0:10
So first, the definition, the quality difference between investors. But in general it's true that over extended periods quality does perform better and it all go back to that in a second. But even over that extended 10/15/20 year periods, you will notice that you have extended periods where quality actually does not perform as well or actually significantly underperforms. For example, between 2027 or 20.
0:41
it it was a period where China was building significant infrastructure, for example, and mining or other commodity companies, oil did extremely well, which are usually these are not quality classified sectors. And in that period of time actually the quality significantly underperformed. So keep that in mind. But the really, really the reason is purely mathematical. The way we define quality is a business that has the ability to generate a high return on capital, but also has ample opportunity to sustain and redeploy capital at incrementally higher ROIC or return on capital. And just mathematically speaking, if a business can do that
1:21
and grow at least in line with the general market, it will overextend the periods, generate significantly higher compounding of capital. So the the answer is really simple.
1:38
So this goes back to my initial answer 25 and I think part of 24 as well was a difficult. For quality and that may sustain in 26 or 27. So even though quality should do better long term, it is by no means a guarantee and it even doesn't make sense that quality always performs, you're in, you're out. There are other parts of the market that may not necessarily generate as much compounding of capital, but they become significantly attractive and then they
2:10
you know, because of a specific catalyst and up performing really well in 25 was no, no, you know, typical story like that or typical year like that where you had other segments of the market that that did really well. Really for us, it's mostly a question of communication. So we try hard to explain and repeat the message of what we're doing with clients and really keeping the focus on long term compounding. The strategy anyway typically holds positions for extended periods and changes few names on the on a yearly basis. And so really the focus is on
2:51
maintaining that longer term vision of things.
3:01
That usually happens in periods where not no lower quality companies or segments or sectors do really well. We notice that the premium, the quality premium essentially diminishes. So I mentioned before between 22,000 and 2008 you had that phenomena and then you had the GFC global financial crisis in 08. So when we look back at our, you know, US strategy, for example, our global strategy in 08 or 09, they really had no premium whatsoever versus the broader market. So that quality premium that we would expect had completely gone and same thing happened
3:41
24, then 2525 was even more exaggerated. Now the premium has not completely gone down to 0, but it has significantly diminished and that's usually what happens. And the longer the low quality rallies sustains, the more that quality premium essentially shrinks, not only because of the performance differential but because keep in mind quality businesses are constantly compounding capital or they should be which also shrinks that premium. So quality underperforming has two effects, one, the pricing differential. So non quality doing really well, but also at meanwhile the quality business is compounding capital so that those premiums can shrink really
4:22
significantly and fast. Now for your second question on the market concentration, that is becoming obviously a bigger challenge for everybody. We've seen especially in the US market concentration in either especially in technology, but in other segments too. So what the market calls the magnificent 7 or you know, big AI kind of stories, you, you do see significant concentration on markets and that is becoming a challenge for us and everybody else. And we'll have to deal with it. We'll have to deal with whatever market throws at us. And this is, I mean this is just a just a reality. But at the end of the day, we are
5:03
benchmark sensitive and benchmark aware, but we are not necessarily following or we're not necessarily obsessing over the benchmark. We look at things from an absolute perspective. We own companies that we think are exceptional, whether they're large or small in the market or in a specific index. And we tend to not completely ignore, but focus less on the market concentration and really look at things from an absolute perspective. For us, what is the best business that we can own today?
5:42
