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The Long View
Brian Selmo: ‘Winning by Not Losing’
00:53:55
The portfolio manager and research director shares his thoughts on volatility, AI, the Magnificent Seven, and private equity.
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Transcript54 lines
- [00:00]
Unknown
Please stay tuned for important disclosure information at the conclusion of this episode.
- [00:06]
Dan Lefkovitz
Hi and welcome to the Longview. I'm Dan Lefkovitz, strategist for Morningstar Indexes. Our guest this week is Brian Selmo. Brian is a Portfolio Manager and Research Director at First Pacific Advisors. Since 2013, he has co managed the FPA Crescent Fund with Steve Romick and Mark landecker, and in 2021 he became co manager of the FPA Global Equity ETF. Both strategies are highly regarded by Morningstar's manager research team. Before joining FP in 2008, Brian worked as an analyst at Third Avenue Management and at Rothschild and was founder and portfolio manager of Eagle Lake Capital. Brian holds a degree from Johns Hopkins. Brian, thanks so much for joining us in the Longview.
- [00:46]
Brian Selmo
Thanks, Dan. It's a pleasure to be here. Thanks for having me today.
- [00:48]
Dan Lefkovitz
Yeah, we really appreciate you making some time for the podcast and sharing your perspective. We are recording this in late June 2025 and markets have settled down, but we did see some very sharp drawdowns earlier this year in stocks and tremors in the Treasury. A couple terms that have trended this year, volatility and uncertainty. I'm curious what your message is for investors who've been unsettled by volatility and uncertainty.
- [01:14]
Brian Selmo
Yeah, sure, Dan. This is a question that would have come up a lot during our first quarter conference call, which was held shortly after Liberation Day. And our feeling is that uncertainty is sort of a constant and intrinsic part of the human experience and it just reflects the fact that there are a lot more things could happen than will happen. And that uncertainty is sort of kind of a definition of risk from our perspective. And I think there's actually people kind of, as you said it trends and people say, how can you deal with all this uncertainty that exists today? And there's so much uncertainty, what are you going to do? And our thought would be there's always been uncertainty. And there was actually a long time ago I read a book by Bob Rubin called In an Uncertain World and sort of the premise of it. And he had had, I think something like a 40 year career at point in government and having previously run Goldman Sachs before being Treasury Secretary. And his premise was basically that you can't really know anything for certain before you make a decision. You sort of have to deal with the facts you have and reasonable probabilities around likely outcomes and then make the best decision you can given that you live in an uncertain world. And so that's, I think, an idea that's Sort of always been a pretty robust way to approach, you know, financial markets and probably geopolitical issues as well. So what we want to do is instead of predicting any particular outcome, which I think we would say is basically impossible, we want to prepare for any manner of eventualities. And so if you think about our Crescent fund, we are endeavoring for equity like returns with less risk over rolling market cycles and over rolling five year periods. And we do that by having a number of different types of investments, some that will do well in a given scenario and maybe others that will do well in other scenarios. And so we want to take advantage of the volatility that is part of capital markets, equity markets, and be able to buy stocks and bonds when we think they offer good value and then sort of buy businesses and bonds that we would expect to do well in any number of circumstances. So things that can kind of ride well no matter what the tide happens to look like, we don't tend to do a lot of changing our mind or changing of the portfolio in response to some item that's in the news at a given point in time.
- [03:57]
Dan Lefkovitz
Yeah, yeah. There was a great line in your first quarter commentary that I highlighted. You have not entrusted us with your hard earned capital to opine on public policy, but to do the best with the hand that we are dealt. I thought that was good.
- [04:09]
Brian Selmo
Yeah, I think that's right.
- [04:10]
Dan Lefkovitz
So you're very much fundamental bottom up investors, but you do describe yourselves as macro aware. So I wanted to ask if you've made any sort of adjustments to the portfolio based on expectations around economic growth or inflation or geopolitical risk.
