6.26.2025 In this video interview, Gary Black, Managing Partner, talks with Advisory Board member, J. Philip Clark. They discuss the investment process developed by The Future Fund LLC for its ETFs.
Why The Future Fund?
Let's come back to your firm, The Future Fund. Tell me a little bit about your team, your resources, the research, and then let's segue into philosophy, what you're trying to do and talk briefly about the investment process.
The team is myself and again, I started the firm as founding partner in February of 2021 with Dave Kalis. Dave had worked for me as a small- and mid-cap portfolio manager at Calamos Investments and I promoted him to run all the US growth portfolios and lead the team. He's a very good Portfolio Manager (PM). He's a disciplined growth PM like I am, and he believes in high conviction investing. He believes in, let's figure out the one or two things that drive a stock. Unlike a lot of growth managers, surprisingly, he is a believer that a company has to have a path to profitability and make money. So that's the investment team. We also have a strategic partnership with One Capital. They have eight analysts that as part of their responsibilities can do research. We've been using them to do some research on some of the companies in the portfolio, which I think will be helpful as we go.
On the distribution side, we hired our first head of distribution, Jeff Ulness, whom I've known for about 20 years. I know you're aware of Jeff on too, who's worked for you. He has a lot of great relationships and we're hopeful that he can help us grow the institutional side and the RIA side as well.
We’re investing in the business as we speak and we will hire more people. We also have a great advisory board who are all salesmen. They're all people who've been great, best in class salespeople during their lifetimes. We have five people on our board, four of whom fit that definition. They're great salespeople in their own right. They really understand distribution. I'm proud of the team we've built and we're now at the point, if you look at the assets we're managing, plus the mandates we've been promised, we're getting close to $200 million of AUM, including the mandates that will be coming in in the next couple months. So we're excited about our future.
Talk to me about just your investment process. How do names bubble up to the surface to do the research? What's the investment process? Sell disciplines?
We talked a little bit about the vision. The vision was high conviction. It is the cornerstone of the investment process: Doing our own research, not trusting the company, going out and talking to competitors, talking to suppliers, talking to customers and the company. So you think about my focus group research on tobacco or going out and talking to distributors. That's the way we think. We’ve got to do our own work. You have to have a research edge that other people don't have. That's part of our philosophy. Be disciplined about valuation. Every single name in the portfolio, we could tell you what we think it's really worth intrinsically. And what we try to do is buy a company where we think there's at least two to one upside to downside. So when we're coming up with a valuation, usually we go out six to 12 months and say, here's where we think the stock can go over the next six to 12 months based on the future cash flows.
We’re not short-term oriented, we go out to 2030, we look at earnings and cash flows, earnings drive, cash flows, we try to discount it back and an appropriate risk adjusted cost of capital. And we come up with a present value. We back out the net debt divided by the fully diluted number of shares. We come up with a valuation. We then compare it to the price that we see in the market. If we can get two to one upside versus downside, then it becomes a candidate that we can put into portfolio. And that's the investment process. It's do our own work, be very disciplined about valuation, and if we have conviction, concentrate our bets. And that's the long-short of the investment philosophy.
Now let me talk about the megatrends. They form the backbone of our portfolios, both on the long and the short side. When we're doing research on the long side, we find something that can exploit those megatrends because they're an innovative company or they have a good brand that can be leveraged, or they just have the right technology, they're in the right place at the right time. They've invested well, they become candidates for our portfolios. That doesn't mean that they go in there, but that's a starting point for us saying these are good candidates. And then we'll do further research.
Further research to us is talking to competitors, talking to suppliers, talking to customers, talking to the company itself. We're very targeted in our questions. We like to have good relationships with the companies that we invest in. We want to be able to call them up and ask them questions and get them to answer us. So we try to make sure they know who we are. And given that Dave and I both been in the business for 30 years each, most of the companies we own, we can get on the phone with folks and say, we have a question about this action happened in the quarter. We tend to try to look at what we call non-GAAP earnings and non-GAAP cash flows. Cash flows are really what drives valuations long term. But we want to be backing out non-recurring events. So if somebody has a one-time charge for some reason, we would back that out. We don't include that.
