Subscribe to the Podcast:

On this special edition of Marks on the Markets, Richard and Luke are joined by Patrick Farrell, the co-founder of Potomac Angel Capital. 

The group connects like-minded investors with mission-driven entrepreneurs for mutual financial benefit, lasting impact, and meaningful relationships. 

And in this episode, Patrick is going to dive into the unique opportunities and challenges that come with angel investing.

He and Luke will also highlight some of the specific market trends to be aware of for anyone thinking about early stage investing.

Find the Potomac Angel Capital video here: https://www.youtube.com/watch?v=bvRsD7xB9zM 

If you like the content, please follow, rate, and share the show.

Episode Transcript

Joseph Honescko: Have you ever been bit by the church parking lot deal? You know the situation. A well-meaning believer with access to capital wants to support another well-meaning believer with a business idea, since they worship alongside each other on Sundays. The investor feels that it would be right to help the prospective entrepreneur out. So they shake hands and agree to work together. And that’s about when the problems start to arise. Without proper expectations, setting agreement upon terms, due diligence, strategy, planning and execution, the business fails and the investor loses money. These situations are often far too familiar amongst faith driven investors, so much so that many have separated themselves from investing in these risky early stage ventures, which makes it difficult for these potentially impactful businesses to find the funding they need to survive. So what if innovative investors could redeem this type of investing? Today, on a special episode of marks on the markets, Richard and Luke are joined by Patrick Farrell, the co-founder of Potomac Angel capital. The group connects like minded investors with mission driven entrepreneurs for mutual financial benefit, lasting impact and meaningful relationships. In this episode, Patrick is going to dive into the unique opportunities and challenges that come with angel investing. He and Luke will also highlight some of the specific market trends to be aware of. For anyone thinking about early stage investing. You’re listening to the Faith Driven Investor podcast. Let’s get started.

Rusty Rueff: Hey everyone! All opinions expressed on this podcast, including the team and guests, are solely their opinions. Host and guests may maintain positions in the companies of securities discussed, and this podcast is for informational purposes only and should not be relied upon as specific investment advice for any individual or organization. Thanks for listening.

Richard Cunningham: Well, hello and welcome everyone to the Faith Driven Investor podcast. We are grateful you are tuning in from wherever you get your podcast from. If you were not with us in our most recent recording, I am Richard Cunningham, I’m on staff with FDI and I have the great privilege. I don’t know if it’s a good thing or a bad thing. Luke Roush of taking over the hosting roles in this next season of the FDI podcast, and the heart behind it, is we want to get you and John Coleman and Henry Kaestner out of the host seat and into that kind of expert analysis, color commentary seat. John Coleman last week said, hey, this is a coup. And he wasn’t very happy about it. I haven’t gotten the opportunity to publicly comment on this yet. So here’s your opportunity before we welcome our man, Patrick Farrell to the show.

Luke Roush: Hey, have you this is a major upgrade, major upgrade to have Richard Cunningham in that seat. Let’s go buddy.

Richard Cunningham: Man, I just I wholeheartedly disagree, but your words are kind. Today is going to be a lot of fun. We’ve got a very close friend, leader in the faith driven investing landscape, and our buddy Patrick Farrell, newest resident to my hometown of Austin, Texas, which I’m particularly excited about joining us today, talking about kind of in the series that we’re doing post FDI conference, where we zoom in on particular stories that we shared in the 2024 FDI conference back in January, Potomac Angel capital being one of those. And the work Patrick’s doing leading that charge. So we’re gonna get to hear from that. But then today’s also a unique marks in the market podcast. So we’ve got Luke and Patrick also providing some insights on, you know, what is relevant to this conversation being early stage investing, direct investing, Luke and their work out of the sovereign venture funds, Patrick and his work with Potomac Angel capital. So you’ll get a little bit of market commentary as well as we think about this conversation with Patrick Farrell. Welcome to the show, man. Grateful you are here. How’s it going.

Patrick Farrell: Man? It’s great to be here just about 75 yards from where you’re sitting, Richard says. Super fun to be live from Austin, Texas. And man, been a fan of the podcast for years, so it’s such a joy to be on it.