- [04:24]
Brian Selmo
Yeah. And specifically with regard to growth and geopolitical risk, the short answer is no. And the reason is that we're seeking to find easy problems to solve and try to avoid hard or impossible problem. I tend to think that coming up with a useful differentiated expectation for growth or inflation expectations is basically impossible. And when I say useful, I mean both different from consensus and also a view in which you have enough kind of conviction or certainty that you'd be willing to risk capital behind it. So that's not something that we can do. What we do just sort of at a day to day basis is we're building and maintaining a universe of high quality franchise businesses and we're looking for a chance to buy them. Think of these as compounders. My partner Mark says that we're looking for compounders that are clouded in controversy. And so you're going to get a chance to buy those kind of businesses when there's some kind of doubt about them and you want to have done the work and have thought about what your anchors to windward are or what are the durable characteristics of the investment before the news events start trying to throw things into a volatile twist. It's very hard to get one's conviction if you are just learning or coming up the learning curve in a very volatile environment. So instead we try to prepare ahead of time and then respond to the opportunities that come on offer when some macro issue comes to the fore. In terms of being macro aware, what we're really doing is looking to understand where there are areas of clear excess. And it could be, you know, a lot of enthusiasm or you know, high priced or overpriced securities and then we're also, or maybe, you know, excessive credit risk. And then we're also looking for, you know, areas that we think are deeply depressed compared to sort of long term sustainable levels. And so we want to avoid the first right. Where we think there's too much froth. A lot of what we're doing in Crescent is winning by not losing. So we want to avoid areas of the market, whether it's equities, whether it's geographies, whether it's industries that the risk reward or the price to value doesn't make any sense. And given our flexibility, we're able to be completely out of various sectors, industries or businesses. And then on the other hand, when a business or an industry is out of favor, operating well below trend or faces sort of some challenges, that's a place we want to sift around for opportunity or for investments.
- [07:15]
Dan Lefkovitz
Yeah. So as you said, the Crescent team has used market sell offs historically as buying opportunities. And the tariff driven sell off that we saw earlier this year didn't last that long. It wasn't a huge drawdown. But curious if you were net buyers of risk assets during the period.
- [07:30]
Brian Selmo
Yeah, we were net buyers. I think we bought a couple hundred basis points in equities and it was primarily adding to businesses that we had been buying over the previous 12 months. So it was a handful of Japanese businesses and then probably seven or eight businesses that are domiciled around the world, primarily in Europe and the US and those businesses range from electronics businesses, consumer staples, energy services, leisure companies, building materials and maybe one commodity producer. And so there's not really any unifying industry or geography around the businesses that we've been buying. But the thing that does kind of unite them all is they're all sort of small to mid cap companies. None of them have market caps above 30 billion. And I think they would be considered classically good businesses. Right. Strong returns on invested capital, strong margins, large shares and in niches where we think the prospects for growth over the Next, call it 5 or 10 years are pretty sound. And so all the businesses have strong balance sheets. I think on the management team side they're somewhere between acceptable to great management teams. And then I think the thing that really makes them attractive to us is given the high quality nature of the companies, they're all selling for between 8 and 14 times earnings when we bought them. On the credit side, we did not do anything directly in response to Liberation Day or the tariffs subsequently. We've done one credit that I think was attractive as a result of some uncertainty or change in government policy with regard to wireless spectrum. But just broadly in the public credit side, spreads were about as tight as they'd ever been. At the end of February or end of March they widened maybe to slightly tighter than normal for maybe a week or two during the little bit of volatility we had in April. And then they've come right back and the credit market is wide open. And so we've kind of been very limited in the amount of credit we've been investing in the last 12 months. And so I was, you know, encouraged to hear Jamie Dimon say I think a week ago or something that if he was a portfolio manager, he would kind of avoid credit in his portfolio. So that that hopefully adds some credibility to the position we've had for a while.
- [10:08]
Dan Lefkovitz
Yeah. You mentioned finding opportunity in the mid cap or small to mid cap space. You know, generally large caps have, have outperformed smaller caps over the past, you know, 10, 15 years or so. Do you find more attractive valuations down the cap spectrum?
- [10:24]
Brian Selmo
We do. If we look over the last year we have been very much net sellers of large and mega cap companies and buyers of mid cap companies. And I think there's probably, there's always idiosyncratic reasons, but it feels like there are maybe some larger drivers of that. I think that sort of the natural buyers of mid cap companies, whether it is, you know, active mutual fund managers or long short hedge fund managers, I think that those managers have seen tremendous outflows from their strategies over the last 10 or 15 years to a point where the industry is almost dead and where you've seen a lot of inflows is one as a competitor to sort of buying these businesses would be private equity. But private equity has probably been a little bit out of the market the last year. Or two because of the increase in interest rate and then also the sort of failure to recycle capital and maybe a little bit of limited appetite. But the other issues have been the huge flow into passives and that tends to disproportionately go towards large and mega cap companies. And then I think the other bit is the kind of dominance of pod shops in terms of trading flows and just assets under management over the last decade. And those are at least as I understand it on the equity side, they're not really natural holders of companies with lower levels of liquidity because in order to sort of run the kind of perfectly hedged neutral model, you really need to be able to get in and out of positions pretty quickly. And so when you have a lot of the market move away from being, call it bottoms up, fundamental long term holders, I think that's creating an opportunity and it's an opportunity that we're very, I think well situated to take advantage of. And it's something that we're pretty optimistic about over the next, call it three or four years or until something else changes.
