The Existential Spending Battle | Adrian Helfert on What You’re Missing in the AI Arms Race

Summary

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Excess Returns Podcast — "The Existential Spending Battle: Adrian Helfert on What You’re Missing in the AI Arms Race"

Date: December 21, 2025
Guest: Adrian Helfert (Westwood)
Hosts: Jack Forehand, Justin Carbonneau, Matt Zeigler

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Episode Overview

This episode features Adrian Helfert, head of multi-asset portfolio management at Westwood, in a wide-ranging conversation about how AI is reshaping investment, the risks of existential-level corporate spending on tech, market structure, diversification, and why the traditional 60/40 portfolio may be due for an update. The discussion is a mix of big-picture macro insights and practical views on portfolio construction, all delivered with a candid, investor-focused tone.

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Key Discussion Points & Insights

1. The Existential AI Spending Battle

• Hype and Risks:

  • Current AI-driven growth is creating both immense opportunity and significant risk of over-extrapolation.
  • Helfert warns:

    "Be careful not to extrapolate out near term exponential growth in revenues and earnings profile to infinity because that's more unlikely to occur. ... We're not there yet as far as the irrational exuberance, but we're getting close. It's almost a risk factor now, as much of it as an opportunity." (00:58)

• Winners, Losers, and Tech’s Dominance:

  • Despite consensus that today’s tech titans will remain, Helfert argues there are real existential threats:

    "We may see an existential problem with a company that you think is an absolute household name and will never go away at this point." (01:59, 25:01)

• Spending Numbers:

  • Citing jaw-dropping estimates of $6–8 trillion on global AI/data centers by 2030, Helfert frames the spend in context of potential productivity gains.

    "Until 2030 it's estimated that we're going to spend something like $6 trillion on data center spend and probably another $2 trillion on AI optimization spend. ... If that productivity gain gives us over five years 20% productivity gain, that's a $10 trillion addition." (11:22–12:26)

2. Portfolio Construction: Capital Appreciation, Event (Opportunity) Risk, and Income

• Bucketing Approach:

  • Westwood explicitly divides investments by capital appreciation, event risk (think M&A/LBO), and income.

    "It’s important because as an analyst, as a portfolio manager, it gives you... a focus on what the real return driver is — why do I hold the security?" (04:01–04:15)

• Covered Call Overlay:

  • Covered calls are used for yield enhancement, particularly in their Income Opportunity fund and new ETF, sometimes turning a low-yield stock like Google into a high-income play:

    "If you can take advantage of implied volatility and sell covered calls into the market ... upwards of 6 to 7% yield." (06:32)

3. Valuations, Market Structure, and Economic Shifts

• Tech as Economy, Not Just Sector:

  • Helfert notes that tech is now the economy, not just a dominant sector — and this affects index concentration.

    "Technology is, it's not only the market, it's the economy now... and you can't put that genie back in the bottle." (21:27)

• Market Concentration:

  • Not currently worried by concentration, but expects eventually other sectors must catch up for tech’s ROI to materialize.

    "At a minimum, I think we have to hit a peak at some point and you need to see consumption come from these other areas that will benefit." (22:28)

• Market Broadening:

  • Broadening is necessary for the sustainability of tech returns — look for margin expansion, earnings realization, and innovation in smaller companies and non-tech sectors.

    "I do see a broadening potential for we're going to use this innovation in order to generate new revenue lines, new margin expansion..." (27:19)

4. AI as Investment Factor & Disruptor

• Native vs Non-native AI Companies:

  • AI-native firms (built from scratch with AI) could disrupt legacy competitors. Evaluating AI integration is now both an opportunity and a risk factor.

    "It's almost a risk factor now, as much of it as an opportunity. I want to make sure that some standard company isn't falling behind..." (18:16)

• Investors on AI:

  • Every investor must consider how their holdings may be impacted, positively or negatively, by AI adoption — or lack thereof.

• AI in Investment Process:

  • AI is a tool but not a replacement for human analysis:

    "People that aren't using AI... are truly missing out. ... But ... human subjectivity still rules the day." (20:22–20:30)

5. The Issue of Growth, Duration, and Interest Rates

• Growth Stocks & Rates:

  • Contrary to typical “higher-rates-hurt-growth-stocks” wisdom, recent market behavior suggests that it's the expectation of near-term growth, not just duration and discount rate mechanics, that's driving multiples now.

    "We're ... pricing more of the short-term growth ... not helping. I mean, the other thing as well is that when interest rates rise ... it's going to come as a component of one of two things. Likely one is growth." (28:37–29:38)

• Rules of Thumb Can Fail:

  "Often when we see these rules of thumb in investing, they're almost too easy... it doesn't end up working out that way." (30:00)

6. Views on International Diversification

• International as a Tactical Lever:

  • Useful but not always advantageous — recent years have favored US exceptionalism.

    "Is it always a benefit? It is not ... But it's a great tactical tool in the toolbox." (31:55)

• Emerging Markets, China, and Tech Race:

  • EMs may benefit via manufacturing and tech adoption, but China’s heavy index weight makes the tech race critical for global allocation strategies.

7. Macro & Recession Indicators: Why the 2020s Are Different

• Failed Indicators:

  • Classic recession signposts (yield curve, SAHM rule) didn’t work in recent years.

    "They're not working. The SAHM rule is not working. The interest ... curve rule is not working this time around... we've never seen a recession where corporate profits are growing at a substantial rate." (35:47–36:25)

• Monetary Policy—The Easing Tool:

  • Higher rates afford the Fed more ammunition to fight downturns; probability of US recession seen as low near term.

• Recession Frequency:

  • Fewer modern recessions may mean the next is bigger if/when it comes.

    "I worry that just means the next one's going to be bigger." (41:05)

8. Inflation and the Fed’s Balancing Act

• Dual Mandate:

  • Helfert worries that the Fed is increasingly skewed to employment over price stability.

    "I hope the Federal Reserve ... still think[s] of, even if we see lower inflation, 2.7% core PCE ... is still above their mandate. And I want them to be cautious as a respect." (43:04)

• Tech as Disinflationary Force:

  • Believes ongoing innovation could keep inflation subdued.

9. Beyond the 60/40: Tactical & Alternative Portfolio Construction

• 60/40 Is Not Enough:

  • Static allocation is insufficient; successful investors must be tactical and consider private assets, convertibles, and other exposures.

    "The standard 60:40 ... is not going to produce your best outcome. Being tactical and understanding ... is very important for value capture." (49:41–50:07)

• Private Assets’ Growing Role:

  • Private mid/largcap companies (e.g., SpaceX) now capture large swaths of value before going public; private asset allocations should be thoughtfully included.

• How Westwood Goes Tactical:

  • Focus on multi-year, fundamentally driven tactical tilts; avoids overreliance on technicals.

    "We're looking at multi year movements around, moving the deck chairs ... as we see that ecosystem start to mature as well, it's going to lead to value capture across different parts of the ecosystem..." (53:57–54:45)

10. The New Enhanced Income Opportunity ETF (YLBW)

• Active, Multi-Asset Income Focus:

  • Combines strategic stock and bond selection with an active covered call overlay to enhance income and shorten duration.

    "We're really excited about this ... we're generating exceptional amounts of income ... that also reduce the risk..." (56:46–58:45)

• Why Unique?

  • Not a simple covered call fund: integrates asset allocation, tactical sector/factor shifts, and actively managed calls for both risk reduction and upside.

