FidelityConnects: Factor investing – the quant edge for today’s markets

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Hello, and welcome to Fidelity Connects.

 

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I'm Pamela Ritchie. Global earnings estimates are climbing and that is giving

 

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value, as a factor, investing a fresh tailwind.

 

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For the first time since 2022 our next guest today is upgrading

 

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value and he says it's also a powerful hedge against

 

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momentum as a factor.

 

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What is driving this shift, and which data points are he and his team focused

 

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on right now? Joining us here today from the edge that Fidelity's

 

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team shows with quantitative research to the factors and

 

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Fidelity ETFs that may stand out in today's market is Bobby Barnes.

 

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He is Fidelity's head of Quantitative Index Solutions.

 

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Warm welcome to you, Bobby. We've been dying to ask you so many different

 

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questions so I'm glad you're joining us here today.

 

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How are you?

 

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Thank you. Good, good. Thanks for having me.

 

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We'll invite everyone to send their questions in for Bobby Barnes over the next

 

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half hour or so. What's going on in the markets right now

 

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in terms of the factor story is it seems like

 

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AI trumps everything. Is that fair to say?

 

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Absolutely.

 

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AI has been a major driver of stock returns over

 

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the past year, 2025 in particular.

 

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Depending on your portfolio's exposure to

 

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AI that in a very nice linear fashion determined how

 

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well your performance was versus the overall market.

 

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To put rough numbers around it I think the 200 stocks that

 

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had the highest correlation to AI last year on a sector neutral

 

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basis, not just overweight tech, that basket had

 

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a total absolute performance of about 45%, well above the

 

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17 or so that you got from the S&P 500.

 

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The other side of that, obviously, were the stocks that had a very low

 

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correlation to the AI trade, those ended up having

 

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low single-digit performance over the course of 2025, again,

 

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underperforming the S&P.

 

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Now, year-to-date is a different story but I would...

 

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It really is, I mean, my goodness, what's going on year-to-date.

 

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Take us there and what you do with a story of factors, or

 

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even sectors.

 

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Here's what I'll say about year-to-date.

 

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I'll start with the punchline first which is I want you to ignore it, what

 

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you've seen, and then I'll explain why.

 

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The reason why is every year there's an

 

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effect that, if you Google it it's called the January effect, what the January

 

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affect is, usually at the beginning of the year, whatever worked last

 

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year you get a short term reversal.

 

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Kind of think about it as rebalancing, where small-caps underperformed

 

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large-caps last year.

 

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You look year-to-date, you got that exact reversal that I'm describing.

 

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Same thing across sectors. Last year tech, comm services

 

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were the best performing sectors. Energy was the biggest lagger.

 

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Year-to-date you're seeing that reversal as well.

 

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I'm inclined to attribute that behaviour to the January

 

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effect.

 

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Just to put a finer point on it, you never want to see a

 

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stock performance up or down that's not also confirmed by

 

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the fundamentals or the earnings revisions, year-to-date that's what's been

 

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happening. You're seeing what looks like a broadening out into these left for

 

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forgotten sectors and reversal of factors but the fundamentals

 

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aren't corroborating that.

 

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We're approaching the end of earning season now, as

 

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we get into March and start the rest of our year I think you'll see a

 

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give-back of a lot of the different dynamics that we've seen thus far

 

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yea-to-date.

 

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Thus far year-to-date we have seen, as you say, sort of lots

 

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of different industries get taken out, concerns of how AI will disrupt

 

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them. That said, you have shifted, as we mentioned in the introduction,

 

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to a value outlook which is fascinating.

 

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This fits into the story of the old economy being revived

 

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by AI and what they can offer, it fits into the

 

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global race for resources and many of these different themes.

 

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Value companies, none of that is baked in, priced in?

 

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Tell us a bit about the value story.

 

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There are a couple of things driving me to that upgrade of value.

 

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Just to list them quickly in three, there is rising estimates.

 

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At the aggregate level what you have to understand about the stock market is

 

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that when you roll up all the earnings forecast for the individual companies

 

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and look at the top level be it for the S&P 500, the TSX,

 

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so on and so forth, the natural progression throughout the year is for

 

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estimates go down.

 

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It's actually rare that you have estimates rising for the top level indices.

 

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When you do have them, however, it ends up being a very strong tailwind for

 

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your pro cyclical factors which tend to be value and small

 

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size. As it turns out we are in an environment where the earnings

 

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estimates across the globe, for emerging markets, the S&P

 

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500 and for EAFE, they're all rising.

