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Meet the Masters – Kevin Lewis, Senior Portfolio Manager with American Century Investments discusses the Focused Dynamic Growth investment strategy, which targets companies in their early and rapid stages of growth.

 

Trevor Chambers:

Hey, everybody. It’s Trevor Chambers with Olde Raleigh Financial Group. Once again, we’re continuing our Meet the Masters series here, blog and podcast. I am super excited today. We’re getting back into some finance and talking about markets and investments with Kevin Lewis. Say hi, Kevin.

Kevin Lewis:

Hey, everyone.

Trevor Chambers:

Kevin is with American Century Investments. He’s a senior portfolio manager, and I’ll let Kevin get right into it. I want Kevin to talk about American Century and himself and give a background. This is going to be a good romp through a bunch of stuff. This guy loves history and architecture, so I’m super excited to have you here. Also, I see Virginia Army National Guard. Thank you so much for your service, sir. How long? Were you in the Guard? Looks like quite a while. Thank you. Talk about that a little bit.

Kevin Lewis:

Six years. Yeah, six years. I graduated from Virginia Tech. I went through the ROTC program there, the Corps of Cadets, and had the honor of serving for six years as a combat engineer officer for the Virginia Army National Guard and the Reserve. It was a rewarding experience, and one I was glad to do.

Trevor Chambers:

Great. Thank you for your service. We always love hearing from you folks, veterans. All right, my man. Let’s just jump right into this. I want to talk about, you guys have a nice growth portfolio that you run. I think you call it the Focused Dynamic, and I want to jump right into it, because we’re obviously in an interesting time in the markets. I want to see, let’s talk about your philosophy and what sets that strategy part and what you guys have got going on with it. Then let’s talk from that, I guess we talked about this a little earlier and you said, “I don’t want to talk thematically.” You don’t invest thematically is what you said, so talk to me about that. What’s going on? Talk to me about American Century. Talk to me about the strategy.

Kevin Lewis:

Sure. Great. First, American Century is a global investment manager headquartered in Kansas City, Missouri. We’ve been entrusted, as a firm, with managing approximately $180 billion in client assets across various investment strategies. Trevor, what I really appreciate about our firm is that our founder, Jim Stowers, he established the Stowers Institute for Medical Research with his personal wealth and the company’s stock that he owned in American Century. Through the Stowers Institute being a part owner of American Century, some of our dividends from our company go to the Stowers Institute for Medical Research, which helps fund scientific research on serious medical conditions that, unfortunately, I think many of our families have been touched by, such as Alzheimer’s and cancer and more to that. Since 2000, American Century’s stock dividends have amounted to over $1.6 billion. $1.6 billion. It’s a world-class research facility with approximately 550 research support staff.

As we go to work every day managing portfolios, we know that also that our company is aligned through its ownership with making a lasting, positive impact on society not only through our investment portfolio and endeavors, but also the company itself. A little bit more about our investment strategy, the Focused Dynamic Growth investment strategy, we are looking for companies, mainly in their early and rapid stages of growth. If you think of a company’s evolution through its various life cycle stages, much like a child might go from a young child to a teenager to a college age and then getting into old age, these are companies that are large and mid-cap companies, but they’re predominantly in their early and rapid phases of growth, so these are companies that are positioned for sustained above-average growth. Excuse me.

We want to invest in great businesses that are defined by having a competitive advantage that leads to above-average profitability and significant opportunities to keep growing the business. By investing in these early and rapid-stage companies, mainly, they should, over time, benefit shareholders through their above-average growth and compounding of their fundamentals, which should lead to wealth creation. An example of this, Trevor, might be take Intuitive Surgical, which is a leader in robotic-assisted surgery. They have a platform that they call the DaVinci platform that the physician will utilize to perform surgeries. Their sales and cash flow have been growing at about 15% annualized over the last five years, and they have around 30% profit margin, so they are a very profitable company, but what positions them for continued above-average growth is that they are leaders in the field of robotic-assisted surgery.

Last year alone, there was over one million procedures performed using their platform, but yet that’s still less than 10% of all surgeries performed. Its system benefits of being typically less invasive, creating shorter hospital stays, and being less prone for errors leads us to believe. Excuse me. I’m sorry.

Trevor Chambers:

That’s okay.

Kevin Lewis:

Its system benefits of typically being less invasive, shorter hospital stays and less prone for errors leads us to believe that there are more surgeries that will be performed in the future. Again, less than 10% of all surgeries last year were performed robotically, so we see there’s tremendous room for growth.

Trevor Chambers:

You find these companies with lots of runway of growth, and they are the thought leaders. They are the leaders in that space. Is that the sum of it?

Kevin Lewis:

Exactly. I think what underscores them is, it’s really innovation-driven growth. You think about Intuitive Surgical. Robotic surgery hasn’t been around for all that long, so they were leaders in this field of robotic surgery, and brought that to market. There’s been a very strong adoption where now they’re teaching robotic surgical procedures in med schools. This is something that we see a world going forward where there’s likely to be more robotic surgery than less, and if that occurs, companies like Intuitive Surgical will benefit from that.

