Speaker 0: Welcome back to the podcast series behind the screens hosted by me, Jock Glover, strategic relationships director here at Square Mile Investment Consulting and Research. In this series of podcasts, we meet members of the investment teams from across the asset management industry whose funds we rate and spend 15 to 20 minutes chatting to them to get some insight into their current thinking.

Speaker 0: This week, our guest is Aziz Hamza Lahari, who is manager of the £1.2 billion Lumas Sales US Equity Leaders Fund, which sits within the Nexis umbrella of companies. The fund looks to grow the value of your investment over time by investing in US companies and has been awarded an A rating by the square Mile. Analysts Aziz. Welcome.

Speaker 0: Thank you very much, Jack, for having me today. My pleasure. Now, Aziz,

Speaker 0: you and I have got something in common That's daughters that fall off horses. Um, but actually, you do as a manager something that's very different. Um, from a lot of your peers, Um and that is to actually outperform the US equity market after fees as a large cap asset. Uh, active manager. Um, so I'm gonna ask start the start this conversation by asking, why is that and what do you think the current market environment means for you as a, uh, as a manager.

Speaker 0: Thank you. Uh, so I really think that you know, people when you look at 2022 and 2023

Speaker 0: there are two very different markets in the 2002 22 was a very down year. 2023 is a very up here, and some people may call it risk off and risk on. And but the way we look at the world is very structural. And when we look at the world for us risk, we have a structural and permanent approach to risk

Speaker 0: and portfolio management. What that means is that rather than just trying to change our positioning each day, we take a very long term structural view to our portfolio, Um, and have. And when you look at the key drivers, why we outperformed lost in a down market. We had businesses

Speaker 0: like Vertex in our portfolio, Um, like mustard beverage that have done really, really well this year in the upmarket. We have companies like Meta uh, and NVIDIA that has done very well, but our portfolio is really

Speaker 0: a group of companies with very different business drivers. That means that

Speaker 0: it's almost like an all weather portfolio rather than trying to be positioned for an up or down market.

Speaker 0: We always start and say first and foremost, do we have quality businesses in our portfolio? Because at the end of the day, those companies control their own destiny. In the long term, they may have short term dislocations, but overall two thirds of the time they do really, really well, uh, history shows for quality businesses. Then we focus on growth being profitable and sustainable. Then we always focus on valuation.

Speaker 0: Um, those three components quality, growth, evaluation.

Speaker 0: It really prepares you well for all sorts of different markets. We have been managing money for 17 plus years now in these strategies, and we went through +0809, 24,022 2023 and in each one of these instances

Speaker 0: before major inflexion points.

Speaker 0: By definition, markets surprised investors,

Speaker 0: and by definition, most people wouldn't have known about these exogenous factors the day before. So I always say it's a risk that you do not see

Speaker 0: that you cannot measure that matters. It's not the one that everyone debates the end degree every day because that usually means that's already priced in.

Speaker 0: So we construct a portfolio of different business drivers with high quality businesses. And when the markets are down, when there are draw downs, if you look at our history, we have done quite well. That's because we always pay attention to

Speaker 0: valuation.

Speaker 0: And when markets come back in inflexion points like it did in 23 2009, um,

Speaker 0: usually we are pre pre prepared. Really? Well, because market rewards over the long term

Speaker 0: good cash flow, growth,

Speaker 0: durable franchises at attractive valuations.

Speaker 0: So I'm gonna ask. I've got lots of questions to ask you After that, uh, open up and and one is long term investor. I mean, what sort of the average sort of holding period for you in a in a holding the portfolio.

Speaker 0: So for

Speaker 0: our track record of 17 years, our portfolio turnover is around 12%. That includes heads and trims, which means that our holding period actually is a decade or longer.

Speaker 0: And if I were to give some very quick examples for your listeners, uh, the importance of this time horizon. Um, when we look at our holdings, for example, Amazon, we own it since 2006.

Speaker 0: We asked a simple question. How many managers own Amazon one time or another

Speaker 0: over the last 17 plus years?

