To be a value investor is to pay less, and the business is ultimately worse. I have learned so much. I think I've made every mistake there is learned on the job in the last 23 years. As long as clients are always a lodestar, then decisions become easy. Sarah Ketterer buys stocks for a living, but she has no interest in buying in video. No, because so much growth is already embedded in the valuation. That's because Ketterer is a so-called value investor. Her $50 billion firm, Causeway Capital Management, focuses on researching stocks with prices lower than their intrinsic worth. To be a value investor is to pay less, and the business is ultimately worse. And we give every company about two years to show us what it can be worth. And then we assess what that price should be two years from now. And if the price two years from now should be considerably higher than it is today, the stock is likely undervalued.

Ketterer comes from a long line of Californians. Her father, John Hotchkiss, was a commissioner of the 1984 Los Angeles Olympics. He was also a well-known value investor and had his own firm, Hotchkiss and Wylie. After getting her undergraduate degree at Stanford and her MBA at Dartmouth, Ketterer did a brief stint in investment banking in New York City before moving back to the West Coast and joining the family business that had started a database business. I rang up my father and his business partner, George Wiley, and said, Do you need any data? And I'm not sure they did, but they were very kind and said, We'll bring it out here to Los Angeles and we'll talk. That's where she met Harry Hartford, with whom she would go on to found a causeway in 2001. They had seven and a half million dollars when they opened their doors.

Today, there are 100 persons that manage $50 billion in assets. Timing is everything. And we launched Causeway after the telecommunications, media, and technology bubble burst. So, this was 2001, and value investing was coming back. The style was coming back into favor. And Ketterer doesn't seem to be slowing down any time soon. I'd like my legacy to be even greater employment. I want to employ more people who are in, as I talked about that great career trajectory. I'd like to have more clients who say, We really appreciate the service you're providing us. Explain to me what makes Causeway so distinctive. Why is it different than other money management firms? There's plenty of money management firms out there. What is, why is your, is different? Well, Causeway has, from our beginning in 2001, believed in a combination of fundamental and quantitative investing. And there are two different ways of doing investment research in the world of long-only equities.

But you put the two together, and you get something that's better than just that narrow sort of very discretionary, subjective viewpoint, and then something better than the statistical. Absolutely. What do you call it? Called quant value or value quant or whatever. And so I'm talking to the clients, I say it's quantum mental to the fundamental people as it's fundamental in quant. So you're what's known in the business as a long-only fund, right? We are long-only, and you're known as a value investor. What does it mean to be a value investor? That is the hundred million dollar question because everybody defines it differently. We define it as for portfolios where we use a fundamental approach. So that's the analysis of financial statements, interviews, a company management. The assessment of the industry to be a value investor is to pay less in the business is ultimately worth, and we give every company about two years to show us what it can be worth.

And then we assess what that price should be two years from now. And if the price two years from now should be considerably higher than it is today, the stock is likely undervalued. Now, the late Charlie Munger said that he changed Warren Buffett's views on value investing. Initially, value investing in Warren Buffett's view was buying something really cheap, even if the company wasn't great. But it's cheap. And Munger said no. By good companies, even if it's a little more expensive, as long as it's not overly expensive. And Warren Buffett allegedly began to do that. So what do you do? Do you buy really not great companies, but they're cheap, or do you buy good companies that are a lot more expensive and call that value investing? Those two and late Charlie Munger could simplify the most complicated of situations, but in a way, it's neither. They may be in good businesses, they may

have very few competitors and maybe in oligopolies, or they may be in an industry that's rapidly growing. There could be reasons why you call them good, but something may stop that they may have a lawsuit levied on them or they may have a scandal or they may have a poor CEO does a poor job of executing and then they become bad and that's when we like them. So if they're if they're good in most well, most markets, they'll be priced for good. So suppose somebody came to you and said, I have a good stock that's growing a lot and it's called Nvidia. And is that a value investment? Do you think that's a good value investment? No, because the. So much growth is already embedded in the valuation. So if Nvidia's in the building part of the technology cycle, then there's the delivery part and then there's finally this where we put it all together and AI

is ever present in that last segment. Enterprises, businesses will need to use A.I. and they have no idea how to many of them. So you could go out and find, for example, in info technology or technology services companies, this Accenture or Capgemini or some of the Leviathans. But as you move down the market cap spectrum, like Cognizant or Fujitsu in Japan or CONCENTRIX or Genpact, these companies are going to be advising their enterprise clients on how to deal with this. Once all the infrastructure is built, once enterprises have moved everything they have to the cloud and they're ready to go. So there's value in this whole concept. The theme that's driving Nvidia has unearthed a whole raft of stocks that nobody cares about today, but they will in the future. So you do some international investing and emerging market investing. So it seems like it's an oxymoron to say

