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Introduction: Be’Anka Ashaolu, Director of Marketing, Propel
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Be’Anka Ashaolu: Coming up next, Chief Investment Officer and Portfolio Manager Todd Ahlsten and Parnassus investments will share expectations of the economy and business environment.
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BA: no small task given the upcoming election and COVID-19 impacts this year on assets has fully integrated PSG or environmental, social and governance criteria for over three decades.
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BA: The firm manages over $30 billion in assets. Mr. Ahlsten oversees all Parnassus investment strategies and was recently named large cap asset manager of the Year by investment advisor.
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BA: Please welcome Todd.
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BA: Todd Ahlsten. Welcome to
Interview hosted by Dario Ambrosini, CMO, Propel with Todd Ahlsten of Parnassus.
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Todd Ahslten: Great to be here. It's a real honor looking forward to the conversation.
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Dario Ambrosini: Yeah, yeah. We appreciate you joining us today. So just so the audience has an idea what's going on here. This format is going to be slightly different than what we've done with some other speakers.
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TA: I'm fortunate enough that every once in a while you give me some of your time we get some insights into what's going on in the markets and we thought as a group that this would be a great opportunity.
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TA: For the propulsion attendees to hear a little bit about how somebody who looks at the markets on a daily basis thinks about what's going on.
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TA: So we were like, hey, can you come out and share some thoughts. So a few weeks ago, we gave you five questions you went back, did some research, which was way more than
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TA: We want to do it but we definitely appreciate it. And today, we're just going to go through the answers that you and your team prepare for us. So we just want to give everybody a heads up as to why there's a
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TA: Presentation and and some answers already ready to go.
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TA: So with that, let me dig into the first question that we asked, we were just wondering if you could give us an overview at a high level, on the economy and markets, what's the status here.
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TA: Right. So thanks so much. It's a great place to start. And you see a slide here with a lot of letters and we'll get into what these are the W's and the visa and the case and
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TA: I mean, there's a lot of Alphabet letters, but we're going to focus on about five of them here. But when you think about what's going on. A lot of people are asking this very important question.
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TA: Hey, what's going on the markets like why are we seeing an all time high on the NASDAQ
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TA: all time high and the SP 500 and the real economy has gone through, you know, the biggest downturn, we've seen since the Great Depression.
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TA: And so where's. Why is the real economy, different than the stock market. And so what's the, what's the connection to that and so
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TA: We've got some kind of graphics here and the thought process and a framework that I wanted to share that we're looking through it at Parnassus and how to put this all together and then what does it mean for your business. So
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TA: Let's think this through. Since we have that complete collapse in March, obviously the mandated
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TA: Kind of locking down to the economy that cause obviously you know crash and the real economy and the stock market. And clearly the first several weeks of the lockdowns
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TA: Unprecedented collapse and economic output so that caused a very steep decline. And one thing you'll notice on all these letters is a very, very steep decline on the first brushstroke
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TA: Of these letters and then once we really had that drop and kind of March 23 is a day, you kind of circle on your calendar.
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TA: The market kind of bottom and started to recover and really some very important things have happened on the market structure here is that
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TA: Starting in late March, the government in the United States monetary fiscal unprecedented stimulus and unprecedented amount of money.
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TA: Started to support the market and that since the Federal Reserve kind of said hey I've got your back here. We're going to do unprecedented measures to cause
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TA: Measures to help the liquidity because the first the first leg down is really liquidity your business, your cash flow is dried up to zero. So, the feds that I got your back, we're injecting liquidity.
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TA: The second thing is clearly fiscal stimulus, you know, direct checks the two people protective payment plans to two people, individuals lost their jobs so
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TA: double barrel stimulus caused a massive recovery and markets and as you'll see in several these letters with the W and the you and the V, you know, massive, massive upper movements in the market, as we saw unprecedented injections.