Richard Cunningham: May. We’re pumped to have you here. So let’s dive right in. Patrick Potomac, Angel capital. The story was told at the very end of the FDI conference, this incredible representation of what it looks like for faith driven investors to get in the game. For those who couldn’t join us for the FDI conference, maybe give us a little kind of response and commentary of what it was like to have that story told in the FDI conference, but also catch those up who maybe might not be familiar with the work of Potomac and what you guys are doing.

Patrick Farrell: Yeah. Well, I mean, it’s one thing to be sort of living that story day to day, but then to see it on video production and, you know, broadcast across hundreds of cities with such a blessing. But I found myself kind of sitting there at the watch party here in Austin going, man, guys are really up to something. And obviously I know that because I’m living it. But it really struck me just to see it up there and just to be humbled by how God has been building this thing and that I’m along for the ride. So that was so awesome to have it featured on the conference. Yeah. So a little bit of background, Potomac Angel capital. We’re an angel network based out of Washington, DC. We invest in mission driven founders from mostly in the United States, but also some internationally. And all of our investors are based in DC. They’re all faith driven investors, and we’re doing early stage angel investing. And so our our angel investors are part of a group that invest together in these early stage companies. And we’re investing really for three things. One is for meaningful impact. So these companies that we’re investing in, our mission oriented and really participating in God’s redemption of all things we’re looking for. Founders are open to relationship. We want to walk alongside founders for the tumultuous journey that is entrepreneurship. And then obviously, we want to look for we’re looking for financial upside. So we want to make sure that these ventures are providing profits and returns to their investors. And so we’ve been doing that for a couple of years now, and it’s been super fun to kind of engage in that space.

Luke Roush: One of the things that we talk a lot about, Patrick, is this idea that it’s not a bad thing to be wrong for like 95% of investors are entrepreneurs, as long as you’re the absolute right thing for the other 5%. And some of what came through, I think, in your video is, you know, a real filtration of, hey, we want to be known for being different and having a different approach in terms of how we engage on both sides of the ledger, maybe speak a little bit more of that just in terms of like a real niche that you have carved out, feel like God’s called you into.

Patrick Farrell: Yeah. Great point Luke. I mean, I think part of it is we’re going to be doing excellent deals. So that’s the foundation being excellent investors. Part of what we’re up to. We’re not making any concessions there. But ultimately what we’re saying is at the end of the day, what we want it to be is like a facilitator of relationships, relationships between the entrepreneurs and investors, relationships between entrepreneurs and entrepreneurs, investors and investors, and ultimately facilitating the relationships between all those stakeholders and God the Father, the son, and the Holy Spirit. And so there’s like this relational focus. And so we. Specifically and intentionally structured our processes, our conversations, the way in which we’re engaging with founders to say, hey, relationships are going to be at the center and at the core of this thing. And if you’re open to that and you want us around for the ride good, if you’re not, that’s okay. But we’re probably not a great fit for you. And so we’ll do things like be really transparent in some of our feedback, where we know a lot of our peers are a little bit more hesitant to do that for a number of good reasons. We’ll make sure that we’re trying to bless entrepreneurs in our feedback as well, where we’ll support them even if we don’t invest in them. Really just trying to create that sort of relational focus. And that’s really what’s built a community on top of the deal flow that’s been so powerful to see and how it’s blessed the DC area.

Richard Cunningham: I love it. Well, Patrick, one of the things we talked about and we talk about often here on the podcast, but both just broadly across kind of the faith driven ecosystem, is this concept of getting in the game. And for investors everywhere, kind of wherever the Lord is uniquely positioned them. Hey, what does it look like for you specifically to get in the game? I think we’ve got two great exemplars here, represented in both of you and what, you know, Luke, the work of Sovereigns Capital and what you guys are doing. And Patrick, what you guys are doing to Potomac Angel capital in the opportunity you’re offering for investors in DC and coming soon to Austin, I think, is what you’re going to get into a little bit later on the opportunity to get in the game, maybe kind of from a definitional standpoint here. I think people here, early stage investing, they hear angel investing, they hear venture investing. And a lot of these terms start to mean the same things to people. Would you both kind of maybe distinguish your approaches, what makes them unique, and maybe just educate a little bit about, hey, venture investing out of a fund what sovereigns is doing along with other venture capital funds, angel investing, and kind of this community oriented approach through Potomac and take us to school a little bit guys.

