Expert: Steven Glass – Balancing growth & value with sustainable investing

Bryce: [00:00:15] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing. Whether you're an absolute beginner or approaching Warren Buffett status, our aim is to help break down your barriers from beginning to dividend. My name is Bryce and unfortunately not always. We do not have Alec with us. He is still at home with COVID, but the show goes on and I am very excited to have another expert in the studio with us. It is my pleasure to welcome Steven Glass. Steven, welcome. 

Steven: [00:00:41] Thank you very much. It's a pleasure to be here. 

Bryce: [00:00:44] So Steven is the managing director and investment analyst at Pella Funds Management. He has more than 20 years of investment experience. And today we're going to be covering ESG investing and all things that come with launching a fund in 2022. What a time to launch. Yeah. But Steven, I want to start with a bit of a game just to kind of get your thoughts on where you think some stocks lie on the ESG sort of framework. Now, I don't know if you've heard of the game shoot Shag Marry, but we're going to call it short Hodl Buy. So I'm going to give you three stocks. I want you to tell me which one you would short. Which one you would hold or just your neutral on. And which one you would buy. Now, this is not a buy, hold sell recommendation just of the. 

Steven: [00:01:33] Yeah, sure.

Bryce: [00:01:34] So we've got Tesla, Fortescue and Facebook.

Steven: [00:01:38] Okay. 

Bryce: [00:01:39] Well, let's start with a short. Which one would you short out of? Tesla, Fortescue. 

Steven: [00:01:43] And is that based purely on investment metrics or is it based on investment, investment and ESG? 

Bryce: [00:01:49] It is completely up to you.

Steven: [00:01:50] Okay. Well, I'm going to focus on investment metrics for the time being. It's too short there for me, but I'm not really going to. That's not the game. I'm going to have to short Tesla. Okay. It's just too expensive. Okay. We've been thinking and actually we've been saying that since it was $1,000,000,000,000 now, but 500. 600 billion. But it is just too expensive. We can't, we cannot make the numbers work. Right. So that it's just impossible to make the numbers okay. Physical model model would have to be face will matter. Yeah. Which otherwise would be my other short. 

Bryce: [00:02:27] Yes. 

Steven: [00:02:28] Because look, that's got terrible ESG, so we couldn't hold it, to be honest. It's got very bad ESG metrics. And people do talk about the network effects of social networks. So I don't know if you are familiar with network effects. Yep. So people say that, but I just don't, I just don't buy it. I just think that we saw a similar thing with the one that predates Facebook, which NewsCorp bought MySpace. MySpace. We just believe that people can actually move off. Now, we understand it's difficult, but it is actually quite easy to just move off in droves of social media. And we kind of have seen that with a face. We've seen it with Facebook. Will it happen to Instagram? Hard to tell, but it has huge issues with its advertising because of the relationship with Apple. The whole whole reason for Facebook having a great business model is because it could get all this information on its people and so on its users. So it could actually give very targeted advertising. Apple changed policies that don't get as targeted. So it's got huge issues. But at the end of the day, ESG is the biggest issue for us at Pella, although this does look very cheap, we just wouldn't hold it because of the ESG reasons. 

Bryce: [00:03:46] Yeah, it's a fascinating stock if you think the stat is if you bought it five years ago, you'd actually be down, is that right? [00:03:53][7.2]

Steven: [00:03:53] Yeah, I didn't know that down.

Bryce: [00:03:54] Something like 40% now.

Steven: [00:03:56] No way. Yeah, I have no idea. 

Bryce: [00:03:58] Yeah. Nicholas, what it's done over the last five years but. 

Steven: [00:04:00] So it's cheap though. It's very cheap now, you know, a free cash flow basis. Yeah. No, it's cheap.

Bryce: [00:04:06] But does that mean it's what's the outlook for it though, if more and more people are leaving it in droves? Yeah, it's an interesting question. 

Steven: [00:04:13] Well, I don't know if people are leaving so much as they've got problems in their base. Yeah. People might leave eventually that you have competition from Tik Tok. Yeah, but it is, it is cheap. It is cheap but yeah. 

Bryce: [00:04:25] And Zuckerberg's betting billions on the metaverse. 

Steven: [00:04:27] On the metaverse, which it would not work in. Not work. And so.

Bryce: [00:04:31] So that then leads us to the by and the only remaining one is. 