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TA: And so then you kind of fast forward. You go into summer we start unlocking the economy, we're stimulating we're printing money, it just for some context.
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TA: The Federal Reserve's balance sheet would say $700 billion in 2008 4 trillion after the global financial crisis ramping to 7 trillion, as we speak, and probably going
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TA: Much higher than that, after the pandemics over. So again, massive stimulus.
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TA: reopening the economy and through that market structure. We've seen record highs in the markets, but what's masking. That is the number and letter k
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TA: And what the key really is the case shape recovery and the case shape recovery is clear. It's we start at the beginning point and then some businesses are winning in this crisis.
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TA: All Microsoft, Amazon Netflix Google Salesforce Autodesk and some are on the k that are losing
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TA: Airlines retailers energy banks. So you're seeing a massive divergence, the economy. Why does this matter. Well, it matters because the stock markets hit an all time high, because it's being driven by
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TA: The fangs and the Facebook's the Amazons and Netflix, the apples that Google's that now comprises 23% of the s&p 500
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TA: And that's driving the appreciation and that is in context record market concentration
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TA: 23% the market is in six names, whereas the top names in 2000 we're only 18% so again market concentration winners losers and then now we go into the next phase after this rally is what's next.
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TA: And clearly the W means do we have for the lockdowns do we fall back and recession.
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TA: The EU is maybe a period of bottoming and then coming out quite strong. A V would be the bottoms. We saw in March are behind us and it's off to the races.
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TA: Clearly, Adele is bad because you crash and never come back. So you can kind of take it all off the table.
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TA: And so finally, as we're thinking through the market is what is the case a recovery mean are you on the right side of history.
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TA: And is your business coming out stronger on the K or are you temporarily depressed.
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TA: But coming back stronger. Once the lockdowns are over or third or you permanently impaired and is your business potentially facing extinction. So our job is asset managers around this all up is
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TA: The on the right side of history I companies that are coming out of the pandemic stronger be robust around these economic outcomes and be built to last for the next three to 10 years. So that's really how we're looking at the Globe and different economic outcomes.
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DA: Right. So when you start looking at the outcomes at a high level, and you start digging into certain industries. There's four in particular that happened to be in our audience. So we asked you to take a closer look at those. And that's basically the health and life sciences.
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DA: industrials tax and consumer goods. So can you give us a little bit more. But if you think about each of those
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TA: Yeah, these are just awesome to dig into. So there's monumental changes going on in each one of these. And let's just start with with healthcare, which is just
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TA: undergoing rapid change. So in the case of a framework.
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TA: Clearly on the on the top side of the K. You've got research and tools and instruments and diagnostics and point of care and electronic medical records and just a whole host of very important
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TA: Dynamics of that industry that are on the right side of history and then clearly right now temporarily down elective procedures.
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TA: Some, some care that's getting deferred because of a week or economy and so clearly there is a case shape going on there.
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TA: But what's really important is underneath the surface you're seeing industries transform right in front of your eyes. So think about pharmaceuticals and medical research.
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TA: One of our investments at Parnassus. This is a company called NVIDIA and NVIDIA is a company that makes computer chips, known as graphic processing units or GPUs and they are literally transforming for our eyes how these industries work. So take the pharmaceutical industry.
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TA: $1.2 trillion in the pharma industry. Now we all know drug discovery is a risky business.
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TA: It takes about $2 billion to research the average large scale drug because a lot of things fail. So think about to
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TA: $2 billion per drug to research and it typically, you know, according to the industry, it's
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TA: It's about 12 years to get those through the market. So you think average of 2 billion each 12 years and 90% fail rate and these are data that Nvidia put out
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TA: Think about the risk of that business. So when you enter in like a graphic processing unit and data centers and simulation and screening
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TA: If you can improve that fail rate improve time to market reduce the cost that could help transform and industry. And so that's what's going on before our eyes.
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TA: As Nvidia mentioned, you know, companies asked her zenica Plaxo Smith time combining data centers to to speed time to market.
