PARTICIPANTS
Mark Brisley
Managing Director and Head of Dynamic Funds
Tom Dicker
Vice President & Portfolio Manager
PRESENTATION
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 Mark Brisley, head of Dynamic Funds. For the last few years, a topic that has been much discussed and analyzed by academics, finance, and investment experts is whether or not businesses that are run by their founders have measurable differences in how they perform versus companies led by non-founders or second-tier leadership.
What differentiates founder-run companies from the rest of the market? Is it the founders of incredible companies that have changed the world are often visionary individuals with a very unique vision of the future? Or is it that they are willing to, as a Harvard Business Review written back in 2016 noted, wage war on industry norms on behalf of underserved customers like what Netflix did for video rentals, or to create a new market entirely like Google has done? Something they refer to as leader insurgency.
Chris Zook, a partner at global consulting firm, Bain & Company, who studies entrepreneurial businesses, noted in the same Harvard Business Review article that when looking at most of the great tech firms of today, when we think of Oracle, Intel, Microsoft, Apple, Dell, Google, Amazon, and Facebook, and so many others, they all had founder CEOs. The questions on the minds of investors of the world over, is there an advantage to be invested in founder-led firms? and why? With the global pandemic still looming over the year 2020, businesses have faced unprecedented and unforeseeable challenges. At the same time, opportunities are emerging as a result of a shifting landscape.
I'm pleased to be joined today by Vice President and Portfolio Manager here at Dynamic Funds, Vishal Patel. As lead manager of growth-oriented North American mandates, together with his investment team, he's currently managing over $5 billion of assets. Vishal employs deep fundamental analysis to select best in class sustainable growth companies and he focuses on finding unique businesses run by strong business leaders, and management teams that demonstrate sound capital allocation discipline. Vishal, it's great to have you in this particular discussion today, and welcome.
Vishal Patel: Thanks for having me, Mark.
Mark Brisley: I wanted to start with really a fundamental question around this whole subject is to ask you to explain the importance of co-investing, which is really when you take a position as a PM in these businesses, you're co-investing with company founders and entrepreneurs. Why is that important? How does it fit into your overall investment process?
Vishal Patel: Sure. The way that it fits into the investment process is really the qualitative step. If you think about business, business is really the combination of people and so we're identifying these high-quality people, and we're isolating that factor. There's a lot of talk of factor investing but I think that the best factor is actually the human factor. These founders, they're rare. They're special, and they're worth investing in. They have a long-term approach to value creation for shareholders.
They think long term, 10, 20,30 years. They're not focused on quarter to quarter. They have an ownership mindset. They have a very disciplined approach to capital allocation and building the business. They're extremely focused. There's a Harvard business study that you've talked about, that really talks about up capture and down capture statistics and earning great returns over the cycle.
Mark Brisley: As an investor then when you're looking for the next great founder, or entrepreneur, or business to invest in, what are the specific attributes that you're looking for in these types of people?
Vishal Patel: You need to study their track record. You need to look at their pedigree. You need to look at their upbringing. You need to understand what they're passionate about. Look at their values. For a lot of these individuals, it's about more than just making money. They're already rich so what's driving them? What's motivating them? I think the perfect example is Steve Jobs. Steve Jobs was extremely focused on the product and the user experience. He constantly talked about changing the world. If you can find 5 or 10 Steve Jobs, to co-invest with, that'll have good results.
Mark Brisley: One of the interesting things to note is that when these founders are leading their businesses, it's great while they're there, and while they're in their early and mid-stage of their careers, but as they age, and the business becomes more mature, then we start to think about things like succession planning. At what stage does founder succession planning happen over the lifecycle of a business? What are some of the investment implications around that?
Vishal Patel: There's really four categories here. The first category is the founder CEO and the CEO still in place. Mark Zuckerberg at Facebook is an example of that. Bezos is an example of that. Jensen at Nvidia is an example of that. They surround themselves with great management teams. This is the area where we're finding the most opportunity to invest in longer-term.
