Iran Headlines vs. Strong Earnings, AI Acceleration and Cheap Quality Stocks

[MUSIC] Hello and welcome to CIO Perspectives. I'm Sid Hall, the CoCO of Private Clients and Damans and Foundations here at Brown Advisory, and I'm joined today again by Paul Chu, our firm CIO with the Capitol C. Yeah, great to join you. Really looking forward to the conversation. So many things have changed since we last spoke in January. It seems like a lifetime ago. What's most on your mind with all that's gone on the last three months? I feel like in my 31 years, I say this so often, but everything changes rapidly. And you and I had a conversation this morning just our normal catch-up and things have changed since we called up this morning. And that is the inevitable in the investing world these days. Clearly, the focus that has impacted investing and kind of taken mind share for the first couple of months of this year was the Iranian War. It's caused quite a spike in oil prices, even though we've seen that now start to come back as we're getting closer to resolution of what's happening. And I think the thing from my perspective, it's quite interesting is that it's been a little bit of distraction quite frankly from what has been a really continued powerful story in the earning story in US equities. It's really quite extraordinary from my perspective. Yeah, I totally agree with you. I mean, Iran's definitely on my mind. We get asked a lot about it, but as you and I have talked a lot over the last 15 plus years, predicting geopolitics isn't a strong suit of almost any investor. Maybe the Stan Druckenmiller's and George Soros's of the world. But I don't think it's a really high return on our time. It's not something we're likely to add a lot of value from. I think we often think about this from a scenario analysis perspective. Sometimes I think that can be helpful. And today, this morning, as we're recording on Friday, April 17th, the scenario's probabilities may be shifting, but I think there's still a scenario where we return to the conflict and we see inflationary pressures oil going up and people worried about fertilizer prices and helium prices and all of the various commodities industrial metals that have come through the street. And I think about what's the part of the portfolio that helps us in that kind of stagflationary environment? Well, those are our real assets. Those are our diversifying alternative strategies like hedge funds. There's also a scenario where the economy would get weak enough to really start worrying about growth. And that's where the bonds in our portfolio are helping us out. And then there's a scenario maybe kind of unfolding now where we're getting closer to a deal. And all those markets that have had more pressure on them, the Asian economies that rely more on the oil that's coming through the street, that they see a big pressure lifted from them. And that's a main beneficiary. And that's why we have exposure to international markets and emerging markets in our portfolios. So I think in general, I look at times like this where the market gets really short-term oriented. And I use that term from our global leaders team, Mick and Birdie. Do I care about this in five years' time? And we probably don't. So let's use this short-term focus of the market to our advantage and do a bit of what we were doing in March and early April. Let's lean into some of those international markets. Let's buy some of the high-quality stocks that are selling off. Let's buy some of the AI winners that, where it's not going to matter in five years what's going on in Iran. And looking at the technicals and sentiment, I don't look at that much, but you could see it in the market, in the positioning, the survey data, the positioning of hedge funds and CTAs. I mean, people were scared. And you could see that if anything positive happened, there was some decent upside. So, yeah. If you don't mind, Sid, I'm going to tap into that just a little bit. Because I think about when you get these scenarios, right? So six weeks ago, we all over the weekend hear the first idea that the Israelis in U.S. attack Iran and we all invariably in the investment world, try and go back and find a corollary period of time. And we all see slides about what did the market do post, the Gulf War invasion and different periods in time like that. And I caution myself, I caution us as investors to be a little bit careful about how we draw conclusions. We'll probably get into this a little bit when we talk about the AI things happening in the world. But the reality is, in their early 90s, when the Gulf War happened, the average automobile in the United States probably got 20 miles to the gallon. The average car today gets north of 30 miles to the gallon. And it's not to belittle the impact that rising energy prices are having. It's wreaking havoc on the airline industry right now from a profitability standpoint. But we have to be careful about trying to find that scenario that's happened in the past and say, this is exactly the way it's going to play out in the future. Because you can get to conclusions that can lead you down that wrong path. And so as investors, it's our job to look at history to say, this might be similar, but also figure out the places where it's different and understand the implications. And as an investor, I also get wars awful. And yet I'm sitting here thinking about what does this mean to investing from my perspective. So it's an interesting time for us all to think about. Yeah, it is always uncomfortable translating into dollars and cents and financial market returns. As you