 

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That's part of why I think that's going to be a tailwind for value.

 

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The second reason is what I call the value of value.

 

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Just to quickly explain, what does that mean?

 

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Well, when you buy a basket of cheap stocks by definition it's going to be

 

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cheaper than the market because that's what you did.

 

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However, what you can do is look at, well, how cheap is it versus

 

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how cheap it is normally, That's what I mean by the value

 

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of value. When you observe that right now we are

 

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at a cheapness or a discount to the market that

 

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is rare throughout history.

 

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In fact, there are only a handful of other times where value has been as

 

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cheap versus the market as it is today.

 

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The third reason why I'm constructive on value is

 

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for the cost of money and the availability

 

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of money, more so in the former.

 

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The cost of money, we've been in a Fed rate

 

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cycle, a renormalization of Fed rate policy.

 

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The last, call it, 24 months there've been several rate cuts.

 

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As I've said to our viewers many times in the past, when you reduce

 

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rates it does exactly what it's supposed to do but with a lag.

 

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Put a rough number around that it's around 15 to 18 months.

 

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I think that that's going to provide some stimulus that'll

 

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help increase economic activity.

 

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All those things, those three things combined, end up being a tailwind for

 

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value. I think that's a key differentiator.

 

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If anyone has listened to me speak over the last, call it, four years

 

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I've been negative on value since 2022.

 

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This is the first time where I'm seeing a fertile ground for that

 

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factor.

 

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But as we started out this discussion the AI theme and how

 

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it affects many of these companies that would be rated value is still

 

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the biggest thing.

 

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Yeah, so here's the interesting thing about value.

 

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In addition to those three tailwinds I mentioned we are in an AI

 

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trickle-down economy.

 

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What that's doing is, you know, we all associate AI as being a tech-led

 

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phenomenon. It certainly is but it turns out you need a lot of old economy

 

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stuff in order to make it work.

 

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Like resources in Canada.

 

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Yes, the resources and then even within, say,

 

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the tech sector AI is very computationally intensive.

 

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To do the computations you need microchips, semiconductors.

 

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Semiconductors, on a relative basis, are cheaper versus other tech companies

 

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because they're more asset intensive.

 

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Generally speaking, more asset intensive industries are

 

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cheaper than their less asset intensive counterparts, say, like software.

 

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Here again we're in a position where fundamentally, the

 

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fundamentals for the semiconductor companies, as an example, are off the

 

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charts. They can't build those things fast enough.

 

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They need to expand capacity so that's a driver there.

 

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Pipelines are full, I mean, as you say, they cannot get them out

 

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there fast enough.

 

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But the trickle down happens when you look at, okay, the first step is to buy a

 

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bunch of chips, now you want to put them in a warehouse.

 

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These chips stacked together get very hot so now I need world-class cooling.

 

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Well, that's just an HVAC company that's an industrial company.

 

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Then you need to power the whole thing so you've got, again, industrial

 

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companies that have always specialized in providing power

 

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so those are in the value bucket and they are participating

 

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in this AI-dominated market.

 

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And then you've got to wire all this stuff up together.

 

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I think you mentioned the word commodities, okay, now we need a whole bunch of

 

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copper because we need copper to connect all these things together.

 

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This is what I'm seeing that's driving some of the fundamental earnings

 

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revisions for what are otherwise cheap stocks.

 

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What happens when, and some of this has been played out over the course of the

 

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last week and a half where we've seen industries get completely rattled by

 

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the effects that AI may have on insurance, on software, obviously, and others,

 

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what happens when companies like, for instance, the hyperscalers,

 

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become a little bit of old world companies in the sense that they become more

 

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asset heavy. I mean, you've got hyperscalers investing and

 

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ultimately looking to own potentially nuclear plants, things

 

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that are major capital stories in terms of heavy assets and

 

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so on. What happens if the companies transform a bit?

 

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I guess just from a factor perspective does that change the buckets

 

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that some of these companies fit into.

 

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It certainly does. A couple of things happen with

 

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the hyperscalers.

 

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The first thing it does is it affects our valuation factor.

 

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The biggest effect is in our free cash flow yield which is one of the

 

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measures we look at to assess valuation.

 

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The more you spend on CapEx the less there is that forecast free cash flow.