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TA: Is going to be crucial. And so, as well. Companies like Becton Dickinson, which we have investments in that you think about what's going on there. On one hand, you've got
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TA: 4 billion devices, they'll reaching customers needles pumps syringes point of care. Those are all points of data that they can take that data go through EMR records.
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TA: Help patient outcomes. And so over the years. Becton is transitioning from a point of delivery of equipment to being a software company.
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TA: And now have over 1000 software engineers, a billion dollars a year of r&d development.
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TA: To turn all those points of care into data that connects with an electronic medical record that can increase patient outcomes. So again before our eyes, it's the case shape recovery.
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TA: But it's going to be innovation moving to industrials john deere is absolutely a fantastic example of a company that's known for iconic brain tractors.
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TA: But they are revolutionising in front of your eyes, taking these tractors turning them into data center on wheels.
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TA: And those data center on wheels now have data on 190 million acres, they can track everything from soil temperature to yield per row to use less pesticides less fertilizers less water.
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TA: That improves yield improves the value of land improves productivity. And so now the key thing and this is probably really important for people in your conference.
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TA: You'll hear the term AI. AI is used all the time AI can be a slow and painful journey for your company.
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TA: And for the companies that we have invested in in Parnassus but if you have a platform and a monopoly and an ecosystem.
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TA: You can take that painful process and basically take the timing off the table.
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TA: Because john deere not only bends the green metal they own the dealer network and the access to the farmer, so they can push that AI right down into the farmer.
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TA: Make that tractor data center on wheels and then once you've done that you've taken a slow and painful process through your channel up to the innovation.
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TA: And then you turn AI into a risky proposition into something that's almost like kind of shooting fish in a barrel because you control. You can scroll a whole network so
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TA: john deere is doing that in another investment industrials water clean water is important.
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TA: We have an investment income to hold his island and asylum cells pumps that purify water and wastewater and
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TA: And industrial water storm drain water all this water has to be cleansed and pumped, or what does islands becomes instead of just being a pump company.
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TA: They've turned into a platform company taking out a lot of the energy usage and then connecting that to spectrum and data to make a pump turn into a platform and so
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TA: That's the water analytics. And so that's what companies are doing. So it's a way to take AI control the ecosystem. And now in the pandemic.
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TA: When you can touch those customers that way it's incredibly powerful again technology is a similar thing where you look at the data centers and you look at
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TA: Companies like Applied Materials that are putting a billion transistors on a fingernail breaking the laws of physics there's tremendous innovation. We're now work promote work from home bandwidth
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TA: You know all that data economy is flowing through to companies that are innovating on the right side of the case shape recovery.
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TA: overarching framework where technological disruption is being fully accelerated finally consumer goods.
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TA: This is an area where for us on the case shape recovery, not only the only companies like an Amazon that are changing the way permanently we buy things and query things and how things delivered in filament.
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TA: There's other companies on the on the bottom part of the case shape recovery, like a booking.com which were invested in that
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TA: It is temporarily hurt, but they're doubling down tripling down on the innovation. They offer for instance beyond your about climate change.
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TA: Your booking.com is looking to institute new tools if you care. You can do. What's the carbon footprint of my vacation. Does that matter to you or not. There's certain ways.
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TA: booking.com is doubling down trickling down and being more important to their customers and the hotels and ends and assets that they serve.
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TA: To be on the right side of history. In this case shape recovery. So overall the framework innovate the on the right side of history.
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TA: And then through taking technology changing the game on how you interact with your customers to provide value to them and drive long term returns for your business and or as the stock market investor, as we are. So that's just our framework and how we take a look at it.
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TA: So it's interesting you touched on a lot of things that are important to our customer base technology AI. We have a lot of people who are working on connected devices and then bringing that information into how they develop products, improving
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TA: And then the whole inclusion of software as well. It has been a just a big trends. So
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TA: When it does come to innovation. We know that that is important to our customer base. But how about you do you look specifically for companies that have innovation or that are focused on innovation. Innovation.