say, we all look at those slides and whether it's actual war and armed conflict or other geopolitical events, elections and what have you. We as investors, our day job is trying to figure out what matters. And as you say, often these things don't matter in the long term, but also trying to draw some correlation to what happened in the 70s. I was thinking the average car in the 70s was getting about 11 miles per gallon. And just the overall energy intensity, the economy has gone down and down and down and down over time. So there's less of an impact in addition to the fact that news cycles tend to focus on the worst case outcome. And I think people realized also as the straight was as close, that actually some of the oil could be diverted through the pipeline in Saudi and some of the Iranian oil was still getting through the straight and going to China. And the market came in oversupplied, you know, 4 and a half million barrels of oil a day. And people were realizing, I think maybe it wasn't quite as extreme a negative to the oil market. So I think you're right. You know, these things are really complex. And again, it could take your eye off the ball of what's going on. And the earnings picture in the US and AI, there've been some really big positives. But I guess maybe closing this out, we're doing anything in portfolios as a result of the conflict and any updated views on where you think we're going to go here. Yeah. And it's not necessarily did I do anything specifically related to the conflict. Like I didn't reposition portfolios because I came into the year with client portfolios over the last 18 months. We've been increasing our allocations into international opportunities, whether it be Japan or different places like that, emerging markets. I continue to have those positions. They, as you mentioned earlier, sold off a little bit more than what we saw in the US because of the fears around they tend to be more net importers of energy. And so as we've seen rise in prices, those markets sold off a little bit more. So for clients that I might not have had my positions build out in the international market, I continue to increase allocations into Japan into a little bit into Europe as part of those opportunity sets. We for a long time at Brownish, you know, have had pretty healthy exposure in the US and had tilted a little bit. But I'm now starting to turn my attention back a little bit towards what's going on in the US and saying, value of patience that come down a lot because the earnings growth has been extraordinary. Looks like it's going to continue to be quite extraordinary and assuming that we're not going to take valuations significantly lower than they are, that probably sets up for a reasonable backdrop for equity investing in general. So I'm fairly optimistic about the landscape. It all hinges as we'll get further into this conversation. Can't have a conversation today about investing and not talk about AI. It's the single largest capital investment cycle that we've ever seen, which is dragging earnings to levels that they hadn't. You and I have been dancing around the earnings here in this call. But like you think about the S&P 500, right? Midteens earnings growth, expectations this year at a time that we're worried about what's going to happen with higher energy prices on the consumer. What's going to happen as the job market's been okay at best. It's not been terrible. It's not been fantastic. There is in my mind a little bit of a period of time where companies are trying to figure out what does AI mean to entry level positions. So we've seen a slowdown in hiring for recent college grads. All those things add up to a picture that on the surface might not seem overly robust, but you start looking at the S&P 500 and take everything with the grain of salt that early in the year, people tend to be more optimistic than what comes out. But the optimism today on earnings is higher than I've seen in a long time, right? Every economic sector in the US is anticipated to have positive earnings growth in 26, led by technology that's probably close to 28 to 30% expected growth. To me, the number that just I have not seen in a long time is the sector is expected to have about 17% revenue growth. It is the biggest sector in the market, too. Extraordinary. We've not seen something like that before. So this isn't a market moving forward on multiple expansion. If anything, we've seen the multiple contract. We were at the end of the year in the fourth quarter, we were talking about 21, 22 times forward earnings expectations. We're now down in the mid-18s, even with the rebound in the last couple of weeks. Which is crazy, because you think long-term historically, you think about 15 times, and that is an anchoring that we had for probably, well, definitely a lower quality group of companies that had a lower margin structure, more dead on the balance sheet, more cyclical. We've talked about this a lot. You can and should pay up for quality. The question is, will these companies continue to be as high quality as they have been? I'm sure we'll get into the return on all the catbacks of the big tech companies. You just mentioned a word. I think you ought to dive a little bit into. Quality in some respects for tech companies if they're in the infrastructure world have been rewarded. But there is a large portion of investing, whether it's software, business services, payment processing that we used to define as quality that have not participated in this. So how are you thinking about that part of the world? Yeah, well, clearly we talked about this in our last