Christine Phillpotts on Investing in Emerging Markets

26:11As we think about the growth potential of a specific stock, we need to put that in the context of the growth potential of that country. And so these top-down considerations are ultimately really critical to consider as we look at specific individual stock opportunities. So like real estate, neighborhood matters. And it also helps determine where we lean into or out of in terms of where we place our focus. We want to make sure that we have an alignment of interest, particularly as minority shareholders. That alignment is not just relevant to the specific stocks in terms of the management teams and the equity holders or the majority shareholders of the companies we invest in.

26:50We also think about alignment at the country level. What is the government looking to achieve? How is that evolving? How is that changing? And our very simplistic criteria is to not get in the way. If there's a country where we think the economic direction is moving in the wrong direction and where there's not that alignment with what the government's looking to achieve, we don't need to be invested in that country. There's other places for us to fish. So I look around the world and I think about the various hotspots. I mean, hold aside Russia, which has essentially become uninvestable, but Argentina and Venezuela went through their issues, and Turkey obviously had some problems.

27:32And to say nothing of what's going on in the Middle East, do you have to have boots on the ground? Do you have to actually go visit these countries and get a sense of, hey, the headlines are overblown, or, hey, this could be potentially worse than we realize? How often are you traveling to different places to get a feel for risk factors there? Absolutely. So we travel quite often. So our team, just to talk about our team structure, six of us have been working together, have moved from Alliance Bernstein to Ariel, and our team has been working together for over a decade, so no less than than 12 years specifically.

28:10And throughout that time, even though we're based in New York, we understand the importance of visiting all the different countries we're actively invested in. And so to that point, for example, last year I spent in aggregate four weeks in China to really not only meet with the management teams of listed companies, but to meet with their competitors, privately held and publicly held, to meet with local contacts, to meet with domestic investors, to meet with other key contacts and players, where you can get more insights by having a face-to-face conversation oftentimes than you may be able to get on Zoom or even via text.

28:52And even doing site visits, right? Going to the malls, visiting real estate sites, going to the auto manufacturing plants, visiting battery plants, really gives you a more concrete sense of what is occurring. And to your point, what is beneath the headlines and what the market could be missing? Really, really interesting. I haven't brought up China, partly because it feels like China has become sort of uninvestable to outside companies because of their A shares and their foreign B shares. I'm curious, as a professional EM investor, how do you look at the opportunity and risks in China? Can we have a legitimate, fair investment in China, given the way things are structured?

29:40Or how do you think about China? So we think the opportunity in China today is meaningful. Largest country weight in our portfolio. It's about 30 % of our portfolio today. and we think that the opportunities are very attractive. I think there's a couple of reasons for that. And by the way, we didn't always have such a large weight in China. For many years, we were underweight China, but we moved to an overweight position last year in large part because from a bottoms-up standpoint, we were seeing companies that started trading at single-digit multiples, so six to eight times forward PE, that can generate double-digit earnings growth.

30:22and that are returning more capital to shareholders, that are actually improving their capital allocation for the first time in decades, that is not being reflected in valuations. From a top-down standpoint, even though the macroeconomic situation in China is challenged, we're not debating that, for us, we're less interested in the absolute level and more in the second derivative. So, for example, for the real estate sector, what is the directionality of inventories? There's still too much inventory, but is it going up or is it going down? And we're seeing evidence of inventories declining. Just as an example, new starts have declined over 65 % from the peak.

31:03So even though demand has declined, new starts has declined even further. In the latest data we're seeing for secondary prices and primary prices, they're still in decline, but the level of decline is lower than it had been. So we think the evidence indicates that when looking at cycles, looking at that second derivative tends to be more correlated with how equity prices perform as opposed to focusing just on the absolute levels. Really interesting. You mentioned you were underweight, China, for a while. Well, when we look at the returns dating back to, I don't know, I want to say the early 90s, hasn't really distinguished itself despite incredibly rapid economic growth, which really raises an interesting question.

31:50Do we invest in emerging market countries because their economies are growing, or do we invest in those countries because their companies are generating growth in profits at a rapid clip? I think that's a really critical point, specifically with China. So as you pointed out, if you look at the history over decades, despite very strong GDP growth, EPS growth lagged that GDP growth, partly because of management decision making, equity issuance, and capital allocation decisions. We're starting to see the reverse now happen, where GDP growth is slowing, and it's never going to match what the GDP growth has been like for the last decades.

