PARTICIPANTS
Mark Brisley
Managing Director
Noah Blackstein
Vice President, Senior Portfolio Manager
PRESENTATION
Mark Brisley: Hello and welcome to On The Money with Dynamic Funds. I’m Mark Brisley, Managing Director of Dynamic, and joining me for today’s conversation is Vice President and Senior Portfolio Manager, Noah Blackstein. Our aim with today’s call is to provide access and insights into the investment management process and capabilities here at Dynamic Funds.
Noah is responsible for the management of over $7 billion in U.S. and global growth portfolios and has been with Dynamic since 1997, where he has established himself as a successful U.S. and global growth fund manager with a reputation that’s strengthened by a 25 year-plus track record of success and numerous industry awards. Alongside his mutual funds, Noah manages two hedge funds: the Dynamic Alpha Performance Fund, a conservatively managed hedge fund designed to protect capital wealth, and the Dynamic Global Growth Opportunities Fund, which is managed with the goal of delivering superior long-term equity-related returns.
Throughout his career, Noah has regularly appeared in many well-known publications, including Barron’s and the Wall Street Journal, and is a regularly featured guest on CNBC and other respected financial news programs. He brings unparalleled market insight and skill to the job backed by a disciplined investment method.
Noah, it’s a pleasure to have you join us today and thank you for being here.
Noah Blackstein: Thanks very much for having me.
Mark Brisley: I’m going to get started with a question among the top of anybody’s mind working in investment management right now, but having said that you’ve been managing money for over 25 years, how does this market compare to anything you’ve seen in the past?
Noah Blackstein: Well, you’re right. I mean, I’ve been running the Power American Fund, July I’ll be moving into my 23rd year of managing the Power American Fund. We ran the U.S. funds in the 2008 global financial crisis, obviously the 2000 to 2002 bear market, but I started in the early 1990s and have gone through the peso crisis, the Russian debt default, the 1998 long term capital and so on and so forth, so I’ve been through many of these market breaks, including the fourth quarter of 2018 as well, which was a decline of nearly 20 percent in a very short period of time.
What I would say is that—so I’ve seen a lot. Typically these bear markets and big market breaks are brought about where you have a Federal Reserve or central bank tightening cycle, and then something usually ends up—the Fed goes too far or central banks go too far, and then something typically implodes and that ends the tightening cycle. Very rare, we haven’t really seen a general economic—we haven’t seen any general economic slowdown, too much supply, not enough demand for decades upon decades, so this central bank cycle of tightening too far and things blowing up really was one where you could say, okay, close to global financial crisis, what was the excess supply of housing, how long before that could clear, how long before FICO scores got to the point where people could get mortgages again, so there was excess in the economy where you could analyze the amount of time it would take to get out of that.
This has been very different in the sense that there were no glaring economic imbalances in the economy going into this downturn. This was obviously a pandemic and the government reaction to the pandemic was to shut the economy down to basically zero, and that’s why I think you’re seeing some of the worst economic numbers since the Great Depression. This is not a lack of demand or lack of aggregate demand, this is much more a policy choice to attempt to stop a virus, so it’s very, very different in that sense because there is nothing glaringly—there was nothing glaringly wrong with the overall economy.
The other thing I would say is very different about what we’ve just witnessed is the speed. Typically over the past 20 years, it’s taken about 180 days to establish a low in the market, and the average decline has been about 27 percent. This time it took 33 days to fall 35 percent, so I’ve never—I’ve seen worse bear markets in terms of percent declines, but I’ve never seen anything this fast. That’s twice the speed of the next fastest drop, where I think in 2010 it only took about 66 days to fall 17 percent.
The rally back has also been pretty tremendous. The recovery of about 50 percent of the decline typically over the last 20 years has taken about 74 days to recover half of the decline, and this time it took 17 days. It’s remarkable in terms of the speed of this decline and also the rebound of this decline.
While I’ve seen worse bear markets, I’ve never seen anything that was deliberately created, and I’ve never seen anything that’s come and gone—come and rallied back this fast.
Mark Brisley: Noah, to your comment around the sheer speed and velocity of what we’ve witnessed, has this caused you to pause and alter or adjust your investment approach, and to follow that up, how do you incorporate an unprecedented macroeconomic event or even a non-economic event like a pandemic into your process?
Noah Blackstein: Well, I think that nothing changes with our discipline and our process, so I’ve managed through numerous market cycles. There’s always an issue for the world to be concerned about, and my main focus is on the discipline and process, running highly concentrated portfolios, either in the U.S. or globally, and really trying to find 20 to 25 of the best names with the most significant upside, so we don’t change our process, we don’t switch our process. That process has been tested through some of the worst bear markets in history, and so we stick to that discipline and process and don’t really change.
It’s one thing to have a discipline in process but it’s another thing to be able to stick to it when things aren’t going well, and we’ve been through enough bear markets to know that it’s the discipline and process that leads to finding big winners over time, and big winners always will lead you up and out from these deep bear markets.
