Investment Insights

So welcome back from break. My name is Lindsay LeBue, and I'm excited to be moderating our first panel discussion for today. We have a great group of finance professionals up here. I'm not going to go through and read their entire bio because I will not do it justice by just reading it. So please take a look at it in the folder where you can look at their complete history. But I do want to actually just do a quick introduction so we know who we're going to be talking to today. So first we have David Antonelli. David is the Vice Chairman, Investment Officer, and International Equity Portfolio Manager at MS Investment Management. David's played a key role in building and enhancing the firm's global research platform and continues to serve as mentor and coach for the firm's global research analysts. He also serves on the investment and US and non-US equity committees. We also have Anne Gallo. Anne is a Senior Managing Director, Partner, and Global Industry Analyst at Wellington Management. More specifically, Anne is a Global Industry Analyst on Wellington's management healthcare team specializing in the healthcare services and medical technology industries. She manages two global healthcare hedge funds and serves in several global healthcare sector portfolios. She also co-manages a multi-sector private company investment fund. And then we have Steve Barry, a colleague of mine, who is a Managing Director and Partner at Goldman Sachs. In his role, he's a Chief Investment Officer of Fundamental Equity. Steve is responsible for the overall business management of the global Fundamental Equity franchise. He also serves as Chief Investment Officer of the US Equity Team, where he's responsible for the portfolio management and investment research process of the firm's US large and mid-cap strategies. So I welcome the panelists. And that is the last time I will read anything from a piece of paper. So look, I think that it was amazing to have Rob sort of T.S. up, because it kind of laid the groundwork for the economy. And the next question is, how do you actually invest in this type of environment? And so our panel today, I wanna kind of talk about how we think about investing, especially in the equity space. And I really wanna start off with talking about sort of value versus growth, and the question about value versus growth. So Steve, why don't you just give a little bit of background, your thoughts on value versus growth, a little bit of a performance. Take it from there. Thank you, Lindsay. And I hate to be the first to follow President Kaplan, so that's always tricky. But we prepared a couple props along the way. We put the slide together here just to give some sense of when people say the stock market, what do they mean, and what might be going on underneath what is an index. And for instance, this slide here, you'll see, it extends back 20, 21 plus years from 1998. You see the gray line there, that's the Russell 1000 to 1000 largest US corporations. Looks a lot like the S&P. Well, we use this one because we're also able to dissect the market by a value and a growth discipline. So what you see here, you'll see a market that's appreciated about four and a half times, right, from the crisis low, coincidentally also from back in 98. So we had that lost decade, 98 to 2008, and then up about four and a half fold as measured by the gray line. And then the bar charts are the dark blue, when it's above the zero line, that's when the growth stocks have outperformed the value stocks and the magnitude of that. And the light blue line are the lines in which when the value stocks have outperformed the growth stocks and their magnitude. Now there's an organization called Russell, they determine what's a value stock, what's a growth stock. But what I find to be really interesting here is people talk about markets being efficient, they talk about the proliferation of indexing, just get the market, but there's a lot of dynamics going on underneath this market rally. And in particular, the last five years, with the exception of the year of the election, 2016, which was quite dramatic in what responded, particularly in the fourth quarter of 16, we've been in a very persistent period of time in where growth stocks, unit growers, have been more and more appreciated by the market. Probably a function of what Rob Kaplan was talking about, with the paucity of growth around the world, and hence how valuable unit growth is. The other dynamic behind here is what's going on in sectors. So if you think about a value portfolio and a value benchmark, what you're gonna find is a benchmark dominated by cyclicals and interest rate sensitive stocks. And so they tend to be the banks and financials, their utilities and their REITs, and their industrials and commodities. When you look at a growth portfolio, you're seeing highly innovative healthcare companies and highly innovative consumer companies and technology companies, where there's been such great growth. So this is really just a level setter to say, what have we been experiencing here? This happened to end on April 30th, so it was a month end as we were preparing it. If we took May into account, markets declined about 6.5% in May, and value and growth were about the same. And then in this last couple days, seems that we've erased half of May's decline. So it depends, I don't know what we're doing this morning, but who knows on that front. But that's just a level set. There's a lot to be captured in the market. And it's not to dismiss or justify active management, but it's to say, don't be fooled by one line. What the S&P has done, the Russell 1000 has done, a large cap or a small cap or a value or growth, because there's a lot going on underneath the market. Do either of you guys wanna have comments on that or do you have anything else to add? I'd say, and again, I focus only on healthcare equities, but those dynamics are playing out meaningfully across the healthcare sector. I think to your first point about growth versus value, I think there are two dynamics there. One being, to your point, that the scarcity of growth is creating a situation where we're seeing growth stocks trade at very high absolute and relative valuations, because again, growth is so hard to come by generally. I think another point is relative to