Yuri Khodjamirian

They were kind of a young boutique, started in 2002, spun out of a big asset manager and very focused on kind of good long-term fundamental equity investing. And so I started my career, as I said, in July 2009, in the middle of the financial crisis on a long short fund focused on picking stocks across the globe. And yeah, I worked my way up basically as an analyst for about four or five years, applied to trade, and then got promoted to run a fund. So for about six, seven years, I ran a UK income fund together with my old colleague and co-manager. And we basically, it was a pretty successful fund. We produced good numbers for our clients. And its peak, it was about $2 billion fund. So that was kind of my training in finance, really one place

Focused on stocks. And then I left Majedi and I got, I always really liked entrepreneurship and kind of focusing on what I would call kind of trying to build your own thing and your own culture and all these kinds of things. Majedi was very much that kind of thing. When I joined, we were 20 people. So if you sort of needed anything done, you had to do it yourself. And so in that entrepreneurial journey, after I left Majedi, I met our founder, Moritz, who was starting Temo ETFs. And so we talked a lot, we connected on a lot of things. And I just felt it was kind of the most exciting place going on in active management and specifically active ETFs. And so I joined about a year ago,

If it feels hard to believe it was a year. We've achieved so much. We've kind of launched five funds in the market and we're really trying to pioneer the space of active ETFs, specifically focused on really interesting long-term structural themes. So that's a little bit of my background, how I ended

Widely as I can because I think it's quite important to read lots of things like fiction books, philosophy, all this kind of stuff that may not seem immediately relevant to the job of investing. But I think the wider you read, the more interesting things you come across. And I think a lot of the best insights you can have are where interesting connections are made between fields that might look completely separate, but actually, somehow get connected. So I do that. Um, and I think it's, it's kind of my, that's pretty much how I spend my time. I just, I just had a baby boy as well. So that's also actually a lot of my hobbies are going out the window rapidly, um, taking

I think the first one is non-replicable physical assets. I think, the more the world is moving to digital, the more people forget that actually physical assets are, what the makeup of the world and, and digital is sort of infinite, right? Whereas physical is, is finite. And I think a railroad is a perfect example of that. There are six class one railroads in the United States, which is the large ones. There used to be hundreds or 180, I believe, uh, in the 1920s, we've gone all the way in through mergers and bankruptcies down to six. No one's ever going to build another railroad in the United States. It's just going to be impossible. The permissions, the costs is, is prohibitive. And so I think that means that you have this asset that cannot

Be replicated. So that's kind of group number one. Group number two is, is a classic kind of network effects. Uh, I think essentially is every user that gets added to the network creates more value for everyone who's already a member of the network. Uh, now social media doesn't fall into that. And I'll get, explain why in a second, when we get on some of the other topics, but I think things like, uh, financial exchanges is a perfect example of that there's regulation around it, but also liquidity begets more liquidity and more people trade in a venue, the more valuable it is to other people. Um, then we have high switching costs. So, places like medical devices where switching some of these, uh, in between competitors is almost impossible. It's prohibitively

Expensive in terms of time and training. Um, so that's a really good example of that. Um, and then regulation, as I said, many of the monopolies are semi or quasi regulated type businesses, whether you think about airports or actually toll roads, like the ticker T O L L. These are, there's a contract, the concessions often run 70, 80, 90 years. So this is the kind of horizons we're talking about when we speak about monopolies. Um, and lots of things can change in the world of other types of companies, but they're sitting on this concession and they'll, they'll continue to do that. And a lot of the stuff is written into the contract. Um, so that, that's the kind of, uh, regulatory part of it. And then the final bit is kind of economies of scale. So here we're talking

About companies that have essentially created so much scale that in the end they can produce the marginal cost at which they produce the product is really low and therefore no competitor can produce it. Uh, and a great example of that is semiconductor manufacturing, right? Where we, you have to reach a level of scale. And in this case, we're talking about scale in the tiniest amount. I don't know if you read the wired article about TSMC, but, uh, he goes and visits the fab and he calls it like, it's like seeing God. it's, it's, it's essentially, and there they produce so many transistors that it's more than every factory is produced of anything ever in the history of mankind. Uh, and it's kind of mind blowing,

But that's the kind of scale that you need to produce, uh, transistors and semiconductors at a good cost, in which case you beat your competition. And so each one of these is, as you can see, kind of draws very strong competitive answers. And sometimes you have companies that have both or a combination of the two where it becomes particularly powerful. Yeah, sorry, go on. No, go ahead, please. No, no, I was just going to say the one thing missing from that, which a lot of people often associate with most is things like intangible value. And for us, that's just too weak of a reason for competitive advantage that can be broken much easier than people think. Um, and I think that's a really important point to mention as well. What isn't the monopoly?

