← Enterprising Investor
Enterprising Investor
Dan Boston: Volatility, Valuation, and the International Opportunity Set
00:32:37
Dan Boston, Lead Manager of Polar Capital’s International Small Company Fund (PCSCX), shares his perspective on why international equities may be poised for a resurgence. The conversation unfolds amid sharp market volatility following President...
Loading summary
Transcript32 lines
- [00:00]
Fintool Representative
Fintool is ChatGPT for SEC filings and earnings calls. Are you still doing keyword searches and going to the individual filing and using control? F. That's the old way of doing things before AI. With Fintool you can ask any question and it's going to automatically generate the best answer. So they may pull from a portion of an earnings call or a 10k, whatever it may be, and then answer your question. The best part? Every portion of the answer is cited with the source document. Now, if you've tried to do any of this in ChatGPT, you may know that the answers are often wrong or full of hallucinations. The way Fintool is able to outperform ChatGPT is their focus on the SEC filings. If you're an analyst or a portfolio manager at a hedge fund, check them out@finTool.com.
- [01:01]
Mike Wahlberg
Hello and welcome to the Enterprising Investor, the flagship investment podcast for CFA Institute. I'm Mike Wahlberg and I'm joined today by Dan Boston. Dan heads up the Global Small Company team at Polar Capital and is lead manager on their International Small Company Fund. Prior to joining Polar, he spent time at Brown Capital Management, Baird and Ensign Peak Advisors. Dan earned his MBA from the Yale School of Management, where he was a research assistant to none other than Nobel Laureate Robert Shiller. Recent guests on the show have spoken about the accelerating pace at which the US Seems to be fleeing globalization, and what better topic then for us to discuss than the role of global stocks in portfolios? How much is enough? How much is too much? Stay tuned to find out. Welcome to the show, Dan.
- [01:45]
Dan Boston
Well, thank you Mike. Thanks for having me and it's a pleasure to be here.
- [01:50]
Mike Wahlberg
So I should say before we get into this general discussion about global equity allocations, I will want to talk to you about your thoughts on recent markets. We're recording April 9th for the knowledge of our listeners there. And being the diligent interviewer that I am, I decided last night to take down the market performance since Trump announced his sweeping tariff regime for the planet on April 2nd. As of last night, markets were off 9 to 11% around the world. US treasuries are up about 40 basis points from where they started the week at about 4.4% $. It continued to trickle down against all the major currencies. Even Bitcoin was down. The only good news in there, other than for the energy companies themselves, was oil's decline to its lowest level in four years. Then, if you remember your April 9th this afternoon, the 90 Day Tarif Reprieve was announced and of course everything is now racing in the other direction. So my first question to you, Dan, how are you doing?
- [02:42]
Dan Boston
Are you okay? Yes. Personally doing well, team's doing well, firm is doing well. But certainly the headlines coming out seemingly every minute, every hour have a lot of heads spinning at the moment. So we've certainly spent a lot of time at night reviewing the day, going over the next day, maybe taking a step back from the headlines. So we're at a heart of what we do. We just look for wealth, creating alpha generating compounders. So the vast majority of what we do is looking for a specific type of company. But what we won't do is ignore the context in which we're doing this, which is the market. And today it's whether you're a stock picker or a fundamental analyst, it is unavoidable to not recognize the global change that's occurring.
- [03:41]
Mike Wahlberg
Yeah, I mean that's the thing most, you know, people outside of our industry, they think, oh, you know, it must be all pulling your hair out and jumping out of windows when the markets are falling like this. But the, I mean the truth of the matter is, right, I mean it's the same in our shop is your stuff's going on sale, right. If you, if you've been doing the work for a long time, are you finding that there's, there's good opportunities of companies that you like that just weren't trading at the right prices that are and well, until this afternoon that were sort of coming into focus.
- [04:05]
Dan Boston
Indeed we have. So we have added one company so far this quarter. For context, we don't add that many companies per year. So when things go on sale, including our portfolio, we certainly look to add. So we have been able to take advantage of the sell off for that reason, which is great. At the same time we also track where we think our companies individually price on a discount basis to themselves. So as, as companies have traded down, the discount to their intrinsic value has also gone up pretty dramatically. So whether, whether you're looking at your watch list or, or your current portfolio, everything should look a lot better than it did when we started the year.