prior times, and you're seeing certain industries that are being completely disintermediated by technology. So in the past, maybe there was cyclicality, maybe some of the devastated sectors aren't going to come back. So kind of like these industries that are going to be in structural decline going forward. So I think that's another dynamic that possibly is creating a situation where growth has outperformed meaningfully for an extended period of time. The other thing I would say, within healthcare, to your point about a line doesn't really tell the whole story. What we're seeing in equities generally is this rise of passive investing and ETF investing. And where we're finding the greatest ability to attract and retain assets are sectors, and I'm talking my own book here, of course, but like healthcare, where it's really not easy to ETF the performance of an active manager. So in the healthcare world right now, it's a pretty tough time when you think about the affordability issues. But at the same time, the innovation we're seeing is game-changing. And so we're having a situation where the haves and the have-nots, the gap, the dispersion is widening. And again, to your point, you're not gonna capture that if you're just looking at one line, one index. I think the points that Steve and Anne both make are great points, and I think I'm often asked about being a manager of growth funds is now the moment to switch out of growth and into value because growth has outperformed for such a long time. And I think it's a way too simplistic question or argument to try to make. I think the sectors are far more important. I think it's way too simplistic in terms of how value stocks are determined, sometimes purely just on PE or some other metrics. So I think what's much more important is identifying growth opportunities and value opportunities in virtually every sector. And they're there, even financial services. There are parts of financial services with technology and other advancements that are truly growth areas. And there are growth industries, whether it be technology or whatever, which are tremendous values today, given the outlook for cash flows and earnings as you look out over the next five to 10 years. So I think anyone making a choice, especially a passive choice, and saying I purely wanna go into value now because I think growth has outperformed, I think it needs to go a level or two deeper in making that choice. On that point, what about when it comes to small, medium, and large cap companies? How do you think about the performance and how do you think about evaluating where's the best place to invest? Yeah, I mean, I think I'll start in, you know, I think small versus large. Obviously, in an environment where the market has been very good, the economy, I should say, not necessarily the market has been very good, and you're looking out towards potentially some storm coming in the future, you probably wanna be a little more careful on small cap stocks. For the simple reason, there's just a lot less of a margin of safety with many of those companies. They're often one product companies, they're often funded, but potentially somewhat at risk if funding dries up, and obviously, if the economy catches a cold, some of those small cap companies are gonna catch pneumonia pretty quickly. And so when you're looking at an environment where things are likely to slow down, you probably want a little more margin of safety on the margin, and so, you know, so focusing on some of the larger, much better funded, much more stable companies might be a good idea. I'm never a fan of making sharp moves and saying, okay, I'm gonna get out of any of the investments I have in small cap and move into large cap. Clearly, over a long period of time, small cap stocks outperform. I think it's by something like 200 basis points on average, and small cap value is probably the best of that lot. But I think just being mindful of the environment that you're in and the amount of risk that you wanna take matters. And just, I would say on that point, again, I talked about, you know, the ETF, ETFable. We're seeing now as more and more of the market goes to passive, small cap stocks are trading as a group more than I think they have in the past. It's almost like a factor. And so, you know, when you think about healthcare, the period in late 2015 and the period in early 2017, when the sector was hit, it was a situation where all beta names and small cap names were off. And more than I've experienced in the past, you saw all the small cap stocks, all the subsectors within healthcare, the biotech, the small cap med tech, some of the high growth small cap service companies that wouldn't necessarily trade with such correlation in prior times. With all this money going into passive, there's a greater degree of correlation that's not driven by fundamentals. I would just say, and then I'll let Steve go, that gets my heart pumping quicker when you see that, because clearly that's where the real stock picking opportunities remain in those small cap companies where you really need to and can understand what's happening. And whether it's index or passive buying that drives it or some other factor, that really creates the wonderful investment opportunities that you can find. Maybe we have a slide that I think follows this one that talks a little bit about, maybe back one. So this is a depiction of, since 2006, again, just before the crisis. Because post-crisis, the proliferation of passive solutions and their attractiveness, it's really asymptotically accelerated. And so what you see here, again, the light blue line below are the withdrawals out of the active managers as a class. So in constant, with the exception of 2013, constant redemptions, matched in very, almost perfectly, in some cases, there was some liquidation of equities broadly, but a flow into passive vehicles. Not just the index funds of Vanguard and State Street, et cetera, but including thematic ETFs and other things. And to both Anne and David's comments, the fodder for active management is when their correlations are high and dispersions are low. And hence, they set it up for us to pick, pick the differentiators when they're all treated as a unit. And we have been in an environment of that. We have had a growth value disparity, but when