Finny Kuruvilla – The Fourth Source of Alpha at Eventide (EP.343)

28:04And so you've got to be very skilled at doing roll up the sleeves, really good science and medical work there. And so we've got one of the best teams out there of scientists and physicians who know how to analyze clinical trials. We go to the medical meetings, we know our management teams really well, and we're just assessing what is the quality of these assets and how is the market priced or mispriced those assets in the share price. There is no substitute for being a great, solid, fundamental investor. And really what the values represent is a guiding light or a compass so you know what to be aiming for that is going to help you to get hopefully even better returns over the long haul.

28:47What are the types of companies that fit into your sweet spot? We'll look at industries that are the intersections of secular growth, so long-term secular growth themes, and then these companies that are advancing human flourishing. So if you think about a Venn diagram there, we want to find long-term great areas. So like an example would be orphan diseases, Alzheimer's. I mean, these are going to be huge, long, multi-decade themes that are going to be really, really exciting. And then asking the question, some of those are promoting human flourishing. So is sports betting doing that? Probably not.

29:22So we would exclude, even though that might be a great growth theme, it's probably not advancing human flourishing in ways that we could all feel really good about. Once you have that intersection of the right industry with an industry that is advancing the common good, well, now you've got a set of companies in here and you want to try to find the ones, according to this Business 360 philosophy, that are adding the most value to its stakeholders. That's that crucial step that I talked about. And then, of course, then you got to do the roll up your sleeves, fundamental due diligence, build a model, do a DCF, figure out what it's actually worth relative to the share price.

29:57So broadly speaking, what we're looking for is that intersection, but then within that intersection, where is there mispricing? And again, often mispricing is a function of these values. There was a very, very interesting study that Russell Fuller did as part of his doctorate, where he made the case that there are these three forms of alpha that portfolio managers and allocators should be aware of and seeking out. So the first one he said was informational, where you know more than somebody else and you're trying to get some kind of advantage in terms of, say, estimating earnings. This is a classic example of where a fundamental manager would be playing.

30:41Then there's an analytical type of alpha, where you're using quantitative strategies and you're trying to identify a factor that's gonna outperform. The third type of alpha he talks about is a behavioral alpha where the most famous line here is from Buffett's, be fearful when everyone's greedy, be greedy when everyone is fearful, where you can do better than most people if you understand the behavioral biases and foibles that we humans have. But I think he missed the fourth form of alpha, which is this values-driven form of alpha, which admittedly is long-term, I think the best studies out there would suggest that there's somewhere in the neighborhood of 3 % annualized alpha that the market hasn't captured, well-controlling for size and market cap and all the standard factors there that is to be harvested.

31:33And so we would try to make the case that if you can find those intersection points, and then use that fourth source of alpha, which is the least appreciated form, then you should be able to do really well as a fund manager. How do you think about integrating your assessment of management teams in that framework? That's a great question. And one of the things that I learned in my eight years of venture capital was the single greatest asset or liability of any company is its management team. The challenge for most investors is that management teams are selected because they're good presenters. And there's very few CEOs that aren't very talented presenters.

32:16He or she can get up at a sell-side conference and wow people with how amazing their company looks. And so how do you really discern what true management excellence looks like in a world where even if you meet management, you're going to walk away thinking like, wow, this is a great company. It's really hard to do that well. So often, what people fall prey to is the fallacy of receiving and taking at first value charts that are handed to you. So we all know there's a cherry picking bias and anybody who's published anything knows that you can choose the axes or get the data in such a way that it looks really good.

32:55So the real challenge that we have as investors is to build up almost from a bottoms up perspective and to say, okay, if I didn't have all this data over here, and I was just trying to reconstruct in my own ways using my own much more dispassionate, unbiased forms of analyses, what would I land at? And that actually is one of the most powerful tests for management integrity that you can find. It's really that gap between how they present something and how you would present it if you were, again, this disinterested party that wasn't trying to sell shares in the stock or something like that. If you can do that well, you will have a really good ability to assess a management team.

