Animal Spirits Podcast - Talk Your Book: Disruption as an Asset Class

Episode Date: February 7, 2022

On today's Talk Your Book, we spoke with Kristof Gleich and Spenser Lerner from Harbor Capital about owning and managing portfolios with innovation stocks.   Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talker book is brought to you by the Harbor Disruptive Innovation ETF. Go to harborcapital.com to learn about their NOETF, INNO. That's again the Harbor Disruptive Innovation ETF at Harbor Capital.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holtz Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's wealth management. This podcast is for informational purposes only and should not

be relied upon for investment decisions. Clients of Rithold's wealth management may maintain positions in the securities discussed in this podcast. So, Ben, the big question is the re-rating cycle that we're in for these growth stocks. Like, where are we in that? What inning are we in, I guess? And who knows? So one of the things that we were talking about was like Shopify, for example, example, which is a great company, was a great stock, got cut in half in 50 days. And it was trading at nosebleed valuations, 50 plus almost 60 times sales. And now after being cut in half, it's only, air quotes, 29 times sales. And the thing is, these companies never look cheap on traditional valuation metrics. But you have to use something. And I guess the question is

like can companies like this, and they're not all going to, but which companies can grow into their valuations, whatever multiple you're trying to use? So if Shopify is going to be 10 times bigger in five years than it is today, it could damn well look cheap. But I was comparing this to like Amazon, for example. And I know we're using crude metrics, like price of sales, whatever. But Amazon in the 90s for a second went crazy and then obviously a crash. But since then. Like you said like, oh, Amazon never looks cheap. Amazon was trading at less than one time sales at the bottom, but it was like, I don't know, three, four, five, three, four, five, basically this entire time, even two. I'm just pulling this up like 2012. It was trading at two and a half

time sales. The metrics in some of these companies, even after this, are still really hard to wrap your arms around. So you really have to believe that these are truly disrupting whatever space they're playing in in order to believe that these companies are cheap now, which could very well be the case, you know, too soon to tell. The question is, like, if they are able to still grow 20 or 30 percent per year, then who cares about the multiples right now? Yes, yes. So we had a good talk with the guys at Harbor Capital. And we talked about, we've been saying, like, the pandemic has been probably bad for some growth stocks because the expectations got too high and out of whack. They also said, but it's also been good for some because the ones that have pulled forward,

not just pulled forward stuff, but have gotten subscribers, especially. That's the thing I think you didn't really have in the dot-com bubble is like recurring revenue for so many of these companies. So don't you think that kind of puts a floor under some of these valuations where you're not going to see a one-time sales like Amazon for the true good stocks? Like maybe you're just never going to find these stocks cheap if they really are. Oh, these stocks will never get cheap. If we're looking at traditional metrics, they will never ever be cheap.

None of the, well, Apple was, I guess, statistically cheap in 2012-13. But the hyper-growth stocks, the disruptors will never appear cheap. And it doesn't matter if you're using sales or free cash flow, which actually forget that they're mostly negative. You have to use different metrics. And actually, this is what a lot of the work that Kai Wu does on his, like, intangible stuff, stuff that is off-balance sheet that you can't measure using old-school metrics. I think I kind of came up with a new, I said like disruption is not an asset class.

And I guess you could credit Arc with starting this. But it really does feel like we've had in the past. value stocks, but also deep value stocks, like the Benjamin Graham's or whatever, however you want to define it, there really hasn't been a, I mean, there's been growth stocks and then I guess tech stocks, but this sort of innovation and disruption as a theme is kind of like the polar opposite end of deep value. Yes. Right? Hyper growth, whatever you want to call it. And so I'm trying to wrap my head around. Is this a bad thing that we're now having all these companies, fund companies focus on this area, or is it a good thing because it means maybe more money goes into these

companies and that helps them out? What do you think? I think the bottom line is these companies, if they're being priced at hyper growth multiples, they have to continue to grow at warp speed. And guess what? A lot of them just aren't. Like Zoom's last earnings call was ugly. And Robin Hood's most recent call was ugly. And if you're being priced at these multiples and you're falling short of crazy expectations. And if you fall bigly short, you're toast. Right. Which is interesting because the idea for a lot of these companies is just buy them

and hold them and plug your nose forever. But investors can't handle that. So that's why I thought this talk with Harbor Capital is so interesting because they're talking more about it like adding some risk management and portfolio management to it where there has to be maybe some rotation in it out of these stocks and not just saying, hey, listen, this is going to be a trillion dollar company someday. so you just buy it and hold it, but there has to be some give and take because these companies are, when things are going really well, going to get ridiculously overvalued. And I think it's impossible for investors not to let that happen.