 

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Hence, on our valuation models, the hyperscalers on

 

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balance are getting more expensive because their free cash flow, and hence

 

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their free cash flow yield, is deteriorating.

 

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That's going to cause, on balance, that factor to sell those stocks.

 

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Similarly, perhaps on the quality dimension

 

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it'll take a little bit longer but we assess quality, one of the principle ways

 

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we do it is on return on invested capital.

 

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Now, to the extent that that deteriorates because that's one of the big

 

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questions that everybody's asking about with the Mag-7,  are they going to get

 

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a return on all this AI investment?

 

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It's a fair question to ask but I think it's too early.

 

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I think there's no way to answer it now.

 

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I also think that you should ignore trying to answer that question and focus

 

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on other areas which are where's all this money going?

 

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That's fascinating.

 

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That's sort of where the value story picks up from there.

 

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How do you take a look at momentum?

 

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We mentioned at the beginning that since 2022 you haven't really been looking

 

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at value as an out performer and that's because momentum's been in there.

 

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Momentum's just been ... and also quality ...

 

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but momentum has been unstoppable until I don't know,

 

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now, or you tell us.

 

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Momentum is, you know, to use an old adage,

 

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the trend is your friend. That's what the momentum factor picks up on it.

 

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Looks at whatever worked and assuming that you're in a trending environment

 

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with no major rotations then

 

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those, whatever worked is more likely to continue to work.

 

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If you rewind the clock we kind of went through 2022,

 

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which was when inflation rose, but then from 2023

 

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onward we're in a growing economic

 

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environment but growing at a slower rate than what we experienced coming right

 

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out of COVID.

 

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That was why I had been prescribing for a momentum overweight during

 

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that time, which has played out as expected.

 

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Pre-COVID we had FAANG, that's the other thing to

 

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remember, we were in a trending environment pre-Covid as well.

 

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The FAANG stocks, many of which became the Mag-7 stocks, they went

 

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on to do very well in that trending positive

 

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but lower growth environment.

 

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My prescription, to be clear, I'm still prescribing an overweight to momentum

 

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and quality which is what I had been prescribing for the last four years.

 

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It's really just the addition of value along

 

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with those two.

 

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Hello, investors. We'll be back to the show in just a moment.

 

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else you get your podcasts. Now back to today's show.

 

13:47.726 --> 13:51.864

Can you tell us a little bit about low vol? When certain investors have

 

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run for the hills over the course, again, of maybe the January effect, sort of

 

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the February effect last week and a half, low vol maybe looks more

 

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interesting as a place to hide out in. There's

 

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been a little of a run to defence so I wonder what role you

 

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see low vol playing going forward.

 

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Is it a longer term trade? Is that just a quick, oh-oh, hide behind the tree

 

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for now? What do you think?

 

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That's another great question. Low vol is going to do what it's

 

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designed to do when it's designed to do it.

 

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If there's sentiment that people are running for the hills and

 

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wanting to get defensive low vol is gonna do that more

 

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effectively than any other factor, hands down.

 

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Having said that, however, I'm not of the view

 

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right now that we're going to, over the course of 12 months we're

 

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going to be in an environment where you need to run for the hills.

 

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As I mentioned at the outset with earnings revisions at the

 

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top level rising that, all things being equal, is

 

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an indicator that you're going be in a rising market as opposed to a falling

 

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one.

 

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The way that I think about low vol, if you're

 

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wanting to own it for insurance, like the in case something happens,

 

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then for me the better way to play that would be to

 

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own quality, with the reason being that, okay, there's going to be more

 

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upside participation in the factor if, you know, think the bottom

 

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doesn't fall out.

 

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It is actually part of the reason why I am still overweighting or recommending

 

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an overweight to quality as opposed to

 

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utilizing low vol for that insurance part of your portfolio.

 

15:39.238 --> 15:42.508

Bobby, as a scientist, you're a rocket scientist, we often introduce you that

 

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way, what is fascinating to you, to your team,

 

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about the AI tools that they're allowed to play around with, use,

 

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put into their own analysis to get you where you are right now.

 

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Tell us just a little bit about ...

 

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I think we've asked you more about what's exciting about AI but now you're

 

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actually seeing people using it.

 

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What's the newest there?

 

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You're right. As an engineer and scientist I am absolutely

 

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impressed and I find it mind boggling

 

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what AI is able to do.

