MASTERCLASS: Global Equity Outlook
- 01 hr 11 mins 13 secs
Stocks have hit dozens of new record highs in 2021, but investors face their fair share of risks in 2022, as inflation ticks higher, tapering continues, rising rates loom, and new variants of COVID emerge.Channel: ClearBridge Investments
Three portfolio managers identify different areas of opportunities and weigh risks in the new year.
Three portfolio managers identify different areas of opportunities and weigh risks in the new year.
- Margaret Vitrano - Portfolio Manager
- Dmitry Khaykin - Portfolio Manager
- Elisa Mazen - Head of Global Growth and Portfolio Manager
Jenna Dagenhart: Hello and welcome to this Asset TV Global Equity Outlook. Stocks have hit dozens of new record highs in 2021 but investors face their fair share of risks in 2022 as inflation ticks higher, tapering continues, rising rates loom, and new variants of COVID emerge.
Jenna Dagenhart: Joining us now with more, we have three ClearBridge portfolio managers, Margaret Vitrano, who oversees the ClearBridge large cap growth strategy, Dmitry Khaykin, who oversees the ClearBridge large cap value strategy, and Elisa Mazen who oversees the ClearBridge international growth strategy.
Jenna Dagenhart: Everyone, thank you so much for joining us. One of the most hotly debated topics of 2021 has been inflation and whether it's real or fleeting. Dmitry, kicking us off, how do you see a higher inputs impacting the sectors and companies you target?
Dmitry Khaykin: The market expects inflation to be about 2.6% by year end. It's clearly an issue. It's an issue for the administration. It's an issue for the investors. Some of it is kind of fixing itself, as we speak. The shipping rates are coming down. The number of vessels off the coast of California is slowly reducing, but some of it is spread and inflation seems to be spreading from the goods basket to the services.
Dmitry Khaykin: The spikes are pretty impressive. You can look at the lumber prices that went almost doubled from December year-end last year to May of this year and then collapsed but if you look at the Mannheim use car prices, for example, it's at all-time high, and it doesn't seem to be bulging. We can understand why that's happening because people want to drive. They have money to spend for multiple reasons. Supply, demand and balance, there is shortage of chips and other products, OEMs can't produce enough vehicles.
Dmitry Khaykin: One very short anecdotal evidence example, I bought a car three years ago for my son. It's a Volkswagen Golf R. It was a year old. At that time, it was about 20,000 miles. It was flooded, unfortunately. It was parked in the street [inaudible 00:02:48] was flooded. Two months later, Geico sent us a check. It was about 30% more than what we paid for the car three years ago, and it had about 15 to 20,000 more miles. That's real. It's not something that is just read a newspaper online.
Dmitry Khaykin: Wage inflation and rents is something we pay a lot of attention to, because wages are sticky and Fed pays a lot of attention to wages. It's something that's important for investors and it's something that affects decision making on a day-to-day basis.
Dmitry Khaykin: Taking it down to the strategy, large cap value strategy specifically, what we're trying to do is we're trying to buy high quality franchises with high returns and differentiated product offerings where they can price through the inflationary periods. We're not positioning portfolio for a particular outcome or particular macro environment, but generally through the cycle, they should do well.
Dmitry Khaykin: Inflation, the way we think, it affects different sort of parts of the portfolio. It varies obviously. A rise in rates as a result of inflation should be positive for let's say, financial companies, modestly rising inflation. It's positive for pure commodity private companies, such as energy companies. We don't own a whole lot of commodity businesses like miners, because it's not our strategy but it is clearly something that a lot of industrial companies are dealing with in terms of input prices.
Dmitry Khaykin: For example, a company like Deere. The Deere is a top 10 position for the strategy, they absorbed a billion and a half of raw material inflation last year, raw materials and freight inflation last year. They're going to absorb another $2 billion incremental on top of that, plus $250 million labor inflation due to new labor contract. Yet, it's able to expand margins in a fiscal 22 that they just started, because they have pricing power, because they have brand and because they have differentiated product offering. It's really what we're trying to do. Yes, it can hurt profitability in the short term but it's a very short term impact in our opinion.
Jenna Dagenhart: Dmitry, I love your used car example. That's a great trade as an investor.
Dmitry Khaykin: I'd rather not because now I have to get, I have to make a decision what to buy, and I'm going to get, I have to pay out for something else. It's good until you spend the money.
Jenna Dagenhart: I would break it into similar buckets. I think about commodity cost inflation and I'm less worried about commodity cost inflation, because that seems to be self-correcting in many ways. Inflation, it seems like a dirty word to many people. It's not a bad thing, if you have pricing power, right? Think about semiconductor companies. Yes, they are seeing shortages and yes, they're raising prices, by some estimates as much as 10% because the demand is there, and consumer or customers need, they need the chips, and so they're willing to pay 10% more because they need the products. For them, inflation is not necessarily a bad thing. They're making more money or the life cycle of the semiconductor cyclical life cycle is going to last a little bit longer.
Jenna Dagenhart: I've been most concerned about that wage inflation and how it's going to play out with consumer discretionary because course with restaurants and retail labor costs are an enormous part of the income statement. Surprisingly, a little bit to us, because we were really worried about operating margins being down in 2021 and 2022 but because the consumer generally is in pretty good shape, partially because of monetary and fiscal stimulus and partially just because wage rates have gone up and hours worked have gone up, so far, so good in terms of consumer discretionary company's ability to pass along higher prices.
Jenna Dagenhart: I thought it was astounding to me that Tractor Supply, when they reported the last quarter, they talked about 7% inflation that they were able to pass along and the consumer took it. They may not have been happy about paying the higher prices, but they did because the consumer generally is in such good shape. I keep when we're thinking about impacts on the portfolio where we need to be worried, I try to keep asking myself the question of, okay, well, do they have pricing power because if they have pricing power, I really shouldn't be worried about this as a risk for the company.
Elisa Mazen: It's funny you say that, Margaret, markets like Japan have been at pains to go through lots and lots of hoops to try to generate inflation because they've been in a deflationary spiral, which has been very, very difficult. Inflation, yeah, it's not all a bad word and if anything, you need to have a little bit of inflation to be able to cover those fixed costs that kind of grow each and every year. At the end of the day, I think even a little bit of labor, inflation is not a bad thing for people to be able to sort of earn that living wage. Again, that's okay.
Elisa Mazen: With retail, what we're seeing is certainly, margins still are pretty good actually, even though but they're using less and less labor. If you go into the mall and you go to a store, you can be assured that you're going to be on a very, very long line, which is forcing people into the digital economy and other things as well, but we agree. I mean, I don't think, although Europe has high inflation, it's 4.9%, it's less than the US, I would expect that to moderate a little bit more than maybe you see in the US, which is a little more open. Labor costs tend to be a little bit more fixed. There's a little more slack in the economy. Unemployment is still higher. It's coming down, which for Europe is good but I think you'll probably get a little less sort of longer term inflation. That doesn't mean it won't react to US rates though. That's clearly going to happen.