Trevor Chambers:

Would you mind giving me another example, or maybe another company [inaudible 00:07:16]?

Kevin Lewis:

Sure, yeah.

Trevor Chambers:

That’s fascinating, man. I love hearing about you guys that put the deep research into companies like that. It’s so cool.

Kevin Lewis:

We pride ourselves in the deep, fundamental research that we do on companies, Trevor, meeting with management teams. Not only the CEO to the CFO, but we try to go layers deep into the organizational structure. For instance, we might meet with the Chief Scientific Officer at a medical company. This would be that, say, Lead Scientist, who’s responsible for the scientific programs and development, because they’re the person who can help us to understand, at a very granular level, what are the drugs in development that may be still be at early clinical stages, but that may have great promise as they enter the market to continue driving growth. We’ll meet layers deep with companies’ management teams, going down to the Chief Marketing Officer, Chief Scientific Officer, Chief Technology Officer, to try to understand the real nuances of that growth. Our team is especially equipped to do that. I might highlight my teammates, because they’re very strong.

Trevor Chambers:

Yeah, yeah, if you want to.

Kevin Lewis:

This is a group effort. We believe in the wisdom of the crowd as we make decisions, and what I mean by that is that this is not a star portfolio manager. This is a team where every idea that gets presented for potential inclusion in the portfolio is vigorously debated by a team that challenges the assumptions and the forward-looking models that we create about the growth rates, the margin profitability, things like that, but what equips us, I think, pretty uniquely versus other people is that, or other teams, is that we have a team that’s filled with many former industry practitioners, so one of my colleagues and teammates is a co-portfolio manager Michael Li. He went to the University of Michigan. He got his PhD there in chemistry.

After the University of Michigan, he went to work for Bristol-Myers Squibb as a research scientist. Michael has actually helped bring drugs to market while at Bristol-Myers Squibb. He’s authored papers that have been out in the marketplace for other scientists to look at. When you want to know who is one of the key people who was doing the healthcare research on our team, this is Michael Li, who brings that experience to bear when meeting not only with the Chief Executive Officer, the Chief Financial Officer, but the Chief Scientific Officer. He’s really well-equipped to have those conversations, drug scientist to drug scientist.

You asked for an example of other companies that are in the portfolio that are driven by innovation that’s leading to long opportunities for growth ahead of them. I might highlight a company like DocuSign, who many people on this call may be familiar with. This is a company that has an e-signature product, and really, there’s not many competitors to them. There’s one large competitor, but we think of DocuSign as having a very competitive advantage because of its flexibility and availability of their product versus the leading competitors. As we’ve met with this company, and remember, this is a company who’s made it available by patent protection and legal enforcement that when you sign off on a document on your computer, which creates great convenience, when you think about it, especially in a COVID world. When you sign off on that document, that it’s legally enforceable in a court of law. They’ve built that intellectual property around getting all of that done.

DocuSign, as we’ve met with them, what’s been impressed upon us is not only their leadership, and I’m talking about the management leadership and we look for that as an indication of quality, but the business model about the opportunities for increased profitability and increased products that they’re developing, but management impressed upon us that, by their estimate, inside the US, this disruption that we’re talking about of the traditional, paper-oriented process of creating the document, sitting in front of a person to get that document signed, this is about a $25 billion dollars a year business just in the US. Outside the US, another significant opportunity for them. Yet, as you look at a company like DocuSign, which has done well in the recent environment, they have about a little over a billion in revenues that should be expected. If you think of their just over a billion dollars in revenues that’s being expected of them compared to the large TAM, Total Addressable Market of over $25 billion dollars, there’s still long runways ahead of growth for them to continue adding on new products and services.

I might highlight that they just made an acquisition recently of a notary service, so imagine a world in the future, potentially, where you could do a home closing from the convenience of your coffee table or office, and it’s notarized and signed off there right at your own convenience.

Trevor Chambers:

Yeah. We use it all the time here. It’s awesome. The whole, frankly speaking, I personally can’t, just in my level, mostly I’m running retail clients, no reason why we can’t run a lot of accounts from anywhere. It doesn’t matter. Anywhere in the country, certainly, we can run it. I think the idea of using Zoom and things like you were talking about to engage a client and service a client, there’s no reason why you can’t do that now. I think that this has just pushed that whole thing forward to that point in that trend. All right, cool. Hey, let me ask you this, though. When do you normally get out of these positions? Is there some sort of, how long are you typically in them, or is there a typical time that you’re in these types of companies? When is the inflection point when you say, “It’s time to take some profits off the table?”

Kevin Lewis:

That’s a great and timely question. Ideally, the time to get out is ideally, if all the fundamentals and valuation continue working, is forever. What we want to do is do that strong, deep fundamental research up front so that we can then allow these companies to continue doing what they are doing so well. Remember, strong management teams, executing their business game plan, that if correct, should grow the fundamentals at a very, very high, above-average rate, and the result of that will be a positive wealth creation effect, or it should be, anyway. What we do on every company, as we go meet with them, and we meet with them not just once, but regularly during the course of ownership, of course we’re on all of the quarterly conference calls, but then we’re doing follow-up meetings with these companies to update our models because we have a model on the projection of the future for these companies.