 

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I would also share with you that I think we're extremely early.

 

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Just from my own personal network people are starting to use it but

 

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it's not ubiquitous. It's not the case that it's everywhere and everybody's

 

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kicking the tires.

 

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Anecdotally, among my crew of scientists and engineers

 

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and quantitative analysts and PMs, the people that are using it are

 

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describing it as life-changing.

 

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Just last week one of the quantitative analysts that I work with was

 

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using, I think Claude Code was the AI tool that she had just gotten access to.

 

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She said, this is going to fundamentally change the way that I forever write

 

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code moving forward.

 

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Those are very profound words to be hearing from people who are experts

 

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in coding and the like.

 

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Another point that I will make is that what she's experiencing

 

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right now. she's experiencing the worst that it's going to be.

 

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It's only going to get better from this baseline that she used today.

 

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I think it's a very exciting moment in time.

 

17:20.105 --> 17:24.543

It's going to lead, in my mind, to, I think, the largest industrial buildout

 

17:24.543 --> 17:26.211

of our lifetime.

 

17:26.211 --> 17:32.384

Do we have a factor for that?

 

17:32.384 --> 17:35.387

We talked about momentum and how it's the trend is your friend.

 

17:35.387 --> 17:38.724

The stocks that will benefit from AI, it already captures them and it will

 

17:38.724 --> 17:40.626

continue to capture them.

 

17:40.626 --> 17:44.696

The other way that I would think about playing it though

 

17:44.730 --> 17:46.932

would be ...

 

17:46.932 --> 17:50.636

you sometimes meet with one of my counterparts, Denise Chisholm, who's our all

 

17:50.636 --> 17:53.939

things sector and industry expert but I actually think that sector and

 

17:53.939 --> 17:58.677

industries would be the most efficient way to

 

17:58.677 --> 18:03.182

play an industrial buildout where you want to overweight some cyclicals

 

18:03.182 --> 18:07.419

like industrials, or we talked about commodities and how there's

 

18:07.419 --> 18:11.523

going to be demand for those as you build out data centres

 

18:11.523 --> 18:15.961

and the like. You've got the factor play but I like the

 

18:15.961 --> 18:20.232

industry or sector play as well as a way of participating

 

18:20.232 --> 18:22.901

in that trend.

 

18:22.901 --> 18:24.903

That's really fascinating.

 

18:24.903 --> 18:28.907

Back to the international story that was tied to international revisions

 

18:28.907 --> 18:30.943

of earnings which are going up.

 

18:30.943 --> 18:35.180

It's an international story, it seems to be, as you noted, across the

 

18:35.180 --> 18:39.418

globe. I'm not sure what you put into the reasoning behind

 

18:39.418 --> 18:43.555

last year's, by all accounts, pivot ultimately to

 

18:43.555 --> 18:47.693

international but the dollar, certainly,

 

18:47.693 --> 18:51.763

and the so-called sell America trade, and therefore the dollar

 

18:51.763 --> 18:54.666

dropping a bit in terms of value, was part of it.

 

18:54.666 --> 18:59.905

Where do you see that piece of the international trade going?

 

18:59.905 --> 19:03.976

There are a couple of things that I think go unappreciated when thinking about

 

19:03.976 --> 19:08.113

the international trade.

 

19:08.113 --> 19:12.551

I did a deep dive on what drove the performance

 

19:12.551 --> 19:16.522

of EAFE to developed international and emerging markets

 

19:16.522 --> 19:22.561

versus the US. If you start with EAFE or developed international,

 

19:22.561 --> 19:26.832

rough numbers it had like 30% performance last year,

 

19:26.832 --> 19:31.403

whereas the SAP 500 was at 17.

 

19:31.403 --> 19:35.073

Actually, most of that was due to the depreciation of the dollar, all of which

 

19:35.073 --> 19:37.309

happened in the first six months.

 

19:37.309 --> 19:40.846

If you unwind that piece of it and look at the performance of developed

 

19:40.846 --> 19:44.950

international on local currency conditions instead

 

19:44.950 --> 19:49.321

of bringing it back to North America, just that alone gave

 

19:49.321 --> 19:52.491

you a market performance that was equal to the US.

 

19:52.491 --> 19:54.092

Having said that...

 

19:54.092 --> 19:55.994

That's really interesting.

 

19:55.994 --> 20:00.766

People aren't necessarily looking at it that way.

