Finding opportunities across the small-cap spectrumFor big ideas, think small

Christopher Beck

Christopher S. Beck, CFA

  • Executive Director, Chief Investment Officer — US Small-Mid Cap Value Equity
Alex Ely

Alex Ely 

  • Managing Director, Chief Investment Officer — US Growth Equity
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Previously recorded: September 26, 2019

This previously recorded webinar challenges the misconception that bigger is better. Think small as Macquarie Investment Management (MIM) professionals provide distinct perspectives on the small-cap equity landscape in both the growth and value asset classes.

MIM investment experts review the history of the US equity market, discuss the differences between areas of opportunities and variation in small-cap styles, and provide an outlook for the remainder of the year. Watch the webinar replay or read the full transcript below.

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Good afternoon. My name is Zack Per, and I'm a small-cap investment specialist at Macquarie Investment Management. On behalf of everyone at Macquarie, thank you for participating in our third capital markets coaching clinic of 2019: Finding opportunities across the small-cap spectrum. Before we begin today's presentation, I'll provide you with a few housekeeping details for your benefit. Upon successful completion of our webinar today, we will report on your behalf to IWI and the CFP board so you will receive continuing education credit. If we are missing any of your validation information, we will contact you to request the necessary information in order for us to provide it to the necessary CE credit boards. You can view today's presentation by clicking on the resources widget to the left side of the window. If you have any questions during the presentation today, please type them in by clicking on the questions widget below the slide window. We will do our best today to answer all of your questions at the end of our presentation. If we're not able to answer your questions today, a member of the Macquarie team will follow up with you directly. Finally, in order to deliver you with the best content in the future, please provide us with your feedback by clicking on the survey to the right of the slide window after the presentation.

Today, you'll be hearing from two of Macquarie's small- and mid-cap equity portfolio managers, Chris Beck and Alex Ely. Alex is the chief investment officer for the firm's small- and mid-cap growth team, which manages Delaware Small Cap Growth Fund. DSGDX is the ticker, and Delaware Delaware Smid Cap Growth Fund, DFDIX. Alex has 27 years of investment experience and joined Macquarie in 2016. Chris is the chief investment officer for the firm's small- and mid-cap value team, which manage Delaware Small Cap Value Fund, ticker DEVIX, and Delaware Mid Cap Value Fund, ticker DLMIX. Chris has 38 years of investment experience and joined Macquarie in 1997. Today, Chris will be leading off the presentation by providing you with a brief overview of the small-cap investing landscape. He'll then give you his perspective as a value investor and hand that presentation over to Alex to discuss his perspectives as a growth investor. Chris, thank you for your time today.

Great. Thank you, Zack, and good afternoon everybody. Let's start with page five, slide five, and this will give a little bit historical on the small-cap market going back to 2000, which was actually a nice chart to show because there was a big move in small-caps in terms of value versus growth. You can see that the small-cap numbers generally are increasing over time, which is what you would expect. As the market moves up, the debtors of small-cap will also increase. And just for a little bit of reference, when I broke into the business in 1981, a small-cap stock was actually, divided something between 250 million and 500 million market cap. So just for some highlights here, let's go to 2008 and 2009 where you can see the top end of the small-cap went from 2.7 billion down to about 1.7 billion. So a decline of around 40%. And then the low end of small-cap in 2009 was all the way down to 78 million, which really we would classify as a micro-cap under any circumstance. And then you'd have gradual increases, for the most part, through then. And right now, you have small-caps being defined as about 5 billion in market cap, which is a lot of change for people who've been in the business a long time. As I mentioned, when I first broke in, 500 million was the top end of a small-cap stock. So with a little luck as we keep going on in the years, the definition of small-cap will increase, and that will indicate that the markets have been going up time.

On the next page, you can see where we have some differences between how value management would define their stocks and growth management would define theirs. Now, value managers tend to look for more stability. And if you look at the bottom bullet point there where it says return of capital to shareholders, as an example for our team, we really highlight things and companies that will generate free cash flow. We want companies that will give money back to us as shareholders in some form. Now, whether that's dividends or buybacks or debt paydown, we tend to be mostly different. Although at this point in the cycle, we actually do prefer dividends if companies are able to either initiate them or increase their dividend at an above-average rate. Typically, for value managers, you will have older companies that have more stable financials. Now, on the growth side, it's actually much more important for that also that bottom bullet point where they reinvest capital back into the businesses. Markets tend to want companies if they're in the growth side to be able to keep reinvesting in their business as opposed to giving it back to shareholders, which, typically, could indicate that they're running out of growth opportunities. So historically, until a couple of years ago when on the larger cap side, you had Microsoft and Apple that distribute large dividends to their shareholders. Prior to that, most times if growth companies distributed dividends, that was considered a negative sign, and they would not react well in the market.