I'm a value investor in emerging markets because emerging markets are more volatile. So, explain how you can be a value investor in an emerging market. I do want to add we also manage money globally, so we have global equities. But I think investing in a number of areas could be an oxymoron. The emerging markets, the single largest country in the emerging market index is China, and it has gone from being a powerhouse of growth to slowing considerably. The Chinese property market is weak, dragging the economy. The population is aging, which is also creating cost. So, emerging markets is a blend of fast-growing India and slower-growing China. But there's always value. And we approach emerging markets with a quantitative investment research style, and that allows us to use both value and some growth as well as other factors to identify outperforming stocks. The theory of our emerging market investing is that the rate of return will be higher because there is less competition, prices are lower, etc.

But that theory has not been proven yet. Has, in other words, the rate of return risk adjusted for emerging markets investment is not that much better than developed market, is it? Again, talking about a broad index, I totally agree with you. It hasn't been better. It had its run in the early part of the 2000s and right through the global financial crisis. But ever since we became much more financially accommodative in the developed world and central bank balance sheets expanded and financial conditions became very loose. Emerging markets then had their own issues. I think that China really crested in 2021, which was the leading market in emerging markets and now is suffering under the cloud of potential overregulation and Communist Party rule. So today, when you're making investments, you've got about 130 people in your firm, something like 77. Okay. So do they come to you for every decision?

Do you have to say yes, buy the stock or not buy this stock? Or do you have a delegation of approach where you don't have to approve every investment with a very dispersed decision-making? And that was deliberate when I co-founder Harry Hartford and I set up a causeway just in our minds long before we actually launched the firm. We didn't want to have a star system. We didn't want our investment results to depend on any one or two people, no matter what the strategy was, because there's too much business risk doing that. It's risky for clients and it's risky for the firm itself. Right? Suppose I say I heard about your company and I'd like to give it a chance. What kind of rate of return? What I expect I could get. I You're doing emerging market and international and also domestic long-only equity investments. Is that a 7% eight rate of return business, 9%, 10%, 12%.

What do you think it is in an area of four or 5% inflation? Yeah, well, I think the 4 to 5% inflation might be more emerging markets. Otherwise, we're all in serious trouble in the developed world. But let's just take a 4 to 5% ten-year government bond yield and, or maybe four, might be more reasonable, and add an equity risk premium so that the premium is the four, taking the risk of buying long-only stocks, publicly traded equities. How much more should the investor be paid? That's probably three or four percentage, maybe four percentage points more. So maybe out of public equities anywhere in the world. If the risk-free rate is somewhere around four, should expect eight, maybe 9% per year from your equities. But that's just the index. And you pay us as the active manager to do best. Well, let me ask you about that. There's a theory that you can't beat the

markets. So, some people have propagated the idea that the best thing to do with your money if you're going to be in equities is to buy an index fund, with a tiny little fee, and you are the market. Whatever the S&P 500 is, or the Dow, whatever the Dow is, you're going to be that. Your theory is that you can beat the markets. And have you been able to beat the markets for the years that you've started the company? About 20 years ago? Yeah, it's been 23 years, and we don't beat our indices. So, international has an international market index, emerging as an emerging index. Global has the global index, and we don't beat it every year. I don't think we could. Given our investment style is and isn't in favor every year, but we beat it over market cycles, and markets rise and fall. We call a full market cycle. We outperform these benchmarks. So, as I look at opportunities now that

might be available for a long-only investor in the United States and/or around the world. What are some of the opportunities generically that you think are attractive, not necessarily companies, but opportunities? Generically, the entire non-U.S. region has been a second-class citizen versus the extraordinary U.S. market. And think about non-U.S. developed as a value stock. The income just on average from stocks listed in Europe and even parts of Japan, not just the dividend income, but the buybacks, far exceed that of the U.S. So there, I just can't tell you when I just keep moving to the U.S. market and get concentrated in a few stocks. That leads to a great opportunity for investors to find mismanagement or situations where companies just need a nudge from institutional investors like Causeway to get them to improve their outcomes. We went out and found external capital because I couldn't get any money out of my family.