 

20:00.766 --> 20:05.437

People aren't looking at it that way which is why I think it's important to

 

20:05.437 --> 20:09.007

have that understanding as you think about, okay, moving forward where do I

 

20:09.007 --> 20:13.011

want to allocate capital, and do I think that this outperformance is going to

 

20:13.011 --> 20:15.547

be sustainable moving forward?

 

20:15.547 --> 20:19.685

Implied with that you would also have a view that

 

20:19.685 --> 20:23.755

the dollar's going to depreciate. I'm not a currency expert, that's not

 

20:23.755 --> 20:26.758

my sandbox, my wheelhouse. I think currencies are hard.

 

20:26.758 --> 20:30.796

If that's an implicit part of your bet you

 

20:30.796 --> 20:33.365

should know that and should be deliberate about that

 

20:33.365 --> 20:36.301

Okay, that's interesting. It is such a fascinating part of the market, the

 

20:36.301 --> 20:39.504

currency side of things. Some great questions coming in.

 

20:39.504 --> 20:42.040

Some of these topics you've touched on slightly but maybe just we could add a

 

20:42.040 --> 20:46.144

bit more. Should we expect any changes to the strategic weight of U S.

 

20:46.144 --> 20:48.680

positioning, which is what you were just talking about, in the All-in-One

 

20:48.680 --> 20:52.818

portfolios? Some of that, I think, you'd leave to the team in

 

20:52.818 --> 20:57.189

Canada  but maybe you can just speak to that.

 

20:57.189 --> 21:01.326

The All-in-One portfolios are a one-stop shop, single ticket,

 

21:01.326 --> 21:05.497

that does your complete asset allocation for

 

21:05.497 --> 21:09.434

you. Now, having said that, the way I think

 

21:09.434 --> 21:13.538

about them is the stock picking is what we would describe as

 

21:13.538 --> 21:16.375

active by design but passive by implementation.

 

21:16.375 --> 21:20.245

You're getting the best thinking of how do we define value or momentum and

 

21:20.245 --> 21:24.716

quality within each of the regions that it's allocating to.

 

21:24.716 --> 21:28.687

If you take a click higher, though, and look at your

 

21:28.687 --> 21:32.858

regional allocation there's no active management

 

21:32.858 --> 21:37.763

happening there. You're mostly getting a strategic

 

21:37.763 --> 21:41.867

allocation to the

 

21:41.867 --> 21:43.735

US and EAFE.

 

21:43.735 --> 21:47.572

The same thing across asset classes, you're getting a strategic allocation to

 

21:47.572 --> 21:51.543

equities versus fixed income.

 

21:51.543 --> 21:55.814

Because we intentionally don't do active management at that level I

 

21:55.814 --> 22:00.052

wouldn't anticipate a change in the allocation of

 

22:00.052 --> 22:04.122

your equity portfolio as it pertains to how much EAFE you

 

22:04.122 --> 22:06.591

own versus the US and Canada.

 

22:06.591 --> 22:10.929

That's fascinating. This next question touches on smaller companies

 

22:10.929 --> 22:15.033

and ultimately maybe how you look to invest in them but also just

 

22:15.033 --> 22:18.904

sort of the story there. Can you discuss how AI is being used as a tool to

 

22:18.904 --> 22:27.012

predict and take advantage of micro stock movements.

 

22:27.012 --> 22:31.683

We haven't touched on, at least internally, using AI to

 

22:31.683 --> 22:34.353

pick stocks.

 

22:34.353 --> 22:37.989

The way I like to think of it is we're mostly using it as a way of making you

 

22:37.989 --> 22:40.726

more efficient at the job that you are doing.

 

22:40.726 --> 22:45.197

I mentioned the one analyst on my extended team who's

 

22:45.197 --> 22:50.035

using AI and it helped her code

 

22:50.035 --> 22:53.672

some stuff that she was coding. Similar on the fundamental side, our

 

22:53.672 --> 22:57.676

fundamental counterparts at Fidelity are using AI to,

 

22:57.676 --> 23:01.847

say, read through all of the earnings call transcripts and provide a summary

 

23:01.847 --> 23:04.416

of the key points and relevant information.

 

23:04.416 --> 23:08.387

That's very different and distinct from

 

23:08.387 --> 23:10.822

saying, hey, AI picked this stock for me.