With that model, we can determine the intrinsic value. That is, what is this business worth when you look over the next, say, five-plus years and you look at the cash flows that are going to be thrown off by that business and you discount those stream of future cash flows to the present, that enables us to determine intrinsic value of this company, hence its upside and potential downside. We’re always looking at that, and if a company gets closer to that intrinsic value and there’s other opportunities to invest, we may trim a little off. That’s very nuanced types of just continuously making sure that the portfolio reflects where are the best opportunities in the market. Again, that being said, our portfolio turnover is about 30% but our name turnover is significantly less than that, around 15% to 20%.

The difference between those two is the portfolio turnover may reflect that as a stock races ahead in the market and we say, “You know what? It’s raced ahead. Its relative price appreciation, while still good, there may be others in the portfolio with a little bit better.” Let’s maybe trim, just like you do a plant or a bush. Let’s trim a little bit of that excess growth off and let’s re-deploy and feed a company that maybe have lagged, but we have now, because it’s lagged, has significant more upside potential and we believe strongly in the fundamental growth. That’s how we go about the, always, the decisions around what we make in the portfolio are, what’s the growth opportunity of this company? What’s the valuation of this company, and then the third dimension we’re always thinking about is what’s the risk to the portfolio? We don’t want this portfolio to just reflect one company’s fundamentals, but the fundamentals of many companies and diversify that risk across the handful of companies we have in the portfolio.

Trevor Chambers:

Yep. Growth, we feel, plays, some sort of growth strategy like you’re talking about, plays a role in most people’s overall portfolio mix.

Kevin Lewis:

Mm-hmm (affirmative).

Trevor Chambers:

I really appreciate you going through the detail about how you look at growth, because it’s important, especially when you’re talking about people’s retirements option into their 30-plus years of retirement. You’ve got to have it, in my opinion. Can you speak to automation? I don’t know if you have any positions in automation companies, but it seems like automation is just, not seems like it. It’s going to play an interesting role in society moving forward. It already is, but that has some interesting impacts. I don’t know if you have any comments on that, on automation companies and automation in general?

Kevin Lewis:

We do. There’s been more talk recently of on-shoring and bringing supply chains and critical components back to the United States. Just recently, we had news from Eastman Kodak which highlights that they’re getting a loan from the government to manufacture essentially active ingredients used to produce pharmaceuticals. Now the speed and degree of that on-shoring are hard to gauge, but there’s definitely interest there by different constituents. In conjunction with that, Trevor, what you’re asking about is the strong trend towards factory automation, meaning that there’s more use of technology in the manufacturing process. We believe that probably on-shoring will pick up, and our portfolio should benefit from the manufacturing revival, not only because of that on-shoring, but from the trend of creating more automation in the manufacturing process.

We have two portfolio examples. One is a company called Cognex, which is a leading company in the industrial machine vision. They help machines see objects and bar codes. You can imagine a reader that is reading bar codes of boxes going by very quickly. Let’s suppose that bar code says, “This box goes to Raleigh. This box goes to Kansas City,” where I’m based. It can do that at a very high speed. It can tell the machine, “Shunt it this way. Shunt it that way,” by just reading the bar codes or scanning objects and looking for defects. That’s a company that, through their machine vision, is empowering this automation of the process.

Another company that we have in the portfolio is a company called FANUC, which is a leading industrial robot company where the overall demand is projected to be growing for robots at a double-digit rate. The thing you see more and more of is that they are putting more robots in the manufacturing process to relieve the human workers of that level of exertion and things like that. Those continue to get smarter and more productive over time. Those are two examples of automation that we strongly believe the trend is there and that we have representation in our portfolio.

Trevor Chambers:

It was interesting. I was reading an article about automation, and saw that meat processing and how we can still really cut down much better an animal, and then so far, but the robots are catching up. [inaudible 00:21:48] obviously the COVID breakouts and stuff. All right. Love the detailed, wonky stuff about stocks and stuff. That’s super cool. What was the name of that last company?

Kevin Lewis:

FANUC, F-A-N-U-C.

Trevor Chambers:

Really cool. Very cool. All right. Let’s switch gears a little bit here. Let’s get a little more macro. I want to talk about timing and just talk to it a little bit because I think we’re going to have a lot of people. We had a lot of people trying to time, that got out at the bottom in March. We’re all trying to shepherd long-term thinking. I know you guys at American Century think long-term. I want to talk about that, and then I just want you to comment a little bit on what your views on a relationship with China and those supply chains we were talking about earlier. We can get into that and take it from there. Any words of advice for our people being long-term thinkers from a sage financial superhero like you, my friend?

Kevin Lewis:

I don’t know about the superhero part.

Trevor Chambers:

I’m going to say that. I know your wife would say he’s probably not a superhero.