33:39That's number one. Number two is I don't think we put near enough attention on how people have actually used their previous roles to contribute or detract value. So a lot of people, they'll say like, oh, they worked at Tesla or they worked at Biogen or they worked on such an... And they just assume that there's a credit that that person should get by virtue of being associated with some really exciting, amazing company. But as we all know, if you've worked in any company of any size, success has a lot of people who want to claim it, but there's actually in the end, a much smaller number who genuinely contributed to it.

34:21And it takes a lot of work, a lot of back channels, reference calls, networking, all that to figure out what really that person truly contributed in terms of value generation. I would boil it down in saying that the management team is certainly the most important asset or liability, and it's worth a lot more time and a lot more creative forms of analysis to really understand how good they truly are. One of my major annoyances is when an analyst will meet with a management team, they'll come here to our office in downtown Boston, and you'll say, how was management? and they'll say, great, why? Well, I like them.

34:59And you get that so often, I like them. Pay attention to that, how many times people will say, I like them. And they're just speaking to chemistry. That's all that it is. They're speaking to some kind of feeling they get. And that feeling is a complicated result of charm, beauty, eloquence, all these factors that don't really, in the end, correlate very well to, are they a great business person or not? How do you integrate your fundamental work management assessment into making decisions about what names will go into your portfolio? We'd like to hope that we're finding the best management teams, but it is certainly the case that there are fewer great management teams than there are companies.

35:43There's a lot of biotech companies that are run very poorly because management is just not very good. And so what you want to do is you want to try to identify those teams that have that dynamic combination of history of value creation with the right gifts and the right skills that are working in tandem and complementary one to another. And as you find those management teams, you grab hold of them and don't let them go. It is a rare find to find those kinds of companies that really are there. So when you find them, because they are so scarce, you want to concentrate as much as you can on those types of companies and let them compound over time.

36:23What do your portfolios look like when you put them together? Typically, we're going to have around 50 to 60 companies in a portfolio. We have some of our portfolios that are a little more concentrated, more on the 30 to 40 side. But as is widely known, you want to be more concentrated than diffuse. How do you think about position sizing? Position sizing is something that is going to be highly dependent on the type of company. So there's going to be certain companies that are stable compounders that are profitable. And those you can size in ways that are very different from a company that, say, has a big binary event on the horizon.

37:05Those types of binary events are ones that can give you high blood pressure because they can make huge moves in one direction or another. As a rough rule of thumb, we would say that if you're going to deviate by more than 1 % based on one position in your company, then you got to be really careful there. In other words, let's say you have a company, it's a 3 % position, and you think it has a reasonable likelihood of losing half of its value at some catalytic event, say a clinical trial or FDA approval. Well, 3 % is probably too big of a position that's probably not sized properly there. Something along those lines is appropriate for managing risk in ways that you and your investors can handle.

37:50Once you've built a portfolio, how do you think about ownership of those businesses consistent with the continued adoption of your values? Investing is ownership. Investing confers an ethical responsibility to the owner for the activities of the firm. Let's say I owned a corner store retail firm and people found out that the employees were trafficked from some other country. Well, that would be horrible. And I would look bad as I should, and I'd get in legal trouble. And I, as the owner, would be culpable for the activities of that business. But then similarly, if I do really well and I'm adding a lot of value, people love the store and there's a sense of the community really appreciating it, well, then that redounds back to me as well.

38:38And I get a positive benefit from that. One of the things that we want to do as investors is say, okay, let's think now as an owner of the firm, not just as an investor, but as an owner. And just because it's a publicly traded stock, It's not different than if it was you and your buddy owning the corner retail store. We as investors have a surprising amount of power over the direction of the company. You know, that phrase, the pen is mightier than the sword. Well, the wallet is even mightier than the pen. And people pay very close attention, governments, communities. People recognize that business is the lifeblood of any country, of any community.