MasterCard and Visa, between them control about 84% of the kind of networks payments, uh, business that as a duopoly, if there ever was one. And, but Visa has created an incredible amount of value for everyone in the ecosystem. Start with consumers, the ability, and people forget this, right? And you can just walk into a store and pay with this card and it's instantly accepted. This is accepted, I think in something like 140 countries, and there's only about 150 countries in the world. So it's, it's ubiquitous, right? And it's just created this value for consumers and for merchants as well, like to be able to accept payments safely without fraud, all of this stuff they've created. And all they do is take a tiny little,

As we call it, toll, right? And so that's why I think a lot of these other sources of competitive advantage all come down to this kind of thing where if you're a company that provides a mission critical product for customers and has provided a ton of customer value over time, that's the kinds of businesses that over time will morph into the source of competitive advantage and then, uh, create value for, for, for consumers. And it goes across all of them, right? Railroads have created a lot of value by moving goods around. That's why it's consolidated as well. If you look at the stats, even though there's only six railroads, actually pricing is cut continues to come down in many ways in terms of real terms. And it's a very competitive industry against things

Like truck. I could go on with lots of different examples, but I think the key point is mission critical, lots of customer value creates each one of these five different types of competitive advantage that then creates the monopolies that we see today. So that's why we think they're not bad, right? They're not evil because they created this value for customers.

What they're doing is going through a transformation in terms of AI and people kind of think about NVIDIA when they think AI, but actually they should be thinking about companies like Moody's that have enormous databases that are proprietary. Moody's has the biggest database of private and public companies in the entire world. That data is just beautiful for artificial intelligence to be used over it as a feature and a layer. And Moody's investing heavily in that. And that's the kind of thing that we want to see, right? Uh, creating value by playing defense and investing in your business. That's part one. And part two is obviously these companies have, because of their strong competitive position, this highly recurring revenue base, a lot of this contractual kind of safety that's written into them. They just have pristine financials

And often have very high returns on investor capital. And as we all know, return on investor capital is like investors and shareholders friend, right? It's, it's essentially like the easiest way to make money in the market is you let companies create this value through high returns and keep reinvesting those returns over time and pounding. And, but I think it's very, very important that quality often in the market is, is well known, but the thing, the reason why Monopoly is such a good investment is because of the durability of that return and that quality. All our time is spent understanding that durability. And I've talked about the kind of 60, 70 year concessions, that durability creates a kind of a way for the fade not to ever happen because the market is very

Conditioned on returns to come back to the cost of capital. And for these companies, this doesn't really happen. And the market just cannot price this properly. And that's why you see share prices of these companies go up over time because they're constantly kind of beating expectations of the fade in the market. So what I would say is that it's not enough to just buy high ROIC companies. What you need is ROIC companies that have durability over time.

Spending all of their time thinking, okay, what is the universe of monopolies out there? There are definitions in our perspectives about what they are, but that's the main name of the game. So that creates your thematic universe, which we call a pure thematic universe. It purely expresses the theme as it's written on the name of the fund. And then we apply good old-fashioned fundamental equity analysis, which I've been doing for well over a decade, basically thinking, okay, what are the best 30 companies I can come up with in this universe? Then you might use some screens, for example, looking at balance sheets or other metrics. But really what we're doing is good old-fashioned fundamental analysis. We usually narrow down to a research set of companies, and then we apply

What we call kind of the four pillars of our investment process. So we look for companies that have strong operating bases, solid foundations of their businesses, good balance sheets and cashflow generation. And those are really, really important, those two factors. They're really the reasons we don't invest in companies that fail those two first tests. And then we think about the upside. We think, what is the valuation case here? And in my world of monopolies, often some of these companies are a little bit richer value than the market, and you need to really build a really good, solid valuation case. And then finally, what is our edge in this particular stock and investment? And that's a really difficult question fund managers often don't ask themselves, right?

And so we force everyone in the terms of the TEMMA process to ask that. If you meet all four tests, then it's a security that can be part of the portfolio and enters the investment. And that's the kind of work we do. It's a lot of fundamental work, meeting companies, talking to them, building financial models, working with, reading the conference transcripts, all of that kind of

So you have your thematic universe, which is runs in the hundreds of stocks. And is that every are those the 30 best monopolies out there at any particular given point in time, and the 30 best valuation cases that you can you can put together. So we do that. And then we do quite rigorous risk management. Sometimes that means you might chop and change names if there are issues that arise. So we watch a lot of risks very, very carefully. And that can lead to a sell as well.