- [12:30]
Dan Lefkovitz
Yeah, I wanted to ask about geography. As you mentioned, you're very much a global investor. You own businesses in Europe and Japan and Korea. US has obviously outperformed again going back 10, 15 years. Do you find more compelling valuations outside of the US than within generally? Do you have a perspective on the long run of outperformance of us?
- [12:50]
Brian Selmo
Yeah, I would say that it's a little bit hard to say because we don't invest from a macro basis, from top down basis. We follow businesses by their industry or competitive set and we follow them across geographies. So the people who cover a particular business niche would certainly not stop their analysis at sort of a geographic border. They would cover that entire value chain and then we would invest really open mindedly across wherever the companies might be domiciled considering the valuation, considering the competitive position and considering the management quality and maybe shareholder friendliness. And so I think that we have over the last couple years been buying more things that are domiciled internationally. But it's not necessarily a comment that generally market A is cheaper than market B, you know, and in terms of understanding some of the, you know, outperformance of the U.S. over the last, call it 10, 15 years. I mean I, I think the punchline is a lot of it's earned and I think there's a couple of things that went into it. I think one is that you know, the starting point after the financial crisis was time of Certainly reasonable valuations in US markets and the currency wasn't particularly expensive. And a lot of emerging markets at the time, and even international markets in general, their economies, they benefited proportionately a lot more from the commodity super cycle. And you might remember, but I guess there weren't memes at the time, but there was a theme at the time that there was going to be a decoupling and that the brics were going to pull the world ahead and decouple from the US and maybe from Europe. And so I think that's all largely reversed. And that's probably a bit of a cyclical experience where you see different markets outperform for a decade and underperform and that's kind of ebbed and flowed I think off and on for the last hundred years. The thing or the issue that's maybe a little bit different in the last 10 or 15 years from my perspective is I'd call it Silicon Valley funded tech platforms. And so putting what amounts to, from our childhood, what amounts to a supercomputer into 5,6 billion people's hands has created business opportunities on a scale and a profit sort of profile, the likes of which just didn't exist prior to, let's say the opportunity didn't exist prior to 2010. And if we think about X China, almost all of the important firms that have succeeded on building those platforms or US domicile and so they're going to be in US indexes. And then when you have sort of the power law of success accruing to the few, you have a result of where real economic activity in terms of business performance, a lot of their activity is actually happening globally. But in terms of where the companies are domiciled that are experiencing all of this very real business value growth that's just been in the US market. So I think it's only natural if you have that, that that market would outperform. We started talking uncertainty. Just because that's been what happened the last 10 or 15 years, it certainly doesn't mean that's what will happen in the next 10 or 15 years. And AI is I think, very likely to be a new tech platform, right? A new compute platform. And historically when you've had new platforms such as the mobile platform, that's created a change in the landscape and an opportunity for new businesses to create very, very big profit pools and new type of economic dominance in some way. And so I don't know where the dominant AI companies will be developed and they very well could be developed outside of the US maybe Not the betting odds, because Silicon Valley is still very well funded and probably at least now in pole position to win with AI. But it creates another shot at things for other geographies in terms of where these businesses might get built.
- [17:23]
Dan Lefkovitz
Yeah, I wanted to ask you about AI, how FPA is thinking about it and whether it's core to your investment thesis for any of your holdings. Looks like you've got Meta and Alphabet, Amazon, some semiconductor manufacturers.