you're inside a growth or you're inside a value, the sector, there's been a lot of common sector performance. So we're entering a period, I think we all, maybe a little fingers crossed, but also I think there's real evidence underneath it that the return of the active manager is coming. We've learned a lot over the course of the last 10 years. We've learned about fees. We have to compete against the zero. Sometimes they'll even pay you, I believe, to take your money in some of these passive alternatives. But we've learned as an industry about being, how do we respond to a more reasonable fee? Where can we add more risk management and smart asset allocation even within classic portfolios and have us well-prepared in an environment where there's been a lot of homogenous performance intersector to start to differentiate and earn our keep. Nice to set you up to you. Can I make one more comment about small cap? There was a chart, go back to that one. That's just a depiction of large performance versus small cap performance. And what you see is reasonably consistent over a period of time. And if you look in the most recent month to two months, you've seen a pretty significant underperformance of small cap versus large cap. I think it's to the tune of about 600 or 700 basis points. The markets are moving, so it may have changed somewhat. But it's fairly distinctive. And there's some questions about that. One question being, is that the canary in the coal mine or one of the canaries in the coal mine signaling, just like the inverted yield curve and other things, that perhaps there's a slowdown coming in earnings and the economy. And clearly, as I mentioned earlier, the small cap stocks are the ones that feel that first and the most significantly. So I don't necessarily have an answer to that, but I just would call that performance out in the last couple of months that it's been fairly distinctive. I actually have a question on the back of that. So given that most small caps, not most, but given that it's not uncommon for small cap companies to not have a global footprint, given the potential slowdown in the global economy, do you see, would you see more people looking at small caps or because of the potential slowdown in the U.S. economy than you wouldn't? I'll give my own views on it. And one, you didn't necessarily mention the tariffs or maybe you did, but the tariff situation, as that unfolds, clearly the small cap companies which in many cases are much more local in nature, in some cases insulated from some of those tariffs are often ones that are in favor. And particularly if this continues to play out, I would imagine that some of those small companies, especially the ones that would be considered steadier and a little bit less sensitive to the economy would probably be interesting places to be. So it's hard to know, but I think from a tariff situation, small cap is certainly more favorable. David, I just say to your comment around the canary in the coal mine, the one thing that struck me with President Kaplan's comments was if the 10-year is at 211, down from three and a quarter or so, equity markets at least measured by larger cap are relatively at their highs, a couple of three, four, 5% maybe off, but small caps lower. Something is not right in the whole equation and maybe it's the earnings and maybe the small cap companies are picking up that there's more vulnerability in the earnings than otherwise generally appreciated in the market. But something is probably inconsistent there, either rates are too low or earnings are too high, how that manifests itself in multiple movements and all those things, but it feels like that's where we might be in a shorter term period here. I don't know if either of you have comments there. Well, I do think the active-passive, because I think your question, the premise of it is exactly right. And you should see, and to David's point, in a situation like this, if we're worried about tariffs, the smaller cap domestically focused companies do better. And I think part of the flow issue may be tampering that phenomenon from really taking place. I think what we're saying and what we said earlier was ultimately in the long-term fundamentals are going to drive performance, but in the short-term, these flows can have a much bigger, much longer impact just given the magnitude of the assets in these classes. We mentioned, so we've been talking about tariffs a little bit, we've talked a little bit about active versus passive management. I have a question for you, Anne, actually when it comes to, obviously politics is a big part of the markets and healthcare is always a topic. And so how do you manage in sort of an unpredictable environment like this? It's a great question. And as you mentioned earlier, I'm responsible for our healthcare services and all of our medical technology stocks, and I have colleagues that are responsible for biopharma. But the past 27, eight years where I've been involved in investing, my first focus has always been healthcare services, which is always dominated in the long-term and the short-term by politics. And I think the way I invest and the team invests in uncertain environments like this, it's very hard for us to say in the short-term, and I mean by that one, two, three years from a Washington standpoint, what exactly is going to happen, but it's pretty easy to determine what is absolutely not going to happen. So that's one. And maybe an example of that, the whole repeal and replace conversation, there was a very close to zero chance the ACA was going to be repealed. One, because politicians never take away a gift and two, they didn't have the votes for it. So that made it easier. The other thing I would say, the great thing about healthcare investing is we have these great, strong, powerful tailwinds like demographics. We're aging and we use more healthcare as we age and innovation, which I mentioned earlier, is really game-changing. That said, we had this affordability issue, we have an access issue and it's just getting tougher. So what the US and every country is trying to do is do a better job allocating our scarce healthcare resource. We do a particularly horrific job in the US. And so what we're seeing and will continue to see, the gap, if you want to get incremental reimbursement or you