Kevin Lewis:

I can speak from my 35 years of experience. I think you often learn from the painful parts of that experience. What will I do better next time? From my 35 years of experience, I’ve seen many who have tried to predict a market outcome, and it’s just, frankly, it’s very difficult to get the repositioning right. You may get the exit right, but you may miss the re-entry, or you may get the exit right but buy the wrong next asset that you think will go up. Again, just seeing that has been very, very, very difficult. That’s because the financial markets move on a combination of both fundamentals and on psychology. You may get the fundamentals right, but you may miss what the psychology aspect is. Those can, particularly the psychology, can turn very quickly.

When we are investing, we focus on the fundamentals and the valuation of the company. That’s the area that we have the most control over. I think the best way to deal with potential market rotations or the inclinations of wanting to market time or rotate is to first know your personal risk tolerance and the risk you have in your portfolio because you have to be comfortable with what you own. If you’re comfortable with what you own, you may not be as inclined to try to want to time the market. Secondly and to that first point, your risk can be balanced out through diversification, stocks, bonds, other categories. You may feel, maybe I should move in or out of the market because I see this or that event, but if you have a well-diversified portfolio, probably the other part of the portfolio, the diversified part of the portfolio, will make up for the area that you think may be harmed or hurt or what have you.

Then within stocks, more to the area that our team is focused on, diversify by style, growth and value. Each will have its day. We are strong believers on our side and have strong conviction in the growth side of investing, but I respect my colleagues and we have a very strong team at American Century that does a value-style investment. I think it’s important to have both in the portfolio. I think what’s really important and underscores our decisions and I think what investors, particularly if they’re in their later stages of investing and they might be in the just before retirement or in retirement distribution phase, is to really emphasize quality in their portfolio because that tends to be a characteristic that wins over time. When the markets turn against you, quality almost inevitably always wins.

It happened in the market draw-down earlier this year. What we saw was, in the significant market sell-off, there was a dispersion between the high-quality companies and the low-quality companies. Part of our out-performance this year was in making sure that we had those companies in the portfolio that financially strong, run by strong management teams, significantly good products, be they in leadership positions in the marketplace, but that quality for us is demonstrated by above-average profitability. You see it time and time and time again. Where quality tends to lag a little bit is when everybody’s believing the market can do no wrong and go up. Low-quality tends to win at the beginning of an economic cycle, but high-quality tends to out-perform, not only over time, but in the later stages of an economic cycle, and helps guard on the draw-down. That’s the point I’m trying to make. If you can lose less, then you have to not win as much on the upside. It’s a characteristic that our team personally strongly believes in in our portfolios.

Trevor Chambers:

Yep. You just summed it up. Heard it here first, folks, actually a million times. Slow growth, low value and I think you would agree. Understand that this money’s got to live a long time and likely will live a long time if you’re patient and don’t tack with the wind, which leads me to this. There’s always going to be a problem in the world.

Kevin Lewis:

Yes.

Trevor Chambers:

There’s always going to be a problem in the world that’s going to take the knees of the market out every, what? Five, six years. This is a pretty significant problem we have right now, but let’s move beyond COVID, because I think eventually, unfortunately, yes. A lot of people have died and more people will, but I think we’ll get it under control eventually. I want to talk about some more macro stuff, if you don’t mind. Talk to me about China. What’s going on underneath the surface that you’re maybe biding, and then also globalism. Are we pulling back? You talked about supply chains earlier. It seems to me we are, and how that maybe plays politically into populism. It seems like we’re definitely seeing a rise in populism, both in the United States and around the world, and did globalism maybe play a role in that? Anyway, a little bit of, I maybe asked you a lot right there, but let’s start with China. What’s your feelings on all that?

Kevin Lewis:

I’ll start by saying that we focus our energy on US-, mainly, based companies, but certainly the global economic situation has influence on what’s going on here in the US. What we’re seeing with the increased rhetoric with China is that, and obviously, can create a slowdown in our global US growth rate because obviously, that’s a big economic force out there in the world. Trade tensions with China and things like that, at the margin, have the potential to slow down the US GDP growth rate. With the on-shoring that, while people want to bring the supply manufacturing back, the critical components manufacturing back, what that could result in is a little bit higher inflation down the road.

Globalism, like everything in life, has both positives and negatives, and the positive would be that you can potentially manufacture at cheaper prices and hopefully pass that on to the end users of that product, but the negative could be, as we’re seeing, is that with your manufacturing supply lines several time zones away, that you’re at the whim of those regions and the conditions of those regions. I think what we’re seeing now is that reflex in our thinking, that being the national thinking, that maybe some of these things, we don’t want manufactured abroad. Bringing them back to the United States to manufacture could result in slightly higher costs being passed on to the consumers.

That’s why we don’t see inflation a threat today, but we see the potential for a pickup inflation, the degree to which we don’t think will be significantly higher, but we do see that potential for rising because, of course, the United States has higher wages, but we still see that companies will try to offset that through more automation, which we talked about earlier, through robotics and technology. China is definitely an impact on our economy, and we think about it that way.

Trevor Chambers:

All right, cool. Tell me about you a little bit. How did you arrive at the desk running this portfolio? You tell me all that and also, by the way, what’s going on with the Royals? Are you a Royals fan?