32:33But EPS growth is going to actually exceed that GDP growth because of some of the behaviors I mentioned of a steep acceleration in share repurchases, more judicious use of capital, exiting non-core businesses, redeploying that in higher incremental returns generating ventures. And so the relationship between EPS growth and GDP growth, in many cases, there's a strong correlation. But in other cases, you really need to pay attention to the company-specific drivers for the EPS growth and free capital generation because that's ultimately what determines share price moves, not overall GDP growth. Really fascinating.

33:12What about the risk? I have a vivid recollection of a couple of years ago when some of the senior executives at big tech companies fell into disfavor from the, let's be blunt, the central communist planning group. and folks disappeared for a while, the head of Tencent, the head of Alibaba, the head of a couple of other companies just suddenly disappeared, or at least temporarily. How much of a risk is there when you're investing in China that you don't know what the Chinese government is going to do? And to be fair, hey, I have no idea what the American government's going to do either, but it seems to be a very specific risk that's foreign to American investors.

33:58Yeah, and I think that goes back to this idea of trying to understand the incentive structures of the government, having a view on what they're looking to achieve, and not getting in the way. So to use the example of the tech crackdown, and I'll extend that to also the education sector crackdown that preceded it, Xi Jinping had been, I would argue, pretty clear on some of the issues he had with private sector, with private education, with how tech companies had evolved, and the role, the disproportionate role they were playing in the economy and the relationship with merchants. and ultimately some of the concerns around common prosperity or that going against the common prosperity agenda.

34:47And so I think there was that tension already in place. It was a surprise about how the government decided to go about resolving that tension. But the tension was there. And so I would argue, based on our framework of really trying to understand what are the problems the government's looking to solve and lean into the companies that could be solutions to those problems as opposed to the companies that are viewed as obstacles to solving those problems is a way to reduce the risk from regulatory intervention. You want to align your investments with things that the central planners are in favor with.

35:28And so when you're investing with a company that also has the backing of the government, you're much less likely to have those sort of kind of surprising one-off risks that we saw a few years ago. Fair? Yeah. And I think just going to the big tech companies today, they are now proactively managing how they engage with merchants and making sure, for example, that the split of value is, I would argue, more favorable to merchants today than it was during the period of the crackdowns. There's also an element of making sure that the entrepreneurs are not outshining party officials. And so there's a lot of different elements that are being explicitly taken into account that one needs to be aware of as we think about, again, what are those potential risk and pressure points?

36:23How do we mitigate them? And ultimately, we're looking to build a 60 stock portfolio across 20 plus different markets. So we don't have to be in all countries. And we certainly don't have to be in all sectors if we think that that misalignment exists. So final question about this topic now. You know, pretty much the past decade, everybody lagged what the U.S. did. And I've been hearing lots of people throwing the towels and saying, hey, if you can't beat them, join them. is now the wrong time to capitulate, is now the wrong time to give up on emerging markets and frontiers? Tell us what opportunities are out there looking forward.

37:01Absolutely. So if you look at the history of EM equity performance relative to U.S. equities performance, there's a clear pattern over the last couple of decades of very long cycles of outperformance and underperformance. And clearly we're in a very long cycle of over a decade, of EM and, quite frankly, anything outside the U.S. underperforming the U.S. The reason why I think now is the wrong time to capitulate is for a couple of reasons. One is, if you think about EM equity valuations versus the S &P, the EM index is trading at 10 to 11 times forward PE. The S &P is above 20 times. So the discounts from a price to book standpoint is over 60%.

37:48Price to earnings, about 40 % discount. That's the widest discount we've seen ever. But cheap valuations are necessary but not sufficient condition for an opportunity to be attractive. You also want to see what is the catalyst to that valuation discount closing. And we see several of those catalysts in emerging markets. One is emerging markets earnings this year and for the next few years are expected to accelerate. EPS growth, for some of the reasons I mentioned earlier, is expected to accelerate and be higher than the arguably lofty EPS growth expectations out of the U.S. And that's driven by not only economic drivers, but also fundamental company-specific drivers.

