On the Money


Focus Remains On the Fundamentals

April 1, 2021

Noah Blackstein, Vice President & Senior Portfolio Manager discusses recent market events, including the rotation that has been happening, along with the involvement of Central Banks and the overall direction of rates. He also speaks to us about the secular growth themes, how his funds are positioned, and that regardless of what happens in the markets, he continues to stick to his investment discipline.


Mark Brisley
Managing Director & Head of Dynamic Funds

Noah Blackstein
Vice President & Senior Portfolio Manager


Mark Brisley: You are tuning in to On The Money with Dynamic Funds, a podcast series that delivers access to some of the industry's most experienced active managers and thought leaders. We're sitting down to ask them the pertinent questions to find out their insights on the market environment and navigating the investment landscape.

Welcome to another edition of On The Money. I'm your host, Mark Brisley. My conversation today is with veteran growth manager, Noah Blackstein, who's been managing US and global growth mandates over the course of his investment career, and now manages over $10 billion for us at Dynamic Funds. Noah last joined us on this podcast back in July of 2020. While much has changed, what hasn't is the unwavering commitment by Noah to the same investment process that has been at the core of his long-term success during the past 23 years.

His investment process is what contributed not only to his successful 2020 returns across his mandates but also to his long-term track records across the same mandates.

We're hopefully at the beginning of the end of this devastating global pandemic but the economy that lies ahead will be very different in many ways. As Noah Blackstein has discussed over the last couple of weeks, the acceleration of secular and digital transformation in many industries will not mean revert. He continues to stress that the focus remain on the fundamentals and what you are ultimately paying for, which is the value in future growth through earnings and cash flow.

To jump right into our conversation Noah, I'm going to read you a quote from a recent commentary of yours where you said, "Going through these types of rotations has been quite common over the past 10 years. When good or bad periods occur, our focus on our investment process doesn't waver. Great companies have always led us up and out. Unlike other periods, the economy is looking better, not worse, six months out, and will further accelerate the growth for many of our names."

Let's talk about what you've seen in the market since our last discussion, your thoughts on this rotation that has taken place in the markets, which I believe you said started back in August of 2020.

Noah Blackstein: I think one of the things that we've seen is that since the financial crisis, macro investing has morphed, really no longer is very effective between bonds and equities for a variety of reasons, some of which are due to quantitative easing by central banks. A lot of macro investing has morphed into factor investing or sector rotating. We've seen these quant-type funds rotate between value and growth factors during different periods of time. Those signals are usually triggered by the slope of the yield curve, that's the curve that the duration of a whole bunch of treasury bonds makes. The steeper that curve is it's usually an indication that the economy is getting better.

For a lot of quants, that's then says it's time to rotate into financials or into cyclicals or into some more economically sensitive names out of some of the growth areas. Interest rates really started moving up in August of 2020. They continue to power forward once we got the positive vaccine news in November. Then they really taken off year to date with the yield on the benchmark 10-year US Treasury up nearly 90% since December 31st.

It's been a substantial move not only in the 10-year yield but with low rates anchored or held constant by the Federal Bank, the yield curve has tilted up. That's really resulted in a huge sector rotation into some of the more distressed or harder hit areas of the overall market. Some might call it a rotation into value, but I think if you look a little bit closer, it's a little bit more of a rotation into some more distressed and unprofitable companies than necessarily cheap companies with solid balance sheets.

There's been a rotation into that, based on the slope of the yield curve, which from our perspective is it's positive in the sense that, one, the better the economy, obviously, the better the outlook is for the companies that we own in the portfolio. Two, I think that you really need to know why your stocks are underperforming or outperforming. If it has to do with a rotation predicated on the yield curve, those typically been opportunities. We certainly saw that in the fourth quarter of 2016 when rates moved up a lot higher and then began to fade.