Kevin Lewis:

I am a Royals fan.

Trevor Chambers:

Okay. It’s been a hard [inaudible 00:32:03]. I brought you up. Yesterday, we were talking, just on social media with some guys. I said, “I’m going to be talking to some guys in Kansas City.” I did, I guess, catch wind that your Super Bowl-winning quarterback bought a little part of the Royals.

Kevin Lewis:

Yeah.

Trevor Chambers:

Cool.

Kevin Lewis:

That’s been the more recent news. It’s easier to be a Chiefs fan this day and age than it is a Royals fan, but everybody likes recent success.

Trevor Chambers:

Yeah, exactly.

Kevin Lewis:

We’re convinced the Royals will bounce back.

Trevor Chambers:

You’re going long on the Royals.

Kevin Lewis:

Yeah, we’re diversified in our sports. We’ve got both football and baseball.

Trevor Chambers:

Yes.

Kevin Lewis:

On a personal level, I was born and raised in Virginia, and then I graduated from Virginia Tech. In addition to my business degree, I’ve obtained the Chartered Financial Analyst and Chartered Alternative Financial Analyst designations. I have over 35 years of investment experience. We mentioned my military service. I’m proud of that, to have served the country, and given back. I also have two wonderful sons. One’s now a medical doctor doing his residency training. He just recently graduated from medical school.

Trevor Chambers:

Wow.

Kevin Lewis:

The other works in a medical lab here in KC. My hobbies are both history and architecture, which I think you could see, tie me back to Virginia.

Trevor Chambers:

Yeah.

Kevin Lewis:

When you grow up in that part of the world, I know you’re from Raleigh, that whole part of the world goes way back in our country’s roots and origins. The older I get, the more I just enjoy reading about that. I think the interesting part of history, and you and I were chatting earlier that many of the conversations or debates that we’re having today about, for instance, the role of government in our society, traces its roots back. This conversation’s been had ever since the founding of our country, as what is the size and role of government in our day-to-day lives. Without wading into an opinion about that, other than to say that this has been a conversation that’s not new, but has been going on since the 1700s.

Trevor Chambers:

Yeah. Before we started, we were talking about architecture and history. Is there any particular structure that you tripped across in Virginia or elsewhere that is interesting and maybe people don’t know about it, or maybe it is well-known, but you may know something interesting, and how does it fit in with the same framework you were just talking about, the history of the United States and all that?

Kevin Lewis:

I’ve always been an admirer of architecture in general when I travel. We have clients all over the world, and I love seeing the architecture unique to, say, corporate America across the world. I also, being back in Virginia, have also admired the older homes and the architecture, but certain aspects of that, not only the aesthetic beauty of how they have designed these homes and their templates go back to, and many times the Greek architecture, but how they were innovators and forward-thinking, long-term thinking, if you will, in being able to innovate with the resources around them. For instance, it impressed me. Some of these old, stately homes, big farms and whatnot, you’ll see a column of trees that lead up to the front doorstep.

While that has a nice, aesthetic beauty appeal, the mature trees, I was told once by a historian at one of those sites that those trees serve the purpose also of channeling the wind. In many cases, these homes are near the water, river, water, and channel the wind off the river, the water, up through the home. It serves as a way to air-condition the house, although using the ambient temperature of the outside air. It’s moving the air through the home. I find that just really innovative and also long-term thinking, because clearly, they didn’t plant these mature trees, probably but as saplings, but had the forward thinking and patience to say, “This will benefit not only the home from an aesthetic standpoint, but also from a functional standpoint.” We think from a very long-term perspective when we invest, and I guess maybe that’s why this train of thought aligns with us.

You’ve got to be patient. You’ve got to allow these things to come to fruition and, for us, these investments that we’ve done a great deal of forward looking but deep, fundamental research, the opportunity to let those teams execute on their business strategy and allow those fundamentals to compound into wealth creation potentially. This long-term thinking and being resourceful with the materials and environment around you to innovate, to adapt, and to create solutions. It’s much like how we invest. Are these companies who are innovating, who are adapting and creating solutions to grow their businesses?

Trevor Chambers:

Love it. Yeah, the planting of those trees is the ultimate growth model, right? The growth portfolio.

Kevin Lewis:

Yeah.

Trevor Chambers:

Yeah, I love it. I think it’s a great, is there any particular home that strikingly had that, that you want to mention?

Kevin Lewis:

Certainly one of the great pieces of architecture in Virginia is Monticello. You think of somebody like Thomas Jefferson, who was very much a Renaissance person. He loved gardening, surveying, engineering. On a personal note, some of the architectural details of Monticello, I tried to design into my modest home here in Kansas City. I’ve got a little piece of Virginia designed into my Kansas City home here today, but very modest. I just love the aesthetics that were there at the house, to his home there.

Trevor Chambers:

Nice. A little Virginia in the crib in Kansas City.

Kevin Lewis:

Yeah. I like to say I’m the Southern-looking home on the street here in Kansas City.

