnot. And it's a long trip and I'm going from Australia to Japan, and so it's two weeks and I'm like I want you to come with me and I'm going to compliment my wife because I think admitting you're wrong with investing is kind of like the feeling you get when you know you need to apologize to your wife. The longer you wait to do it, the worse. Yes, you kind of get this feeling you're just talking, and so my wife has been very adapted, helping me learn when I need to apologize, and I've learned the sooner you do it the better, and I think it's.
Speaker 2:You get a lot of feedback, don't you? Very immediate feedback.
Speaker 1:So I think like failing fast is something my wife has helped me learn to do.
Speaker 2:That's very good. There's another topic right there you touched on don't bet on stocks.
Speaker 1:Bet on stocks.
Speaker 2:Bet on a macro and I suppose there's a balance in how does that look in a practical basis in the portfolio. Like to explore that, but also like there's a sub question out of that too, which is when does strong industry conditions kind of stop and then it starts looking like a macro bet.
Speaker 1:Yeah. So I mean, I'm sitting here telling you about the lesson I learned in 07. And I kind of made a reference. It's kind of not unlike today, Right? So we've had an inverted yield curve since December and there's all kind of data and statistics that say an inverted yield curve of X amount over so many months. Give it a year and then boom, you're going to have a cycle, a down cycle, and so, frankly, I very much still believe that. I think that risk is very much still topical and top of mind for me. But if you think about what's happened year to date, I think equity markets are up like 10% or 15%, depending on which it's been the baseboard about October or so.
Speaker 1:Yeah, but even just since January. Yeah, if you look back from October, and I do think I've learned from the 07 mistake because I've outperformed modestly during this extreme market rally, even though I do very much fear recession and I kind of the analogy of I want to stay involved in the market because you don't really know what's going to happen and long, long term, I'm very bullish on equities. I think they're a great place to invest, but I want to keep my hand on my wallet because I don't want to be overexposed and have a significant drawdown and, frankly, not be in a position to lean into risk when things get more attractive. Because if we have a big earnings correction, big valuation correction, I'm kind of watching, I'm ready, I know which stocks I want to buy, what zones I want to buy. So I'm kind of happy that I feel like I've learned a bit from the 07 mistakes.
Speaker 2:Yeah, okay. So we'll get into a couple of market topics now. So you've historically had a mid-cap bias, so what's your major case for mega caps? Yeah, so.
Speaker 1:I would push back a little bit on the mid-cap bias. I think with industrials and what I did with industrials, I definitely had a mid-cap bias and that's because within industrials, to really grow faster than the economy you need to be a smaller company that serves some niche that the end market is kind of growing faster and the niche has to be small enough that big companies don't see a big enough profit pool to come into it. Yeah, okay, right, yeah, and so it kind of I think industrials kind of mid-caps have an advantage in industrials because of that and when you think, once you get to a certain size in industrial land, you're growing at a function of GDP growth or industrial production growth and it's very hard to differentiate yourself. And so I very much had a mid-cap bias with industrials. But with global select, while I am underweight, the mega-cap fang stocks, I think my median market cap weighted average is like 70 billion, yeah, okay, and so that's certainly not mega cap, but I think that's clearly large cap. Yeah, yeah, mid-cap would say 40, 50 maybe, yeah, and I do own a handful of stocks that are, let's say, in the 10 to 30 billion market cap range, but part of global select and the mandate for global select is to offer a core product that's concentrated. And core by nature means you're investing in established companies that are profitable. Yeah, you know I own some things that are really growthy. I own some things that are deeper value, but I really don't own unproven business models that it's unclear if they're going to survive and thrive. That's for like a small cap growth to do. And so you mentioned the case for mega caps. I think mega caps some of them are fine, but I do believe, like the next, let's say, 20 years, won't be defined by the stocks that defined the last 20 years. So if you think of you know, it's certainly the last 10 years, but maybe the last 20 years it was fang, right, and we're now changing the name of fang because the companies are changing their names. But we know those stocks.