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Notable Quotes & Memorable Moments

• On AI Spending Risks:

  "They think there's going to be a clear winner here and they're spending massive amounts of money. ... if they're not that winner ... there could be risks to some of them." (25:06)

• On Tech as the Economy:

  "It's the market, and it's the economy now ... you can't put that genie back in the bottle." (21:27)

• On Human Analysis vs AI:

  "Those ... saying 'I'm going to completely adapt and ... deploy [AI],' good luck to them ... because human subjectivity still rules the day." (20:27)

• On Rules of Thumb:

  "When we see these rules of thumb in investing, they're almost too easy ... it doesn't end up working out that way..." (30:00)

• On Price Discovery & Innovation:

  "The inefficiencies around price discovery and ... opportunities ... are only going to increase as a result of all this technological innovation ... it's going to assist those that know how to ask the questions ... Human subjectivity is really going to help us." (62:13–63:28)

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Timestamps of Key Segments

• 00:58: The danger of extrapolating AI-driven growth
• 03:41: Adrian explains Westwood's capital appreciation, event risk, and income buckets
• 06:32: Covered-call overlay for yield and its impact
• 11:22–12:26: AI/data center spending and the productivity math
• 18:16: AI as a required risk factor in investing today
• 21:27: Market concentration, tech dominance, and sector balance
• 28:37: Growth stocks, long duration, and why higher rates aren't always bad for growth
• 31:55: International diversification—benefits and current limitations
• 35:47: Why classic recession signals failed this cycle
• 41:05: Fewer recessions mean bigger ones?
• 49:41: 60/40 portfolios: why tactical and private assets matter now
• 56:46: Launch and explanation of Westwood’s Enhanced Income Opportunity ETF (YLBW)
• 62:13: Adrian’s contrarian view: increased price discovery and inefficiency thanks to AI innovation

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Summary Takeaway

Adrian Helfert delivers a nuanced view of today’s market, arguing that while AI and tech are undeniably transforming both the economy and portfolio construction, these trends come with existential risks and require a more flexible, tactical, and diversified investment approach. He stresses the importance of not relying on outdated rules or static allocations, incorporating new tools like covered calls and private assets, and—above all—maintaining human analytical judgment in an increasingly AI-assisted world.

Transcript

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[Adrian]

We see a near term great opportunity. But be careful not to extrapolate up near term exponential growth in revenues and earnings profile to infinity because that's more unlikely to occur. And I think now we're not there yet as far as the irrational exuberance, but we're getting close. It's almost a risk factor now, as much of it as an opportunity. I want to make sure that some.

[Justin]

Standard company isn't falling behind on some.

[Adrian]

Area that's going to deteriorate their operating.

[Justin]

Margins significantly and suddenly lead to an outcome I don't expect. I took a, you know, went around the investment committee the other day that we run and took a vote of who thinks wannabe mag7 won't exist in 10 years and nobody voted yes.

[Adrian]

But I, I would tell you that.

[Justin]

There'S a pretty significant probability by what I just said around the existential nature of the spending. They I mean we're going to have the winners and losers still and the winners may gain quite a lot and they'll likely be in technology in 10 years time.

[Adrian]

But we may see an existential, existential.

[Justin]

Problem with a company that you think is an absolute household name and will never go away at this point.

[Podcast Host]

Adrian, welcome back. Thanks for joining us once again on excess returns.

[Justin]

Thank you for having me.

[Podcast Host]

At Westwood, you spend a lot of your time thinking about how to build portfolios, balancing capital appreciation, income and risk management and managing those strategies through different market environments and periods. And today what we want to talk to you about was how you're viewing the market and economy today, what maybe you think has changed how investors should be positioned and Just in general, how you're thinking about portfolio construction across growth income and you know, the possible risks that I think investors should be paying attention to. You know, it's the end of the year, a lot of investors are thinking about next year. We obviously have year end S and P estimates and market, you know, prognostications happening all around us. So it's always good to have someone like yourself on where we can kind of talk about, I think some of the basics, but then also some of the ways that you, you know, the way that you guys look at the markets at Westwood. So looking forward to having a good conversation with you today. Where we wanted I think to start was talking about how you sort of have these three buckets when you think about investing capital appreciation, event risk and income. So can you walk us through that framework and what that actually means?

[Adrian]

Surely, great question.

[Justin]

Thanks for doing your research.

[Adrian]

We do take our securities and we bucket them out into, as you said, capital appreciation, event risk.

[Justin]

Event risk being that of a company.

[Adrian]

Getting taken out in an acquisition or leveraging up in an lbo.

[Justin]

And of course income, and income is usually dividend yield.

[Adrian]

We've expanded that out a little bit. It's subjective but really important. And it's important because it's as an analyst, as a portfolio manager, it gives you, well first it gives you to a focus on what the real return driver is.

[Justin]

Why do I hold the security?

[Adrian]

Why is this important in our portfolio? Because it's going to add capital appreciation. Because the argument in the stock is revenue or a generation beyond the consensus. And that's going to drive a higher multiple or effectively just drive a hard stock price as we see realized earnings. Or it is that it has a very safe and growing stream of dividends that we like at this point. And so you manage a portfolio on many different spectrum. And one is that, okay, you've got to focus on what's driving your portfolio.

[Justin]

But it also says at times in.

[Adrian]

Your portfolio you may see less potential for revenue capture and you may want to have better earning income stream. And so you can weight your portfolio a little differently. So it's, it's very important to have that part the event risk. I get excited about the event risk.

[Justin]

Part and I get excited especially this.

[Adrian]

Year when we're cutting red tape and acquisition in, especially in financial land, for instance, where it used to take you 18 months if you're a large bank to go out and buy a small bank by which time they've leveraged up, some of your teams have left the proposition for why you bought this bank has changed.

[Justin]

We're seeing an M and A environment that is changing certainly and there's a.

[Adrian]

Potential for additional value capture on that metric.

[Justin]

So that's something that we use as.

[Adrian]

A subjective but a really important way to have that discussion with our teams and to keep our eye on the.

[Justin]

Ball of how we're going to make money with our portfolio allocation.

[Podcast Host]

Yeah, so maybe not event risk, but maybe event opportunity. To your point about some of this deregulation and red tape being cut and I think some of the markets are starting to sort of, you know, perk up a little bit because of some of those changes.

[Justin]

Very much so. And you know, I'll add one thing as well that it changes as well. On the income variant, these things have significant overlap. I'd like to see an investment that.

[Adrian]

We have have capital appreciation plus good.

[Justin]

Income and then get taken out at a 20% premium. That would be the best of all worlds. But in realizing, you know, what the.

[Adrian]

Real argument in this is, then that helps us identify, but it also on the income variant, we're starting to do.

[Justin]

Covered calls now on our Income Opportunity.

[Adrian]

Fund we are reasonably balanced between income capital appreciation and downside protection. When we start moving towards, we just launched an income variant ETF or more income focused ETF that clearly that is the primary component there. When you add covered calls, it adds a way to take advantage of the capital appreciation by being involved plus that covered call income. And so it may actually change the scoring. You put on something like for instance, a Google where if you can take advantage of implied volatility and sell covered calls into the market, you get a 30 basis point dividend yield. But that's not the yield that you're going to get on the position. It's upwards of 6 to 7%.

[Podcast Host]

So do you think anything has structurally changed in the market or the economy that would support, you know, higher than average returns over time?

[Justin]

That's the big question.

[Adrian]

Over the last, what is it?

[Justin]

Since the global financial crisis or the.

[Adrian]

Great financial crisis as some call it.

[Justin]

So over the last about 16 years, less than that, about 14 years, we've.

[Adrian]

Averaged 16% returns on the equity market. And when, you know, we put that in my old school paradigm of the usual 8 to 12% paradigm on equity market returns, either something has changed or we're due for a correction.

[Justin]

And one thing I'll say what has changed a little bit, number one is.

[Adrian]

Tech is a higher constituency of the indices than it used to be. This is not the railroad economy. This Is a technologically driven economy. Now can tech keep doing its thing and producing a higher return and an increased multiple as we extrapolate out this excitement and exuberance of future earnings growth? Well, maybe it's an accelerant, unlike I'd say railroads or some of the other industries, energy as much were. So I could see that we will maintain a higher multiple for some time.

[Justin]

But I'd be loath to say that.