Speaker 0: And the answer is, it's 10,000 plus funds. But if you ask the next question, what portion of these or what percent of these managers owned it for the entire of these 17 years? To get to the benefit of this extraordinary return that this company generated, the answer is less than 1%.

Speaker 0: And then you go down to the list like the participated in Visa IP O. You know, there were 8000 plus funds that participated in the IP 0. 1% of them, you know, uh, still on the visa shares. It's, I think, less than like 0.3 or 0.2%. So

Speaker 0: it's really it's not just what you own, but how you own it, because that really determines your overall returns in the long term

Speaker 0: and your portfolio. It's quite concentrated, I think, isn't it? You don't have hundreds of holdings in your portfolio either, do you?

Speaker 0: It's great that we have always a very focused portfolio of historically 30 to 35 names, and the top 10 usually is around 50% of our portfolio. OK, so time horizon of 10 years, plus 30 to 35 really good names and then the and that barbell of quality growth and valuation. It's not a barbell, it's a it's a It's a +33 levers, isn't it? Do you have particular

Speaker 0: rings that you like to have to each of those? Or does it just You have to tick the box for all three of those to get into the portfolio and then hold be held in the portfolio?

Speaker 0: First, they need to meet all those three criteria because

Speaker 0: if you think about equities is like a bond, in order to value a bond, you need to know the duration and the coupons in an equity

Speaker 0: duration is determined by quality because that gives you the competitive advantage period, meaning how long this business is going to be able to sustain these

Speaker 0: good returns that we see in the future. So that's your sort of duration coupon is your cash loss and that's determined by the growth that we just discussed. You know, what is the market share? What the market growth rate is, Um, and that determines the coupons. And then you can value the business because sometimes people say, Oh, this company is cheap. This company is expensive

Speaker 0: with no context, it really difficult. It's difficult to, uh, you know, give a value to an asset. But once you know the duration and the coupons, then you can say this is my estimate of intrinsic value. Based on that, this company is trading at a significant discount or a premium, and our position sizes are a direct by product of this risk reward calculation. So we usually, um,

Speaker 0: start a position in a company and build our position with a predetermined game plan, saying We wanna increase our waiting as hopefully the stock goes our way. Which is we believe it or not, we invest in a company, but we want the stock to country to go down so that we can buy this great asset at a bigger weight. So our rates are usually between zero and 2.5% at the initial, uh, entry point. Uh, and we built up to 5%.

Speaker 0: And that's based on the risk reward that we see in a company. And then we max out at 5% at cost and 8% at market value.

Speaker 0: OK, so start trimming once it gets up towards eight. But we start trimming to control the, you know, position size, Uh, and trimming and self discipline is also all predicated upon risk reward. But we also sell if we find out that our initial thesis was

Speaker 0: not correct or meaning we were wrong, or we find a better risk reward opportunity. Uh, and in the last 17 years of our track record, we sold roughly 60 companies in from our portfolio, of which half of them be sold it because they reach intrinsic value roughly a quarter of them, because we made, uh, initial, um,

Speaker 0: mistake in our key assumptions.

Speaker 0: And in another quarter, we sell because we find a better opportunity to finance a better opportunity. We sell a company

Speaker 0: and and with all this chat of risk, and you mentioned how you think about it's not just risk on risk. Often what markets are doing as AAA manager of a large Cap Equity Fund in what has been a pretty tough rising inflation environment. Until recently, interest rates have been hiked up to levels people haven't seen for 20 plus years. In some instances, um, lots of investors are in that sort of risk off mode.

Speaker 0: Whether I can go and get cash, I can get interest at four or 5% at the bank. Why would I put my money at risk in markets? Uh, do you Do you have a Any views on that? In terms of the opportunities that you're seeing as a manager in this market now, today? Looking forward?