And I think you also, and the guys from Harbor talked about this a bunch that you have to think long term with these names, but, ooh, it's that difficult when they're getting cut in half. And that's the price you pay, right? We've written about this a million times, all the best stocks, Amazon, Apple, Netflix, Google, they've all been cut in half multiple times. And that is, you know, if you want the upside, you've got to take the downside. All right. So here's our talk with Christoph Gleish and Spencer Lerner from Harbor Capital. We are joined today by Christoph Gleish. Christoph is the president and CIO at Harbor Capital.

Spencer Lerner is also with us today. He is the head of multi-asset Solutions at Harbor Capital. Gentlemen, start your engines. No, thank you for joining us today. Great to be here. Thank you, Michael. Ben. Great to be here.

This is great timing because the bulk of our conversation today is going to be around your disruptive innovation ETF, ticker I-N-O. And it's great timing because the disruptive names have gotten disrupted by investors puking them over the past couple of weeks. One of the things that Ben and I have spoken about is the pandemic, which was seen as a huge tailwind for these companies to stay at home stocks. Is it possible that that actually hurt these names, pulling forward so much demand, making comps like totally impossible going forward? So, look, I think at this, there's a couple of things. There's a lot going on at this moment in markets.

And I think at this moment in time, there's really two major sources of volatility. Firstly, we have inflation uncertainty with a Fed that genuinely doesn't know what it's going to be doing in the next three to six months. The market has become accustomed or sort of spoiled by clear forward rate guidance by the they're telegraphing exactly what they're going to do and when. And we don't live in that world anymore. And so we're going through, the markets are going through a big adjustment towards genuine monetary policy uncertainty for the first time, probably in 20 plus years.

And so until this settles down into more of a rhythm, I think volatility isn't going to go away. And I think added to this, we've got some pretty tough comps. We're still constructive on earnings for this year. year and still think they're going to do well. I think in some of these names, there is this tough year-on-year comp now on base effect. But to go as far as to say the pandemic was a negative, I mean, some of these companies have experienced tremendous growth. Take sort of Zoom, for example, this is a business that is back to levels it was in March of 2020, even though the business has grown sixfold since then. And I think the ultimate sort of test for some of these businesses

when the names become a verb, which for Zoom it has done through the pandemic, I think it's generally been positive. But yeah, in the short run, it's made some of these comps tougher. So how much do you need to think about putting aside the macro stuff? Obviously, these names that are going to have huge gains are also going to get crushed from time to time. So how do you have to think about that from a portfolio management perspective and also risk management perspective? I mean, is it just that you have to find these companies that are in different business lines? Like, how do you think through that so you don't just get crushed? Because these downturns are inevitable in companies like this, correct? Correct. And this is one of the key

features to the INO product. This is one of the key things we were trying to solve for, which is to have sort of an all-weather, if that's such a thing within the innovation space, type of strategy. And what that means is we're certainly going to have volatility along with the broader innovation space. It's just, it's a very, very high-risk space. Most of the cash flows of these businesses are far out in the future. That's the attractive quality of them. That's also a liability in the short term. There's no valuation support. There's no cash flow support. And so you can get these tremendous bouts of volatility in the near term when sentiment changes with the wind. So it seems at times. So there's no question that there's a ton of volatility. So what can we do to try and

dampen that volatility? And that's really something that we tried to solve for in a more nuanced and creative way. And so what we've decided to do is we within the inno product or the mutual fund version of this, which we also have available to clients, bring together five different sleeves of active managers of more boutique-oriented innovation-focused and growth equity-focused active managers, and they deliver to us highly concentrated portfolios of their best ideas within the innovation space. So on average, within those five sleeves, there's about 15 to 20 stocks each. So generally, when you hear 15 to 20 stocks, you think to yourself, that's an extremely concentrated portfolio, and it is. And we did that by design. None of the sleeves