39:19So I'm very, very excited about this. We want to stay engaged and closely bound up with our companies. We want to meet with them and ask them to consider these types of issues. We have basically codified this that we call RAISE. RAISE stands for Restore, Access, Innovate, Stewardship, and Ethics. And it's basically saying, okay, we want to have fair pricing. We want to have it so that investors are well compensated, that society is rewarded, that patients have access to these medications. It's going to be a group holistic effort. We want to be working in great cooperation with our peer investor groups.

39:58This is not a one firm heroic story. This is going to be something where we have to really lock arms with our fellow mutual funds and hedge funds and venture capital firms to do this well. We also think highly of what Peter Kolchinsky and RE Capital is doing with their No Patient Left Behind initiative. There's a couple of these types of movements that continue to gain steam. so that we can advance these causes in the ways that investors can do far more skillfully and far more effectively than anybody else can. I'm curious in the competitive environment for these companies, take pricing as an example.

40:36You have a company who is not, let's say, maximizing what they might be able to do in the market. They're not trying to gouge consumers and they're competing against someone who is. How do you balance trying to do the right thing in a world where other people may not be? Ted, that's such a great question. And it's one that I think for so many people just dogs them. In a hardball world, how does it look to actually compete and to be long-term successful? There's some very good examples of this that I'll point to here where doing the right thing, which has led to maybe short-term decisions that may not seem as profitable, have actually long-term redounded to the health of the company and the benefit of the company as well as shareholders.

41:21So the example here that's a classic in my industry is that of ivermectin. So ivermectin is a medication that was discovered in the 1970s. Some scientists at Merck discovered that ivermectin was the cure for river blindness. So river blindness is a disease that affects particularly people in Africa and parts of Latin America, terrible disease. It affects the poorest of the poor, people who can pay essentially little to nothing for their drugs. And so scientists at Merck figure out that one pill curing the condition, it's that good of a medication. And then all of a sudden realizing, wow, how in the world are we going to get people to pay for this?

42:04And they tried going through the WHO and other organizations and just didn't find funding for that. And Merck made the very interesting decision to actually give it away. They just said, you know what, we're out of the generosity of our heart and even at a cost to our organization. We're going to do that even though it doesn't make financially much sense at all. Now, I will be the first to say that this cannot be precisely measured. However, what happened with that move was that Merck became recognized as one of the most positive, ethical, virtuous companies to work at. And a lot of people to this day say, I'm at Merck because of what they did with Ivermectin.

42:45Now, contrast that with other companies where they had huge hits in their own PR, customer loyalty, employee loyalty. There is a case to be made. And again, I'm not going to say that this is ironclad at all, but even that short-term decision that Merck made about ivermectin actually long-term benefited the shareholders of the company through these secondary benefits there. And I don't think people realize enough that a company's reputation and a company's sense of integrity is so important to be able to attract and retain the right employees, have the right loyalty with doctors. I often recommend an author whose name is Fred Reichelt.

43:27He's a management consultant at Bain, where he has shown that the companies that make the right decisions, even in the face of seemingly financially disadvantaged conditions for the short term, over the long haul, actually outperform their peers. And frankly, it's hard because sometimes we can't draw all the linear connections of this because there are these halo benefits. Sometimes we get so caught up with trying to build a model or focusing on just a five-year DCF or something like that, that we miss the bigger picture that actually might be the best long-term good for the company. And not to say, even talk about all the people that were cured of river blindness because of Merck's decision that they could easily have shelved.

44:13I mean, the most sensible thing from a financial perspective would be like, okay, that's nice. Nobody can pay for this. Let's just throw it on the shelf and not spend the millions of dollars that it's going to take to get it out there. So there is an element of, let's call it faith. There is an element that we have to say, we can't always point to that well-ordered set of cause and effect that's going to come back to the company. And again, I want to stress, we are a competitive company ourselves. We want to beat our peers as much as we can. I'm saying this not as a person who's anti-competitive or anti-capitalist, or anything like that.