Patrick Farrell: Yeah, for sure. Well, I’ll start Luke. And then you could kind of add some color on the fun side. Typically when, you know, early stage companies are starting to raise capital, oftentimes they’re a little bit too early stage, a little bit too risky for institutional capital. And so what ends up happening is they have to go to family and friends or high net worth individuals, folks that they’re in relationships with or folks like us, angel networks to try to raise that sort of really early capital. So typically we’re working behind companies when they’re just getting to market, just building their team and really getting behind them and hoping to and not only see them take it all the way through exit or acquisition or IPO or through profitability, but also hoping to get in and kind of create that bridge between where they are right now and where an institutional investor can get behind them. And so typically we’re writing smaller checks in a fund would. Right. We’re taking a little bit more of a minority position. We’re investing on instruments that are facilitated to make the deals run faster. So there’s not a ton of legal. And we’re really jumping in early early stage with these entrepreneurs. And then hopefully if we’ve made a good bet the company grows and as well. And then a firm like sovereigns is able to kind of hop in and provide some more fuel to the fire. So that’s where I’d kind of create the bridge to you Luke.

Luke Roush: Yeah. You know, I think that the red thread that runs through everything that we do is really centered on leadership. And our view is that, you know, faith driven cultures are not just created, but also stewarded and perpetuated over time by the right leadership team that continues to make that a priority and really living out, you know, what does it look like to love your neighbor in and through a company? We have tremendous influence. And, you know, in a lot of ways, Patrick, you’ve got even more influence as an early, early stage investor. Maybe one of the first, you know, checks into the business, and that comes with an incredible amount of influence. And that influence can be shepherded, for better or worse. So capital equals influence and that influence. If you find not just alignment around the what we’re doing, but also why and how we’re doing it, there’s real power in that. And I think that that creates an environment where the entrepreneur feels more free to be able to share, not just on like, hey, this great thing happened or that great thing happened, but also, hey, here’s some challenges, here’s some real struggles that we’re having because it’s not just about the what, it’s also the why and, the how. And so for our work, you know, we’re looking for companies that have demonstrated product market fit. They have some number of customers that are already coming in the door. And we’re looking to, you know, find individuals, leaders that we believe in, the vision that they’re casting. They understand the problem they’re trying to solve. There’s enough of a market fit validation to feel like, all right, this isn’t just a total flier napkin. And then, you know, but both of us, you know, an area where I think both of us can find a lot of commonality is patience. It almost always takes longer and takes more money than you think it’s going to take. And also just that, you know, hey, great companies are usually built over, you know, a decade or more. And so this idea of kind of quick in and out or, you know, pulling up a plan every ten days to figure out whether the roots are growing is not a great way of keeping track of businesses. You got to be able to let that stuff, you know, ride a little bit and be patient. So I think that’s how we fit together.

Patrick Farrell: Yeah, as Luke said like this is a long game that we’re playing. We’re not investing in really liquid assets. These are companies that are growing and scaling and hoping that, you know, within 5 to 7, sometimes even ten years to provide an exit to investors. So we’re thinking about the long term redemptive impact and upside financially, which means that for our investors, they have to be willing to kind of weather that long period of time without having that sort of liquid option. And they also have to understand that at our stage, it’s a very risky game. We’re talking about a point in time where there’s no guarantees that companies are successful, but that’s also what makes it really, really fun and makes it really, really valuable to walk alongside entrepreneurs, because that process is such a roller coaster and can be so emotionally stressful and puts stress on their families. And so we want to walk alongside for that journey because they got to make it out of the early stages. They’re going to get to the later stage. And so yeah, just wanted to add some color on that Luke because I think, as you.