 

23:10.822 --> 23:14.860

I think, at least for our part, our company, we're never going to use it

 

23:14.860 --> 23:17.729

in that way. There's always going to be a human in the loop who's going to be

 

23:17.729 --> 23:23.468

responsible for the investment decisions on behalf of our shareholders.

 

23:23.468 --> 23:27.339

The other thing I would say while we're on the topic of small size, there's a

 

23:27.339 --> 23:31.309

subtle nuance to some of what we've talked about where you

 

23:31.309 --> 23:33.278

would think on its surface ...

 

23:33.278 --> 23:37.816

Bobby said earnings are rising across the globe, that

 

23:37.816 --> 23:43.188

implies rising economic activity and that backdrop is good for value.

 

23:43.188 --> 23:45.991

Typically, it's also good for small size.

 

23:45.991 --> 23:49.294

Interestingly, I am not in favour ...

 

23:49.294 --> 23:53.498

I haven't been in favour of small size ever since 2022

 

23:53.498 --> 23:55.967

but I'm actually not now.

 

23:55.967 --> 24:00.572

Although I'm upgrading value I'm not upgrading small size, the

 

24:00.572 --> 24:04.509

reason being is that I'm seeing in the data the

 

24:04.509 --> 24:06.244

K-shaped economy.

 

24:06.244 --> 24:10.415

Large-cap value stocks have these tailwinds that we've already talked about but

 

24:10.415 --> 24:14.553

when I look at small-cap companies they don't have this mixed exposure to

 

24:14.553 --> 24:18.490

AI. When I looked at their fundamentals, which is my

 

24:18.490 --> 24:22.527

key guidepost for what parts of the

 

24:22.527 --> 24:26.932

market to be overweight in,

 

24:26.932 --> 24:28.934

it is the case that small-cap earnings revisions are actually declining.

 

24:28.934 --> 24:33.004

Despite that the top level S&P are rising

 

24:33.004 --> 24:37.843

small-cap earnings revisions have declined in all of 2025,

 

24:37.843 --> 24:41.913

and even though it's early innings in 2026, we're only a month and a half into

 

24:41.913 --> 24:45.750

it, I'm continuing to see that be the case.

 

24:45.750 --> 24:49.521

I think that putting it all together we are still going to be in a K-shaped

 

24:49.521 --> 24:53.725

economy moving forward, hence I'm not an advocate

 

24:53.725 --> 24:57.696

for overweight in small size, even though it's outperformed

 

24:57.696 --> 25:01.466

year-to-date, but again, I mentioned the January effect, and that's I'm

 

25:01.466 --> 25:03.034

attributing it.

 

25:03.034 --> 25:05.837

That's so helpful and so interesting.

 

25:05.837 --> 25:10.141

You have said before don't worry about where AI is going, worry

 

25:10.141 --> 25:14.279

about the money that's investing in AI and where it's going and invest there.

 

25:14.279 --> 25:16.882

Don't try and figure out what the killer app is.

 

25:16.882 --> 25:19.484

That said, I'm going to ask you ...

 

25:19.484 --> 25:22.320

because you're a rocket scientist and we want to know just your thoughts

 

25:22.320 --> 25:26.725

broadly ... something along the lines of the connectivity that we're already

 

25:26.725 --> 25:30.328

seeing. The companies that we think are coming to market over the course of the

 

25:30.328 --> 25:35.901

next year, certainly our connectivity in space, satellites,

 

25:35.901 --> 25:40.171

finding new problems to solve probably, maintaining

 

25:40.171 --> 25:42.107

things in space.

 

25:42.107 --> 25:46.211

What do you see 10 years from now based on what it looks like lots of seeds

 

25:46.211 --> 25:49.614

are being planted at this point?

 

25:49.614 --> 25:52.450

I think the future is very exciting.

 

25:52.450 --> 25:56.721

I can't be a former rocket scientist and not be excited

 

25:56.721 --> 26:01.059

about putting data centres in space and the connectivity and

 

26:01.059 --> 26:02.827

so on and so forth.

 

26:02.827 --> 26:07.399

That being said, if I take my rocket scientist hat off and put my investor

 

26:07.399 --> 26:11.503

hat back on I think that there is a lot of

 

26:11.503 --> 26:17.108

hype around some of these things.

 

26:17.108 --> 26:21.112

Ten years into the future the question will remain how much of

 

26:21.112 --> 26:26.718

this stuff will be economically profitable.