Let's go to page seven, and that will show you some differences between the sectors in small-cap growth and small-cap value. And this is as of August 31. Now typically, growth funds will have much more in healthcare and technology and value funds will have much more in financials. As of August 31, healthcare and technology combined were about 47% of the Russell 2000® Growth Index. And they were only 14% of the value index. Conversely, financials, this is excluding REITs, were about 30% of the Russell 2000® Value Index but only 5% of the Growth Index. So that's the big change in terms of how growth versus value. And that's been fairly constant over time. As far as I can remember it, going way back, you never had a real period where financials were a big part of the growth index. And you never had a major period where healthcare was a huge part of the value index.

Let's go to page eight. And here we have the small-caps style going way back. And the reason why we start with 1979 is that's when the Russell small-cap indices were created. So, yes, I know it's tough to believe in this environment, but if you look back then, before looking PEs for growth, on average for small-cap companies, and this is for the small-cap growth index, was eight. And for value companies, it was around five. So clearly, we don't deal in those numbers anymore. But also think back in 1979. You had inflation that was in double-digits, and you had growth that was very low, and you had interest rates, which were very high. And they stayed high for the next three years. So gradually, you can see – and it's pretty clear from the chart when the Fed really starts to lower interest rates back in 1982. You can see the big spike in PEs. And the next thing I would highlight would be the year 2000 where you saw that the spike especially on the growth side in the PEs. And that's where they peaked at around 26. And these are excluding the companies that did not have earnings. These were real earnings for the companies. And as of today, you have growth companies with PEs that are north of the average. They're somewhere around 18 to 20. Just to give a little bit of flexibility. And on the value side, it's around 12 to 14. So much higher than they started with, but they've come down a little bit over time.

If we go to slide nine, this will tell you it's almost like we're in two different lifetimes here for the last 20 years. 1999 through 2008, you had the value stocks doing much better than the growth stocks with exception of three years. And in 2009 through 2018, you had the growth stocks doing much better than the value stocks except for two years. Now, what drove the '99 through 2008? It was an economy that was doing okay. You were coming off the Internet bubble, which really started in 1997 and continued through March of 2000. And then once that came down, value took over. Now, as an example as far as what I mean by growth really outperforming value: Just in the year 1999 and the first two months of 2000, the Lipper Small-Cap Growth managers returned 106% in 14 months. And the Lipper Small-Cap Value managers in those same 14 months returned zero. So you had this huge outperformance by the growth managers over value.

And of course, remember back then in the Internet, any company that did not have any prospect of earnings was treated like royalty. And when they IPOd many times, they doubled immediately. Then you get past the financial crisis in 2008 and heading into 2009. Growth starts to resume some leadership as they have for the past 10 years, most of the past 10 years. And here, we're dealing with an economy that's been growing for the most part around 2%: plus or minus 1% around that 2%. So slower growth leads to companies that have a scarcity value that can grow. So the Russell smaller growth companies have been doing better than the Russell value companies, and it's been fairly consistent with the exception of a couple of years, the main one being 2016, and that was really after the election. The reason being that Donald Trump had campaigned on cutting corporate taxes. And given that small-cap value companies were going be to the primary beneficiary of any tax reform, they reacted very strongly in those six weeks following the election in 2016. But then they gave most of it back in 2017 and 2018.

If we go to slide 10, here's your performance of large-cap versus small-caps, and it actually had a fairly good record until recently, really in 2000 starting with 2015 where large-caps started to have some outperformers. Actually, in 2014. And so they have done better in the last several years. Last four years. Prior to that, small-caps had a, actually, a very good track record especially following the Internet bubble as you can see there in the year 2000. Some of the things I'd highlight. Typically, when larger-caps will do well is when you get a lot of international competition in terms of profitability. And small-caps like it when the domestic equities and domestic markets do better. So as we move forward here, you'll see a chart later on where the US economy is by far the strongest one of the developed world. And that should be a good prospect for small-cap companies as we move forward.

Now, let's go to page 11, slide 11, where we actually do have some valuations here. And you can see that on the very right-hand side how cheap small-caps are versus large-caps on a relative PE basis looking forward. It rarely gets this cheap. The one time that obviously I would out point to is 1998 through 2001. Particularly 1998 and 1999 where that was actually the last time we had a craze in terms of passive investing. But it really was dominated solely by the S&P, what they were called back then is spiders. And they were the only real active ETF that people could buy. So 1998 was what I would classify as a horrible year for small-caps relative performers where they actually trailed large-caps by close to 30%. There has not been any year close to that since then. And hopefully, there won't be any year close to that since then. But right now with the relative PE somewhere around that 0.9% range, that's very cheap historically. So this would also point to the fact that small-caps look good relative to large-caps from a valuation standpoint.