Trevor Chambers:

You are, okay. Weird. Yeah, that’s awesome. Yeah, Virginia definitely is gorgeous. The horse country and stuff like that, oh, my God. I was actually in DC with my family last summer, and we saw it’s just so interesting. All right. We’re switching it up here. What are you reading, podcasting and/or streaming these days?

Kevin Lewis:

Okay, a couple thoughts on that. One of my personal goals is to always be learning, so I like to read and I like to listen to podcasts, which is a recent innovation on this trend of innovative, new technologies. I recently finished a book. It’s called Shoe Dog. It was by the founder and chairman of Nike, Phil Knight.

Trevor Chambers:

What’s it called?

Kevin Lewis:

Shoe Dog. S-H-O-E-

Trevor Chambers:

Shoe Dog, okay.

Kevin Lewis:

D-O-G.

Trevor Chambers:

Mm-hmm (affirmative).

Kevin Lewis:

The stock is in the portfolio, so it intertwines there, but it’s interesting to see the tenacity and drive of Phil Knight in creating that company. It illustrates, again, the quality of the management, the forward thinking, and I think the tenacity is just a great attribute to have, to keep at it and against the many challenges that he and his team faced early on. That’s a book I’ve recently finished. The podcasts that I listen to run a broad spectrum from college football to business to history, and two history-related podcasts that I listen to is one by a gentleman by the name of Dan Carlin. He’s got one called the Hardcore History, and another more tied to Virginia, there’s an organization there called the Virginia Historical Society’s lecture series. They will bring in speakers and they will podcast those speakers. They run the gamut from medical, history, and it’s not necessarily tied to Virginia, but largely, it is. Just various facets of history and you have these wonderful speakers. I just enjoy listening to those as I’m driving or as I’m walking or things like that.

Trevor Chambers:

Cool. What does history and studying this, how does it hone, and maybe you already talked to this, but it’s so interesting because you’re a history buff, but on the other side, you’re looking for truly a mountain of innovation. You have no lack of looking at companies-

Kevin Lewis:

Right.

Trevor Chambers:

That are forward-thinking, so what is the history, how does that help?

Kevin Lewis:

I think with history-

Trevor Chambers:

This is such a deep question. I don’t know. We’re digging real deep here, Kev.

Kevin Lewis:

I think for history, what it does is, there’s that adage that history may not necessarily repeat itself, but it often rhymes, so you’ll see a very similar version of events today that we had similarly in our past. I think what is important when you think about history is to learn of the solutions that they tried, the thinking, the framing of how to go about solving that issue, and then you can take those lessons, whether they directly apply to that problem, you can reapply them to a different problem. This is how we might create an innovative solution to it. I think studying the history enables you to have a perspective on methodologies and perspectives of how to approach future problems. That’s why I’m careful to say that you can’t apply every solution that they used back over the last 200 years to every new problem, but you can have under-pinning tenets or qualities that you can say, “They went about it this way, which was a really smart way to tackle that problem.” Maybe not have the same solution, but you can use the same framework and tenets to solve that problem.

Trevor Chambers:

Yep. Yeah. I think, and then to transfer that to a company, you’ve got to be tenacious, certainly. You’ve got to be ethical, and you’ve got to have really sharp capital allocation skills.

Kevin Lewis:

Exactly.

Trevor Chambers:

Where do we put the money, man? That’s the part that, you see that every day, especially that last one. Holy cow. That’s super important. It’s super important, and it’s not something, I think, that’s appreciated.

Kevin Lewis:

I think, not that learning about history gives you all the answers, because it doesn’t, but if it can help you with a framework, but if anything we’re seeing is that the events and the disruption of our day-to-day living are happening more rapidly and rapidly and rapidly. There’s different timelines that have been created that show it took X amount of years to progress in society from, say, the fire to the light bulb and then the next distance of time from the innovation on the light bulb to, say, the LCD might have been shorter. You’re getting a compression of the innovation and disruption. To be able to have a framework to start applying, at the next disruption, how should we think about the approach to finding the right solution, either how to invest or how our company’s applying those tenets, I think is very, very useful instead of approaching each problem as a brand new, unique, never seen this before.

Clearly, on the innovation, I might highlight is that healthcare, which we are just strong believers because we’re seeing the Renaissance of discovery in healthcare that’s taking place right now. It’s well-represented that innovation is being well-represented in our portfolio, because we see that there’s just a leapfrogging of thinking and advancements in healthcare. At the end of the day, that not only can help investors, but it will help society with these advancements and now, say, cures to serious medical conditions versus just treatments, and better ways of surgery and better ways of delivering healthcare. We are strong believers and proponents on that aspect and representing the portfolio.

Trevor Chambers:

Yep, which means people are going to live longer and it ties right back into, you’ve got to have smart portfolios, that have, to some degree, a little smattering of growth and well-rounded growth, smart growth.