Jenna Dagenhart: Yeah, well, speaking of rates as inflation runs hot, especially here in the US, the Fed is hinted at concluding tapering sooner than expected, which could open the door for rate hikes. Margaret, do you think we'll finally start to approach normalcy in 2022?
Margaret Vitran...: Knock on wood, everybody around you. I hope so. I mean, in some ways, I think I've been saying this for maybe six months, 2020 was all about, it was all about the pandemic and monetary and fiscal stimulus. I'm hopeful that we're getting back to normal economic cycle kinds of decisions. It is very typical mid-late cycle when the Fed starts tapering and tightening to see more volatility in the market. I think we may see more volatility, but I also think that should be a situation where you'll get back to stock selection, driving returns and driving results. We've been buying focused on just trying to find stocks that we think we can own for the next 5 to 10 years and investing that way.
Dmitry Khaykin: Yeah, maybe I'll just chime in. We all, I think, crave in for some level of normalcy. Just when we thought that things are getting back to normal and over the summer, there was delta variant, and now there's Omicron, right? Things are highly unpredictable, unfortunately. The reason we, I mean, market is a very efficient accounting mechanism in a medium term, medium and short term but the short volatility that we've experienced since Friday last week and earlier this week, it's all about the short term uncertainty, right?
Dmitry Khaykin: Omicron, where they say it's more contagious. We don't know if it's as severe as some of the prior strains or not and I think in a pervert kind of way, if it's contagious, but not very infectious may be, it's not a horrible thing for the sort of society, right? We'll get to herd immunity sort of in a natural way and can go by doing our business, kind of the way we used to do.
Dmitry Khaykin: The process of tightening, there's a high level of uncertainty of what the Fed will do, right? I mean, that clearly accelerating in the pace of tapering at about $15 billion a month. Hopefully, the balance sheet will stop growing by mid next year, if not sooner, but just to put things in perspective, the Fed had a balance sheet of under a trillion dollars before the financial crisis. It went to about three and a half $4 trillion post financial crisis. It's now under $9 trillion. That's the size of the balance sheet. It's enormous.
Dmitry Khaykin: When somebody says, "Oh, it's okay to have a lot of debt on the balance sheet or okay to have a lot of debt at the federal level because rates are low." While rates are low now, it doesn't mean that they'll stay low for indefinite period of time. That can create some unforeseen situations. We simply, I mean, we all try to think very hard through and position portfolios by focusing on the best companies we can buy and that can withstand all this uncertainty, but there's clearly a lot of uncertainty in the marketplace.
Margaret Vitran...: Yeah, I think in some ways, the way we're thinking about portfolio construction is maybe a little bit different than we would have been five years ago because there have been periods over the last five years when we've said, "Gosh, we really like healthcare," or "We really love technology." Right now, given where we are in the macro cycle, it seems to me that it's just prudent to, we're hugging the index more in terms of sector weightings because I don't know that any of us have visibility on exactly when reopening is going to happen.
Margaret Vitran...: When are we all going to start getting on a flight to a different country? I don't know. I don't know if it happens in six years or five years, and to try to figure that part out is really almost a distraction. In terms of portfolio construction, we've been thinking about, look, just try to have some reopening plays in your portfolio. Try to have some plays in your portfolio that should benefit as rates go higher. Try to have just diversification in the portfolio so that all of that uncertainty you can hedge against by having different kinds of drivers in the portfolio.
Jenna Dagenhart: Elisa, how can active management make a difference against this backdrop? How do you manage through rising rates?
Elisa Mazen: Well, I think a lot of it depends on a few things. First of all, how quickly rates move and sometimes that may go against your strategy. We have a growth strategy. We have three different buckets of growth that we invest around. Emerging growth, which is sort of that very high octane growth. Sometimes those companies are very light on cash flow in their early stages. Their stocks do very poorly in a very quickly rising rate environment but what we've seen with rising rates is it's not always bad for growth companies.
Elisa Mazen: There have been plenty of periods of time where growth has outperformed. What we've seen is that some of these steady secular growers, which for us are the largest part of our portfolios. They have pricing power. They do actually quite well and do pretty well, even in a rising rate environment.
Elisa Mazen: Part of the rising rate environment is how quickly our rate is going to rise, what is that delta, but what it can also do is provide opportunities to buy growth cheaply, because it's obviously not going to go up into infinity. I mean, at some point that will stop, that will normalize. People will kind of catch things up in their sort of spreadsheets and they're usually things get over done.
Elisa Mazen: What we find is those are opportunities to be aware that could happen, maybe size the position appropriately for today. If something like that happens, you can obviously either increase an existing position or there might be something that you've been looking at. We actually have a watch list of very interesting tech names that we've liked that have been expensive. We're kind of hoping that the market gives us that opportunity to buy what we think are great quality businesses at a discount.
Elisa Mazen: At the moment, many of those names are kind of fairly priced. There's no major discount. We're hoping that we'll get some sort of a discount. There will be something that somebody doesn't anticipate. The comments from Chairman Powell the other day, were a surprise to everyone. We have that sort of times 15 different central banks around the world even more. We've seen tightening in markets like Brazil and emerging markets. We've seen a lot of tightening moves as inflation has really spiked. You've had political noise as well. There's definitely been a lot of volatility on the non-US side, especially in EM in a rising rate environment. Again, it can provide opportunities, but you have to be pretty nimble, I think, to handle it.
Margaret Vitran...: 00:16:11 That's interesting perspective, Elisa, because in the US, one of the things I've been thinking, I've been saying is that as rates increase, the most expensive tech names are the ones that are most at risk. It's a little bit surprising that actually, we've already seen that correction. The mid cap technology names have already underperformed, the underperformed the mega cap tech names quite a bit. I don't know that we're there yet. I certainly wouldn't call them cheap but we're inching closer towards something that might be an investable opportunity with that sector, I would agree.
Dmitry Khaykin: 00:16:44 Yeah, I would just add maybe briefly that if you look at the first quarter of this year when the 10-year went from, I think, it went from 90 basis points to about 170, it was, I guess, expectation that rates will start moving up, the Fed will start tightening. That was before delta. The volume, preaching my own kind of strategy, obviously, but the value has done very well in that environment. The ROV was about 11% and growth lagged a little bit but at the same time, I want to echo what both Elisa and Margaret said, I lived through the TMT bubble in 2000, '99, 2000 and the keds.coms and the broadcast.com companies was no cash flows to speak of.
