PARTICIPANTS
Jason Gibbs
Vice President & Senior Portfolio Manager
Tarun Joshi
Portfolio Manager
Mark Brisley: You're listening to On the Money with Dynamic Funds, the podcast series that delivers access, insights, and perspective from some of the industry's most respected active managers and thought leaders. From market commentaries and economic analysis to personal finance, investing and beyond, On the Money covers it all because when it comes to your money, we're on it.
Jason Gibbs: Welcome to another edition of On the Money. I'm your host, Jason Gibbs, co-head of the Dynamic Equity Income team. Today we have with us Tarun Joshi, who is a co-manager with us on some of our North American dividend funds, as well as our energy transition fund. Tarun also heads up our industrial sector coverage on our team. It gives me great pleasure to introduce to everyone today, Tarun. How are you?
Tarun Joshi: Good.
Jason: Tarun, you have a unique background in terms of having both operational experience and investing experience, which certainly has served you very well on our team and serves our clients well. Maybe give us a bit of your background.
Tarun: I went to school to be an engineer and I had the chance to intern with Ford. When I graduated, I was employed by Suzuki and with GM in several automation roles. I found myself with a very interesting problem. I had some savings, and I was perplexed because I didn't really know what to do with these, and investing my savings in stocks made the most sense. However, my timing was just tragic because in a few months, the global financial crisis hit, and General Motors filed for bankruptcy.
The pain was real, and I didn't really understand how this was possible. The world was a happy place half a year back and now we're seeing companies fail, banks fail, and the globe is in panic. It basically triggered in me this desire to essentially learn how finance works. I began reading books. I began training myself in finance. A few years passed by, and I realized that I spent more time reading finance books, so that epiphany led me to basically quit my job. I went back to school, did a MBA program with a focus in finance and was able to transition my career.
Jason: Tarun, we've been increasingly hearing about supply chains and the notion of reshoring for a few years now. What are you seeing and what are your thoughts there?
Tarun: I have a hard time believing that it's been three years since COVID, and supply chains are still a very topical problem. What basically transpired, we have outsourced lots of our factories from the Western world to essentially geographies where the cost of labour is cheap. Basically, adding fuel to the fire, we have improved our manufacturing practices to be just in time. What this actually means is even though manufacturing as a whole became cheaper, became more efficient, but what this also means is when things are not fluid, every single small blip magnifies problems on the other side.
COVID obviously was one of the biggest shocks we've seen, and the reverberations from that big impact are still being felt. Essentially the challenge going forward I believe is twofold. The first is COVID has shown us that supply chains cannot really flex all that fast. Case in point obviously is when we look at the auto industries, companies didn't have enough semiconductor chips, and a lot of those issues have taken years to work through.
The second big issue which I see going forward is we're seeing flare-ups in geopolitical tensions between the U.S. and China. Some of your industries, which are very important for national security, such as defense and healthcare, these factories have to be close to home. It sounds easy in concept, but the ecosystem is just so big. For example, if you think of a defense company, a key input for them is steel. Now the entire steel industry has to be close to home.
Secondly, what we're seeing is the issue of real wars between Ukraine and Russia, and we're also now seeing tensions in the Middle East. All of these challenges essentially mean that some of the key industries have to be close to home. Case in point is for the first time in history, the U.S. is actually committed to bringing back the semiconductor industry back to its shores. The U.S. passed a $300 billion CHIPS Act last year to essentially accomplish this goal.
Jason: Tarun, is this all talk or are you seeing any signs of the rubber meeting the road and actual investments being made here?
Tarun: To actually see quantitative evidence, it's obviously still fairly early. The evidence takes time, but increasingly, the management teams of companies which we own and companies who we speak to are increasingly saying to us that they would rather have smaller factories close to where those goods are used. Where we're seeing the data really substantiate these claims is in the north of Mexico, where companies are actually investing very heavily, and we are seeing labour there being extremely tight. Some of these changes in some of those pockets are very real.
Jason: Tarun, does any of this impact automation? Can you speak about the automation exposure that we have in our funds?
Tarun: Automation, firstly, is not something which is new. As we look back in time, automation has been on a secular path of growth, firstly, because the fact is products naturally are becoming more and more complex, which means it's increasingly hard for humans to be able to assemble them and basically be able to deliver the kind of quality which robots and automation can.
As the cost of labour goes up, the propensity to use automation obviously goes up. What we've seen in the last few years is extreme challenges in getting skilled labour in the Western world. Some of the strikes which we have seen in the last half a year, particularly hitting the automotive industry, highlight the fact that going forward, factories of the future will increasingly use more and more automation.
From an investment lens, we believe we're still very early in the high growth part of this journey. As a consequence, most of our funds have decent-sized exposure to names which either enable automation, or names which have secular exposure to geographies which we believe will be the prime beneficiaries of reshoring. We currently own some names which provide us with exposure to electrification, automation, as well as railroads which will benefit from the secular growth for perhaps decades to come.
Jason: Electrification, that's another thematic that we hear a lot about. Does this pertain just to electric vehicles, or is there a bigger opportunity at play that we can invest in?
Tarun: Electrification definitely is one of the bigger thematics which we hear. If you think of the world as a bigger picture, this arguably could be one of the biggest megatrends for decades to come. What's happening is, firstly, as the human population grows and then as our needs for energy climb, given that the per capita income has been climbing, our energy needs grow significantly.
Now, humans are increasingly realizing that delivering these energy needs through fossil fuels has consequences for the planet. As we look forward the next few decades, for humans as a species, I strongly believe that the only answer is renewable energy sources, and this journey is just beginning. I believe this touches most aspects of human life. Our energy will be coming more from solar, wind, nuclear, essentially more renewable sources.
In place of gasoline burning cars, the future will have a lot more electric cars. The future will have a lot more hydrogen cars. Finally, to basically enable all these changes, our electricity grid is aging. Currently, the average age is over 25 years. To be able to support all these energy transition electrification needs, this basically comes with the grid needing a significant overhaul.
Finally, I believe we are just in the early innings of recognizing this change and the early innings of putting dollars towards this change. I think a perfect example is the Inflation Reduction Act, which was passed by the U.S. Congress at the end of 2021, which essentially allocates $400 billion towards energy transition technologies. I strongly feel we are very, very early in this journey. Within our team, we're believers in this notion to a point that we have a dedicated fund which invests in technologies which are weaning the planet away from fossil fuels and towards a cleaner future.
Jason: All right. Thanks, Tarun. That was excellent. Very insightful. You're a key member of our team and you help us every day in these funds. It is rare to have someone with both operational expertise and financial expertise, so thanks for joining us.
Mark Brisley: You've been listening to another edition of On the Money with Dynamic Funds. For more information on Dynamic and our complete lineup of actively managed funds, contact your financial advisor or visit our website at dynamic.ca. Thanks for joining us.
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