The Exchanges

Q Mike, you mentioned the importance of hiring and how some firms do it better than others. What are your current hiring practices when you're bringing somebody in today?

A Well, I think the thing that we have really Stuck to since the beginning is looking for talent in unique places. Paul talked a little bit about the origins of how myself, Pete Hunkle, Sanjay Ayer, how we were all hired, all of which had relatively unconventional backgrounds. I was writing a newsletter at Morningstar. Sanjay had left business school. Pete had an operations background. And in many respects, all of us Our self-taught investors, because we didn't go through a traditional training program at a large asset manager, and it, I think it's created the starting conditions for having people that just think differently and try to Somewhat creative and curious, and so we really tried to stick to that. We hired somebody two years ago that we actually originally found on Twitter. He had a Twitter handle under a fake name. He was someone that we followed, we liked. It was very much, in a way, Paul's experience with me in the newsletter, just saying things that kind of resonated with you personally, and then ultimately I think we figured out that he lived in London. We reached out to him, direct messaged him, turned out that he was actually doing really, really well in an investment management firm in London, and then just basically courted him to come to WCM, but constantly trying to stick to that. We really try not to use headhunters. We find that to be an unbelievably ineffic…

AI assessment note: “the thing that we have really Stuck to since the beginning is looking for talent in unique places.”

Q How did you end up going from Morningstar to WCM?

A So I was there for about four and a half years and After about three years, my boss at the time had come to me and asked me about writing a newsletter. She and I were sort of kindred spirits, along with probably Sanjay, that there were some inherent flaws in Morningstar's process, and we were kind of missing these growth companies. She said, hey, what about writing a newsletter about, about growth stocks? I had, had been toying with this idea of buying moats that weren't just big moats, but small moats that were going to grow. And so kind of a core feature of that newsletter was this watch list called emerging moats. And it was kind of like, Hey, buy the wide moat businesses of the future today. And Paul and Kurt both subscribed to that newsletter. And I found that out later, but one day I was sitting at my desk in Chicago. Paul called me up, left me a voicemail, said, Hey, I'm Paul Black. One of his big, very enthusiastic voicemails. I'm Paul Black from WCM Investment Management. I'm a big fan of your work. I'd love to be in Chicago in a couple of weeks. Would love to have lunch. And I thought it was really just like a portfolio manager looking to fill a slot of a day of consultant meetings or something in Chicago. And so we had lunch and it was very clear that within A couple of minutes that they had been reading the prior, I don't know, nine or 10 months that I had been doin…

AI assessment note: “Paul called me up... I'm Paul Black from WCM Investment Management.”

Q Mike, I'm curious, as you've grown and you think about the business, so much of that Incredible growth has really come in one product. Have you thought about just trying to get better and better at doing that one thing and, you know, mostly international growth compared to taking the skill set and broadening out in different investment strategies?

A Yeah. I mean, I think that's going to become a huge part of our story in the next 10 years. It's interesting because I think growth is kind of a dirty word in investing. And I look at it slightly differently and say growth is such a huge part of our story and what makes this a fun place to work, why people are so engaged. And so we need to continue to find other avenues of growth. So we've done that out of the global equities team. By moving into global emerging markets, international small cap, global launch short, we have a China fund now, and there's a lot of interesting things that we're doing, and I think asset classes that we're exploiting some major inefficiencies, and we're going to develop some great businesses out of those products. But then also, what's really exciting is trying to make this a platform for other people. I mean, I think I look at it and say, we are the luckiest Guys in the world to be sitting where we are, and what better thing to do than give other people an opportunity to, to do what we've done, and so we started doing this actually a number of years ago. We brought a team in that's now does small cap value that's based in Cincinnati. We've got a team in St. Louis that does small cap growth, and then we've got an ESG team in Denver, and I hope we continue to do those. I mean, our intention is to continue to find People that are passionate about what…

AI assessment note: “we need to continue to find other avenues of growth. So we've done that”

Q What was WCM like when you got there?