None, not even a penny. So that was another good luck. You're on your own, kids. Let's talk about the beginning of your life and then how you came to start. Cause way. So where were you born? Pasadena, California. Okay. And your father is a very famous investor. He was a very famous value investor. That's fair. It's fair. And he started some companies that were well known in the investment world. He did. So did he say, I want my little girl to grow up to be a investor? No. I went into undergraduate as a pre-med, so I had no idea that finance was in my future. And what happened to technology or chemistry? Yeah. No, it wasn't just spinning out of organic chemistry. It was taking economics. Oh, yeah. I had the most extraordinary professor, Michael Boskin, who at the time was the when he became the head of the Council

of Economic Advisors to Bush. Exactly. And that was a classic like, this is for me. So you told your father you're not going to medical school, you're going to be an investor? He said, What if he. He said, Just finish college, please, and then we'll talk. But I had I would. Why wouldn't it do better banking. And that turned out, at least from my perspective, to be a poor fit for my skill set to transactional. And I was really interested in something where I could dive in and spend a lot of time thinking about underlying companies. So after you graduated from Stanford, did you do some investment banking for a while or. I did corporate finance for two years at a firm called Dean Witter, which is in winter long gone hard to find. And then you go to business school afterwards. I did. And you went to tuck at Dartmouth? Mm hmm.

Well, I mean, talks a great school. It's a wonderful school. Dartmouth is wonderful, but it's a long way from California. So how come you went all the way east? I only applied to East Coast graduate schools because I needed to get out of California. Just part of the California is wonderful, but it can be a little insular. And there was so much more to learn. When you graduated, did you say, I'm going back to California? What did you do then? No, I took my first job here in New York City for another firm that doesn't exist any longer, Bankers Trust Company. So when did you say I'm going to start my own firm? I was thinking of some of these other people had started a database business, recognizing that I was using I had some non-U.S. transactions I was working on, and the data was scarce. It was hard to get information on non-U.S.

companies that were as good as you could find for us. So I left and founded one, and then I needed a new customer. So I rang up my father and his business partner, George Wiley, and said, Do you need any data? And I'm not sure they did, but they were very kind and said, We'll bring it out here to Los Angeles and we'll talk. Well, your father started a firm with his partner, Hotchkiss and Wiley. Your father was John Hopkins? Yes. And then he. Oldham. He sold that firm to Merrill Lynch. Merrill Lynch. And then were you at the firm when he sold it? I was. And then he said, Well, now the firm is sold. You can stay or you can go. What did he say? He said, Good luck. That's right. He was on an earnout, so he was being paid over time, over the next several years for his ownership stake.

And I went on a and an employment contract. But when my employment contract ended at Merrill Lynch, nobody renewed it. So knowing that I was a free bird, I started to plan this idea of causeway. That was the that was the where did the causeway come from? My business partner, Harry Hartford, he's Irish and it comes from the Giant's Causeway, which is this 50 million year old array of basalt columns in Northern Ireland that leads up to the outer. Is your partner? My partner, Harry Hartford. He came from the Bank of Ireland. I met him on the phone in 1994, and it was like a wicked storm. I mean, the weather was so bad where he lived in Dublin and I still like it in Los Angeles. So you started the firm with any money. What? How much money did you have to get started? We had all what Harry and I had saved our c o whose remains? Our c o today, Gracie for Familia.

Another woman in leadership at Causeway. She pitched in. We went out and found external capital because I couldn't get any money out of my family. None. Not even a penny. So that was another good luck. You're on your own, kid. And. All right. She went out and we. How much money did you have when you started Open the Doors? We opened with seven and seven and a half million dollars, $75 million with 24 people. And we lost money for three years. So we had external capital who took 20% of the business and they were anxious. But now you have 50 billion. Yes. So how did you go from seven and a half million to 50 billion, was it? You must have a good rate of return. So what what enabled you to grow the firm? Largely the. We had just built an incredible team. It's always about the people, especially in asset management.