Dmitry Khaykin: 00:17:38 This is not the technology necessarily companies today. I'm a value investor. We like technology companies because we want to be on the right side of the tech, but rising rates effect that's the long live assets in a different way than maybe some mature, more mature businesses but it's one thing to say that you need to look at 15 years before the company makes a diamond profits versus something like Google, for example, or Microsoft, companies that are printing money today, generate a lot of cash and free cash flow, and do have over capitalized balance sheet stuff.
Dmitry Khaykin: 00:18:12 Those companies, they'll have an initial sell off and we see this sort of indiscriminate of sell off in the last few days but the high flying stocks have underperformed in the first quarter when rates move up, and they probably continue to underperform if rates continue to move up over time, but not necessarily the more established companies.
Jenna Dagenhart: 00:18:30 Yeah, and Dmitry you mentioned Omicron earlier. I know none of you are infectious disease specialists, at least not that I'm aware of but I do want to hear your thoughts on the new variant that initially sent stocks sliding. There's still so much to be learned but some investors including billionaire Bill Ackman have made the case that this potentially less severe and more transmissible virus could actually be bullish for stocks. Dmitry, where do you stand on this?
Dmitry Khaykin: 00:18:57 Well, my crystal ball on this subject is a little cloudy, to be honest with you. I think anybody who comes out with definitive answers are probably not being very transparent because we just don't know. We all read the same data. We all listen to the same specialists. As I mentioned, if it's highly transmissible and highly infectious, that's a problem. If what we read from some of the doctors in South Africa where it's highly transmissible, but very mild, it is not necessarily a horrible thing, right?
Dmitry Khaykin: 00:19:27 It could mean that, yes, we might get infected but if it's mild, we'll get some level of immunity, and in the long term might actually be beneficial but the point is, and I think the market doesn't know what to do, and that's why we have this daily swings, up 2%, down 2%. We're all waiting for data points. We have internal discussions. We talk to our healthcare analysts. We talk to the virologists out there and trying to collect data points, but it's a big unknown at this point.
Elisa Mazen: 00:20:03 When you look around the world, countries have very different sort of responses to sort of COVID outbreaks. China is an example. We'll see a COVID outbreak and shut everything down. They'll shut down a town. They'll shut down a village, a factory, what have you. It depends on sort of the place that you're in. What can happen? It can have an impact.
Elisa Mazen: 00:20:26 I mean, what we find is it's pushing earnings out. What I'm hopeful of is what we see in Europe is there's a move toward mandatory vaccinations among people that are unvaccinated. I think that's having an impact. I just seen I have two sort of kids that are in their 20s and they didn't get their booster yet. I said, "Why don't you get your booster?" "Yeah, yeah. I'll get it. I'll get it." Then, the variant breaks out. Guess what? The appointments are at the end of December and mom's annoyed. I ended up getting them boosted anyway, somehow, but I think that, so those things I think will ultimately be better for our society at large.
Elisa Mazen: 00:21:06 Again, it's about trying to get to this increase sort of immunity as quickly as possible. I think in Europe, there is not a lot of appetite for increased shutdown, that's had a pretty detrimental impact on the economy, and everybody's kind of done with it. It's really about let's kind of move ahead. We know some of the things that we need to do here. I think also, the thing that we talk a lot about internally is not just the vaccines, but also the treatment options, right? If there's a pill that you can take at your home, if you get it, that will I think greatly sort of allay these fears and the shutdowns that we seem to be seeing and sort of keep pushing out some of the earnings impacts that we're seeing.
Elisa Mazen: 00:21:44 Also, it's impacting production as well. It's impacting supply chains. We saw in this year with Vietnam and Thailand where the markets were shutting, production out of the sneaker factories was really impacted. It's having these sort of long term impacts through very long supply chains coming out of Asia. I'm hoping we're kind of that Omicron is dealt with in the way that it's going to be dealt with. There's going to be something else that comes behind that. No question about it. How we deal with this as a society, maybe more effectively, globally, I think it's important.
Margaret Vitran...: 00:22:21 We've been spending time thinking about how it impacts our portfolio. We do have reopening trades, whether it's in medical devices, where if hospitals in New York aren't allowing procedures, what does that mean for our companies or what does it mean for appetites to shop?
Margaret Vitran...: 00:22:42 The area where I think we've been spending most time has been on that question of cross border travel, because cross border travel it has broader reaches into companies that you may not even necessarily think about. It's a big part of profit of visa. It's a big part of profit of Fidelity National. It's a big part, obviously, a company like Booking has exposure there.
Margaret Vitran...: 00:23:15 I think in the portfolio, we just want to make sure we don't have too many plays that are dependent on people all getting together again that might skew the portfolio a little bit like that. We've been just making sure that we don't have too much risk in that regard. The other thing that I've been wondering is the longer this lasts, the more consumer behavior may change, durably change. Of course you want to make sure to adjust for that too in the portfolio.
Jenna Dagenhart: 00:23:45 Turning to China, has most of the risk been washed out of Chinese corporates or could there be more regulation ahead? Margaret, Elisa, I know you have slightly different views here. I'll let you dive in.
Elisa Mazen: 00:23:58 Who wants to go first?
Jenna Dagenhart: 00:24:00 That's the question. Margaret, why don't you kick us off?
Margaret Vitran...: 00:24:03 I'll go first because I'm going to simplify it. Elisa clearly spends a lot more time looking outside of the US than we do. I think it's impossible to predict what the Chinese government may do next year and in some ways, the easier part of investing and thinking long term is to just ask yourself the five-year question, do you believe that there's a growing middle class in China? Do you believe that internet adoption will continue to grow? Do you believe that the Chinese government does in fact want to evolve into a consumer-led economy?
Margaret Vitran...: 00:24:39 The answer to all of those for us is yes. Then, you just say, "Okay, well, we know that GDP growth in China is still, even if it's a little bit slower now, it's still better than many other parts of the world." As a growth investor, I'd like some exposure to the faster growing economies. I believe in these long term secular trends. Then, you just ask yourself, how much risk are you willing to take. Clearly, higher risk, lots more unknowns with the Chinese internet companies than there would be with some of the US-based companies but we're trying to manage that risk in position size. We do have some exposure, but I don't think it's outsized exposure. I think over a longer period of time, that'll add value to the portfolio.
Elisa Mazen: 00:25:25 What we've seen out of the new prime minister has been a much more aggressive rhetoric than we've seen in the past. It's been a lot of focus on fixing some of the previous ills through sort of these big, sort of growth initiatives that have happened under previous administrations led by technology platforms that really did contribute sort of meaningfully to grow. The Chinese state-owned enterprises don't really grow very much. They weren't particularly well managed. There were lots of problems in the real estate sector. We're seeing this with the China Evergrande issue.