You're always, you're reducing the probability in a multiple way. So it starts with the security selection, making sure that, for example, things like balance sheet are solid for the companies that we invest in. And I'm talking about balance sheet in the broadest possible sense. And I, as CIO, I obsess about this because getting the balance sheet wrong on a company means a permanent impairment of value of the equity. You're never going to get it back. we've seen that with many examples. Rework being the most prominent example this week, but it happens all the time, at Silicon Valley Bank. Get that wrong, you never get your equity back. profit warnings, margin resets, you can get your money

Back. And so we're just always really cognizant of that. And then you have kind of the portfolio construction process, which is an interesting way, idea that we've put together, which is kind of having three conviction tiers of position size. And that controls your highest kind of position size, but also make sure you don't have the behavioral biases that risk management often needs to kind of counter. That makes sense. And then we have lots of different checks. I sit down with the fund managers every two weeks, we discuss the portfolio, we make sure, easy, the worst thing is taking risks that you don't think you're taking and making sure that we, one, we know all the risks we're taking and two, making sure we're happy with

The risks that we're taking. And that's the kind of philosophy that permeates. And then we have a lot of the modern kind of tools in terms of risk models to try to understand how these portfolios will behave in different environments. Remember, we're running 30 stock portfolios, so they can they can move around. And so it's really important to know, if another crisis happened, what happens to your portfolio? How do these stocks behave? And we run all kinds of analyses to do that every quarter to make sure

Its sizing and how, what are some of the pitfalls that can happen. And there's a lot of behavioral science behind this as well. And so we did all of this work. We talked to like multiple, multiple participants in the industry, read a lot of academic literature, and we came up with a process that's a little bit of a middle ground where we have three tiers of position size. Moving between the tiers is a conviction decision. So we have the highest conviction, medium conviction, and sort of entry position as well. And that means that you have a minimum position size, which is very important from a behavioral perspective. People often have little positions that don't really impact the end investors outcome, but are there because, the fund manager feels comfortable. You also have a maximum

Position size. So you don't take overly confident risks as well and keeps you cognizant. And then you move up in between these, you make trades that are substantial trades, if that makes sense, rather than sort of moving little tiny bits that don't really impact the decision. But then this framework works really well. And it also has an active systematic rebalancing approach where you essentially, the fund manager makes the decisions, but they're always thinking about rebalancing at the right time rather than rebalancing in a mechanistic way. And this is what we found. We've been testing in the market and lots of the models, and it works really well. Fund managers like the structure around it because it gives you this kind of risk managed approach. And the reason for this is fundamentally,

Active management is really good in general. The good fund managers are good at picking stocks. They're not that good at sizing the positions. So you need some rules and guidelines on sizing to make sure you harness that stock picking alpha in the funds.

We sit down, we look at it, and we say, okay, has this, I sit down with the fund manager, and be like, has this gone above what you think is the right risk reward for this particular stock? And you make that decision at that particular point in time, it's active management, but within kind of what I would call guidelines. So it's different to a completely systematic approach where you have to rebalance every six months, it works well, because sometimes you don't want to be doing, selling that particular position. Equally, though, it counters the idea that people should let their winners keep running. Because in truth, if you look at the most successful fund manager, the generation of alpha and really good ideas is about an 18 to 24 month life. And so you don't,

And I think that's important to say, because you don't want to be scaling positions up at the time where the idea is probably past its best point. Does that make sense?

Is, is it means I pose pertinent questions to the fund managers and ask them, are you sure you want to be taking this risk? And also, it illuminates risks for people. And we cut the portfolios in every way you can imagine, and including proprietary ways, different subsector allocations, different risk profiles that we've identified, interest rates, macro environments, you name it. And it's always the conversation is, hey, your portfolio is too exposed to, it's correlated to the long bond yield. Are you sure you want to do that? Maybe you want to diversify it a little bit. And that's what we're trying to do. But ultimately, the security selection comes from the bottom up level. So it's a more of a question after you've picked the portfolio than it is in the process of picking

Period of time, going back to the 1920s, and there's a great paper by AQR, where they analyze different factors, a quality factor in equities, global equities, and US is one that works in almost every single environment over a very long period of time in and out of sample. And so we think that is that. And this is a very quality portfolio, but this is a subset of quality portfolio that has a lot of durability built into it, because it has this innate building, ability to kind of keep fighting the fate of returns. And so we're often having these conversations where we're saying, you're probably your own SPY, you're actually and you actually own seven stocks, right? Let's be real here, 30% of that portfolio is those seven stocks. Are you a stock

Picker? No. Okay, should you be thinking about diversifying your allocation to something else? How about some international? How about high grading the portfolio? And we go down those two avenues.