within Inno, you can't access any of them in a daily liquid vehicle on their own as a standalone strategy. Some of them were designed specifically for us. Some of them are only available internationally or in SMAs. But generally, we had them produce or provide to us concentrated versions of other strategies they have or launch entirely new bespoke strategies for us just in the innovation space. And the idea is let's outsource the stock picking to those that are great at analyzing businesses and picking great stocks and generating security-specific alpha, that's what, not all, but many active managers are wonderful at doing. But what they tend to not be great at doing is constructing portfolios, thinking about the risk part of it or the portfolio of interaction effect and

how to think about diversifying without overly diversifying. We don't want to have 300 names and be a 1.5% tracking our portfolio. And then after you fee, it's nearly impossible to generate any type of alpha that's really worth the fee in the end. We don't want to produce that type of a result. So in our portfolio, we have these five different sleeves that are all synergistic in the sense that some of them are a little bit more garp and higher quality oriented, looking at businesses that are further along in their S-curve, that are more profitable, have positive free cash flow. And then we have sub-advisors that are looking at the earlier stage businesses that trade at much higher near-term multiples, but also have much higher growth and we'll deliver higher returns in the future. And then we use different optimization techniques to try and protect on the downside. And we think that we can deliver a product in this space that is much more downside protection than just your average. typical innovation strategy. Keeping in mind, it's still a very high volatility space, but we can

deliver high returns with better portfolio construction and risk management. I want to talk about volatility and cash flow and fundamentals in the portfolio. Before we get back to this, maybe we should take a step back and I apologize, I should have teed you up for the first question. Who is Harbor Capital? Can you just give us like 30 seconds for people that have never heard of you before? What do you guys do? What do you represent? We're a $60 billion active investment boutique that partners with outstanding alpha managers across the world in various different asset classes and bring those managers to the marketplace in a solution that has priced attractively for clients.

Perfect. All right. So getting back to this portfolio of innovative stocks, you talked about, or maybe I'm putting words in your mouth, maybe dampening volatility because these are extremely volatile strategies. Should that be the desired outcome to dampen volatility? because if you're going to have these outside returns, don't you sort of have to eat that or are you trying to eat that on the way up and avoid some of the carnage on the way down like we've seen

recently? To a certain degree, absolutely. I think volatility is asset class is a permanent feature. And markets have a habit of doing what causes most pain. And this asset class attracts a lot of tourists and volatility in these drawdowns shake them out. What we try and do as investors is skew and have that asymmetry, upside, downside. We want clients to be out of weather this through the tough times. Markets are very humbling. Drawdowns in markets are a permanent feature of investing. And so what we try and do is we try and balance the portfolio that it protects a bit more on the downside while still capturing a decent amount of the upside. The problem with letting volatility kind of go all over the map without any regard to it is your clients are less

likely to stick around and they're going to bail at exactly the wrong time. Morning Star does this report every year where they look at the difference between money weighted returns and geometric weighted returns, i.e. what the manager produces versus what the clients actually earn depending on when they buy and sell ETS and mutual funds. We're not very good at timing as a species. We're not very good at timing into things and out of things. And generally, the more volatile, the asset class, the bigger the difference of money-weighted return. So that's what we're trying to compensate for a little bit, is that behavioral dynamic as well. How did we get to the point where it does seem like innovation stocks or disruptors are almost

their own asset class? It's almost like there's growth stocks, but then also we have this new asset class. It's almost like value versus deep value, but the other way around for growth. Is this just a timing thing? How did we get to this place where we have this innovation almost as an asset class? I think it's a great point. And we are firmly in the camp that disruption has become its own asset class. And we're in the early stages of that. We think it is separate and distinctive from traditional growth investing. And there are certain sort of characteristics or traits that innovation managers have. I'll list out a couple of them, but you have to have a long-term time horizon. And I'm not talking three months, six months,