Elisa Mazen: 00:26:03 The government has a lot of different, I think, initiatives on their plate, not least of which is the sort of succession planning coming from Prime Minister Xi, which is in October of 2022. That's quite long dated. There are lots of new structures that he is implementing to control things; social behavior, behavior of monopolies and platforms, gathering of data, controlling that data. There are a lot of things that look quite scary to us.
Elisa Mazen: 00:26:41 Historically, what we had seen was there was some crackdowns. The government didn't like everybody that was gaming. They didn't like a lot of tourists or a lot of people going to Macau and gambling. They would issue some pronouncements. There would be some slaps on the wrist. Companies would change and then it would kind of go back to normal. I think people were kind of expecting that this time and I don't think that that is what Xi is interested in all. He's interested in a moderately prosperous society for all, which in my mind, means the lower people go up and the higher people go down.
Elisa Mazen: 00:27:15 He's interested in Chinese culture. He doesn't want to hear about sort of the foreign culture sort of invading sort of Chinese lands, certainly a strong military. There's some things that sort of kind of can ring some alarm bells here. He has created structures like the SAMR, the cyberspace sort of new structure where you're regulating monopolies, you're putting very senior people in place. Those things usually don't just exist to be quiet. They exist to do something. I think that they are continuing to go and sort of fix some of the social problems that you see in China; social inequality, regional inequality, et cetera, education inequality, by kind of like a Robin Hood approach, take from one and kind of give to the other.
Elisa Mazen: 00:28:17 We're perplexed as to kind of what the next sort of few years' state of play is. For us, we've generally taken down most of our Chinese weightings. We are playing China through other things because like Margaret says, you do want to be involved in one of the higher growing areas of the economy but in terms of some of these big Chinese tech platforms, which historically, we have been invested in, we're sort of taking a wait and see approach. I don't know what happens after October of 2022. I don't think anybody does. Does Xi say there's going to be a successor announced in five years? Does he take all the titles for himself? What does that mean? I mean, I think there's a lot of big questions.
Elisa Mazen: 00:28:58 Now, things may stabilize before this party congress. He's going to want to look really good. He doesn't want to have a lot of volatility and disruption around that but I'm very cautious as to what could be happening. In terms of investing directly in China, I think the way that we're approaching it is we want to be aligned with these communist party platforms. Excess returns will not be given is what we see. Initiatives around healthcare, we're still very interested in. There's a lot of green initiatives going on in China, which I think are interesting. Electric vehicles are certainly accelerating there. I think there's some ways of playing it directly in China. We're taking a more sort of circumspect approach right now with technology.
Dmitry Khaykin: 00:29:51 Maybe I'll just chime in on the same subject. We don't really have sort of direct exposure to China per se, but by virtue of [inaudible 00:30:04] sort of global multinationals, they all have presence or most of them have presence in Asia and in China specifically. Elisa mentioned automotive industry, right? Electric vehicles, right? China is a big, so what is it like 90 million cars may global on a good day, right? China represents what a third of that probably.
Dmitry Khaykin: 00:30:26 You can be sort of say, I'm not going to invest in China and the companies we do own across sort of various sectors, they do have exposure to China. What we try to do is, again, find companies that have some moat around them and have differentiated products that are not easily substitutable. Specific to China, that they have full control of the operations as opposed to a lot of companies historically, particularly industrial companies and automotive industries, they've been forced to do joint ventures. We want to make sure that the companies have full control of the operations, can protect their IP, and ultimately be able to make money, right?
Dmitry Khaykin: 00:31:04 Because there's no reason to be in the market, [inaudible 00:31:06] fast growing it is, they can make money in the business, right? You want to make sure that you generate the adequate returns. Some companies said, heck with it. We can make money. It's too competitive for us. We're just going to cut our losses and leave. That's okay, too because it's better to cut your losses as opposed to throw in more good money after bad, if you can really make returns but it's important.
Dmitry Khaykin: 00:31:32 Evergrande there, and real estate developers are being clipped now. We own company like Otis elevators. China's a huge growth market for them. We spent a fair amount of time trying to understand what's the exposure? What are you going to do if the growth rate in real estate development slows down? How do you prepare to mitigate those types of events? That's sort of part of our day-to-day engagement with the companies.
Jenna Dagenhart: 00:31:57 Yeah, that's a really interesting point too about Evs, Dmitry, and I think a lot of people would be surprised to know that more people or a higher percentage of people in China are buying electric vehicles than in California.
Dmitry Khaykin: 00:32:10 Yeah, I don't know the exact number. Elisa probably could quote them but look, I mean, EV is all things electric, right? It's not just electric vehicles, it's electrification. We'll look at it much broader. It's lifted allocation of the grid. It's electrification of the transportation, both light vehicle production and potentially midsize and over time, there's going to be different mode of fueled trucks and trains, and airplanes. This is all in the longer term.
Dmitry Khaykin: 00:32:42 We spend a lot of time talking about technology, right? The technology, the way we think of technology can be a friend or a foe, right? It's probably don't expect a value manager talk about technology stocks, but we want to make sure that A, we don't get disintermediated by the Amazons of the world that becomes, you don't want to be Amazon that becomes sort of like a [inaudible 00:33:04] in itself. We want to make sure that technology is an enabler for the company to continue to grow top line and grow profits.
Dmitry Khaykin: 00:33:13 Specific to electrification of the vehicles, we own this company and we've owned it for 10 plus years, called TE Connectivity, and I think it might be owned by other portfolios of the firm as well. They made connectors. If you think about the electric signal going from point A to point B through the wire, there are two connectors that need to be at the point of initiation of the signal and point of termination. It's not specific to cars. It's pretty much anywhere, right? It's in your iPhone, it's on your computer, it's the power line that goes, sends electricity, it's everywhere.
Dmitry Khaykin: 00:33:48 Specific to TE Connectivity, roughly half of their business is automotive. They've carved out a niche specifically where they have very strong market share position. If you think of battery electric vehicle, it's higher voltage, so more differentiated products, better price and power. As a reference point for a traditional internal combustion engine vehicle, they make about $65 of content per vehicle. It's doubled plus of that for electric vehicles.
Dmitry Khaykin: 00:34:17 It's a long term secular trend that you can continue to play assuming valuation stay reasonable. It's also very ESG friendly company, which is what we're trying to do is where the ESG considerations become the benefits for the fundamentals of the business. We can go through the portfolio and say [inaudible 00:34:35] utility, which is not what you think about when you think about electrification but if you think about the mandate in California, and people are moving to Texas, which are the two regulated utility footprints they have, you need to support the grow, you need to support transition from sort of traditional power generation to renewables.