[Adrian]

That'S going to continue at infinitum. And I think that's the fear that investors have. And the fear that I have is that yes, we see near term great opportunity, but be careful not to extrapolate out near term exponential growth in revenues and earnings profile to infinity because that's more unlikely to occur. And I think now we're not there yet as far as the irrational exuberance, but we're getting close. So. So can it continue forever? It's unlikely to unless we see economic growth be long term above the trend 2%.

[Podcast Host]

Gravity is a pretty powerful force still in our, in physics, in our, you know, in the world. So. Yeah, but, but I think to your point on tech though, it is, you know, one these big, large technology growth companies that have led the market over the past decade plus, you know, they mostly have delivered from a growth and just overall economic standpoint. So I think that that's one thing and the other thing is, you know, a lot of these companies now are doing more with less real assets and more intangible assets. And I wonder, I wonder if that plays into like a step up in sort of this valuation that maybe can be a little bit longer, more permanent.

[Justin]

That's a very good point. And we see some of these companies.

[Adrian]

Now that are, they're not operating at a 30% gross margin. If you look at Nvidia, they're operating at a 75% gross margin. And they are hard assets.

[Justin]

But being able to also use intangible.

[Adrian]

Assets more efficiently, like Google's got this extraordinary set of intangible assets with value creation and that's pushing up their growth.

[Justin]

Margins significantly, which means that you could.

[Adrian]

Have increased growth over time. You could have an increased moat as well over time.

[Podcast Host]

Although maybe, and this is to the next point, you know, they were doing a lot with intangibles, but now a lot of these companies are also plowing a lot into this big massive data center, you know, build out hundreds of billions, if not trillions of dollars, you know, being put into this, this area. So how do you think about sort of that? And you Know, do do and I guess the potential of what needs to happen on the back end in terms of the profits that need to be generated from this massive, you know, build out and how that kind of impacts the way maybe investors should, should, should be looking at some of these companies.

[Adrian]

You're right, it's huge and it's, it's with a T. It's trillions that they're looking at and maybe best if I, if I get my numbers right of walking through what an example looks like.

[Justin]

Until 2030 it's estimated that we're going to spend something like $6 trillion on.

[Adrian]

Data center spend and probably another $2 trillion on, on AI optimization spend. So call it really $7 to $8 trillion the numbers they're looking at and.

[Justin]

That'S increased from recently. If we were looking at something like 5 trillion. It keeps, it keeps moving up the.

[Adrian]

It's estimated that the global workforce is around $50 trillion in productivity of output.

[Justin]

If we see productivity gains from the.

[Adrian]

Implementation of technological innovation like I think we would expect, we are going to just as every day we're using ChatGPT for helping us write things or summarizing a statement or we're going to find efficiencies.

[Justin]

If that productivity gain gives us over.

[Adrian]

Five years of 20% productivity gain, that's 10 trillion addition. Just we're just talking to the global labor force. That's a 10 trillion gain for which we've then spent let's call it 7 trillion.

[Justin]

That's I mean even that I would.

[Adrian]

Say is on the conservative side for what we might see from productivity gains.

[Justin]

So now you're looking at somewhere between.

[Adrian]

30 and 40% operating margins that we can get on that.

[Justin]

That kind of spells it out for.

[Adrian]

At least where it might come from.

[Justin]

Of if we see that productivity game as a game as a result of this technological innovation, then it's justifying that amount of spend if we can do.

[Adrian]

It even near where the operating margins are on these companies are today.

[Justin]

Now there's all kinds of questions that you want to delve into.

[Adrian]

Well where does that money come from.

[Justin]

That the I don't know, $7 trillion. When you look at the book value of equity of the Mag 7 it's around a true.

[Adrian]

It's a little over a trillion dollars.

[Justin]

When you look at the private equity.

[Adrian]

Universe and the drive how do they have.

[Justin]

It's about two and a half trillion, a little less.

[Adrian]

Right now the venture capital is 300 billion and the biggest year we've had in IPOs and raising funds not their valuation and raising funds has been about 300 billion though we're still at a.

[Justin]

Pretty like a multi trillion gap in financing that we can still see that.

[Adrian]

Is likely to come through through credit in other areas.

[Justin]

So yes I do see it as a, as a potential justification and our.

[Adrian]

Human brains need to look forward to our, our peers now which are AI peers and see the justification or see the benefit that we're going to get in productivity gains. The financing is going to change markets substantially from where we are out till 2030. So that's, that's a big notable item and that leads to investable outcomes.

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[Guest or Co-host]

Yeah, it's so interesting because like the value investor in me is like there's no way like all this money is being spent. There's, there's no way they're going to be able to get returns on this. But like when you talk to people, I was listening to this podcast with Gavin Baker the other day. Like when you talk to people that are behind the scenes, they're like when these, when these companies are spending directly on AI, they're producing positive ROI with this. So it's just such a challenge to balance like your thought of this is such a massive number and the gains are so huge they're gonna have to come with like on an individual basis. Like this is producing positive returns.

[Adrian]

Yeah, it is.

[Justin]

And you know not to put out a competitor podcast to you guys, but the BG2 podcast does a good with Jensen Huang and Satya Nadella talks a lot about, I mean they think in.

[Adrian]

50% margin perspectives, operating margin perspective at that you're still looking at profitable growth for really large amounts of spend. If we achieve that, that productivity gain that we, we think we will, it's.

[Justin]

Just hard because we as humans we're.

[Adrian]

Used to extrapolating out to the 2026 outlook, like you say now we're talking about 2030 and can this continue for an elongated period? And how much, how much string do we give this new paradigm to say it might work or not? We do need to see results from.

[Justin]

Companies that are implementing it and finding an optimal solution. And I think we see some of.

[Adrian]

That already and I look for it consistently.

[Justin]

You know, one area is Walmart. For instance, Walmart said they've saved 30.

[Adrian]

Million miles of shipping, 30 million miles of shipping this past year alone in AI driven optimization of, of routes.

[Justin]

That kind of productivity gain, that kind.

[Adrian]

Of operating margin gain for them is a benefit.

[Guest or Co-host]

Justin, I wish we could be competitive with the BG2 podcast. Bill Gurley and, and Brad Gerstner. We're probably a couple levels below that in our viewership, but, and in our technology. But, but I wish we could do that. How much do you think about this? Like, when you're analyzing any individual investment, like, is AI something that's always top of mind now because it's changing the economy so much? Like, are you always thinking about how AI might impact this particular investment?

[Justin]

Good question. Gosh, it's hard not to think about it. And I think it should behoove any investor now to think about not necessarily can they implement it, but are they.

[Adrian]

About to have their lunch eaten by.

[Justin]

Some other company that is natively implementing AI? And that's a distinction that we're starting.

[Adrian]

To see is native versus non native.

[Justin]

AI implementation within companies. That said, we do still look at traditional metrics and you have to as well, because even if these, you know, if we have a native AI company.

[Adrian]

Meaning they start from scratch with AI, build a product that competes with another product, and suddenly they've got a company that is AI driven, they still have.

[Justin]

To have customers, they still have to.

[Adrian]

Have a fundamental income stream driven by.

[Justin]

Some spend, some efficiency they create for some other company, some business model that.

[Adrian]

Downstream is usually driven by real gross.

[Justin]

Domestic product growth, of which 75% of that is consumption. So we're still fundamental investors looking at the same metrics. Yet AI is, it's a question at.

[Adrian]

The top of mind. So I want to make sure that it's almost a risk factor now, as much of it as an opportunity. I want to make sure that some.

[Justin]

Standard company isn't falling behind on some.

[Adrian]

Area that's going to deteriorate their operating.

[Justin]

Margins significantly and suddenly lead to an outcome I don't expect.

[Guest or Co-host]

And I wonder how much like the benefit will be to the Indirect plays here. You know, if you look at previous things like the Internet, the people that built it out didn't necessarily do that well, but the benefits to society were huge. And then it carried down to all the other companies. And so it's just interesting thinking about these builders that are building this versus all the other companies that are going to benefit from it and where that benefit lies.

[Adrian]

Yeah, truly this gets back to the.

[Justin]

Question as well around all this financing and some would say circular financing that is, that is happening around the market. As we for instance Google and semi.

[Adrian]

Google with Oracle and, and Meta and.

[Justin]

Discussing how they're doing things. Some of these companies have talked about this as existential. So they're spending not, but not, I mean they're spending because they see opportunity but also because they have to, they.

[Adrian]

Have to keep up.

[Justin]

And so it spells to me as well of I do have an asymmetric concern of some of these companies just may not, as you say, they may not make it. This may be a great reward and.

[Adrian]

Benefit and certainly it's kind of, you know, I'm trying to fix my refrigerator.

[Justin]

Today and I'm asking AI, you know, some questions around it. It's a benefit to me but that.

[Adrian]

May not lead to any income for.

[Justin]

Some company that's, that's spending on their capex side to try and deploy it.

[Guest or Co-host]

I'm just curious, beyond fixing your refrigerator, have you seen like in terms of your investment process, in terms of thinking about potential investments like have you seen benefits from AI in your process and how you operate?

[Justin]

Yeah, I mean we deploy the same investment process consistently and we really ensure that we have the same mindset, the same steps that we go through to delve into what provides value. The same questions we ask. But does AI provide us with an additional insight? Does it often identify as well things that I might have missed?

[Adrian]

For sure.

[Justin]

I would say people that aren't using.

[Adrian]

AI or saying eschewing it and saying.

[Justin]

It'S, it's not going to be a.

[Adrian]

Part of anything are truly missing out.

[Justin]

Now those also that are saying I'm.

[Adrian]

Going to completely adapt and I'm going to overhaul everything and I'm going to.

[Justin]

Listen to what it says and deploy it. Good luck to them and I look forward to competing against them as well because human subjectivity still Ruiz the day.

[Adrian]

But as Stan's yes.

[Justin]

Do we find optimizations that help us create more time so I can spend more time with subjectivity driven research?

[Adrian]

For sure.

[Justin]

At the same time do I, do I use it in some way that says, give me a quick update on the nuclear sector, on what some of the new laws coming out are and what some of the things coming out.

[Adrian]

From the current administration are. For sure, it makes it much easier than me reading a term paper on that.

[Guest or Co-host]

Back to the biggest companies we were just talking about, how do you think about market concentration? I mean the market's among the most concentrated it's been at least in history. And some people see that as a risk and some people say, you know what, these companies are the greatest companies in the world, they deserve to be that big. It's not really that big of a risk to the market. People need these products in their everyday life. Like how do you think about that balance and the risks of concentration overall?

[Justin]

I think it's going to make me sweat a little bit to tell you this, but I think this is the economy we're in currently and I think this is the economy we're in for a long time. I look back to those historical paradigms of railroads and energy and banks that were at one point a significant portion in telecom technology is it's not only the market, it's the economy now. It's the economy we're operating in. We're talking on a podcast, we're looking at video, we're deploying AI and helping us summarize areas and create efficiencies. And you can't put that genie back in the bottle though. It's a significant change. And so getting to your, your diversification question. Well, it's the market and the economy now, so it doesn't surprise me that it is such a large component of.

[Adrian]

The overall market and we're talking upwards.

[Justin]

Of 50% of the market now. Because even though Zemana and Google are.

[Adrian]

Poster childs here for not being in the tech portion of the index, they're still technology companies.

[Justin]

And so it is significant exposure to that thematic, that is artificial intelligence or accelerations in computing technology. So it is very important to see economy. Now is it a lack of diversification by having Google being 6 plus percent of the S&P 500 index? Not at this, not yet. But that said, what it gets back to as well, what are all these other companies actually do? Banks, energy companies and pipelines, consumer companies, utilities. Are they going away or are they getting larger at some point? Well, they better grow commiserately otherwise these large tech companies are not going to realize their return on invested capital. So at a, at a minimum, I think we, we have to hit a peak at some point and you need to See consumption come from these other areas that will benefit. So I'm kind of giving you the two handed economist answer here. I don't think we're there yet as far as overweighting and diversification problems but at the same time we're going to see a broadening other companies will benefit otherwise that return in the rustic ROIC that other, that the tech companies want won't materialize.

[Guest or Co-host]

Yeah, I think the two handed answer is probably the right answer at this point. It's interesting to me like if you look historically at the biggest companies in the S and P like the top 10 and you look decade to decade there's usually pretty high turnover within those names. You know companies we think can't be upended are. But I, I wonder a lot about if that's going to happen this time because these companies are so dominant in the space and they're also dominant in sort of AI the new thing we're doing. Like I wonder. I don't have the answer one way or another but I Wonder if like 10 years from now these will still be the biggest companies or if some company we haven't even thought of is going to come from behind.

[Adrian]

This is back to that.

[Justin]

You know it's almost two handed to.

[Adrian]

Say on one hand tech is going to be a large weight for a.

[Justin]

Long time and the fact that, that.

[Adrian]

Google for instance is nearly a $4.

[Justin]

Trillion company doesn't mean that that's the maximum it can be.

[Adrian]

It can be larger. But there's the other side that is, but that constituency can change. And you know I took a, you.

[Justin]

Know, went around the investment committee the other day that we run and took a vote of who thinks one of mag7 won't exist in 10 years and nobody voted.

[Adrian]

Yes, but I, I would tell you.

[Justin]

That there's a pretty significant probability by what I just said around the existential nature of the spending they, I mean we're going to have the winners and losers still and the winners may gain quite a lot and they'll likely be in technology in 10 years time.

[Adrian]

But we may see an exist existential.

[Justin]

Problem with a company that you think is an absolute household name and will never go away at this point.

[Guest or Co-host]

Yeah, when you're spending is if your life is on the line and that's kind of what these companies are doing right now. I mean they're expecting that there's, they're looking at this as a winner take all type thing which is interesting. I don't see it as much from the outside but I think they do from the inside. They think there's going to be a clear winner here and they're spending massive amounts of money. So to your, to your point, there could be risks to some of them if, if they're not that winner, if that ends up being the case.

[Justin]

Truly.

[Adrian]

Yep.

[Guest or Co-host]

How do you think about the broadening? You mentioned broadening of the market before and you know, anyone who's used the value strategy or any type of strategy like that has struggled for a long time. You know, the average stock of The S&P 500 has struggled relative to the S&P 500 as a whole. How do you think? I mean, I feel like we've been thinking that's going to change for many, many years and it just doesn't. Like, how do you think about that potential going forward that we're finally going to see a broadening where maybe your average stock is doing as well as these large companies?

[Adrian]

I think we need to see that at some point, as I said, otherwise that ROIC from the spend is not going to materialize. So I'm consistently looking for that.

[Justin]

Where we're going to see. It doesn't necessarily need to be a difference in multiples at this point, or.

[Adrian]

I should say it doesn't need to.

[Justin]

See necessarily multiples rise on industrial sector or consumer sector.

[Adrian]

But it does mean earnings realization from innovation and maybe a better feeling for margin capture so that we send up with a better equity risk premium on some of these smaller companies.

[Justin]

Get that with as well dropping interest.

[Adrian]

Rates or a dropping debt load.

[Justin]

Debt interest load for some of the smaller companies.

[Adrian]

And gosh, maybe small caps finally perform as well because that's been a difficult area.

[Justin]

There's a lot of things that we would look at. It's not that it doesn't make sense. It's not the economy that you traditionally think of where small caps don't perform.

[Adrian]

As well as large caps. That is unlikely to persist as we.

[Justin]

Start to see innovation, consumer capture, margin.

[Adrian]

Expansion grow in areas that aren't just.

[Justin]

The magnificent seven that are still the picks and shovels. Keep in mind they're still the ones manufacturing the stuff of the gold diggers.

[Adrian]

That are going to go out and find the gold. So we're still in that age of.

[Justin]

Still selling all the stuff that are.

[Adrian]

Headed out to the hills.

[Justin]

There will be the winners and the.

[Adrian]

Losers there as well. But I do see a broadening potential for we're going to use this innovation in order to generate new revenue lines, new margin expansion, et cetera, picking up.

[Guest or Co-host]

On the idea of growth stocks. And I don't know where I saw you talk about it, but I heard you talking about somewhere about this idea of growth and duration. And you know, one of the things a lot of us thought is if interest rates go up, it's going to punish growth stocks because they're, they're longer duration assets. Rates are going to go up, value is going to come back. That's horrible for long duration growth stocks. And I saw you in an interview somewhere and I forget where it was talking about this idea that maybe that's not right. Maybe these higher rates are not punishing these long duration growth stocks like we think they are. So can you talk about that?

[Adrian]

Yeah.

[Justin]

Traditionally that is the metric of. I'll just, I'll just repeat it because I, you know, when I grew up in investing, I, I bought it until I started to dig in and realized number one, it's not working. It's, it's not. When we see interest rates rising, we're not seeing growth stocks do worse because longer term cash flows coming in are getting discounted at a higher rate than worth less. That just doesn't work, maybe on a short term basis, but not on a long term. And so why might that be different? Start to question. Well, one reason it might be different is because the growth stocks, especially now, especially in this, this latest run that we have seen, they're really pricing more.

[Adrian]

Of the short term growth that we're.

[Justin]

That we're seeing this extraordinary capital expenditure.

[Adrian]

In the next three to four to five years.

[Justin]

That's what we're more pricing now as opposed to the terminal value that would.

[Adrian]

Get discounted at a higher rate.

[Justin]

So the actual, the cash flow curvature is I suppose different than just a straight line of when you discount, you discount a straight line cash flow curvature. So it's a notable item that I think that near term growth that we're seeing is something that's not helping. I mean, the other thing as well is that when interest rates rise in this cycle, if we see interest rates rise significantly on the long end, it's going to come as a component of one of two things. Likely one is growth. If we see an expansion in growth expectations, which, if we see an expansion in growth expectations driven by technological innovation or AI or anything else that's true driven, then that's not necessarily going to hurt their multiple. Even if we see interest rates go up, it's going to probably outweigh the.

[Adrian]

Cash flow discounting component of it or.

[Justin]

It'Ll be a component of inflation expectations. Rising in the long end and then that could have a different effect. If we see that start to deteriorate the long end, then we'll start to make a distinction that actually has probably.

[Adrian]

More inflation than growth.

[Justin]

I'd have more concern there.

[Adrian]

Just don't see that yet.

[Guest or Co-host]

Yeah, what I like about that too is often when we see these rules of thumb in investing, they're almost too easy. We think, oh, obviously rates are going up, it's going to penalize growth stocks. And there's so many other things like this and if you just take them as completely literally, it doesn't end up working out that way in the real world half the time.

[Adrian]

No, it hasn't. And it's hurt investors that have tried to play the factor game, which is a good game. You look for all of your vectors.

[Justin]

Of alpha, if you will, and people.

[Adrian]

Should think that way of when growth might work and when value might work, but it just changes why it might work in each scenario. And it's less interest rate driven on the gross value side. Except for 2022, where 2022 was, we.

[Justin]

Saw that rooster come home.

[Podcast Host]

Maybe that's what it was. You had that initial adjustment and then as these companies then turned and started growing again. Particularly to your first point like that, the shorter term growth maybe being weighed more, you know, those interest rates. Because I've always been in the. I'm, I'm still like wrestling with this. I want to. I'm gonna listen back to this part carefully because I'm still kind of perplexed by this idea of the higher rates don't. Shouldn't hurt growth companies more. It's very interesting, very interesting stuff.

[Justin]

It is and it's, it's surprising because it's just, it's too easy to do the math. And I've done the math a number of times and tried to figure out.

[Adrian]

Exactly how much a 1% bump in 10 year rates would impact the terminal.

[Justin]

Value and so depress your multiple.

[Adrian]

And the math is there, but the market's not right.

[Guest or Co-host]

Speaking of something else that struggled, international stocks, at least until this year, struggled a lot for a long period of time. And it led a lot of people to question the value of international diversification. And I'm just wondering what your take is on that. Like first of all, just at a high level, before we talk about them now, like, what are your thoughts on the benefits of international diversification? Do you feel like it's a significant benefit for US Investors to have significant international exposure?

[Justin]

For sure. I think it's A great tactical tool.

[Adrian]

In the toolbox, if you will.

[Justin]

Is it always a benefit? It is not. And I mean over the last decade.

[Adrian]

We'Ve seen pretty significant divergence between US.

[Justin]

Exceptionalism and international laggards.

[Adrian]

Right?

[Justin]

So yeah, it doesn't always work for you, but it's a great tactical tool in the toolbox.

[Adrian]

The other question is do I think US Exceptionalism is, is run its course and we're going to start to see, you know, whether, or at least, you.

[Justin]

Know, international stocks are simply cheap enough.

[Adrian]

To start to revert relative. I don't think we're there yet.

[Justin]

And I'm more talking about developed market international as well.

[Adrian]

I do believe that we're going to see, you know, in a period where.

[Justin]

This coming year we've got dropping interest rates, we've got an outgoing Fed governor, sorry, Fed chairman in May of 2026 with a new one that without a.

[Adrian]

Doubt will be more dovish than where we are now.

[Justin]

We have the big beautiful bill that is coming into effect that some parts of it have already come into effect. And we're going to see those tax refunds be a significant consumer impulse coming into the new year. We're going to see different expensing laws come into effect. They're going to help corporations in the coming year. So this is not the year that I think that the catalysts are there for international developed markets to outperform the emerging markets, I think are. They've also deteriorated relative for the last.

[Adrian]

Decade, almost a decade.

[Justin]

And so that's a, that's a notable item. If we see this growth though materialize, if we see a, AI and other things on the technology side start to deploy more, more copper lines and more optics and more, more areas that are, that are manufacturing driven. We're going to see a benefit come from markets for that and that often.

[Adrian]

Is going to come of a result in emerging markets.

[Justin]

Now China is 30% of the emerging markets index as well. And guess who we're in a race with on this technological innovation stuff. So we just saw data come out well last night they come out on Sunday night they said growth wasn't so great there. I think we'll likely see some stimulus come to the Chinese equity markets or to the Chinese economy at some point, but over a longer term paradigm we're in a race and we're in a race for technology dominance. We know this, but just remember who our partner is in the 30, they're 30% of the emerging market index.

[Adrian]

And I think that investors would be.

[Justin]

Well served on the diversification component you.

[Adrian]

Asked about to have that as a.

[Justin]

Part of their portfolio with the US Markets.

[Adrian]

Yeah.

[Guest or Co-host]

It's interesting on the US exceptionalism point, like people tend to think these things end with a bang. And I think that's not necessarily the way the day it always works out. Like people think everyone's going to be pulling all their money from the US and all these large foreign pools of money are just going to withdraw their money and it's like there's going to be some sort of massive outperformance. And usually these things move pretty, pretty slowly back and forth.

[Adrian]

I don't know.

[Guest or Co-host]

Correct me if you don't think that's right.

[Justin]

Well, either that or if they don't move slowly, it happens on both sides of the ocean.

[Guest or Co-host]

I want to switch to the overall economy here because we've been I was listening to another podcast you had done and you were talking about the economy. And one of the things we've seen a lot of people this was not you that we've seen talk about is this idea that we were going to have a recession for many, many years. Like thinking about starting like 2021, everybody was calling for a recession. I think many people thought just the degree of the rate increase had to trigger a recession almost. But in these indicators, you know, the yield curve inverted, the SAHM rule triggered all these things that usually would trigger a recession did and we didn't get the recession. I'm wondering, do you have any take on that as to why maybe a lot of people got that wrong and why we didn't maybe get the recession many people thought we were going to get.

[Justin]

I, I, you know what's funny is.

[Adrian]

I listened to Ed Yardini on you.

[Justin]

Guys podcast and he was talking about the, you know, some of these indicators.

[Adrian]

Like the leading indicators, it's just broken.

[Justin]

I mean send it back to the.

[Adrian]

Manufacturer and try and get a refund.

[Justin]

They're not working. The thumb rule is not working.

[Adrian]

The interest that the curve rule is.

[Justin]

Not working this time around or not yet, but usually you would have predicted as such. And now we're going into an easing cycle and right now we're going into a, we're in a cycle as well.

[Adrian]

Where corporate profits are are growing and growing significantly. We and since 1940 we've never seen a recession where corporate profits are growing or well as they're growing year on year but also growing at a substantial rate.

[Justin]

Though it's hard to see where the recession comes from at this point on in part because we're still seeing growing profits. We're still seeing companies that are doing well and in part as well. Because what tools do we have in.

[Adrian]

The toolbox to dampen the volatility risk when it rears its ugly head?

[Justin]

One of those is monetary policy.

[Adrian]

And it's much harder to do when interest rates are near zero or you've.

[Justin]

Got a really expanded balance sheet. And then guess what, we're not at zero.

[Adrian]

We are still at an elevated rate. We could cut rates by 300 basis points in a day if we needed.

[Justin]

To, to, not that we would, but.

[Adrian]

To suppress a big downturn, we could.

[Justin]

Expand our balance sheet back out further. We've been decreasing its size in order.

[Adrian]

To buy assets to provide liquidity to the market if we need to.

[Justin]

That's helpful. It doesn't mean that we're not, we're.

[Adrian]

Going to avoid a downturn, but it.

[Justin]

Does mean that we can at least stem the tide with the tools that we have in the toolbox from this point.

[Adrian]

And maybe, maybe we're off a recession if we start to get there where.

[Justin]

We have negative economic growth, though I.

[Adrian]

Don'T see it in the next year.

[Justin]

The average probability of a recession runs about 25 to 30% 12 months forward by various economists and by the models.

[Adrian]

That we run as well.

[Justin]

It's just how the models work out. And right now, guess what, economists, average prognostication for a recession is at 30%. I would put it below that. I think we have enough impulse coming in the United States, I think we.

[Adrian]

Have enough impulse capable in the United.

[Justin]

States that is highly unlikely we're going to hit that level of a speed bump in the United States. And you know, the caveat, of course, being all the stuff we covered at.

[Adrian]

The beginning, which is we're still pretty overladden with tech.

[Justin]

If something happens where it's a realization that there's just not going to be the capture to justify the spending that these companies certainly are now sitting on.

[Adrian]

A bunch of debt.

[Justin]

For those that have the debt that.

[Adrian]

Is going to have much, have a.

[Justin]

Much harder time of being paid off or that we're going to see the market go a different direction, then it's.

[Adrian]

Large enough that that would be a.

[Justin]

Really big negative impact. We saw some of that at the beginning of 2025 where we saw a pretty big tech sell off. At the beginning of 2025, we saw some concerns. Deep Seq came out this year. Recall and Deep Seek suddenly scared the market with the idea that, wait a second, maybe we don't need these super expensive Nvidia chips, and that $4 trillion company isn't going to be worth $4 trillion and all sorts of other things. Maybe it's just kind of a fancy hack that actually we can do to implement this. We're still going to implement this and companies are still going to find the optimal ways to deploy it and get good revenue streams and expand out their margins.

[Adrian]

Just a matter of how much that's worth.

[Justin]

So until we really figure that out, I I think it still has high value. I you know, back to Nvidia. Nvidia has upwards of 85% market share of the AI chips deployment market.

[Adrian]

If that deteriorates and they go down to 75%, but a 75% gross margin.

[Justin]

They'Re still doing pretty okay. That's we're just not there yet.

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[Guest or Co-host]

I'm wondering too, you know, one of the things you see in the data is we've just had less recessions, you know, in the modern era than we did in the past. I don't know if that's because we're getting better at managing it or if there's something else going on, but that also seems to be a factor here. We aren't having as many recessions as we used to, which makes it hard for these people that are calling for recessions to be right about it.

[Justin]

Yeah, truly, I that's a tough game to get in because I worry that just means the next one's going to be bigger.

[Adrian]

It could be.

[Justin]

Yeah, that's right. We have. We've often talked about things like financial excesses building in the economy and, you.

[Adrian]

Know, I'm old enough to have lived through the last couple recessions and on the last one where you've started to see debt rear its ugly head with shadow leverage and CDOs and CDO squareds.

[Justin]

Asset backed securities and things that a year prior you weren't really talking about. And then suddenly they became a problem. I'm consistently looking for where that cliff is. If there's, if there's an issue with. I mean, leverages is the constant one that we can see an unraveling there and periodically see a little bit of an unraveling that's, that's less of a problem. But I am looking for the excesses that mean the next one's bigger or that they're the problem.

[Guest or Co-host]

How about inflation? Is that something that concerns you? I mean, it's been running a little bit above target, but that doesn't seem to be a huge issue overall for the economy. Like, what are your thoughts on that?

[Justin]

You know what I hope, I hope that the Federal Reserve, the FOMC looks at it as. It's not that it's a huge issue, but it's equally as important as labor. And I think we have lost that a little bit. And I think even by saying that, I just probably took myself out of.

[Adrian]

Running for the next Fed chairman, but not that I was ever in the running.

[Justin]

I didn't want that job either.

[Guest or Co-host]

That's a pretty tough job.

[Adrian]

I think the idea that, because of.

[Justin]

Course we have a dual mandate that's labor and inflation being stable prices and full employment. I think that we have been pushing more on that full employment and saying 2.9% core PCE, 2.8 about where we are now is fine as long as it's not moving much, even though it's.

[Adrian]

Above the historical 2%, what we deem as stable prices.

[Justin]

I worry that that is still on the high side. That could lead to a consumer problem and a debt problem in the future.

[Adrian]

If it gets out of control. It's too close.

[Justin]

I would rather see it a balanced mandate now. Where do I stand on it?

[Adrian]

Is your question of do I think.

[Justin]

It'S going up or down? I actually think it's probably going down. My expectation right now that once a month I go through and I, I run the models that give us an outlook and our outlook is less than the market in part because I, you know, as you've heard, I believe in this technological innovation. And if I believe in that technological innovation impacting companies and providing new revenue streams, then it's highly possible that technological innovation is going to be a disinflationary force. So that's a, you know, I believe we'll likely see lower inflation, but I hope that the Fed does still think of, even if we see lower inflation, 2.7% core PCE, one of their chosen metrics, is still above their mandate. And I want them to be cautious as a respect.

[Guest or Co-host]

As someone who manages large pools of capital, how do you think about this macro stuff? On one hand, it's very, very difficult to predict, and as you pointed out, economists have no idea where the economy's going. But on the other hand, this certainly affects the investments you're investing in in different ways. Inflation's the spike or if we have a recession or things like that. So how do you think about that? Balance between, like this is very difficult to predict. But I also have to take this into consideration when I'm making decisions.

[Justin]

It's tough.

[Adrian]

I, you know, when you actually do.

[Justin]

Attribution models of performance on portfolios, there's no doubt that it's something like 70% of your attribution is driven by macro forces. That doesn't mean that everybody becomes a macro investor. That means that either you have some areas where you think you have insight.

[Adrian]

And you can produce outsized returns by.

[Justin]

Finding asymmetric risk reward, or an insight that is a deployable, investable insight, or you insulate away some of those conditions, which also means you need to know the macro environment, you need to know.

[Adrian]

Some of the major catalysts out there.

[Justin]

And the timings of those catalysts in order to insulate away from things you just don't know. Geopolitical risk, I generally think of, I have no idea what's happening in the.

[Adrian]

Back rooms with people smoking cigars and.

[Justin]

Talking about, you know, what, what piece of territory is going to go where or it doesn't. I mean, it's, it's great to read the paper and think about it, but it's more something that I want to insulate against as opposed to try and.

[Adrian]

Understand which way is going to happen In a geopolitical force.

