Sam Klar, GMO

It definitely does. Yeah. So again, I'm very fortunate in that first and foremost, investing is both a hobby and a job for me. I absolutely love it. And so as much as I'd love to tell you a bunch of really interesting hobbies about me climbing mountains and scuba diving and all that stuff, all too often at nights, weekends, non-work times, my wife will ask me what I'm reading and inevitably it's something about business or investing. I love it. She calls me a nerd. I think that's a term of endearment, at least I hope so. But beyond that, I mentioned my wife, but I'm also incredibly fortunate. I have two amazing kids. My son, Ben, is 11. My daughter, Sophie, is eight. Those are really, really fun ages and I don't take that lightly.

And so my rule with them is whatever they're interested in, I'm interested in too. So my daughter, Sophie, is very involved in music and dance. And so I have a great time kind of following her growth in that area. She kind of makes sure I'm up to date on whatever eight-year-old girls are into these days, whether it's Taylor Swift or K-pop Demon Hunter. So I'm pretty well briefed there. And my son, Ben, is really into sports. You mentioned we moved to North Carolina from Boston a few years ago, but I've definitely infected him with my lifelong love of Boston sports. So I have a ton of fun watching him play basketball and flag football and kind of being the parent on the sidelines. And then, of course, watching games together, cheering for the Celtics and the Patriots and

The Red Sox and all that sort of stuff is just a huge amount of fun for me. That's great, Sam. I'm not going to bring up the Patriots anymore on this call after the dismal Super Bowl a couple of weeks ago. I'll spare you that. But let's go back to GMO. For listeners who might not be familiar, GMO has been around since 1977. There's about $70 billion in assets, if I got my numbers correct. At a high level, what is the firm's investment philosophy and what makes GMO GMO? Yeah, I think two terms you'll hear a lot with respect to GMO are quality and value. And those are definitely both a huge part of the firm's DNA.

When I think about, kind of my particular experience here, though, I really think the common element across everything is conviction. The investment world is massive and competitive, and there's always a temptation to try to, as an investment firm, be all things to all people. I think what makes GMO different, what I love so much about it, is that we really kind of focus our efforts on figuring out where the big opportunities are, and then we tend to ignore the rest. So conviction is kind of what gets us there. Beating the market is really hard. It's even harder when you're afraid to look different from the crowd. And so one of the things I love about GMO, and again, something I think cuts across everything,

Is how willing we are to follow our conviction, even if it means looking different from the crowd in the short term. So GMO has been building out an ETF suite. You've got a handful of names, quality, quality, one with a Y, one with an I, a handful of others. And now you have D-RES, which is D-R-E-S. So what was the decision to move into the ETF wrapper? What are you trying to make accessible to investors that they couldn't get that easily before? Yeah, so GMO has a long history of doing institutional investing really well. The challenge was obviously that that business tends to come with high minimum levels of investment. So personally, just from my own perspective, I've always loved the work that I was doing

At GMO and was really happy and thought it was a privilege to do it for the types of institutional clients that we have. But one little small frustration was always that for friends or family who couldn't meet a $10 million investment minimum or didn't work at GMO, they weren't able to invest alongside me. And I think the ETF really changes that. It's one of the reasons I'm so excited about the ETF vehicle is I kind of think of it as democratizing the investment management business. It opens it up to more folks, which is really exciting. And so when we launched Domestic Resilience, D-R-E-S, as you mentioned, is the ticker this past October, it gave me the chance to do something really cool, which is I got to invest my own

Money in it. Institutional clients got to invest their money as well. But also I had friends and family often with really smaller, comparatively smaller, kind of dollar size coming in and investing alongside them. We're all investing in the same thing. And to me, that's just really exciting and really inspiring as I think about going about my job on a day-to-day basis. So I love the ETF wrapper and I'm really excited to kind of continue to see how it grows. So let's talk about D-Res. As you said, it's the GMO Domestic Resilience ETF. At a very high level, what is this fund and what's the problem it's trying to solve for investors? Yeah, so the creation of the fund is, as all things GMO, we have to develop that conviction,