Steven: [00:04:34] Fortescue. So we believe in commodities for several reasons and I actually don't know what Fortescue's ESG is like. I have to assume that it's quite good because I know what the attitude of Twiggy is and he's got a very positive attitude. I have to believe it's quite good. We don't really look at Australian stocks much, so I'm not all over Fortescue. Having said that, we do. As I said, we like commodities. We think that for several reasons. One of the issues is with the way that governments have implemented fiscal policy and monetary policy around the world means that we're basically debasing currencies. And one day what that could mean is that the world. The world currently uses the US dollar as the world's reserve currency, and if the US carries on, it's its current which really means it's a store of wealth. So I've got lots of money. I need to store it in some asset I'm going to store in US dollars because it's risk free. Now the problem with that is the US, as we all know, they've got these huge budget deficits. One day they're going to have to fund it. Otherwise they're going to have less, less confidence in the US dollar. And what that will mean is people have to, will, will restore their money in something else, something else that will retain value. And those other things that retain value are real assets. So they're equities, they're commodities, they land agriculture as well. But they're real assets. They're not currencies which are really based on trust and trust and faith. And what that means is that we do believe that there's something that's going to underpin commodities as long as the US carries down its path of these huge budget deficits and Qantas own estimates, the budget deficits are going to get worse. No, not, not well, the aggregate budget deficit is going to get worse and they've got a huge entitlement gap, which means they've got to fund a whole lot of people who are retiring and all those, you know, Medicare, all that kind of stuff. So there could be huge issues for the US dollars, which should underpin real assets and commodities will just retain the value.

Bryce: [00:06:29] Fascinating. Well, I'm going to get your view on markets, inflation and rates in a moment. But yeah, that was fascinating. So let's move to a bit about yourself, Steven. We love to understand the story of our guests' first investment. So it doesn't have to be in equity, doesn't it? Just whatever you classify as your first investment. Can you share that story with us?

Steven: [00:06:50] Sure. You know, I will share it, but I can't even remember the name of the company. So it was during the dotcom boom. So I was studying finance accounting during the dotcom boom. So that was 99. Yeah. And I bought some telco stock that I can't even remember what it did. I just thought everything was going up. So I thought, you know, TMT was going up. So I thought, I don't know, I had some good story to support that. Yeah. And I kind of remember if I lost or made money, I deserve to have lost money. But I actually can't remember. I probably put $1,000 in with my mates. Yeah, I can't remember it. I really can't remember. 

Bryce: [00:07:29] I feel like the probability at that time of losing money would have been pretty high. 

Steven: [00:07:34] Well, I may have been lucky and sold out before the crash, but yeah, actually yes. That was the first time I opened a CommSec account. 

Bryce: [00:07:43] Oh nice. Okay. 

Steven: [00:07:44] Yeah, it's an even read that I didn't even read the prospectus, I didn't even read the annual report. All I knew was everything goes up in TMT. That's all I knew. Physical. Yeah. So yeah, those days are long past but yeah. 

Bryce: [00:07:57] So from that point to now, you obviously got plenty more experience in the markets. How would you define your personal investing philosophy? 

Steven: [00:08:05] It's important to me to get value and growth. So a lot of people want value. I'm a value investor, which is fine, or I'm a growth investor, which is also fine. But I find it impossible to differentiate the two because at the end of the day, the value of something is partly a function of its growth. So for me, I like to get value and growth. Now growth requires a quality business, it requires a good business, a quality business, or requires a strong cycle. So those are the things you have to focus on. Now, what I don't do, which I used to do, is I used to start off by reading all the Warren Buffett books and I thought, okay, you've got to be like Warren Buffett. But in actual fact, I think that's a mistake, which is a big, big fall. It's a little bit like saying, you know, seeing the best skier in the world and saying, well, they do that, so I'm going to do that. It can be very dangerous. So, for example, Warren Buffett would say if you see a stock, you like it and it drops, you just buy more and you just buy more and so on and so forth. Now that's all very well. If you Warren Buffett, he's also got this huge capital pool and all the rest of it. But it can be a huge mistake for just a first time investor or anyone not Warren Buffett. So he's also got a different set of metrics that he's measured by. It's a different game he's in. So I think that's a mistake. Just looking for and trying to be Warren Buffett. I try to be Steven Glass so I can be the best that I can be. Now, having said that, quality does matter and I try to find businesses with sustainable business models. They have to have strong balance sheets and you've got to think about what your edge is. It's a very, very smart market out there. For every person that's buying that, someone sells it and vice versa. You've got to understand why you've got it, why you want to own it. And I don't think you should focus on too much and say, What do I know that other people don't know? Because that's just bullshit, to put it bluntly, like everyone knows everything, but you've got to understand where, how you differ and how you see things differently. And you've got to be patient and you've really got to just shortcut emotions. Then one of the most valuable things I've learnt to invest in is how powerful emotions are. You've got to do things when it's often when it's uncomfortable. You've just got to. If the market sells off, it's hard. But when a stock drops and, you know, say you're looking at a stock that you wanted to own and it drops 40% and outside your buy price. But there's a problem. It doesn't just drop 40% for nothing. A lot of people go on this show and say, Yeah, but I no longer like it because there's this problem, that problem, this problem. You've got to just say, I know I've got to go now because this is the time. Yeah. 