This one probably has some durability. Interest rates are now back to where they were pre-pandemic, a combination of vaccines and tremendous stimulus, obviously, but they're well off of their highs in November of 2018 when the 10-year Treasury was double where it is today, more than 3.2% to 3.4% range versus today's 1.7. A stronger economy bodes well for our companies for sure. The sector rotations are just the nature of markets currently and they should be used to your advantage, provided nothing has changed with the underlying companies that you own.

Mark Brisley: With your emphasis, Noah being on US and global mandates and markets, I wanted to see if we could just walk through two of your particular funds. The Dynamic Power American Growth Fund and the Dynamic Power Global Growth Fund, both of which had pretty incredible years in 2020 and 2020 brought a lot of opportunities to you, how they're currently positioned. Maybe we could start though with a brief overview of what you're looking for in the companies that you're selecting for these two particular mandates.

Noah Blackstein: Typically our process, which has served us for a long period of time and moving into our 24th year has been to find companies that have the ability to grow over time. Typically, we're looking for fast-growing companies, high teens or better revenue and earnings growth at the end of the day. We are really focused on that revenue or earnings growth. We're not looking for somatic growth stocks or potential revenues or potential earnings.

We're looking for real revenues today and real earnings, however you want to measure that. You want to measure that through earnings per share. You want to measure that through cash flow per share, free cash flow per share. We're looking at economic earnings at the end of the day.

We run a screen globally in the US and globally as well. We're trying to find companies that meet that criteria. There's not a lot of companies that meet that criteria, but we probably get from the universe of 5,000 companies or screens probably get us down to somewhere between 100 and 200 names on average. Then really we spend the time doing the fundamental work on the company, really trying to figure out what does this company look like three to five years from now?

What's the potential for the earnings to grow to? What's the potential for the revenues, obviously, to grow to? Where can the operating margins be that obviously continually reassess where the margins can go and whether or not the management team can execute those goals? For us, that process has stayed constant regardless of the monthly or daily or three-month rotation. Sticking to that discipline and process is what generated the 20 plus year track record, whether that's in the Global Fund or in the American Fund.

Sticking to that discipline and process is key because what we know over time is that those companies that can grow both revenues and earnings, the stock price tends to follow over long periods of time. That our goal is to say whether the stock price today provides enough upside to where we think the future revenues and future earnings can be, that it's a worthwhile investment today.

Mark Brisley: I was watching one of your recent interviews on CNBC. I think for a lot of our listeners that have seen you on some of the bigger media outlets where you're being interviewed, we hear over and over again, your commitment to this process. It's that commitment to process you speak about often that's led you to a lot of innovative companies and given what we're going through with the pandemic, many of which have been in the healthcare sector. Maybe let's talk a little bit about what secular growth themes you are investing in right now. Is this growth still intact?

Noah Blackstein: I think pre-pandemic were really at the beginning of a shift, whether that was in terms of e-commerce, or whether that was in the shift toward digital transformation of enterprises. When we were investors just after the IPO in Google, at the time, there was a huge advertising market and online advertising was less than I believe 2% of total ad dollars were going online. If people in the covenant demographics we're spending roughly 20% of their time online.

If you think about that back then when they went public, they were just doing under $2 billion of revenue and the thought process was well. Even if they capture a small piece of this global advertising pie, this is a 15 or $20 billion type of opportunity. When you see that shift of ad dollars, though, that occurred in the middle part of the last decade from traditional media to online, you realize that this is a theme that's no longer just affecting advertising, for example.

You're seeing this overall shift transforming the way we view and consume media. You're seeing it, I think if the pandemic did anything, it highlighted the importance of cloud-based technologies, but this was occurring before the pandemic and pre-pandemic. It just put a much larger emphasis on the ability to have cloud-based applications. As well as just the tremendous investment that's gone on in the cloud, by the large hyperscale cloud companies.

The future of reaching customers and the future of using analytics, whether that's in machine learning or artificial intelligence, really to connect with and to figure out what your customers are looking for. We were entering the next generation of technology where it's not really about selling a box that sits on your desk or a piece of glass and metal that sits in your pocket. It's really about how you engage with customers, how you communicate with customers, and ultimately how you sell products and that's really transformative of all enterprises.