- [04:50]
Mike Wahlberg
So, so what do you, what have you been seeing specifically in international markets? And you can take that however you like. Anything outside the US I guess leading up to and through this last week, maybe look at it on the, on the year to date post Trump. Just curious, kind of what you're seeing in those markets.
- [05:09]
Dan Boston
So from a big picture perspective, we wrote about the year 2025 in our outlook. And what we mentioned was three things. Essentially we said that this US led unfettered globalization was about to change. And tariffs are essentially the, the mechanism, but they're not necessarily the reason for the change. There are many reasons underneath this. We feel like that certainly come to pass. We also wrote about the dangers that we see in China, specifically around their capital allocation, around some of the real estate troubles they're having. And then we also wrote a little bit about commercial real estate repricing into the future. Today we're what, like four months into this roughly? And we'd say all those things still hold true. Happy to go kind of market by market. But if we're talking just broadly speaking, what this is turning into is what we would call a great global reset, where the terms of trade, the terms of defense and how stimulus is being spent nationally and globally is all about to change. So we feel like we are truly at the cusp of what we would call a great global reset at the moment for those three items. And they'll have significant repercussions for all markets. US Global, emerging markets, everyone.
- [06:41]
Mike Wahlberg
Well, let's start with China because they were the ones region that was remains in the crosshair increasingly. So after the everybody went to back down to 10% and they jumped from 104 to 125%. Hopefully these numbers aren't stale in a week or so when this gets, gets published. But you know, huge focus, he renewed the focus on that. So what, what are the implications for, for the Chinese trade war on international stocks as well as, you know, on.
- [07:07]
Dan Boston
The, obviously with the U.S. well, it's a great question. So clearly the U.S. has gone after what it would describe or what President Trump would describe as the largest trade imbalance, which is true. If you look at trade deficits, China is the largest one. So I think the hope of tariffs, broadly speaking, will be something like increase the tariffs, tried to bring back some of that manufacturing that has been hollowed out over the last, call it 20, 30, 50 years and bring back some of that to the United States. The mechanism of that, the timing of that is fairly uncertain. And then the question remains today is how are each of these nations going to set the rules of the road? We are in the period where the rules of the road are being set. And to your point, the first big question is China. What is going to happen with the US And China? We think China is in a tough and precarious situation on the back of a real estate bubble bursting on the back of A lot of debt that's not properly been accounted for that now sits in the banking system or outside of the banking system in a lot of cases. And so China and the US Getting into a spat is quite risky in terms of global growth. So if this spat goes on for too long and becomes, or turns into a situation where trade slows down, what you'll instantly see is prices of goods going up in the United States. And you'll also instantly see the factory of the world, which has become China, start to slow down, which will create all kinds of local government pressures and kind of company pressures that China will singularly face. From there, if that starts to happen, you'll see China try to make other deals with European countries, more and more of the neighbors in Asia, which they already have done to some extent. But the reality is the US has the demographic base and the consumer base that the world wants. That's an undeniable truth. That's why deals will happen globally. But with China, there's clearly an antagonistic relationship that if it persists and grows, will probably threaten some sort of recession, certainly in the United States, and most likely that will be reciprocated to China as well. So it's a, it's a tough situation for both of those countries and it will slow down certainly the, the momentum and the, the velocity of the economy globally, too.
- [09:59]
Mike Wahlberg
Yeah. I had Peter Zion on the show here a couple of months ago, and he reminded us of the demographic cliff that China is also facing. He's, I mean, he's, he's always very, very has strong views about the extent to which the demographics are going to come to bear on, on the countries that he's talking about. And China is one that he just slams the table and said, these guys are, they're dead. They're dead in the water. The one child policy is catching up to them. And so that's, I guess that's another factor that's running in the background for China, I would imagine.