A From what I could tell, before I joined the firm, it was really successful. I mean, they had grown a ton in the last, say, five years. It was about 3.9 billion in assets at the end of 2005. So this was, when I met Paul, it was December of oh five. They had started to build a pretty good institutional business. The overwhelming majority of those assets were in a domestic Large cap growth product. They had had a rough year in 2005, which was largely explainable by what was going on in the market at that time with commodities and energies and things that they weren't nowhere close to investing in. And so Paul basically sort of pitched it as an opportunity to come in and have a big impact. I had two analysts at the time, wanted a third, and it seemed like a really no brainer, great culture, great people. But then when I got there, you never know what it's going to be like, right? Until you actually, I mean, I always ask that now of CEOs, like, okay, well, I know you took this job, and you probably had some idea of what the culture was like before you took it, but like, what are the big surprises? I mean, I've lived that, right? Like, you only know until you actually Walk in the door and are a part of it. And so it turned out to be quite the wild ride. And what I think I pitched to my wife when we moved out there turned out to be something that was very, very different. I really tho…

AI assessment note: “when I got here, I remember in the first couple of weeks, just starting to”

Q With the outsourcers, there's this typography. You've kind of figured out there are these four key criteria that help you figure out what's happening with the moat. What are the other ways that you've tried to measure these widening moats across either different typologies or industries?

A Yeah, well, one thing that we realized eventually with the case study approach was there is some selection bias that comes with that. If I know intuitively that most outsourcers turn out to be great businesses, okay, I can give you a list of 10 that we should go study, but I kind of forget about the ones, or I never knew about the ones that tried and failed, right? And so, certainly you can study the life cycle of the moat and figure out what potential sources of deterioration there are, but But it's hard to know what the failed examples were. And so we've also done this, I think, in a more quantitative way by taking an industry and all the participants in the industry and then study what's happened to them over the course of a few decades. So as an example, luxury goods is, if you're a global investor, odds are you've spent a lot of time looking at luxury goods stocks over the years. And we studied about 50 luxury companies over the course of 30 years and tried to find What were the markings of the ones that really compounded returns at really high rates for a long period? I'm not the ones that, you know, sure, there's many of them that had their day in the sun, but what are the ones that were really lasting and enduring? What are the real coffee can investments in that group? And when we did that, it was really clear that there was two criteria. One, the higher the price poin…

AI assessment note: “we've also done this, I think, in a more quantitative way by taking an industry”

Q All right. We're going to keep going here. As you know, a couple more questions for you. What's your biggest investment pet peeve?

A There's two. The biggest one would be Analysts that have a lack of recall, so nothing irritates me more than if I go to somebody that I work with and They've done a bunch of work on a name. And then I asked them, hey, what's the latest there? What's going on? And they say, well, let me get back to you. I'm going to go do a couple of GLG calls and call the company. So that's one. And then two, information gathering is another one. Ultimately we're paid and we're supposed to be making unique insights. And so people that just are more information gatherers, as opposed to making insights, that tends to be a pet peeve of mine as well.

AI assessment note: “There's two. The biggest one would be Analysts that have a lack of recall”

Q If you look at WCM business and the trajectory of the business, so much of the initial success was in the core flagship international global growth strategies. What's happened over the last couple of years as you've gone into different strategies that are adjacent to what you're doing?

A I don't think the firm's ever been better positioned in that the firm has had some meaningful product concentration risk over the years. Today, hundred and twenty billion dollars in AUM, we actually have nine products that have more than a billion dollars in assets. Those smaller call it billion dollar products have incredible tailwinds behind them. There are very, very good times ahead. And that's exciting to see because those efforts to get smaller strategies up to different levels of scale where they can attract large institutional flows is very hard work. The investment team, the sales team, the whole firm has gone to great lengths to put all of those in a position to succeed. The thing that's a natural extension, but that's maybe new in the last couple of years is what we're doing in private markets. We started thinking about private markets a long time ago. It's something I knew I wanted to do largely for research and investment reasons. When you're growing as fast as we were growing, you don't want to upset the apple cart and just focus on what's right in front of you. And then life brings a little bit of serendipity and certain people come into your life and you think, okay, maybe now's the time. And we didn't really get going in private markets until. You could have thought at the time maybe we're too late. Some of our peers had already started to move in a big way in …

AI assessment note: “new in the last couple of years is what we're doing in private markets”

Q ago, and you guys had just written this piece about how to become a hundred billion dollar asset manager, and of course, in a very WCM way that marked the peak. Going into 2021. And I'd love to jump into that. After this incredible trajectory over the last 15 years, you have this bump in the markets in your style of investing. How did you approach that as a firm?