44:47I'm saying this as a person who believes that business should be excellent and outperforming, but that sometimes making the right decision is going to cost you. And in surprising ways, those costs will actually be long-term value adds and blessings down the road in ways that it's hard to predict ex ante. I'm curious, when you run an organization with this passion for investing combined with this passion for values. What is the culture of Eventide like internally? We are very proud of our culture. One of the things that I think is so important is that you want to hire people for mission fit and for mission alignment much more so than recruit people on financial generosity or something like that.

45:38You can do that. But in the end, what you're going to have is to be somewhat crass is a lot of mercenaries, people who are waiting for more pay at some other firm, and they're going to jump to there. And you're not going to get the kind of cohesive long-term family that you really want to have at a company. I'm really proud of the low turnover we've had, the fact that people can come here and have a great experience. We have done something which is from day one, when somebody starts the interview process, we're going to be having a really interesting set of conversations around values and around real situations that we have faced that is going to be very illuminating.

46:17If you can get that fanatical belief in the mission of the company, if you can have people who rally around that as their first order, what gets them up in the morning, not so much going for a paycheck, then you will have a place where you are genuinely excited to be at. And I will say to this day, here I am 15 years into Eventide. I am as or more excited to come into the office than I have ever been before. And I'm eager to get in. I'm eager to see my colleagues. I'm eager to be here because it just feeds on itself, right? Like when you get a lot of people who believe in that, it's just such a different environment than a lot of companies being these more mercenary style, financially oriented firms.

47:00So I would say it starts with a mission and flows down from that. Where do you want to take the business over the next couple of years? We would love to be the premier firm that offers excellence in values-based investing that's rooted in this love-your-neighbor Judeo-Christian perspective. So right now, if you look at the percentage of assets that people have who are religious or values-inclined, frameworks like that, it's certainly less than 1%. The field is in the early days of what hopefully will be a long-term movement. So that means that we have to cover a lot of asset classes. We have to be something where we can offer the full package to investors.

47:44And my hope is that over time, what we'll really do is be a part of getting people excited about business and investing to reclaim and to get people excited about the potential of business to fix a lot of the problems that we are facing today. That ought to be something that I hope will resonate, which is that if we want to be capital allocators in a world where there's still capital and capitalism, we have to realize that the tide is moving against us. There was a lot of stats that came out at the last presidential election cycle about people who favored socialism more than capitalism. It's not so clear that our current system is going to endure for 20, 30 more years.

48:29Maybe it will, maybe it won't. I don't know. But it certainly can if we get back to this vision where people are authentically allocating capital to the businesses that are doing the best at value creation for its stakeholders. And if we can truly do that, people will sense it. I think humans are remarkably good at sensing authenticity or not. we're pretty good at sensing people that care about us, that are really in it for our good. The public is pretty good at sensing when a business is doing the right thing and trying to serve it versus not. And I hope that we can be a part of offering these products, but more importantly, bringing this philosophy and this discourse back into America and hopefully beyond America so that we can create a bright future for our children and for their children.

49:22Finny, I want to ask you a couple of fun closing questions before we wrap up. What is your favorite hobby or activity outside of work and family? I'll give the boring but true answer here, which is reading. My favorite hobby by a mile is reading. I spend many hours a day reading. It is something that shapes me, inspires me, forms me, that would easily be number one. Outside of that, maybe more exciting answers would be hiking and tennis would probably be my outdoor type activities. But even those are not quite at the level of reading that for me has been my favorite passion from when I was very small.

50:01What's your biggest pet peeve? I probably have thoughts 10 to 20 times a day about how short life is. For whatever reason, that's how I'm wired. I tend to think and count a lot and think like, how many years do I have left? How many weeks? That sort of activity, which I know can be morbid, but for me, it's motivating. So I walk around with this acute sense of the scarcity of time and how precious time is. Because of that, the pet peeves that I have are those that contradict my use of time. So I hate most meetings that I get dragged into, that there's no way we needed to spend an hour doing this or a lot of small talk, this kind of thing.