The second piece is really the family member succession. Examples of that would be Estée Lauder. You've had members of the Estée Lauder family take a seat on the board, and then potentially the son or daughter can become the CEO. You see that in Canada with the Weston and Galen Weston Jr.
The third category is really where the founder takes a step back, hires professional management, and takes a seat at the board level. Some good examples of that and successful examples of that is really Google. Larry and Sergey Page, they've gone on. They hired Eric Schmidt and now you have Sundar Pichai and Ruth Porat running that business. Nike is another example, Phil Knight had Mark Parker and now John Donahue.
The last piece where we're not finding a lot of opportunities is where the founder-led business sells itself, the founder is no longer involved, which you would see in history. Examples of that would be things like Carnegie Steel which would be U.S. Steel right now. There's really four categories, but where we find the most opportunity is really when the founder is still around at the board level or is still the current CEO.
Mark Brisley: Vishal, I mentioned during our introduction that the global pandemic is still being very much a part of our world and all the challenges and impacts and some opportunities that are coming as a result of it. It's also been an accelerant to a lot of conversations. One of those conversation has been around ESG or environmental, social, and governance considerations when we look at firms we want to invest in. How important are those considerations when you're investing in founder and family-led firms?
Vishal Patel: It's actually very important. Some of the founders are extremely passionate about the topic. A perfect example would be Mark Benioff at Salesforce. He's a good example of the E&S, environmental and social. They actually donate a percentage of the profits for different causes. Specifically for us, we're now signatories of the United Nations Principles for Responsible Investing, and we integrate ESG into the investment process. We have access to databases like MSCI and Sustainalytics.
On this topic where we see things differently and how we take an active approach is really the GPs. When we think about governance, a lot of people think multi-vote is bad, and some of the databases would say multi-vote is bad, but for us, we actually liked the multi-vote. We believe that there's actually strong alignment because of the multi-vote. We like it. We feel very comfortable with it. We think that the management teams are able to actually take that longer-term approach because they have the multi-vote.
Mark Brisley: I know you to be a real student of this subject, Vishal. I think our listeners would be really interested in hearing who you think some of the great business leaders and entrepreneurs are that have shaped your thinking when it comes to investing, especially on this particular subject.
Vishal Patel: There's a lot of examples but I'll hone in on a couple of them. Buffet, I would say is number one. He wants to actually be known as a teacher, and I would consider myself a student of his. Earlier, I mentioned Steve Jobs with Apple. That focus on the customer, that focus on the user experience, sticking to it and doing it for the long-term. A Canadian example to use, and I think it's a lovely story and is a story of starting from the bottom, starting with one convenience store and growing it to the thousands of convenience stores and having that entrepreneurial drive would be Alain Bouchard. He's the founder of Couche-Tard these Circle K Stores that you see everywhere.
Two other individuals that have actually shaped my thinking from an investing standpoint, but we can't really participate in that because these are private businesses and our conversation today is really focused on public businesses, Jimmy Patterson runs an amazing business, and the same thing for the Irving Family.
Mark Brisley: Timing of this conversation is interesting because I just happened to be reading Howard Schultz's new book From the Ground Up, of course, Howard Schultz being of Starbucks fame. Starbucks wasn't really his firm. He started a firm, it was II Giornale, which became what Starbucks is now. Do you consider a guy like Howard Schultz a founder?
Is Starbucks a founder-led business?
Vishal Patel: The answer is absolutely, and it's an amazing story with humble beginnings. Howard started in New York in what you could consider not the best neighborhood. He would now be one of the richest people in the world with billions of dollars. I do consider him to be the founder because the idea here of retail was actually his idea. When you talk about what he was working on before, the idea was really selling wholesale coffee and selling wholesale coffee in bags.