can't, the gap between changing the standard of care, the bar is much higher from an innovation standpoint. It's much higher from a value standpoint. I'm exaggerating here, but the reason the pharma stocks did so well in the 90s and the early 00s is they kept coming up with these Me Too drugs that were branded, they were patented. Well, that doesn't work anymore. And as we see more transparency and aligned incentives come into healthcare, the gap between those that really are adding meaningfully from a clinical standpoint or adding value out of high-cost settings into lower-cost, high-care quality settings, that gap is going to continue. So what we look for when populating a portfolio are stocks that are going to be all weather in that the incremental innovation they're adding is really good and it's going to survive any short-term changes in reimbursement. Or these kind of companies are helping us make better decisions in healthcare. So regardless of, again, a short-term reimbursement change, these companies are gonna help us transition from where we are, a fee-for-service healthcare system, to a value-based system. So it's a very long, I apologize, way of saying that if you think about what governments want, they want value in healthcare, and if you think long-term and focus on those stocks as opposed to stocks that are playing short-term games, I think that's how you create an all-weather portfolio. I will say, though, in the hedge funds, my net exposure is on the low side. I think this is an election year, and election year and a half, and unfortunately, there's gonna be a lot of volatility over the next 18 months, and that's gonna create a lot of buying and selling opportunities, but it's gonna be a ride. I'm curious of the panel's view. We have a panel discussion later, actually it's the next one, talking about robo-investing. And you had mentioned, Steve, the fingers crossed that active investing is gonna get sort of an uptick. Do any of the panelists just have a comment on robo-investing versus active investing, especially sort of in this politically charged environment? Well, I'll make a couple of brief comments just on passive-active, and obviously robo is connected to that. I'm talking my own book, coming from an active manager. I'm a believer in active management, although obviously it has to be high-quality or there's not a place for it. I do think a lot of the discussion, and certainly much of the growth that we've seen in passive investing has come in really an unprecedented bull market of sort of 10 years of largely straight up. I think, and many of the measures that you see to justify passive investing are typically done over a 10-year period, where it shows that active managers underperformed, in some cases, hugely underperformed. I do believe that many active managers will struggle given fees, given the cash drag that's out there, and a variety of other flows, a variety of other things that certainly put them under pressure relative to a benchmark. But I do think that if you look over a full market cycle, that active management, that's high-quality active management, there's very much a place for it in terms of managing risk in anyone's portfolio. And so I am a believer in that. I do think from the standpoint of robo-investing, there are certainly plenty of investors out there who don't have the wherewithal to really get good-quality advice and recommendations, and in many cases, they're gonna make mistakes, typically knee-jerk reaction kinds of mistakes. And so robo-investing and advice that comes in that form certainly can be pretty valuable for people that don't have access and don't have the wherewithal to get sensible, good advice. And usually that advice is around long-term investing because if they get that advice and they focus on it, they're typically gonna come out with a much better result. So it's a juicy subject that could go on for a while, probably about active-passive, but. I just reiterate one point I made earlier. Again, the gap between the haves and the have-nots within healthcare. I'm sure that's the case in other sectors as well. Robo-investing doesn't afford you the opportunity to pick the winners within a sector. This isn't directly on point, but I would say the same tools, much of the same tools that are being used for robo-investing, whatever the term is, our firm and other firms, I think, are really investing quite a bit in the data science, in big learning. We, as a firm, believe that rather than compete with some of these tools, we can use them to augment and enhance our process. We're still, I'm still a bottom-up fundamental healthcare investor. But if I can use my quant colleagues, the data scientists that Wellington is hiring en masse to help me do a better job, we are all for that. And I think that's gonna be a big trend you see in active managing as well, just using these tools that are increasingly available. I wanna switch topics a little bit to go to the private versus public market. We've seen a trend in having private companies stay private a lot longer than they did in the past. Can you talk a little bit about sort of what you're seeing there? Yeah, so what Leslie's talking about is this somewhat new class of private securities, which is very late-stage growth. So if you think historically, I'm not sure if that's up there, historically, you kind of had a situation where there was early-stage venture and then you had late-growth venture done by the private equity-specific firms, and the companies would come public and firms like Wellington and MFS would participate in the IPOs and so on. But beginning about five, six years ago, we saw a situation where a lot of these private companies were staying private longer. I think much of that was driven by the fact that equity or investors across the globe were looking for more alternative ideas, right? Everybody is looking for private opportunities and the private companies are realizing, hey, this isn't so bad. If I can delay going public for a year or two and I don't have to deal with shareholders and quarterly earnings, I'm gonna do it. And so that really created a new class of equities. A lot of firms like Wellington, which predominantly focus on publicly-traded securities, are targeting this very specific new class, this late-stage growth. And what we