So you would go out and raise the money, which was not part of your job to raise the money. Initially, it was. I took a lot of red eyes. I had three young kids at home, and I was on airplanes constantly. So you got raising the money, and you're telling people your track record is good. And then were you surprised? It went sort of much like this in terms of raising money. You got a fair amount of money. 50 billion under management is not bad. Yeah, timing is everything. And we launched Causeway after the telecommunications media and technology bubble burst. So this was 2001, and value investing was coming back. The style was coming back into favor. So we had the wind at our backs. We had so many clients who were under-indexed to value and wanted value and were interested in non-U.S.. Now in 070 wait, there was a gigantic financial crisis in the United States, known by some to some as the Great Recession. What happened to your business then?

Our assets under management halved. So we shrunk precipitously. And at the time, Harry Hartford and I had taken out loans to buy out our seed investor. So it was perilous and it was really nerve-wracking. It was one of many. I'd call it significant bumps in the road along the way to 50 billion. Who owns the firm now? We are 100% employee-owned and one board member who's a former portfolio manager who's retired. What is the biggest challenge you have? Is it getting more money, getting sure the returns are good, figuring out what's going on, the geopolitical situation? What is the biggest challenge you have today? It's always retaining the talent, making sure that the people we have think about it. At least in our business, it's just layers of succession. There's the senior generation I'm a part of, and there's the generation beneath that, the one beneath that, ensuring

every individual, no matter the area of culture in which he or she works, is on a path, a career path that's satisfying and one where that individual will continue to contribute and is motivated by times have changed and they've improved. But in the eighties and the nineties, it wasn't easy being a woman in finance. Lots of closed doors, but no longer. So do you get tired of people asking you what it's like to be a woman-owned firm and a woman CEO and a money manager? And I assume you get tired of that, but what is your non-tired answer to that question? Times have changed and they've improved. We have a pipeline of incredibly talented young women coming into research that never even ten years ago didn't exist. So some of them call me a pioneer, which makes me feel ancient, which they're absolutely right. But in the eighties and the nineties, it wasn't easy being a woman in finance.

Lots of closed doors, but no longer. So what's the best investment advice you've ever received? I assume your father probably gave you some or maybe Charlie Munger or other people like that. What's the best investment advice you ever got? Well, all my mentors were men I mentor, aptly named, and often it was. And these aphorism are as good today as they were decades ago, which is Don't fall in love with your stocks. Remember, if you can just think beyond the market short term viewpoint, you can if you can be patient, you can see a reasonable return. Never neglect income. Like, I don't know if I could rank these. There are so many of them. What do you think the most common mistake that investors make is selling too soon or buying too soon? What's the most common mistake in your observation that investors typically make? Well, even institutional investors who I think should know better, they project

the present into the future. They extrapolate. So when an investment style with a great team like Causeway, where all the talent is intact, turns down, they panic. And when we do everything in our power to explain to them, as we would our mutual fund investors. This is a time when we're doubling down. We're buying more of these stocks that have underperformed because we have conviction in them. So you should think the same of us. So if I come to you and say, I have 100,000, I don't know what to do with it, what would you recommend I do with 100,000? That's suppose I'm a middle-class person. I've saved up some money, I've got 100,000, and I want to lose it. But I do get more than a Treasury bill rate of return. What should I do with my 100,000? My answer would depend on when you want to retire.

Do you have any major expenditures? You're going to put kids through school. So knowing when you need the money is very that determines because if you need it sooner rather than later, equities can be volatile and and cash now pays five plus percent in the US. That might be a place to put whatever you need in the next two years. So let me ask you today, as you look back on your career, do you think that you have fulfilled what you wanted to do, build your own money manager firm? What's your ambition now? You're still very young, by my standards. So would you like to build it into a bigger company than in your have or do something different professionally? What is your your professional goal now? I'd like my legacy to be even greater employment. I want to employ more people who are in is I talked about that great career trajectory. I'd like to have more clients who say, We really appreciate the service you're providing us, and that's just going to

take more time and effort. This idea of bringing more fundamental and quantitative investing together more closely to get a better outcome, there's just more work to do to get there. So but you still enjoy what you're doing. What have you learned about yourself as a leader? So you went into this company, started it, and about 20 years ago you had not owned a company and run it one yourself. You had been in money management. Now that you've been a leader for 20 years or so, what have you learned about yourself that you may be surprised you? I have learned so much. I think I've made every mistake there is. I've learned on the job in the last 23 years. But one of the biggest lessons that I've taken away is don't underestimate the need to collaborate, even though I'm convinced I know the answer. Bringing others along and making sure that they have bought in and they take

ownership of the solution that I'd like to implement.

Bloomberg Wealth: Sarah Ketterer

Scripts