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TA: D'Addario is the lifeblood of how we about evaluate companies, and I'm sure everyone in the audience today.
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TA: So, you know, for us it's really a testament that what's the durability of your company. What's the biggest problem you're trying to solve and really increasing the shelf life of your innovation is absolutely vital. And it's really important that your companies have a culture of innovation.
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TA: thinking big. The ability to take risks move quickly.
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TA: Have that lens that everybody in the organization is innovating. It's not just the r&d department. And that's a really important misnomer that we found in investing and one of the important things about it is sometimes people feel innovation just has to happen in a lab.
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TA: Some of the best innovation is really just listening to your customers, understanding the value of the problems that your customers are solving
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TA: Bring that back to your own company, and then double down triple down on it and you know my my entire day is basically spent talking to the management teams that we invest in my analysts and our team and
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TA: I'm blessed to see many examples of companies are incredibly innovative when you talk about software. What are the leaders right now it's on top of a ton of innovation that I would recommend anyone to take a look at as a company called cadence design systems.
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TA: And cadence design systems, we think about innovation is probably one of the best examples that I can give today that
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TA: What this company does, is there in the electronic design automation industry or eta and what these what the company does is it developed a software.
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TA: So, in essence, companies like Intel and video and the leaders in the semiconductor business can design those chips. It's how do you place.
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TA: How do you place a billion transistors on a fingernail and five nanometer. How do you do that, how do you design that. And so that's the legacy of what kids has been in
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TA: But their businesses evolved right before their eyes, for instance, they're designing these chips and now we're finding is in data centers, the amount of energy that's being used is going up parabolic way and if we don't do something about the electrical grid.
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TA: All the benefits of not traveling or going to get sucked down by zoom calls for example because he's data center so
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TA: Basically cadences trying to redesign how our chips architected to take data and heat and productivity of silicon and basically taking all that data moving through networks.
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TA: Not only making it faster, but taking down the mountain energy, reuse, and so now they used to just sell software design chips.
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TA: Now they're doubling down tripling down to not only design those chips.
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TA: But design them using less energy, because what it happened is a lot of chips are over engineered for certain functions. And now we can get more specific silicon chips to say
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TA: I don't need to do all this, I only need to do this so design me a more specific chips. So I can take energy out of my process.
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TA: And so then their business count evolving. Now you have Amazon building out their own ship design teams and then you put systems around that and then you
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TA: You put mega mega data centers around that so their company has really double down on innovating and letting that innovation flow into solving the most complex
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TA: Problems and Sam Microsoft or Amazon or what Google is doing in search or what a data center doing to take energy out of their process so
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TA: They do that through a culture of innovation and again it's doubling and tripling down on innovation within a company and looking at the long game.
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TA: And that's going to be a very, very vital part of how we look at software design. And that's, that's, you know, Autodesk is doing that in a very important way with how their customers connect
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TA: With their services and what you're finding is the really big point is that companies like kittens are actually a very small part of what Intel spends on Rd but it's increasingly valuable chunk. So,
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TA: pricing power and their business really evolved. So again, very important. And the other part about this as well as customers are starting to see different things that weren't valuable become more valuable for instance stereo on
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TA: A global climate change and become very important. And now there's a vast array of disclosure that's coming out so
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TA: Not only do companies want to bring carbon down, but they're looking to their supply chains to bring carbon down. And so the software that Keynes is designing
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TA: Takes carbon out of Intel which tastes carbon out of the data center, which takes carbon out of Comcast and Verizon and Google and Amazon. So you start to feed all that in
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TA: And then if you're using outsourced services from Azure or AWS, if they're taking down data and your Clorox your household products company using those that brings down your data footprint and your energy footprint. So
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TA: All these emissions all the disclosure all the innovation is flowing into very, very valuable data for customers so software is playing
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TA: A very important role. They say software is eating the world and I'm kind of convinced it is. So there you have it.