- [17:35]
Brian Selmo
Yeah, I mean, I think there are a couple things. One, a lot of humility in terms of thinking about what you don't know. But two, I think as a firm, we want to embrace it as much as possible. So we want to be listening to podcasts by people who are leaders in the industry. We want to be reading about people's perspective and insight into what might be possible with this technology. We want to certainly use it and incorporate it into our work when we have tools that are useful. And that's both on the investment research side, but also on the operating the business side. And so we use various AI tools as an organization already, and I only expect that to increase. And then I think personally, you want to experiment with them as much as you can on the investing side. I think what's really important for any investment but, but particularly kind of like I said, a likely paradigm shift or platform shift in a technology is you want to be sort of creative and broad in how you think about what might happen. You want to entertain what maybe seems implausible because it's usually the failure of imagination that gets you into trouble. Right. It's imagining you're making an assumption that something implicit, often that something won't or can't happen and then it sneaks up and surprises you later. So we want to be as imaginative as possible in terms of thinking about what businesses and what activities might be challenged. And then we would like to certainly have various exposures to things that we think would benefit from AI, but particularly we want to focus on those things that we think are going to be durable and not change in light of AI, because it's the things that you can get sort of a confidence in not changing, that you can really build a position or build a business around in terms of the companies that we own. In the Mag 7, you mentioned Amazon, Meta and Alphabet. I think to date, Amazon and Meta are generally viewed as beneficiaries from AI. And I think that Alphabet faces a very obvious risk. And I think just so everyone's level set, I mean, Alphabet is a number of different businesses. There's cloud, there's YouTube, there's search as you think about it, and then there's some of the other bets. And Waymo's maybe starting to come into its own in terms of the other bets. And the best part of the Google Business, the 10 Blue Links is probably not going to be as good a business the next 10 years as it was the last 10 years. And so that creates uncertainty and risk. I would say say that to some degree that's I think well identified and probably incorporated in the stock price to some degree. I think there was a presentation a week ago by a very prominent hedge fund manager who's also involved in big way in growth, equities and venture. And I think Alphabet and Apple were kind of his picks to no longer be top 30 businesses over the next decade or maybe even in the next five years. And so I don't think it's lost on anyone. I think that. But it's also worth remembering that a lot of these companies have reinvented themselves over time. I mean I would say that no one really uses original blue Facebook anymore, but that hasn't prevented what is now meta from remaining a very relevant and valuable business. And so I think from our perspective the big question mark at Alphabet is how is management going to handle this? And I think to date they have probably not covered themselves in glory, but certainly it should be front page now for them and hopefully they will execute well.
- [21:37]
Dan Lefkovitz
And then your positions in semiconductor manufacturers is that sort of picks and shovels play on AI?
- [21:44]
Brian Selmo
Yeah, we've owned some so called power and analog semiconductor businesses for a number of years really going back I think, oh probably 10, 12 years in the case of ADI. And so those are largely picks and shovels or you can think about them almost as a toll on the digitization of the world. And we think that that's a very durable long term trend. AI is I think going to benefit and accelerate that trend. But we got into all of those well before AI was sort of front and center and evaluations that made a lot of okay.
- [22:27]
Dan Lefkovitz
And then how are you thinking about regulatory risk in the context of some of these Mag 7 holdings? There's been some antitrust actions.
- [22:36]
Brian Selmo
It's another uncertainty. I think that we will see what the impact is. I think for some companies there's a thesis to be had that if you broke them up into their component pieces that maybe they would be worth more than where they trade in the markets. But we don't take a particular view on how the regulatory environment will play out. We think that the asset bases that the companies have and the financial wherewithal they have in the various discrete businesses within the companies are all probably strong enough to be certainly Fortune 500 companies on their own. And so we suspect that it might not be the end of the world if they were to get, you know, rearranged a little bit organizationally. And it might even create some energy and focus from the management teams. I mean there, yeah, there's a, you know, I don't think many people believe that Alphabet is the, you know, best managed, most lean, you know, financially or commercially aggressive organization in the world. And so, you know, having a little bit of the wolf at the door might be helpful for them.
- [23:53]
Dan Lefkovitz
Going back to the opportunities you've been finding in the small and mid cap space, the compounders that you've been adding to recently. Wondering if you would be willing to share a couple names and walk us through the thesis.
- [24:04]
Brian Selmo
Yeah, sure. I suppose I'll start with the one that's the most fun, being a user of the product. So over the last, call it, six months, we were an opportunity to buy what we think of as a unique trophy ass in Vail resorts at what are very undemanding prices. And the very simple thesis is that there have not really been new ski resorts developed over the last 50 years. We think that people's propensity to ski is a pretty durable human desire. And over time we would suspect that the company can manage the, you know, revenue base and price their product in a way that slightly exceeds inflation and that that ought to allow for a bit of margin benefit. And you have a business trading at, as we said, somewhere between 8 and 14 times earnings and redistributing just about all of that cash to shareholders in the form of dividends and buybacks. So I think that the math works and we think it's an asset that no matter what happens with AI is likely to remain relevant. So that's one that we've been doing.
- [25:25]
Dan Lefkovitz
Can I ask with that one? Do you think climate change concerns have kind of weighed on the share price at all?