one year, two-year, these managers that are investing in this asset class are looking out over five to ten years. And that's really important. So they use the time horizon as a form of arbitrage to earn superior returns. These managers as well, typically that I think the most proficient in this area straddle the private and public markets because you're investing in newer businesses younger companies that generally entrepreneur-led businesses as well and so the some of the managers that we use have been investing in some of these companies for years before they hit the public markets and so when they do hit the public markets they're not picking up coverage for the first time, they understand the vision of the management teams, and that's all going to help

them weather through some of the volatility. From an asset class perspective as well, there's a lot of dispersion between winners and losers, which all else being equal for active management is a good thing, as long as you're good at it, like it increases your opportunity set. And then we've done some research around this as well, when you look at the space and you look at this kind cohort of disruptors, it's a very idiosyncratic group of stocks, which means, despite what you might think at the moment, not everything is led by interest rates. There's actually a lot of the returns are explained by what the companies are doing over the long run, rather than what factor momentum or interest rates or value they may have

exposure to. So from that perspective, we think it's definitely a unique asset class that's going to grow from there. But there's no doubt that low interest rates have been a tailwind for these long-duration names. If interest rates are low and then people are more patient with losses today for the promises of returns tomorrow, free cash flow tomorrow. So I guess I'd ask you the unanswerable question is, where are we in this cycle? Like it's great that some high quality names and I'll just throw out one, for example. People love Shopify. It's a great business. They're certainly early in

their journey and they're growing super quick. And the stock just got cut in half in like 50 days from its high in November. So you might say, well, now is the time. to look for bargains. And on this one crude metric alone, it's still expensive. I'm looking at a price of sales ratio of still almost 30 times after it got cut in half. So how do we square these two circles of opportunity, because these names just got killed, while also reconciling the fact that they still might be expensive based on traditional valuation metrics or are traditional valuation metrics just total garbage with high growth companies? Where do you guys fall down on that? There's a lot to unwrap there. Let's start with the first part of that question and your question on interest rates

and how that's been sort of a factor in these names. So historically, and we've done a lot of research on this, historically interest rates have not really been much of a driver of the performance of these stocks and more specifically of the multiples and how they move, believe it or not. There's really not much of a connection. You're talking about disruptors. Disruptors, that's correct, in the innovation space and just sort of growth equities overall. Historically, what does a disruptor look like? Before today, for example. Like what are the types of attributes of a disruptive company? Yes, exactly. So when you're doing historical analysis, what are you looking for? I'd be curious. There are different ways to look at it. You can look at the high flyers part of like the IGV or the software sector. You can look

at it from the perspective of expected future growth rates coupled with looking at companies that have high price-to-book ratios. So they tend to be more expensive relative to their actual net equity sort of at the present day and there are high expectations for future forward sales growth. Those are good top-down variables that you can use to sort of narrow the field, but that's not going to include all of them. There certainly are secular growth companies like a Chipotle or something over the last business cycle that may have met that criteria, but we wouldn't really necessarily consider it like a disruptive innovation. And this is bringing us to the earlier point where innovation really is its own sub-asset class, like within growth equities.

The way we think about it are there are capital compounders and the more defensive type of growth equities, like a Procter & Gamble, for instance, or even like a Nike. And then there is is the cyclical growth types of businesses. Sometimes home builders can offer you a great growth profile or a Home Depot or a Lowe's or something like that if you buy them in the right part of the cycle. And then there's secular growth businesses where the cash flows are really sort of uncorrelated

to what's going on in the broader macro backdrop. Now, it's within that secular part of the growth bucket. If you double click into that, innovation is sort of a part within that, a subpart within that of the broader growth equity universe. And the innovation bucket is really, it's hard to qualify an innovation company using traditional variables and metrics.