Luke Roush: Well know, it’s like, you know, a lot of times people will say, you know, it takes a village to raise children, but if you really want to build, you know, an angel portfolio of investments, it’s probably going to take more than just you. Right. And so I get pinged all the time by hey, would you look at this deal for me? Tell me if you think it might be a good angel. Deal. And my response is always, well, you know, how many angel deals have you done or do you expect to do? Because if you really want to build a portfolio of angel deals, because of the risk in the timeframe that you described, Patrick, you got to be prepared to write 15 or 20 or 30 checks, and the likelihood that you individually can diligence that many different types of companies that are likely to come across your plate, it’s very low. That’s going to be much better done in community with other people, where you can rely on one another and a close knit circle of trust and rely on the strengths of the group. And that’s that’s what you guys have really leveraged, I think.

Patrick Farrell: Yeah. Luke, we’re going to have to get you out there doing the sales pitch for me at some point, because that’s exactly right. It’s really about the community doing deals in community, reduces the risk for the investor, but also just having somebody else to get eyes on, having me and my team around to help diligence the opportunity to help filter those opportunities. Man, it just makes doing it so much easier. And so yeah, 100% with you on that one.

Luke Roush: Yeah. And it’s like after you write a check. Right. So like we always kind of laugh when firms will put out these press releases of like, hey, we wrote a check, right. That’s awesome. Like, it takes a lot of work to originate a deal, to diligence a deal, and then actually, like structure a transaction and wire the money over. But like a lot of the hard work, particularly in this early stage of venture investing, is still ahead of you. And so it’s not, you know, something to be celebrated with, like, hey, we raised all this capital or we invested all this capital. What’s really to be celebrated is how do you walk alongside, you know, the team, as you said, it’s a lonely journey and the work of actually monitoring performance and being able to help founding teams look around the corner and like what’s coming next. You know, you, Patrick and the folks that you have a chance to work with and invest with, you know, you guys have a lot of pattern recognition collectively amongst the group. So helping founders kind of look around that corner and figure out what’s coming. I mean, it’s extraordinary intelligence that founders are able to bring in through having the right investor pool.

Patrick Farrell: Yeah, yeah, 100%. And especially since, like a lot of the folks in our group are either entrepreneurs that are like in long term businesses that are just cash flowing in their investing out of that, or they’re former entrepreneurs who have had an exit or multiple exits like they’ve been there, done that. And that sort of experience is huge when you’re walking around, you know, trying to help a founder look behind the next curtain or the next stage of growth is just having somebody who’s been there. So that’s a huge value that we bring to the table as well.

Richard Cunningham: Love it man. You guys, I could just put a quarter in and watch you go. This is great. We need to realize that the NPS score of the FDI podcast will be a lot higher the less we hear the Richard Cunningham voice. So, hey, while we’re talking maybe methodology and kind of, you know, some of the uniqueness, nuances and similarities between angel investing, venture investing, maybe give us some color on just what you guys are seeing right now, some trends, commentary in the markets. I know, I mean, on a public markets front, we’re potentially about to close here recording this on Leap Day. Just so everyone’s oriented of where we are February 29th, 2024. We’re about to close with maybe S&P 500 and Dow Jones being up the highest they’ve been as a first two months start to the year since pre-COVID levels. So stock market kind of persists on that. We’ve been down a couple of days this week having a positive start to the year, but maybe bring us down to the earlier stages in the venture kind of sandbox fellows, and give us some kind of what you’re seeing.

Patrick Farrell: Yeah. Well, especially it was almost a year ago when SVB collapsed and that was I think, a marker in the market for us because 2022, I think if you look at the data, was a record high in terms of valuations, money pouring into the early stage, and all of a sudden SVB collapses, market starts to take a turn. And we saw a lot of companies that typically would have moved quickly to institutional capital end up going back to angels and kind of re raising and trying to kind of weather that storm. And so also and we had this kind of flood of deal flow, flood of quality entrepreneurs because all that institutional capital sort of dry up. And so we’ve seen in the last year or so just a ton of high quality, amazing deals. And our investors are starting to be like, man, we’ve got an opportunity cost. We cannot invest in everything. And so. Subsequently because so much of supply, maybe if you were to use it in a sort of economics term, has flooded into the angel stage. We’ve consequently seen valuations come down a little bit in a later end of last year, early end of this year. But now I think that the market is starting to open back up a little bit. Capital is flowing a little bit easier, and some of those entrepreneurs that are in that kind of middle ground are starting to be able to raise capital, which is awesome, because that’s what we want companies to be able to kind of increase and improve in stage and kind of grow and of course with their timelines. But it’s been a flood of interest and the angel stage that we didn’t quite anticipate, and that’s coincided with Potomac Angel capitals brand. And just the fact that we’re doing deals has also kind of gotten out there a little bit. So some of that might be intertwined. But yeah, we’ve seen a lot of folks coming out of the pandemic starting businesses hitting that Angel stage right around now. And so it’s been really fun to see what folks are innovating on out there. But Luke, just curious if you agree with that, what you’ve seen on your end.