- [25:31]
Brian Selmo
I think they do weigh on it from time to time. I mean, I think the interesting thing to point out there is, I'd say a few things. There is always a scenario where an investment won't work out right? So there's no sort of perfect investment in my mind. And there is a, you know, if, if for some reason the world does not produce enough cold days for skiing, that will make their business, you know, irrelevant, non viable. I would though say that when people talk about this as a near term issue, this is a little bit of a headline divorce from fact. And so the reality is that the number of skiing days generally in North America has gone up over the last decade and over the last two decades, so meaning the number of days that the resorts are open. And then secondly, the Vail resort mountains have actually increased their skier days by more than the industry over the last 10 or 20 years. So the actual amount of, call it, skiing days produced has gone up, not down, despite the kind of concerns around climate. And the reason for that is largely because of the snowmaking capabilities and capacities at a lot of these resorts. And being the best capitalized and best invested in Vail has actually on a relative basis, even benefited vis a vis the rest of the industry. And so it's certainly something that would cause the investment to not work over a very long period of time. But I think in the more near term it certainly hasn't been an impact, I think on the business in terms of days that the mountain is open.
- [27:12]
Dan Lefkovitz
Gotcha, gotcha.
- [27:14]
Brian Selmo
I think another business that we bought over the last six or 12 months is a company in Europe called Eurofins. And this is a business that does testing for, you know, call it life, what they would call. And so this is whether it's environmental testing, whether it's around drugs that are being developed or whether it's around various materials or in the food chain, they kind of ensure that sort of the environment, the food or the medicines people are taking are safe and then also allow people to innovate in those fields and kind of get quick results. And it's a, an owner operator who we think is built a terrific network and franchise and over time is going to accrue the benefits of the long term trend of a greater interest in sort of a clean environment and a robust food chain and biologic and health innovation. So those are kind of long term trends that we think ought to underpin the growth of the business. And the organization is well set up to be a cost leader because they've developed their own IT system in house. And we think that that's going to give them a little bit of a benefit and over a fixed cost base. If they can manage those costs a little bit better, that'll be some margin benefit. And then again we got into it on a non demanding multiple with the management team that is actively buying back stock and paying dividends. So we think the math will work there too.
- [28:53]
Dan Lefkovitz
Very interesting. That healthcare sector overall seems like it's kind of Derated. Have you been finding opportunity?
- [29:01]
Brian Selmo
We have. We've gone from about zero in healthcare during. Not about. We've gone from zero in healthcare during kind of the COVID mania to now a few, let's say a little over 3%. And what's interesting about that is that backing 2012, that's kind of like the peak fear of Obamacare. Healthcare was our largest exposure and then as valuations got to points that we thought were kind of untenable, we just exited outright. And that's consistent with how we invest in sort of across the board. Right. If we think the opportunities are good, we're happy to invest. If we think that the risk reward doesn't make sense or everything's overpriced, we don't have any preconceived notion that we have to be somewhere so we'll go to zero exposure. Currently, I would say we're most interested in the picks and shovels in the healthcare business. And these are really companies that help develop pharmaceuticals or biologics or produce them. And I think that they're probably pretty well established as high quality franchise businesses. There's a bit of a, maybe cyclical slowdown and some uncertainty given the changing posture at Department of Health and Human Services. But long term, I think we're very bullish on healthcare spending because if you go back to what's durable for a given level of efficiency, or assuming that incremental spend can be done productively, it's incredibly societally positive to invest more and more money into improved health and longevity or health span. And so we think that it's pretty healthy for an economy to ultimately spend more of discretionary capital in that field. And we think that that trend is kind of going to continue kind of forever as long as there are good prospects for that spend. And coming back to AI, one of the big promises of AI is going to be an increase in the number of opportunities or development pipelines or development ideas in various, call it cutting ed, biologic cell and gene therapy. And so I think if anything the future is very bright there. If you go out T + 5 or T + 10 instead of maybe the next 12 months where you got to think a little bit more about the budget cuts and maybe some loss of patent at the pharma companies where there may be some little bit of an air pocket in terms of what demand looks like shorter term.
- [31:43]
Dan Lefkovitz
Yeah. Going back to the global conversation, we were having a number of holdings in Europe and Japan, Korea as well, but not much in emerging markets. I do see Grupo Mexico in the portfolio. But it doesn't seem like you have much in India or China or Brazil, some of the big emerging markets. Is that by policy what has kept you out?
- [32:03]
Brian Selmo
Yeah, in general we're looking to invest in scaled high quality businesses and there are just fewer of those domiciled in emerging markets. We have in the past. There's no policy, I should say we have in the past had exposures in China and even in Russia and we still actually have a little bit in China in India today. But in general we are happy to get the exposure to those economies through multinational companies. And the more mundane businesses in those geographies tend to have a lot of state influence. They tend to maybe subject to regulatory environments that we're not comfortable with and probably are not of the business quality or shareholder alignment that we're typically looking for. And so as we mentioned earlier, we're happy to kind of not do things as well if we don't think they line up.