Right? So we're not the firm that's going to, launch a triple long Tesla ETF just because Tesla stock is going up. We really do our research and we spend a lot of time doing it. So domestic resilience really stems from a multi-year side project that Tom Hancock, who runs our quality business, and I worked on together. And the idea of the project was to understand the forces behind deglobalization and the shift to kind of more of a multi-polar world where the U.S. isn't the sole superpower in the world. China's rise is obviously a big part of that story. But as we kind of dug in and tried to understand both the risks and the rewards associated with this kind of global transition, what we got really kind of excited about was the opportunity

And implications for the U.S. market and U.S. investors. And that kind of is what brought us to the concept of resilience and kind of national resilience and how if you think about more of a multi-polar world where borders start to matter more than they have in recent decades, the concept of what makes a resilient country a resilient economy becomes more and more important. So the reason we kind of called the strategy domestic resilience is that that concept of resilience allows us to capture really important areas, really big megatrends in America, like reindustrialization, which is a major area we're focused on today, but also use that wider lens to think about opportunities around that. And so the reason we launched it as a standalone strategy is we thought it really helped solve

A problem investors have today, which is that for most investors, your core U.S. holding, whether that's GMO's quality strategy or simply an S&P 500 index fund, is U.S. in name, but is really quite a multinational portfolio. So for example, in the S&P 500, less than 60% of the revenue for companies in that U.S. index actually come from the U.S. market. So in building a strategy like domestic resilience, we're able to really kind of focus in on where we think the opportunities are. So we have, again, closer to 90% of the revenue for the companies in our portfolios actually come from the U.S. market. And what we found and the reason we launched a strategy around it is it really addressed a gap in the market and kind of thinking about where the exciting opportunities were around

American re-industrialization and resilience of the U.S. more broadly, that they weren't really being well captured in investor portfolios. So the problem domestic resilience solves is it gives you a vehicle to make what appear to be U.S. holdings in your portfolio that are really quite multinational really kind of blend in some domestic resilience with that to give you kind of a much better opportunity to capture some of the upside from American re-industrialization and more broadly the trend around resilient economies and countries. So walk me through D-Res, what it actually does then like day to day. So I get the entire concept. It makes a ton of sense to me. But we have to build the portfolio. And so how do you decide what gets in, what stays out?

What are the benchmarks in order for you to look at a name and say this belongs in D-Res? Yeah. So we start with a universe of a couple of hundred names. And the commonality of all of those names is that if we think of re-industrialization and the transition to a more resilient U.S. economy as a call option, I want my universe to be companies that are long that call option, right? So who have outsized exposure to key areas of the U.S. economy that are kind of at the core of resilience, whether it's reshoring or other areas. So we kind of start with that as our focus. We narrow that list. We kind of get to the 200 by narrowing a much broader list where we also focus on companies

That have a majority of their revenue coming from the U.S. market. Again, we do think that's a distinguishing characteristic. We want this investment strategy to be really focused on the U.S. So that's kind of the first level. And then the second level is, okay, what are the types of companies we're thinking about? And what we found in doing our research is that traditional sector definitions, whether it's by GICS or any other industry classification, didn't really capture the resilience opportunity particularly well. So we ended up having to create our own. So we have four buckets of companies that we think fit the domestic resilience kind of trend really well. And those four are first manufacturing and automation. Seems pretty straightforward in a reindustrializing world. The second is transportation and logistics.

The third is energy and materials. And the fourth is defense. And so we find companies in each of these areas to be, again, kind of disproportionately long the upside of the transition to kind of a more resilient United States. So that's our universe. But then the step beyond that, which is really kind of what makes the strategy different and kind of goes to our roots as an active manager, is that we're not just going to give you the universe and treat all the names equal. We do a lot of fundamental work, both myself and a lot of other members of the focused equity team at GMO that I'm a part of, to really dial in and understand the specifics of the companies that we're investing in.