The whole idea of having a retail shop, a retail presence, and going back to that customer-focus, customer-experience, I would say is actually him. Then if you take this conversation back to the ESG conversation we just had earlier, I would actually say that he was at the forefront of ESG a long time ago. He did it because it made a lot of business sense sense. I think he's leaving a lasting legacy, whether it's free-trade coffee from an environmental perspective when you think about worker pay and health care benefits, employee share ownership plans. I definitely consider him to be an amazing individual, he still owns a lot of stock in the company, he's now chairman emeritus. I believe he's got some political ambitions but Starbucks is definitely an amazing business and Howard's an amazing guy.
Mark Brisley: You mentioned stock ownership. That's a really interesting point. I'm curious if you think there's a certain percent of stock ownership that you look for, by the founder in these founder-led businesses.
Vishal Patel: There's no golden rule on, you got to have X percent or y percent. It could range from as little as 5% to 75%, but the idea is, you really are looking for somebody who wants to own the business longer term, not trade their ownership position, take that longer term behavior, have that ownership mentality. The idea is actually around, they're not just looking at if it doubles, or, if the market cap reaches X, they want to sell down. You actually want them to be thinking longer-term, thinking multi-generational.
A perfect example of this would be Jeff Bezos. Imagine, he decided to sell his stake in Amazon when it reached 10 billion, he wouldn't be the richest person in the world right now.
The idea isn't looking for that specific price target or specific exit strategy but the idea here in the concept is somebody that's going to keep that ownership stake for the long term. That being said, over time, I do understand that managements, companies, and founders need to sell down, and a majority of the cases, it's because of philanthropic activities. Microsoft and the Gates Foundation is a good example of that.
Having a slow sell down for a foundation or philanthropic activities is desirable. These are the good things that does some of these individuals want to do longer term.
Mark Brisley: So many of these types of businesses, the founder becomes or attains almost a celebrity status. That would maybe potentially make somebody think that team building is not as important as the self driven aspects of one's ego, but when you read about them, you do realize team and culture seems to be really important. How important is building the right team and culture in these businesses? Is that an aspect you're looking for in the companies that you're investing in?
Vishal Patel: Definitely. I believe there's a book saying, "Culture trumps strategy." You're actually creating a good culture and this goes back to the founder and building those unique cultures and having the right values. I believe that culture is actually extremely important. The perfect example of somebody that really embraces culture, and how they talk about culture is actually amazing is Jensen. He's the CEO of Nvidia.
Nvidia is focused on artificial intelligence, and they make a graphics processing unit. The way he talks, he really says his chief job is really culture catalysts, but his job is to create the right environment for talent to succeed. Just think about that. Create the right environment for talent to succeed. If you come to Nvidia, and you want to compete in high-performance computing, it's a place where you can do your life's work. Here's somebody that's saying, "I need to create the right culture so that talented individuals can do their life's work." It's just a beautiful story. I think he's created an amazing culture. If anyone actually gets to spend a little bit of time visiting the corporate headquarters, it would be something I would recommend.
Mark Brisley: I'm going to go completely, what's going to maybe seem like a weird direction here for a second, but you and I had been talking about the miniseries out right now The Queen's Gambit on Netflix. You wanted me to ask you about it. How is that connected to our conversation today?
Vishal Patel: Sure. I'm recommending the show. It's actually really good but the core concept in the show is really talent and being best in class. It's about being best in class in chess. When we think about public market investing in our topic today, the beauty with the stock market is that you have 11 sectors, so you can actually go out and find the best. From coast to coast in Canada, you can actually say who's the best. You can go to the US and in public markets, you're able to partner and co-invest with the best.
This idea, we just talked about Starbucks. It could be the best in coffee, and that's Starbucks. It could be the best in shoes, and that's Nike. It could be in healthcare and biotechnology, there's many areas in the marketplace that you can invest in but if you can go out, find the best and co invest with the best, I believe that you're going to add a lot of value, longer term. The key concept here is imagine if you can actually benefit X percent of the earnings power of one of these great individuals and that's really what public market investing allows you to do.
Mark Brisley: Hopefully, we continue to talk about a global economic recovery. There'll be all kinds of debate about what stage of that we're in right now or even if we are, but as this continues to evolve and unfold, Vishal, where do you expect to find out opportunities in the market?