Speaker 0: Yes. So, I mean, first of all, I would start by saying that when,

Speaker 0: um you know, I remember when we started managing money in 2006, I would have meetings where people would say things like,

Speaker 0: you know, US market is a very mature market. Why wouldn't you invest in emerging markets Or, um, you know, active management is difficult. And actually, in 2010, you look back. The prior decade the entire decade was a flat market, very tough environment and fast forward 2010 2006 to now in 17 years, we compounded returns at

Speaker 0: around 14 15% and there were also ups and downs. So I think investors really would be so much better served with a disciplined approach to asset allocation rather than find the time tanks. Because by the time people again can see, smell and appreciate a risk, usually that risk would be priced in. And

Speaker 0: look how many people got it wrong in 2008, 2009. How many people got it wrong in 2022 and 2023? Who would have said at the beginning of 2008 that there will be a market that will be down 30 plus percent or 2022 down more or than around 20% and vice versa for the following years? So I really think that

Speaker 0: one has to have a structural and permanent approach to risk rather than dial in dial out. And the reason for that is the risk with that is being reactive and late, Uh, rather than being proactive, um, and early in your positioning. So I think that people should just look and say, Here's a bucket

Speaker 0: of managers that I want to allocate based on assets. Pick the better managers, hopefully from each category and stick to that discipline. Because otherwise, there are all these studies that show that, um, for example, in the pension world, um, how

Speaker 0: decisions made. And because of market timing, I would call, uh, in terms of dialling up dialling that actually, people destroy value rather than adding value. Same thing, actually, even hiring and firing managers, you know, uh, the same outcome. Uh, you know, people react to the most recent history and that recent supplies unfortunately, yield sub optimal results in the long term.

Speaker 0: Great. Thank you. Now, um, that that's just

Speaker 0: turn to you and your team. Uh, a little bit. Um, we talked about what's going on in the in the in the market? Uh, a bit. So how do you and the team split your day in terms of what you do time wise in terms of doing research, company meetings, internal meetings, meeting managers, all that sort of stuff. What ho. How how does your team support you and what do you do and how? How does that all break down?

Speaker 0: We spent most of our day doing research and doing research means, you know, meeting with the management teams of the companies that we, uh, invest in or think about investing in in the future, meeting with their entire value chain meaning,

Speaker 0: uh, or talking to their customers, their suppliers, um, spending a lot of time with as a group with our analysts thinking and going through our key assumptions. Um, but at the end of the day, the most important activity is doing independent deep thinking,

Speaker 0: um, about our businesses and our what I call value chains or profit pools that we want to invest in so that we can get to the

Speaker 0: insights that are key in our decision making. But in a typical day, it is really doing a lot of reading a lot of meetings with, um, you know, companies and their customers and suppliers. Um and, um, you know, talking to, uh, key players in the value chain

Speaker 0: and and within when you were then constructing this quite sort of focused portfolio of 30 th 35 sort of stocks.

Speaker 0: Uh, you're just focusing on each company and all those nuts and bolts you've just described. Rather than having a thematic. I think you know it's gonna be great for healthcare companies with the next um, Y. You know what happens next in, You know, Republicans, Democrats, whatever. You know it. It's not thematic driven. Then it's all bottom up. Is this a good company? How does it fit into the the process? And how does it grow?

Speaker 0: Great question, because it is not a top down approach,

Speaker 0: as you said, based on teams, but rather a bottom up approach. And the reason for it is very simple. Let's say that we were having this podcast. We wouldn't have any podcast but interview, Let's say back in 1923 rather than 2023. And I came to

Speaker 0: I have this grand vision for the next century, which is that there will be a day where there will be a flight from each city to each city in the globe, and aviation will be the biggest thing that we will be facing over the next

Speaker 0: 2030 50 years, let's say, and therefore I'm going to invest in airlines. So it would have been a terrible investment because how many airlines went bankrupt? TW a and and so on and so on. And so

Speaker 0: I really think it is as important to first always start with the quality of the business. But of course, we are a growth investor, then, which means we are looking at opportunities that provide us well above average growth rates versus the overall GDP global GDP. Whether it be online advertising,

