← Capital Allocators – Inside the Institutional Investment Industry
Capital Allocators – Inside the Institutional Investment Industry
Mike Trigg and Sanjay Ayer – The Discipline of Getting Better at WCM (EP.467)
00:58:11
Mike Trigg and Sanjay Ayer are Portfolio Managers at WCM Investment Management, a $120 billion investor in growth stocks, where Mike also serves as Co-CEO. I’ve had the opportunity to chronicle the growth of WCM over the years in conversations with...
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- [00:00]
Sanjay Ayer
Playing the long game is the right strategy. The market's myopic Stick to your knitting, but there are occasions where long termism is a lazy crutch.
- [00:15]
Mike Trigg
I'm Ted Seides and this is Capital Allocators.
- [00:21]
Ted Seides
My guests on today's show are Mike Trigg and Sanjay Air, portfolio managers at WCM Investment Management, $120 billion investor in growth where Mike also serves as co CEO. I've had the opportunity to chronicle the growth of WCM over the years in conversations with Paul Black, Mike, Sanjay and other members of the team. Paul first joined the show in 2018 when WCM managed $25 million and Mike last appeared four years ago with Paul describing a piece they had just written entitled how to build $100 billion money manager. That podcast marked a near term peak in assets for the firm and subsequently offered a great case study in humility, adaptation and evolution. In this conversation we unpack how WCM navigated its most difficult stretch of performance in a long time, what they learned from it, and how they came out stronger on the other side. Mike and Sanjay discussed changes to their investment process like putting the trajectory back in moat trajectory and searching for the cult in culture, retooling the research funnel, integrating AI as a research partner and expanding into private markets. As always with wcm, a common thread throughout our discussion is doubling down on the firm's core values to think different, get better and serve others. I hope you enjoy the show and if you do this week, why not reach out to your parents? If they're anything like my folks, they probably aren't that technologically inclined and might need to learn how to use the podcast app on their phone. Reach out to them, send your love and show them how to use the app and then tell them you might want to listen to Capital Allocators. Thanks so much. Thanks much for spreading the word.
- [02:09]
Morningstar Announcer
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- [02:44]
Ted Seides
Please enjoy my conversation with Mike Trigg and Sanjay Ayer.
- [02:49]
Ted Seides (Interviewer)
Mike Sanjay, great to be here with you.
- [02:51]
Mike Trigg
Great to be here Ted Mike, the.
- [02:53]
Ted Seides (Interviewer)
Last time you were on the show was four years ago and you guys had just written this piece about how to become $100 billion asset manager. And of course, in a very WCM way, that marked the peak going into 2021. And I'd love to jump into that. After this incredible trajectory over the last 15 years, you have this bump in the markets in your style of investing. How did you approach that as a firm?
- [03:17]
Mike Trigg
2022 was incredibly humbling in many ways. It was our most difficult year, performance wise. Now, with the benefit of three more years, you kind of look back on and say, I'm so glad that happened to us, because I know we've gotten so much better because of it. I think back to that period in May of 2022. We had had a dreadful January and February to start the year, muddled along for the next couple of months, and we had a firm wide off site. And I got up in front of the entire company and I said, I am so excited about being here right now, because Sanjay and I had both felt 20 and 21 while we had incredible absolute and relative returns. And that was a continuation of a very long period of both consistent and very durable outperformance. The market had become a little bit one note, and there was a certain type of investing that was working and we probably weren't having that much fun, even though we were doing great. I was really looking at 2022 as, wow, this is great. This is another opportunity for us to reassert how we're different in the market and separate ourselves again. Fast forward three or four months later. These different stages of grief. There's like these different stages of underperformance. Man, I just want to start winning again. There's a seminal meeting that took place within our team in October of 2022, after it was pretty clear that we're going to have a really bad year. All sat in a room for a day. And it was very easy at that period of time for a growth manager like us to point to all the external factors that had led to our underperformance. Rising interest rates, rising inflation, high starting valuations. None of these things are good for forward returns of growth equities. And we too, I think, had done better than our peers. So it's easy to say, hey, look, we've done pretty well. We've performed the way the clients want. But we took that opportunity, particularly beginning kind of in October, to look inward and identify two or three profound lessons that we've used to incrementally improve the investment process from here.
- [05:27]
Ted Seides (Interviewer)
What was it like for you guys? And as a firm going through that period the stress, the uncertainty. For the first time in a while when things have been going so well for so long, It's a very rich topic.
- [05:41]
Sanjay Ayer
As far as how do investment managers react to disappointing performance, I'll avoid the euphemism of volatility. Culturally, I think we were in a good spot because Mike and I have always led the research team in a pretty even keeled fashion. So in 2020, 2021, there was no high fives in the office. Main thing, we would tamp things down and warn people that market moves in cycles. We're not this good. 2022, you have the currency really to like go to the team and act inspirationally. Having the team where we've hired several people in recent years, it's very important from a cultural standpoint to set that and make sure we're in a position where people see that we're operating from a business standpoint, from a position of strength. There's no reason we can't make the best judgments. A lot of the other business considerations a manager might have during a time like that, we did not have. So it was just chopping wood, figuring out what to do. Because oftentimes playing the long game is the right strategy. The market's myopic. Stick to your knitting. But there are occasions where long termism is a lazy crutch. There was no, like, epiphany moment. But as we put the pieces together, we realized this was one of those moments where there was so much change at play that we needed to sensibly adapt to what was going on.
- [06:56]
Ted Seides (Interviewer)
What were the conversations like with your clients?