look to do, we started a new PE business at Wellington six years ago, and we don't look to get involved in early-stage and be on the boards of directors and run these companies. We don't think that's where we add value. But we do think we can add value when companies are at the, we wanna be the last liquidity event before an IPO or some other transaction. We can help the companies position themselves to IPO. We can, if we find the IPO offering attractive, we can participate throughout our portfolios. And so that's where we are now. I'm not sure that this phenomenon where companies are staying private longer will continue. I tend to be a skeptic. I have a lot of people at my firm that disagree with me. It's wonderful if they do. But what I think is driving this, a lot of our clients, sovereign wealth and so on, who are really long-term investors, say we don't mind holding this illiquid security for 10 years, because we're long-term. In my view, my experience, everybody's long-term until the valuations start going down and then they want their money now. And so that hasn't happened yet. I'm a little skeptical that companies will be able to continue to enjoy access to private capital. There's certainly been plenty of capital out there, particularly in the private equity space, a lot of money chasing fewer and fewer deals. And with all that funding, it's allowed some of these companies to wait longer and longer. At some stage, maybe some of that capital dries up and that may be one of the reasons why we see that unwind a bit. But I'm an ants camp. I don't think it's gonna persist quite like it has now. And it's unfortunate too because as a stock picker, you'd much rather have that earlier stage where you have the ability to look forward when some other investors may not and you can see some things that give you an opportunity. And some of those have been bid away. And what do you think about the companies, the quote unicorns that have been coming to market that don't make any money? And after they go public, they announced they've lost billions of dollars the first quarter. So what do you think about those unicorns and how do you think about as an investor investing in those or not investing in those? I'll start, at the core of our philosophy is that over time, value of a business is the present value of all the future cash flows, hard stop. And the market will fall in love with things and embrace and business models that we can tolerate companies that are burning cash. There's parts of the cycle that you believe in the model, they've got a moat around the business and hence they wanna capture as much market share as they can and hence will make good longterm decisions that may not result in near term profitability. However, what we're very, very concerned about are the businesses in which there's a subsidization going on to drive unit growth that's really not economic growth and that when someone comes public and they have to reprice their goods or services to an area which is true economic transfer, that the growth rates will either be much lower than they are today, or that the economic model has some creaking in it. So we're being very selective in this market. There have been some very large companies to come public, there are more to come, great businesses and very innovative, but the valuation will matter and how they have generated the current growth. Is it truly durable when you start to put true economics around what they're offering? But I think the laws of finance that have persisted for thousands of years will remain and you better be able to generate free cash flow or you're not gonna have a really sustainable business. I want to talk a little, just transition a little bit to the global markets. And David, maybe you can kind of give your views on some thoughts regarding the global markets and how investors should be thinking about that. Sure. I mean, ultimately, around the world, I don't care what market you're in, it's kind of the same. The stocks follow the earnings over the long term. We've certainly had a period, and if you look over a very long period, the non-US markets, US markets, they generally perform reasonably close to one another, although we can go through pockets where that's not the case. That has been true most recently. I think we went through, have been through a period of maybe seven out of nine years where the US market has outperformed non-US markets. And I describe non-US markets, if I do it simplistically, say with IFA, which is the developed non-US markets, or even if you include emerging markets in there, that's also true. Why is that? The reason, I think, is quite simple. Earnings have been better in the US over the last decade, and the outlook for earnings have been better in the US over the last decade. One, because we were quicker with interest rates coming down and being much more supportive in the environment. We've done more with technology. We've been more aggressive with cost cutting and other areas to try to squeeze margins higher and higher. So in the last decade, it's certainly been about the US. The US market has obviously moved faster than the earnings, and that's caused the multiples to go up. And if you look at, there is a chart, I think, that highlights multiples. And clearly, the US earnings multiples, whether it's cash, whether it's PE, whatever it is, is a little bit further extended from what it might historically be. That's justified by lower rates. I think over a long period, though, I'm a believer in returning to the mean. I'm a believer in valuation. I'm a believer that earnings will be there. And so when I look out at some of the non-US markets, particularly Europe, where there's been a dearth of growth, I'm somewhat optimistic that over the coming decade, even with relatively minimal growth, I think many of the companies have tightened their belts in a way that they can squeeze a fair amount of earnings out of relatively less growth. And so when I look around the world, I kind of look and say, where is everybody not looking or not excited? And clearly, Europe is one of the places with all the turmoil, sovereign debt, and Brexit, and et cetera, et cetera, et cetera. And so I kind of look at that market and say, there's probably some interesting ideas, some interesting companies, obviously, bottom