So that's some background for the small-cap market. Now, we can go to where we have the small-cap value portion of it. And on slide 13, I mentioned before that one of the topics that we look for and focus on in our analysis of companies is what is the free cash flow of companies? And what you're seeing here is in the last 33 years. So a very extended time frame of free cash flow yield quintile. And what it shows that the companies with the highest free cash flow yield have done the best in the market over these last 33 years. And it's a perfect quintile. I would call it progression or regression depending on your point of view where it says – and when you get to that bottom quintile, the returns over 33 years have not been good at all. So what this does is it tells investors if you're looking at something that's for free cash flow as one of your focus points, please look at the ones that generate the most free cash flow if you can. Because obviously, those first two quintiles have very powerful returns. And really, the simple answer on this one is try and avoid the ones where there's no prospect of free cash flow going forward. Those companies that always outspend what they take in do not have a good track record of giving good returns to investors.

If you go to the next slide, you can see some of the things that we use as value managers to focus in on companies. And our favorites tend to be price to earnings, price to cash flow, and then enterprise-value-to-EBITDA. Those are all good valuation metrics and really do have some component in them of cash flow or free cash flow. Not necessarily in the formula, but in what gets to the formula. And then financials on the right-hand side, they're more concerned with price-to-tangible book value especially for banks. Price to funds from operations, which would be more REIT focused, and then the price-, then, to-asset-value also in REIT. But all of these do depend on valuation to some extent for the investor to really get a handle on what would be a good potential valuation for that particular sector. In ours, we really do like to use that bottom one, the enterprise-value-to-EBITDA, for all of the sectors except for financials because it really does give a good indication of how much people are expecting free cash flow and what you're paying for that free cash flow.

On the next slide on 15, for financials, you can really divvy it up into cyclicals versus defensive as far as what will work. So think of it in a cyclical environment where loans are strong. Credit's good. Economy's growing. Retail banks generally tend to do well that are asset sensitive. Meaning that they're priced to higher interest rates. Life insurance will also do well in that environment because they have a lot of equity market exposure as will asset managers. Now, on the defensive side, if you're afraid of the economy that it might be going down into recession or very, very slow growth, regional banks that are liability sensitive, meaning that they don't depend on higher interest rates for their profits, tend to do well. Property-casualty insurance companies because they tend to retain their pricing power because people still drive whether there's a slow economy or a good economy. And then financial exchanges and data because people also trade whether the economy is good or bad. So that's how you can really look at financials as far as which ones will tend to work depending on the economy. Cyclical versus defensive.

If we go to the next page, what we'll see here is that there's a big change in the last couple months. Actually, I'd say the last year as far as how banks are being valued and how property-casualties are being valued. So if you think of what we said on the previous page, from August of 2014, banks generally carried higher valuations than insurance companies. And then when you get to the middle of 2017, they start to converge. And right now, they're lower because people are thinking that the yields are going to remain very low for a long time. That the Federal Reserve is going to be very accommodative, which we agree with that they will be accommodative. But they're also saying that the economy will be slow, which means that loan growth tends to be sub-par. And that makes it tough for profits to grow when loan growth is going to be sub-par. Now, conversely when you look at the property-casualty, which has been more defensive, you can see that they now have a several multiple point advantage in terms of PE versus the regional banks. So they've been very defensive in the sense that their earnings have done fairly well in this environment. Their pricing power's actually held up also fairly well in what's considered a very low inflationary environment. So they've been able to maintain very good and strong PE levels versus history and certainly relative to the banks.

Now, if we go to next slide, here we have utilities and real estate, and these are what you consider your real focus stocks for slower growth and for yields. And we have to be realistic that in the past several years, there's been a real scramble for yield. And really, you can take it back to 2008 and 2009 when the Fed first cut interest rates, the fed funds rate, to 0%, which at the time was supposed to be a three-month experiment, and it turned into a seven-year experiment. So we had seven years of basically 0% interest rates, and utilities and real estate investment trusts have been good for investors since then because people really did have a scramble for yield. Think of any bond that people owned that it was called or redeemed or matured. There's any way for people to reinvest it at the same rate if they were looking for any sort of quality. So all of a sudden, utilities and REITS became some of the preferred investments. So you can see their valuation on the right-hand side in terms of PE. It had some of the highest levels that we've seen in the past several years.

One of the fun charts I like to point out is the oil chart as far as how much crude the US produces. And energy has been a very interesting sector in small-cap because even with the price of oil doing fairly well, small-cap energy stocks have not done well. It's been a very poor sector for most investors. Now, think back to – we'll go back in time now to, let's call it, ’68 to ’72 when production peaked in the US at about 8 million barrels per day. And for the next 25 years, even let's call it 35 years, it generally was on a continuing gradual slide down except for a very brief spike in 1981 and 1982 when Prudhoe Bay came on board and when the price of oil was still hovering around $34 a barrel.

Then all of a sudden in 2009, fracking becomes very popular. And, of course, with the price of oil hitting around $100 a barrel for three consecutive years from 2012 to 2014, it really gave great incentive for a lot of exploration production companies as well as oil service companies to drill. And they did. So at this point in time, as of now, the US is the largest producer of crude oil in the world. And there was a time, and I thought I would never be able to say that under any circumstance because Saudi Arabia and Russia had always been the two leaders, but the US, because of the fracking revolution, has overtaken both of them. And the odds are that the production will continue to grow for the next couple of years. Even with the recount declining. So it has not made us energy independent, but it certainly has made us less energy-dependent, so it's been a very good thing for jobs. For wages over the last several years. For the trade deficit as long as we've had us importing less oil at prices that would've really made the trade deficit go up by a lot, and that has not happened. So it's been a real positive for the US, but as I said, we're not getting energy independent, but we certainly are less dependent than we were before because it's not that long ago that we were basically importing 70% of our energy needs. And we are way below that right now. So it's been a good thing for the country.