Speaker 1:And I remember when I started at T-Row and Bill Stromberg who hired me, and Bill just retired and thank you for hiring me, bill, if you ever see this. But Bill called me and he said what do you want to cover? And this was like I don't know 2003 or something, and one of the options was do you want to cover, like Intel, gateway computers, dell, basically hardware and if you remember the hardware stocks of the late 90s, I mean people called them like the four horsemen. You know that, like Dell and Intel. Yeah, I said to Bill.
Speaker 1:I said you know, I mean those are certainly big, important companies, they're interesting, but I don't feel like the stocks of the 90s are going to be the stocks of the 2000s and so I'd really prefer to do something else. And I started with garbage. Okay, literally garbage companies, yeah, yeah yeah, waste management, republic services, waste connections, and I just think that was a very good decision. And if you looked at the relative performance of those industries and stocks and I kind of feel that way now about the mega cap tech, I'm not saying those stocks will be terrible, but I just don't think they're going to offer nearly the returns they did the next 10 years. As the last 10 years and when I take kind of growth shots on goal within global select, I want to try to find the next generation of stocks that could be multiple compounders over, you know, multiple bag compounders over five plus years.
Speaker 2:I think maybe semiconductors fall into that kind of category.
Speaker 1:I am very bullish on semiconductors and I.
Speaker 1:That is an area of the market where I believe you can take economic and cyclical risk at return levels that justify the risk you're taking.
Speaker 1:And if we think about society and you know just the way things are evolving we all have an iPhone or a Samsung phone in our pockets, and the new phones come out with better chips with more processing speed. When you think about all the stuff going on with AI and chat, gpt and you know just, you know data centers and processing and inference and autonomous driving and everything that has to happen, it all ties to compute and speed, and that means you need better semiconductor chips, and so I very much believe in that durable trend. I think society wants to continue to evolve and I think the companies that either make the chips, supply the machines to make the chips or design the chips are going to make more money in the future than they are today, okay, and there's a little bit maybe not macro, but geopolitical, in chips as well there is, and, frankly, it creates inflation, because the I don't want to say de-globalization, but there's definitely geopolitical stress and because of that geopolitical stress, supply chains.
Speaker 1:Well, companies are realizing that they need to diversify their supply chains, and you mentioned semiconductors. Semiconductors are very important strategically, and so semiconductor manufacturing is being diversified, and I think that creates some inefficiencies, which might make the chips more expensive, because the best place to make them is in the current facilities, but that does increase demand for some of the pieces of the supply chain that are needed to build more capacity.
Speaker 2:And just on another stock that you brought into the portfolio of Alombe. That's a tough one to stand up in front of your peers, in a sense, with the current backdrop in the US potentially going into recession you talked about potentially well. A majority of the time, recessions are associated with housing issues as well. How'd you get that?
Speaker 1:one up, yeah, so Avalon. So we're kind of talking about growth in semiconductors and those are very much growth pieces of the portfolio. Avalon Bay is a value piece. So the reason for owning Avalon Bay it's a US apartment company, so they own, operate apartment buildings. Their customer is effectively a young white collar customer, let's say 25 to 35, somebody that either is single and just doesn't want to buy a home or somebody who's just too young to buy a home and they haven't started having kids yet, whatever. But I think the average rent's about $3,000.
Speaker 1:And I think the stock is exceptionally cheap for a couple reasons. First, on cash flows as interest rates have gone up, you mark down the value of the cash flow. It's just kind of discount cash flow math. But I think, given what's happening with inflation, I think the ceiling on interest rates we have a better view of what that ceiling is today than we did a year ago. I'm not saying I can call the ceiling, but I do think the range of outcomes around that ceiling are more controllable today and if rates peak and fall, that's very good for Avalon Bay.
Speaker 1:But also there's a ton of credit fear around Avalon Bay. So if you chart Avalon Bay and compare to a bank and you put the charts just up on a screen without names. Often you can't tell who's who and, just like banks, are under pressure because credit is getting worse. But keep in mind, credit is going from as good as it's ever been to normalizing. The same is happening at Avalon Bay. If normal delinquencies meaning people who don't pay their rent or you kind of need to kick them out it's very small. It's like 1% or 2%, maybe 3%.