38:32I think the other standpoint to think about is in terms of flows. The U.S. dollar is at close to 20-year highs. in a period where the U.S. deficit running at 6 % arguably is going to widen, at a period where rate policy is TBD. Our thesis is not premised on the U.S. dollar massively weakening, but we think that there's increasing probabilities of dollar weakness given the starting point that we're in, and that from a flow standpoint should be an additional upside driver to flows into emerging markets. Really, really interesting. Hi, I'm Stephen Carroll. And I'm Caroline Hepker, here to introduce you to a podcast that brings you the news you need to start your day in just 15 minutes.

39:23It's called Bloomberg Daybreak Europe Edition, covering all the top stories across Europe and around the world. Each weekday morning, we're up early to bring you the latest news by 7am. We've got everything you need to know from geopolitics and global events to economics and what's moving markets. I'm covering it all from London. And I'm in the EU's capital, Brussels. We have 3 ,000 journalists and analysts around the world to tell you what's happening, what it means and why it matters. It's more than just business headlines. From the price of your breakfast to global shifts in power, economics and money aren't just part of the story, they're often the driving force.

39:59So start your day with us on Bloomberg Daybreak Europe Edition for the news you need to know and the context to make sense of it. Find new episodes of Bloomberg Daybreak Europe Edition by 7 a.m. London time on Apple, Spotify, or wherever you get your podcasts. So after a decade at Alliance Bernstein, you landed Ariel about a year ago. Tell us what that transition was like from what's a giant investment house to something that's a little more of a boutique. Yeah, absolutely. So Ariel was seeking to launch a dedicated emerging market equity strategy. Ariel has a 40 plus year history of value investing in equity markets, starting in the small and mid cap segments in the US.

40:46The firm launched in international and global strategies about 12 years ago. And so emerging markets was actually a natural extension as Ariel focuses on investing in the less efficient parts of global capital markets. Because as you imagine, U.S. small cap is also relatively less efficient compared in the context of the U.S. equity markets. Our team had an opportunity to join to help build the emerging markets business at Ariel. And it's a really extremely exciting opportunity. As I mentioned, our team has been working together for no less than a decade. We've had an investment process, an investment style that has been deployed for decades.

41:29And to me personally, it was really exciting to have the opportunity to be an intrapreneur and to really launch a new business with the backing of such an established and well-respected platform like Ariel. And I had been following Ariel and John Rogers and Melody Hobson since my analyst days at JP Morgan. So I was particularly excited to join a firm just given the really strong track record and reputation. One of the things I find interesting about Ariel is the insignia of the firm, which is a turtle holding a trophy. And like the sash says, slow and steady wins the race. What does that say about their philosophy of investing and their emphasis on long-term goals?

42:17Well, that's one of the many elements that made joining Ariel so incredibly attractive. First of all, in terms of their investment philosophy, it really is across all of the investment strategies at Ariel having a fundamental, bottoms-up, value-oriented style that really thinks about the long term. So we're not looking to call quarters. we're really thinking about the longer term trajectory of a business and owning businesses that are trading at meaningful discounts to their intrinsic value. We're able to look at that longer term horizon and take advantage of market dislocations that often focus too much on short term noise as opposed to long term trajectory.

43:01And we take advantage of that discrepancy. But it not only reflects how they invest, it also reflects how Ariel thinks about building the business and growing the business. So we were strategy number four at Ariel. This firm started in the early 80s. So you could say that Ariel is adding a new strategy once a decade. That's very different than other firms, particularly larger asset management firms, where there's often pressure to add more and more new strategies in a much more diversified fashion. And so I think the focus on value investing, the discipline to really just focus on expanding and adding strategies where it's a fit with the culture and the investment philosophy of the firm is really attractive.

43:47And for us as a new team, their longer term horizon is also attractive because they're thinking about emerging markets in the long haul. They're not saying, OK, we need this to work after six months. They're thinking about building this business from a longer-term horizon, which again, as a team, was extremely attractive for us. If you go to the website today, it specifically says active patients. Yes. So a new strategy once a decade, that seems fairly patient approach to investing. What was it like rolling out their fourth strategy? It's been incredible. I think going in, we clearly had high expectations going in or else we wouldn't have made the move.