When you look at the outlook on page 19, some of the things that we would have to highlight: Corporate profits are likely to continue to grow but at a much slower pace than last year, and I'll get into that in the next slide. Dividends and buybacks remain strong. They've been strong for many years now, and this has been one of the rare environments in terms of economic growth where it's been slow enough that companies have not been having increases in capital spending. They've been very disciplined. And instead of throwing money into plants and equipment, they've been giving money back to shareholders in dividends and buybacks in particular. The Federal Reserve has remained accommodative. Absolutely no sign of them not becoming accommodative. I think they've seen in the market very well that the days of rate increases, for the time being, are over. Capital spenders, as I mentioned, will be increasing by that disciplined level. And consumer confidence. One of the things that we really like to track because a consumer is a huge portion of economic growth in this country is still close to a 20-year high. So I read that as saying that the consumer thinks that something is going right. Whether it's housing or whether it's their job market. And, of course, with unemployment at 3.7%, most likely anybody who really wants a job is able to get one. And that has not always been the experience. So if the consumer feels pretty good – and you think that with all that's going on in the world in the last several months whether it's the tariffs or the trade or something in the Middle East, consumers still seem fairly optimistic. And that normally is at least a decent sign for the economy and economic growth.

Now, if we go to slide 20, here's where you see some of the earnings and expectations and actual earnings growth. So it's been a pretty good several years of earnings growth in the – for small-caps, you can see that in 2015, it was 13 and a half. Then in 2016, 10.4. Then 2017, 15.3. In 2018, 29.1. Now, 2018, we had a lot of help from the tax reform. So we did have basically a built-in, I call it, 12 to 15% growth rate without doing anything. Just from alone in the corporate tax rate from 35 to 21%. And that's why this year when companies and analysts were starting the year saying that there's no reason to expect earnings wouldn't grow at 20% again. To me, there was every reason to expect that they would not grow at 20% because you did not have the tailwind from the tax reform. That ended in the first quarter of this year when you had the comparisons that now were low tax rate versus low tax rate. So you can see on that bottom part of that chart how throughout the year the expectations for earnings growth had been declining. And right now, they're at a realistic rate of around 5.7%. So usually, you start the year around 20%. People are optimistic, and it tends to go down throughout the year. But it's going to be a very difficult comparison versus 2018 because of the tax reform.

Let's go to page 21. Quarterly dividends and share buybacks have been very strong for several years. There's no reason to expect they won't be strong again this year. Again, companies are giving a lot of money back to shareholders. They are not increasing their capital spending at any significant rates, which means that there's more money to come back to us and shareholders. So expect strong numbers again for share buybacks and for dividends. Page 22 gives you the M&A activity, which also remains very strong. And on that top graph where it said the total deal value, that's including equity and debt. And typically, equity represents about 70 to 75% of the total deal value, so you can see there's been a lot of stock market capital taken out because of deals, and the last five years have been incredibly strong. If you go back to 2005, 6, and 7, the last time you had some very historic numbers in terms of the upside. A lot of that was driven by private equity, which were very involved in the M&A acquisition game back then.

If we go to page 23, here's your inflation and Russell 2000 reform. So we're looking at small-caps, and they're still kind of in the sweet spot. But what it shows here is that when the CPI ranges between one and a half and two and a half%. Even let's go to 3%. That generally, the returns whether 3 months, 6 months, or 12 months tend to be pretty good. So the small-caps are like most other equity investments that they don't like accelerating inflation if it's going to be a significant accelerating inflation, and that just takes away purchasing power. They do like it when the CPI is fairly tame but there's some inflation so they can get some pricing power.

Then if we go to page 24, you can see where I've talked about before how small-caps like the domestic economy. And when you look at the big seven – so we're excluding China here in the developed world. The estimated growth. The US is still the only one with expectations above 2%. The slow growth environment. We all know what interest rates are around the world. They're not high anywhere. And that looks like it continues the case for at least the next year. A little history that would put things in context. You can see that back in 1994, that was when the last time that I consider the Fed going on a very significant interest rate raising period where they had 3% increase in rates over 12 months. And you can see from the chart that the small-cap market did not do well. Now, when rates are falling, conversely in 1996, you can see 1995 and ’96 all the sudden, they do much better. So they're like other equity investments. They like it when the Fed is accommodative and giving them more money. A couple of other things that we look at. The manufacturing ISM report tells us whether manufacturing's improving or really the economy is improving or slowing down. And usually, an over 50 number is good. Under 50 number is negative. Obviously, you worry about it if it lasts for several months. You can get these blips occasionally where it goes down for one month and then back up or it goes up for one month in a big way and then back down. But for the most part, the last several years, this number has been reading very much right around that 50 and above. So that portends good things for the economy.