podcast that the AI Death Star is coming for all asset light businesses and software is firmly in the sites, but it bled into many different areas. And just in general, I think investor attention has been pulled to asset heavier industries and more obvious AI winners. And that's left not just the software companies trading at low models and bulls. Can I stop you for one second? And maybe for those people that are listening to this podcast, give the simple explanation of why capital intensive versus capital light has been historically you've wanted capital light. Sure. I mean, capital light businesses, the software business model is a fantastic business model because it requires very little investment in order to generate very strong returns. So the return on invested capital is very high. And every year, you don't have to spend much of the revenues that you're bringing in in order to continue to grow that revenue base. And so the margin structures tend to be higher and the risks around those kind of businesses tend to be lower because these are businesses that generally haven't needed to go out borrow money to fund capital expenditures and get stuck in a tough period of time like 2008 when they're making those capital expenditures and they don't have access to that capital. And so you saw great returns, but these are generally intellectual property heavy businesses asset light businesses. And I think what AI is threatening is all things intellectual property, all services, businesses again, in theory, what is threatening is all these things that it could create credit ratings as well as a human. It could help facilitate a changing way that we're doing payments with the gentick AI and it certainly could design new software very quickly much more cheaply than some of the existing software businesses. And that's I think what people are so concerned about. But yeah, we'd seen a tightening of focus of quality investors on all things asset light because of the great returns on investor capital that you could get and that's been called in a question. But I think we're at a moment where the baby's been thrown out with the bathwater. And if you're really sharpening your focus and so I think what we've been doing and our stockpickers have been doing, there's some fantastic opportunities out there right now. And whether that's in the payments companies, the mass scars and visas or the rating agencies or exchanges, we've talked about this on the last podcast. In a lot of cases, these are really high quality businesses, very above average businesses trading at average or below average valuations right now. And honestly, that's one of the things I'm most excited about is buying a portfolio of companies I think I want to own for 10, 15 years at really cheap valuations. You spend a lot of time talking to folks that go both long and short and it's been a wonderful environment for people to short securities because there hasn't been somebody willing to step in and buy some of these companies that look like they're AI disrupted. What changes it? How low can they go on value? When does this narrative start to shift a little bit? I want to bring up one thing because you talked about shorting stocks and I just want to highlight this really interesting point. We've been showing this start for three years that 75% of the stocks in the S&P 500 are underperforming the S&P 500 and the irony that makes it really hard for a long-only stock picker to outperform because you've got to be in those 25% that are outperforming and concentrate in them. But it's made it really easy for short sellers because you got a 75% chance of shorting a stock that's going to do worse than the market. And so that's been a huge benefit to strategies the last few years. So I just think that's a really interesting point to make and that's helped a lot of portfolios the last three years. But as to where do things bottom out, I think we're getting to a point for a lot of these software companies where again, they're trading at a low multiple of gap earnings. So taking into account all that stock-based comp that they love to give out. We're starting to see not only the management teams coming in and personally buying stock in these companies, but also companies like Salesforce going out and they're borrowing a huge sum of money to go out and buy shares back at the company level. And the very recent history in the last week or so, we've started to see a number of these stocks bounce off of some pretty extreme levels because sentiment has just been so negative. I'm not all in right now on software and I don't think many of our managers are because I do think these AI risks are very real. So I think what you have to do is look at what are the advantages of these businesses. Do they have proprietary data advantages? Do they have significant distribution advantages? Are they really offering a lot of value for the service versus the price that you're paying? Are they going to be given time to have their own AI solutions integrated? But the power of having an installed base of users of millions and millions of people who are reading and writing and editing on your software in the case of Microsoft or Salesforce right now, that's very powerful. It's painful to pull those things out of big organizations like ours or what have you. And that gives them time. And so I think the devil's in the details. We've got to be drilling in on the specifics of each one of these companies, but it feels to me like we're closer to a bottom from evaluation perspective because of that valuation. I mean, software trades at a discount