Luke Roush: Yeah, no, I do. I think when you start a firm deal, flow is at first it’s harder than it should be just because people don’t know who you are and at times you don’t even know who you are. You’re kind of figuring out you’re building the plane or building the car while you’re running it. I think later it actually is almost easier than it should be because there’s a recognition of the brand and there’s a recognition of the relationship that you built with founders and with your investors. And so the more differentiated you are, the quicker you can build that differentiation and really attract deal flow. And so this is why, you know, a handful of firms in Silicon Valley that have really built expertise, whether it’s fintech or whether it’s AI or whether it’s software as a service. And then once you kind of have that reputation, then everybody’s kind of coming to you. And I think on an angel stage basis that’s done more locally, regionally than it is, like monolithically in a market, like a Silicon Valley or Boston or someplace like that. So I think that is actually encouraging. Should be encouraging to founders everywhere that you’ve got an opportunity to you don’t have to get on a plane and go out to Northern California to be able to attract early stage capital. There are groups that are more local, regional trust based, with real deep roots in a market. And that’s what you guys are doing. I think what we’ve seen in terms of deal flow is because some of the funds that were investing, you know, five, six, seven, eight, even ten years ago, the public markets effectively shut down. So some of the companies that grew up during that period and would be responsible kind of counted for to be able to return capital back to the original investors, which would create an kind of virtuous cycle of them. Redeploying all of that liquidity in the public markets has kind of gotten locked up or at least put on hold. And then, you know, when you think about M&A transaction volume, right, the two major ways for a company that is one of your investee or one of our investee to exit is either go public or get bought in. The M&A volume over the last 18 months has been really, really slow. We are seeing that start to change. But I think that over the last year or so, that has resulted in a lot of companies that are needing funding in some of the pockets that they might have gone to for that funding are still kind of waiting to get liquid on their stuff from 5 to 10 years ago. So it’s a long road and there are kind of like ebbs and flows and deal flow based on things that are entirely outside of a founder’s control. So I think I agree with what you shared.

Richard Cunningham: Good words. Thank you both. Yeah, I’m looking at an e y study right now. And it said in 2023, venture funding kind of accumulated at $140 billion, which was low and down from already declining levels in 2022. And there’s projections that 2024 might be a sub $100 billion in kind of total venture funding type year. So Luke, that sentiment you have about just what’s taking place in the public markets, though, we’re seeing that IPO market and kind of engine ramp back up. There’s still kind of interest in the hangover that trickles all the way back down all the way to the you know, even the pre-seed and seed levels that you two play at. All right I want to kind of make a transition here. You are an incredibly humble dude. I love your vulnerability and transparency. If anyone you haven’t heard the Patrick Farrell story, you need to watch the Potomac Angel capital video because you just you get to see his heart shine through. You also get to see his just wicked awesome parents, Paul and Leonard. Just special people that are in DC. Some of the founding investors alongside friends like Bill and Dana Wichterman at Potomac. But Patrick maybe in humility, there’s some cautions out there about angel investing. Like, you know, there’s the famous line of like, I’ve been burned by the church parking lot deal. But just because we share the same faith, people, you know, walked into a deal with, you know, poor expectations around terms and people get burned and lose a lot of money. It’s highly illiquid. So you have to view it. And, you know, you guys are hitting on this earlier just in terms of full blown asset allocation. And there is also this thought to is, you know, Proverbs 15:22, while there’s great wisdom in a multitude of counselors and angel investing situations, can get a play where there’s groupthink and more people around a deal actually isn’t helpful. It just slows down the process. People aren’t actually willing to talk honestly about maybe what’s going on there. So maybe in just humility, talk a little bit about this. Some of the things you’re seeing, some of the pitfalls for people to be aware of when it comes to. Angel investing. There may be honestly, some of the rebuttals or different ways you guys are trying to kind of counteract some of these thoughts as well.