- [07:00]
Mike Trigg
Those were incredibly positive. We actually had net inflows on the institutional side through that period. A lot of the sustained performance in prior years had created a great foundation and a lot of goodwill. There weren't difficult conversations. Many that I can think of during that period where it got kind of interesting was when there's this tug of war between trying to stick to what's gotten you to where you are today, versus trying to flex and adapt and evolve the investment process. That's where you need to be right if you're going to make some of those changes. Evolving and adapting what we do, creating different pieces of infrastructure to execute the process in a more robust way, enabled by some lessons that you learned and mistakes that you made. We're also fortunate to have these two pillars, our investment philosophy, moat trajectory and culture, which are pretty flexible in terms of where they can be applied in the market. They kind of work almost in every sector. As we started to come to the conclusion that what had been the winners over the prior 10 years may not be the place you want to be in the next 10. We weren't having to completely change what we do. We're just having to kind of apply it to a different part of the market or different companies. That message was well received. Two of our core values are think different and get better. So by definition, we believe in this notion of the iteration of your investment process and constantly trying to evolve and get better. We've always told the story back to the days when we both worked at Morningstar. Morningstar had this thing called the Morningstar Investment Conference in the mutual fund world. It was the Berkshire Hathaway annual meeting. We would go to that in our early 20s. It was a big opportunity to hear the preeminent mutual fund managers at the time speak. And one thing that we observed was one year there'd be the Morningstar manager of the year, a rock star walk in with an entourage and people were running after the guy in the hallway of the place in Chicago that they had the event five years later, person was nowhere to be seen. Our perspective on that was that a lot of people in this industry don't believe in this notion of adaptation and evolution of an investment process. That's how we're wired. And we've always talked to clients about that. Even when we were speaking to some of the things we wanted to do differently or some of the things that we wanted to use to evolve the investment process, they're like, oh, of course, even when things were going well, you guys were doing that. That led to a lot of good conversations with clients.
- [09:19]
Ted Seides (Interviewer)
So in this period, as you got through that point in October, what were those two or three insights that led to changes in the research process?
- [09:28]
Sanjay Ayer
We had a seminal meeting in November of 2022 and Mike crystallized the issue at play with really a rallying cry where he said we need to put the trajectory back in mode. Trajectory. We'd been through this 10 plus year period heading into the COVID bull market where backward and forward looking quality and growth were highly correlated. You effectively could just keep owning the same thing and do well. Names like Louis Vuitton, they just re rated Costco. Year after year, 15 to 20 to 25 to 30, you started to condition your muscles in the wrong way, thinking that that was always going to be the case. We camped out in these so called compounders a bit too long. And when we zoomed out and asked the question, hey, is the moat trajectory of these companies positive? Are these companies actually getting better? You put that under the microscope, you start to raise questions. That rallying cry sparked a reevaluation of the portfolio. And then when you zoomed out from there, you realize there was just a lot of change at play. 2022 is a dislocation in that correlation between backward and forward looking quality growth. You had some of the interest rate and inflation dynamics. You had the birth of new secular growth themes ranging from artificial intelligence to obesity drugs. The biggest shock to the system was just these supply demand cycles. Covid pulled forward demand for a lot of industries and then created a lot of sticky supply bottlenecks that were proving to be long lived in nature. Add all that up and you throw on things like geopolitics more recently. You just recognize that we had to adapt, we had to change, and forward looking quality growth was going to be different than backward looking quality growth. And we couldn't just camp on what had worked.
- [11:14]
Mike Trigg
The only other thing I would add is that when you go through a laundable market like you did up to 2022, it's easy to focus your energy and resources around things that are doing really well. With the benefit of hindsight, after 10 years, you could maybe have looked back at the focus list and said it doesn't have quite the breadth that it should. Coming into that year, we did a lot of things knowing that the portfolio felt expensive and thought we were taking the proper action to sell certain positions. The whole focus list felt expensive, so it didn't feel like there was great places to go. We had sold a lot of our biggest winners that had been the growthiest Covid beneficiaries, but it still wasn't enough. Reinstituting this focus on making sure that we got a really wide breadth of different ideas, that's been a really important thing that's helped us.
- [12:08]
Ted Seides (Interviewer)
What'd you do on that process infrastructure to get to the point where you had the breadth of ideas?
- [12:13]
Sanjay Ayer
There were a couple of key tools we developed. The one was pulling the thread on what was the core issue on portfolio construction. A moat trajectory and culture is the pillars we talk most often about. But portfolio construction has been a key driver to the consistency of WCM's performance over a long period of time. Not just buying the best ideas, making sure they fit together. One of the conclusions was the portfolio was too correlated, but the root cause of that was the research pipeline had become too correlated. We developed tools and a common language over prioritization. As a lean team, how do you prioritize which idea to work on next. I think if you just let your team tend to be a decentralized organization, they'll naturally chase what's working in 2020. It's, let's look at another software as a service stock. And there was endless IPOs. It was very easy to run into that problem. And flash forward to today. It's very easy to chase the next data center theme stock. But now I think we have guardrails and tools such that if we see three analysts trying to bring up another data center theme stock to own, we'll pull up our construction and say, we own enough of this. Unless you're really convinced it's better than an existing idea we own in that category, we're going to redirect efforts elsewhere. So I think having those guardrails as a forcing function to making sure you have that breadth up idea generation is something we've hard coded.
- [13:38]
Mike Trigg
The other tool that enabled that effective prioritization was creating this thing called categorization, which for years we have been frustrated with the traditional GICS classifications around sectors and industries. And we thought, wouldn't it be cool to have our own custom version of that? And coming out of that period, we basically created a hundred different categories across about 700 companies. And that allowed you to go a layer deeper than even our bucket taxonomy that we use to think about construction between defensive, secular and cyclical growth. We rely on that quite a bit to think about the construction of the portfolio at any given time. This actually went a layer deeper because that broke down because of some of these correlations that Sanjay was mentioning. So now you can actually see at the category level what the bets are in the portfolio. You have a better sense of what you own and also what you don't own. That was initially designed to fix this correlation problem that we mentioned. But what it also ended up being was this incredible tool to improve the idea generation and the focus list breadth because you could very clearly see what we're in, what the other names are that are similar to that, what we're not in, and use that as a filter to marshal the team's resources around different ideas.
- [14:52]
Ted Seides (Interviewer)
When it came to looking at the portfolio, a lot of times you have this drawdown and the names you own you won't hold because you do want to be long term. And what you're talking about is refreshing a portfolio that's down. What were those conversations like?