Mark Brisley: Now that we’ve seen U.S. and global equity markets move off the lows of March that you previously mentioned, a question that’s been coming up quite a bit is whether or not we feel we’re entering a new bull market or are we just really experiencing a bear market rally. Your thoughts?
Noah Blackstein: Yes, I mean, these are fun things to talk about at dinner tables, I guess, and on TV. I’m not sure if there’s a stuffed animal you win on getting that right. I think the way we make money over time is finding a company today that’s perhaps $1 billion or $2 billion in sales and that number is going to $10 billion to $25 billion to $30 billion in sales, that’s doing maybe $0.25 in earnings per share and that earnings per share number is going $5 to $9 a share. Trying to figure out whether this is a bear market rally or it’s a new bull market and stuff, these are easy to know with hindsight. I’ve never really made money off of that kind of stuff.
The depths of the bear markets, or the low to ’02 or even in ’08, I said find the companies that continue to grow, that continue to have good opportunities in front of them, and stick with those types of companies. That’s why—that’s how you obviously make money over time, and that’s certainly how we’ve made money over time.
Mark Brisley: Noah, could you—with your emphasis being on U.S. and global mandates, could you walk us through how two of your particular funds are positioned currently? Of course, I’m speaking about the Dynamic Power American Growth Fund and the Dynamic Power Global Growth Fund.
Noah Blackstein: Power American and Power Global, Power American was launched in 1998, the Power Global Growth Fund in 2001. The discipline that we use in the Power American Growth Fund, the one of looking—trying to find companies generating high teens or better earnings growth, and then really trying to figure out the sustainability and the long term outlook for revenues and earnings, which ultimately will drive the stock price. That’s also applicable in the Power Global Growth Fund, but it’s done obviously on a global scale versus a U.S. scale.
I think coming into this, a number of the themes that we continue to believe in was really the transformation, the digital transformation of enterprises, the move toward cloud computing, the move towards a reduction of paper processes, the ability to automate processes internally, but also the ability to have an ability and access to your corporate IT network from wherever you are. Also, the continued transformation of other areas, whether it was telehealth or whether it’s remote patient monitoring, whether that’s through continuous glucose monitors or other products, even the transformation of the retailing sector into two—into a bifurcated market of either ecommerce or convenience and experience.
Many of these companies, all of our themes come from the bottom up. That’s sort of how our positioning was going into this, and obviously many of those companies, while hit initially, came roaring back to new highs very, very quickly because what this pandemic really has done is accelerate many of those trends. Those trends, when I mention them, I think a lot of listeners will probably think of names like Amazon and other names like that. This is really a global phenomenon, so whether it’s ecommerce and online payments in South America through Mercado Libre, whether it’s online gaming and shopping through SEA in places like Indonesia, the Philippines and Vietnam, this digital transformation of not only the consumer but also the enterprise is happening globally as well.
Mark Brisley: The goal of one of the funds that you manage, Noah, the Dynamic Alpha Performance II Fund is, as you have put it, to keep the wealth in wealthy. If we look back at the market selloff from the peak on February 19 to the bottom on March 23, the S&P 500 was down about 34 percent while the Alpha Performance II Fund was into positive territory. Can you touch on your liquid alternative solution, the Alpha Performance II offering, and how you position that fund to protect capital?
Noah Blackstein: Well, we’ve been running the Dynamic Alpha Performance I Fund since 2002, and really the alpha generation that we’ve been able to do on the long-only side is what we wanted to port to a long-short strategy. Say we were able to X-percentage of alpha over the years, we wanted to port that alpha into a strategy that took some of the beta, or the volatility out of that strategy. In 2002, we launched the Alpha Performance Fund, which was delivered through an offering memorandum and was a long-short hedge fund.
In 2018, the rules changed and allowed us to offer that structure within the liquid alt category, which was much more similar to a mutual fund in terms of the rules, in terms of the daily pricing, in terms of the minimum amounts. Today, we run the Alpha Performance II liquid alternative completely and exactly the same as we run the Alpha Performance I OM, offering memorandum product, which goes back to 2002.
Really, the goal of that fund is to keep the word wealth in wealthy. For investors, our goal was to take our alpha generation, a single digit, mid to high single digit type of return and be able to deliver a produce with low correlation and low volatility. I’ve never believed and always sort of rolled my eyes when people would say that there’s an asset class out there that is naturally low vol. Sometimes you’ve heard that in relation to low beta funds and other things like that. It’s not true. A stock doesn’t know if it’s a low vol stock or a high vol stock, so I think you’ve seen in the selloff the absolute collapse of things that were considered to be low volatility, whether it was in fixed income or REITs or in utilities.
The reality, as I’ve always argued, is that I think a hedge fund and hedges is the best way to manage volatility, and that’s really what we’ve been doing in the Alpha Performance Strategy for the past 18 years.
Asset allocation is changing. I think the old paradigm of bonds and stocks being mutually diversifying is coming to an end, whether that’s because of the ETF-ication of the fixed income market, whether it’s because of central banks lifting all asset prices, I think the reality is that we saw in 2018 for most of the year, when stocks declined, bond prices declined. Similarly in March of this year, we saw incredible turmoil in the bond market. In fact, there was one day back in March when both stocks and fixed income fell about 8 percent on a single day.