up, that are there. I put emerging markets in very much that same category, that there's been a lot of negative news that's out there, but I do believe over the long term, it's an above average grower, and I think there's opportunities. I'll close and make a last comment about currencies, where the US has been very strong, the US dollar, and if you look at any kind of a purchasing parity measure, I think the US dollar stands out as being maybe ahead of itself. I'm not a currency caller, but that also, as a non-US investor, provides a little bit of benefit if that unwinds and you get a little stronger euro, you get a little stronger yen, or even, and in particular, the emerging currencies, which have been dramatically under pressure over the last decade. Maybe I'll just add, from a healthcare standpoint, in our portfolios, our allocation to US stocks is higher than it has been over the 22 years I've been at Wellington. I think there are fundamental drivers that are causing that. When you think of where the innovation is in healthcare, the vast majority of biotech investing in R&D is in the US. Even the pharma companies in Europe are more big pharma, as opposed to these smaller biotech companies that are really at the groundbreaking part of science. So that's one. Interestingly, though, the valuations for non-US healthcare stocks tend to be higher in Europe than in the US, and I think that's a scarcity issue. There's just not a lot of investable healthcare companies in a lot of countries, and so the locals bid that up. I'll say something controversial as it relates to innovation. I do think in healthcare, we're seeing a big move forward in biotech in China. I've been going to China once a year since 2006, I think, and when I started going to China, what we were looking for is information on how the Chinese economy was going to drive growth for the large multinational companies, multinational selling into China. I'd say the second third of that period, we started to see Chinese companies selling to local Chinese institutions, and we started to see the introduction of domestic healthcare service companies. This past trip was amazing. I think the Chinese government knew way back when it was too late for the typical oral solid pharmaceutical market, but they started laying the groundwork years ago to create a world-class biopharma infrastructure, and I think we're going to see within the next three to five years, Chinese companies competing globally with innovation, not me too, drugs. I think we'll see, I'm not sure if people are familiar with immuno-oncology. This is the breakthrough in cancer where these targets or these pharma companies are getting your immune system to kick in and address the cancer. I think we'll see one from Beijing, a company on the market in the US within three years, and I don't think, I think it's different than technology because the standards of the Chinese SFDA, which is similar to our FDA, are very high. I'm not talking about the non-innovative, generic-sized drugs. I'm talking about the fact that the government really has built a world-class biopharma industry that you're not seeing it now, but you will in the next five to 10 years. I'll also say in some areas where we're looking at newer industries within healthcare, for instance, robotics, robotic surgery, genomics. In other areas of medtech like stents, the Chinese companies were generations behind. They're not now. The focus they're putting on robotics is the same as the focus we're seeing here. Genomics, they may even be ahead of us because they don't have the same rules and regulations we have. You know, Ann brings up a great, I'm sorry, go ahead. I'll follow up. I was just gonna say, Ann brings up a great point. There are great companies everywhere in the world. They're not only sitting in the US or only sitting in one market. And anything that drives sort of a broad brush investment, whether it's let's get out of international, let's get into US, means you sell companies that are, in some cases, the greatest companies in their business in the world. And in many cases, then, the valuation looks more interesting. So I like to think of investing not so much about investing in the US or investing in Europe or Japan. I just like to think about investing in the greatest companies. And you expand your population and you expand the opportunities to find those, I think. Sorry, Steve. I'd just add on the emerging market attraction and the innovation that's going on, the secular wave of middle class growth there and how these economies are evolving from central spending and capital spending and infrastructure, particularly in China, to something much more closed loop, just like we are in the US, where there's a lot of internally driven demand. And you overlay that with indices that are quite flawed because they are dominated by the companies of the past. Very often, the financial corporations, the big energy companies, they dominate the indices. And yet, these smaller companies, which won't really affect the EEM or any of the other holistic views of EEM, you're stock picking to both of your points. There is real innovation going on. That means competition for those companies in the US and a lot of opportunity, whether it's China or India. Our organization is very optimistic about the multi-year basis, knowing we're in a lot of volatility near term on the massive macro forces. But we do feel that there are great companies to be found and organizations such as the three of ours, where you can be on the ground doing the work, will be fruitful for returns. At this point, I'd like to open it up to the floor to ask questions of our panelists. I think we have people walking around with microphones as well. So I think there's a gentleman over there. In terms of healthcare in China, there's been stories very recently that 80%, I don't know if it's all drugs or generics, come from China into the US. Do you see or is there a movement now to ban to have barriers or tariffs? Because that can be viewed as a vulnerability, depending upon how scary you wanna be. But do you see that happening or might happen? Yeah, so it's a really great question. What you're talking about, I think, is that 70% of the API, that's the active pharmaceutical ingredient, comes from China and India to some