- [15:08]
Mike Trigg
That was the hardest part. Clients were incredibly supportive and you say, everything's fine. This is part of running portfolios. We've Been here before. And then you start to see elevated turnover, you're going to get questions about.
- [15:21]
Sanjay Ayer
That, not just elevated turnover. I mean, you're selling names like Louis Vuitton and Costco and buying names like Rolls Royce and Siemens Energy. There's going to be questions about drift, quality, bias. What are you guys doing both externally and internally. Thankfully, we've built a research culture here that insulates the team from a lot of that noise and built a phenomenal marketing and salesforce as well, could be connoted as drift or be evaluated as drift. But in reality, what it was is getting back to mo trajectory and culture because we had lost that a little bit during that period. That helped us from a communication standpoint. The other point is the feedback isn't immediately good. From a performance standpoint, you're making these changes. It's not the next month, you're paid off. Oftentimes you're a little bit late, a little bit early. That compounds the questions you get.
- [16:10]
Mike Trigg
The following year, you're making these changes, turnover's up. You're really trying to explain to people the process improvements that we've been in place, and then also just being incredibly transparent about the ideas themselves, reeducating people around. Truly what moat trajectory is. It's about identifying high quality in the future before the market does, not about what the company's necessarily done in the past. There's a loneliness when you're going through that and you hear the chatter, these guys better be right. You start to get into a period in 2023 where you had a little bit of a snapback. We're taking the portfolio then further away from then what's snapping back. And we do these frozen portfolios where we look at prior vintages of the old portfolios versus the current portfolio. What you want to see is that the turnover that you're engaged in is actually leading to a portfolio that's performing better, not worse. In that first part of 2023, the results were not there to justify the changes that we were making. And that was the loneliness part. And fortunately, the end of 23 was a very different story. And 24 and 25 has been as well. And now if you look at those same frozen portfolios, there's a piece that we published on our website which talks about this period of time. And you can see, had we done nothing and continue to run the old portfolios, what the performance would be versus what the current portfolios is. And the performance improvement is not just good, it's drastic. Fortunately, those decisions we were Rewarded soon enough to where it became really, really hard. That was probably the hardest part.
- [17:37]
Sanjay Ayer
That's the hardest part. I think what gave us optimism and the foundation of trust among the team was we've been through cycles before. It's not like we're a messing manager that was born in 2017, wrote a good wave and then 2022 hit. We've been through cycles or market leadership change and having that compass around mode trajectory and culture where it's proven in the past to work gave us that internal and external goodwill to get through that period.
- [18:04]
Ted Seides (Interviewer)
It's so difficult as an asset manager. You've had this great success, you have this hiccup, you're refreshing the portfolio. You're in 2023 and it's not working. In retrospect, you can look back and say, well, we were right, it worked. There must have been conversations at that point in time where there's a little bit of WTF going on here. What were those more challenging moments like.
- [18:28]
Sanjay Ayer
Internally, during those months that what we had sold was snapping back, you'd get email chatter. Internally, you redo client calls and be like, are you sure you guys made the right moves here? The software stocks, for instance, are up 40% in the last month. You just sold them. That's not easy. You're getting called out and the performance isn't there. So I think those moments, there were several of those where Mike and I would stay late and commiserate over this. And the asset we had, Ted, and continue to have is Mike and I, we're on the same page. We've been 20 years at this, trying to build this journey of how do you build an investment manager that stands the test of time without succumbing to preservation mindset. Having that hardwired into how we view the world was huge because there'd be days I'd be okay and he'd be down. There'd be days he was okay and I was super down. We know each other well enough to be counter emotional during those points. So I think that helped. June of 23rd was a moment where there was email chatter and we were like, oh man, are we right about this?
- [19:28]
Mike Trigg
Because you don't know. You're right in the moment. This firm is so close and so tight knit. It had come off of an unprecedented streak of success and growth. People don't want to see that come to an end by any means. And that is part of what makes this place what it is. There's no complacency. There's an incredible desire to win at all times. I don't think there was one horrific story where we totally hit rock bottom or anything like that. But it was a lot of self doubt at times. There's been times over the years where we've stayed up very late at night together and questioned, are we doing the right thing? There was a moment years ago when we were trying to go all in on this concept of moat trajectory and pattern recognition. And several of the analysts at the time were questioning whether this was the right thing to do. And most of the people in the room said, I don't really buy the concept of pattern recognition and everything We've just laid out that we want to build the investment process around. Not everyone's on the same page.
- [20:27]
Ted Seides (Interviewer)
What were some of the other small changes you made in the process?
- [20:31]
Sanjay Ayer
One was the portfolio construction tool, as Mike mentioned. So prioritization, categorization. From a team dynamic standpoint, we really reduced meeting sizes to get the people with the strongest views and most relevant views in the room. And trying to keep it to five or six people. That was a tricky one because we had to exclude people that could have gone a different direction where there was a lot of angst and pushback on it. But we're pretty transparent as far as, here's why we're doing it. Here are some of the things we're seeing that were not diminished. Clarity of thought, slower speed of decision making. Most people got it pretty quick, others had questions. But then it was building the performance back and people seeing the evidence of that helped us get through that.
- [21:14]
Mike Trigg
We were doing lots of regular one on one check ins throughout the week. Yen Lau spent a couple days in our office around that period of time and made this incredible recommendation around this document that we now fill out every Friday at noon that talks about what you did last week, what you're doing this week, interesting things you encounter throughout the week that you want to share with the team, things you need back from people. So we instituted that and that lifted an incredible management burden off of us. A lot of really what we're trying to do is just make sure people are focused on the right things any given week. And then you want clarity and communication. You want to know what everyone's working on.
- [21:49]
Sanjay Ayer
What was happening is collaboration was tipping into coordination. It started to feel bureaucratic. This was a very low lift way of making a light touch collaboration, which is important. Without meeting creep, we've doubled down on.