I tried to do that using valuation metrics and growth metrics. But in reality, it's a more qualitative perspective when you're underwriting a business. And there are things like they're really sort of at the intersection of the digitization of the real economy. And so what does that mean? It means they're providing goods and services. An innovative company is providing a good or a service that ultimately is supporting the economy and its transitions toward digitization, which creates and improves productivity. And so the means of production are shifting from labor to capital, aka technology. And as the means of production shift from labor to capital, it's the innovators that are supporting that structural shift in the global economy. And so if they're

part of that, they're creating new end markets and they're taking huge shares of existing end markets. So whether it's Shopify like you mentioned before or online sales in the shift from bricks and mortar to e-commerce or digital workflow solutions like a service now or a snowflake, automating manual processes where labor just becomes less required, and you can actually create productivity enhancements from that, and that keeps inflation down. That's actually something that we're seeing now, and it's created an acceleration in demand for those types of workflow automation companies. But anyway, I'm sort of going down a little bit of a rabbit hole here, but the main point here is it's the companies that are at the nexus of that transformation

that really support the innovation theme. It's not just all companies that are secular growers, and those are the businesses that we're focused on. When we try and run these analysis, I mean, there are indexes that you can look at. Like there's the MSCI Acqui Innovation Index. We think that's decent. We look at the historical holdings of that. We use our own analysis, like I mentioned before. And so we can put together sort of this innovation bucket of stocks. And then we try and look at what drives their performance over time and things like that. And the interesting thing, if you go back to 2017 and 2018, these stocks did incredibly well. Now, if you remember 2017 and 2018, this was a hiking cycle. Powell was still in the FMC. They were raising the Fed funds rate.

they got it to 2.25% in Q4 2018, real rates were rising. I mean, real rates were positive and rising. The tenure got to, I think, 3% towards the end of 2018. In that backdrop, these stocks were outperforming massively. Their multiples weren't really responding. And because at that time, their fundamentals were massively accelerating. And so that became much more important than the discount rate rising. So now, however, what we're finding is that doesn't seem to be the case. So the interest rates do have a lot of impact on how they're performing today. And so why is that? We believe it's because real rates, and I say real rates, not nominal rates, because we think

real rates are actually the key driver here. Real interest rates are negative. Now, historically, when real rates are positive, they don't have much of a correlation to driving the multiples of these stocks. But when real rates turn negative, it's the only thing that matters. Like the R-square goes from 0 to 0.85 when real rates are negative. I'm sure you've heard sort of the generic cliche term of when rates go to zero, multiples go to infinity. There's some truth to that. But when we look at it from a real rate perspective, and there's much more

sensitivity, the beta of real rates to broader equities, there's much more sensitivity to growth equities and particularly innovation equities rather than just the market because their cash flows are so much further out in the future, it makes their cash flows more sensitive to the discount rate and to the equity is premium of their overall discount rate. That makes sense that inflation is the bigger driver, I think. But by the way, You said Chipoli is not a disruptive company. It can be if they make guac free. That's where I stand.

Do you know they now have cameras above where their servers are, and they have all of this AI that looks at the guac to make sure, because avocados are their most expensive input costs, and so they now have all of this technology about to make sure the servers are putting exactly the right amount of watch. Driving up costs even more. it's probably has become more of an innovator but last cycle it wasn't as much your question on valuation i'll put it simply any single valuation metric in on itself is pretty much garbage

in investing it doesn't matter whether it's price to work price to running investing is way more nuanced than that and there frankly if you look at stocks that are trading at a hundred times next year's PE. Some of those stocks are expensive. Some of them are fairly valued and some of them are incredibly cheap. And you just have to peel back the onion, look at the longer term prospect. My favorite example, do you remember when Facebook IPOed in 2012? Yes. Yeah, they won the Barron's cover, right? Yes. So what happened when Facebook IPoed in 2012 got killed? Got killed. It got killed. I went to 15. Yeah. And so in 2012, if you were holding Facebook, you were underperforming the S&P by 63%.

Okay, and you were holding a business that was trading at 120 times earnings. You look at like, we all now have the benefit of hindsight. He's not a smart investor with a benefit of hindsight. But you look at it now, it feels like, oh, that was an obvious stop to hold over the last 10 years or so. But you had to experience pain, multiple drawdowns, what looked like nose lead valuations, and you have to kind of look through this, have that kind of long-term thesis. And actually what we know now is Facebook was trading on one or two times 10-year forward earnings at the time. It was trading on 120 times next years, but the further you look, took that window out, it was trading much more cheaply.