So really, since the end of the global financial crisis until about 2018, both bonds and stocks went up over the long run but they went up at different times and they were mutually diversifying. That’s no longer true, and really hasn’t been since about 2018, so the traditional 60/40 or 50/50 balanced fund, which offered diversification is no longer doing that. Your bonds aren’t offsetting your stocks and your stocks aren’t putting up gains to offset your bonds. What we’re finding is that there is a need to look toward different alternatives in being able to get those type of balanced fund returns over time, but diversifying into the alternatives category.
The liquid alternative base and the ability to launch the Alpha strategy in a liquid alternative has really provided people with the ability to diversify a little bit more and diversify a little bit better using alternatives, because the traditional 60/40 or 50/50 balanced fund has really become more challenged over the last few years. Given where interest rates are today, it’s unlikely that that challenge won’t exist for years to come.
Mark Brisley: You’ve mentioned in previous comments that the current global pandemic pauses the present but accelerates the future. If we look across your mandates and your process as an investment manager, are there areas that you’re currently finding opportunities, and has the crisis created any potential opportunity scenarios that you’re looking into sectors or business-wise that previously you may not have?
Noah Blackstein: Sure. I think there’s a number of industries which have never sort of gone through this before. I think for the airline and travel industry, the only analogy is probably 9/11, and they came back quicker obviously. But in terms of other industries, like the restaurant industry, they’ve never gone through something like this unless you go back to Prohibition and the banning of alcohol sales in the United States, so it’s very difficult to find a playbook here.
But whether it’s the shift toward ecommerce, whether it’s the shift to work-from-home or the digitization of enterprise, this process is continuing and is probably accelerating. We heard from Microsoft recently that they’ve done two years of digital transformation of enterprises in the last two months, and so I think most plans are now being designed and re-architectured to the point where, where can we bring in software that can automate manual processes, where can we bring in that our sales people or our other employees could access the corporate network securely from remote locations and work without any interruption. This digital transformation, which was going on anyway because of the flexibility vis-a-vis use of the cloud, is now accelerating.
That’s true of internet shopping as well. I think e-commerce and internet shopping has also begun to accelerate, as is media, whether it’s Netflix or subscription-based services, over-the-top services have continued to accelerate. I believe a lot of the trends where we are positioned, which were market share gainers, have accelerated through this pandemic, and that’s unlikely to change.
Now, we’ve heard from Shopify, we’ve heard from Twitter, we’ve now heard from Facebook that employees can work from home indefinitely, so this isn’t something that is going away. I think that there’s a—this transformation is likely to continue for years ahead. It’s a long time since the tragedy of 9/11 occurred, yet we still take off our belts and our shoes at the airport, so this pandemic planning, this work-from-home, this digital transformation, this is going to continue for years and years to come and probably at an accelerated pace.
On the flipside, though, it’s also accelerating the—it also accelerates the future in negative ways, certainly, so whether that’s office-based REITs, whether that’s malls, whether that’s mall-based retailers, malls and mall-based retailers were already suffering from a lack of traffic, and this pandemic that’s shut down many of these malls has accelerated a process of bankruptcies and liquidations in that space.
To the extent that we’ve been positioned in the growth sectors and the growth is accelerating, I think that’s good, but for some of the other sectors, I do believe it’s accelerated the negatives as well. It’s pulled in something that would probably have played out over a number of years to something that’s probably going to play out over a number of months.
Mark Brisley: Taking account what we’ve been through thus far but obviously looking forward, and there is definitely a sense of optimism in your comments, what would be your final comment to our listeners today just around investing in this environment, more importantly staying invested, and in particular with an active manager?
Noah Blackstein: I think that the important part is that, depending on where you fit on the spectrum, I do believe duration is the key and time is the key variable. There are numerous products today and numerous features of the market today that probably didn’t exist 20 years ago, whether it’s ETFs or high frequency traders that make the short term volatility significantly more extreme, as we saw in March of this year. But if you’re really in this for the next 10 years and you’re really looking for capital appreciation, those are your opportunities over time. Certainly your opportunities in sectors where the growth outlook remains, if in fact it doesn’t, even in our case in some of our companies, get better.
There’s obviously opportunities for deep value managers, and I think it’s important to be balanced between both growth and value managers for sure, but as an investor the advantages you have is duration and time, and so you won’t be able to time. These breaks have become faster and faster and quicker and quicker, and the ability to try and time or trade around them is becoming ever more difficult.
It’s never been a better time to be a long term investor, and we think that is more true today than it was even 20 years ago.
Mark Brisley: Well Noah, this has been an insightful discussion, and I wanted to thank you for joining us today and sharing your insights. I want to thank everyone for listening to this edition of On The Money with Dynamic Funds.
For more information on Dynamic, please reach out to your financial advisor or visit us at dynamic.ca.
Until next time, we wish you health and safety. Thank you for joining us.
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 and we disclaim 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 prospectus before investing. The indicated rates of return are the historical annual compound total returns including changes in unit values, and reinvestment 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.