And what we're really looking for there are companies that can give us the best bang for our buck as investors. And the key factors that we tend to focus on are quality and value. So high quality firms with defensible kind of business situations and then value, making sure that we're not overpaying for kind of the optionality of reindustrialization and some of these really, really interesting themes. So that process, that stock selection process allows us to narrow the universe and run a much more focused strategy. We typically hold about 35 to 40 names. And the idea there is to kind of get the best of the best from within the universe from both that quality and the value perspective. Yeah. So you kind of walked me into my next question, which is GMO is really known for quality and

Valuation. And so have there been companies that you loved from a reshoring standpoint, but the valuation just wasn't there, didn't meet that screen and you got to put them on the bench? Yeah, it's a great question and definitely something we had to think a ton about in building the strategy. So yeah, you hit the nail on the head. Quality and value are definitely at the core of what we've done at GMO for decades. And the simple reason for that is that they work, right? Like these are investment traits that have stood the test of time and have delivered for investors. And so we take them very seriously and we kind of try to embed the lessons that we've learned from those kind of principles into our approach to stock selection.

The best way to kind of talk about how we have to deal with that is kind of by example. And so the first example that I give you is in a sector like steel, which we think is definitely along the upside of American reindustrialization. As we build more factories and buildings, et cetera, we're going to use more U.S. steel to do it. But when we think about how to gain exposure to that, how to benefit from it as investors, our holdings in the U.S. steel sector, we tend to find the higher quality companies. So Nucor and Steel Dynamics are two of our holdings in this area are the best run and the best capitalized names in that sector. And that's really important because steel is tricky.

It is on the positive side, absolutely critical for building. And yet on the negative side, it's also a really cyclical sector. So getting exposure through high quality firms, we think it gives us the ability to kind of weather that cyclicality in the sector and kind of improves our odds of generating great returns. So even in a traditionally cyclical sector, we find that that kind of quality bias, if you will, really helps us generate, kind of better overall returns. And then the flip side to that would be from a value perspective. You ask the question about companies we might not own because of value. And the answer is absolutely. But the really cool thing about markets is that if you develop views on these companies,

Markets will often kind of serve you up opportunities to own them. So a recent example is a company called Fastenal, which is an industrial distributor in the U.S., absolutely exposed to American reindustrialization and a really high quality company with an amazing long-term track record. When we launched this strategy this past October, we couldn't get quite comfortable with Fastenal's valuation. It was just trading at a level that we couldn't quite get there on. Fortunately for us, again, we maintained our research on that company. We didn't own it at launch, but we were still focused on it. And they ended up reporting a disappointing quarterly earnings report in October. The stock sold off about 20% from its peak. We didn't actually think the future fundamentals had changed a lot.

What had changed was sentiment. And so now kind of the value came to us. And we were able to initiate a position at prices that were a lot better than we would have had we kind of forced the fund to buy when we launched in October and kind of ignored that valuation principle. So that combination of value and quality, it's not just theory for us. It really just does impact how we manage the portfolio on a day-to-day basis. I love that. And so now I'm going to have to ask you a question as a, maybe skeptic's not the right word, but from a devil's advocate point of view, which is the portfolio as I looked at it is about 75% industrials, 15% materials, 8% energy.

Like you said, very concentrated, about 36 holdings in there. A skeptic would say that it's just a sector bet dressed up as a theme. How would you combat that? Yeah, it's really important. And the thing I would say is to look under the covers because we really had the same instinct when we set out to build domestic resilience. We looked at it and said, gosh, is this just a matter of owning an industrials ETF? Is that all it is? And frankly, if that was the case, we never would have launched an active strategy. We would just told people, oh yeah, you can go buy XLI or something like that. But what we found when we kind of dug in and did the work is that the US industrial sector

Suffers from a lot of the same issues as the S&P 500, which I mentioned before, which is that it's very multinational. So less than two thirds of the revenue exposure for XLI, the industrials ETF, actually comes from the US market. So when you look at our portfolio and kind of dig under the covers a little bit, yes, we do own a lot of companies that are in the industrial sector, but it's with far more of a US focus, thinking about companies that will really benefit from American reindustrialization and not be kind of caught up in what's going on in Europe or Asia or what have you. The other thing that we found kind of, again, which got to stock selection within the sector rather than just thinking about this as a sector bet, is that US industrials is kind of a weird

Sector in general. A lot of stuff gets thrown in there. So for example, if you look at XLI, a top 10 holding in that ETF is Uber. Now, Uber is an interesting company. We actually know it really well at GMO. We cover it fundamentally. But it is much more of a tech company than an industrials company. So by doing that work and understanding not just what we own, but also why we own it and where we're really focused on, we're able to kind of really drill in this strategy to the factors that we think will drive future outperformance. So we do own a lot of industrials, but they're different from the names in the industrial sector of the top 10 holdings in the industrials ETF.