Kevin Lewis:

Right, because in many cases, that’s where the innovation’s coming in your portfolio. I’m not saying value doesn’t invest in innovation, but I think looking at the population of stocks on the growth side versus the population of stocks on the value side, I think one would have to conclude that there’s more of the newer innovation and potential disruption on the growth side. That’s why I think it’s important to a) have a balance of both, but d) don’t neglect growth in your portfolio.

Trevor Chambers:

Yep, I like it. All right. One last question, and I’m going to let you get back to looking at whatever company’s up on your tab on your computer. Actually, can I just ask you one other question? I see you doing all the research now remotely. Maybe some people are getting on planes. How has the day-to-day been? How are you? Out of the house?

Kevin Lewis:

Our team has been, actually, built on a remote model. Not that we’ve all been working from home, but we’ve been in various offices, American Century offices, across the country, so the majority of our team is here in Kansas City, but we do have a senior portfolio manager, Keith Lee, who is in our Mountain View office. Now he’s working from home because of the COVID. He’s been in our Mountain View office. He follows technology for our team, and he’s the senior portfolio manager. He’s embedded in Silicon Valley. He’s talking to companies every day. We also have Prabha Ram, who is in our New York office. Prabha is a co-portfolio manager for Focused Dynamic Growth, and her location in New York City puts her right in the epicenter of the financial district, the financial world, so those two have always been remoting into our team and we do technology.

We are on a private chat network set up that we have literally chats going back and forth at all hours of the day, the night, the weekends, just to be apprised of information. Then we meet formally twice a week, where through teleconferencing, you can see the person’s face. You can see the audio and we can pull up computer models and screens to see everything that happens that way. Then taking that communication amongst ourselves and then visiting companies, we’ve seen no diminishment in the capabilities for companies to adapt to allow us to visit with them over video, much like you’re visiting with your clients over video. We can have that same access and see things right over the computer as we talk to them.

Trevor Chambers:

You know what? I, certainly seven years ago, this would have been very restricted. I know that Zoom and the Zoom-alikes have been around for a while, but it’s amazing, just to your point about innovation, where would we be ten years ago if this had happened? Twenty years ago? It would have been a problem, a real problem. The fact that, listen, there are a lot of people that are out of work. I get it. They aren’t in positions. You and I are very lucky, very lucky. To your point, I don’t know if you want to speak to that, but-

Kevin Lewis:

I think you’re right. If there’s a silver lining in this COVID scenario, and again, you have to look for the positives, recognizing the very severe nature of it, I think that our corporate capability, being America’s corporate capability, was better equipped to handle this rapid onset to deal with working from home and working with clients remotely and to address the responses on the healthcare front to it. You look at companies who have, now we’re in testing for vaccines. We have treatments that are being tested, and this has come about, remember, in about three or four months. Our response because of the innovation and emphasis there has made us better equipped than going back in time and, I hate to keep going back to history, but the Spanish Flu epidemic that was a very, very serious event in our nation’s history. A lot of people passed away from that, and it looks like that we have, through the evolution and innovation of our society today, better dealt with that, obviously better dealt with that than that very serious event in our history.

Trevor Chambers:

Yep. I’m sure you know that they were complaining about masks then, too.

Kevin Lewis:

Yeah, exactly.

Trevor Chambers:

It’s just so classic. Again, that puts a bow on this thing, actually, because my grandfather had a saying. “The only difference between now and then is the trees are taller and a little less light gets in.”

Kevin Lewis:

Yes.

Trevor Chambers:

Right? Where are you getting to go and/or I don’t know if you’re venturing out, but where are you? I want a shout out or two to some local restaurants. I know you guys do barbecue and steak up there. Holy Moses, you guys do, but a couple shout outs to some places there locally? It’s got to be local. It’s got to be local.

Kevin Lewis:

I’ve got to be local, okay.

Trevor Chambers:

Yeah.

Kevin Lewis:

Okay. I was going to go with a Chipotle, which is a portfolio.

Trevor Chambers:

Hey, do you guys own that? Do you guys own Chipotle?

Kevin Lewis:

Yeah, we do.

Trevor Chambers:

That’s fine. That’s fine, and I think Chipotle, I think their model just couldn’t be better set up for this situation.

Kevin Lewis:

Yeah. For takeout, my son and I will go to Chipotle. That’s been a portfolio position for over four years, and investment’s doubled in value from the stock appreciation. The qualities demonstrated by the good economics of not only the base restaurant business, but its management had the foresight to add Order Ahead that’s benefiting us now and catering capabilities, which make their store restaurants have even higher profitability than the base walk-in business. Now, they’re adding drive-through windows. I’m not sure if they’ve got to every location in Raleigh, but they are adding drive-through windows. What that does is it raises the brick and mortar store profitability even higher, and as they roll that out across the country, we think it will continue positively impacting the stock price. It’s been a great investment for us, knock wood.

Trevor Chambers:

Can I just say something about that? I want to say something, and then I want to hear about your local, but you talk about innovation in the restaurant business. My family’s, my sister-in-law and her husband own a place here locally called Bella Monica, 20 years [inaudible 00:54:22]. It’s just, restaurants are not going away. There’s one thing I do know. There’s always somebody that’s going to want to be a police officer, a fire person and open a restaurant. That’s not going away, but I think the innovation that’s going to come out of this, devastation for sure, but I don’t know if you guys are looking at any other companies that are coming out in that space, but my God, I just think, and to your point, Chipotle is so set up for this. It’s crazy.