A 2022 was incredibly humbling in many ways. It was our most difficult year performance wise. Now with the benefit of three more years, you kind of look back on it and say, I'm so glad that happened to us because I know we've gotten so much better because of it. I think back to that period in May of 20, 22, we had had a dreadful January and February to start the year, muddled along for the next couple of months, and we had a firm wide offsite, and I got up in front of the entire company, and I said, I am so excited about being here right now, because Sanjay and I had both felt 20 and 21, while we had incredible absolute and relative returns, and that was a continuation of a very long period of both consistent and very durable outperformance, the market had become a little bit one note. And there was a certain type of investing that was working. We probably weren't having that much fun, even though we were doing great. I was really looking at. 20, 22 is wow. This is great. This is another opportunity for us to reassert how we're different in the market and separate ourselves again. Fast forward three or four months later, the different stages of grief, there's like these different stages of underperformance, man, I just want to start winning again. There's a seminal meeting that took place within our team in October of 2022. After it was pretty clear that we were going to have a r…

AI assessment note: “There's a seminal meeting that took place within our team in October of 2022.”

Q in one strategy. And today you have more than that in a variety of other strategies. And I'm, I'm curious outside of that original strategy as you've brought in some other teams, some other people, what have you learned about what it takes to integrate someone who isn't just investing in international growth stocks with expanding modes with good cultures into a firm that was built on that one philosophy?

A Well, I think the, before we even think about indoctrinating them on our investment philosophy, I think the hardest thing is to indoctrinate them in our way of doing things and our culture. And I love telling this story, but when we were first coming out of our abyss, I guess, we started to have, we do a lot of retreats with our different teams and with our whole firm, and Paul would inevitably get up, and he'd start crying at these things, and at one point, I was like, would you just stop it? You know, I'm like, listen, like, we're rebuilding this thing. Like, stop getting up there and, like, talking about the past and crying. It's, let's go, man. Like, and I have done a complete one 80 on that because, and I've acknowledged that I was wrong about that, and the reason is because it's those stories and explaining them to people over and over again and letting them understand Where we've come from and giving them an understanding of why we do things the way that we do. That's really the only way we're going to be able to scale the culture beyond the core group of people that have been here for a long time. So it's a lot of storytelling, but it's also in the moment, vulnerability and openness as well. We had our retreat this year, took the whole firm to a ranch up in Montana and And Paul and I had, there was a bunch of stuff going on in advance of that retreat, and at one point, …

AI assessment note: “the hardest thing is to indoctrinate them in our way of doing things and our culture”

Q And what advice do you give to your peers?

A You know, it really depends. I think authenticity is huge. I think being, if you're trying to be something you're not, is not a successful, sustainable way to be in this business, and that can be around your investment philosophy, how you present the firm. I think you need to be totally Authentic with everyone. But then, you know, I was thinking about that. If it's somebody that's going through a difficult time, my advice would be, don't give up, stay the course. And if it's for somebody that's kind of firing on all cylinders right now, it's like, stay humble. You're never as good and it's never as bad as the outside world thinks. And I've been there when people didn't want to do business with us and the firm didn't have a great reputation and having to cloud through those barriers. And I also remember now when we Come into meetings and the same things I was saying back then are suddenly sound a lot smarter and people like them a lot more. So that's one of the difficult things about this, but I think it's important to remember the importance of being really humble, especially when things are going well.

AI assessment note: “I think authenticity is huge... don't give up... stay humble”

Q In that example of the outsourcers, so what are those four criteria, and what's an example of where you saw that across different industries?

A The first thing we would look for is we want a runway of outsourcing. You don't want to invest in outsourcers when the majority of the market has already been outsourced. And that can take a really long time to be honest with you. These things are actually pretty slow moving. Even in some of the other industries that we're involved in today, things like outsource clinical trials or outsource pharma manufacturing, you're looking still at well under 50% of those markets being outsourced. And then the second piece is you want the outsourced service to be Relatively small part of the customer's P&L, but the cost of failure to be really high. So if it's a really high piece of the expense line, oftentimes you don't get the pricing. It becomes a little bit more contentious, and so you want more of a cozy relationship, and it's easier to achieve that when, when the actual service cost is relatively small. And then the other one is a fragmented customer base. And that too is pretty apparent. You don't want an outsourcer that's largely relying on two or three customers. That can become also something that's not going to lead to the same amount of durability or not the kind of durability, at least that we're interested in. So you want some level of customer fragmentation and high barriers to entry. And then the last one, and this is probably the most important one, is you want evidence th…

AI assessment note: “The first thing we would look for is we want a runway of outsourcing.”

Q So there's a big difference between those starts in the international product after six years being a hundred million and where you are today. And we had talked to Paul about the sort of two key features of the investment process, but let's start on this question of moats and widening moats. How do you think about assessing companies through that lens?