Then internally within enterprises, you can just think of the competition from digital transformation. The competition really in digital transformation is paper. How many processes are done by paper? How many are done by old-time reports? It's really streamlining enterprises to become much more productive and much more efficient, as well as using digital channels to interact with and get customers. We've seen it repeatedly, whether it's in retailers or even in banks in the United States.

Getting a new customer is so much cheaper doing it online than it is in the traditional way. This is just the future of capitalism and the future of consumer engagement and we still have a very, very long way to go in terms of the opportunity for infrastructure companies, in terms of companies who are redoing enterprise software, and in terms of just every industry embracing technology to get new customers and grow their businesses, whether that's in banking, whether that's in travel, whether that's in media, even healthcare. These themes are secular in nature and are going to continue long after the pandemic has passed

Mark Brisley: Another area of getting a lot of attention and discussions and I guess largely due to just the outperformance in the US last year, is around geographies. If we think about international versus US, where are you seeing new opportunities outside of North America within your global mandates right now?

Noah Blackstein: The difference between the US Power American growth and Dynamic Global Growth really has very little to do with anything other than the opportunity set. Whereas the American Fund is just focused on the US, the Global Fund is focused on the world. The opportunity set globally is larger than it is in the US but I would say that we don't talk about geographies or sectors necessarily as areas from a top-down view that we would invest in.

Everything is driven by the process and everything is driven from the bottom up. Wherever we can find fast-growing profitable companies with the opportunity to be significantly larger, we'll do our due diligence on those companies, and then look at the opportunities ahead of them. Despite the emphasis on the US in 2020, we say our Global Funds had an extremely strong year but whether that was in the emergence of digital banking and financial technology in Brazil, whether that was e-commerce in gaming in Asia, whether that was payments in Europe.

Many of the things, the areas of secular growth that we've talked about, digital transformation of finance, of the healthcare, of media, of reaching the consumer. Many of these trends are global in nature. It's not just happening in the United States or in Canada, it's happening in Europe, it's happening in Indonesia, it's happening in the Philippines, it's happening in Brazil. We talk with US-centric focused often in North America but these are global trends that are happening everywhere.

Each market is a little bit different by the regulatory aspects of it, but for sure, many of the themes that we've talked about in the US are themes that are occurring globally. That's really not coming down from a 10,000-foot view from the top of the mountain. That's from base station zero at the bottom of the hill, working our way up to the top to get a bigger picture. For sure, what we're seeing is from the bottom up, these trends are global and secular in nature.

Mark Brisley: You also speak quite often in the media and in your commentaries about central bank involvement in the markets and we've heard quite a bit from central banks, especially in the last few weeks. What are your thoughts on what they've been doing of late and also on the direction of the overall rate scenarios that we're seeing emerge?

Noah Blackstein: On the negative side, I think every big bear market of my career excluding the pandemic, was really caused by not raising interest rates too much. I think that the market today with the moving rates is arguing that the federal reserve will be raising rates a lot sooner than they said they are going to raise interest rates. They're certainly trying to avoid tightening financial conditions and raising rates too soon. There are base effects on a year over year basis with the pandemic, just the collapse of the economy, during the shutdowns, there's obviously going to be some higher inflation just because of the year over year comparisons are going to be high.

What happens longer term, in terms of the secular forces on inflation, there still is no general theory of inflation, despite every single person getting on television and talking about inflation is coming. We still actually don't really know what causes inflation. Obviously, printing too much money is inflationary. No one really knows what exactly that means.

From my perspective, I think that you can get caught up a lot in the overall macro, I think it's really important to focus in on companies. I think that the biggest risk to companies is obviously going into a recession. That usually, pre-pandemic has been induced by central banks interest rates too far. They told us not to look at the yield curve when it was inverting. Then we had a nearly 20% correction in the markets in the fourth quarter of 2018.