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TA: Alright. Alright, so let's switch gears a little bit and there's an upcoming election three weeks away. I'm sure it's not Lawson anybody earlier.
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DA: We had a Bruce Melman and giving us a little bit of a background actually quite a bit of background, I should say. So I don't want to go back and revisit that.
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DA: But you talked a little bit about stimulus going from 4 trillion to 7 trillion on the balance sheet PPP some of the other things that are going on.
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DA: From an economic standpoint. What do you think happens after the election year in a few weeks.
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TA: So this is where the rubber hits the road. I'm not taking sides. I'm not endorsing any candidates.
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TA: But I'm here to allocate capital and this is the way I. The way I see it, I think the most important thing
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TA: Is to know who the winner is. And I know this is a very emotional election, there's very, you know, sacred beliefs on both sides, and we'll leave that to another discussion.
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TA: But the market hates uncertainty. And so knowing who the winner is in a timely fashion.
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TA: Is absolutely the most important thing in some ways from a market standpoint and more important than who the winner is. And this, let me give you a couple of misnomers that
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TA: In the past, people have felt well you know a democratic administration and higher taxes, maybe not as market friendly in this case.
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TA: Again, not taking sides on this, but if you did have a democratic suite and that enabled the next administration to write very, very large stimulus. I think a democratic sweep will probably mean
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TA: A very large and I again I'm just putting out the framework you know 2,000,000,002 trillion 3 trillion some major symbols plan after the election when you control three branches.
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TA: That happens sooner and probably some of the punitive tax increases you're hearing about probably I'd be a little skeptical of those getting implemented in a
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TA: In a recovering, you know, coming out of a recession pandemics. So historically things you may have thought were good for the markets, maybe actually might be different and then clearly
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TA: If there's a Republican administration. I think you're going to see very large stimulus and no tax increases. So really,
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TA: The skeptic in me is, I'll give you the money. Now I'll either tax you later or never tax you. And so I think that's probably pretty positive for the markets, my concern will be the rubber hitting the road.
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TA: Probably sometime next year when all this stimulus and I'm expecting record deficits across the globe record deficits in the United States.
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TA: Our deficit in the country just hit $27 trillion. The balance sheet, it would not be totally shocking, just as a shock value that our balance sheet that's
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TA: 7 trillion. As I mentioned, is 10,000,000,000,015 trillion and some Victor, number one, this pandemics over again, not for guidance is a framework and then you take, you know, two $3 trillion stimulus at some point.
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TA: What do we do about insolvency, because we have a lot of small business that is really struggling and the Fed can can
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TA: Do something about liquidity they can paper over the cracks for a while. But if you've got a problem on insolvency. That's where I'm really worried about banks energy
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TA: Insurance commercial real estate. They call it the fire economy and again I have friends in these industries. But if you're if you're finance, insurance, real estate energy
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TA: that's connected to the real economy, and that's probably a pretty dangerous place are going to be tough. The other areas and the positive part of the K state area.
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TA: Probably innovation and long term. You know winners with innovation those areas are probably better. But getting back the election.
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TA: We got to know who the winner is. And that's going to be the most important thing
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DA: So again, I just want to make sure I'm clear and understanding here. You need to make sure we need to make sure we know who the winner is. But then, regardless, there may be some details that differ from one party to the other.
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TA: But you're expecting a massive stimulus in a way I am, and I think it's going to be major say two $3 trillion. And this is, again, my own, you know, personal view here.
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TA: And I think that will be the most important factor rolling into next January, February, March, and then I don't feel the there's tax policy out there.