Dmitry Khaykin: 00:34:55 That means that you need to connect the wind farms and the solar farms to the places where people live. You need hard infrastructure to withstand all the issues that California is dealing with. It's a long term visibility in spent and capital and earning guaranteed returns for those types of businesses. They're still trading at pretty attractive valuation. We kind of take a holistic approach on a broader basis and tried to pick our spots where we can add value.
Jenna Dagenhart: Yeah, let's take a moment and focus on ESG here. Everyone from corporate boards to C-suites to retail investors is talking about it. Elisa, can you describe the ClearBridge approach to incorporating ESG?
Elisa Mazen: Sure. ClearBridge has started sort of its ESG investing a long time ago back in 1987. We've been involved in this for quite some time. We think we've always had a differentiated approach in terms of how we approach it. We integrate it into our fundamental work. The people that do that are the people that do the fundamental work. We don't use, we do, of course understand what something external sources say, but they don't sort of drive how we sort of rate a company.
Elisa Mazen: We have our own proprietary writing process. That's something that we do as a team ourselves. We evaluate the different components of the E, S, and G. We weight the relevant, like if it's a chemical company, obviously, the environmental side would be very important. We sort of rank order the different issues there. We understand what those different issues are. We sort of think about it as another level of risk mitigation or risk understanding, a way to engage with companies. Companies want to engage with this but it's also as companies sort of move on that trajectory from maybe sort of ESG, sort of beginners to kind of the more advanced players, there's actually financial benefits to it as well.
Elisa Mazen: Now, Europe has been sort of the leader here and is sort of dragging everybody with them, which I think is great. We are really seeing ESG kind of come into its own this year. Since 2019, we've seen half a trillion dollars in flows into ESG assets and some big numbers. If you edit sort of the ETF and active managed flows, those actually have been negative. The money has been going into ESG in sort of a very big way.
Elisa Mazen: You saw a little bit of a spike up in sort of the ESG stocks last year, but this year, you've seen there are lots of initiatives coming out of Europe in terms of decarbonisation. Their EU Green Deal is going to be, we think a game changer in terms of performance in Europe. What does this mean for the world? I mean, they really are sort of leading on decarbonisation, electrification. I think they're creating a template for other places around the world to do that. We think that corporates, the other thing we see from corporates is corporates are including ESG in their compensation for their senior management. I mean, it's being embraced by their labor forces.
Elisa Mazen: I mean, we're talking to who are we hiring here? We're hiring people like my sons, who are very interested in sort of the health of the planet. You have to have the senior guys and the guys down at the bottom newly on the way up with sort of aligned mindsets. That's something that, actually I think, is incredibly encouraging. We see it as a way for, there'll be a little bit of investment period, but we also think there'll be a period where they will reap the benefits through additional cost saves and other things and the fact that the planet will even be around, as a good thing.
Elisa Mazen: For us, the ESG investing mantra that we've had, had good success with our ESG products, clearly, it's a fast growing area internally at the firm. There's some very, very exciting things coming in sort of the ESG sphere. I mean, it's not just about sort of decarbonisation targets, it's also about soil, how we plant things, regenerative agriculture, plant-based meats, cell cultured seafood, lots and lots of different ways of sort of tackling sort of some long term environmental issues that have been plaguing us.
Elisa Mazen: I think it's a very, very exciting time with ESG. It's not conceptual at this point. It's something that every corporate is really embracing, even the oil companies, even the mining companies, because they too, have a part to play. They're not going to continue to just invest in things that are going to cost them more money. We're seeing carbon targets and carbon emissions being priced, that will be a serious cost for them. They will be reorienting themselves well. The idea of everybody working together to kind of make this a better place, although it sounds a little corny, I actually, I think it's something that could happen.
Jenna Dagenhart: Margaret, I think a lot of people are looking at tech companies and how they're handling ESG. I understand you had a recent engagement with Facebook. What's the value of having these ongoing communications with senior management over ESG issues?
Margaret Vitran...: Well, I think the dialogue is helpful for them and for us, because I always say that companies don't always agree with our opinion about fundamentals or about their ESG best practices, but they certainly want to hear what we have to say. I think as a firm, ClearBridge is kind of an ESG 2.0, if you will. I think we're getting smarter about the criteria that we go to companies with about the thresholds that we hold them accountable to and how we track them over time. I think that's good for the companies, because they know when they say that they've got a certain five-year goal, we have it written down, we want to talk to them every year about how they're doing and making progress towards that goal. That's kind of helping us all move forward and move ahead to at least this point.
Margaret Vitran...: In Facebook, of course, we've been engaging with that company. Elisa mentioned before that on the E and the S and the G, they're all important. I think for Facebook, specifically, the S part is really important right now. Most of our engagement with Facebook has been focused on the S part and thinking through and talking about some of the headlines that we've all read recently that absolutely don't pay the company in a favorable light with relationship to, with regard to platform safety or content, algorithms, et cetera.
Margaret Vitran...: We have regular dialogue with the company in general, especially when something like this is quite topical, we want to engage with the company to understand what do you think about the allegations that have been made? What have you done? I mean, Facebook, specifically, when you talk to them and think about some of the steps that they've taken to improve the safety of their platform, they have 40,000 people working on this issue, 40,000 people working on this issue, which is an incredible amount. They're spending $13 billion since 2016 on this issue.
Margaret Vitran...: They actually have a transparency report, just like Uber does, that they send out every year, which shows you the good, the bad, and the ugly of what they've seen and how they've addressed it. They've responded to criticism by shelving things like Instagram Kids. They've been asking for regulation for years. Maybe the one silver lining of all of the engagement with Facebook and all of the headline risk is that this company has been asking to understand the rules of the game for years and maybe now the output, maybe that will have some regulation around this space of social media to try to set boundaries and things for the company but I think that having those engagements helps us understand really how to hold companies accountable but it also helps the companies understand what long term investors want, where we're thinking they should be dedicating their time and moving forward.
Dmitry Khaykin: Yeah, maybe I'll just chime in very, very briefly on the same subject. Elisa said something that we do things internally, it's sort of part of our fundamental analysis. It's not something we outsource. We often come across situations where a third party sort of vendor that is an expert in ESG sort of issues has a view that is meaningful or different, or maybe much narrower define than our view. We try to both engage with those vendors as well as engaged with the companies and try to sort of educate ourselves while educating the companies and try to encourage managements of companies to make their case to those third party vendors, and to make that case to investors, because a lot of times, particularly in the value land, where you perceive to be sort of the old, stingy, polluting industries exposed type of portfolio, it's actually quite the opposite for us.