right now to the overall market. For decades, it's a trade at a 50% premium. These AI model companies can't do everything. They can't go after every single bit of software. And I do find it interesting that even Jensen Huang of NVIDIA talks about this all the time. If you're going to use AI and you want your agentic AI to do things for you, you're probably going to ask it to use a lot of the tools that already exist rather than to recreate the tools for you and then do the task because again, you got to recreate a lot of tools, especially vertical software tools that do one thing really well and they've been doing it for years with the proprietary data advantage that they fixed all the bugs they've dealt with all the edge cases. So anyway, I'm rambling a bit here on this. You're rambling, but you're hitting into like, you know, we've all started to see some of the revenue numbers that Anthropic is throwing out there and open AI, particularly Anthropic. You know, I think the end of the year they were at a $9 billion ARR and today at the end of March, it's 30 billion and you know, they're talking about 30% revenue growth on a weekly basis, which it's really hard to kind of put your head around the scale at which the revenue growth is happening for some of these AI companies. So, you know, I mentioned in the oil and talking about things from my perspective. One of my, if you've heard me on some of the other podcasts, I spent a little bit of time early in my career covering software and technology during the tech bubble going up and I was probably wrong initially on the AI movement because I thought back to what happened during that period of time and pricing for compute was priced in MIPS back there then and it declined precipitously and that huge revenue opportunity for companies really ended up accruing to the businesses that we're going to be built using the technology. This case has been very different because the pricing has not come down to the degree and so a lot of that's going to the companies that are creating these models and hosting things and not necessarily to the next generation of companies and so it's extraordinary and, you know, I think you and I have talked about we're starting to see that benefit now for client portfolios are really starting to come in valuation in our private area. equity portfolios where a lot of these companies have seen valuations that are moving up anthropic as rumor to be in a stage that looks like it's going to be at least a doubling of valuation over this period of time. But for a company that's gone from nine to thirty billion dollars of ARR, it's probably a justified increase in valuation. And it's hard to kind of get for somebody like myself that's been doing this for a long time. I really get my head around how fast they are growing as a business and what that truly means on a long-term basis. I know it's good, but I just don't know how to put it into context. Do you have any thoughts around how you're thinking about these companies? It is totally staggering. I think we were talking about earlier today, you know, like in one month anthropic added a workday in this year they've added nearly a sales force worth of revenues in a really short period of time. I mean, at this scale, those kind of growth rates are truly unprecedented. And I think what we're hearing from a lot of the investors we have that own stakes in these companies is that the gross margins they're generating on that revenue are actually pretty good. And so I think one of the biggest developments this year is probably people changing their views a bit on what could be the returns on investing capital for some of this catbacks and why the big tech companies are so excited. And I think you're point about the compute. I mean, it's pretty wild in the last month or two that the prices that people are paying to rent the old Nvidia chips like two generations ago are going up fast. And that's because again, this is still today is a market defined by shortages. We have shortages of the semiconductors, all the equipment around it. The high bandwidth memory is obviously been a big story this year. We need a lot more of it. Because a lot of these companies are looking back at the last 30 years and saying, geez, we've had a lot of tough cycles. So they're pretty slow to invest in the capital expenditures to grow capacity. And so that's just led to a really tight market. So what we've seen is still some really interesting. I think opportunities and AI infrastructure. But back to the model companies, I would make one comment, which is that I think people often view this as a zero sum game. You know, it's like anthropic and open AI, all these revenues that's going to come out of the pockets of all the software companies. What you hear from a lot of companies that are utilizing AI the most actually is that they're using it a lot to do things they weren't able to do before. It's new projects. It is additive. And so I think we need to keep our minds open to the fact that it's not just AI model company revenue. You go up software company revenue go down that we are going to see just more things done. So we do the overall potential bull case, right? We're talking so much about Iran and government deficits and what have you. There is still a bull case here that if AI makes us more efficient and makes us more productive and we're able to do more things. You and I talked about a dozen things today that we're thinking about doing that can make us way more efficient as a business using AI. That's a really big positive for just corporate America and the world. I think it's going to be one of the most important things that we listen to on earnings conference calls over this quarter is our companies. Now early on we've heard from software companies that have been reducing the size of their software developers utilizing AI. But I think every quarter we're going to hear more and more companies and maybe it's an industrial company. Maybe it's a healthcare company, a consumer company that are utilizing the technology to improve their profitability. To me, that's the second wave of this AI story. Maybe more about companies making themselves better by using more of the technology that they're purchasing. We start to see that flow into earnings, growth and margin expansion for companies from that perspective. This is the question I ask every single external manager that I meet with them. They give me more examples of where you're seeing industrial company, a consumer company B. We've seen this. We got C.H. Robinson last year. It was a great example. Walmart talked on the last podcast with Mike Pogi who runs the large cap value strategy about what AIG and other insurance companies are doing to underwrite business more quickly. I think we're starting to hear more of it, but you're right. I think that has to be part of the story. If people are getting more efficient, if they're spending all this revenue on it, they are expecting and hopefully getting a good return on that spend. One thing we talked about earlier that I do think is interesting. It's seen some headlines recently about some of the early adopters of AI saying they've blown through their budget for tokens in the first four months of the year. All those shortages that I was just talking about of compute and so the costs per token, the cost for running AI for inference is still pretty high because of all these shortages. I do wonder a little bit how much that's going to be a limiting factor to adoption as if we can't bring costs down. Every time we get a new set of Nvidia chips or the next generation of Google's TPUs or Amazon's training, they're getting meaningfully more like step function more efficient. All the models themselves, the new models, they become more efficient. I think I'm still of the belief that the cost per token, the cost of running these AI models is coming down very rapidly. But I do think it's interesting that some people are saying, "Wow, this is actually pretty expensive." Are you doing anything differently in terms of how you're thinking about gaining exposure to AI? I know you and I, Bright, and we as a firm, we have done some of these late-stage venture investments to gain access to companies like Anthropic and OpenAI and DataBreak, some of the ones that are leading. We obviously have a good amount of exposure to some of the public, semi-conductor names and energy companies. Are you thinking about it differently? Do you want to be more targeted, more concentrated? Yeah, I think it's important. I think there's multiple ways you gain access to this theme and it's not always obvious stuff. In the US public market, it's pretty obvious what the companies are. They probably have used more passive because it's easiest way to gain exposure to companies that are large portions of the index that are playing in that. Passive allocation in my client portfolio is higher than it's ever been. I also maintain some pretty healthy exposure in emerging markets because the reality is the best semi-conductor manufacturing company in the world is in South Korea or top. Then we have Taiwan. All the memory companies in South Korea. You can get some of that exposure by maintaining that portion of it. I've done that. When it comes to the private markets, I think there's some important things that we as investors have to realize with how much capital is now available to invest in private businesses. I can't even fathom the concept that we're going to have IPOs for companies. They're going to be north of a trillion dollars in market cap. We didn't have trillion dollar companies until a couple of years ago in the markets overall, let alone new businesses coming public. So much of the value of a lot of these companies are really accruing to the private market investors. As somebody that runs balanced client portfolios, I need to maintain my exposure to best and breed venture and growth stage companies and complement it when you can get co-investment opportunities because the reality is these companies are raising enormous sums of capital to build the compute that they need to do. Most of the funds can't take down the scale of capital. There's been more availability of co-investment opportunities. I think we need to continue to lean into that because waiting for them to come public at an IPO is really becoming more of a pure retail investment opportunity, not where you're going to make most of the money. We've talked about what's happened to the small cap investing world and it's kind of shifted into the growth stage venture world. That's what I used to think about when I invested in small cap growth. I think I now need to do that in the kind of a growth stage private market investing. The good news is you can get enough information about those companies today that 20 years ago, you were investing more in a black box at that time. Yeah, I think it's really interesting. SpaceX, $2 trillion IPO, it's going to be really something to behold. The other thing I think about too is we've definitely had our moments where some of the crossover investors were not covering themselves in glory. Some of the people who do both public and private markets, but certainly with the last