Vishal Patel: I continue to believe that this founder-led, family-led business in the long term, sticking with them long term remains the best opportunity set. The idea isn't pre-positioned, pre-COVID, post-COVID, pre-election, post-election. These founders, they're running the business for the next 5, 10, 15 years. If you have an opportunity to co-invest with them for the long term, I believe that they'll be able to manage through any macroeconomic scenario. That would be point number one.
Point number two would really be around searching for that next-generation founder and entrepreneur across all the different sectors. There's so many industries, so many sectors out there. There's a bunch of emerging founders that there's not books that have been written about them. If we can find these emerging founders before the books are written about them, co-invest with them and benefit from that longer-term success, I think that that's going to be one of the huge areas of opportunity longer-term.
Mark Brisley: We talk a lot about long-term investing, and the need to be focused on the long-term to come out of the current situation we're in, but also just for success in general, in any market or any cycle. What are some of the words of advice you can give to our listeners about staying focused on the long-term as an investor? A good colleague of ours has often shared that phrase in a humorous way that people are our long-term investors one month at a time, but that doesn't work. What can you share with us to keep us focused on the long-term?
Vishal Patel: Sure. Today, we introduce the concept of co-investing. It's a simple concept, but it's a very powerful concept. The reason why it's a powerful concept is there is alignment, and there's alignment of capital, but that alignment of capital and this simple concept can only work if you're willing to take that longer-term approach. This is why I believe that if you actually align yourself with some of these great business leaders and founders, you'll do extremely well.
You want to participate and benefit in this ride, this success that they're having. The best thing you can actually do is go out and co-invest so that you can actually maybe spend more time with your family, maybe you can watch some Netflix. There's a lot of things written about successful habits that you should have. I think one of the best habits that you can actually form is the habit of co-investing with great people.
Mark Brisley: That's great advice. Those businesses weren't built overnight, and neither will the success of investing with those business leaders as well. Vishal, one of the things that the pandemic has done for a lot of people is giving them more time to do things. You've always been a voracious reader. Any book recommendations for us to take a look at over the holidays coming up?
Vishal Patel: I actually have three recommendations, and they're connected with every piece of the conversation that we had earlier. The first recommendation I have is really Jeff Bezos's book. It's called The Everything Store. It's the ultimate example of a founder-led business who's still in the chair right now. This business, Amazon has touched all of our lives. One of the points that I liked in the book was he actually spent a little bit of time with Jim Sinegal. He's the co-founder of Costco. He was able to learn from others. This concept of learning from others is key.
The second book is really Bill Campbell. The book's called Trillion Dollar Coach. All these founders have coaches. Bill Campbell has actually been the coach for some of these businesses that we're talking about today. It's interesting, the ability to be coachable, to grow and develop. These people that we're talking about right now to co-invest, they're not perfect. It takes time, and they're developing over time. We talked about wine. In a way, they're like a fine bottle of wine. They're getting better every day. They're growing, they're developing, but for them to reach that heightened level, they do need coaching. They need to be coachable, and Trillion Dollar Coach is an excellent book.
The last book I'm recommending, and it goes along with the idea of co-investing. This is Kenneth Langone's book. It's called I Love Capitalism. He made his fortune organizing financings from Home Depot. He actually aligned himself very early, similar to the discussion we're having today. He owned Home Depot shares very early, and he was able to benefit from the ride and success at Home Depot. I'm recommending that book, I Love Capitalism.
Mark Brisley: Great recommendations. As always, Vishal, really insightful. Such an interesting topic, especially given the times we find ourselves in. I want to thank you for taking the time to share those insights with us today and to thank all of our listeners for joining us as well. If there's more information that you'd like to find out about the way Vishal Patel and his team invest or any of the other portfolio managers here at Dynamic, we invite you to visit our website at dynamic.ca.
Of course, as always, we believe that the best information source for you is through a qualified financial adviser and invite you to seek more information on any of the topics discussed today or that you are interested in via that means. We want to thank you for joining us on another edition of On the Money.
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