Portfolio Insights: Small Cap Focus & Mid Cap Focus


Amy Zhang : I feel that tech is not cheap. That's why I trimmed our tech portfolio last year. I thought health care last year was much cheaper. You look at healthcare and technology versus the cyclical companies and they are much, much better positioned. I'm confident coming out the rebound that high quality, high growth companies have the potential to do much better because the recovery for those companies are more likely to be V-shape whereas for some, for the cyclical companies will have to be the U-shape because they just cannot recover that quickly. Plus, they’re also going to have more of a pricing power, pricing pressure. And some medical devices’ companies are clearly having a pause. But those elective surgeries, especially the kind of companies we invest in, are really mission critical and lifesaving. Someone cannot put off a heart surgery for that long. That is why we continue to invest in companies that are specialized in those areas that are extremely essential. We are buying those companies on weakness because when we open economy, which is soon but gradually, doctors plan to schedule weekends, surgeries. There is going to be pent up demand. I continue to believe growth will continue to outperform value coming out of this just because the business model exposed how cyclical they are. In terms of some of the other guy cyclical company. Speaker Question : It seems like it's been a one-way trade here where anything growth has been bid up and anything remotely value's been trashed. And I know you said you think growth will continue to do well, but you can kind of see what's happened on some of the days when the markets have had some strong rallies. I wanted to see why you feel growth is going to outperform. Amy Zhang : Yes, you can have those irrational days, right? Everything is like up a lot just because sentiment, like last Friday for example, Gilead. Its drug is not really a silver bullet in my humble opinion. Value could have some temporary snapback but the fundamental drivers are not there for those value companies. Meaning first

of all interest rates. Value would do well in high interest rates and high inflation periods. When economic growth is that robust, that will be more than 3% GDP growth. We are extremely far away from that. And I'm not being a Debbie downer. I'm cautiously optimistic. It's going just to take time. I feel it's going to be long way until we get to three and half percent plus GDP growth. The U.S. is actually not in the worst position, even though now we're not in a great shape, but the virus started here late, I think we will bounce back probably stronger than most of, even arguably Europe. I mean, that's just my personal view. So, again, interest rates exceedingly low. And look at QE. QE is happening and in QE growth would do better. I think if we take a six months to a year view, I'm confident that growth will continue to outperform value. I always want to use volatility as my friend, and that's been my sort of playbook. So I actually don't mind if something goes up, but that's for whatever sentiment reason now for fundamental reason, plus people are going to pay attention to the earning season. Earning season for that stuff is going to be a lot worse than people envision, I believe. Brad Newman : I think it's really just a, a question of whether talking about a trade or investment. As Amy mentioned, value stocks are much more cyclical, they're more loaded with financials, energy, materials. Industrials, those kinds of companies. They're more levered to the economy as she mentioned. And so when economic growth comes back, they may tend to outperform during that time, but that's really not a longer term structural type of investment. That's more of just a trade or a bounce back. We’ve written a lot about this from a macro standpoint about these structural forces that are in place that are driving growth relative to value. And we think that the classification system is structurally impaired and that a price to book value, which drives how companies are divided up between growth and value, is structurally flawed because it doesn't capture intangible investments.

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