[Justin]

I can know when geopolitical risk is, is increasing and when I want to be, when I want to be more insulated away from it.

[Adrian]

That's, that's how I use that information. Primarily if I look at Federal Reserve.

[Justin]

Or if I look at the US Economy, those are economic forces which are just the contemporaneous forces. You break it out into trailing indicators, contemporaneous indicators, and leading indicators.

[Adrian]

And we have a pretty good idea.

[Justin]

Of which fall into which bucket. And we can use that to help drive sector performance or factor performance or quality performance. Because as I said earlier, you want to use all of these vectors, not just the fundamental does this company generate enough income and is it going to be above the consensus? But are they going to be increasingly benefited by what we're seeing as the leading indicator giving us the tailwinds of.

[Adrian]

The economy, Though I use that information where I can and where I feel.

[Justin]

Like we have an understandable, investable bias.

[Adrian]

But there are other areas where I.

[Justin]

Just use it to insulate away from risk that I don't want.

[Guest or Co-host]

Just one more on the Fed, because you referred to the situation they're in and it's a pretty challenging situation. How do you think about what they're doing right now, the fact that they are cutting right now? It seems like maybe you're thinking, not think enough about inflation when they're doing that. But how do you think about that balance they're in right now?

[Adrian]

I, I think it's a, you know, there's a lot of chatter right now about whether the Fed, on their balance, is, is kind of lost its way and there's a loss of independence as a result.

[Justin]

This last one, we had three dissenters on the Fed.

[Adrian]

We had, we have a pretty wide band of, of the actual voting bloc.

[Justin]

That is going one way or the.

[Adrian]

Other, with Governor Mehran saying we should.

[Justin]

Be cutting by 50 basis points and then two of the governors saying that.

[Adrian]

We shouldn't be cutting at all.

[Justin]

So there's still independence and thought we may see a push towards more of a dovish bias on the committee as a whole. And I think we will see that. Certainly we're going to see that when we get a new governor appointed, a new Chairman appointed in mid-2026, probably before. As soon as it's announced, we'll start to price that in. But what do I think about it? I think it's still independent. I think this is not that different from any other political administration we've been in. I'm going to test that it is a little bit different, stronger handed. But I don't think that there's a secular change in how the Fed is going to operate. And I have hopes for the Fed. I hope that they keep to our.

[Adrian]

Dual mandate and not preference, one side versus the other.

[Justin]

But at the same time, if we start to see that, that becomes an investable thesis for me and we are seeing a little bit of that.

[Adrian]

We're seeing even just in that you're.

[Justin]

Asking about it of, well, does inflation.

[Adrian]

Not that it matters anymore, but is 2.9%, 3% the new 2%, as some would say? I don't think that, but I do think that easing is the new neutral. And by easing as a new neutral, I mean we're pushing more on the labor mandate. We want the labor market to be really healthy and as healthy as possible partly because of the voting block. And we're pushing more on that in.

[Justin]

Part because we do see some negative metrics coming out of the labor market and we have concerns around technological innovation that could impact that though. But that's a growth oriented indicator, labor versus inflation, which is an overheating indicator. So what do I think about the Fed? I think easing is a new neutral. I think it's in an easing mode. And I think that's for at least the next year to come, if not longer.

[Podcast Host]

Sort of stepping out of equities a little bit. I wanted to ask you about the 6040 portfolio. So the 6040 had like a, a great 35, 40 year run up until 2022. And then, you know, both because of, as you mentioned earlier, you know, the Fed was aggressively raising rates. So bonds obviously got hit very hard. And then, you know, equities went down as well. And so it kind of, it woke a lot of investors up to that while the 60:40 had done very well. And it's certainly a, a decent strategy, but there is kind of this weakness to it. And you know, just generally how do you think about, do you think investors sort of need to be thinking about, about going beyond the 60 40? And I guess if so, you know, how would you, what other asset classes would you start to be looking at in there?

[Adrian]

I think it's, I think it's clear with my bias that the standard 60:40.

[Justin]

Hold it at 60:40, watch it at 60:40 and retire with it. 60:40 is not going to produce your best outcome. Being tactical and understanding even whether you've tactical whatever time period means one year.

[Adrian]

Or three years or five years in.

[Justin]

Terms of making changes to that paradigm.

[Adrian]

Is very important for value capture. That's going to compound over a long, longer term and the constituency of 60 40, when we talk 60 40, of.

[Justin]

Course we're talking 60% equities and 40% bonds. Well, there's more liquid markets that have come out in a number of areas.

[Adrian]

That make sense for people to be involved in.

[Justin]

One of those would be convertible bonds. So that's not just bond, but at least being creative around your public equities.

[Adrian]

And your public oriented bonds that you're invested in.

[Justin]

And I think increasingly the investors that.

[Adrian]

Have that 6040 should be thinking that it should include some element of a private captured.

[Justin]

So not just set it at 6040.

[Adrian]

And do that when you're 30 years.

[Justin]

Old and wake up when you're 60.

[Adrian]

And retire on that forever retires when.

[Justin]

They'Re 60, not me. But that's a changed paradigm now and.

[Adrian]

We'Re seeing so much more value creation in the private sphere.

[Justin]

We're seeing so many companies now in the private sphere that are.

[Adrian]

If they were public they'd be mid cap or even large cap securities. I mean take Tesla and so not Tesla, take SpaceX actually just take Elon Musk generally.

[Justin]

But these are extraordinary value capture that.

[Adrian]

Are still private and still in the.

[Justin]

Private capital because there is a lot of private capital there.

[Adrian]

That's the in investable area that 60:40.

[Justin]

Investors should be thinking about. In our we have a fund that's our income opportunity fund where we aim to take advantage of that where we can. And I think it's reasonably distinctive how.

[Adrian]

We'Re looking at it in our equity book.

[Justin]

This is a great addition if we can find good value capture with good transparency.

[Adrian]

Oftentimes we have more transparency on a.

[Justin]

Private than we do on a public because you're having direct access to the management team.

[Adrian]

And just go broadly, people should be looking at where you're going to see the opportunity lie there.

[Justin]

When that comes to market you have less of the value capture.

[Adrian]

So if you can find a good.

[Justin]

Mid cap company that's producing cash flow.

[Adrian]

That is in any stage of its life that you like, that should be an opportunity, not just a private fear.

[Justin]

So going Back to your 60406040 is a proverbial number that over a long term probably is still about right.

[Adrian]

I would probably say it's slated over the long haul to be a better capitalization with less bonds.

[Justin]

But from where we stand now, it's important for investors to look at some.

[Adrian]

Time period for which they change that matrix or really just add a tactical lever to it.

[Justin]

But also understanding that private capital is increasingly melding with public capital and should be a part of that consideration.

[Podcast Host]

I think one of the things that when you're talking about a tactical.

[Guest or Co-host]

Lever.

[Podcast Host]

Like how would you, you know, for a retail investor is that leaning into maybe where there might be more value. To your point about international earlier, I'm just just try to sort of shake out like what levers realistically because you know, a lot of our listeners aren't necessarily they're not, you know, it's not their day job to trade their portfolios. But I think they would be interested in hearing about what types of levers a firm like Westwood looks at when making those tactical adjustments.

[Adrian]

Sure.

[Justin]

And so when I think about tactical.

[Adrian]

Levers, I mean we are looking at.

[Justin]

The, you know, we talked about leading.

[Adrian]

Indicators and trailing indicators and contemporaneous indicators.

[Justin]

We'Re using, I'd say more fundamental of.

[Adrian]

Looking at the universe at large to say what are the winds of change and how are we going to capture those winds of change? And they may not be technical indicators that say, you know, we just hit the, the 200 day moving average.

[Justin]

That's less of the kind of thing.

[Adrian]

That, that we're looking at versus looking at the environment and what is going to perform in an environment where interest rates are dropping and easing is the new neutral and we see jobs as a concern. Those kinds of things are going to help drive returns. And as I said, this is, this is a multi year kind of timeframe. So we're looking at multi year movements around, moving, moving the deck chairs around a little bit, if you will. We talked about emerging markets. That's a tactical move as well. We haven't held emerging markets where we are in part because we've, we've seen US exceptionalism and we've seen the aggregate of the growth of the mega caps in the United States and that being a big part. But as we see that expansion out.

