SPEAKER: Welcome to TDAM Talks, a TD Asset Management podcast. Join us for insights and analysis on current themes in capital markets from our thought leaders. From market insights to investment strategies, we'll help you navigate the complex landscape of investing.
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JASON MCINTYRE: Hi, Steven. Thanks so much for joining us today. Appreciate you taking the time.
STEVEN D. BLEIBERG: Oh, my pleasure. Thanks for having me.
JASON MCINTYRE: Look, let's get right into it. I'd love to start, though-- you're with TD Epoch, formerly Epoch. Would love a little bit of background as to Epoch, the history, if you can, and then a little bit about yourself.
STEVEN D. BLEIBERG: Sure. So Epoch was started almost 20 years ago now, in early 2004-- a group of-- we like to say experienced investors who had worked together before, which is a polite way of saying older investors-- experienced. And it was really about wanting to start a firm to express a certain philosophy of investing having to do with, basically, the importance of free cash flow.
And that's what Epoch has always been all about-- the belief that it's the ability of a business to generate free cash flow, not accounting earnings, that makes the business worth something to begin with. And, equally importantly, it's how management allocates the free cash flow between the different uses of cash, either reinvesting in the business or giving it back to shareholders. If management makes those decisions sensibly, they grow the value of the business. If not, they could destroy the value of the business.
JASON MCINTYRE: So Epoch 20 years ago. So when did TD come into the picture?
STEVEN D. BLEIBERG: So that was 10 years ago. In early 2013 is when TD acquired Epoch, so we've been part of TD for 10 years. My own background-- I've been in the business-- it'll be 40 years next year, shockingly. And, actually, I was first hired out of business school years ago by Bill Priest, who was one of the co-founders of Epoch. So I've known him for a very long time. And we had worked together in the past, obviously, in the '80s and '90s before I-- I joined Epoch back in 2014, so nine years ago.
So that's my background. And I've done a variety of things over the years. I started out looking at US equities. Then I actually spent most of the 1990s managing Japanese equities. And then I switched over to doing asset allocation the turn of this century and actually was managing some open architecture multi-manager fund of funds products, which put me in a unique position, I think, in our business.
Because most people in our business have only sat on one side of the table, which is presenting yourself to consultants or prospective clients. And I've sort of-- I've sat on the other side and listened to managers make their pitches. It was sad to realize that most managers come in, and they start off talking about how unique they are. They're completely different. And then you hear the story, and you realize it sounds a lot like the other managers that have come in here and said the same thing.
JASON MCINTYRE: Let me play on that for a second, because I've heard you say that the Capital Reinvestment mandates are unique. So what makes them unique, then?
STEVEN D. BLEIBERG: Yeah, yeah. We're very aware of that-- not falling into that trap of sounding like everybody else. So we've identified a few things that we think make what we do unique. Number one is that we have this really intense focus not on growth, but on profitability. And then-- we can come back to that-- why profitability matters more than growth. That's number one.
Number two is that our portfolio just actually looks different than most of our competitors. It's more diversified. It's not as concentrated in a few names. It's got more of an all-cap profile. And when you look at style characteristics or just risk exposures of our portfolio versus our peers, it's a very distinctive profile.
And then, third, there's a real discipline to what we do, both in the way we first narrow the universe down to get to a number of stocks where we can then do a deep dive and exercise the real fundamental judgment, and also that, once we've done that and decided which names we want to own, how we combine them into a portfolio. We really use a very disciplined process there, too, using portfolio optimization to make sure we are taking risk as efficiently as we can.
JASON MCINTYRE: So when you talk about being more all cap than some of the more large cap, mid cap, small cap mandates, is that a result of the process, or is that something you set out to do to have equal weights amongst the portfolio?
STEVEN D. BLEIBERG: Well, it's kind of the-- it's the result of being agnostic about what kind of stock we would own. We have a process, as I said, to narrow the universe down. There's thousands and thousands of publicly traded stocks. Nobody has enough fundamental research resources to do a deep dive on every single one of them. You have to have some way to sensibly narrow the universe to a pool that meets some initial criteria that you think make them attractive.
But then you got to do the fundamental research to make a final conclusion. We're, as I say, agnostic about where that process leads us. And it turns up names all over the capitalization spectrum. And we're just happy to go wherever it takes us, if we find a company that we think is really attractive to us. And we can talk about what makes a company attractive to us in more detail as well.
JASON MCINTYRE: Yeah. That's great. So, maybe just pivoting for a second to a macro view, I know you run global mandates and US-specific mandates. The mandate that we're going to talk a little bit more about-- the one that you're taking over management of in November-- is a US mandate. So, when I look at the S&P 500, I think we're up nine-plus percent year to date over the last year. Give us, just from a macro view, your perspective of the US markets, where the opportunities are, and how you guys think about that.
STEVEN D. BLEIBERG: So I know this might disappoint you, but we don't really take what I would call a true macro view. We don't try to forecast the economy. We don't try to forecast what sectors are going to do well relative to others. This is a very bottom-up, fundamentally driven process, looking for companies that have high returns on their invested capital relative to their cost of capital and have some sort of sustainable competitive advantage that's going to enable them to keep that going.
That does tend to-- over time, we've tended to have certain structural biases built in towards certain kinds of companies, things like health care, technology, consumer goods companies-- a bias away from other kinds of companies, like utilities or materials or energy. Not to say we've never owned any of them, but we're usually pretty underweight in those sectors. And it's really pretty bottom up.
The example I like to give is-- one of our big holdings lately has been Eli Lilly, the drug company. And then I say, well, people are constantly asking things like, what do you think the Fed's going to do, and how does that affect your investment process?
Well, think about a company like Eli Lilly, where the vast majority of their business right now is diabetes drugs. Is another hike of 25 basis points by the Fed or not-- if they don't-- how is that going to affect the demand for diabetes treatments? It's not really going to have a big impact. And you could go through the portfolio and find so many companies where that's true-- that these things aren't really that sensitive to macro variables.
And, in particular, this thing that we focus on, profitability and not growth, if you isolate, quote, "profitability" as a factor, style factor, what you find is, over time, it's got a very-- it's a very nice tailwind to have at your back. There really aren't long periods of time where profitability just doesn't do well and highly profitable companies underperform. The market just doesn't work that way.
JASON MCINTYRE: So I think you talk about some of the names in the portfolio. I know this is the point when people listening in usually turn up the volume a little bit because they like to hear those stories. Maybe a couple of names in the portfolio, maybe a surprise that people would be surprised come out of the work that you do and the analysis. And maybe give us a couple of examples. That'd be great.
STEVEN D. BLEIBERG: Sure. Well, a few months ago, I think when we were looking at the June 30 data, the largest holding in our US portfolio at that time was a company that I imagine most people have never heard of called Copart, which is a, basically, salvage auto auctioneer. And I think it's the largest one in the US. I sadly had to send off the title of one of our cars to Copart not too long ago after it was at an accident.
But, anyway, so that was our largest holding. And, again, most people have probably never heard of it. Because it's a duopoly market, basically, it gives them pricing power. There's steady demand. Again, talk about not being economically sensitive. People get into auto accidents all the time. And they earn very good returns on their capital. They seem to have a sustainable competitive advantage.
So that's one example of a company we've owned. Another, coincidentally-- you could argue it's related, but O'Reilly Auto Parts was another one of our top 10 holdings. Again, these are just not names I think most people are used to seeing. They're used to seeing big weights in names like Microsoft and Apple and Alphabet. And we own some of those names. We don't own all of the Magnificent 7. We own some of them. But when we do own them, we actually tend to be not at a market weight.
And it doesn't mean we don't like them. It's just that the way we think about constructing a portfolio is 5%'s an awful lot to put in one name. There's plenty of other fish in the sea, so to speak. There's lots of other stocks out there that are equally attractive. And, if they have low correlation with those big names, you can get a better result in the long term in terms of risk and return.
JASON MCINTYRE: Yeah, and it's interesting doing it that way, because you think about the big seven stocks that have driven performance up and down in the S&P. And the fact that when we look at relative performance, and we have lots of information on our website on historical performance, the way that you guys have managed to outperform on a risk-adjusted basis has really been something that I know, obviously, when we looked at the manager switch and brought you guys on to take over the portfolio, something that really resonated with us.
STEVEN D. BLEIBERG: Yeah. Well, it's a testament to the way we go about building the portfolio. As I say, there are always plenty of opportunities out there. I sometimes call it the, quote, "tyranny of the index," being people think, oh, if it's 5% of the index, I have to have more than 5% in it if I like it. Well, again, not necessarily. There are other names that might be equally or more attractive, and there's no reason why you can't put some of that weight there.
So, if we're 2% or something in a stock like Microsoft, and it's more than that in the index-- and people would say, well, but if Microsoft does well, that's going to hurt you. You're underweight. Well, that's half the story. The other half of the story is, what did we do with the rest of that portfolio weighting that didn't go into Microsoft? Where did we put it? And, if that stock did equally well or better than Microsoft, then it was a win for us.
JASON MCINTYRE: A lot of times advisors and investors will look-- is this mandate a growth strategy? Is it a value strategy? How would you categorize the Capital Reinvestment strategy?
STEVEN D. BLEIBERG: Yeah. Well, it definitely tilts towards growth. We would describe it as quality growth. Most people are accustomed to that value versus growth spectrum. When you look at our portfolio historically on that spectrum, we always come down in the middle between growth and core. We've never been on the value side of that spectrum. We've always been somewhere between core and growth.