few years and some of the concentrated bets that those managers who are maybe a little bit more appropriate to analyze a business of this scale that, in the case of a SpaceX, it's a free cash flow positive business that is growing really quickly and the numbers are really big. But those numbers aren't as scary for the public. It's determined if it is still a free cash flow positive. Yes. prior to the AI business, we'll know after the analyst day, the roadshow analyst day in a couple of weeks if they still are. It's probably a road in a lot. - But you know, this is actually, I think, gonna be impactful for a number of portfolios that we have people who are making larger concentrated bets on the crossover side. And I think about that is also a place where we can have some exposure, but with very high bar for inclusion, it's hard to do public and private investing, but that that can be a compliment to some of what we're doing in venture. And then to your point, in venture, I think we always, and most people like to really focus at the earlier stage, there's still great opportunities there, but the venture market has changed. And I think sometimes at the earlier stage, what a lot of the big funds are doing now is they're trying to buy access to these companies. They're a little bit less concerned about what price they're paying, because they know they're gonna put a lot of money in if they're successful at the later stages, and they've done it very successfully, but being willing to have a bit more of our venture exposure at the later stage, which we've done, I think is important too. - I think it's interesting you bring that up, right, 'cause you used to think about biotech company, right? That if you invest in a private biotech company, you have to go into that assuming that there is a lot of capital needs, so you have to size your initial position, assuming that they will raise capital every six months or quite frequently. And so if you make too big of an investment early, you don't have the capital to keep your position as you just get diluted down. A lot of these investments, you gotta now in tech or have a very similar profile, because OpenAI feels like they're raising capital every three or four months. And yes, the valuation keeps going up, but if you haven't been able to size your position, your percentage of that company continues to go down. And so it's a very different, 'cause the capital intensity of the opportunity set, some more akin to the biotech world than it is to the software world, where a lot of you could make an investment in a software company and the initial round might kinda get them going, and then they have to do a grow stage round to build out the sales capabilities to take it public. So, you know, what's the problem? - And then you're done, and then it just compounds. What do you think's gonna happen with this IPO, this SpaceX IPO? And there's a lot of other ones that are in the pipeline as well, right? OpenAI is gonna wanna come public soon and throttback. It's like, how do the public markets absorb all of this? And what do you think? Are people already kinda making room for these stocks in their portfolios? Can we handle these size companies? - I think it's a really good question, right? Because normally IPO is gonna be, maybe they're raising a billion dollars on capital and sale. And some of these are gonna be $75 to $100 billion of new capital. We've started to hear the indexes talk about, normally indexes wait a while to put a new IPO into the index. We've heard some thought from Frank Russell that they might start including these companies into the index. Now, you get into the challenge of SpaceX comes public at $2 trillion, which I just can't believe I just said that. How much of the market is gonna be free float and the index inclusion is based upon free float, not necessarily market capitalization. And the hard thing, I think, for investors at that point in time, if the free float is, let's say, $100 billion. And there's $1.9 trillion of people that are locked up that have been early venture investors or late growth stage. You know, does that create over the next three years? There may be this constant selling pressure on those securities as people try to get liquidity out of those positions. You know, we've heard there's a couple of large university endowments that did co-investing with one of the venture funds that was an early SpaceX investor. And we've heard that it's like 15 to 20% of the entire endowment value. Pretty certain they're not going to be sitting on that type position size because there's been so much appreciation in the security. So these stocks may not initially one year out do as well as you might think they are because there's so much the private capital overwhelms the public float. So there may be a digestion period for some of these securities. That's why. And to your point, right, these companies have been private for so long that the gains are so significant that yeah, you're not going to sit around with 15% of your portfolio in a single company like this for very long. Just to put it in a little different. The co-investment opportunity for some of the university endowments was at a $50 billion round on a $2 trillion company. And by the way, I remember at the time everyone thinking, God, $50 billion for this, you know, for a space company. Yes. And we have people who invested at the $150 billion round and I remember thinking that's a big number. But in actual fact, by the way, it turns out very useful to be able to launch a rocket into space, drop off some satellites and then land it back