A It's been a huge evolution, right? I think if you asked anybody intuitively, they'd say, okay, yeah, like, I get it. Why wouldn't I want to own a business with a set of advantages or a mode that's strengthening? But how do you detect that? How do you do that with any sort of consistency? And We've done it a bunch of different ways. The first thing we really started doing was case studies actually on companies. A lot of it is rooted in backward looking analysis, which is funny because I think a lot of people are attracted to this industry for kind of the immediate gains, the cause and effect relationship of investing. And maybe that explains why people don't do more backward looking work. But we started doing case studies on companies like great companies and tracing the Full life cycle of the business and trying to figure out, okay, what is this company's moat? What were the early signs that this moat was actually developing and being built? What did the market think about the company at the time? And then going all, all the way through to say, okay, and then what were some of the early warning signs when this moat maybe started to peter out and then ultimately maybe even start shrinking. And so we did that on a bunch of different companies. And the interesting thing was, um, We started to see patterns amongst companies. And sometimes those patterns were not just several compan…

AI assessment note: “we created a, a set of typologies or frameworks really rooted in this idea”

Q What teaching from your parents has most stayed with you?

A I think my dad was always really good about when I made mistakes, like looking at them as learning opportunities. So that's part of the reason I feel so strongly about some of the stuff that I mentioned earlier. And then I think my mom, I came from what seemed like a dysfunctional family at times. And I remember as a kid complaining to my mom about that. And she'd be like, yeah, you just don't realize every family's got their issues. And as I got older, I started to realize that's actually really true. So And the more you can have open, trusting relationships with friends and deal with those types of things and not bury it, I think that that leads to really good relationships. So that's probably what my mom taught me most.

AI assessment note: “my dad was always really good about when I made mistakes, like looking at them”

Q So you touched a little bit on culture and this notion of culture being aligned with that competitive advantage that creates that growing mode trajectory, and Paul's talked about that. You've mentioned it a bunch of times. What does it actually mean to do the analysis on a company's culture that's aligned with their competitive advantage?

A It's been a huge evolution here. So when I came to WCM, actually, Paul and Kurt were already talking about culture. They had experienced a huge transformation in their own lives, which Paul talked about, I think, in your conversation and became convinced that culture really, if it mattered for our company, it should matter for the companies we invest in. But the truth of the matter is that at the time, I think there was a pretty narrow view of what a great culture really meant. In fact, I think Paul would tell you that Basically what we were trying to do is just go find a bunch of companies that sort of smelled and tasted like WCM. Hey, if they talk about the same things that I'm talking about and. I'd really want to go work at that company too. If I was in that industry, then that's must be a company with a great culture. And over time, we just realized that that's a really flawed way to kind of look at things that number one, there's no perfect culture and particularly what culture works in one industry might not be right for another, right? So the joke that we've used for years is Google's infamous for unstructured time that they give developers to go work on pet projects and create things, and that's a huge part of their culture, and Canadian Pacific, which is a railroad that we've owned for a long time that is a very operationally driven company that's all about Sweating i…

AI assessment note: “what culture works in one industry might not be right for another”

Q Well, this is going to be fun. You know, we did a nice overview at WCM, I guess a couple of years ago now with Paul, and it's going to be fun to dive in a little bit deeper on what's become increasingly just such an interesting story. So why don't we start with your initial interest in investing?

A Before we get into that, I was thinking about Paul's podcast and And how I enjoyed it as well. In the situation I'm in, it reminded me of having to go after the guy at a rehearsal dinner that just gave a really great toast, you know? I don't know if I'll be able to top it, but I am happy to be here and dig more into the firm and our story. I have a bit of an unconventional background, I think, by investment management standards. I really probably fell in love with investing when I was in college, and back then we had a computer lab. And so you'd go to the library, you'd study, and then you'd inevitably go take a break. And that was in the late 19 nineties. And so it was a pretty exciting time to be in the stock market and you could invest and you can kind of throw a dart at the wall and make two or three times your money. So. My buddies and I would go up there and talk about different stocks. And I ended up stumbling across the Motley Fool message boards. And the Motley Fool was a website that wanted to empower the individual investor. And then they had these message boards with all these really interesting, smart people that you could sort of interact with. It was kind of like, you think about all the stuff that's happened in social media now, they were kind of way ahead of their time and started learning more about investing. Obviously I was a finance major, so I had some pra…

AI assessment note: “I really probably fell in love with investing when I was in college”

Q As you've gone through this incredible trajectory in the firm, even in the last three years that we've known each other, how do you turn that lens onto WCM? So how do you think about what's happening with WCM's moat and what's happening with WCM's culture?