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TA: But I'm a little skeptical of them passing major tax increases with the unemployment rate and the economy where it is. There may be some things you know cosmetically to show taxes are going up, but
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TA: I'm actually thinking. That's the first move. I'm more concerned the rubber hits the road next
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TA: June, July, August when we've been in a slow recovery and insolvency kicks in. So that's more of an economic issue, then, of course, okay, okay.
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DA: All right. And then, last question. So years ago I remember you telling me that every summer you read The Black Swan I to lab. And that is just a good reminder of what can go on in the world and you need to be prepared for it.
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DA: So I'll ask. This is a two part one just for my own interest. Do you still read that every summer because this summer I skipped it, I felt like I was living it
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DA: And then to what value do you put on resiliency and the ability to just handle these black swan events.
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TA: I put them on. I still read it and I actually have it on my desk right now so I can make this film. So, and there's a bunch of books back there that are
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TA: His other insert that he's written so absolutely if I was running a business of any scale absolutely critical. I think to read this book and some of his other works skin in the game.
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TA: Fooled by Randomness, to name a few others. And I think, here's the thing. You kind of be robust to the improbable that can happen. And I think there's a misnomer at times that
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TA: There's gotta be some crystal ball and like I got to figure out something crazy. It's going to happen in the world and and somehow I'm going to figure that out and be prepared for it.
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TA: That is true. In a sense, but like, here's the rubber hitting the road and I'm going to give you like two minutes of of my life experience in this
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TA: Random consequential events happen all the time, and it's your job as a manager to think about how is your business.
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TA: Prepared for them when I entered this business in 1995 nobody saw a.com boom in 1999 Netscape had just gone public nobody was talking about that.
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TA: And then in 1999 read a top of the market.com so that was a positive as a white swan. Right. But then 1999 to 2003 and I'm going to go and four year increments, because we're talking about politics here.
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TA: 2003 we had the.com crash 911 and a war. So did anybody see that coming in 1999 but then if you're running your business, you could think through
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TA: How would I navigate major geopolitical tension 2003 look out the 2007 did anybody in 2003 say we're gonna have the biggest housing boom we've ever seen.
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TA: Again, maybe a positive White Swan. People didn't see that coming. Then in 2007 let's for this zoom the camera out to 2011
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TA: Who saw the global financial crisis in 2007 and then Obama, President who people barely heard of in 2007 so 2007 to 2011 big change again highly probable impact and then 2011 slow recovery.
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TA: You know, things aren't going well in terms of economy by 2015 we've got quantitative easing Operation Twist all these deficits and the stock market has climbed the wall worried
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TA: 2015 you go out the 2019 Donald Trump elected president continued bull market and then a pandemic. So if I'm giving you a framework that
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TA: Major things happen around you. They're geopolitical their business their economic and cycle. And our job is to it says the impact of the highly improbable.
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TA: The key is has not seen says you can almost set up a book and in a couple sentences. Don't be the Thanksgiving turkey, who for the first two years of his life is fed by its master.
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TA: when that when that event happens that that Thanksgiving turkey and I'm sorry for the vegetarians here but ends up on your, your table for your dining room for Thanksgiving.
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TA: That was a black swan event for the turkey, but it wasn't for the butcher. Right. So the key is
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TA: Think about your business and think about the last 2025 years. Think about the cycles and how can I think above the fray zoom the camera angle out
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TA: And build a robust company for the long term. So that's what I need a reminder every year about what maybe the future is and knowing that I can't predict it.
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TA: Because I just gave you a walk of 25 years and I cannot predict all that. What I can do is think about how would my business.
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TA: Be resilient to that. And can I really build something to last. It's anti fragile it's durable its robust. It's innovating, it's task management.
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TA: Close the customers adopting technology accountability integrity moving quickly taking risks if you don't do that, you find extinction. So that's why I need to remind it every year.
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TA: Great. I can talk about these all day long. But unfortunately, we've reached the end of our time slot Todd Ahlsten. Thanks so much for joining us today. Thanks so much and hope it's a great conference.
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