I worry a lot about central bank mistakes on raising rates too far. I also worry that in the last little while, you've certainly seen a tremendous number of companies with very questionable balance sheets, and really questionable companies as going concerns, that the stimulus in the bond-buying really allowed them to use the markets as a refinancing tool. There were a number of companies, for example, who were basically from an operating basis anyway, in the short term, were insolvent. You've seen some of those companies double or triple their share count and were able to issue bonds as well. Really, those are companies that should have gone under.

I think central banks, during this pandemic, change the functioning a little bit of the markets to financing from sorting out the right capital allocation, I think. I worry a little bit about that but that doesn't really change my main focus. I know my main focus is to find a company in the early stages of its growth, profitable growth, wherever that company may be, and try and find it and own it. If that management team can execute, that's how we deliver returns for shareholders. That, at the end of the day, despite multiple central banks, despite multiple interest rate regimes, that's really the way to make money over time in the stock market as far as I'm concerned.

Mark Brisley: There's always so much to unpack for investors when they're looking at the market broadly. It seems like every few years, we end up with something new, that gathers a lot of headlines, and often comes in the form of an acronym. I'm almost reluctant to go down this road with you but because it's out there in such a heavy way, we're hearing a lot about SPACs right now, or the special purpose acquisition companies.

For investors listening to us today, that are unfamiliar with the term, essentially a SPAC or the special purpose acquisition companies are companies listed on the stock exchange, acquire private companies, and then take them into the public company realm. My question to you, Noah , is if you could give us your thoughts on these companies, the momentum behind the growth of this space, and any impact this might be having on the markets, and anything investors need to be concerned with or paying attention to.

Noah Blackstein: We run a couple of hedge fund mandates and our more aggressive one in the Global Growth Opportunities Fund. Part of the problem more recently, on the short side has been that a lot of companies with just atrocious credit, terrible fundamentals, and heavily indebted balance sheets have been the best-performing stocks over the last six months. It's over the last even nine months. It's been frustrating in that sense on the short side, but in one of the portfolios, we've spent a lot of time and a lot of the SPACs. At least four of them have been quite profitable for our Global Growth Opportunities Fund on the short side.

There's a tremendous amount that we can unpack on SPACs. I would just say, for individual investors, the best bet is to not participate if you don't know who the sponsor is or what's going on and just sit on the sidelines. I think that there's a lot of money to be made for the sponsors. There's a lot of money to be made for people who are doing pipes investments. It's a private investment and public equities, which are typically SPACs and there's a tremendous amount of dilution.

I think it's a very dangerous area for the most part. I think it will all settle down and winners will be sorted from losers but that's going to take some time. There are some good firms that are sponsoring SPACs for sure, some VCs venture capitalists with excellent reputations, and no deals announced but you really got to go through the details of each of these individuals SPAcs, and its a tremendous amount of work. I would say more recently, some of these nonsense ones have been profitable shorts, but I was just telling investors to ignore them, especially when they come out.

Then after they do a deal and if you can analyze the facts of the deal, maybe they'll work out with their interesting opportunities for sure. As of now, I think that they should be-- personally, from our point of view, we're avoiding them on the long side and some of the ones that have been backed into companies with no revenue and no earnings for the next seven years that have been stuffed into a SPACs so they could announce a deal from our perspective, represent excellent areas for the short side, and there've been very few excellent areas on the short side, over the past nine months.

Mark Brisley: I appreciate that insight. Another area too, that has been in the news recently, and these are tools that have been around for a long time. Of course, I'm referring to hedge funds, but more negative news recently when we think about firms like Melvin Capital and most recently in the last week with Arca ghost fund, very different from what you mentioned as the hedge funds that you run and for our listeners that have this unfortunate view from the media that hedge funds are run like the TV show Billions. I want to get your thoughts on these types of hedge funds and how that differs with what you're trying to achieve in your hedge fund and alternative strategies.