down on Earth and then reuse it. And that you see an enormous advantage over every other person you're competing with. And then, you know, to have Starlink up there potentially as a long-term competitor to how we're getting our internet from broadband is also pretty compelling. But I think some of my clients were able to invest in one of the funds that was an early investor. Yes. Very helpful. Maybe we could talk about in private markets, the other side of this AI trade as well, which is, and we talked a lot about the software exposure that's in private credit portfolio. Because there's also a lot of software exposure in buyout private equity and some of the venture portfolios that we have. How are you thinking about that exposure in client portfolios today? I've gotten some questions saying, hey, how should I think about the valuation that's on the printed page right now for some of the legacy buy? I mean, something like, so I statistic the other day that almost 50% of all the private equity deals that we're done in the last couple of years were software deals. How are you thinking about that kind of risk? I think we got to be a little bit concerned because if you think about three years ago, if you sat down with a PE buyout manager or private credit, the easiest thing to underwrite is a capital light business that has high recurring revenue that has attractive growth rates. And so people wanted more of that. Now, the challenge that I think the markets faced with is a lot of those PE buyout deals were done with shorter term financing that there's a lot of debt that needs to be refinanced that at a minimum, we're seeing spreads start to widen out, right? Because the reality for a lot of the businesses today, they're not actually seeing the AI disruption that the market is pricing in today. So this is the challenge. If you just look straight at fundamentals, we talked to one of the private credit managers that has a fair bit of software exposure. And they were telling us in the fourth quarter that they actually marked up the value of their software businesses because the fundamentals were increasing. And so it's not an obvious issue today, but I think it's going to really impact the financing. And I think without financing, a lot of these values that you see on some of these buyout deals are going to need to be impacted. Because nothing's going to move. I mean, at a minimum, you're talking about pushing out any type of liquidity event, right? You're not going to take a SaaS-- no one's going to IPO a SaaS software company right now. I think it's going to be a long workout period in that place. And to me, I look at what's happening in the credit space. And I know you've been a bit of a champion of this is with these type of disruption does create some potential opportunity set. And maybe you can talk a little bit about what you think about the BDC sector. We haven't yet done anything, but we certainly are circling our wagons on it. Yeah. I think right now we have this dynamic where these semi-liquid, non-traded BDCs are basically being priced at $1,100 on the dollar. And as you point out, in some ways, that makes some sense because a lot of these software businesses haven't yet seen any impact. But the public markets are pricing in the potential for that in a pretty extreme way. If you look at where software stocks are trading, also many of these private credit firms have their own publicly listed BDCs that are basically just like stocks that own a very similar portfolio to what the semi-liquid vehicles own. And those are now trading down at $0.80, $0.70, in the case of one of them, $0.50 on the dollar. And so we're spending a lot of time looking at whether or not that might be a more interesting way to take advantage of this because the yields they're well into the double digits now. And so you just need to kind of be able to scrub those portfolios and understand what exposure you're going to get to software and really think through what are the draconian assumptions that you need to make on what the recovery rates would be if one of these software companies defaults. But we're at a level where it's starting to look a lot more interesting. I think it's also interesting. We talked in the last podcast about recent partnership we entered into with a private credit manager that's drawing capital right now to make new loans. New loans are getting priced at higher spreads, higher yields. And so also, I think going out with fresh capital and saying, I'm here to make loans, probably not as much to software companies, but to others, that's much more attractive now because a lot of the industry is in defense. They're in selling mode. They're in a mode where they can't be leaning into these opportunities. So I think that's also something that is attractive for portfolios today. If we stick on the fixed income topic, but move more towards like the investor in grade world, and then we'll close it out with some closing thoughts. But interest rates have moved a bit this year higher. And obviously some of that is fear of rising inflation from the conflict in Iran. How are you thinking about bond positioning and portfolios and specifically like the duration that you want to have in bond portfolios? Yeah. I think about we're north of 4% on 10 year treasury. We've lifted a bunch as fears of inflation have come in, which is kind of pushed out expectations for Fed to cut interest rates. So when I'm thinking about bond positioning today, I had been for the last couple of months pushing out duration a little bit under the sense that I kind of had two ways to win. And that