And I just think that's a good example to kind of just ground ourselves when we're looking at current valuations and trying to read sort of too much into one metric. Actually, the unsatisfactory answer is it kind of depends and you have to do your homework and you do diligence and your stock. I agree with you that like the valuations are, especially in this space, sometimes you can throw out the window. So how do you involve the risk management portfolio management aspect of this? So you talked about how you have these five buckets and you shift back and forth occasionally. How do you go back and forth between like letting your winners run and also maybe having some meaner version? Because maybe what you saw is that last year in January and February, some of these stocks had a huge run up. And you say, well, we could let them run and they're going to be these huge 10 back. for us or they're going to get crushed. So how do you determine when to move stuff around in there and when to shift things around from an allocation perspective? We have a few different inputs to that. We try to allow the portfolio to really be driven by the underlying idiosyncrasies of the businesses that our sub-advisors choose. We want that to be the predominant driver of the portfolio overall. So although we're a multi-acid solutions team, although we're coming up with tactical asset allocation views and we have views on interest rates and real rates and different styles

with inequities and global equities and all that stuff, we're not really getting those views into this particular portfolio. Instead, when we construct the portfolio, we're really trying to maximize the diversification benefit of the underlying sub-advisors. However, that said, we do on the margin try and allocate between the underlying sleeves to some extent to risk manage. So, for example, we track how the underlying sleeves, how their performance is actually correlated to different types of macro variables like real rates, the curve steepness, underlying interest rates, high yield spreads, things like that. And when we identify that correlations are becoming too high in certain sleeves, we might look to reduce exposure and move

into other sleeves that are acting in a more idiosyncratic way, such that the underlying business, financial, and company success can continue to drive the performance, and we're not just trading along with interest rates. Now, certainly, interest rates will always kind of have an effect in broader markets, and it's not going to be different here. We're trying to minimize it as much as we can in a space that has a tremendous amount of volatility. What does de-risking look like? Would you move from some of the more high-beta names, some of the more really high flyers to some of like the Fang type names, would that be like a de-risking? That's exactly right, Mike. So one of the ways that we think about valuation in the space, and I thought Christoph said it

perfectly before, which is looking at near-term multiples really does not tell you too much about what's going on from a real valuation perspective. When they get to very extreme levels, they can usually tell you that you're going to have a tremendous amount of volatility to come at some point. It doesn't tell you a lot about the underlying company's valuation. So we tried to come up with a way that we can think about valuing these businesses from a top down. So what we do, is we have sort of a group of these types of innovators, and we try to put together a three to five-year forward IRR. So when we look at that, we're thinking about an EV-to-forward sales ratio. What are they

trading at today? What do we think is a normal, sort of reasonable equilibrium EV-to-sales ratio? And then you're compounding the change in the multiple or the compression in the multiple that we expect and have expected for a while now relative to the amount of sales growth that you're going to get over three to five-year time period. At the end of 2021, if we go back to December of 2021, these stocks had done really, really well since the summer. We found at that time that our forward IRA analysis was pointing to about a 6% return over the forward three to five years. We actually run it for four-year periods. Over the forward four-year period, a 6% per year return. It's still positive, but if you consider the volatility of these names, 6% per year is not attractive at all.

And so when our IRR multiple dropped to below 10% and got to the mid-single digits, we realized valuation was beginning to be a headwind. At that time, their forward EV to sales multiples, on average, equally weighted average across the whole space for how we defined it, was trading it about 30 times, which was very high relative to history. And we were expecting that 30 times to come back down to about 15 times, which is what it was on average in 2019. And that multiple compression was just going to offset all the cash flow and sales growth we expected over the next four years. And so at that time, in combination with the fact that some of our higher risk sleeves were starting to become really correlated with real rates. We made the decision at that time that we

thought it made sense to shift into some of the higher quality, more profitable sleeves in the portfolio. And so we did. We shifted a good amount of the portfolio into those more defensive sleeves. Thankfully, that ended up being a good move at that time. The higher beta growth names have underperformed quite meaningfully. Now we're at the point where when we update that IRR analysis, that 30 times forward multiple is compressed down to 20 times. And we think that 20 is going to come of 15. We think there's more multiple compression to come, but when you couple that with a 30% cager of sales growth over the next four years, when you net those two things out, at the present time, we expect about an 18% per year return for these innovators over the next four years.