Kevin Lewis:

Yeah, that management team, which you get, when you meet with them, you just go, “Wow, this is a very thoughtful, solid management team.” We always look at this component. Then their business model and then their innovation has really driven the growth there.

Trevor Chambers:

It travels well, too, by the way, you know what I mean? Which is a huge component. The actual food does. It travels, but a local restaurant?

Kevin Lewis:

Back to the barbecue theme. I first say that I don’t have a favorite barbecue. I just love barbecue, so it’s fun to, when I go back to Virginia or the Southeast and to taste the North Carolina barbecue, which is a distinct flavor, I love it there. I go to the Southwest and taste, and the flavor of the Southwest barbecue down in Texas and Oklahoma. The Kansas City barbecue has its own unique style and flavor. I’ll point out there’s a place called Joe’s Kansas City Barbecue, very famous, and so I love that. I guess you’d say that I love barbecue and being able to sample it all over the country and just admire the different takes on what they use to put in the barbecue, to flavor the barbecue, and again, I declare no winner, but maybe the food is a winner as barbecue instead of a regional favorite.

Trevor Chambers:

Yeah. My father, who taught Latin, among other things, when we didn’t like something at the table like broccoli or something like that, dinner table, he’d say, [foreign language 00:56:48], which is Latin means “In matters of taste, there can be no dispute.”

Kevin Lewis:

Wow.

Trevor Chambers:

When it comes to, you can’t. What’s better? It doesn’t matter. It’s all of it. Yeah. You talk about history. You know what I mean? There’s a lot of time and a lot of subtlety put into those recipes, a lot of subtlety. You know what I mean? Cool. Kevin Lewis, I think you’ve done a hell of a job here. You’ve given me a little, about an hour of your time that you’ll never be able to get back, but I hope it was worth it. I had a great time talking with you.

Kevin Lewis:

It’s been a fun conversation. I appreciate it.

Trevor Chambers:

Yeah, I appreciate it, and I really appreciate you contributing to this series. As I said, it’s called Meet the Masters, and I just love to talk, obviously, with a guy like you. With 35 years of experience, you certainly, I think, have had great success and will continue to have great success. I just love talking to guys like you. Listen, stay safe. Everybody cool up there in your family, I take it, with the COVID thing and everything? Everybody’s healthy?

Kevin Lewis:

Yeah. We’re all safe and secure, so that’s great. I hope for you and all your listeners, that’s the same with them, too, to be safe and be secure.

Trevor Chambers:

Yeah, I appreciate it. Do you guys have a box at the Arrowhead, or at least you go there?

Kevin Lewis:

American Century does, yes.

Trevor Chambers:

That’s what I mean. Yeah, yeah, yeah.

Kevin Lewis:

Not Kevin Lewis.

Trevor Chambers:

You may not get in there. I don’t know.

Kevin Lewis:

I have occasionally been in there as our clients have come in. I’ve had the occasion to be in there. It’s a very fantastic venue to see the Chiefs up front and very nice. Yeah.

Trevor Chambers:

What a run last year, and I suspect you guys are going to have a lot more because you locked up your guy there for ten years. How exciting. How exciting to have something like that in your hometown. That’s just killer. All right. Listen, you keep trucking. I appreciate the time, and maybe we’ll have you again down the line. I’d love to have you.

Kevin Lewis:

I’d love that opportunity, and maybe, hopefully it’ll be a scenario when I can travel out to Raleigh, out to that part of the country, and we can do this in person, but if not, we’ll certainly make sure we do it online like we’re doing right now.

Trevor Chambers:

Yeah. To that point, when you do come in, when we do do in-person events, we do it at a place called the Carolina Exotic Car Club, which essentially is a country club for people who like cars.

Kevin Lewis:

Wow.

Trevor Chambers:

It’s a great room filled with all sorts of cool exotics and classics, and it’s also an event space, so we’ll do it there, and I’ll bring 20 to 40 of my favorite friends, all right?

Kevin Lewis:

Fantastic.

Trevor Chambers:

All right. All right, brother.

Kevin Lewis:

I’m looking forward to that. All right.

Trevor Chambers:

Yeah, no, you will. Believe me. You’ll love it. Kev, thanks a lot for the time. By the way, I have a brother Kevin, and you are definitely smarter and better-looking than him. I do love him, but I’m just telling you. You’re a little higher up on the totem pole than my brother Kevin.

Kevin Lewis:

I appreciate that. I’m sure he has strengths that far surpass mine. We all do.

Trevor Chambers:

Yeah, I don’t know. It’s debatable. He used to torture me a lot as a kid, so I don’t know, but Kev, thanks a lot for your time. I appreciate it. Have a great week.

Kevin Lewis:

Thank you.

Trevor Chambers:

Thank you.

Kevin Lewis:

Talk to you. Bye-bye.