We only have one overlap in domestic resilience holdings as well. So it really is a differentiated portfolio. We apply the same principle to materials and energy. And so again, it's that it's not quite as simple as just looking at the sectors. We really think that the companies do matter. And that's where we focused a lot of our attention on building the strategy. And so I've noticed as I drilled down, you've got, some top holdings in there like Union Pacific, CSX, Knight Swift. It's pretty heavy on transportation and logistics. So walk me through why the movement of goods is such a central piece versus the companies that actually are, building factories or making stuff. Yes. I mentioned transportation and logistics is one of the four categories that we

Invested in the strategy. And it really kind of gets to the key aspect of how we think about investment opportunities. And it goes back to that quality principle. And so the kind of analogy that we use for thinking about companies like transportation and logistics is one of picks and shovels business models. So the picks and shovels analogy, I believe, dates back to the gold rush in the United States where the idea was everyone wants to focus on gold because it's going up and it's very exciting. And so everyone's competing on trying to buy the perfect piece of land that's going to have the most gold when they start digging. But really the best strategy from a business perspective and from an investment perspective that had the lowest risk was not to try to pick the perfect plot of land that you singularly

Can benefit from, but to sell picks and shovels that everyone is going to need who's doing their own digging. And so those tend to be better business models. They tend to have kind of these higher quality characteristics that we like so much. And so when we think about the transportation sector in the US, we look at it very similarly in that when we're thinking about American re-industrialization, rather than trying to guess exactly where the next factory is going to be built or who's going to build it, we look for the companies that are really, we think are positioned to win regardless. So transportation name, we own rails and trucking in particular, do benefit from America kind of doing more manufacturing within its borders rather than doing all that manufacturing overseas.

And the only shipping being coming when you kind of ship the finished product to the United States. The other thing that we like about the transport sector is that we do think that there are stock-specific opportunities to add value by kind of really digging in and again, understanding the company fundamentals. So Union Pacific, you mentioned, is our top holding and our strategy. And that's again, it has that transportation and logistics aspect to it. We think more shipment in the US, more manufacturing is good for the rails in general. But there's also stock-specific drivers. Union Pacific is in the process of acquiring Norfolk Southern, which is another railroad. They're going to create an end-to-end railroad in the United States that starts on the West Coast, ends on the East Coast, a truly transcontinental railway.

And we really think that could be transformative for the company. But because the merger is going to take a while and it's going through a regulatory process that has some uncertainty, the upside from that opportunity we don't think is reflected at all in Union Pacific's current valuation. So again, transportation and logistics, a good place to be in general. But the reason we lean more towards holding more Union Pacific is because, again, we do have that stock-specific view and kind of, again, gets back to the key of managing it as an active manager. We do have these views. We're not just trying to own a little bit of everything. I'd say there's a similar story within trucking where, again, the nuance there when you dig into the trucking sector is that we think one of the really interesting things in trucking

Today is that there's been a multi-year freight recession in the United States. And so a lot of these companies have really depressed fundamentals. And again, we think that those quality characteristics are really important because the companies that have been able to survive kind of this washout in the trucking sector are in a really interesting position when trucking rates start to inflect again. And so, again, kind of taking that quality principle, understanding the specifics gets us a little bit more in the transportation and logistics sector. Interesting. So one of the big questions is with any reshoring or, as you call it, a domestic resilience strategy is how much of this depends on who is in the White House and what policy looks like. Without getting into politics, this is a very America first administration.