- [10:32]
Dan Boston
Well, not only China. You know, Peter's right about China being. Assuming the numbers are correct, which depends on who you want to believe. And there's official government statistics and there are statistics that come out of, like the Shanghai University and then, and then there are others that, that kind of try to make heads or tails of those two sets of data. Right. So there's a question as to exactly what are the numbers. But what is undeniable is that there is a demographic cliff that can be described as China having around half the people being, you know, 53 or older or 53 or younger. So that's a, that's a fairly high age to essentially have it as a median, which puts you in a tough place. The reason I would say China is in a difficult space when it comes to demographics, but it's not the only one that faces those types of demographics. So if you go over to Korea, you'll find a similar situation. If you go to Japan, you will find another similar situation. If you go throughout Europe, the same thing is true. I would point out Germany, for example. You have this demographic situation where the average age is quite high. But remember that consumption really takes place at the lower end, right? Where you have children, you're buying high chairs and you're upgrading your car, you're moving out of the city to the suburbs. All these things start to happen as you have children. And so when you have that younger demographic being thinner, that creates a bit of a consumption hole. So then you have to ask yourself, well, what do we do with that consumption hole? We have a level of production. Let's say if you're in Germany, you're producing Porsches, but all of a sudden you can't sell all of those Porsches in Germany. You've got to go to other market. China was an interesting market because it was newly opened. Now that it's been opened now, you have this demographic headwind. What the US offers is a demographic that's much more appealing generally speaking, vis a vis home country demographics such as Germany and South Korea, as we were saying. But on top of that you have, call it 350 million people with an average income of almost $70,000. So it's a massive market. You have one, largely one set of rules, one FDA, you know, one SEC. And so you have big country good demographics, relatively speaking, with one set of rules, which is why countries will line up to make trade deals. Because that production that they have in their own country will not be absorbed by their own people. So they need the US market to absorb what their companies make. So, you know, maybe, maybe we shouldn't use Porsches because that's a fairly high, high heeled product. But maybe, maybe we'll talk about VW automobiles. And that's where Germany in this instance would, would need the US to kind of really drive scale in that business.
- [13:36]
Mike Wahlberg
That's right, yeah. Because the scale of the US and the, the rule of law and just the, you know, the transportation networks and the, the massive consumption and their wealth, that's, I mean that's a lot of reasons in a row for why it's so attractive and has historically been so successful a lot of these trading relationships. But I wanted to pick up on one thing you mentioned about China, which I, I was thinking about, which is this idea of new trade partners. So the rest of the world's basically having to adapt to having not, not a. The best relationship or the not as profitable a relationship. I guess I'll put it with the US Depending on where this all lands, who knows? Right? Like I'm just gonna put that out there. But to what extent do you think you'll see some rejigging of trading relationships increases? You know, Canada, Europe or Japan. I was going to say Korea, but maybe not there.
- [14:25]
Dan Boston
Germany, you know, so it's an interesting question. So for the last 75 years, the US has essentially provided global security in terms of its navy. Right. So that underpins global transportation, which allows for global trade. And, you know, most of us have been alive for 75 years or less, so that's all we've ever known. But if you go throughout history, you would realize that this is really the only time that one country has kind of kept together this, this global trade to this magnitude and this size. So then the question becomes, well, if someone's going to step in and start dealing with China directly, like you're suggesting, is that the European Union, is that a collection of, of Asian countries? Perhaps. We'll see. Probably not would be my, my statement back to that. But you could see countries unilaterally just going to China and trying to make deals. The problem with that is that the US Will most likely, and already has hinted that they will make rules around shipping, for example. So if you have a Chinese ship in your fleet or if you are buying Chinese ships, then you will be penalized for trading with the US Right. When that ship comes to port or when that fleet comes to port. So it's what's different this time than, let's say, Trump's first term when he also had unilateral tariffs on China. What we saw was, and maybe a little bit to your question, we saw China and companies specifically start to shift production away from China, maybe to Vietnam, but somewhere generally within the southeast region. And so what the Trump administration would say, well, we enacted these tariffs, but look, we only had a slight increase in prices in terms of inflation. Well, that's true, but part of the reason that happened is because you essentially just shifted to regions that didn't have those tariffs. What's different this time is that there's going to be some level of Tariff coming across every region and we'll see what these deals look like. Again, the rules of the road are being negotiated right now. One thing I would point out is that typically these trade deals, coming back to your question, you know, these trade deals usually take around 18 months, assuming everybody's on board and people want to sign off on them. You know, we're talking 90 days pause. So we're looking to make a lot of deals in a very short amount of time. And not just with the US but like you're saying, will other countries go and make, make deals with, you know, more unilateral deals with what, Vietnam or China or et cetera? We'll see. But the reality is this is all going to happen really quickly. And the fact that these tariffs and these trade terms, let's say, are going to be more broad based than they were before under Trump's first term. What's inevitable to us is that you will see many years of reset in terms of where things are made, where they're produced, how they're produced, who produces them. And so I guess bringing all those thoughts together, there's a lot that's unknown at this moment. And we think the ultimate result of all of these things, once they're known, will be higher prices, a slowing of economic trade on most levels, as well as some period of reset which should in theory favor the U.S. for example, gaining some sort of level of manufacturing at the margin. You know, we're not going to make probably Nike shoes in Alabama, but we, we may start to make Toyota engines in North Carolina or something like that. Like the, the percentage of content for some goods will probably go up. But you got to remember that's going to take a lot of time to get there, a lot of investment. So the question I would say you asked about these unilateral deals with China, and I realize I'm this is a long winded answer, but I think part of the answer is how long can the Trump administration do this and still stay, you know, with a Republican majority in the Senate, in the House? So there's a lot of things in the air at the moment that create enormous amounts of uncertainty. And frankly, we don't know the answers, but the path in a lot of ways is clear.
- [19:05]
Mike Wahlberg
Yeah, that's true. I mean, he doesn't have an eternal Runway. You've got a couple years here before you've got the, you got, the next.
- [19:12]
Dan Boston
Set of midterms are next year, right? Next year, right?
- [19:16]
Mike Wahlberg
Yeah, I guess that's right. Yeah. Because we're into 25 already. Holy smokes. Yeah, so.
- [19:19]
Dan Boston
Right.
- [19:19]
Mike Wahlberg
So that's maybe part of the reason for the, for the pace at which things are going, trying to get things done. But it's, I mean it's interesting because you, you mentioned Vietnam, which of course became kind of the world's new workshop. But you know, they were had, was it 46, 48, something like that before they hacked back down this afternoon, they, they were getting some pretty serious tariffs faced at them. And that's the reason, I guess right there. So I wanted to talk actually about currency because that's something that you've written about and I'm just curious of your thoughts. I mentioned coming into this conversation that the US Dollar has been losing some steam this year. And I'm curious what you think. How important is the strong US Dollar? Has it been to the long term dominance of US stocks? And what's your outlook for international stocks if it continues to slide?
- [20:04]
Dan Boston
So we wrote this paper, why international, why now? And one thing we did talk about to your point is the strength of the currency. And I don't want to be too simplistic in the analysis because the reality is there's always a multitude of factors that play at the same time. But let's just, Robert Shiller would say to me sometimes the beauty of economics is isolating one factor and starting to more or less manipulate that factor to see how other things change. So maybe, maybe we'll go down that route with currency for a moment. So if you, if you go back over the last 30 years and you can take this analysis further too, what you'll find is that the US Dollar has generally been strong and about two standard deviations away from the mean, which is pretty good. Right. If so, when, when you take this analysis out further, what you'll find is sometimes the dollar is above the average or below the average. Right. But we were kind of coming into this year, we were around two standard deviations or so above average. So in other words, the currency was, was quite strong. You asked how does that play into markets? Well, we've had about a 13 year run in US equities outperforming international equities. For a lot of folks, that's been their entire career, that's all they've known. When you stack up the data. And one thing I'll just plug Robert Shiller again. One thing he was very good at was getting a very large data set and understanding throughout time how that really works. And when it comes to currency and markets, what you'll find is especially US versus International. The currency as well as the outcome of the markets are intertwined. So when the dollar is strong, the US markets generally outperform. And this happens over a decade or so at a time. So if we go back to before our current period, where mag7American exceptionalism was the narrative coming into this year, for sure. But if you go back to 2000 and take the period from 2000 or so to about 2010, what you'll remember is the lost decade and lots of questions as to whether or not anyone should invest in the S&P 500 because you're never going to make any money. What's funny about that is clearly that that message changed with the fortunes of the dollar, in part. So, yes, in our minds, when you stack, you know, the great global reset against a strong dollar, against what will inevitably be some. Some level of, you know, trade war, you get the situation where US stocks have done really well vis a vis their international peers. And what we're saying is we think that there's a good chance or good likelihood that that will reverse.