- [33:02]
Dan Lefkovitz
Gotcha. You mentioned a view on the dollar earlier. Curious how kind of currency considerations factor into your investment decision making and portfolio positioning.
- [33:12]
Brian Selmo
Yeah, I think there's two thoughts on currency. One is on the individual firm. How are they matched revenue, cost and balance sheet and do they have some risks in terms of mismatch there? And so that would be on a kind of company specific basis. The other would be just sort of on a portfolio level and would be interested in holding the exposure to the currency. That kind of comes back to the macro question from earlier, which is we're macro aware in the sense sense that if we don't have a strong view that a currency is particularly unattractive. So if we just kind of think it's within the range of reasonable, we're prone to keep the exposure to the currency and get some diversification benefit. If we thought that a currency was particularly unattractive and we had some investments a decade or so ago after Fukushima in Japan, and we thought the currency was particularly unattractive and there we would have hedged the currency because we had just a sense again from the macro awareness that it wasn't a risk that we wanted to run.
- [34:25]
Dan Lefkovitz
I want us to shift gears and talk a little bit about private markets, which is a very hot topic these days in the investment world. There's a lot of efforts to broaden access to smaller investors. You've owned private companies and private debt for many years now. Wonder if you could share your approach to private assets.
- [34:42]
Brian Selmo
Yeah, for sure. I mean, you know, from an analytic perspective, it's really the same, you know, you have a different level of liquidity. I think the big positives are, you know, if we're talking about companies and if you are able to be in a control position, you know, you have control ultimately over the management, the use of discretionary cash and strategy. And so you can meaningfully reduce the sort of principal agent challenges that you often have in public markets. Now that's not to say there aren't many, many public companies where I probably think the governance and behavior of management is better than it is in private companies. But there's also a lot of challenge. If the nature of the people running the public companies aren't shareholder oriented, it's very hard to change them. And so that's the big benefit I think of being private it. But as a manager, the real issue is around matching the liquidity of the investment to the liquidity of the assets that are a fund that are holding it. And so in Crescent, which is an open ended fund, we have very, very little appetite for privates because it's a daily dealing fund. Now we also manage a closed end fund called Source. And Source has a large appetite relative to its S for privates and it's actually significantly invested in private credit as well as some private equity these days. And I think that will continue because Source is essentially a locked up vehicle. And so it's an appropriate profile to own illiquid assets. Now in Crescent we have invested in privates over time, but these are kind of private or illiquid. I would put quotation marks around really from it an SEC definition perspective rather than what I think of as in practice genuinely illiquid or private. And the reason for that is the two big exposures we've had. There is one, we bought pools of defaulted mortgages after the financial crisis and these were pools where we were the 100% owner of the assets so we could choose to dispose of it when and how we would like. And they were self liquidating, so they were sort of pretty liquid even though they didn't have a cusip in trade. And then over the last 12 years or so we've been investing opportunistically in ships in a number of different sectors within shipping. And this is we've got some partners who manage the buying and selling and operating of the vessels. But we're over 95% of the capital and we can determine the when and if we buy or when we sell. And ships are actually fairly liquid as a asset. Right. They trade pretty regularly and so we can Exit our ships, I think over no more than 60 days if we sort of needed to sell. And so that although it shows up as private or illiquid, it's actually probably more liquid than a call a huge stake in a small or mid cap company.
- [37:57]
Dan Lefkovitz
Yeah, yeah. I'm curious, with all of the institutions increasing their allocations to private equity and private credit, have you seen signs of froth in either asset class?
- [38:09]
Brian Selmo
It's a good question and people have been talking about it for a while. I don't know that I am deeply enough involved in those markets to really comment. I mean, I think we all see that AI backed venture firms are getting money, it seems like left, right and center, at very, very high apparent valuations given either the number of people involved or how long the business has been around. But that's kind of the nature of a big gold rush around an interesting opportunity set. So whether that all proves to be a smart idea or a bad idea, I think it's way too early to tell. And on terms of the private equity, call it traditional buying of mid cap businesses, I think that's a market that's cooled a lot in the last three years or so. So during COVID when rates were at zero, I think people were buying, it seemed to be that people were buying any decent business that would trade. And now I think that that private equity bid is much subdued. So I'm not sure that I have a blanket statement on it.