Patrick Farrell: Yeah, 100%. I mean, where my mind goes to first is a lot of entrepreneurs experience angel networks as highly unprofessional, hard to get a hold of. Take a really long time to invest. And so the way we’ve really fought that is just by me and my co-founder, Mike. With the time that he has putting all of our weight behind the network. So that is my full time thing. And that allows me to do is just try to be excellent as to how we set up our processes or systems. A lot of my job is running around trying to get in touch with people, bringing people into the fold, kind of, to use a colloquial term, herding cats. And so if you’re willing to put that sort of work in, you can really make an angel network run efficiently and effectively and really be founder friendly in that process. So we do our best, but that also doesn’t always cover some of the downsides of an angel network. The angel investors are spending their own time, precious time from their family or from their day job to engage in investing. And when things get busy, it’s typically not going to be a priority. So sometimes things can slip in terms of timelines. Obviously, one of the things that can be pretty difficult to is just when founders are looking for checks that are going to want to come within, like a certain time frame, sometimes it’s hard to meet those timeframes. And so we’ve seen a multitude of things. And you mentioned groupthink. I think Potomac Angel capital, we do it better than most by trying to encourage lively debate, different opinions on certain things, and making sure that all of our investors kind of get heard when we’re having discussions about deals. But by and large, you know, sometimes there are folks in network, they’re just coming up to speed on angel investing and somebody with a lot of clout, a lot of experience at the table will say, hey, I don’t like this deal. I think I’m out. And they’ll feel maybe insecure about their interest in a deal or moving forward. And that can kind of circulate throughout a network. So, you know, we’re not immune to groupthink, even though we’re believers, even though we’re trying to do this in a really redemptive way. That is certainly a downside to the structure. And we know that. So really for us, it’s just about being as transparent and effective communicators with entrepreneurs as we can. So we blessing them throughout the process. So we’re not setting unrealistic expectations and just encouraging and educating our investors on some of the pitfalls of our structure and process so that they can be thinking through it and be acting in accordance with the Kingdom as we’re doing our work together as well.

Luke Roush: There are two things I mentioned real quick. One is just the importance, and Patrick nailed it on communication. You know, it’s okay if you gotta communicate bad news, but just make sure you communicate the bad news. Don’t just kind of sit on it. You know, we tell our team is that in the absence of communication, everybody assumes the worst. And so if it’s going to be another two weeks, call people and tell them, hey, it’s going to be another two weeks. And I know you wanted to happen yesterday, but we got two weeks, you know. And so that way at least they know where they stand. And and then the other thing I think is really, really important is, you know, a lot of the bad stories that go around about angel investors or venture capitalists or private equity folks is where people will substitute getting to the right price on a deal with terms. And so there’s a lot of structure on the deal. And certainly the saying in Silicon Valley is I’ll let you set the price. Just let me set the terms. And what that means is that, like, you know, you can overcome a lot of things. And but what happened, you know, just to make sure that entrepreneurs aren’t confused about this, newer investors, you know, what structure is doing is it’s creating situations where the interest of the investor and the entrepreneur are maybe not totally aligned. Sometimes structure can be used to create alignment, but sometimes it can be used to basically give a higher price, but then create situations where there’s potential for a win lose. And so I feel pretty strongly that the earlier you’re investing, the more clean you want term sheets to be, and not just trying to overcome poorly negotiated price points with structure that creates a lot of strife downstream.

Patrick Farrell: Yeah. And I would even say at our stage look like with our limited resources and time, sometimes if we get like an 80 page, you know, lunch purchase with all sorts of terms in it. Yeah. Here’s some of our investors off, even though we’re going to do the work to kind of run through that. And like our best, it can definitely scare folks off for sure.

Luke Roush: I agree.