44:32But our experience, there's been a lot of upside surprise, to use the term of an investor, relative to the already high original expectations. So it's been incredible. I think the support we've received from the organization has been phenomenal. And again, I'm talking about from the leadership throughout the organization. because ultimately we are the fourth strategy. We're not one of 200 strategies. And so what also makes it a very exciting opportunity and it really scratches my entrepreneurial itch is that we are really able to have a meaningful impact on the firm. We're not a drop in the bucket.

45:12So if we succeed, which I know we will, we can really move the needle. And that has a lot of impact And that does an incredible amount to increase level of motivation. One of the strategies that you guys manage is emerging markets value X China. Tell us a little bit about that strategy. Yeah. So what's interesting is the impetus for launching that strategy, which we launched a month after our emerging markets value strategy, was because several allocators indicated that they had an interest in an ex-China strategy, not because they don't want to invest in China, but because they already have dedicated China allocations.

45:57China is a very large and inefficient market where allocators, some allocators decide to invest in local managers and have dedicated China allocations. So for those managers, some of them have decided, you know what, I want my global emerging markets equities manager to focus on everything else outside of China to not necessarily double up my China exposure. But it is not, to date, has not been a reflection of a desire to not invest in China. So we've talked about lots of different parts of the world. The one area we haven't spoken about is India, which has had some pretty good, pretty robust performance over the past few years.

46:38Give us an update. What's going on in India? How attractive is that? Has that gotten ahead of itself? Share your thoughts on the subcontinent of India. Yeah, absolutely. So India has been the standout outperformer within emerging markets. And I think that it's a market that will continue to have a strong economic growth outlook. That started with the rise to power of Modi, who implemented a number of reforms that really helped unlock economic growth. We see the growth being powered by infrastructure investments, which will unleash some productivity improvement by consumer, by credit growth. So there's a lot to like with the India economic story.

47:20The challenge is that we think that's already priced in to the equity markets. So the market trades above 20 times forward P.E. It's not cheap at all. We think it's priced to perfection. And so for us as value investors, we prefer to invest in a market like Southeast Asia, which has similarly attractive economic growth, 6 % to 7 % real GDP growth over the next few years, at a fraction of the multiple. Markets like Vietnam and Philippines are trading at 10 to 11 times forward P.E. That's what I was going to specifically ask. So it's Vietnam, it's Philippines, any other countries? Yeah. And we think it's a really interesting time in the emerging markets universe because we think it's one of the few opportunities I've seen in the last few decades where you don't have to choose between value and growth.

48:09You can get growth at extremely compelling valuations. India is not one of those markets, in our opinion, but there are plenty of markets that fit that criteria. So help me understand how you guys come up with a way of weighting the various geographies you're exposed to. We've talked about the Middle East, South America, various parts of Asia. Is it a function of the specific companies that you find in each region? Or do you approach it, hey, I think we should have some Southeast Asia and try and ramp that up to X percent? How does that balance out? Yes, it's really a bottoms-up approach. So ultimately, we're looking for stocks that we think can deliver meaningful upside.

48:56So today, for example, we're not going to invest in a new opportunity that doesn't give us at least 30 % absolute upside in dollar terms. We think there's just a lot of really great opportunities in the markets. And so we start with that bottoms-up approach where we're looking for those opportunities that can deliver that. And our investment philosophy is really anchored around value with a catalyst. So we're value investors, valuations and price matter, but it's not the only criteria. We also want to make sure that we're focused on companies where there's a stabilization and an inflection point at hand in the underlying business momentum.

49:33And we think that discipline, focusing on value with a catalyst, helps make sure we're focused on the value opportunities as opposed to the value traps. And so with that lens in mind, we're picking stocks that meet that criteria. And ultimately, as I mentioned, we can lean into or maybe put higher focus on countries where we think the top-down environment is fruitful and lean out of countries that are, we think, heading in the wrong direction. But ultimately, the country overweights and underweights are really driven by that stock selection approach. Really interesting. You know, I read this data point on Ariel that I had to ask about because it's so interesting.