- [39:17]
Dan Lefkovitz
Okay. The common story with private credit is that increased regulation on banks after the financial crisis kind of curtailed bank lending and gave rise to private credit. It'd be interesting to get your perspective on that, especially because you own some big US banks.
- [39:34]
Brian Selmo
Yeah, look, I think that's dead. Right. I think that we were not quick enough to identify and understand it. I think the other thing that that pushed a lot of private lending was just the low level of absolute rates and people's need to meet their obligations. And so there's a ton of businesses that are sort of upscale. Right. I think I saw the other day, 80 plus percent of $100 million revenue firms are private. And so it's actually terrific that the US capital markets are deep enough that they can all get funded sort of outside the banking system. And that has, I think, been what's gone on the last 10, 15 years. I think we should all keep in mind that the banks back leverage a lot of those assets. And so the banks are still exposed, they're just exposed at a lower attachment point. And so actually in a much sort of safer position than they would have been 15 or 20 years ago.
- [40:35]
Dan Lefkovitz
Yeah. I've heard you talk in the past about how the expansion of private market investing and private equity funds have impacted public markets, especially in the small cap space. Curious how you think about the impact of private capital on public markets generally.
- [40:50]
Brian Selmo
Yeah, I mean, I think that like I said a couple of years ago, they were a very competitive buyer for interesting mid cap companies. I think that they're a little bit less so now. I think the other impact has been to sort of part of the sucking capital out of the call it mid cap fund specialists in the long short equity funds. I think that the performance of private equity has been strong enough that's really sucked up a lot of the capital that would have previously gone to those kind of managers. Now what I suppose is going to be interesting is that as you've had very low returns of capital, not necessarily on capital, we don't know how that will play out yet. But in terms of paying back of LPs, LPs seem to be be getting to a point. Traditional LPs seem to be getting to a point of being tapped out on private equity and maybe for institutional specific reasons, but there's a couple of famous leaders in the space that are apparently shopping chunks of their private equity portfolio. And so if private equity isn't able to tap retail capital in a meaningful way, we may be at a point where the growth in private equity starts to slow down a little bit. But we'll have to see how it plays out.
- [42:17]
Dan Lefkovitz
Okay, well, my colleagues on Morningstar's manager research team pointed out to me that FPA has an investigative journalist on staff. I'm curious how that research is integrated into your investment process.
- [42:28]
Brian Selmo
Yeah, we do. And we have had a person with a journalist background for over 15 years on the team. Now the current person in the role, Scott Jindreski, has done a terrific job. He is by far our best journalist. And I think I should give some perspective in that our funds and the funds go back over 30 years, average holding period in the fund has been five years. And the average holding period of the top 10 names is I think about nine years. And so if you are a genuinely long term owner of businesses, and I think that very, very few managers are the decision making of the top people at the organization, the culture, their capabilities, how they're addressing challenges, how they compensate people become incredibly important as you go further out into the future. Right. And so having someone like Scott or a journalist on board, it allows us to essentially do Background checks or personal profiles on executives that maybe we aren't sure about given their public profile. And it doesn't mean necessarily that they've done anything wrong. It's just they could be new to the role. They might just not have an extensive public profile you can make a judgment on. Right. The thing I would say to this is it's hard to overstate how important the people are running a business. The kind of thing we, I don't joke about, but the thing I try to point out to people is the question of apart from 5x the shareholder return, what's the difference between, if you go back to 2005, what's the difference between JP Morgan and Citigroup? Citigroup was probably a better positioned bank at the time. And so what happened? I think that the answer is simple. It's as simple as Jamie Dimon. One of them fired Jamie Dimon five years earlier and the other one figured out a way to buy Bank One to get Jamie Dimon. And so that has made all the difference. And there are a number of businesses that operate that way. And we want to come at it from the people first perspective sometimes not just kind of the financial side. And that's really where the journalist comes into play.
- [44:54]
Dan Lefkovitz
That's really interesting. Have there been examples where the research has kept you out of a position?