So how much of the success of this strategy depends on the continuation of those principles or does it even matter who's in the White House just given the polarization of, as you mentioned very early in this conversation, of China and the U.S. being the two global superpowers? Yeah, it's a really important question. And frankly, we had the same concern when we were kind of digging into the research. And the really cool thing from our perspective and perhaps surprising more than anything is how bipartisan American re-industrialization and American resilience really is. And I say the word bipartisan and I can imagine anyone listening going, what are you talking about? The U.S. is incredibly polarized. Everybody hates each other. It doesn't really make any sense. And yet what's really interesting is that while Democrats and Republicans disagree about a lot

Of things, the idea of making America more resilient is really something that cuts across party lines. I have an exhibit in my set of slides that I use to talk about the strategy where I have quotes from key Democratic leaders and key Republican leaders on the topic of domestic resilience. And my standard joke is that if you covered up the names and you didn't know who it was from, it'd be really hard to tell whether it was a Democrat or Republican speaking. And so again, that speaks to something that we thought a lot about in launching the strategy. We didn't want to launch something that was wholly dependent on who was in the White House or who had control of Congress because we think the opportunity for re-industrialization

Is really durational, right? Like America, kind of spent several decades, kind of moving to offshore as much things as possible. That's not coming back in a month. It's not coming back in a quarter. It's not even coming back in a year. It's going to be a long-term opportunity. Now, that's really exciting for us as investors. And the kind of added benefit there is that we don't think it's particularly dependent on who's in the White House or who's in Congress. And again, that kind of is what's something that makes us even more excited about it from an investment policy perspective because it runs counter to what your first instinct might be. I think a lot of people's instinct go, oh, this is a Trump strategy or something that's

Dependent on who's in the office, in the Oval Office. And again, it's really much bigger than that and far more bipartisan than I think anyone would expect. Yeah, no, that's great. I totally agree. And so there are a handful of other competitors out now. There's RSHO and there's AIRR. I think I know the answer to this question, but how do you differentiate D-Res or D-R-E-S from these two competitors? Yeah, so there are a lot of funds out there kind of doing different things. So I'd be careful not to like overly generalize. But in terms of thinking about what we thought we brought to the table in terms of launching a strategy, so kind of why us? There were a couple of factors that we kept coming back to as areas that we thought we

Could be differentiated within. The first is focus. I mentioned that the way we kind of run the strategy is not what I call a Noah's Ark approach to investing where we own a little bit of everything. We're not also just re-industrialization or just reshoring. We're really kind of focused on the key elements that makes an economy thrive, that makes a nation really resilient for the long term. So again, that focused approach, both in terms of the types of companies that we pick, but also again, focusing the portfolio, again, owning 35 to 40 names rather than 50 or 60 or 70 or 80 or 100 is again something that I think benefits from our experience in active management is something unique that we can bring to the table.

The second thing I would touch on, and again, it's very tricky because I think a lot of people just look at a US ETF and go, oh, that's a US ETF. It must be US focused. The reality, as I mentioned with the industrials ETF is that when you dig under the covers for a lot of these companies, they tend to be very multinational. So I think a second characteristic that we thought we could be differentiated in bringing this strategy to the market was that we could really be focused on US companies by doing the fundamental work and making sure that the companies we own were disproportionately exposed to the US opportunity set. Again, I mentioned it before, S&P 500, less than 60% of the sales of those companies come

From the US. For our portfolio, that's closer to 90%. So again, we really are dialed into that opportunity set. And so kind of thinking about that US exposure as something that we're, this is the thing that we are willing to invest in. We don't want to get tripped up by companies that, yeah, sure, on paper, they look like reshoring beneficiaries, but really, you're going to be much more dependent on what the Asian economies did or what European economies did during the period. So being more US focused is that second piece. And then the final one that I mentioned, because it's a really important concept that we thought a lot about in terms of the type of vehicle we brought to the market and how we approached

It was fees. Domestic resilience is priced at 50 basis points. That is a very competitive fee when we look around at what other products are priced at. And that was, again, something that was really important to me personally as I launched. Again, I am investing my money in domestic resilience alongside investors, both institutional and individual. I have friends and family investing alongside me. And so having a competitive fee ensures that the biggest benefit of us being right and us kind of all as investors coming together and investing in this strategy is that the majority of the gains that will be made by making this investment accrue to the investor, right? And so again, that fee component I do think is really important and it's something we try

To be really thoughtful about and making sure that we were on the lower end of the fee spectrum for any of the kind of competing products out there. So million dollar question here, Sam. Who is D-Res designed for? Or how would you tell an advisor to actually implement this in an already kind of existing model portfolio suite? Yeah. So when I think about that million dollar question, it's a really good one. When I think about how we are talking to clients about using their portfolios and frankly, how I thought about it in my own personal portfolio and how I talked to friends and family about it the same way, we think domestic resilience is a great satellite to your more global tech heavy core holdings.