That's a really attractive return, particularly with the market that's trading at such high multiples that most capital market assumptions call for equities to give something like 5 to 6% in the next 5 to 10 years. We think we can do almost double that, maybe something like 18% if were to buy these types of names. So we think that even though multiples, to your point before, Mike and Ben, I think you made the point that a lot of them still look expensive, Shopify and a 30 times forward, EV to sales multiple, it's absolutely true. And we think multiples need to come down another 25%.

But it's impossible to time when that's going to happen. So if you take a step back and you say multiples are going to come down 25% total over this four-year period, but sales are going to grow 30% per year over this four-year period. The net of that gives you a really attractive return. So we would encourage clients to think about, use this volatility to your advantage, don't get scared of it and run from it. And that's what we're doing. In our portfolio, we're now looking to actually add to some of these more expensive names

that have come down quite a bit recently. We talk a lot in investing around buy discipline, sell discipline, but there is a third as well. It's called Hold Discipline. And when you look at the academic research, I think it was Hendrick Bessonminder from the University State of Arizona, I think it's 4% of stocks in the U.S. account for all of the wealth creation of equities over the long run. And so actually when you look at the median or the average stock, they actually underperform treasuries and you have this massive positive skew to the winners. And to benefit from those investing is as much about having that whole discipline

as it is timing your entry and exit point. Certainly. To that point about the big winners driving the bulk of the gains of the market, there's no historical precedent for these giant companies growing at the rate at which they're growing. Their top line, the bottom line, Microsoft is an example. It's almost like a technology conglomerate at this point, and they're so big, and they're still growing so quickly. It defies logic and everything we've studied in history and textbooks. Can you talk about the upper bound?

Is there any limit on how big these companies can get? It kind of feels like the answer is no until regulatory authorities get involved. One of our sub-advisors likes to talk about the idea of investing in agile companies. They look for agility as one of the key characteristics of a management team and a business and a culture that they look to invest in. And I think that really probably answers nicely what you're talking about here, Mike, which is, and if you look at Microsoft, if you look at Amazon, if you look at Google, what are the fastest growing businesses at these three companies right now?

Cloud. It's the cloud. And these companies did not have a cloud business. 15 years ago at all. And so they've been able to shift the massive amount of free cash flow production that they're generating, shifted to a completely new business that they had zero involvement in. I guess there's some synergy to some aspect because they can use their own data centers,

and that's what they realize we're building out our own data centers. Why don't we start leasing out this space? But the idea is like they can be agile enough to shift into other businesses that are very different than what they're currently doing. There's some synergies, not always. And they can then use those as the new growth engine. And the three biggest companies, I mean, for the exception of Apple, these three of the biggest tech companies that are still very much innovators, they did just that. And they continue to have these

agile cultures for that reason. And they continue to grow their top lines north of 20 percent as a result of this business that they did not have probably even 10 years ago. Apple's about to get into Square's business. They're going to do some sort of like where you don't need a piece of hardware to collect credit card information over the phone. I was joking with Ben on a podcast earlier today, that business, which is about to be built, I'm sure we'll scale up to $10 billion in short order. They just keep coming up with ways to come up with new gigantic lines of business. It's incredible. And $10 billion would be sort of a drop in the bucket for them.

Yeah, that won't move the needle. Which is absolutely incredible. So where can we send people our listeners to learn more about your Harbor Disruptive Innovation ETF? So the easiest place to find out more is at our website, which is www. W's. We got three-dub a boomer alert. I'm still on. I will never live that down, Christoph.

Yeah, if you guys send us some research, we'll be sure to include in our show notes, too. This is great. I think you guys might have talked some people off the ledge here because we have a lot of growth investors who follow our podcast who've been in a world of pain lately. So I think you guys did a good job putting in context for us. Then I'm like, is it okay if I give another quick answer to something you asked before that might help them step a little further back from the ledge as well? Okay. So this is related to the fundamentals that we're seeing. And you asked a question, I thought it was really important.