Noah Blackstein: Well, first of all, you mentioned me on CNBC and one of the writers and producers of the first few seasons of Billions, was Andrew Sorkin, who's a host of the Squawk Box. I would say that it's obviously fictional on Billions, but Andrew is certainly a financial news reporter for both the New York Times and CNBC. Names may have been changed to protect the innocent, but there's a lot of interesting stuff on the early seasons of Billions anyway, that some people would say, "Oh yes, I know who they're pretending to be."

I would say, listen, we run hedge funds that are opportunistic and performance-oriented, like Global Growth Opportunities or Alpha Performance, which are trying to be low vol, and so we've never really employed leverage to a massive extent, like some of these funds that have gotten themselves into trouble more recently.

I know the stories of these two funds. I don't know the facts, so I'm not going to really comment on them specifically, but I would say to the extent that it could have an effect, obviously we didn't own GameStop. We certainly haven't been involved in any actually of the Chinese names that were more recently in the big block trades that were going up during the liquidation of the other hedge fund or a family office at the time.

We haven't been involved, but the fact of the matter is that the leveraging can impact a whole group of stocks if these funds are de-leveraging. There are stocks that got them into trouble and there are stocks that we might hold that they hold, that they have to sell and it's for sellers. That's typically an opportunity provided, nothing has changed fundamentally.

Obviously, there's been a few things going on. I think that I am not ignoring it. I have lived through long-term capital.

I have seen the debacle that occurred in 2008 with off-balance sheet instruments. I would say that CDs spreads, credit defaults spread and the banks still look fairly benign except for a couple of the European and Japanese banks that were directly involved. I'm looking at all the signs of stress in the system and while these hedge funds that blew up can have an impact in the very short term on names that we overlap with. I would say that so far that doesn't appear to be systemic, that could change. I don't know the size of the losses of any of these banks. It's something that we're clearly watching, but as of now, it seems fairly benign. If those facts change, we'll adjust accordingly.

Mark Brisley: As we think then about a lot of the contributors to the gyrations, and most of them are short-term gyrations in the market and some of which we've talked about here today. As a growth investor, how do you look through these gyrations to what really drives the performance of the companies you're invested in and really interested to hear what you've been seeing from your companies during the recent earnings season and their future outlook?

Noah Blackstein: I think we've over the last couple of years have been asked our thoughts on value investing and deep value investors. I've constantly praised true value investors and the importance of having both pure growth and pure value investors within your portfolio. These types of moves that you've seen over the last 30-ish days, probably since the 16th of February until now, these types of rotations can't be timed. You need to be able to own a true deep value manager on one side and a growth manager on the other side. I've always believed that you need to diversify with stop-by style.

I think that's critical. I think that the value funds have had some of their best relative performance in a very, very long time and in a very short period of time. I've always sort of praised some of the value managers out there. I don't believe any of them have ever returned the favor and said anything nice about me in the last 25 years but that's okay. For the most part, I would say that you really need to focus in on the companies and what's driving those companies and how much bigger they can be.

That, at the end of the day, after all of these gyrations, that really comes with a very long experience of doing this to sit there and say to yourself, "I'm going to dump this company which is probably going to grow at 30% to 35% a year and have the opportunity to go from, I don't know, a billion in revenue to probably 20 billion in revenue." Because the market is now looking favorably on movie theaters or cruise lines or shopping malls which weren't great before the pandemic but we've come up with some cockamamie thesis that they're going to be great post the pandemic.

We're just going to rotate into that. I can't make money doing that. How I make money is by owning great growth companies that have that big opportunity in front of them that's not reflected in their current stock price. I really try not to do anything else. The ability to stick to that is really easy when you're up 20%, 40%, 60%, 90% but then you go through periods where it's not working. The difficulty a lot of investors have is to stick with it when it doesn't work. Just like sticking with value when it wasn't working as it had. If you can do that, that's really how you drive performance over time.

Pullbacks are never fun and they're never enjoyable but if you go up a lot, you should expect at some point to give some back and then move higher from there.