extent. And that's not for biopharma drugs. That's for the oral solid market, the typical drug you think of when you pick it up at your CVS as opposed to something that's infused or injected. And so that's been the case for quite a while. There's two things going on now from a controversy. The tariffs, I don't think it's much of an issue. It's a very small percentage of the cost of these drugs, minuscule. And drugs, even generic drugs, have gross margins in excess of 90%. So I think that's less of an issue. The issue, again, the quality issue, is one that is real from time to time. I will say, without doubt, the US government has been more focused, both in India and in China, on making sure the factories there that produce API that go into drugs headed across the globe, make sure those standards are improving. But that's an area that I think, from a tariff standpoint, it's not a big deal. But certainly, from a quality standpoint, we need to continue to look at. So there are lots of threats to the public equity markets. Nationalism would seem like it's one that nobody in the panel has brought up explicitly, but it's kind of on the edges. Would anyone care to deal with that or any other kind of big threat to your markets? So from nationalism, I'm gonna interpret the nationalism comment as kind of the globalization, the supply chain that's been developed. Is that a reasonable way to talk about just- Globalization went a long way. Made in America, bought in America, made in China, bought in China, and isolationism that creates- I mean, the existing stock market is full of companies that have benefited from globalization. It happened. And so the prices are there now. And if that were to unwind, because of nationalist countries around the world turning inward and not allowing this to go on, like tariffs are kind of a here and now thing, and I'm talking about the bigger picture, longer-term thing. I think that we've seen several times in history where the nationalism and the behavior and the mood from one country to the next does affect consumer behavior, and whether it's dictated from above, comes up from below. It is something that we're watching. The US market, of all markets, tends to be more self-sufficient, closed economy relative to others, but Europe in particular is quite vulnerable to export pressures. It seems to be all countries against the US at the moment, so whether Europe can figure out how to circumvent the US friction with China and other supply chains. But that is decoupling what has been 30-plus years of globalizing our supply chains and the disinflationary dynamic of that for consumers is real, and we're seeing it in our company's concern around profit margins, adjusting their supply chains, diversifying away, and determining where they're going to put new capital for investment. And there is a renaissance of some sort going on here in the US for more automation and bringing more things here, because they know the rules can't change that quickly if they make the decision, again, a US corporation to make it here. But there's politics and there's human behavior and there's longstanding pressures that will emanate, and I think you'll see it through the income statements of companies, for sure. That's one of my earlier comments, that the bond market is reflecting something that is different than maybe the stock market at the moment, even though there's been this moderate pullback, that earnings are vulnerable. And you better make sure, and our teams, I know, do this day in and day out, that we know what we own and that the earnings are secure. You really have to think about it stock by stock, in my view. So take the tariff situation again. To some extent, there are big parts of healthcare that are protected because we have the technology that other countries don't and they want it. That's absolutely the case in biopharma. There are some categories within medical technology that are specifically carved out of the tariffs. That said, what I've been very focused on, there are parts that are not as carved out. So many of the life science tools and technology companies, and these are the equipment manufacturers, the imaging manufacturers, the companies that provide the diagnostic tools that enable Chinese companies to develop and bring to market drugs. Those companies, I think, are more at risk from an earnings standpoint. And that risk will increase as, again, other countries get the ability to build their own industries. So I think that is something you have to kind of look at stock by stock. The Mexico tariffs that are being proposed, there's a big difference from a company by company standpoint about which companies do or do not have facilities in Mexico. So again, you have to really, you look in the financial statements, you look in the footnotes, do you have facilities in Mexico? If so, what percent of your products are from there? And so, again, that will have an hit to earnings and margin for companies that produce a lot from Mexico. You also think about it in this way from a nationalism standpoint. There are some Chinese companies that, excuse me, Japanese companies tend to derive a higher percentage of their revenue from China than U.S. companies in healthcare, for instance. And when nationalism rears its head there, you've seen people in China shy away from buying Japanese companies. So it's not just U.S. versus the rest of the world. You also have to think about it throughout the entire opportunity set and what nationalism could bring on a company by company basis. Just a brief comment. I think of the nationalism, protectionism, the things that we've been seeing as in some ways cyclical. We've been through a very long period of using innovation and companies globalizing in their supply chain and the like. To some degree, that pendulum probably swings a little bit, swung a little bit too far, too quickly. There were some deals that are out there that maybe weren't as fair and that comes to light. But I think of it in a 10, 20, 30, 50 year kind of timeframe. Water's gonna find its level. Innovation is always gonna allow companies to find the best way, the easiest way to come up with a product and to distribute it in the marketplace. And I also think the notion of the U.S. sort of building up their borders and moving further down the value chain