- [22:54]
Mike Wahlberg
I want to circle back to one thing you mentioned earlier, which is you had a few factors that were important in your mind, and one of them was real estate. You want to talk about that a little bit more. You touched on it a bit with the Evergreen. Evergreen, but. Evergreen Evergrande.
- [23:07]
Dan Boston
Yeah. So if we take a trip down memory lane, when I first started this job, I've only ever been in the markets. That was my first professional job. Well, I've had. I've had a lot of other jobs since about age 14, none of them looking at global markets, as you can imagine. But when I came out of undergrad, I was very fortunate to land a job as an analyst right away. So that was in the year 2005. So if you recall, the great financial crisis would kind of run through 2005. Six, seven was. Was more or less the peak. And then by 2008, 2009, we have real estate problems in the US subprime crisis. Bear Stearns, hedge funds going bust, all of these things began to happen. One thing that I realized as a young person, and after reading Irrational Exuberance by again, Professor Robert Shiller, I realized that there are times in the market where you just have these economic tsunamis that sort of just wash over everything. So, you know, if you're standing on the beach and your house is made of straw or cement, it doesn't really matter when the tsunami shows up, you just get washed out. So if we go back to 2007 when this great financial crisis appeared. And look at the, you know, the US Market for listed banks. Listed banks, there are something, there are thousands of listed banks at the time. There's a continuous buyout and kind of consolidation going on. But at the time there were thousands of US banks that were listed in the stock market. In 2007, there were four that had a positive return. One of those was Citi national, which was bought out that year. So I don't sure if you count that, but essentially it didn't really matter what you were doing, how good of a bank you were, you just got completely washed out. So coming back to your question about real estate, what I really wanted to do in terms of going to school at Yale for an MBA was track down Robert Shiller and figure out how did he know this was going to happen. So whether it's stock prices, real estate prices, et cetera, how did he know that things were overextended? And so coming to real estate today in China, you have a situation in China that's fairly precarious in our minds. So when you look at one thing Bob would talk about all the time would just be the ability to afford the house in the first place. So in the US you saw this house price to income essentially just grow and grow and grow to a fairly unsustainable level.
- [25:50]
Mike Wahlberg
The same thing infinite with the NINJA loans, right?
- [25:54]
Dan Boston
That's right, that's right. It's well, infinite until the, until the terms reset and then, and then all of a sudden there was, there was no one there to pay. And that's the point is you find these imbalances and in China you can find situations where the cost of a house to the income in certain Cities is over 20x. So how are you paying for that house? And the reality is you're not. There's some NINJA loan equivalent that's going on in China and you can pick the certain circumstances, you know, there, there are many who have documented the, the ghost cities. And you know, China did a fairly good job of bringing folks from the rural areas building out in advance and then having them populate cities. But what I think is generally misunderstood is the magnitude of the build out in China. By some estimates, you know, folks are thinking this is almost 2x the actual housing need. So Bob was always really good at thinking about, you know, cost to replace for a house. What does that look like? Does that justify the home price? And clearly it doesn't in this case. It didn't in the US either back in 2007, cost to income. That doesn't make sense. And so what you find in an underlying situation in China is that, you know, something like 70% of financial wealth, of household wealth is tied up in real estate. Well, that's true because, you know, folks generally either don't have access to the markets or don't trust the markets. And so. And then the banks have an interest rate that is below the rate of inflation oftentimes. So you're on a real basis, you're losing money. So you can't put your money in the banks. You can't really, you know, access, let's say, the financial markets in a way that you would want or trust, let's say. So what's been kind of a sure bet for many, many years, you know, sure bet in quotes, let's say, has been buying up real estate. And that's gotten to the point where, and some of this is the fault of the government for allowing this to happen. Now, you brought up Evergrande. Evergrande started to get into trouble in 2021, but they've been in trouble for a lot longer because they've been building essentially the shadow inventory of housing that nobody was ever going to live in. So in this case, you have enormous amounts of what we would call misallocated capital that was pushed by the state because, remember, the local municipalities can sell land, essentially, right? And then the real estate developers buy the land. Those developers then give that money to the state. The state then can claim, oh, our, you know, our revenues went up and therefore look for a promotion within the CCP party and move up in their careers. So there was a big game, you know, within the, a couple of spheres. One is the government. So they, they essentially promoted it, and then the consumers themselves promoted it, both to very unhealthy levels. And now that's, that's essentially unwinding. And it's been unwinding for a few years now, but frankly, it's, it's so large. And the mechanism to fix it is not as transparent as you might find in, say, something like the U.S. that's what will, that's what will prolong this problem for many years.