And then last chart. Again, as I mentioned, consumer confidence still at a very high level. The last time we had this high level was back in ’98, ‘99, and 2000. Right now, we have it seems like more of a stable economy. It's not built on excesses of an Internet bubble. It's built on actually real economic growth. So with that, let me turn it over to Alex who will cover more of the small-cap growth area.

Thank you, Chris. And thank you, everyone, for listening in. My name is Alex Ely. I am the CIO of the small- and mid-cap growth group here at Delaware Funds. And I'm here to tell you a little bit about how I invest, what we're expecting for the growth markets, and what we're seeing out there in equities. So let's go to the next page. Okay. What I really look for are disruptions. Disruptions are when there's a foundational change in the way business is done in any particular industry or a better, cheaper, faster way of doing things comes along. When this happens, the creative destruction process that makes capitalism so great gets enacted. Typically, these are sparked by technology or it could be new innovations or what have you. We seek out these disruptions within the economy and try to invest in them. So a quick example would be my mother still goes to a teller. She cashes checks. Maybe she gets a cashier's check or a money order while my son just takes pictures of checks and then moves money to friends. And why does he do that? Because it's a better, cheaper, faster way of doing things.

Once this new way of doing things happens, that market enters secular expansion. And when that secular expansion happens, the smaller macro issues don't matter. If we don't do a deal with China, it's not like my son's going to go back to the teller. He's going to keep Venmo-ing money to his friends back and forth. If the Fed doesn't lower rates by another 25 basis points, it's not going to matter. We're early in this transition where people are exchanging currency digitally in terms of history. People talk a lot about the slowing economy. Apple Pay transactions year to date are up 100% year on year. So that's what we look for, and that's how we start in terms of investing for our group. Now, what we end up with as a group is a best ideas growth portfolio. We are looking for a broad long-lasting trend. Every great growth company in history has these types of characteristics. So trends come in one of two forms. It can be an all-new business like, social networking which didn't exist 15 years ago, and now, there's trillions of dollars worth of asset value. Or it can be a better way of doing things like streaming media where my daughters will watch Hulu and Netflix and other streaming options that are more efficient than what we had with cable. Cheaper content. The ability to see that content wherever we may go.

We always try to identify the leader whenever it comes to investing in these trends. In essence, you want to buy Facebook. Not Myspace. The leader is typically the company with the best product. The best service. The largest amount of market share. They have strong management teams. And then they are in an excellent position to benefit in ways that people don't foresee or don't have in their self-side numbers. So they could have things like M&A opportunities. They could have partnerships. They're involved with every RFP because they're the leader. And they get extra fundamental boosts from these things happening, and that's why you want to own the leaders because there's extra upside that's there. Insist on strong fundamentals. If it's the next great growth company, it should be growing. So we always look for that. If a company slows in growth, we sell. We want to maintain growth characteristics in the portfolio. And then finally, be early. This is really just a law of large numbers. It's a lot easier for me to find a $5 billion name that's going to double versus a $500 billion name. It's easier to move the needle when you're a smaller company.

On the next page, we get right into it in terms of the kinds of trends and things that we're seeing out there. It starts with high-quality food. Organics are growing 10% on your grocery aisle while traditional food court categories like soda and beer and packaged foods and can foods are flat or in decline. Just a couple stats for you. Sales of kale over the last 10 years are up 400%. Sales of avocados over the last five years have doubled. So people are eating higher quality foods in general. It's not just in your grocery aisle. It's also going to be on the street. During lunchtime, you can see long lines behind at higher quality food places whether that's a Chipotle or a Chopped or a Dig Inn. It doesn't even have to be food that's good for you. We own Shake Shack. There's currently 240 Shake Shacks. There's 37,890 McDonald's. While Shake Shack burgers are widely preferred over McDonald's by kids. So we expect there to be a lot more Shake Shacks in the future.

Active lifestyle. In essence, people are prioritizing exercise and outdoor experiences. We own brands such as Yeti or Lululemon. We own the largest maker of faux wood for outdoor decking in Trex. Faux wood is gaining over traditional wood because it's cheaper. You don't have to treat it. You just put it up once and it lasts for 20 years. Finally, mobile services. About 60% of people are chemically induced to look at their phone on a regular basis. That's because they're getting a shot of dopamine when they see whether they got something. A like or a view or somebody answered their text or what have you. Just a couple stats for you. About 60% of people text while driving; 35% of teenagers wake up in the middle of the night to check their phones. So this is something that people are very attuned to. I was watching the deciding game of the Red Sox, Dodgers World Series last year, and most people behind home plate in those very expensive seats were checking their phone in between every pitch. Sometimes missing the action. So certainly, phones have our attention. There's certainly businesses that are ideal for it. Diet and exercise are an example. Count your steps. Count your calories. Banking is another one that I just mentioned. If you're going to have a digital currency solution, you're going to want to carry it with you.