- [22:03]
Mike Trigg
The rigor around our forecasts and our modeling. If you think about the names that we've been involved with in a big way the last three or four years. These are companies that are going to look dramatically better in the future. In some cases going from loss making companies to making significant margins and being some of the most profitable companies in their sectors. You have to really be able to tell that moat trajectory story through numbers and through a model. We've established a lot more rigor on that front too.
- [22:31]
Ted Seides (Interviewer)
I'd love to hear an example in that time of a business that you exited from the portfolio because the moat trajectory wasn't as rapid as you wanted it to be and maybe a new business you added at the time for the opposite reason.
- [22:47]
Mike Trigg
One of the notable changes or maybe repositionings that have taken place in the portfolio is what's happened on more the cyclical growth side or within the industrials basket of what we do. And we had ridden the wave of the very highest quality industrial global businesses. Companies like Atlas, Copco, Sika, Old Dominion on the LTL trucking side. And all those companies got to a point where they were pretty expensive and growth was starting to level off and become pretty mature around that time. Looked at GE and when you think about the cycles analysis things that had been Covid winners or Covid beneficiaries from the pull forward of Daniel Aerospace is a great example of what had been a Covid loser. Air travel grinds to a halt. That's the ultimate demand indicator for the investment in planes, new engines, things like that. And then you have all this supply chain tightness that comes with COVID as well from the market essentially grinding to a halt. So we looked at GE around that period of time when we come to this cycle insight and found this incredible culture story to go with it. So you had a very favorable backdrop under earning relative to pre Covid growth levels, a solid cultural turnaround and then just this belief that air travel was going to re accelerate as the world normalized. We bought ge. What was also interesting about that period of time is they spun off GE Vernova, which was their natural gas turbine business. And we got that in the spin off and thought like well what are we going to do with this? What's so interesting about natural gas turbines? And then realized that a lot of those same supply demand dynamics about aerospace were true around turbines. And you had this massive power tailwind that was going to come mainly because the grid was aging and needed to be reinvest. But then also eventually there'd be sort of an AI kicker on top of it. We ended up holding on to Renova. We Ended up buying more of it from that one investment. We subsequently bought Safran, which is a key JV partner on GE's engine program in our international portfolio. We've subsequently bought Rolls Royce, there's a number of aerospace businesses we bought. And then from the GE Vernova Spin, gone deeper into turbines as well with Mitsubishi Heavy as well as Siemens Energy. And that reinforced this cycles view that we had about finding these situations in the same way that we had been hurt by companies that had been Covid winners and benefited from a pull forward of demand. How can we invert that? How can we find things that have been losers from that same dynamic? And that led us first to aerospace, then to turbines. And we've extended into things like senior housing. Obviously there's not a lot of senior housing investment that took place post Covid given what happened around that period of time. Cruise ships, there's all sorts of different parts of the market that you could kind of apply this way of thinking to. It was at a conference with Larry Culp, the CEO of ge. I went up to him and I was like, you have no idea how transformative our investment in your company has been for all of our portfolios. Because it was the seed that brought all these other ideas. That's probably the most illustrative example of maybe the new things that we're doing today that we weren't doing pre2022. Lessons born from that Covid experience. It explains why we're earlier to identify some of these areas, but also I think that we still believe that there's pretty significant tailwind to go and these trades are far from done.
- [26:12]
Ted Seides (Interviewer)
And how about something that you exited at that time?
- [26:14]
Sanjay Ayer
So one of the challenging things in investing is to sell great companies where there's nothing presumably wrong aside from maybe a valuation and things slightly eroding on the edge. Costco was probably one of the most difficult positions to move on from. We had done quite well, as did everyone who had owned the stock for any point in time. It got to a point where they used to say, hey Costco, I'll buy the 20 times earnings trimming to 30. But then it went to 35 to 40 to 45 into the 50s. And you began to ask, can you underwrite solid double digit IRR with Costco? So you asked that question in the vacuum. But then we're also benchmarking every position relative to our focus list and we start to do work on this company called 3i Group, which is based in London. It's a private equity company, but it's basically a holding company. And they made this prolific investment in a retailer called Action, which it's basically Costco. Early days, huge store Runway, an incredible culture. They appeal to scarcity, they rotate two thirds of the items and it's worked in every geography they've gone in. Even the areas like Germany where no global retailer said success, they've been able to crack that market. They'll probably end up in the US eventually as well. So very early in the store Runway, trading low 20 times earnings with higher growth than Costco. So you put those two together, you say Costco at 50s versus 3i grouper action in the 20s. That seems like a trade we should pull the trigger on. And it's a great example of the specialist trap because action is part of 3i Group. 3i Group is a financial company covered by financial analysts who don't really understand retail. For the most part. It's an example of wow, you see the value there is in retail. We're able to apply our retail framework typology to that position and it's been a great investment.
- [28:05]
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- [29:05]
Ted Seides (Interviewer)
Now back to the show. I'd love to turn to culture and how culture of WCM impacted you during that time. And also the lens of culture on businesses that are going through different inflections in a difficult period of time.
- [29:20]
Mike Trigg
For them, the word trust is probably the first thing that comes to mind. I'm grateful that people trust us to be able to do what we do, but also iterate and evolve and do it the way we think we need to do it. If you talk to people inside the team that were kind of at the forefront of instituting a lot of these changes, they would Say the same thing. We think this is the right thing to do, but there's a chance that it won't be. But I'm not going to let that get in the way because I know that I'm trusted to do what I think is best. One of the things that brings a big smile to my face is at any given point in time, we're both pretty good at figuring out what we need to do better. There's moments where we don't have the ideas and the story we always tell is this off site that we had in 2018 or 2019 where we spent the first two hours of the off site. I made this like 60 page presentation and we went through all the embarrassing, stupid things we'd done over the prior 10 years and that was kind of at the peak of our success at the time. And the point of that was, hey, look how well we've done. But also look at how many dumb things we've done over the prior 10 years. Don't think that we have all the answers. I was trying to open the door for everyone not to fall into the trap to say, hey, Mike and Sanjay have all the answers. They'll figure it out. I just want to do what I can to support them. That's the absolute wrong thing to be thinking. We did that and nothing really changed in the first few years. But when 2022 hit, I didn't really know exactly what the next steps were after that. I had an idea of some of the mistakes or areas of improvement, but I didn't necessarily have all the ideas on how to go solve and iterate those. For the first time in a really meaningful way, we had people on our team step up with new ideas. My job at that point was to determine whether it was a good idea or not and then support them and remove whatever barriers I could to make it the most successful as it could be. To me that brings so much pride and joy. It's made our culture better. It's created more leaders within, it's made it a stronger team because we now have stronger peer to peer relationships than we even did prior to that. We've always been trying to innovate, make the process better. It's easy to get stuck in the bright lights of mo trajectory and culture. These are these incredible concepts and maybe even taken too far at times. If you're sitting there and thinking, what can I do to add value to the core philosophy? You could get stuck. I can't come up with anything better than moat trajectory and culture. The changes that took place coming out of 2022. It was a lot of those small 1% incremental improvements compounding every single day. The unsexy part of the investment process is really where we made a lot of the biggest gains. I've used that as a teaching lesson when I talk to people throughout the entire company that are coming to me at times saying I want to add value, I want to do more. They'll look at what is the most exciting thing going on in the firm right now and there might not be a visible opportunity for you there. Right now I would really focus on the 1% better every single day. And there's all sorts of examples of people inside of our firm who have become stars, not through some seminal breakthrough, crazy innovation. They just find little ways to get better every single day. That's a pretty good lesson that I learned. And it's got really strong examples now that we can point to.
- [32:36]
Sanjay Ayer
Our culture always incrementally improves. We're always focused on it. In the last few years, there's been a step change and that's serving others value that we've added as our third core value as a firm in addition to fun and gratitude. And there's a contagion at play when you see other people waking up every day asking the question not how can I make my day the best it can be, but how can I make the best people around me better? And they're rewarded for it starts to build on itself. The other thing I'd highlight that pairs very nicely in this put the trajectory back in mode. Trajectory adaptation we've had is a lot of our decisions on team design have really paid off and have allowed us to flourish in recent years. Three choices we made is one, we're going to be lean, two, we're going to be generalist, and three, we're going to be flexible. And there's trade offs to all of that. Being lean makes our lives harder at times. So much to do. You're pulled in many different directions in an environment like this, where we've been the last few years, you see it's a relatively frictionless environment. So we're able to piece together insights across geographies, across regions, across market caps, without the things that afflict bigger teams. Ulterior motives, information silos, obsession with optics, things like that. I think you've seen that unlock a lot of insights quicker than would have been the case if we were more bigger and bureaucratic. From a generalist standpoint, there are clear trade offs. Specialization means more domain expertise Those late years heading into Covid, being a generalist wasn't a major advantage. The more you knew about SaaS or semiconductors, the better you were. In some cases we had to play catch up on domain expertise in this market. It's been fun because we are viscerally exploiting or have been the specialist trap where if you're an industry Wall street specialist, you've looked at the Same industry for 15 years, you're in an echo chamber talking to peer analysts, management teams all day. You're underexposed to what's happening in the rest of the world. Someone comes to you and says, hey, this time is different. This change at play in natural gas turbines or aerospace engines, you roll in your eyes. I've seen this before. This time's never different. But it turned out to be.
- [34:44]
Mike Trigg
There's like a naivete that comes from we don't have the scar tissue. The sector specialist.
- [34:49]
Sanjay Ayer
Exactly. You've seen that across multiple of the areas we've had success in. And then probably the most interesting one is we're flexible. If your view of solving the market is it's lock and key, you're trying to find the key that unlocks the market. Once you do that, you're golden. The game becomes about minimizing variability and instituting rigidity. Protect what you do, make sure there's very little variance in the system. That would be one point of view. Our point of view is the market's ever evolving. It's a puzzle that keeps changing. You have to keep adapting to solve it. And if you believe that you want to have a lot of flexibility in the system, there's times where people will push back on that, saying you don't have enough guardrails or should you have more guardrails? In our view, there's a trade off. One of the reasons people stepped into the void and carried the torch here is when you have too much rigidity, you SAP curiosity, you SAP creativity. Having a flexible team that you can put the trajectory back in mo trajectory and people feel ownership or empowered to take down a run with it, it's been huge. Without that, we wouldn't be where we are today.
- [35:56]
Ted Seides (Interviewer)
How have you thought about continuing to foster the talent that you want inside the organization?
- [36:02]
Sanjay Ayer
The matching function of external talent with WCM is a tricky one, in part because of our history of being under the radar here in Laguna Beach. I think the big catch is we have quite a high bar. We've been told that by recruiters time and again. Hiring is the field of compounding. Knowledge. The more you do it, the more you should get better at it. It's a discipline. If you asked me a year ago what are the hardest qualities to find in the investment team, I'd point to things like true self awareness, people who could live in cognitive dissonance while still having an opinion, serving others, active curiosity versus passive curiosity. But one thing I've been thinking a lot more about lately is blend or combination of creativity and what I'll call investment empathy. Creativity is shockingly hard to find in the investment community. People who can truly live a few years in the future and envision how today's fundamentals and narrative can evolve. There's just such a reflexive tendency to drag current recent results forward in perpetuity. And when you do get creativity, it tends to be this too much of a vague long term, here's how the world's going to be in 2065 type thing. Creativity is one. But that needs to be balanced with this concept of investment empathy, which is can you see the world through the eyes of an analyst who's covered this company for ages, for decades, who's built up a lot of biases and entrenched views from that long history with the name? Maybe they've lived in a bit of an echo chamber. They've been told this time is different many times over, and it's never proven to be. That notion of true perspective taken in empathy balance with that creativity. That's how you can get from here to there. As far as both the qualitative and quantitative picture, as far as how a company can evolve and how a stock can evolve accordingly.
- [37:59]
Ted Seides (Interviewer)
It's hard to talk about innovation in any process without talking about AI these days, and would love to hear how you've thought about using AI in the process.
- [38:10]
Sanjay Ayer
So we start with let's avoid vapor. There's a lot of AI vapor that's chasing what's hot. We come back to first principles. What's our philosophy? What's the game we're playing? It's really to identify underappreciated change before others do through this toolkit of moat, trajectory and culture. Thus the game selection here at wcm. So when we think about AI, we think about alignment with that goal. How can we get better at diagnosing mode, trajectory and culture, both sharpening our edge on each and amplifying the breadth. Once you approach it from that angle, you start to pull that thread and say, wow, AI can clearly from the amplification of breadth, help us. We've chosen to be lean. There Are trade offs to that? Perhaps AI can help solve that. We're building tools to really codify moat trajectory and culture into a model. How do you diagnose change in the company's moat? Look at it today. Put all this data in there, whether it's SEC filings, transcripts, sell side reports, expert transcripts, and look for change. You can take moat trajectory, break it down by multiple terms, and then look at the company today. Look at it 18 months ago, and this model will flag. Is there a material change at play, both positive and negative? Is it intensifying? And then what's the level of conviction the model has? So that's something we've built in the last two years around that. We're doing something similar around culture, codifying it, and having a model tuned to that so you can view it as a research partner. What we're trying to think of is where are the areas where it's best to automate. Can we reallocate our time towards judgment and intuition? It's a continually evolving toolkit we're building, but I think we're pretty early. We've adopted technology in our firm quite a bit. This is the fastest diffusion of technology we've seen. That's a sign that we're onto something here.
- [40:02]
Mike Trigg
In less than a year, across the team, there's been thousands of reports that have been generated. There's no skepticism about this because it's been built to be so consistent with the philosophy itself. It's an extension of the existing investment philosophy that's making the lives of the analysts easier and the PMs, from both an idea generation standpoint and a monitoring point of view. All the other stuff that you hear about and people talk about around writing reports, summarizing, that's all permission to play off the shelf stuff. There's no edge there. There's no competitive advantage. And trying to think too deeply about any of those things or build that stuff yourselves. We've gone to great lengths to make sure the entire organization understands the importance of AI and how that can improve their day to day. We go out of our way on the investment team. We have a weekly Wednesday standup meeting that people from different parts of the firm attend. And we actually share a recent use case of how we used AI in an interesting way that helped us solve some pain point. And other people, whether it's in sales or operations or marketing, they can see examples of that and then try to go figure out how to kind of apply it to their day to day. We're so lucky we have the size and scale of a large asset manager, but not a lot of the bureaucracy. I've had a couple conversations with people at really large asset managers where I'm like, oh, we must be so far behind you guys on a. You must be doing some incredible things. The data that you must have or the amount of information that you can pull to create tools. And they'd be like, no, actually, Maybe there's certain PMs in certain parts of the firm doing some cool things, but you've got silos, you've got bureaucracy amongst the large firms. I'm hearing cool examples of stuff that people are doing. I just want to make sure that everybody in the firm knows this isn't something to be afraid of. This is something that could make us a much, much better company. I went out this great lunch a month ago with two people from the operations team, and one of the individuals confessed that he's like, yeah, I'm kind of worried about being made irrelevant because of AI. And the younger person at the lunch said, if you have that attitude, you will be made redundant by AI. So trying to make sure that we embrace that and that we're not afraid of that and then casting the vision for how this can make all of our lives a lot better, I think is a really important thing, not just for an asset management company, but that's really what every company should really be thinking.
- [42:26]
Sanjay Ayer
And where our industry falls short a lot is we don't turn the mirror on ourselves. We're just out there critiquing companies. Hey, you're not embracing AI quick enough. And you look at your own company, there's no AI to be found. The privilege we have is we see the cutting edge, how AI interacts with culture, which is a really rich topic, and you could pick the best things that apply to your own organization. We had our annual culture event sandbox in June, and AI was a predominant topic. There was really interesting insights that were drawn, and when Mike and I came back, we're like, okay, let's internalize some of these and apply them to wcm and let's help galvanize the organization.
- [43:04]
Ted Seides (Interviewer)
If you look at WCM business and the trajectory of the business, so much of the initial success was in the core flagship international global growth strategies. What's happened over the last couple years as you've gone into different strategies that are adjacent to what you were doing?
- [43:22]
Mike Trigg
I don't think the firm's ever been better positioned in that the firm has had some meaningful product concentration risk over the years. Today, $120 billion in AUM we actually have nine products that have more than a billion dollars in assets. Those smaller, call it billion dollar products have incredible tailwinds behind them. There are very, very good times ahead. And that's exciting to see because those efforts to get smaller strategies up to different levels of scale where they can attract large institutional flows is very hard work. The investment team, the sales team, the whole firm has gone to great lengths to put all of those in a position to succeed. The thing that's a natural extension, but that's maybe new in the last couple of years is what we're doing in private markets. We started thinking about private markets a long time ago. It's something I knew I wanted to do largely for research and investment reasons. When you're growing as fast as we were growing, you don't want to upset the apple cart and just focus on what's right in front of you. And then life brings a little bit of serendipity and certain people come into your life and you think, okay, maybe now's the time. And we didn't really get going in private markets until 2022. You could have thought at the time maybe we're too late. Some of our peers had already started to move in a big way in that part of the market. The timing turned out to be great. We avoided a lot of frothy deals that took place in 2020, 2021 and our story quickly resonated. I thought the hardest part about moving into private markets would be getting brand awareness and access to deal flow. Partly because how good our story is, how refreshing it is. Our ability to access the best of the best late stage private growth assets has blown away my expectations. And then having a lot of early success. Our first investment was in Anduril at an $8 billion valuation. We were also the first crossover fund to invest in Anduril. So you have a couple early wins. That investment was a great example of why you want to be in private markets. One of the reasons we were early on this Defense thematic was we had some Android learnings as well of what was the tailwinds around Defense. That's become a huge part of our portfolios. That theme or that tailwind and Andrew was a key part of that. So that was very thesis confirming why we want to go to the lengths to spend time building a competency in private markets. Fast forward, we got an amazing opportunity to co lead two rounds with databricks. We were just involved with anthropic raise. We're getting access to all the deals that we want. We've seen a ton of stuff and you think about right to win. And one of our colleagues, Alan Tu, who leads a lot of the research effort on the private side, he put this basic framework together. Think about how we can differentiate ourselves from the other players in private markets. You've got the traditional VC players, they're involved in lots of deals. We're different. We're taking a very curated, concentrated, best ideas approach which resonates with founders and with clients. And they want to know what they own and they want to know why you own it. You got the hedge funds, they have some similar advantages to us. They can move quick, they're nimble, they're not necessarily going to have the staying power inside of a name that we're talking about. We're going to be with you through your entire journey as both a private and a large public company over time. So that's meaningful. And then if you think the other lawn onlys who have done well in private markets, those firms, they're a little bigger, they're a little more bureaucratic, they can't move quite as fast as us and the companies, they struggle to know who to deal with inside these firms. You might get a large round at a large asset manager, but the thing gets sliced and diced and it's in a million different portfolios. We've purposely built our private market operation to be part of our public team. It's the same team. Regardless of what stage you're at as a company, private or public, you're going to be dealing with the same group of people. You're not going to get handed off to a different PM who's going to have a completely different framework to how to think about your business. We'll have still been there the entire way. That's exciting to me. I wanted to do it most importantly because I wanted the research synergies, but also I want to do if we can be meaningfully different.
- [47:32]
Sanjay Ayer
Look at the last 20 years. It's fortuitous, but we staged these new products at the right time to unleash the right insights at the right time. And I've been skeptical oftentimes on new products. This notion of synergy always seems a nice buzzword, but do you actually get it? So when we launched emerging markets back in 2010, it was exact right time. Just as the key risk for most of our holdings was the rise of these local consumer brands. You've seen what's happened to Starbucks and Nike, just getting chipped away. Relentlessly in China, private markets is similar. Take the AI thematic. If you did not have visibility into what was happening on the demand side in the private markets, which is where the big use cases are emerging, and on the cultural side, which is where all the AI native companies are born, you would have a very different view of AI. So you take that, you layer on China, the emerging competition you're seeing there in Taiwan and China enables you to have a much more informed view on this AI thematic, which is obviously a big driver of the markets today. The timing was very fortuitous. And whether it's defense AI we are seeing, the research synergies have definitely eclipsed my own expectations.
- [48:40]
Ted Seides (Interviewer)
What new research initiatives are exciting you?
- [48:44]
Mike Trigg
Well, the AI, it's called Sherpa, that's definitely the single most exciting new thing that we're doing. But we're also always trying to push the framework further. We have this culture philosophy. It's around these three pillars, culture, strategy, alignment, strength and adaptability. But we're always tinkering and trying to make sure that we're making sure that that's relevant and that's evolving. And one of our culture analysts just wrote this great paper called Putting the Cult Back in Culture. And her basic premise of the piece was that we've done a really good job at isolating the behaviors that are necessary to achieve culture strategy alignment. That's a big part of what our team does. When we go in there and we're like diagnosing these companies. Maybe where we spend less time or have spent less time is trying to understand the social mechanisms that reinforce those behaviors. You can have two, three, five companies that talk about the exact same behaviors. Whether it's Lean or the Danaher business system. All these companies are talking about the exact same behaviors. But maybe they don't have the right social reinforcement mechanisms inside their organization. They don't do enough job instilling those things into just the day to day grind of being at the company. Her clever way of summarizing that point was that you need to put the cult back in the culture. And so we need to better diagnose what those companies do to make sure that everybody's living out those behaviors. That's a pretty cool example of something that we've recently done to push the culture framework further.
- [50:18]
Sanjay Ayer
This constant iteration, I can guarantee that we'll continually incrementally get better across these dynamics. But more trajectory, culture construction, and now you could layer on AI and technology. The step changes are harder to see. Oftentimes they're Things that are just triggered in the moment. So we've had a big step change in portfolio construction in recent years. Culture is an area where we've been at it for a long time, but there's no book written on how do you evaluate culture. There's no framework. We're building our own framework sometimes, despite.
- [50:48]
Mike Trigg
Our best efforts to figure out the areas for improvement. I thought our construction framework around defensive growth, secular growth, and cyclic growth was perfectly built to make sure that we had a concentrated portfolio, but one that was diversified by bet type that helped inform the breadth of the focus list. Truth be told, having learned the lesson from 2022, there was some imperfection around some of those tools. They needed to get better, they needed to improve. Sometimes it's like the mistakes that then lead to the next insight. In the meantime, it'll be AI and it'll be these constant chipping away, 1% incremental improvement.
- [51:20]
Sanjay Ayer
Yeah, I think it's that mindset. We have a lot of raw material we can learn from. We built this software app called Everest, which we log every decision or thought or opinion we have across the team in this app. So you have a lot of raw material for this core value of getting better. And I don't think we fully unlocked that with AI. My dream world would be to show up in the office Monday morning and I get an email. Here is the two most interesting podcast insights. One from Capital Allocators, of course. And then here's the Moat trajectory flag or culture flag you should be paying attention to. Might take a while, a few years, but I think it's well within reach. Whereas I wouldn't have said that a few years ago, I'd love to ask.
- [51:57]
Ted Seides (Interviewer)
You a couple of fun questions to wrap up. What is a mystery that you wonder about?
- [52:04]
Mike Trigg
I do think about the literal nature of the Bible. What really happened? How accurate is everything that's partly informed by different morning routines and things that I have. That's probably the one that I more often than not sometimes think, oh, that was incredible. Could that really have happened? Of course there's things like UFOs and figured you go with space, who killed JFK and stuff like that. I'm not a big conspiracy theorist mystery guy myself.
- [52:32]
Sanjay Ayer
I guess they're the same. I'm not a big conspiracy theorist either. I don't think enough people can keep secrets for that long. There's just things around parenting and whatnot. I wonder about how my kids are so different and the mysteries behind that.
- [52:45]
Ted Seides (Interviewer)
How about a recent investment pet peeve?
- [52:49]
Sanjay Ayer
This May be more cultural than investment, but people will come to us and say, what can I do for you? How can I help? That question is very well intentioned, but it effectively puts the burden on the receiver. So then you have to think through this person in their shoes, with their context they have, with their skill set. How can they help me versus this notion of there are people in this organization otherwise who will really take the effort behind the scenes to understand how they can help and then we'll just do it. You could call that passive curiosity versus active curiosity. I'm not exactly sure the right phrasing, but that is a pet peeve. And again, it's tough to really be too critical because it is very well intentioned and people do want to help. But it is an extra effort to really read between the lines, understand at this moment in time, where can someone add the most value and then they just step into the void. Those are the people that do best here.
- [53:40]
Mike Trigg
There's this story that I immediately thought of when he said that about an individual that we've recently hired on our sales team. His name is Justin Watson, and he lost his house in the Altadena fire. After I had chatted with him, I ran into this interview that he had given on local television with his family in Altadena. Burned houses down to the chimneys behind him. As the interview was kind of winding down, I actually turned to the reporter and he says, can I just quickly say something to the audience? And she says, of course. And so he says, a lot of people are going to watch this, or they're watching all the coverage that's going on in the Palisades, in the Eaton fire, and they're going to ask, what can I do? How can I help? And he goes, my advice to those people, just do that is so similar to what Sanjay was just saying. Just do it. One of the things we do inside this company, and we don't talk about this publicly, but I'll do it on this podcast, is years ago, when Covid hit, we canceled our Christmas party. A few of the guys were down at the bar, at the restaurant, and right next to our office having drinks and talking about that. And it's a proper, pretty big Christmas party. The budget's pretty high, so it's a decent amount of money. And so we're what are we going to do with the money that we're not going to spend on the Christmas party? One of our sales guys by the name of John Carl had this idea to essentially create a fund that anyone in the company could access to help people that had been impacted by Covid. So people that had lost their jobs. A waiter that, you know, that could no longer work because the restaurant was closed. But it wasn't designed to be for a charity or anything like that. Go out, find people in your life, ask them how they're doing, and then if you want to come to the company and ask to make a contribution, we'll match 4 to 1, whatever contribution you personally want to make to this person. And we'll use the funds from the Christmas party to fund that. Well, the response to that was just off the charts. We went way over the budget of the Christmas party and then we decided to make it a permanent program. And it's not just during the holidays. It's a year round thing that now exists. And there's so many incredible things about it, so many stories that I could share about people that we've touched. And it's been amazing to watch that giving gene develop and how much fun people have helping other people. But I think the coolest thing about it by far is that the overwhelming majority, if not all of these gifts, come out of the complete blue to people. And it's just doing somebody hearing a story, talking to somebody and saying, okay, I'm sorry to hear that you're going through that. Two weeks later, a check shows up in the mail. This program's called Helping Hands. It is the perfect embodiment of the. Just do.
- [56:34]
Ted Seides (Interviewer)
One last question. If the next five years are a chapter in your life, what's that chapter.
- [56:40]
Mike Trigg
About as it relates to the firm? I try to kind of reinvent myself every five years. And I try to do that based on what I think the needs of the organization are. And I really enjoy that process. Just going through this period of running these incredible products, helping grow these incredible products, us kind of being at the driver's seat of all that. I viewed my next five years to be more about continuing to develop the kind of next generation of people. And there are people that have stepped up and emerged in recent years. I just wake up every day thinking, how can I make that person more successful? How can I remove barriers for them? How can I encourage them? I really want my next chapter to be less about me and more about. I don't want to say I want to be displaced, but in a way I sort of do leadership, mentoring, coaching. Those are things that animate me a ton today versus maybe Covid era time. I was thinking about how to respond to what was going on in the world and things like that. So that's probably what comes to mind.
- [57:42]
Sanjay Ayer
For me, my five year hope is that being on top tick with this podcast. This is going to sound crazy, but in many ways I think we're just getting started. Sounds wild, but this is really the first time Mike and I feel like we have what we need. We have the team, we have the culture, we're clicking, process is good, philosophy is sound. Now it's about unleashing the potential of that. And so when you ask a question about can we be one of those managers who stand the test of time without succumbing to preservation mindset? Because every incentive today is to enter preservation mode, become benchmark hug coast on the brand and now it's really about staying true to who we are and being different and getting better and serving others. If we can do that and do it over the next five years, then we start to really stand out as a firm relative to the base rate of other managers. I'm incredibly excited. I think we have everything we need and now there's really no ceiling to our aspiration. We had an offside and I threw out this crazy notion that can we be one of the best money managers of all time? And that's purely from a client point of view. Can we be one of the best asset managers for them as far as significant and durable Alpha and I think we have a shot. I think it's a very exciting time.
- [58:56]
Ted Seides (Interviewer)
Sanjay, Mike, thanks once again for sharing this next stage of your journey at wcm.
- [59:02]
Mike Trigg
Thanks Ted.
- [59:02]
Sanjay Ayer
Thanks Ted.
- [59:04]
Ted Seides
Thanks for listening to the show. To learn more, hop on our website@capitalallocators.com where you can join our mailing list.
- [59:12]
Mike Trigg
Access past shows, learn about our gatherings, and sign up for premium content, including.
- [59:18]
Ted Seides
Podcast transcripts, my investment portfolio, and a lot more. Have a good one and see you next time.
- [59:27]
Disclosure Speaker
This testimonial will be provided by Ted Sides and Capital Allocators who have been compensated a flat fee by wcm. This payment was made in connection with Capital Allocators testimonial and production of podcasts and does not depend on the success or level of business generated. The opinions expressed are solely those of Capital Allocators and may not reflect the opinions of others. Investing involves risk, including the possible loss of principle. Past performance is not indicative of future results. Please visit wcminvest.com for WCM's ADV and further information.