Speaker 0: uh, which we invested with me in its IP U in 2012. Or Google, you know, 17 years ago where it be obesity and diabetes, which we invested in No, no in 2014,

Speaker 0: whether it be NVIDIA, which, by the way, we invest in 2019 for, you know, a I and NVIDIA was

Speaker 0: the first performing stock in Q four of 2018. It was done, I think, 40% or so we took it. You know the opportunity and invest in it or digitization of payments like Visa or ecommerce. You know, Amazon invested in 17 years ago. Shift the cloud CRM uh, Salesforce meeting Salesforce, Oracle, Google, Microsoft. These are all

Speaker 0: you know. Um, except sales force. They're all 17 year holdings or something. Like energy drinks. You know, per capita spending is the fastest growing category in beverages. We invested in Monster

Speaker 0: 10 years ago. So

Speaker 0: all of these, they're not. They're what we call their business drivers. You can equate it to a team. The difference is in automatic investing, you say something is great and I'm going to go and invest. We do the opposite stuff from the bottom up. And also as important, it's not just to determine what's going to provide growth, it needs to be profitable growth. But in addition to that, you need to be able to pick the winner. This is very important if you go back and look at, for example, data networking.

Speaker 0: 30 years ago, there were Cisco Systems, but there were many other companies Bay Networks, cable, Trone Systems. People even don't remember those names because they don't exist anymore. If you go back, look at databases. There was Oracle. There was also, uh, Informix and, you know, uh, Borland. And again these companies do not exist today. So

Speaker 0: I think there's big danger in investors, especially in growth investing. Having this thematic approach and they just go and buy a slew of companies and hope for the best electric vehicles is a great example. Like we invested company Tesla. We are not going and buying everything to do with EV. Uh, because I think at the end of the day, part of our job is to determine who's going to win and why.

Speaker 0: Ok, so I'm I'm conscious of time. I mean, this has been a fantastic conversation, so I'm gonna ask you one final question. Um, and that's what keeps you up at night as a manager. What is it that you worry about, obviously with long holding periods and a focused portfolio? Um, and it's all bottom up. So you must know the companies pretty well. Do you? Do you sleep like a baby or do you worry, uh uh, at night on a regular basis, you've got something wrong?

Speaker 0: Yeah. So I start my day very early. I get on my bike either outside, whether permitting or inside at home, and I go to work in which I love. I love what I do. I want to do it until my health permits me doing it. I think I will. I will be one of those guys that will, I think just die on in the job like because II I don't see it as a job. I love it. So I look forward to each day. Uh,

Speaker 0: and because I also love the people I work with I mean, I have been working with the same people for two decades now, Um so

Speaker 0: my day, I will say, is really joyful because I'm doing exactly what I want. I'm fortunate enough, and I spend It's a very dense and full day. It's usually like 18 hours, and I come home with my family, spend my time. So I sleep really well because I invest in great. We invest in great businesses. That doesn't mean I don't think about things, but what keeps me if I am awake, it's because

Speaker 0: none of these stuff that we can control and I love doing. You know, if I have a great team of people that I worked for a long, long time, if anyone from my family or friends or um you know, my team members, colleagues, if any one of them are going through some sort of thing where the health issue or some difficulty those are the kind of things that would keep me at night. But most of the time.

Speaker 0: Uh, I sleep really well, because I need those six hours. Got it. That was a a great answer. So the answer is you don't worry about the portfolio, but you're worrying about your friends and colleagues and family, and I think that's a a wonderful way to finish this podcast. So, um, all that remains is for me, uh, Jock Glover to thank today's guest, which is Aziz Amza glare. Uh, who's the manager of the lumas sales US

Speaker 0: Leaders fund for his thoughts and insights today. And you, the listeners for your support? Uh, I say every week. I don't think anyone's done it yet, but try and be the first somebody. If you would like to contact us, please do so through our Web page WWW dot square mile research dot com or by emailing us at info at square mile research dot com.

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