And then finally, dating. We own, which owns Tinder and Hinge and OkCupid. This is something that was somewhat taboo years ago. But not today. All ages, all cultures, internationally as well are embracing finding relationships online. Percentage of relationships that start online now is 40%. So this is going mainstream. People are figuring out ways to make money on it and just lots of opportunities. A quick example for you. In New York City, bar sales are down for the third year in a row because you used to go to a bar to drink a beer and meet someone. Those people are now in their apartments. They're gaming or they're watching Netflix. They're ordering in. Three times more likely than the previous generation to order in. They're smoking weed instead of drinking beer, and they're finding dates on Tinder or Hinge. So definitely a change in lifestyle that we're seeing.

In respect to healthcare on the following page, it really, this is something that we're very early on in terms of the individualization of healthcare. This has arisen from being able to map the genome. That's your technological inducement. We first mapped the genome 15 years ago, and it took millions of dollars and several years to do it once. Today, we can map hundreds in a day just on a desktop sold by Illumina for about 20 grand. So the number of genomes that we can map is accelerating. And with that, we're also looking at RNA, proteins, other biomarkers that are all adding to our information about the body that allows us to detect certain diseases. As an example, women are getting double mastectomies because they know they have a certain kind of gene that will mean that they'll contract breast cancer, and if they catch it too late, they could die. So enormous changes that are coming on. In essence, in the old days, we used to create a product that would treat the entirety of the disease. Today, we create a product that only tries to treat one genetic variation at a time and we use it for people that – and we don't test it on everybody. We only test it on people that have a particular genetic makeup. The combination of precision medicine and targeted therapies leads to better efficacy and better drugs.

Spending on cancer treatments has doubled in the last five years. It's set to double again in the next four years. And it's not just cancer. All of our major diseases: Alzheimer's, Parkinson's, cystic fibrosis, muscular dystrophy, will have step function improvement in cure and treatment rates over the next 10 to 15 years. The opioid crisis. Last year, 70,000 people in the United States died from drug overdoses. 50,000 of them were from opioid overdoses. Over 500,000 people have died in the United States since the beginning of the century. So an enormous epidemic for our country. We own the leading maker of non-opioid local anesthesia in a company called Pacira Pharmaceuticals. This is very important. 40% of people that get addicted to opioids get addicted because they had a procedure and they kept taking the drug thereafter. This is what happened to Prince and to Tom Petty and Mac Miller and many others that you would know about. By using a non-opioid local anesthesia when you're doing a procedure, almost 80% of people never have to take an opioid at all. And therefore, obviously avoiding being susceptible to getting addicted to opioids. Last year at the end of the year, Trump signed a bipartisan law. This isn't a Republican or Democrat thing. It went through the Senate 99 to 1 to subsidize the price of non-opioid local anesthesias. And we think that this will help out the company we have invested here.

Virtual healthcare. People always complain about the expense of healthcare. Co-pays and deductibles get worse every year. How are we going to fix it? Here's the answer. It's telemedicine. This is most likely available on your insurance plan today. The company we own here is Teladoc. In essence, in the future, half of all doctors’ visits will be done virtually as opposed to in the doctor's office. And why? Because it's cheaper. Let's say you have a rash or poison ivy or some bruise that won't go away or something like that, you can go onto Teladoc or a telemedicine service. You can send in an email of a picture or you can FaceTime or Skype or what have you with a doc and get diagnosed right there over the phone.

By doing this, the doctors make more money because they don't need the trappings of an office and extra employees to help them out. Also, they can work in flexible hours. The insurance company makes more money because they don't have to reimburse the doc as much. And you get better, faster healthcare. Not only are we doing this with doctors’ visits, we're also doing this with continuing monitoring of people's bodies whether it be your heartbeat or your insulin levels or your blood pressure. Heart disease number one killer in America. Instead of just taking an EKG for five minutes at your doctor's office, you can have your heartbeat monitored continuously and are much more likely to be able to detect AFib and irregular heartbeat. Maybe you wake up in the middle of the night and you feel flu-ish and the reality is you had a minor heart attack. They would be able to adjust your cardiac treatment regimen accordingly in order to provide you with better healthcare.

Finally, it's my technology page. We've already talked about social networking and streaming media. Interactive gaming. This is something that we'll have to put regulations on. They already have put regulations on in China. You are in essence pitting tens of thousands of highly educated software engineers against the mind of an 11-year-old boy or girl. And who wins? The software engineers do. And what they do is, again, they drive dopamine into the child's head to keep them watching. They drive up viewership, and then they monetize that viewership with ads or music or you can get a new life or a new skin or new energy, and they sell it to the kids with microtransactions at 99 cents or less so their parents don't notice. So lots of money being made there. Fintech I already mentioned, but what a significant move. All banking. All currency. There's still 90,000 bank branches out there. I expect half of the bank branches to go away in the next 15 years. Get ready to go to a lot of restaurants that look like banks. The reality is young people don't go into banks anymore. They use the phone. They use the network.