Mike, I think you asked it earlier. And it was, are these comps impossible? And is COVID actually, does it end up being a negative for these types of businesses because they pulled so much demand forward that they're just going to start decelerating almost in a perpetuity or at least a multi-year period? And it's going to be really hard for them to outperform. And my answer to that is yes and no. And what I mean by that is, yes, there are going to be really tough comps.

That's such a Spencer all that. Yeah. It's like answering a question with a question. Let me try and be clear. What I mean is you're having sort of a very clear bifurcation in the broader innovation in software space. There are some businesses and there are some end markets that are having some troubling demand that's pulled forward and now they have tough comps. Is that going to be a multi-year phenomenon that's going to spell ruin for names like Peloton and DocuSign and Zoom? No, we don't think so. But we do think 2022 is going to be a hard year

to comp, and we think multiples has calibrated lower to reflect that. And we think that 2023, they'll re-accelerate. And for the following years thereafter, there's still sort of that trend line that they're going to move to and they'll deliver strong returns over a multi-year period. However, yes, there are end markets that they pulled forward demand and 2022 is going to be weak. However, there are also other businesses within the innovation and software space in particular where the exact opposite happened. Like what? Cloud migration. To think of Azure, and we just saw this with Microsoft's recent quarter, they're now guiding to an acceleration based on what they're seeing in their RPO or their billings and bookings. They're forecasting an

acceleration, and the commentary around that was extremely positive and portrayed a large degree of confidence of very large clients signing on for very long-term contracts. So the idea that the COVID recession and working remotely and the digitization of the economy definitely accelerated the trends of the migration to the cloud. It accelerated it, but it did not pull it forward. It accelerated it and it's continuing to accelerate. And so that is very different than pulling forward where you move up the slope and then you go down the slope. So we're seeing that in cloud migration, as I mentioned, Azure, as it relates to Microsoft, we believe we're going to see with AWS in Amazon's quarter, global cloud computing. And if you think about it just from a cap

perspective, that's most of the cap in like the growth equity universe. Back office and workflow automation like Service Now, I mean, their recent quarter showed pretty strong acceleration and their guidance indicated acceleration as well. Data analytics like Snowflake, the data analytics part, we think that's going to have tremendous acceleration, and we're not going to give it back the Strong Demand we had in 2020 and 2021, cybersecurity like Palo Alto. So there are segments within software and within information where there was an acceleration from COVID that we think is going to continue to accelerate. And there are parts of the market like front office IT solutions like Adobe, consumer focused like Netflix and Peloton, e-signature,

docu-sign collaboration like Zoom. There are some parts of the market that, yes, they had to pull forward and they're going to give some of that back this year. In our view, this is not just to sell everything innovation and software related, and they're going to have tough comms for years to come. We think it's going to be short-lived. It'll be this year. And if you take a longer-term perspective, even the pull-forward and demand parts of the market are now looking very attractive. And there are other parts of the market. And if you look at the recent quarters, like I mentioned, Microsoft and Service Now and Snowflake, they're indicating re-accelerations and accelerations here over 2022. So we think this is just a really, really attractive space

that is secularly going to grow over the long run as the global economy transitions to be digitized. And in addition to that, I just want to mention this also. There are COVID trends that are persisting that continue to support many of these types of businesses as well. It's not just the reopening trade, and that's bad for all innovation. Believe it or not, the labor shortages that we're experiencing is causing a massive shift in IT spend. to improve productivity for a lot of key enterprise consumers. So if you can't find enough employees, what do you do? You hire a workday, you hire a service now, you hire a snowflake to come in and try

and automate a lot of the processes that you have to increase productivity. As long as the tenure stays below 3%. As long as they're... Yeah, right? No, seriously, though, I just mean to point out that there are some trends that are very favorable for these businesses too. And so when you enter these doom and gloom phases, it usually isn't doom and gloom for everything. And so you try and find the businesses that are actually doing pretty well and that gets sold off with the rest of them and you add to them.

And over the next five years, you end up making a lot of money. Spencer, Christoph, this was fantastic. Thank you so much for coming on today. We appreciate the time. Thank you so much. A pleasure. Thank you for having us. All right.

Thank you to Christoff. Thank you, Spencer, and Harbor Capital, Animal Spiritspod at gmail.com. We will see you next time. I don't know.