Mark Yockey is a managing director of Milwaukee-based Artisan Partners, an investment management firm with over $110 billion in assets under management. He has historically targeted underpriced growth companies with wide moats and solid cash flows. In a recent interview, he shared some of this thoughts on the direction of the U.S. economy, as well as the types of company his firm is currently invested in.
“U.S. economic dominance will continue”
Yockey is not particularly worried about the U.S. losing its marquee position in the world economy and thinks that it will take at least a generation for China to catch up to what the U.S. is doing in more advanced industries:
“The U.S. is good at some industries that the rest of the world is not very good at. And some of these industries we dominate, industries like technology - big chunks of technology we dominate - think of Amazon, or Google or Facebook. Much of the software space is dominated by American companies, and these companies simply do not exist outside of the United States, with maybe a few exceptions.”
He also mentions biotechnology as an industry that is largely driven by the US. He thinks that as long as the U.S. maintains its lead in areas like software and healthcare innovation, there will be more opportunities to invest in the kind of breakout growth that he so likes.
“Growth is going to outperform value”
Yockey goes on to say that many traditional value plays may not yield the same returns that they used to, due to the growing influence of software:
“I think that growth is going to outperform value. I think a lot of value stocks are value traps, because its a digital economy today. The businesses that added a lot of value in the past are being disintermediated - and I’m not talking about taxis and Uber, I’m talking about software companies replacing other companies that provided the same service...A lot of industrial companies are being disintermediated by other companies.”
We think that there is an upper limit to how much software can eat into industrials, so the rise of the digital economy is not in and of itself a threat to industrials. However, technology has definitely lowered the barrier for entry in some of these industries, which may indirectly have led to increased competition among industrials.
Why Artisan likes exchanges
“There’s this other group of stocks that we like a lot and they’re the exchanges. Our second-biggest holding is Deutsche Boerse, it’s the German stock market, but that’s not why you own it. You own it for the derivatives exchanges that they have. The regulators, ten years ago, said after Lehman and all the problems of that bankruptcy, they had to trade products on exchanges. And so all the holders of the exchanges around the world have been beneficiaries of that because a lot of trading was done over the counter. And so it all moved over to the exchanges, and if you owned one of them then you’ve done very well.”
Exchanges have been hugely profitable in the last decade or so, partly because of the growth in derivatives trading that takes place on them, but also because of lucrative contracts that some of them have with high-frequency traders (HFT), particularly in the U.S. By renting out floor space and allowing the HFTs to position themselves between buyers and sellers, exchanges can reap enormous profits. Whilst this is probably not in the best interests of the market, there is no denying that shareholders of exchanges have done very well, and Artisan has been among this lucky bunch.
Disclosure: The author owns no stocks mentioned.