Speaker 1:There's fear that, oh, google's laying off people. There's charts of all these white collar layoffs. Well, all these people are not going to get jobs and they're going to stop paying their rent. I just don't believe that's going to happen. But those two things have depressed valuations at Avalon Bay. So I think you have a company that's got good assets. They've got assets that are nice, where people want to live. I still believe there's economic growth in those areas and I think structurally they'll be able to fill their facilities and collect rent. Now the second component is less clear but I think very much real and just simplistically anybody who owns a house in America or physical real estate in America, the price of that asset since COVID is up 30%, maybe more, and part of that is inflation, but part of that is just inflation to build things right.
Speaker 2:Cost of lumber.
Speaker 1:Cost of materials, cost of labor. So if Avalon Bay were to replicate their portfolio today, it would cost them 30 or 40% more than it cost them.
Speaker 2:historically has this been some of the criticism why Varenska went up when these prices are probably a bit more depressed, and that's spot on.
Speaker 1:But if you look at the stock price of Avalon Bay, it's at about where it is in absolute terms before COVID, and so I think, effectively what that means is their balance sheet and the asset value they're carrying on their balance sheet is underrepresented because it's not marked to market. Now, how does that? How do I get paid for that?
Speaker 1:Because I don't think they're going to start liquidating their portfolio but that does give me confidence that there's very good downside support in the stock and I think it is a piece of the portfolio that is more valuing.
Speaker 2:It's a bit of a ballast and I think it gives me better risk exposure to credit getting better than owning a bank and I must admit it's probably been one of those stocks really favored by a lot of G-rate managers over the years. So it would have been quite interesting to see it come on your screens at a probably a detractive valuation where it hadn't been for a long period of time.
Speaker 1:Yes, it's interesting, but it is very low vol, very, very slow and steady.
Speaker 2:So we'll just wrap it up, but I've got a final question. You've talked a lot about your own humility throughout all of this and how that's guided you. I'm just curious about your investing companies. When you look at management, and is there a natural desire to find also management with similar types of humility in the way that they approach themselves and a way that they approach running their companies? Yes, yes, yes.
Speaker 1:Yeah, so I have to admit.
Speaker 2:I feel like you have many stories about companies?
Speaker 1:Well, I do, you know, investing you probably can't say Well, I would just say to durably compound value. And when you look at wealth creation in stocks, you need to identify companies that are in a business that allows opportunities to grow, but generally the economy grows. So in theory every company can do that, and even some of the industrials I mentioned that are really big companies that don't outgrow their markets, they can still be very good stocks. How can they be very good stocks? So I'll call out a company ITW and ITW, even though it's very big, it is largely an inline GDP grower. It has been an exceptional investment over time because it's a very well managed company that allocates capital very well and they have a strong history of improving their cost structure so that it's like there's continuous improvement on cost and efficiency so that every dollar of revenue is coming in at a higher profit margin.
Speaker 1:And the current executive is Scott Santy and the guy is exceptionally good and it's almost like people could write books about him, but he is a very humble person. I just think he puts his head down and he works hard, and so when I very much part of my process with finding companies is, you have to assess the management quality and the management depth and any management team that, frankly, doesn't pass that hurdle. At best, the stock is a rent Meaning you might own it for a couple of years and then you need to move on. But this is where I own 35 stocks. I don't need to own the market, and so I am looking for unique companies and unique individuals, and I'm glad you brought up management, because that is assessing their abilities is a big part of what we do and all the foreign air comes.
Speaker 1:Well, they control the purse strings and we've all seen instances where capital deployment can add value or detract value. And because I mentioned earlier, I'm investing in companies that are largely established, they're profitable, they have a current earning stream. The market is pretty efficient at valuing that current earning stream, but there's tons of differentiation on how that earning stream is handled to drive value for shareholders and that's where management comes in.
Speaker 2:Thank, you, peter. I think we'll leave it there. That was fantastic, and please come visit us again.
Speaker 1:Next year.
Speaker 2:Yeah, same time. See you then, cheers.
Speaker 1:Thank you.