Mark Brisley: I've heard in the last couple of interviews you've done and people love to ask you this question or write about this rotation and you've addressed that in the beginning of the call, and as I mentioned, when we did the introduction that you defined how you look at value is what is the value in future growth when you're thinking about earnings and cash flow? You also talked about the fact that value is important. For distress value investors out there, it's an important piece of a portfolio but you do make the comment that the best way to access this is through active management.

Noah Blackstein: For sure. I think the other major factors that as the evolution of macro investing which has failed pretty badly since 2008 and that may be attributable to quantitative easing, I don't know exactly why. It's been so dismal. You've been in the slow growth, low inflation environment so these rotations have just caught them off guard. For the most part, these investors have rotated to factors and a lot of the factors that they use and they used to rotate are value or growth index funds. The problem is that the index providers are just, basically, if you look at the construction of their value and growth indexes, they're really basically based on--

They're not really value and growth. They're expensive and cheap. They're low price to book versus high price to book and for the most part. The value indexes end up being mostly energy in banks and the growth indexes end up being healthcare, communication, services, and technology. You're more sector rotating than you are value and growth rotating. I'm not here to make somebody's factor funds better. At the end of the day, I just want to focus on individual companies.

Sometimes there's information prices when companies are getting hit and stocks are going down that maybe there is something fundamentally wrong with the company or with the management team or with the outlook, but you need to be able to distinguish that between this dynamic in the market of people selling growth stocks to buy banks, for example, based on the slope of the yield curve. You really don't want to let that shake you out of a great company that can be a significantly larger company in the next five years. Really, you want to figure out what the value of that company is.

When Facebook came public just under $4 billion of revenue, if you did the work that you could have done on Google on Facebook, that stock was in the mid-20s in 2013. Five years forward, the stock was $200. Today, it's close to $300. It's gone from $25 to nearly $300 since 2013. Those are the types of things that drive portfolios. Those are the types of things that drive returns. The reason why it did so well was the revenues and the earnings grew dramatically more than anybody thought. Those are the types of things that we're really trying to find.


Mark Brisley: Noah, these are great insights. As always, it's a pleasure to have you speaking with us. I look forward to our next conversation where undoubtedly things will have changed yet again but the one thing we won't be talking about is any alteration in your process. Investors have certainly been rewarded as a result of that. Thank you very much for your time today and unpacking a lot of this information for us.

Noah Blackstein: As my favorite drummer of all time wrote, [foreign language]

Mark Brisley: Fantastic. I want to thank all of our listeners for joining us today, this edition of On The Money. If you'd like any more information on any of the mandates we discussed or further information on Dynamic Funds, please visit us at dynamic.ca. Of course, we always think that you should seek more advice on any of the information that we've covered today or in investing in general from a qualified financial advisor. On behalf of all of us here at Dynamic, we wish you continued good health and safety, and thanks again for joining us.

You've been listening to another edition of On The Money with Dynamic Funds. For more information on Dynamic and our complete fund lineup, contact your financial advisor or visit our website at dynamic.ca.

Speaker : This audio has been prepared by 1832 Asset Management LP and is provided for information purposes only. Views expressed regarding a particular investment, economy, industry, or market sector should not be considered an indication of trading intent of any of the mutual funds managed by 1832 Asset Management LP.

These views are not to be relied upon as investment advice, nor should they be considered a recommendation to buy or sell. These views are subject to change at any time based upon markets and other conditions. We disclaims any responsibility to update such views. To the extent this audio contains information or data obtained from third-party sources, it is believed to be accurate and reliable as of the date of publication, but 1832 Asset Management LP does not guarantee its accuracy or reliability.

Nothing in this document is or should be relied upon as a promise or representation as to the future. Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the perspectives before investing. The indicated rates of return are the historical annual compound total returns, including changes in unit values and re-investment of all distributions does not take into account sales, redemption, or option changes or income taxes payable by any security holder that would have reduced returns.

Mutual funds are not guaranteed. Their values change frequently and past performance may not be repeated.

Listen on