to take back jobs that went somewhere else that were down that value chain. I think that's nonsensical. I think we'll use innovation maybe to upgrade those low value added roles into higher value added. But ultimately, I think we will continue to try to move up that value chain as will most other developed nation around the world. And so I think this is in some ways cyclical rather than a trend that's likely to persist for a very long period now. And just let's not forget also that the tax reform that went on a couple years, I don't know, it feels like a couple years ago, but that will also encourage leveling the playing field of where that next dollar of innovative capital spending will be had and hence how supply chains will evolve on incremental new dollars, which I think the U.S. is gonna be a magnet, a magnet for that for some foreseeable period. Next question. Thanks very much. I'm just curious on your thoughts on the future of the buy side. Obviously, the passive money has been reaping most of the capital that's been coming into the equity market and the fee pressure has been quite heavy. And I'm just wondering it's, in terms of your thoughts, how this is all gonna shake out. There's obviously been some consolidation. There's some pressure such as Mifid that's impacting a lot of firms. And where does this all kind of lead to? Lindsay, how about a few slides? I was switching slides. Sorry, I didn't hear the question. Go ahead, Anne, if you. Well, I think someone mentioned it earlier. Fee pressure is here to stay. What we're seeing with technology, data science, that's here to stay. That's gonna continue. So I do think this industry will continue to experience more and more pressure going forward. It doesn't mean that it's all gloom and doom, however. There are sectors for which, throughout the whole market, stock picking is very, very important. That's crucial. And again, that's what we're talking about here. The value that active managers who are accomplished and have track records and have a process and philosophy that is durable, absolutely will be able to attract and maintain assets if they put up results. But I do think it's gonna be increasingly difficult. I think we'll continue to experience fee pressure. I think it's going to be tougher and tougher for smaller firms because the investment that's going to be necessary in IT, now with Mifid in research, with in compliance and so on, I think it's gonna be very, very difficult for small firms to be able to invest as much in that type of infrastructure as they need to. So again, I'm thrilled and blessed to be in this industry. I love it. I do think I've been in the industry for 27 years and I probably was very lucky to be in one of the best periods of time to be in the industry, right? And I do think it will get tougher going forward, to your point. Yeah, I'm obviously on the buy side. I'm very optimistic about the opportunities on the buy side for a number of reasons. First off, on the notion of passive versus active, I've already made the point, I think, that we're in an unusual period and measurements are being made in that unusual period and not necessarily taking the whole picture into play. I think the second point I'd make is when measurements are made in terms of active managers outperforming or underperforming, I think one thing that's true is there are certain group of managers that are persistent in outperforming. There's a certain group of managers that are persistent in underperforming and I would argue that that group that's persistent in underperforming in a sense impacts the whole. And so I think if you come to market with a product where you can truly outperform after fees, after the cash drag and other things that are a drag against the benchmark, I think there's very much a place for that and I do believe that's going to come much further into focus when we run into a difficult bear market. You read lots of different studies and surveys that are out there. One survey that I looked at, interviews were done of passive investors and they were asked a couple of simple questions. One question was if the market goes up 10%, how do you think that your investment will do? Obviously a large percent thought that it would do 10% or maybe more, but a more telling question was if the market goes down 10 or 20%, do you think that your portfolio will outperform? And it was extraordinary. It was something like two thirds of the people that were invested in passive investments thought their portfolio would outperform in a down market. And I thought, well, that tells you a little bit about perhaps the misnomer of passive investing. So I think there's a place for passive investing, but I do think there will remain a place for good active investing. I'm on Anne's side in the sense of consolidation. I think you do need scale, increasing scale to have the ability to do the forward-looking research to allow you to outperform the benchmark. And so I think that'll be important. I think you've said it all, but it does echo with what President Kaplan had said. All industries are looking for scale. All industries are being disrupted. We have the fee reduction for sure. That's here to stay. The cost inflation of data, of quality of people, of MIFID, of compliance, of all technology underlying, that's here to stay also. Margins are under pressure, and the only way to get that, to have the economics work are to have incremental growth, and we have to do that by performance. And so we've had this perfect storm of difficult performance versus a passive, versus the quote-unquote free alternative as our costs are going up, as markets have only been straight up. Thank goodness for that. That's a good component. But the downturn will be telling, and I think, too, there will be consolidation and whether that's investments in ESG and all the other things that are happening out there. It'll be very difficult to be a mid-sized organization. I think being small and quite nimble and very focused on what you do is one thing, and being large, but somewhere in the middle, those are gonna be, I think, it's gonna be difficult for them to justify their persistence. Well, that actually brings us to the close of the panel discussion. I wanna thank everybody up here for your thoughts and insights, as well as the questions.