And then finally, the Internet of Everything. I like to give a historical perspective here. If we were all sitting here 250 years ago, there's a 92% chance you'd be a farmer. Almost all of those jobs went away into something else. If we have arrived 120 years ago, we would've arrived on horse and there'd be horsemen and groomsmen and saddle makers. All those jobs went away. Most recently, we've seen Toys “R” Us go away and Circuit City and the toll operators and the parking attendants. And it's because technological solutions came along to provide better ways of accomplishing those tasks. Whatever they may be. What's next? In the future, half of all accountants go away because the big four accounting firms are accelerating. That's the keyword. Accelerating spend to replace basic CPA functions with machine learning and AI within their companies because it's a better business model. And that's really the point is the race is on to use tech as a weapon to beat your competitor.

I'll give you another example. Half of all truckers will go away in the next 10 years. It costs about 200 to 250 grand in salary, benefits, and insurance to put that trucker in that cab. You can use it on software and connectivity solutions to drive your trucks autonomously. If you own a trucking company and you get to this model first, you get rid of half of your labor costs. Ninety percent of your insurance costs on those trucks because if there's an accident, don't sue me. Sue the software company that's driving the truck. And then finally, you can run those trucks 24/7. What a boost for the business model. You can lower your prices and take all of your competitors' market share. So again, the race is on.

Finally, one more for you. We'll be getting rid of half of the cashiers. In the future, you'll walk in with a cart or a bag into a grocery store or a Walmart or a pharmacy and you'll fill up the bag or cart, and you will walk out the door. And over the door will be an E-ZPass-like gate that will be sensoring all the RFID chips, which cost less than a penny, that'll be either in the packaging that's on the item that you have or on a sticker that's on an apple or something else that you see. And they'll scan all of the items just like an E-ZPass scans your car as you go through it, and you'll be able to walk out more efficiently. Now, that sounds great. Like okay. We get rid of cashiers, but what else do we get rid of? We get rid of all shoplifting. Incredible. Nearly 2% of retail sales that we are able to recoup. Most of which is done by a company's own employees. That's nearly $10 billion a year that Walmart will be able to save. So just dramatic changes. I often say that my grandkids will look at me and say, "Jeez, you were driving a car while distracted with flammable liquid. Wasn't there accidents?" Yes. 30,000 people die a year. Wasn't there a lot of burglaries because people were carrying cash? And wasn't there muggings and so forth? Yes, there was. And my goodness, people actually went into stores and stole stuff? Were they poor? No. Rich people did it too. So really a dramatic change in what's happening. That's how primitive we are in terms of where we're going in the future with tech.

At this point, I'd like to give an historical perspective to map out how these disruptions will continue regardless of minor macro issues. You can see here we peaked out in 1929. Think of the disruptions of the day. We had the light bulb. We had the telephone. The radio. The combustion engine. Incredible. The market got too greedy and we collapsed. We had the Great Depression. 25% unemployment. 47% of banks fail, and we had war. Whenever there's not enough money around, populism spikes, geopolitical risks spikes, and that's what happened here. We finally broke out in 1950. And over the next 18 years, the S&P - this is a chart of the S%P – was up 500%. 500%. And what's it being driven by? New businesses like commercial airlines. United Airlines, Pan Am, Boeing. Interstate highway system. Container shipping was invented during this time. Huge boost to logistical capabilities. US Steel, Bethlehem Steel are a couple of the companies that benefited. Everyone gets a car. Everyone gets a phone. GM, Ford, AT&T gets so big you have to break it up. And you can't time it. You can't sell in ’56 and buy in ’57 and sell in ’59 and buy in ’60 and back and forth and back and forth. You believe in the disruptions of your generation, you own the leaders of those disruptions, and you hold on through those periods because trying to predict the next correction or the timing of the next bear market is really folly. You won't be able to do it consistently.

On the next page, you can see the same thing. Market peaked out in 1968. We got too greedy, and then some bad things happened. OPEC gets created. Oil goes from 3 to $30 a barrel. We get massive increases in interest rates. You saw the lower PEs as a result in Chris's review. 20% mortgage rates. 16% on the 30-year T-bond. I bought a 14 and 1/2% CD in 1982. And then we break out. 1400% increase in the S&P from ’82 to 2000. And what's it being driven by? Globalization of American brands. Coke, Nike. PC penetration. Microsoft, Intel. Big box stores. Companies like Home Depot, Walmart. And look at the variations in a day. When you have the ’87 crash, do you get rid of the PC and go back to calculators and typewriters? No. You keep going. And that's the point is that in each case, these disruptions continue regardless of shorter-term macro issues that come up.