50:42There's the general category of these self-imposed time wasters that we spend. They're just awful. I think that if we were to take an accurate inventory of the time that we spent over the last week, month, year, and laid it out, we would just be horrified. And we would say like, what are we doing with our most scarce and precious resource, us, which is not money, it's time. So I would say, yeah, that domain is for me, the source of my pet peeves. Which two people have had the biggest impact on your professional life? First, my PhD advisor was a huge person in my life who formed me in very powerful ways.

51:19His name is Stuart Schreiber. I still feel very indebted to him. He's a legend in my field of chemistry and chemical genetics. What I learned from him was how important it was not just to be a great thinker and a great scientist, but how to communicate well. And I can still remember, I thought I was a good writer before I joined his lab and I wrote my first paper and I gave it to him and he gave me back his comments and the whole thing was marked up, you know, red and all that. And I just thought like, oh man, and I had to rewrite that thing despite what I thought was good at a first draft. And I realized that I wasn't as good of a writer as I thought.

51:55And he taught me a lot about communication and confidence and the value of integrating being a great communicator with being a great scientist. And if you don't have the communication side, it'll put a lid on your ability to succeed. The second person would be Nick Galicatos. He was one of the managing directors at Claris Ventures, now at Blackstone. And he was the person who really found me and took me under his wing in the realm of biotech investing. He's won the Midas Touch Award for biotech venture capital. He taught me how to diligence people and the value of people. So I learned from him that if you really want a diligence of somebody well, learn how to go out to lunch and dinner with not just that person, but the associates of those people to really understand who they are.

52:43It's amazing what you can learn over a meal that you wouldn't learn over Zoom. And just how to put it all together, he was a great influence on me. What's the best advice you ever received? What comes to my mind here is something that I say a lot, which is that you're only as sick as your deepest secret, meaning that a lot of us can live these lives that are seemingly put together. You can go to a good school. You can have great accomplishments, all these things. But there's like this 2 % of who you are that it's hard to get on the table. It's hard to really talk about that. And these dark corners in our lives are the areas that actually hinder us the most.

53:25And I was given the advice to every single week to get with a small group, two or three people, and just put out the good, the bad, and the ugly in front of this group and learn how to process it and work together through that. If you can get that last 2 % out on the table and come to a place of resolution and peace there. It is amazing how that will just unlock a whole set of potentials that you didn't even know were there. And I think a lot of people, unfortunately, are living lives that are much more bounded than they need to be simply because they're harboring secrets they've never really talked through and worked through.

54:04Finny, last one. What life lesson have you learned that you wish you knew a lot earlier in life? I often have this picture of I wish I could talk to my 10-year-old self and just sit for a couple of hours and give a lot of advice to you so it's hard to distill down. For the sake of choosing one thing here, one item would be go deep before going wide. Especially if you go to good schools, you are encouraged to have these applications where you're doing music and sports and get a good GPA and all these things and you're this renaissance person. And of course, we know that so much of that is just resume building.

54:42And in the end, most people have a much more limited number of true excellence areas and passions. But what happens from a very young age is that that philosophy actually messes people up in very profound ways. Because what you end up doing is you end up with this state where you're overstretched. You've got way more than you should actually be signed up for. And things fall through cracks. And you live lives that you're disorganized in terms of piles of paper, in terms of commitments, in terms of all kinds of obligations. And the author, David Allen, who's pretty well known for his book, Getting Things Done, talks about how a lot of us, our psychic state looks like Pigpen, that Charlie Brown character, you know, who's got like all the dust and dirt twirling around him, that that's actually like how a lot of us are in our minds, where we're not in places of order and peace and rest.

55:35And these habits that we get taught from high school and beyond stay with us for decades to come. What's way better, and unfortunately not as incentivized in our world though, is to do way less, but to do a limited number of things very, very deeply and well. And if you do it deep, eventually it'll be wide. Unfortunately, our world is just not properly instructed where that's the right incentive. So I would definitely encourage my younger self to learn that lesson much earlier. Benny, thanks so much for sharing this fascinating blend of values and investing. Thank you, Ted. It's great to be with you.

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