A We're all of the view that nurturing and protecting and keeping the culture as healthy as possible is probably the single The single most important thing we can do. And I think the cultures, obviously things are going to change. They change with size, but we spend a lot of time trying to articulate where we've come from, the difficult periods, the behaviors that we think were essential to get us where we are. I worry, honestly, when you have people that have come in and all they've done is experience a tremendous amount of success and prosperity, and then they don't have a big reference class of experience to look at that. They might miss certain attributes that I think have been sort of core to making this place successful, and I worry that they stop trying to make the firm better because they think it's already so great. We talk about the core values of the firm, which are fun and gratitude, and I think Paul went into those in your conversation, but on the research team, we have our own core values as well, and they're think different and get better, and in some ways, the firm embodies those as well, but the research team went through its own process of Establishing core values. And it was a very similar process to what the leadership team did when we came up with fun and gratitude. A lot of it's like just looking back and saying, okay, how did we end up here? And what really…

AI assessment note: “nurturing and protecting and keeping the culture as healthy as possible is probably the single”

Q What were the conversations like with your clients?

A Those were incredibly positive. We actually had net inflows on the institutional side through that period. A lot of the sustained performance in prior years had created a great foundation and a lot of goodwill. There weren't difficult conversations, many that I can think of during that period. Where it got kind of interesting was when there's this tug of war between trying to stick to what's gotten you to where you are today versus trying to flex and adapt and evolve the investment process. That's where you need to be right if you're going to make some of those changes. Evolving and adapting what we do, creating different pieces of infrastructure to execute the process in a more robust way, enabled by some lessons that you learned and mistakes that you made. We're also fortunate to have these two pillars of our investment philosophy, mode trajectory and culture, which are pretty flexible in terms of where they can be applied in the market. They kind of work almost in every sector. As we started to Come to the conclusion that what had been the winners over the prior 10 years may not be the place you want to be in the next 10. We weren't having to completely change what we do. We're just having to kind of apply it to a different part of the market or different companies. That message was well received. Two of our core values are think different and get better. So by definition, w…

AI assessment note: “Those were incredibly positive. We actually had net inflows on the institutional side through that period.”

Q What happens in the situation where people want to be at WCM doing great, having a good time, but in your evaluation of someone's work product, it becomes clear over time that for whatever reason they need to be voted off the island. How does that conversation go?

A Well, those are never easy conversations. I think the truth is, in our experience, that it's really been cultural complications and bringing the people around you down that has ultimately led to us to say it's time to part ways. We give people an enormous amount. I mean, my own experience at this firm was, and I've said this before, it's not like I came into this firm and just started shooting the lights out. And so, um, You go into it knowing that you need to give this person time and a long leash to make mistakes and make sure they understand it's okay to make mistakes. The important thing is that are you acknowledging them? Are you learning from them? Are you getting better from these mistakes? And making it clear to that person that hiding mistakes and you'll go further in this firm faster if you actually acknowledge that you've made mistakes. And so we do a good enough job, I think, on the front end to make sure we don't encounter too many of those situations. But the Funny thing is, Paul and I actually had lunch with somebody a couple weeks ago, and we were sort of chatting about this. What I don't think people probably totally appreciate about leadership is oftentimes when you let someone go in your organization, Paul or myself might have to be the one that has to do it, but you know what? The reality is, nine out of 10 times, your people tell you that that needs to get …

AI assessment note: “Well, those are never easy conversations. I think the truth is, in our experience”

Q If you're an outsider, you're an investor, investing in a fund, an allocator, what are the signs of what a toxic culture would be?

A I don't think there's a single marker of a toxic culture. When an allocator would sit down with us, it was quite often actually that you can just see there's a chemistry, there's a love, there's an admiration, there's a lightheartedness, there's a self-deprecating nature to the way we interact with one another. I can't imagine that If a firm had a toxic culture that you would see that, and that's feedback we've gotten that just, wow, like instantaneously that people would say to us, wow, the chemistry between you guys is just something that we've never seen before. I think we've told that story in the past about many, many years ago, visiting Whole Foods and talking to the founder of Whole Foods, John Mackey, and expressing to him the feeling that Paul and I had upon walking into their offices, and his response to us was, yeah, that's because there's an absence of fear here. And I think that that's something that has always resonated with us. It's something that's kind of hard to put your finger on, but honestly, when I've assessed cultures of companies that we've invested in, it's that same sort of intangible quality that, that I've seen as well. I think there's other markings that we've learned. That an allocator could look out for that could lead to the possibility of the culture becoming toxic, a lack of succession planning, the level of engagement that the founder has, how…

AI assessment note: “a lack of succession planning, the level of engagement that the founder has”