[Justin]

We see, as we see that ecosystem.

[Adrian]

Start to mature as well, it's going to lead to value capture across different.

[Justin]

Parts of the ecosystem that as an.

[Adrian]

Investor you want to be able to take advantage of. So that leads to either sector biases or factor biases. I mean there are times we talked a lot about valuation at the front end of this podcast and valuation is stretched right now relative to history. No matter how you slice it and dice it, we're sliced very high as price to earnings or price to cash flow or including, you know, price to fail. That's, it's hard to get away from that rubber band. Not coming back a little bit though, just investing to understand that there's less potential upside in this market. So your symmetry is different, is very important. And if you're a 6040 investor, you're.

[Justin]

Invested across asset classes as well.

[Adrian]

And we're in an environment right now where as stretched as equities are, you can double down on that for corporate bonds. You're not getting paid for default risk right now where you are in corporate bonds broadly but there's still some opportunities, but broadly not near as much as a symmetric equity. And so the tactical investment would say.

[Justin]

Now is not the time to be 60, 40, now is the time to.

[Adrian]

Hold more equities, potentially more conservative equities with less of the fixed income risk.

[Podcast Host]

You guys just launched the Enhanced Income Opportunity etf. You had mentioned that earlier, the ticker symbol is ylbw was just launched actually a few days ago. So it's, it's relatively new and out of the gate.

[Adrian]

But.

[Podcast Host]

And you know, I don't know for sure, Jack might know a little bit more than me. But I mean this, I don't think I've seen many other ETFs that are doing what you're doing here. So it's a combination, it's really a multi asset sort of strategy with this cover call overlay on I guess the equities. Right. So just, just talk about what this strategy is intended to do, what it is doing, what's it intended to do and like what, what is the investment process behind this, this new etf?

[Adrian]

Sure.

[Justin]

And thanks for asking.

[Adrian]

We're really excited about this. Now we don't see others doing this as well. We see just enough that there's a, there's a true investor need for this product. Something that you know, as we look at our biases being trying to capture.

[Justin]

The capital appreciation available in the market.

[Adrian]

To us, provide good income and provide downside capture. This really centers in on that and it focuses on that income variant as.

[Justin]

Being something that you can count on.

[Adrian]

And you know what else it does? It shortens up your interest rate duration. It actually reduces risk in two ways. Number one, it reduces your overall equity risk, but you can still you get better income with less interest rate duration.

[Justin]

Those cash flows that you get, you.

[Adrian]

Either reinvest at a good level, you redeploy as if you were just having three month bills that were rolling off or you take and you go buy a fancy red car. We don't mind what you decide to do, but the idea is that it reduces your risk in more ways than just with having a straight bond and equity portfolio provides great cash flows and at the same time our equity selection is very important as well. Covered calls, adding covered calls is something they're that others do. We're doing in an active way where we're going out and we're selecting securities that we think provide a great capital appreciation potential. We're generating off of that. Gosh, where else do you get paid to set a price target that's effectively what we are doing when you, when we're doing covered calls on this portfolio.

[Justin]

That'S an active manner.

[Adrian]

We're getting paid to set a price target.

[Justin]

That's what's important about this.

[Adrian]

It is a diversified portfolio that is a 60, 40 like balanced portfolio.

[Justin]

That's tactical.

[Adrian]

We're looking at the winds of change on the economy. We're looking at different asset classes that might benefit us and we're generating exceptional.

[Justin]

Amounts of income on the back of that. That also reduce the risk in the.

[Adrian]

Way we generate the income. Number one, we're doing it in securities we feel have a good potential for appreciation. And number two, that income is actually shorter in duration because we're doing it on the options role. We're not doing it with a long term capital appreciation potential that could get discounted out as rates go up. So that's, that's a notable the way.

[Justin]

That we're doing it.

[Adrian]

The process for us is, it does add to our process.

[Justin]

You know, it's a standard process we've.

[Adrian]

Run for decades of selecting securities and setting fundamental, fundamental price targets and finding the best opportunities we can that have a best risk reward for individual securities. Pricing out on fixed income the amount of appropriate default risk or that spread that investors should receive. We still do all of that. There's also the added dimension now of looking at what companies as well provide.

[Justin]

Us with the best income.

[Adrian]

Looking at the implied volatility. There are companies that just before their earnings profile, I won't say their name but they're above $4 trillion in market cap. So kind of hard to, hard to miss which one has extraordinary volatility just before earnings. And investors have the capability of taking advantage of that to their benefit for income. Because Nvidia goes up and down pretty significantly around earnings a ton. It's an investable paradigm. If we like a name, we could take advantage of the name plus additional income though it gives us one more vector of analysis in our process.

[Podcast Host]

No, it's really interesting I think distinctive strategy. Let me ask you so. And by the way, investors can go and see the funds like you know, the fund page online. But what you can always do with ETFs is download, download the holding list and then you know you can kind of take that and say okay now I'm kind of seeing visually what kind of stocks they're buying and you know, what kind of corporate bond. But this is more of a question for me like when you're showing your bond position like for like you have an HPQ bond in here. And this is an individual recommendation from me or you, Adrian. But when you have that position and then it says after the. After that it says 6.1 and then it gives a date like April 25, 2020, 2035. Is that 6.1, the actual annual coupon? That's a great question.

[Justin]

That is the annual coupon, yes.

[Podcast Host]

Okay.

[Justin]

Doesn't mean that the. That doesn't mean that's the yield to worst over the lifetime of that bond.

[Podcast Host]

Yeah.

[Justin]

That is the distributed coupon that it pays. It borrowed at some point in its life. And it will keep paying that up until 2035, we hope left it defaults or some friend some other way to take it out. But it will pay that 6.1%. But if HPQ suddenly becomes a really risky company, then the next time they borrow, they're going to borrow with an 8% coupon. That bond will trade at a discount.

[Adrian]

Okay.

[Justin]

They'll still be a 6.1% coupon.

[Podcast Host]

Yeah. So certainly encourage those listening to go check out the ETF and look at what they're doing here because it is pretty unique and cool. Okay. So we always like to ask our investors a standard closing question. You've been on us once before, so. But we do have a new one for you. And that question is, what is the one thing you believe about investing that the majority of your peers would disagree with you with?

[Justin]

I'd probably say I'll reach. There's probably a lot of areas. One of them would be that price discovery, that the inefficiencies around price discovery and the opportunities that exist are only going to increase as a result of all this technological innovation that we're discussing that, you know, those that, you know deploying AI, we're all deploying AI. And those that don't are. We're going to separate out between the analysts and the analysts that know which questions to ask. It's not going to take out the analyst pool.

[Adrian]

It's.

[Justin]

It's going to assist those that know how to ask the questions and as I said about the, you know, the potential trading paradigm that is just purely technical, using that information, bring them on. That's where the human subjectivity is really going to help us. I see. Price discovery is going to increase and opportunities increase. As my analysts that know how to ask the right questions, use it to their benefit, but still very much so, use their subjectivity, find opportunities. And whether that's this tactical orientation of reading the winds of change and finding.

[Adrian]

How to move your factors or quality.

[Justin]

Your asset classes, your sectors around, or whether it's on an individual company, it doesn't matter. I believe we're going to see greater inefficiency of the post. LD s great.

[Podcast Host]

Thank you very much Adrian. Really appreciate it and wishing you and yours happy holidays. Thank you.

[Justin]

Likewise. Thank you both.

[Podcast Host]

Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess Returns [e-mail]. if you have any feedback or questions, you can contact us@excess returnspodmail.com no information.

[Sponsor Voice]

On this podcast should be construed as investment advice. Securities discussed in the podcast may be.

[Justin]

Holdings of the firms of the hosts or their clients.