Bryce: [00:10:44] This is probably a moment in time where a lot of the investors in the Equity Mates community have experienced something like this for the first time. And so understanding how your emotions react as an investor during a time like this is really important. Yeah. Yeah. What do you weigh out of value and growth? Is there a bias towards one of these? 

Steven: [00:11:04] Yeah, I think I prefer I think if I was to go and one of them would be more valuable. Yeah. The price you pay really is so important. Yeah. But I do recognise higher quality, faster growing companies deserve to trade on a high multiple. Yeah. So I'm not looking for low, low multiples. But I must say I love it when things are cheap. Yeah. It's just. Yeah. At the end of the day, that's your best protection. 

Bryce: [00:11:27] Yeah. Now, you used to work at Pengana and now at Heller Funds Management, launched in January 2021. I'm fascinated, fascinated to know what that's been like. But for those that haven't come across Pella before, what is it?

Steven: [00:11:41] Pella is a global investor that specialises in responsible investing, so that's ESG and sustainability. The thinking behind that is my business partner, Jordans Feather Norske and I have always been ethical investors. So if you are a shareholder, you're an owner. That's a fact. And you've got to think to yourself, would you want to be an owner of certain businesses? If I said to You could buy a business that makes bombs, you know, land mines? Would you want to own that? Presumably no one knows the answer. So I don't want to own businesses like that. So that was always my path and that actually started right at the very beginning. So my first job was at Platinum Asset Management and I did look at our defence contractors and I just didn't want to, you know, it just doesn't interest me. I just don't want to make money that way. And so my whole life I've really been invested in that way. And then the whole industry has just moved and it's become far more sophisticated. So we've become more sophisticated with it. We're learning with the market and we've realised that when you run an ESG fund or responsible investment funds, it has to really be dedicated to that. You can't have one fund that's ESG and the other. That's not it's just we don't think that works. It's got to be a whole philosophy. So that's our thinking. We also believe in the value and growth you have to marry. We also believe that a tight knit team is the best way to actually manage money. A team of thousands or so doesn't work. Yeah, and we can speak about that later if you'd like. So we launched Pella and it's been a fascinating experience. I have to say. I've learnt a lot about business, you know, all I've ever done is looked at businesses. But when I'm actually in one, yeah, you learn a lot and I'm sure you've got a lot of experiences you could share with these skills. Yeah, you just learn. And one of the things I've learnt, the three most important things for a funds management business are you've got to have investment returns, you've got to have good distribution and compliance, you have to have top, top compliance. And I didn't realise how important compliance is. I mean we've always complied with everything that is so much to it and you just don't want to get it wrong. So it's been a great experience. It's also hard. I work seven days a week, literally seven days a week and work in the early morning until late at night. And it's but it's a project of passion. 

Bryce: [00:14:01] And so how have you found the process of actually raising money and distributing the fund in a time when everything is going down? And I think also, particularly at a time where coal and oil and non-energy stocks have been absolutely ripping, we've seen some of these stocks pumping out profits and shareholder returns at record levels. Yeah. So how have you found that dynamic? 