50:18Employees and board members own almost 95 % of the firm. What does this mean to you as an employee and what does it mean to your clients? So just as I as an investor focus on alignment of interest with the companies I'm investing in and with the countries we're investing in, I think our clients are equally asking similar questions of what is the alignment of interest with the investment managers I do business with. And so with that statistic, it's very clear that at Ariel, there is that strong level of alignment. Not only do the Ariel employees, a majority of Ariel employees' compensation is tied to stock.

51:07It's also tied to the performance of the strategies you're responsible for managing. So we're eating our cooking. And at a firm level, because it's such a focused firm, when I own shares in Ariel, as a portfolio manager in the emerging markets division, I can move the needle of that broader Ariel share price in a way that is hard to do when you're at a$600 billion or$1 trillion asset management firm where if you get equity in that company, your contribution just mathematically. mathematically, is a lot lower. And historically, you were at Alliance Bernstein, you were at J.P. Morgan, you were at Morgan Stanley.

51:50You could shoot the lights out. It's not going to impact the bottom line all that much because they're just such behemoths. Exactly. So it's just a different structure and a different model. But I think with this model, and I see it with our team, it's clear we've always been an extremely hardworking, diligent, motivated team, but it got kicked up a thousand notches when joining Ariel. And so it's just incredible case study in what strong alignment of interests can do in terms of just shaping your day-to-day behavior and how you interact at work and ultimately how aligned you are with the clients you're investing money for.

52:31I think I have an interview coming up at Future Proof Citywide Miami with Melody Hobson, who you work with. She's a legend in the industry. What's it like to work with Melody? She's incredible. As I mentioned, I've been following her since I was a junior analyst at J.P. Morgan Asset Management. Getting to work with her and John Rogers has been just unbelievable and incredible. And one thing I think about Melody is that she is really funny, very down to earth. I mean, I was surprised how down to earth she is and just very passionate and diligent about her work. And so, you know, the fact that she is out there actively advocating for and fundraising for our emerging market strategy, I'm just so incredibly grateful for.

53:26But it just shows that level of focus and dedication and the fact that Melody can do that because we are a firm that is focused and not trying to be all things to all people. So that's just been a really incredible and inspiring experience. And let me throw you a little bit of a curveball before we get to our favorite questions. You serve on the board of directors of the Small Enterprise Assistance Fund. Tell us a little bit about what that impact fund does. Yeah, absolutely. So I recently stepped off of the board, but I had been on the board for a number of years. And the CIF fund is an impact investing fund that actually I had a chance to co-invest with and work alongside when I was at Grassroots Business Fund.

54:11So it's a fund I'm very familiar with that really focuses on private equity investing among small and mid-sized companies as a tool of grassroots bottoms-up economic development. So impact, not merely looking to generate returns solely. You want to actually - Looking at both, yeah. So what I guess we would call a double bottom line fund. Exactly. So the fund has experience from China to Tanzania to Peru to Ukraine. I mean, they've worked not only in emerging and frontier markets, but I would call horizon markets, which are kind of the level, I guess, below frontier markets. They've worked in really challenging but interesting places.

54:59And so it's a fun that even though I recently stepped off the board after a number of years, I have a tremendous amount of respect for the work that they do. Really, really interesting. All right. Let's jump to our favorite questions that we ask all of our guests, starting with what's keeping you entertained these days? What are you watching or listening to? So it's interesting. I tend to, in terms of streaming and TV, I tend to lean towards dystopian scripted dramas. So think Squid Game, Black Mirror, Three Body Problem. I love those shows. I love Three Body Problems. It's incredible. Did you start the new season of Squid Game?

55:36I did not because now I'm on Squid Game. Oh yeah, I did start Squid Game version two. I just saw the preview for it. It's incredible. I love it. I love it. It has mixed reviews. I love the first one. The second season has mixed reviews, but I'm really enjoying it so far. So that, I would say, is my core. But I also really enjoy Below Deck. Below Deck? What is Below Deck? Oh, you mean the Star Trek animated? No, no. Below Deck is literally a reality show on Bravo. It's the only reality show that I watch. But it's basically about crew that work on yachts. Okay. And what I love about the show, it's I mean, it's the typical reality show where there's drama and all this other stuff.