Dmitry Khaykin: We have companies like Air Products, which is industrial gas companies that is yes, they make air separators. They're the largest producer of hydrogen that is used for petrochemical companies and in refining. Yes, it pollutes, but for every unit of pollution that is generated, they save two plus units of that is avoided. That's one way to take a look at that subject.
Dmitry Khaykin: On top of that, they've been making massive investments and I'm talking about close to $10 billion now, in generating hydrogen from green hydrogen in Saudi Arabia to blue hydrogen in Canada, and the most recent project in Louisiana. They see the world transition in to sustainable energy source, and then they want to be a part of that transition. We want to align ourselves with this forward thinking management teams that are going to be enablers of this transition.
Dmitry Khaykin: The other aspect about sort of ESG conceptually, again, what we think about is let's see what the companies do, not just what they say. I think actions speak often more louder than words, right? Companies like American Express has not laid off a single person. I shouldn't say single person, they did not have massive layoffs like many other companies did during the period of pandemic. Why is it possible?
Dmitry Khaykin: Because they remain highly profitable during the period of distress because of their business model and instead of stepping back and hankering down like a lot of other companies did, they leaned in and they tried to go after the customers, knowing that pandemic will pass and the customers will appreciate, employees will appreciate the highest satisfaction rates internally will result in employees being more dedicated. It's sort of, again, higher profit, more profitable and more differentiated companies can afford to do all things right and that's sort of a virtuous cycle that sustains itself.
Jenna Dagenhart: Now, looking at different regions, and then sectors, Elisa, are you still seeing the best growth opportunities in Europe or are parts of Asia becoming more attractive?
Elisa Mazen: I mean, we have a pretty wide net. We're going to look for kind of the best growth opportunities, but it has to come in at sort of an appropriate price. We are growth with a valuation mindset. We call it the valuation approach to growth. Europe has always screened very well because valuations are really attractive. If you look at the valuations relative to bond yields, very attractive and growth companies are actually increasing in proportion in sort of the public markets from what they were, let's say 5, 10 years ago.
Elisa Mazen: Europe does not want to be left behind in the digital world, by any means and they have been for a period of time. Google is dominating the media landscape in Europe. They've sort of missed out on some big growth, I think, and they're not going to be left behind this time. What the pandemic has done has allowed them to think about, where do they think they could lead? Where do they think they could grow? There's a great industrial base in Europe of really high quality businesses, really high quality management teams, companies like Sandvik and Atlas Copco and ASML in semiconductors, I mean, just some brilliant companies that have grown from very small home markets to become very big global players. They didn't have a big domestic market. They had a very little one. They grew through acquisitions and sort of human ingenuity.
Elisa Mazen: The Green Deal is going to bring in trillions of dollars in terms of investments in all parts of sort of the world, in real estate in terms of buildings and energy efficiency, in terms of decarbonisation and digitalization and so on. I mean, we're going to see, I think, a pretty big shift there. I think that Europe will be a primary beneficiary of that.
Elisa Mazen: We are interested in names in Asia. The focus for us is very much on growth but again, it has to come at the right price. We do believe, I mean, if you look at things like the digital economy in places like Southeast Asia and Latin America, it is very, very, very low. I mean, we're talking about single digits in terms of penetration. That has a long way to go. We have some really interesting growth companies, like Sea Limited, Mercado Libre that will participate in those sort of long term growth trends from for many, many years.
Elisa Mazen: We like certain businesses across the world. We are always a little bit more again, circumspect with state-owned enterprises and other things, but there are always other ways of playing let's say the growth in China without owning a Chinese EV maker. Dmitry mentioned TE Connectivity. We also own TE Connectivity. Tesla is very big in China. TE is a servicer of Tesla. The Chinese are investing very aggressively behind electric vehicles. We're seeing sort of a big growth trajectory there. Why? Because they don't have a home grown auto industry. That was what everybody else did. That's what the Germans did. There was a lot of expense that goes into building an engine and they didn't have it. They were just kind of assemblers but they are going to lead here on electric vehicles. That's very much what they're trying to do.
Elisa Mazen: I think we have to nuance to every sort of country, region differently, sort of what do we think is very interesting. There's a company in Japan that we really love called Recruit Holdings. Recruit owns Indeed, which we all know. It's sort of the online way of looking for a job. That business is growing meaningfully. They also own Glassdoor, which is a way of kind of looking at whether you want to work for a company because of your employee reviews.
Elisa Mazen: These businesses they tend to be sort of ad-driven businesses but more and more people are using them. The services are improving there. We think there's some very interesting long term growth ideas in parts of Asia. Certainly, we would not only be a European-led portfolio but there's also some great businesses like Diageo in the UK, which sell brands that everyone around the world tends to like to drink, including the Chinese, which suddenly have found a taste for scotch, and they are one of the largest market players in scotch. It's now the largest investment, not the largest, but the fastest growing area in China.
Elisa Mazen: They've been there early. They've been very patient. They've been early in India. They've been very patient. They're working on tax issues but we think they could be a big, big beneficiary of growth there for a long period of time. Again, as people come out of COVID and they go back to restaurants, and they go back to bars, and they go back to shopping and travel retail, they benefit from that as well. We've seen Diageo upgrade their guidance several times this year. Things are looking very good there. There's lots of ways of playing growth in different parts of the world, either directly or indirectly. We're just looking for the highest quality businesses with the best sort of return profile for sustainable periods of time that we can find.
Jenna Dagenhart: Then, the sector level, Elisa, what sectors or industries look the most promising in 2021?
Elisa Mazen: Well, we have a pretty diversified approach. Again, sort of like what Margaret said at the beginning. We don't say we like technology over healthcare over consumer discretionary. If you looked at our portfolio, it's pretty balanced among each of those different sectors. For us, what we say is we're looking for growth areas and if a stock that we look at in a sector can't grow above the market sustainably, then we don't need to be there. That's sort of the mindset with what we're looking for. We're looking for a company that we can own, that's going to beat the market for a long period of time.
Elisa Mazen: We do own a utility in Portugal, which is we think one of the key players in renewables in Europe, which is EDP in Portugal. This is a company that's been transitioning its asset-base from sort of coal to renewables, and it will be sort of purely renewable in the next few years. This is sort of one of the leaders in Europe. We also own material stocks like Dmitry mentioned Air Liquide, which is French. We also own Linda, which is again, going to play into sort of hydrogen and other things.
Elisa Mazen: In technology, there's so many interesting trends going on in technology in terms of digitization, sort of this move to the cloud. COVID has accelerated a lot of those trends very meaningfully. People that were kind of on the fence about it before and much of Europe was, frankly, have changed their mindset very quickly. That spending is not going to decelerate, we don't think. We see more people going to the cloud. We see more people gathering data. How do you look at that data? How do you search for that data? How do you understand that data?