- [45:00]
Brian Selmo
Yes, there are examples and, and I probably won't name them because some of them are recent and I think there's people who I've got a lot of respect for, I think are in some of these stocks. But there are just a fair amount like anything, there's a fair amount of below average or professional or uninspiring managers. And you see all the time as someone coming from the financial side of Company X is well positioned, they have share, they have every reason to succeed. Why hasn't it worked worked and we've been in some of those. So I mean, if you want a couple other examples of how important people are, I'd say take a look at the experience of a company called Esterline and the performance of those assets after it was bought by Transdigm is absolutely tremendous. What can be done with the exact same asset under a different kind of environment? And then the one that we, you know, you know, had a tremendous amount of benefit from is a company called Helmet, which had been a subsidiary of Alcoa, you know, a long, long time ago. And when John Platt became CEO, it's, it was this again, no, no acquisitions, no change in business mix. But you can, you can track the performance of that business sort of starting on the day of his appointment. And. And it looks like nothing compared to its past. It's a tremendous change just on the basis of really one individual being changed out there. And so we want to be. It's imperfect and it's hard, it's very subjective, but we want to be open to those kind of ideas. The other one that I think was pretty important for us is that that we had a pretty meaningful position in a company called Broadcom, became a Vago. And at the time that we got into it, if you rewind, these were like the days of Valiant, if you remember Valiant, and the roll up kind of idea that you could just sort of roll things up and cut all your costs. And there was a fair amount of controversy about the CEO at Broadcom at the time. I won't bore you with the story, but we did a tremendous amount of work on the person interviewing the original private equity sponsor who backed him decade earlier, talking to a number of people who had sold businesses to him, had worked with him and had left and kind of came to the conclusion that even though Wall street maybe had a narrative that he was Valiant 2.0, that there was really something else going on there and that was all qualitative, that wasn't in a spreadsheet. And that certainly was important for us.
- [47:52]
Dan Lefkovitz
Yeah, very interesting. Well, we only have time for one more, Brian, but I wanted to ask about working with Steve Romick, who's had such a long and distinguished investing career at fpa. Maybe you could share how Steve has impacted you as an investor.
- [48:06]
Brian Selmo
Yeah, Steve's great. I've been working with Steve for 17 years and then my other partner, Mark, for the last 16 years. And I'm grateful for both of them as partners and also people I've learned a lot from in terms of Steve. I think the big thing on the analytical side when I first joined or started working with Steve is Steve had a background in shorting. And so he did a fair amount of individual name shorts. And that, I think caused him to have a focus on the bear side. Right. There's always a bear case to an investment that was probably much greater than I did. And I think that was very helpful. Right. So Steve is very big on the look down always or first kind of idea. And I think that it's helpful to think through how might investment X, Y or Z not work. Right. I mean, you talked about Vail earlier. Right. There is a bear case. You want to identify the bear case. You want to Understand what it would mean to the individual security, and you want to understand how it would impact the rest of your portfolio. And so I think that Steve really put that in my head in a way that probably wasn't before. And then the other thing I think that Steve should get a lot of credit for is that he has had, I think, the entire time since he started Crescent, a focus on what the client's or LP's experience is. Right. And I'm sure many of your listeners will be familiar with the stories of managers who have kind of tremendous long term track records, but the actual result for their clients was sort of, maybe even negative, I think, in some cases, but certainly it paled in comparison to the performance of the fund. So Steve has always wanted and impressed upon all of us the importance of the LPs having actually a good experience and getting the returns of the fund, not just the fund putting up an impressive number or something. I think those are two things that very much Steve talks a lot about.
- [50:15]
Dan Lefkovitz
Does he do that through. Is it mostly through communication? He just kind of urges them to stick with the fund through downturns and not buy low?
- [50:24]
Brian Selmo
I think we try to be thoughtful in the letters we write. Certainly we try to be thoughtful in the call it quarterly calls. And then it's also just the mandate. It's coming up with a mandate which is equity, like returns over time with less risk and pursuing it in a way so that we kind of never set the fund up to be in a position where we think you might be taking off the cliff. Right. And so many funds, because of their narrow mandate, are kind of forced to stay in an investment, whether it's a geography, a style, whatever else it might be, even when it gets to a point where it doesn't make any sense, because that's sort of the business proposition they've had. And so if instead you just sort of structure it from the beginning with a business proposition that is, you know, flexible to avoid, you know, you know, difficult decisions as we talked about, and kind of to keep the portfolio disciplined, I think it just results in a more sustainable result for people.
- [51:26]
Dan Lefkovitz
Well, Brian, thanks so much for joining us in Longview. This has been great.
- [51:30]
Brian Selmo
Yeah, thanks for having me.
- [51:37]
Dan Lefkovitz
Thank you for joining us on the Longview. If you could please take a moment to subscribe to and rate the podcast on Apple, Spotify or wherever you get your podcasts, you can follow on socials at dan Lefkovitz on LinkedIn. George Cassidy is our engineer for the podcast, and Cary Greshik produces the show notes each week. Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us@thelongvieworningstar.com until next time. Thanks for joining us.
- [52:07]
Unknown
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- [53:42]
Brian Selmo
Sam.