- [29:24]
Mike Wahlberg
Yeah, I can add one. I have my own anecdote from that because I did a reporting story. I reported with a team of people over there on the environmental movement in China about 10 years ago, 12 years ago. And yeah, we took the bullet train from Beijing down into central China, Henan province. And on that train ride down there, we would go by entire cities that were basically 30 towers that were 40 stories tall that were kind of just stopped. You know there's a crane there. Yeah. And you do it by two or three of those on the way down there and you're like, what is happening with all of this? And that was. Yeah, that was, yeah, 13 years ago. 12 years ago. Yeah. You could see the early signs of it early on. So interesting to see how that, how that all comes out now. Unfortunately, this has gone actually by really fast. Dan, I. We're down to our final two part question here, which will, will circle circle you back to your first day as an analyst coming out of school. That was your first job in the industry. So if you go back on that day and take yourself for coffee, what key piece of advice would you offer yourself?
- [30:26]
Dan Boston
Find a mentor quickly, whether this is your boss or not. Find the best person in your industry and make them your mentor and pay. You said take them for coffee, I'd say take them for lunch. That'll keep them there longer. And just ask question after question after question. Because the reality is there's a wealth of experience that comes not necessarily because you have a certain number of years within an industry, but the reason I say go search out for a mentor who's really the best at what they're doing is because those people are just different. And I've seen them throughout my career. I've been around them. So we've talked about Bob Shiller. There were friends certainly I've had in the industry over time that I would point to that in their own right were the best in the industry. And so with those mentors and those mentorships, let's say you learn so much more than you would ever learn from your day to day activities and certainly so much more than you would learn from, let's say an academic, you know, work like a degree or a post op or something like that.
- [31:36]
Mike Wahlberg
Nobel Prize optional.
- [31:39]
Dan Boston
Well, to be fair, you know, Bob didn't have a Nobel prize when I first started working with him. So maybe if he had that, he would have said no. I don't know. I think I was an MBA student, so I'm surprised he took me on at all. But I really liked the work he was doing. I'll just say one quick thing about Bob. He always focused his work on things that were useful for the average person. So stock market, real estate, bubbles, those were extremely useful and applicable to a large number of folks, which his intent was to be useful and helpful. The result was that he became quite famous in the industry because of the market he was addressing was so large. So I don't know that I don't think that was his original intent. But the result was by helping the most number of people and not only just kind of live in the jargon of the academic world, which he can do quite well, by the way. He also wrote books that were very consumable for the average person, such as myself on my first day. So he was he's very exceptional person.
- [32:45]
Mike Wahlberg
I've been speaking today with Dan Boston, head of Polar Capital's global small company team and lead manager of their international small company fund. Thanks so much for coming on the show today, Dan.
- [32:55]
Dan Boston
Well, thanks, Mike. Thanks very much for having me. And hopefully your listeners were able to glean some sort of insight useful to their life.
- [33:03]
Mike Wahlberg
I'm sure they have. I'm Mike Wahlberg, and this is me, the enterprising investor.