sounds odd. But like I think if the inflation picture continues to be worse than what we expect because of the conflict in Iran and the price of oil really starting to seep it in other parts, it's going to cause the economy to slow. And then the Fed will be back in cutting mode. If oil prices recede because the conflict has been resolved and we go back, we go back to what you talked about at the beginning, oil prices and we start the year in $50 range because we were oversupplied that maybe we go back to where the economy is solid, but not growing so fast and the Fed will continue to rationalize rates. So I've wanted a little bit more duration in the portfolio than I've had. I'm hopeful quite frankly that some of the things that we've seen will push credit spreads to continue to go a little wider because I'd love to get more public credit back into the portfolio. But beginning of the year there was not much opportunity and public credit because spreads were just so tight. So why do I want fixed income in my portfolio is I just need that diversifier, right? Something that's going to be the ballast to the portfolio, produce some income and allow us to lean into equities where we want to lean in to equities. Yeah, looking like a pretty good decision. Obviously with what's going on in markets today, we're seeing rates coming down a decent amount. So like the way you frame that is the kind of the win win. And I know we've been adding the last few years going to have a little bit more duration in our portfolios after almost none of it during that zero interest rate environment we're in for so long. The inflation picture as we've talked about too, right? If we kind of go back to normal, if we have a true ceasefire and as Trump has just said around agrees to never block the straight again. Yeah, we get back to some of those dynamics of the oil market was oversupplied. We get back to we talked about this in January, China is still kind of exporting deflation. They have a lot of over capacity and a lot of production of what they export to the world like electric vehicles. And I still am of the belief that AI is pretty deflationary. And so we get more of a balanced view on what impact that might have. And maybe it loosens it up for the Fed a bit. Let's close it out. Just high level. What is the messaging that you were communicating to clients to your team right now about investing into this environment? Yeah, I think it's steady as it goes, right? I don't see dramatic like the risk profile is probably fairly balanced. I think valuations across the globe have more kind of coalesced. And so there's not huge differentials in asset valuations across the equity world. There is an enormous fundamental drivers we talked about with earnings and US isn't the only place that's seen the earnings lift around tech. We've seen it in developed international. We've seen it in emerging market equities that earnings growth is going. And I think when the one thing I've learned in my investment career is when earnings are positive returns are usually following. And so I don't think it's an environment where you want to make dramatic decisions either way and try and be a little bit opportunistic, whether it's leaning into there will be dislocations in private credit and areas like that that may create some opportunities for us to incrementally lean into things. And so to me, it's kind of steady as you go and look for those little opportunities to add something to the portfolio. What about you? I'd say pretty similar. Stay in the boat. I say a lot. I think in times like this where you've got really negative headlines and lots of fear about geopolitics and the stuff that seeps through to everybody. Everybody's reading these headlines whether or not you're watching the market every day. These are challenging times. I've been asked a bunch recently what is there to be positive about? And I think you outlined some great things to be positive about as an investor, which is earnings have been quite strong. I think everything we just talked about with AI is a positive. And I actually feel like the market would have been up a lot more if it were not for Iran. And there's kind of this pent up move in markets that maybe could be released if we resolve the conflict in the Middle East because of all these positives that have been going on in AI. And then we've talked about before. Overall, the economy is doing relatively well. The consumers doing still relatively well, particularly at the kind of mid-level and at the higher end. And the last thing is what we talked about with some of these quality stocks. I mean, as a stock picker going out there and trying to find 20 companies that you want to own that you think are going to generate great returns, I would argue it's a really interesting environment right now. And so I'm also just trying to preach a little bit of patience with people who own a handful of these companies. I mean, a Microsoft that was down 20% to start this year. It started to trade at a market multiple. It's one of the biggest positions we hold. I think Microsoft at $350 a share in March was a gift. And I think we have an opportunity at 400 and some wherever it is today to also compound our capital at a good rate. So stay in the boat. I think steady as she goes. I guess we both use boat metaphors there and try to tune out the noise. I agree. Well, thanks Paul. Such a pleasure as always. Great conversation. Appreciate you making the time. And thanks everyone for listening and joining us. We'll be back with even more of these conversations as the year unfolds. Great. Thanks, it.