 

26:26.718 --> 26:30.855

Data centres in space is an interesting one because I understand the science

 

26:30.855 --> 26:34.826

for why that's attractive. For example, your energy coming from the sun

 

26:34.859 --> 26:38.930

is free and there are a lot of other detailed things like that that

 

26:38.930 --> 26:43.034

make it make sense. But in my mind as an engineer and an

 

26:43.034 --> 26:45.503

investor it's a maintenance nightmare.

 

26:45.503 --> 26:48.907

When something breaks I'm not going to send an astronaut with a wrench up into

 

26:48.907 --> 26:52.844

space and try to reconnect these pipes.

 

26:52.844 --> 26:56.081

Ten years from now it will be interesting to see how these companies as they

 

26:56.081 --> 27:00.085

become public and continue to grow, how

 

27:00.085 --> 27:01.319

that part of it evolves.

 

27:01.319 --> 27:05.724

How they make money, ultimately, for any company there.

 

27:05.724 --> 27:07.425

Do you have just a little bit more ...

 

27:07.425 --> 27:11.363

I want to go back to the value which we began with and just sort of spell

 

27:11.363 --> 27:15.400

out ... you mentioned what's interesting about the international

 

27:15.400 --> 27:19.738

trade, what's interesting about value, do we come back to

 

27:19.738 --> 27:23.842

large-cap in both cases, value US regionally

 

27:23.842 --> 27:26.645

over value still large-cap globally?

 

27:26.645 --> 27:32.384

I'm still curious about a little bit of the sell America that gets overdone.

 

27:32.384 --> 27:37.822

Regionally what do you prefer, large-cap international, large-cap US?

 

27:37.822 --> 27:42.494

Value in both cases.

 

27:42.494 --> 27:45.764

This is another subtle but very important point because a lot of people will

 

27:45.764 --> 27:50.201

conflate ... when you say value they'll conflate it across regions.

 

27:50.201 --> 27:54.639

It's not to say that they're wrong because it is true that the P/E of

 

27:54.639 --> 27:58.376

EAFE is lower than the P/E of the S&P 500.

 

27:58.376 --> 28:02.681

The reason I don't like to do it at that surface level is because

 

28:02.681 --> 28:06.885

a lot that difference can be attributed to simply just a difference in

 

28:06.885 --> 28:11.089

makeshift. The US has more tech which just structurally

 

28:11.089 --> 28:13.792

has a higher P/E than other sectors.

 

28:13.792 --> 28:17.929

EAFE's got more banks which just structurally has a lower P/E.

 

28:17.929 --> 28:21.132

The two aren't really comparable directly in my view that way.

 

28:21.132 --> 28:25.670

I think the right way to do it would be to control for sector composition.

 

28:25.670 --> 28:29.674

If you say, well, if I allocate the same amount of weight to each

 

28:29.674 --> 28:34.746

sector across each of those regions now which one is cheaper?

 

28:34.746 --> 28:38.249

If you're going to express valuation express it across regions I would do it

 

28:38.249 --> 28:41.419

that way as opposed to the way that people typically do it.

 

28:41.419 --> 28:44.589

And which one looks better?

 

28:44.589 --> 28:48.226

It is the case ... even though I've said that it is a case once you do that

 

28:48.226 --> 28:53.131

control that EAFE developed international is cheaper than the

 

28:53.131 --> 28:56.901

US. But valuation is not a catalyst for outperformance.

 

28:56.901 --> 29:01.372

The catalyst for outperformance is always earnings revisions and

 

29:01.372 --> 29:05.410

who has the highest. Value, however, has an important role to play and

 

29:05.410 --> 29:08.146

it dictates by how much you outperform.

 

29:08.146 --> 29:11.750

The first question is, do you have higher relative earnings revisions?

 

29:11.750 --> 29:18.990

If yes, then the amount by which you outperform is dictated by valuation.

 

29:18.990 --> 29:21.860

You're being careful about not giving a call there.

 

29:21.860 --> 29:26.097

We love your research. Bobby Barnes, thank you so much for joining us.

 

29:26.097 --> 29:29.067

We wish you very well and we look forward to seeing you in the months ahead.

 

29:29.067 --> 29:29.801

Thank you.

 

29:29.801 --> 29:30.602

Thanks for your time.

 

29:30.602 --> 29:34.539

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29:34.539 --> 29:38.676

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