Elisa Mazen: We have a company called Elasticsearch, which helps you understand all those things and we think that this is a 40% plus grower for a very long period of time. If you look at sort of some of the numbers in terms of how much data we are producing through all of our connected devices, it's sort of staggering numbers. We need a way to understand that. We need a way to, we need a place to put it somewhere. There are lots of different angles to play, I think, there.
Elisa Mazen: In terms of online retail, I mean, I feel like this is something we talk about every year, one of the things that still remains very underpenetrated in terms of online is supermarkets. Supermarkets have sort of single digit penetration of online retail because people say they like to shop for themselves and everything else. I don't know about anybody else, I don't have time to do that. Unless I send somebody else out to do that, I mean, the only way for busy people to really do that is to do it online and have sort of a consistent way of doing it with a set time that it will be delivered in a way that you can trust.
Elisa Mazen: The enabler behind much of that is Okada, which is a UK company setting up warehouses for lots of big supermarket chains around the world, in Japan, in France, in Spain, in the US with Kroger. Kroger has a stake in, in Ocado and that allows them to go into markets in a much more capital efficient way, without having to open stores and hire people and find the real estate and all that stuff, they can just build these big warehouses and then start servicing people online. I think it's a really interesting company with a very interesting long term trajectory around a very, very big addressable opportunity, which is food spent.
Jenna Dagenhart: Dmitry, how do you feel about your financial's exposure should the yield curve steepen?
Dmitry Khaykin: It's been an interesting last, I guess, 12 months or so, with a lot of fits and starts, with rates moving up, rates moving down. The yield curve is actually not particularly steep. Historically, it would indicate that investors don't have high conviction in growth rates in other years. I think there are a lot of factors in play here. Nobody really can say definitively what is causing the rate the yield curve to be relatively flat.
Dmitry Khaykin: At this point, given the inflation concerns, I think one can argue that, and again, this is just a one of manufacturers that because US rates are still higher than many other countries, and even with the FX carry trades, you can still make money by investing on a longer end of the US curve so that may be pushing the yields down. We don't know. I think the experiment and I hate to use that word, but an experiment that we all kind of live in through was unlimited money and budget deficits and stimulus monitoring fiscal, we don't know.
Dmitry Khaykin: What we try to do is on a stock by stock basis, try to understand what's the sensitivity of different companies are to interest rates and specific to financial services. We own companies such as Bank of America and Bank of New York. Bank of America, I'm just going to read some numbers, 100 basis points of net, 100 basis points of higher rates when the short end of the curve would result in about seven plus billion dollars of net interest income, which is about 65 cents a share in earnings. Then, you can put that against by $3.15 in earnings that the market expects in 2022, very meaningful.
Dmitry Khaykin: For Bank of New York, it's a dual drive, and not only that it benefits their net interest income, NII, but it also would eliminate money market fee waivers. Combined those two factors would be about $1.50 of incremental earnings on a base of about 450 next year. It's very meaningful. I guess what I'm trying to say is that we don't necessarily need to see a steepening yield curve for the companies we want to benefit as long as the short term rates move up.
Dmitry Khaykin: Schwab will be a very major beneficiary as well. Schwab invests about 40% of their balance sheet is invested in short term sensitive type of securities. It'll be about 10% incremental revenue, earnings I'm sorry, on a run rate basis plus the fee [inaudible 00:58:59] well in a money market side. It's meaningful. I mean, I think the value portfolio and our value portfolio will definitely benefit if rates move up over time and even more so if the yield curve steepens.
Jenna Dagenhart: Margret, Dmitry mentioned EVs earlier and the electrification of everything, do you think that this will be the year of broad EV adoption both at the consumer level as well as the business logistics level with companies like UPS, Amazon? How are you participating in this trend?
Margaret Vitran...: I would say it's going to be the decade of EV, broader EV adoption and broader EV infrastructure investment, because certainly I think COVID pulled forward some trends. You listen to Biden's goal of having 50% of the car sold in the US be EV's by 2025, 2030 and the NEU has similarly aggressive goals. We're heading there.
Margaret Vitran...: Just in terms of net trend, specifically, the way we've chosen to invest it is really less on a specific buying a Tesla, and more on some of the suppliers to those cars. We own some of the chip makers that make chips and sensors that we think that's kind of the diversified way to play EVs because we don't have to figure out which one of those players actually wins the most market share. We win if the whole trend works. That seems to be to us to be an easier that to make.
Margaret Vitran...: We also, Dmitry was talking about electrification earlier, and if you think about that, the number of EVs that are in California, we need an infrastructure to support the number of those EVs because as that penetration grows, we don't have the bandwidth to get electricity to and from the household to charge all of those cars if everyone tries to charge during primetime. We have multiple years of electrical infrastructure investment, both in charging stations and homes and at malls and in commercial places and just in terms of up and downstream electrical flow. We've chosen to play those kinds of trends and think about those kinds of adoptions.
Margaret Vitran...: I do think the broader picture of what we're thinking about for the next couple of years is what are the trends that COVID accelerated that you want to get behind, right? Think about hybrid work. Okay, what does hybrid work mean? Hybrid work means that we're all in different places. What are some of the ramifications of that? Yes, Elisa mentioned cloud. Yeah, it's cloud. It's also security. The number of endpoints that we have to protect just went up exponentially.
Margaret Vitran...: Security is a big theme that I think remains a top priority of Chief Technology Officers, over the top content consumption. Cord cutting continues to accelerate. More and more content is coming over the top. That's a multiyear trend too, mostly outside the US, but that's still a multiyear trend. We've tried to put on a longer term hat and think about EVs and over the top content consumption, digital disruption, in FinTech. Lots is going on there. How can you get behind those trends? Which of the legacy players that we own actually aren't part of the new party? We may need to switch horses a little bit. That's kind of where we're spending our time right now.
Jenna Dagenhart: Yeah, a lot of trends certainly accelerated. 2021 saw enterprise software, healthcare testing and diagnostics, Omnichannel commerce thrive. Dmitry, what secular trends do you see showing strength in 2022?
Dmitry Khaykin: I think it's going to be more of the same probably, right? We spent a lot of time talking about EVs, I think connectivity is going to be continued to be a big theme. Companies that enable this hybrid work environment is going to, like Margaret just mentioned, and we will try to have exposure to those areas. I think that the area, so to extend inflation picks up a little bit and rates go up, I think some areas might be a little bit more pressured, I mean, maybe some staples areas where they have been used as sort of bond proxies where valuation may not necessarily be as compelling, that may not be necessarily the most attractive area.