Because what we're really more focused on, again, is quality, meaning profitability, high returns on capital. Part of our process-- we do want companies that can grow at least as fast as the economy. So we do have a growth hurdle in our initial screening. But it's basically-- as long as you're growing your top line at the same rate as nominal GDP or better, that's good enough for us.
So think of it as there's a bell curve with-- the middle of the curve at the highest point is nominal GDP growth. So we're just looking at the right side of the bell curve. But stocks don't have to be way out there on the far side of that curve to get into our portfolio. If you're growing at 6% a year, that's good enough. So we do have this little bit of a tilt towards growth pretty consistently.
JASON MCINTYRE: Switching gears a little bit, I do want to ask you about a recent win that we had in our institutional business. One of the areas-- and we had Mark Cestnik on, who's my counterpart in the institutional side-- on a prior podcast talked about the opportunities globally and how we're looking at TD Asset Management to expand globally.
We just had an amazing win that I know you're a big part of in Japan with the world's-- I think I can say this-- the largest pension fund in the world for the Capital Reinvestment strategy, so just a terrific win for us, competing globally against every other asset manager. Maybe just a quick note on that, and what was the deciding factor, do you think, in the opportunity for us to manage money for the pension fund?
STEVEN D. BLEIBERG: TD Epoch started out really focused on that institutional client base. And so we're very used to operating in that world. And there's often very high hurdles you have to get over to get hired in those kinds of clients. You have to go through months and months of multiple rounds of meetings and dealing with consultants who have to approve of what you do.
So generally, what they liked about us is the disciplined process that we follow. I would say our strategy is based on what I would call sound financial principles, meaning the idea that the way you grow the value of a business is you invest capital into the business in such a way as to earn a return that's higher than the cost of the capital.
It's just like an individual. If you could go out and borrow money at 5 and earn 10 on it, you're growing your wealth. If you're borrowing at 10 and earning 5, you're slowly destroying your wealth. It's really the same for a business.
And so that's the basis of everything we do-- focusing on companies that can earn high returns on capital relative to their cost of capital and have the ability to sustain it. And we're extremely rigorous and disciplined about what we do. And that's, I think, what appealed to-- the client in question was GPIF. It's the government pension fund for Japan. It's over $1 trillion in assets total. That's what appealed to them about our process.
JASON MCINTYRE: That's fantastic. And it leads me into maybe the final topic of conversation, which would be I'm really excited about the announcement that we made, moving responsibilities for management from our TD US Blue Chip Equity Fund over to TD Epoch-- yourself and David Siino. In the name change, or in the-- within the fund, we're going to change the name as well to the TD Capital Reinvestment Fund. That's going to occur on or about November 4-ish. Really excited about this.
And I think, for the first time, being able to offer Canadian investors access to this management is a wonderful opportunity for us and our clients and our investors. Maybe just a quick word about that. And if you can take us through, at a high level some of the tactical things that are going to happen once you assume responsibility for the portfolio, turning over securities and that sort of thing, it would be great.
STEVEN D. BLEIBERG: Sure. Well, we are equally excited, if not more so on our end. We are very excited at this opportunity. And I want to just note, it's more than David and I. We are a team of six, actually-- four additional dedicated analysts besides David and myself on the team. And we really do operate as a team. This is not a star manager kind of thing. This is a team effort.
Yes, so when we take over, the portfolio, obviously, looks quite different from the way we manage a portfolio. I mentioned that we tend to be pretty diversified. We've usually got about between 80 and 90 stocks. Usually, no one stock is more than 2% of the portfolio. The top 10 are usually only about 15% or 16%.
The existing portfolio looks quite different. It's quite concentrated. So there's going to need to be transition. We're not intending to just come in and do it all overnight. We understand there are going to be tax consequences because a lot of these stocks have been in there for quite a while, and they have some pretty hefty unrealized capital gains.
So our goal is to start the process in November but try to keep the realized gains pretty limited through the end of the calendar year because this came late in the year for people. They didn't have a lot of time to prepare for this. Once we get past January, I think you'll see us finish that process and see now there would likely be some additional realized gains next year for calendar '24.
JASON MCINTYRE: Yeah. And, look, I think it's obviously a question that people will have. I have a lot of comfort in working closely with you and the teams, that there's two things we want to accomplish. One is to get the portfolio transitioned, and it looks like we've got a really good plan, and also doing it in the most tax-efficient manner, which I'm really confident we're going to be able to do.
And I think that the people that we've been out speaking to are really confident that we'll be able to accomplish that as well. So that's wonderful. Listen, Steven, I really appreciate your time today. Thanks so much for joining us, and hope to have you back soon.
STEVEN D. BLEIBERG: Thanks very much.
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