Steven: [00:14:27] That's been difficult. Yeah, that's been our biggest one in a relative sense. Our biggest headwind has been energy. And that's just a fact of life. Now, people know that when they look at us, but a lot of people don't. They just look at, you know, that headline and we've actually kept up with the benchmark. So we're very pleased with it and probably a bit ahead of it. So we're pleased with that without owning any of that energy. So we've had to do it the hard way. But you know what, we're long term investors. These things go in cycles. Energy will today that the market works. There's always a narrative for a market. That's how markets work. And when there's a narrative, there's always someone who's got the biggest investment in that narrative and they're the hero. And then there's someone who's got the least exposure to that narrative and that villain and what we never follow those market narratives. So if we go back a year ago, it was all about growth. You just had to have lots of growth and there are lots of funds who are printing these phenomenal numbers who look unbelievable. But actually all there were, we're investing in a big narrative and when it comes off, you get smashed. So what we believe is we've got to have a balanced portfolio. You've got to not have to be the best before. In fact, it's probably best not to be the number one performer in one short period, because that means you've got a big investment in one narrative which can flip. Yeah, and we just float along in the first quartile, just steady as she goes. And we know that if you do that over ten years, you'll come out on top for five years because our last one and Pengana did actually come out on top over five years. Now I'm just going to share a very interesting story, if I might show you. There's the best fund manager of all time. It's called Peter Lynch. So the best investor of all time, Warren Buffett, best fund manager of all time, Peter Lynch. He wrote a book, one up on Wall Street. And he managed the fund called the Magellan Funds at Fidelity in Boston. So nothing to do with Magellan here. And he managed that fund between 1977 and 1990. So for 13 years. And during that time his average annual return was 29% per annum. Crazy. I'll never be done again. Crazy. Yeah. The average investor in that fund lost money. But the average investor lost money. And this is Fidelity's own research. You can Google this now. How is that possible? Yeah, because it was very volatile and what would happen would go up a lot. One year down a lot, one year up a lot, one year down one year. And people being emotional would react to that and take up money after big drops and put more money when it goes up. Now, everyone, I'd tell the story to think says how stupid. But it's not stupid. It's you and it's me. And the reason I say that is because that fund had tens of thousands of investors in it. I want to say 100,000 investors in it. And it was managed for 13 years. It is statistically a true measure of population. No one wants to believe it, but the statistical sample size tells us what people do. And I just paint a picture. Imagine you're 50, 60 years old, I've got your superannuation in it. It drops 50%, one year, 20% the next year. So now you're down 60% over two years. You're taking your money out of that. You're going, I can't, I cannot bear this. Then the next year it's up. But you might not take all your money out, you take up 50%, then the next year doubles and then it goes up another 50%. This guy's a genius. I'm going to put more in yet. Land up losing. Yeah, they would have faint. Now he's the best there ever is. I'm not criticising him and if anyone just held on that would have been fine. But the fact of the matter is, people are emotional and you're better off. You are literally better off with 10% per annum over that same 13 year period, you would have landed up a lot better. Now the way to do that isn't to bet on one market narrative at a time. It's to be diversified, it's have stable companies and it's to be solid and have a solid portfolio. Having said that, you can't ignore the exciting stuff. You've got to do it at a little risk to spice up life and it can really add to your returns, but you've got to wait for it properly. 

Bryce: [00:18:32] Yeah. 

Steven: [00:18:33] So in our portfolio we have 60 to 80% invested in those in core stocks. Google's Nest lays things like that. Just then we've got 0 to 30% invested in cyclical stocks, so agriculture, commodities, banks take advantage of cycles and then we've got 0 to 20% invested in those innovation stocks or really high growth exciting stocks and we create different rules around them. So stop losses, things like that. And what that means is we can actually allocate money to those exciting things and sometimes they work and often they don't, but it won't kill you. But if you do it in a way like that, you can get some stability to your portfolio and you're not going to be whipped and you can just have a nice, steady portfolio. So I think my key message here is it's good to have some of that exciting stuff, don't have too much and it's good to have some cyclicals, don't have too much, and it's good to have those stable stocks. But again, to have too much because, you know, invest in it, you need to beat the benchmark. Yeah. So you needed to have the differences. Yeah. 

Bryce: [00:19:36] Well, I guess they'll be people sitting at home listening to that and saying, if there's nothing wrong with 10% per annum for the rest of your life, like that's just the average market return, right? So if you can just take the index and live a happy life. But I guess the counter argument that you're making is that you don't have the ability or I guess if you do a satellite approach, you miss out on some of the exciting stuff that might generate outperform. 

Steven: [00:20:00] Yeah, well, the market's average return, according to our metrics, is 8% per annum, so you're not far off. So the 2% does actually add up over time, but yet you do want to do better than ten. But ten is your. Honestly, if you do 10% over your lifetime, you will be a wealthy person. And also, if you go in the benchmark, you can't get the right ESG and responsible investing, which I think is very important. 

Bryce: [00:20:23] Yeah. Well, let's move on to ESG, because I'm interested to know how you actually define your investing universe. But before we do, we're just going to take a quick break to hear from our sponsors. So, Steven, there are a lot of ESG funds out there now. There are a lot of products that have ESG in their name. And it's one of those parts of investing that is very personal. You as an industry investor are different to how I might perceive ESG investing. So can you talk us through the investment process that you take at Pella and you know, I guess distinguish between is it a negative screening, is it a positive screening and just how you define your investable universe? It is. 

Steven: [00:21:06] So difficult. It's an alphabet soup, all these different ESG things. It's really hard to define it. I will say Pelé is Alphonse also being distributed in Europe, which is the leader in ESG, and we're something called an Article eight there, which means we're bona fide. We've been looking at the regulators. We satisfy their principles. So I'll speak about our principles and we can speak about what the regulators want to see. So there's several approaches to response, but I'm going to call it responsible investing, if you don't mind, because ESG is one component of it. So within that, there is negative screening. So let's avoid the bad stuff, there's ESG, which ESG actually isn't about what the business does. So Lockheed Martin, which makes weapons might I think it actually has pretty good ESG. So ESG is how you define it, but it's about what I do. So I am a defence manufacturer, but within that realm I'm going to do everything I can to have to have the least environmental damage, the least social damage, and have the best governance that I can. So it's often industry specific. So that's ESG. So that's how you behave. Then there's something called norms based invest in which has which is, but it's about if you do something that contravenes standards. So that's again about your behaviour. So for example, you've got negative screens which are what you, what you produce. And if you produce stuff that's bad by someone's ethics, you can be taken out. Then you've got ESG, which is about the structures you have in place to guide your behaviour. And then you've got norms based screens which are about what, what have you actually done. Has there been controversy? So for example, we sold out of Visa because of our norms based screen. Okay, now norms space. The reason we did that is they were implicated in finance in in enabling the payments for child pornography on Pornhub. So what actually happened there were these allegations and then they said, right, okay, well, obviously we don't want to enable that. So we're no longer going to enable people to pay. We're no longer going to enable people to pay for a pornhub subscription using a Visa card. Okay. But they didn't stop the advertisers from advertising on Pornhub using Visa cards. So they knew there was a problem, but that only went half the way, which is actually a little bit worse in a yeah. So that the problem the problem was that Pornhub had child allegedly child pornography and visa were alleged well were enabling payments for advertisers on that child pornography where there was child pornography for us that was behaviour that we don't want to be involved in like no one wants to be involved in, you know who wants to be involved in that kind of thing? Yeah. So that was a norm based thing. So its ESG was fine. It's got all the structures in place. It doesn't do anything bad like it's, you know, it's a payment business, but it's behaviour, it, it did something bad in its behaviour. So that's a norms based screed. So long answer there. 

Bryce: [00:24:16] Interesting. Yeah. And so then applying these screens, how many stocks did I met? You're so you're a global investor. How many stocks do you generally find?

Steven: [00:24:26] We've. 

Bryce: [00:24:26] Got a deal.

Steven: [00:24:26] We've got at least 2000. Okay so what we do is we screen out the industries we don't want to invest in tobacco, armaments, for profit, prisons, cruelty to animals, things like that. We take them all. But, you know, we're lucky when international funds we invest in companies from 1.5 billion USD market cap all the way up to Apple, 2 trillion. So we've got this huge 8000 company universe. Yeah. So you take out those and then what we do, we use MSCI to screen for ESG factors. So they look at thousands of companies, they got experts, and then we will take up all companies with the lowest ratings. So we can't be in those. Yeah, and we've got special rules around that kind of stuff. And then what's left. We can analyse once we own a stock, we can actually check if it's controversial and that'll be the norm. Space screens. So the first 1/1 can be very quantitative. Avoid industry to look at a company. Does it do any of those activities we don't like? Yes. No, that's quick. Again, the ESG is relatively quick because we've got we use MSCI and then the norm space is yeah, that's where the controversies are. And you often have to think more. 

Bryce: [00:25:33] And you then. Overlay a value approach. At what point does valuation come in? 

Steven: [00:25:37] The whole point, all points are these things define our universe. And then from that universe, we pick 30 to 50 stocks, typically 40. And those stocks have developed valuation growth curves. So we know if a company is growing 5% per annum in order to achieve our target return, we have to buy it on 5% free cash flow yield. So we think like business people, we want to get a target return in order to get that type of return. If that's its growth rate and that's the valuation we will need. And we also know what the market's on. So we've worked out, we've got all these models work out the market's value curves and that's how we do it. 

Bryce: [00:26:13] Yeah, right. How do you approach company greenwashing? Mm. 

Steven: [00:26:19] Look it's a, it's a topic de jour and no one in a way you alluded to it first is a proliferation of ESG funds. Yeah, because I have to say, I think it's a great thing. Now, greenwashing is not a great thing. Greenwashing is a terrible thing. But I think it's wonderful that there's this recognition of the importance of these things and it's the first step. So everyone's starting to move to it and I'll drive ev companies trying to do something than nothing. Now, if there's no substance behind it, then this bullshit then obviously. But at least that's the first step, you know. That's the first step. At least I know they need to. I mean, what would a company greenwashing be? That would be a company saying we really care about the environment, but the actual actions don't. That'll come out in a controversy. So then we'll just leave it. Yeah, it'll be found out. So an example, this is a bit of an unfair example, but it's a real life example, Inditex, which is Zara. So they write very highly on all ESG screens and they say all the right things. And I'm not saying they're greenwashing, but at the end of the day, fast fashion is terrible for the environment. It just is. We won't invest in it. So what our approach is, we don't touch those things. We won't get involved. Another approach is we take all the companies we invest in, we approach them to get them to become signatories to the UN Global Compact, to make a written commitment, a global commitment that has to be signed by the CEO so that they are going to comply with all these ESG requirements. 

Bryce: [00:27:48] Basically, all companies in. 

Steven: [00:27:50] Every sport, they're not they're not all signatories, some aren't. But we approach all of them. So, for example, we got Samsung to sign up. Wow. That's not that big company we've been trying to get Google to or Alphabet to sign up for a long time. They haven't done it, but most of our companies are. But we will. We try to get them to do that. But you know what? Even though it's easy to say, yeah, we're committed to it. It's nothing to actually do it. But you know, as the saying goes, a journey of a thousand miles starts with a single step and at least companies that are recognising the importance, at least they've started the journey. I'd much rather that than nothing. Yeah, you know. Yeah. 

Bryce: [00:28:24] I want to talk about some of the specific companies in the portfolio, but I want to do it in a bit of a structure and go through it. So the first one, if you could provide an example, you've mentioned Visa, but perhaps one where you have excluded from your ESG universe due to ESG, perhaps not the norms, but or maybe norms as well, but we've excluded and then one where you have engaged with them to do better, and then also one that kind of just ticks all the boxes of of of of ESG or responsible investing. So start with one that you've kind of excluded to help paint the picture of your process. 

Steven: [00:29:06] Okay. Look, there are so many, for example, many things to do with food and meat. So Tyson Foods, we will not invest. It's just cruel to animals often. And people do need to eat meat. I'm not a judge in any. I eat meat and anyone. Often these animals are tep they don't have a quality of life and that that's just not good enough and they just pumped full of hormones and for milking cows, they just factory milk and they just all they do is milk all day. They don't get a quality of life. So those are just a non-starter for us. 

Bryce: [00:29:39] I guess the flipside is, are you then invested in companies like Beyond Meat? 

Steven: [00:29:43] No, we're not, but not today. Bad business model. So yeah. So yeah, we won't invest in something just because it has good ESG or just because it has a positive impact, which is fine. That's a positive impact fund. But that's not what we do. We, we have to make money like. It's just that's the way it is.

Bryce: [00:29:59] Yeah. 

Steven: [00:30:00] So anything involved with animal cruelty in any shape or form. So once we once invested in a company that did testing of drugs, so it outsourced testing of human drugs. And this just felt past all the ESG screens and there was like nothing negative there, but there's just something that wasn't sitting comfortably with us. So we went to Peter, Peter to check out this company's track record. And it turns out, according to Peter, that severe cruelty to primates.

Bryce: [00:30:31] Right. 

Steven: [00:30:32] So we sold out something subsequent. He got taken out, taken over by Charles River Labs. And, you know, we would have made another 30% on that stock, but it just doesn't matter. I don't care. I just don't care. I need to be involved in that. Yeah. So that's it. Those are types of examples. I just won't won't cut it. For example, I want to have a positive note now. Yeah. Companies with great ESG. So Novo Nordisk, which is Danish. Have you heard of it? 

Bryce: [00:30:59] Yeah, I have. But for those that haven't yet gone. 

Steven: [00:31:01] Yeah, it's a Danish insulin maker, a Danish pharmaceutical company, and it makes the best insulin for diabetics. It's got its triple-A rating. It has a positive impact on the world given its give, given what it does. I mean, it's the reason for being. It has a really encouraging I think it's got I I'm pretty almost certain it's got very strong representation of females on its board. It's got all the right stuff that you only see. So it's triple-A rated by MSCI, it does all the good stuff. We love it. It's actually our biggest position. But it's not just about the ESG. It's actually invented this drug that actually helps people lose weight. 

Bryce: [00:31:41] Yeah. 

Steven: [00:31:42] So it's just going to be a mess. I mean, just think it is the best drug for losing weight. Is it approved? And it's approved and it's and it's and it's just you can just imagine the growth that's going to get. Now, we don't want this to be abused, obviously, but there's a lot of rotund people in the world. And, I mean, you know, I just think it's just going to be you can just imagine how big that's. 

Bryce: [00:32:04] Going to be. Yeah. So do you find that countries are producing more sort of investable opportunities than others? 

Steven: [00:32:13] Well, the Scandinavians are the best at ESG, Europeans and Scandinavians. They just often reflect their society. Yeah. So the Scandinavians are wonderful. We've got big exposure to Scandinavian countries. 