Dmitry Khaykin: I think the long-term trends if we get COVID behind the rearview mirror, I think that the travel-related sectors should do well, again hopefully, fingers crossed for everybody else sakes, whether it's bookings or airlines, and again, I think we have exposure to companies like Raytheon Technology that has a lot of aftermarket aerospace business. That should continue to do well to the extent that travel comes back.
Dmitry Khaykin: I think what I would like to emphasize is that because the high level of uncertainty, we try not to, again, Margaret made a point of having a diversified portfolio, we try not to make a bet on one sort of outcome or the other one scenario or the other, having a diversified portfolio of high conviction names that should do well regardless of what the sort of the market throws at you, I think, is probably a good strategy in the current environment.
Dmitry Khaykin: We spoke a little bit about, touched upon sort of active management and whether it should be good or bad for stock pickers, very simplistically and obviously biased opinion, but one can argue that if the market is going one way, you can just buy cheap data and sit back and relax and watch Netflix. In the periods of uncertainty, you could say that, that creates a lot of opportunities for active managers, as opposed to follow the herd mentality, you can pick your spots and be ready to pull the trigger. That's what we're all trying to focus us at ClearBridge as high active share type of investors.
Elisa Mazen: One of the things that we really didn't make a lot of discussion about is healthcare, which I think has been a, it's an interesting area for investors. Certainly, they generate a lot of cash. We had done some work a few years ago, sort of pre COVID in the diabetes space. This was sort of a big project, because we thought, "Gee, this is really interesting these sort of continuous glucose monitors." What does this mean? There's a lot of data here. It sounds really interesting. I personally knew somebody that wore one of these monitors and she was telling me about sort of how great this was. I thought, "Okay, we need to kind of dive in and take a look at this."
Elisa Mazen: What was really interesting is, yes, these are phenomenal businesses. They can kind of be life changing, sort of aids for people who don't like to prick their finger all the time, or they only want to do it some of the time just know what their glucose is, and again, not go through a pretty onerous process with regard to their health.
Elisa Mazen: Through COVID, what we found out was for people that were actually in ICU and in hospitals, for nurses to come in and check their blood levels and their sugars all the time, it required masking and gowning, and PPE, which was in short supply, and they realize that these monitors allowed, again, this remote controlling of finding out where things were, did they need to have something without having this kind of in and out sort of behavior all the time.
Elisa Mazen: Suddenly, from something, you realize there's cost savings, there's lots of advantages. There's remote monitoring, which really can save a lot of costs, especially for the elderly. There's lots of very interesting sort of digital changes going on in the healthcare industry, not just in, obviously, in glucose monitors, but also digital health, as well. We did talk about some of the newer technologies that sort of brought our vaccines to the fore. What does this mean longer term?
Elisa Mazen: I think there's some very interesting things at work, especially in areas that have been big contributors to inflation. If you look at where inflation has been coming, it's been coming from education and healthcare. The fact that you could have more efficient ways of understanding things and doing things and maybe actually keeping inflation a little bit more controlled in areas that have seen huge amounts of sort of inflationary pressure, I think there's some really interesting things at play.
Jenna Dagenhart: Finally, looking at growth versus value, 2021 has been full of fits and starts with growth leading then reopening trades leading and fears about inflation and the pandemic ebbing and flowing, amid that volatility, Margaret, how do you think about positioning for 2022 as a growth manager?
Margaret Vitran...: Well, I already know Dmitry is going to disagree with me as the [inaudible 01:07:48].
Jenna Dagenhart: I know so too.
Margaret Vitran...: But I have to talk my own book. Look, I think one of the beauties of growth investing is the secular growth stories are going to trump things through time, right? We've been thinking a lot about early adoption, big markets like diabetes that Elisa was just talking about, or look at Amazon 20 years ago, look at Walmart 20 years ago, both when they were in their hyper growth cycle, regardless of the economic scenario, Amazon grew 25% right through the great financial crisis because the secular growth was there.
Margaret Vitran...: As we think about where we want to be next, we do want to stay diversified. We're not trying to make bets on reopening or bets on interest rates or bets on one economic macro scenario versus another but we are trying to think of good quality growth companies that still have years of runway and if they have years of runway, then we think we're going to be okay even if we do have some changes in leadership in the market.
Margaret Vitran...: Certainly, technology has been the leader in the market for the last couple of years. I think that what we're going to see over time is diversification. We're going to see other sectors catch up and do well. At least for from a growth perspective, I look at the RLG and the appreciation over the last couple years, 25 to 30% a year for the last four years, that's not normal, right? Last 50 years has been 12. Should we have a little bit of a mean reversion and Dmitry, you're going to get your day in the sun, probably at some point over the next couple of years but I still think that as long as we stick to our knitting and invest in early cycle growth companies where we still see large, untapped markets, that that should compound nicely over the next several years.
Dmitry Khaykin: I would argue and I'm going to say something very profound that in a quality portfolio for any investor, there is room for both growth in value and international and I don't think you really need to make a decision. It's not either or, it could be both and it should be both. The reason it should be both is because we've had over the long term history, we've had very long periods where one style outperformed the other style, right? If you look at, I was just doing some very rudimentary research in preparation for this interview, surprised me, 20 years from pre-COVID, 20 years pre-COVID, going back to 2000, January 30, 2000 through January 30, 2020, which includes the basically post financial recession period.
Dmitry Khaykin: Russell 1000 value outperformed Russell 1000 growth by 100%, cumulatively or 1.6% but what it means is the starting point matters, right? The tech bubble and what transpired since then was very painful period for the growth investors to recover from. Just to keep things fair and balanced, if you look at pre-financial crisis through the same time period, January 30, 2020, growth outperformed value, which is basically June 2007 through January 2020, growth outperformed value by about 5% annually and during COVID that gap even expanded further.
Dmitry Khaykin: My point is, it's hard to make this long term predictions of where the value is going to outperform growth. We also know that valuations matter and we've spent a lot of time talking about how higher rates will affect different parts of the market. There is a lot of froth in the market in more speculative sides of the investment universe. I do think that companies that Margaret talks about and Elisa talked about in terms of cash today, strong balance sheets, that part of the growth market probably is going to do okay, but [inaudible 01:11:56] go up, there's probably going to be some trade over from value to growth. Not making a prediction to what extent it's going to happen, it's probably safe and prudent for investors to have exposure to both and hopefully we'll do get a day or two in the sun.
Jenna Dagenhart: Well, everyone, thank you so much for joining us. I know we could go on and on but we better leave it there.
Dmitry Khaykin: Thank you.
Jenna Dagenhart: Thank you for watching this Global Equity Outlook Masterclass with ClearBridge Portfolio Managers: Margaret Vitrano, Dmitry Khaykin, and Elisa Mazen. I'm Jenna Dagenhart with Asset TV.