We then try to come up with a cost of capital that we can look out and say, okay, based on the risk of the firm and what we think the market spread for equities versus tenure treasuries, which is the risk fee rate, what would be the cost of equity? And what is the cost of debt? We weight that and discount it back to come up with the current price. If we can find a company that fits the megatrends where we've built the model, we feel good about the catalyst, we think we know the business and we think the price is below where we think the long-term value is, then it becomes a much more interesting stock to us. And then to figure out what position a company should be in the portfolio, a lot of it's risk-adjusted upside downside if we think something has four to five times upside and we try to come up with downside scenarios. So a five to one upside/downside that would tend to be a candidate for being in the top part of the portfolio through it all.
Phil, I think one of the things that portfolio managers have to have, and I think Dave and I both have it, you really have to be able to understand businesses. It's not about financials. It's being able to look at a business strategically and say, is this a good business? Is it a bad business? Is the firm position to take advantage of these megatrends or have as a headwind these megatrends? So really understanding a broad collection of businesses. When I try to hire an analyst, that's the first thing I'm looking for. But you also have to have the financial discipline to be able to say, okay, based on the discounted cash flows, is this worth buying? What are the catalysts that are going to allow the stock to realize it's full value over the next six to 12 months?
That's the Achilles heel of most growth managers. I've learned that when I was at Alliance Bernstein, I thought that the growth managers at Alliance were pretty disciplined about that. They were not momentum, what I call momentum growth managers; momentum being defined as you buy what's worked in the last six to 12 months. That generally doesn't work as an investment process. We're trying to find stocks that we can buy for less than what they're worth. But you have to be very vigilant as a price, as a stock works. Once it reaches your price target, you have to get out. Sometimes you don't want to get out of a stock that’s worked. And I've seen, I've been an analyst my whole life. Analysts like to reinvent why they own a stock. And I say, well, I bought it for this reason. One of the first signals that an analyst is bluffing me, I'm being nice, is when their investment thesis changes. Like you told me the reason we bought this stock was because of x. Now you're telling me it's y. Usually it's because the stock has blown through the price target and you've reinvented why we should keep owning it, rationalize, continue holding.
It's the hardest thing to get rid of a stock that's worked. Emotionally you tend to want to get rid of stocks that haven't worked. Dave and I are the opposite. We tend to want to buy more of stocks that haven't worked, and we try to be very disciplined about stocks that work. So our first sell discipline is when a stock hits your price target. The second is it even harder if your investment thesis isn't working? If you bought a stock thinking they're going to gain market share because of some new product, launched a new product, but they gain no market share, your investment thesis is wrong. When you realize your investment thesis is wrong, you have to be disciplined enough to say, let's realize we made a mistake and get rid of it. A third sell discipline is just better risk reward within a sector. If you see something that you like and you find that there's something else that's doing better than that. The fourth thing is just if near-term expectations are too high, let's suppose we own a stock and we think earnings revisions are going to turn negative because the company's going to cut price. That would be a reason to sell something. Those are the four reasons. Or trim.
There's a fifth one, but it's more of a one-off. If we see a CEO departure that we weren't expecting or we see on the other hand a big strategic change, they go out and they make a big acquisition that transforms their business, that would become a candidate for sale. But it's not automatic. It would be something we would've to do more work on because sometimes CEO change is good.
Any just final thoughts about the investment world you, what we're trying to accomplish?
We're very excited about where The Future Fund stands. We've got good performance. We've got two good products already out in the market that are growing. We're launching a smid small- and mid-cap growth product. We are thinking about other products that we think are potentially big. We have a great new head of distribution. We have a great advisory board. I think we've got a really good research process about looking for high conviction names that fit our megatrends. We're disciplined about valuation where we can really understand the business. I think we've got a really good investment process that works.
IMPORTANT INFORMATION
Investing involves risk, including loss of principal.
Investors should consider the investment objectives, risks, and charges and expenses of the Funds before investing. The prospectuses contain this and other information about the Funds and should be read carefully before investing. The prospectuses may also be obtained by calling 877.466.7090.
Past performance is no guarantee of future results.
The Future Fund ETFs are distributed by Northern Lights Distributors, LLC, member FINRA/SIPC. The Future Fund LLC is the investment advisor to the Funds, and is not affiliated with Northern Lights Distributors, LLC.
Opinions expressed are attributable to the speakers and are as of the date of this interview in February 2025. The Future Fund LLC is an SEC-registered investment advisor and advisor to The Future Fund ETFs.
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