Bryce: [00:32:26] Yeah. So Steven, before we move to the final three questions to close it out, you've spoken a lot about the sort of the internal fundamental research that you do and sort of the process that you go through. But there's plenty happening in markets out of macro level. We've got inflation ripping, interest rates increasing, it sort of record speeds. We've got house prices that are now starting to come off here in Australia and in some of the hot property markets around the world. How does all of that impact what you guys do at Pella? Does it impact? Does it matter? And what's your sort of current view just on the broader macro environment? 

Steven: [00:33:04] Look, it does impact us and we do think about it. It's inescapable, like a lot of people say, which is fine. Again, everyone's got their approach. I don't look at macro well, that's fine but macro is going to affect you say it's I think it's worthwhile to look at it. So we do take it very seriously and we do look at it a lot. And we've got a professor of economics at the University of Chicago on our advisory board. And so we take it very seriously. I don't think he can ignore it. I think it's a mistake to ignore it because it's probably the biggest impact on us on markets at the end of the day. Now, where do we see markets go? Well, that's a tough question. You know, I can't. I don't really want to get drawn into that because it could go anyway over the long term. They're going up. Is that the editor says no, but over the short term, there are serious, serious issues. You know, there's yeah, there's tightening monetary policy. There's the potential for an extreme tightening of or introduction of cute quantitative tightening. So we saw the impact when there was QE, when central banks pumped money into the economy. What will happen when they take it out? But maybe they won't take it out. They're saying they will, but so far they've been very reticent in their actions. Inflation is very high, and I don't think monetary policy alone can bring it down. We need a fiscal policy to go hand in hand with it. And we saw what happened in the UK when the fiscal, you know, when they departed, we just saw that market collapse. But we do need some kind of fiscal response which we're not seeing yet. So I could just paint a very gloomy picture, but at the end of the day, interest rates are not that high and probably aren't going to go that much higher. I mean they might go to 5%, but we're not talking about the mid-teens interest rates of the early eighties, you know, so they're probably not going to go there. Employment remains exceptionally strong. China still got a long way to grow. Yes, it's got huge issues in the short term because of its property market and decline in productivity and workforce. But still, I think that GDP per capita is $12,000. It's going up. So in general, I have to say, there are a lot of reasons there are negatives. But I can tell you something, in my experience, we always muddle through. In the GFC when I was working at the GFC, I thought it was the end of the world and then literally the end of the world. Yeah, yeah. We muddle through, you know. And tech wreck. I wasn't, I don't think I was. The end of the world, but it was a problem. We will muddle through this whether we have to inflate our way through the government debt and we do that or however we muddle through it, we will muddle through it, we will be fine. And that life will go on and it will be good. Yeah, but in the near term, there's going to be more volatility. You have to be ready for that and you have to be prepared to invest when the market drops. 

Bryce: [00:35:56] Yeah, that's my next question. It's for those sort of listening, experiencing this for the first time. How do you think about allocating capital during a time like this? Easy to allocate capital when you're in a bull market, but a little bit difficult from an emotional point of view anyway. So how do you think about allocating capital?

Steven: [00:36:14] To be honest, I find it far easier in these times. I find it hard in a bull market because I know when things are just going up like that, it feels great. You're making money, but you're not making money. You're renting money.

Bryce: [00:36:25] Nice. 

Steven: [00:36:25] You're renting it because things are going to change. I know if you pay too much and the market's too buoyant, your rent in those returns when you buy things, when they lower your own in those returns. So to buy a good company at a cheap price, you're going to make money to buy a rubbish company. That's just because it's going up. You're going to lose it. Forget it. Unless you get out at the right time, you're going to lose. 

Bryce: [00:36:46] Love that when you're in a bull market not making money, you're renting money. Yeah, good part. Part that's even. We have come to the final part of our interview, which is three questions we ask all of our guests. So we'll start with are there any books that you consider a must read and they don't have to be investing related?

Steven: [00:37:05] Yeah. Yeah, absolutely. Well, first of all, the power of habit, very important book. The reason I read that is because I really struggle to understand FMCG. I struggle to understand brands a lot of the time. Why are people prepared to pay more? Because something says finish on it then if it says Aldi on it. Well, I just struggle to understand these things and the power of habit explains it. This one by it's name could be called information economics. I'm going to have to forge the name that explains everything you need to know about the microeconomics of competitive advantage for companies, for many companies. So before we before we started this, I was explaining discriminatory pricing to you. And, and that's the book that explains bundling and so on and so forth. So that is a definite must read. And then I have to say the selfish gene, which is probably the best book I've ever written, I've ever read. So I wish. 

Bryce: [00:38:13] It wasn't that selfish. 