So whether you own the S&P 500, whether you own quality, we think domestic resilience is a great compliment. We had one client that when we were introducing the strategy said to us in a way that I loved and I'm going to paraphrase a little bit. They said, there are two big things going on in the investment world today. One is AI, which everyone is focused on. The other is resilience, which comparatively few people are focused on. We tend to think of that lack of focus as an opportunity for us, both as investors and as managers bringing a product into the market because we think it's something that's underrepresented in typical client portfolios. Your typical core exposure today has a lot of tech and a lot of multinational exposure.

So when you think about American reindustrialization, as it plays out, you probably don't have a lot of exposure to it. So blending in some domestic resilience alongside your US core holdings, we think gives you a better overall shot at delivering the returns you need because it's not just dependent on AI. You get that other kind of mega trend as well, but you do need to kind of have an active overlay to do it. Owning the S&P 500 passively is not going to get you there independently. And so again, we do think it's an opportunity for active management, both within the strategy itself, but then also for allocators, understanding that they have kind of an underweight in this area in their portfolio. And domestic resilience is really a great vehicle to kind of true that up.

So the fun has been live about five months. It's always hard launching a new product. What surprised you so far? What has been the response from investors and advisors? Yeah, the biggest worry that I had was that everyone was going to be so focused on AI that they wouldn't care. But I've been pleasantly surprised. There's a lot of interest here. And both the number and quality of conversations that we've been having has been really amazing and rewarding to me. Again, we launched this strategy in October, but I've spent several years working on it. So it's been really exciting for me to kind of, pull the curtain back and go out and start talking about it to me. And again, I think the biggest thing that we've seen, and again, we saw it, but it's

Been really affirming to hear it said back to us, is just the notion of how clients are really just starting to understand how underexposed they are to this area. I had a client say to me just yesterday, this is a really interesting area of the investment world and everyone is underweighted. And so again, that's been kind of, it's a challenge in that we have to kind of get out there and tell that story, but it's been a really positive surprise because the story has been really, really well received. And I think people are really just starting to come around to it. And so we're kind of, coming into the market at a really interesting time with, with again, a lot of depth of experience and research behind it so that we can have those

Conversations and help people understand where it fits in their portfolio. So Sam, I really appreciate you taking some time to hang out with me today. Where can people learn more about GMO and where can people learn more about this ETF, DRES? So GMO.com is a great place to start for domestic resilience specifically. We obviously have a lot of information about the fun fact sheets, et cetera, on GMO.com. So I would direct you there. The other thing that we've done that's a little bit unique is we started writing a LinkedIn newsletter. It's called the Resilience Rundown. It's free. You can subscribe to it on LinkedIn. And I write this monthly. And the idea behind it was this is at its core, there's big thematic elements, but at

Its core, we really are in business to pick stocks and find the companies that will benefit. And so writing a monthly piece on LinkedIn has given me the opportunity to talk more deeply, not just about the themes that we're investing in, but also the companies and why we own what we own. And so kind of thinking about this both as something that plays an important role in your portfolio, but also something where the companies do matter. And the fact that we're doing our in-depth research and kind of understanding these companies at a more granular level, the chance to go out and talk about them, I think, can give people additional comfort and frankly, just additional information to understand why we're investing in what we invest in.

And so I would strongly encourage you. It's the Resilience Rundown on LinkedIn. And we've got a lot of subscribers already, but we'd be delighted to have some more. Sam, again, thanks so much for spending some time with me and being here today. Brad, thanks so much. This was fun. Thanks for listening. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye.