Transcript:

It’s hard to define exactly what “crowded” means. We tend to look at it through the lens of valuation. If a set of stocks is much more expensive than it’s been historically, that’s likely because a lot of investors are piling into these stocks, for any set of reasons.

Right now, the driving force in the market really has been the ultralow interest rates on offer by the banks around the world, and what this is leading people to do is seek out other sources of income, other stocks that can behave like bonds: utilities, high-dividend yielders and the like. These stocks have the most bond‑like characteristics, so it’s not surprising that people are looking for these to carry those sort of safe, income-producing characteristics.

These stocks can get much more expensive than they should be, because there is an overwhelming affection for income and desire for people to find these safe bond substitutes. That they can become very, very expensive, so that the first sign of anything going wrong, the downside potential on them can be very large. But the second risk that’s there is: Many of these stocks are trading like bonds, so they are very sensitive to interest rates. So while you may be owning stocks for different reasons—for diversifications to your bond portfolio or otherwise—by piling into these high-dividend stocks, you may be doubling down on the same bet and find yourself with a lot more interest-rate sensitivity than you might be aware of.

This doesn’t mean that seeking income is a bad thing; you just need to be conscious that you’re not overpaying for that income, or overpaying for that perceived safety. And we think there’s better ways to go about looking for, for names than just the, the most obvious places.

We think there’s a lot of good business models out there that generate cash in a very predictable and sustainable manner in many other industries, like technology, retail, even consumer and media stocks as well.

It’s important to be selective when trying to find these opportunities. If you just go in and own a whole group of stocks together, you’re not really doing any differentiation between what might be companies with quite different prospects going forward. Whether they have a better business model or a better product set, better technology—something that could create an advantage for one company relative to another—even within a sector that seems safe overall, like consumer staples. We think it’s much more important to be selective and look for companies that have this source of competitive advantage. This can often come from a better brand or technology; it could come from a cost production advantage; or in some cases can come from a network effect, where the first mover is able to establish such a strong position that they’re very difficult to dislodge and can create profits for much longer than people think.