Steven: [00:38:14] The Selfish Gene by Richard Dawkins. Yeah. And that's a book that's recommended by Charlie Munger. And it's to understand adaptability. Yeah, that's a must read. And I think the way that relates to investing is I always remember when I started platinum, Andrew Clifford would say to me, and he's a very smart person. Andrew, he would say to me, when things go wrong, people get downbeat on a company, but they fail to understand how the company is going to react. It's not going to just stand there and let the world crater in on it. It's going to do something. And I think the selfish gene speaks to that from a biological point of view, how biologically we adapt to the environment if we're capable of it and we thrive. So I would definitely say that that's a must read for life. 

Bryce: [00:39:00] I love it. I love it. Yeah. So we'll add all those to our website and I'll put some notes in, show some links in our show notes as well. Second question is, however you want to approach it, it can be fundamental. It can be just a business model. It doesn't have to be a valuation or anything. But what is the best company that you've ever come across? It doesn't even need to be listed. 

Steven: [00:39:20] Oh, well. Well, there's a few. Obviously, Alphabet is right at the top there. Yeah, I think CMA is an amazing business and I thought Alibaba was amazing until the politics etc. showed you how powerful politics can be. CMA is just a phenomenal, phenomenal business. 

Bryce: [00:39:41] Is that the exchange? 

Steven: [00:39:42] Yeah. Chicago, Mercantile. Chicago. 

Bryce: [00:39:44] Yeah. 

Steven: [00:39:45] And the reason that's such a wonderful business is it's got network effects. So if you're going to sell a futures contract, you've got to go where the cheapest liquidity people live. So you go where the buy is off. If you're going to buy it, you have to go where the poor sellers are. So it's got this amazing network effect, but it owns the asset, the security of trade. And so you're going to trade a ten year treasury derivative. It's actually there. So you can't, it's their product that they designed. So you can't trade on the difference exchange. So it's not like with a stock exchange where if I buy BHP shares on ASX, I can also trade on Chi-X, it's theirs, but then it also has the clearing and the clearing house and because they're the biggest. So clearing house is what enables all these trades and that's of all the positions and it reduces risk in the system. Basically it's that they're very important and in order to trade, you've got to put money down at the clearing house. And the more you have, the more you trade, the more they can net off all your positions at the clearing house so you don't have to hold a lot of money. So if I'm Goldman Sachs and I'm trading interest rates and futures and commodities, I say, right, you trade and all these things. This is the correlation between them. So if you had to put down $10 for each, that would be $30 of capital you have to put down to trade with us. You actually have to put down 22 because we know about all these different correlations. So we don't need as much insurance from you. So therefore, Goldman Sachs say, well, okay, well then why would I want to trade somewhere else if I were to trade? These are three different exchanges. I'd have to have $30 up to $10 at each one for my capital. But if I centralised it all at CME I only need 20 odd so of course I'm going it'd all there. Yeah capital light. The business is basically a set of servers. It's not like ants and every year they just decide the biggest decision they've got to make is how much they want to increase their prices each year. 

Bryce: [00:41:40] Wow. Wow. Well, we have it. We've had the alphabet a few times from experts. We definitely had CMHC. Yes. That's a good one to add to the list. Yeah, that's David. Thinking back to that moment during the dot com boom when you were buying the telco stock or whatever the stock might have been, what advice would you give to your younger self? 

Steven: [00:41:58] That's such a toughie. If I had to say one, I'd have said Be more aggressive. 

Bryce: [00:42:02] Okay, nice. 

Steven: [00:42:03] Be more aggressive.

Bryce: [00:42:05] In general or with investing. 

Steven: [00:42:06] With, invest in, invest in. You've just just you've got to be you know, this thing about being careful and I told you all these things about low volatility and all of that and it's important rewind but but and I do believe that you need a strong base but this idea of being conservative and backing off, it doesn't work. You've got to go out there and you've got to do uncomfortable things and you've got to back yourself and put real money in and you've got to go with the flow. But you know, don't be stupid about it, but this it doesn't work like everyone wants a safe. Sure thing. It doesn't exist. Yeah. So you've got to go out there and you've got to be a tough person and you've got to. You've got to take it. It's not going to just land in your lap, grab. 

Bryce: [00:42:51] It by the. 

Steven: [00:42:51] Horns. Yeah. Got it. 

Bryce: [00:42:53] Awesome. Well, great way to finish, Steven. Thank you so much for sharing your time with the Equity Mates community this morning. I know that they're definitely going to take a lot from that interview. I certainly have some great quotes there that I've got that will include you have to do things when it's uncomfortable. When we're in the market over the long term, it always goes up in the market. You're not making money, you're renting money. A few quotes there, but I really enjoyed the conversation. Steven, thank you so much. If you do want more information on Pella, you can head to Pella funds dot com, is that correct? Correct. Nice. But Steven, thank you very much.

Steven: [00:43:28] Thank you. I've enjoyed it.