On the next page, you can see where we are today. Market peaked out in 2000 at about 1550 on the S&P. And we had our big bad macro issues. We had the tech wreck. Consumer debt bubble collapsed. We had war again. Finally, we break out around 2013 or ’14. I can even argue that we broke out in 2016. And now where we are today, we're only up 90% from where we were almost 20 years ago. And so I'm optimistic. I'm bullish. I think that the market will triple by 2030 from where we are today. It sounds like a lot, but it's only about 11% a year. And what will it be driven by? All of our food. All of our banking. All of our content. Treatment of all of our major diseases. Undergoing foundational change. Huge businesses. I'm not talking about smaller things. I'm talking about big businesses being completely disrupted. Now, the reason I'm so confident in our bullish outlook is nobody is talking this way. Most people are bearish or neutral at best.

I took a Goldman Sachs portfolio managers survey. Percentage of portfolio managers that are just plain bullish: 4%. Only 4% of managers. Bank of America's global portfolio manager survey most recently said that investor confidence was the lowest it had been since the global financial crisis. Equity allocations in hedge funds are at multi-year lows. Institutional equity ownership is at all-time lows. Meanwhile, we see consumer confidence and CFO confidence is very high. Consumer credit scores are very high. The technology that's out there is accelerating. Unemployment is low. So we're in a good economy.

If you go to the next page, you can see the acceleration of technology out there and how things are happening quicker and quicker and quicker. That's what's happening as technology works its way into our economy. And then finally, just to give even a longer-term perspective as to how I see things. I really believe that the time in history that we are in is very much like the Renaissance. The Renaissance was kick-started in the mid-1400s by the invention of the printing press by a guy named Gutenberg. Unbelievable invention. Mass communication for the first time in history. By the end of the century, it took a little longer for technology to roll out back then. This technology was available in 200 different European cities and towns and 20 million books had already been printed. And before this invention, the literacy rate was 0%. The only people that could read were kings and queens and monks. After this period, people wrote in the wrong vernacular. And what was the result? Some of the greatest ideas in history are created. Ideas like democracy, private property, freedom all invented during this period of time.

In the arts, obviously, everyone knows there were lots of great art in the Renaissance, but I'll give you some examples that stand out. Shakespeare created 1,500 new words like awesome and elbow, but also ways to make content more engaging with things like the comic interlude or foreshadowing or the anticlimax. Power structures were upended. The Catholic church was upended by the invention of Protestant faith. We saw monarchies upended by the invention of the nation-state. And then finally, financial opportunities. There was a monk named Luca in Italy who invented double-entry accounting so that you would have collateral. What an incredible change to the way people could create businesses and the way that they could borrow money and so forth. So just incredible opportunities there. Today, it's the same thing. Where, yes, we've had the Internet for 20 years, but we've only had high-end smartphones for the last 10 years. And really coverage has only gotten great over the last six years, and we're still moving to unlimited data plans today. From an historic perspective, we're very early.

Here are the numbers. As of 2010, 10% of the world's adults had access to a high-end smartphone. About 27% of the people in the US. Those numbers are now 43% of the people in the world and 79% of the people in the United States that have all the world's information, education, and content in their pockets. And what a change. So let's go through it backwards. Financial opportunities. You've got Crowdfunding, Kickstarter, GoFundMe. The ability to invest in all kinds of different things in different ways that you never had before, and it's because of the network. Power structures. The movement against racism and sexism has accelerated in this decade, and it's because of the phone. The communities that are created out there that embolden people to fight against racism and sexism, as they should. And what a change that we're seeing. I'll give you an example. Obviously, this is a terrible thing, but my daughter was going to college last year, and I got to reading about sexual assaults in The New York Times. The number of sexual assaults reported on college campuses and in the military has quadrupled in this decade. Quadrupled. And it's because of the support of the communities that are on the phone that are on the network that are changing society.

In the arts, so you can look at Netflix and Amazon. How many shows can they make? But you can also look at the businesses that are created and the content sharing worldwide that were seen on things like Instagram or YouTube or other ones like TikTok and Edit and Switch. Content is changing. It's more engaging. It's more individualized, and it's more global than ever before, and people are building lives upon it. And then finally, it's ideas. I kind of leave this blank. I've laid out what I see are the major disruptions of our generation, but the reality is I'm an optimist. From where we are in the state of humanity and where we are from a societal point of view, there's lots of good that can come from everyone finally coming together to share ideas and share thought and share content and so forth, which makes me so excited to be a growth manager today. So that's all I have for – thank you for listening in. From here, I believe we take questions.

Yeah. Thank you, Alex. This is Zack. In closing, I want to thank everyone for their participation today. We've actually come to the point where we have questions that we'll follow up with you after the call. We've reached our time allocation for today. For more information from the portfolio managers that you heard from, if you look on the web, you can visit the resources widget where you'll find links to our most up-to-date digital content. Additionally, we're going to email you today's presentation later today. If you would like to receive regular commentary from Chris Beck's team and Alex Ely's team and other teams at Macquarie, please visit the insight section of our website at and subscribe to receive updates whenever new content is published. Again, thank you for your participation, and please consider completing the survey to the right of the slide window.

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