56:18But what I love about it is because they're actually working, there's a lot of kind of managerial lessons of leadership. The relationship between the captain and the bosun, the relationship between different departments like the interior versus the exterior of the boat, hiring and firing decisions. There's a lot there that I find to be absolutely fascinating. And beyond that, they're in mega yachts in incredible locations around the world. It looks great, I bet. I think Harvard could do a case study on it at some point, but it's a fun show. I'm going to drop a footnote with you on Squid Games.

56:59Do you know the background of the guy who wrote Squid Games? No. So there was a Wall Street Journal article right in the early part of the pandemic when Squid Games had blown up. It turns out that this guy had been trying to sell the script for Squid Games for a decade. And could everybody – this is crazy, a competition for money where people die. Nobody would believe this. This is too crazy. And Netflix, as they tend to do, they just buy stuff en masse and then go through the process of seeing what they can develop. Like they don't just buy something from Fred over there. It's like, let's just scoop up all this and see what we can find.

57:42And at one point in time, the guy who wrote it, who developed it, had to sell his laptop because he was that broke. And it just goes to show you, like, nobody wanted anything to do with this. And it's the single most successful show in the history of Netflix. It's just wild. And it's fascinating to me, too, because it's also just part of this surge of the globalization of Korean culture, right? whether it's K-pop, in movies, television, even food, cosmetics. So it's really interesting to put Squid Game in the context of this huge resurgence in Korean culture globalization, which quite frankly I think people wouldn't have predicted a decade ago.

58:27So it's really interesting. I think Netflix just spent another billion dollars over the past three years since Squid Game buying more South Korean product, product, which is pretty amazing. Next question, tell us about your mentors who helped shape your career. So I've been tremendously lucky that over the course of my career, I've had incredible mentors and also sponsors. And I like to put the point on the sponsors piece because I like to think that mentors get you into the building, but sponsors put you on the express elevator to the top. And so they're the ones who are pounding the table for you when you're not there.

59:05And so I've been lucky to have incredible, you know, relationships in both dimensions. People I'd call out specifically, I mean, there's a lot, there are a lot of people who've been very helpful. But I would say if I think about my JP Morgan days, you know, particularly, you know, earlier on at J.P. Morgan. Individuals like Kay Hur, who was an equities analyst, now she's actually in fixed income at J.P. Morgan Asset Management. She really, when I was just a college student that didn't know anything about investment management, really took me under her wing and really encouraged me to actually pursue credit research before equity research, because there's no opening in equity research.

59:49And she said, you know what, credit research, I know that's not what you want to do right now, but this will help you build the skill set that you will need in equity research in terms of assessing companies, et cetera. And I'm so glad you gave me that advice because that really was the starting point of my career in securities analysis. You know, other individuals include Professor Andre Parold, who was my finance professor at HBS, who I'm still in touch with. he's been a really great advisor and mentor to me and really has helped counsel me through you know different stages of my career and again I feel bad because there's a lot of people I'm not naming but there's just been you know I've been very golden globe speech I know I want to thank everyone but I've just been very fortunate to have incredible mentors still in my life and I just hope that I can pay it forward for that next generation and in the process of mentoring kind of more junior talent to, again, try to pay it forward.

1:00:44Let's talk about books. What are some of your favorites? What are you reading right now? So I just finished The Obstacle is the Way. Ryan Holiday? Ryan Holiday, yeah. That really, I found to be an incredible book because it essentially talks about how obstacles, challenges, problems are not things to be avoided, but embraced and sought after, which seems very counterintuitive because we're constantly trying to optimize our professional and personal lives to, you know, avoid stumbling blocks. And this is saying, no, embrace the stumbling blocks, because that's ultimately how you learn. And for me in particular, as a recovering perfectionist, it really resonated with me to kind of hear that message.

1:01:26And I actually find myself referring back to it in my personal and professional life that, you know what, the obstacles are a good thing. And you learn from them. And that's how you become stronger. And he just points to so many different examples from history, philosophy, current events that really ties and brings to life that concept. So it's a book I really, really enjoyed. And what I'm reading right now, I'm kind of 25 % of the way in, is Aung Zhe Zhe Ping, written by Kevin Rudd, who's a former Australian ambassador, who has decades of experience living and working with China and with politicians in China.

1:02:06I read The Avoidable War, which was an incredible book that talked about U.S.-China relations and the outlook for that. Anjie Jiping specifically focuses on Jijiping thought and what's the basis for that thought, what's the basis for the thinking, what are the incentives, and how those could evolve. And my friends who work and are based in China, different individuals separately have told me that he's probably the top Westerner who has the best understanding of Chinese politics today and of China. And so I take their word for it that he has a lot of good insights. Really kind of interesting. As a side note, I am not a perfectionist, but I have noticed, we've all heard the expression, don't let the perfect be the enemy of the good.

1:02:56I could tell you from my personal experience, it doesn't matter if you're shopping for a house or anytime you're making a consumer choice, I have a tendency to go down a rabbit hole and let the perfect be the enemy of the good. And it's been a process to kind of learn how to get around that. How did you learn how to manage? And by the way, I am not a perfectionist. I'm a just get it done. It doesn't matter. If it's not perfect, we'll fix it later in most things. But in that sort of big consumer choice, the perfect has always been the enemy of the good for me. And I look back at choices I made and I'm like, gee, I should have done that house, which has appreciated more than...

1:03:44Because you don't end up in a perfect house and what you sometimes give up. So I'm curious, Just how did you manage that personally? I am still managing it. So I'm still - Well, you're always going to be. I'm always working on it. And so, I mean, it's actually interesting talking about real estate. I mean, as a side note, my husband and I have been talking, we live in Brooklyn now. We've been talking about moving closer to our kids' school, which is on the Upper East Side, to optimize the commute, et cetera, et cetera. We've been talking about this for maybe six years now. Watching prices just go up and up and up.

1:04:18To your point, well, I want this and we want that. And this is like our perfect dream home and it needs to be two blocks away from the school. And so this is literally an active conversation as we enter 2025. Like at some point we just need to do it. It's not going to be perfect. And so for me, I think in terms of opportunity cost, right? So what are we giving up by not doing this now? Right. And which is what you alluded to as well in terms of pricing, appreciation, et cetera. and also just understanding that there is no perfect anything. It's trade-offs. So you're 100 % right. I have a quick funny story to share.

1:04:58A couple of years ago, I'm trying to remember if it was pre or post pandemic. No, I think it was right after the pandemic. I gave a presentation to the International Luxury Real Estate Alliance, and it was in Aspen, Colorado. So it's beautiful there. And it's a few hundred real estate agents and each of them represent the highest performing realtor in their town. And it's not, you know, podunk. It's Vail and it's Nashville and it's New York and it's Seattle and it's London. It's just crazy. The sort of like top real estate producers all around the world. And we're having the dinner that night or a bunch of separate tables of six or eight.

1:05:47And there's an older woman from Palm Beach, Florida, ritzy part of Florida. And she takes a phone call and she's like, I apologize. I have to take this. She's gone for 30 seconds. She comes back and she goes, oh, deal is done. Oh, what'd you sell? Palm Beach on the water,$110 million. What? And I say,$110 million, that house has to be perfect. And I'll never forget her response. She's like, meh. I'm like, wait a second. $110 million, what are you talking about? And she goes, well, it's a part of Palm Beach I like, but I don't love. Three blocks in either direction I like better. It's a bulkhead, not a sandy beach.

1:06:32You go two doors over and it's sandy beach. They have a dock, but it's not a deep water dock. Like she starts clicking stuff off. And I'm like, do you mean to tell me that not that I have$110 million, but if I did, the house I'm buying is really a series of compromises? And she said, every house at every price point is a compromise. That's very true. How insane? But you would think at a certain point. Right. Like it needs to nail most of the requirements. And it's like, but she like clicked off like, wait,$110 and you don't love it? She's like, that's all right. I'm like, come on, you got to be.

1:07:09I'm sure there are lots of houses that most listeners would say, you know, for five million dollars, I would love that. Yeah. Yeah. And at 20 times that amount, it's like she was just so now granted, she's been doing real estate in Palm Beach for 40 years. She's seen everything. Right. But still to just kind of shrug and say, you know, it's all right. That's mind blowing. So that puts in perspective. And that's kind of what, you know, whenever I'm like, I like this place, but it doesn't have this and this and this. It's like, well, it's$107 million than the Met Place, cheaper than the Met Place in Palm Beach.

1:07:48So deal with some trade-offs. Trade-offs, exactly. And like, what do you prioritize? Because you're not going to get everything. Right, that's right. So what are we trying to solve for? So once you adapt the attitude that, right, I'm never going to get everything. What's the bigger priority? Hey, I don't really love this kitchen. And where the driveway comes in, I don't love that. But you could always change. If it bothers you that much, you can eventually change it. But it's shocking that even at that price point, there's some trade-offs. That has stayed with me for forever. I mean, it's only been a couple of years, but it stayed with me because when the perfect is the enemy of the good, Yeah, exactly.

1:08:31Like at what point is it perfect? Yes. If it's not perfect at$100 million, well, I think you have to give up the idea. Exactly. But that's been an issue that I've always kind of wrestled with. And the sooner you accept, it's always a series of tradeoffs. Yeah. But that's an absolutely true story. And it stayed with me to this day. All right. Our last two questions. What sort of advice would you give to a recent college grad who is interested in a career in either investing or emerging markets and value? Yeah. So I think it relates to what we're just talking about, about not being a perfectionist.

1:09:11Because as an investor, you are knocking it out of the park if you're right 60 % of the time. Even that's a high level, right? you're going to be wrong a lot. And particularly in listed equities, unlike when I was doing private equity, private credit, where there wasn't a mark to market every single minute, you know, whether you're adding or detracting value on a real time basis. And so letting go of the idea that, and I think sometimes young people feel this pressure when they start in this business that, you know, I need to get it right 100 % of the time. And that leads to a lot of risk aversion as a result because they're afraid of making a mistake.

1:09:54They're afraid of making the wrong call. And that could help stymie decision making and decisiveness. I try to tell people who are starting this business, you need to let go of that and just kind of understand you will be wrong. Ideally, you want to be right slightly more times than you're wrong. And when you're right, ideally, the upside is greater than the downside when you're wrong. But that's the game we're trying to play. We're not shooting for 100%. so I would say that's the biggest piece of advice I would say the other broader advice is to what as someone put it earlier in my career you know lead with a yes and so if there's projects that come up if there's new opportunities not over analyzing or overthinking well am I 100 % ready to do this just say yes and then you'll figure it out and I think that's where you grow That's where you learn.

1:10:46That's where you can really stretch yourself and kind of step out of your comfort zone, particularly in emerging markets where there's a lot required to kind of step out of comfort zones in terms of cultural differences, in terms of other dynamics, just being comfortable or embracing that. Really, really interesting. And our final question, what do you know about the world of investing today you wish you knew 20 or so years ago when you were first starting out? I would say that the concept of it goes back to the importance of the mosaic theory and particularly in less efficient markets like emerging markets, you know, all the data is not going to come in a neat package.

1:11:35and so needing to be creative with how you get information it's almost like being a detective in some ways how do you get information how do you piece how do you put the pieces of the puzzle together how do you think outside of the box because oftentimes I think when you know when I was in school you have an agenda a textbook you're learning things you're doing the test you get an A plus and then you kind of move on, right? In the world of investing, it's just so much more nebulous. And so it just requires you to stretch and have more creativity than just expecting things to come at you in a cleaner fashion, which to be honest, was my experience in US large cap tech investing where data was abundant and widely available and much more efficient.

1:12:29But even with that type of investing, I think thinking more along this, being creative and putting the mosaic together more proactively is probably a lesson that I would want to tell myself, my 20-year-old self. Really interesting. Thank you, Christine, for being so generous with your time. We have been speaking with Christine Philpots of Ariel Investments, where she is a portfolio manager for emerging market value strategies. If you enjoy this conversation, well, be sure and check out any of our more than 500 previous discussions we've had over the past decade. You can find those at iTunes, Spotify, Bloomberg, YouTube, wherever you find your favorite podcasts.

1:13:12And be sure and check out my new book, How Not to Invest, The Bad Ideas, Numbers and Behaviors That Destroys Wealth, publishing on March 18th. I would be remiss if I did not thank the crack team that helps put these conversations together each week. Sarah Livesey is my audio engineer. Anna Luke is my producer. Sean Russo is my head of research. Sage Bauman is the head of podcasts at Bloomberg. I'm Barry Reholtz. You've been listening to Masters in Business on Bloomberg Radio.

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