Richard Cunningham: All right, gents, I want to close with this. And kind of our final topic that we’re going to wade into is Patrick, you’re clearly here in Austin, as we just talked about. Potomac, though, started in Washington, D.C. you’ve got this flourishing healthy network there, and you might be able to correct me on some of the particulars, but 14 deals done already with something like 20 members. So, you know, be sure to brag a little bit on all that’s taking place there and the Lord allowed you guys to accomplish and the early life of Potomac. But hey, what’s God doing in your story? What’s he teaching you in his word? You’re now here in Austin, Texas, so there’s clearly some kind of physical work taking place as he’s taking you to a new location. And then Luke would love for you to also chime in of just like, hey man, what’s the Lord teaching his word? What’s he showing you right now? And encourage those that are listening on the Faith Driven Investor podcast.

Patrick Farrell: Yeah, well, this is what’s really fun for me is just to kind of share stories about how God is moving in this space. So obviously we started Potomac Angel Capital in January 2022. In D.C., a really heightened focus on locality and investors faith driven investors in community Together in person, which created a really unique blend and allowed us, especially with me putting all of my time behind it, allowed us to kind of accelerate quickly and start doing deals fast. That alongside just a very willing group of investors who were partnering with God and listening to him and saying, yeah, we want to invest in these companies. So it was super fun to watch. It kind of really blow up in the first year. And then after that first year, we started talking to folks in our networks, folks that we knew, and they started to say like, hey, you guys have got something kind of unique in D.C. there’s some awesome angel networks out there, but you guys have kind of taken a different approach, a different model. We wonder if your model would work well in other cities. And so we started to explore that. And like any good entrepreneurs, me and my business partner, Mike Grubbs, came down to South by Southwest last year in Austin, just to do some market validation to figure out whether there was some demand down here for this, for the people wanted it, whether there was anything like what we had in D.C. here in Austin. And literally the first day in my quiet time here in Austin, I just felt like God was inviting me to move here, which for me was an incredibly impractical thing to think that you’re hearing from God. Mainly because I’ve been in DC for ten years. I’ve grown up in the area. I left for college and then came back. All of my investors were in DC. I had deep community church roots, all of it. And God’s like, let’s go to Austin where I don’t know very many people. And Richard, we were kind of acquaintances before then, but I didn’t have very many relationships in Austin. And so what that did is it kicked off sort of a discernment process with some of the people that were holding me accountable, walking with me in my life, and turned out that everyone was thumbs up, even my parents who were sad to see me go. We’re like, I think this is what God’s doing. And so I came down here in the fall to Austin, moved to Austin full time. I still go back to DC about a week, a month just to manage the relationships and all the good stuff that God is doing at Potomac Angel capital, and that’s still my day job. But I’m down here creating relationships, casting vision, hoping to plant a new network of investors down here with a similar ethos to Potomac in local community faith driven. What does it look like to do this thing together here for the good of the city of Austin? And then obviously all the companies that we’re founding and walking alongside. And so that’s kind of created this is sort of an adventure for me down here in Austin, just following Jesus on every next step, letting him lead the way. And man, it’s been really, really fun. And so, Richard, as you know, we’re co-hosting pitch event and panel next weekend at South by Southwest Sunday service, which is going to be unbelievable opportunity, such a huge conference, but also just to to put faith in the marketplace on display. And Richard’s going to be joining us on a panel for that particular event. So that’s super fun. But just see what is up to here in Austin. And I’m droning because it’s so exciting. But man, this city is really, really taking off. God is doing some awesome things, moving some great people here. And so it’s been really fun to just be on this adventure, with Jesus so far.

Luke Roush: That’s great. Yeah, I think for me, I’m just going to pump like one book that I got and I’ve been going through, same as ever that’s written by Morgan Housel. And it’s just, you know, the tagline is a guide to what never changes. And that takes me to Hebrews 13 eight. Jesus Christ is the same yesterday and today and forever. And so I think that there’s a whole bunch of things in business, in the marketplace that, you know, we somehow kind of like discover a new every 5 or 10 years or so. But the reality is that the fingerprints of kind of lessons learned that we should be applying to the work that we do every day are all over the last 100 or 200 years. But the only thing that really is consistent throughout all of human history and will always be true, is what is the character and nature of God, and who is the Son Jesus Christ? And what is the relationship that His Son wants to have with each of us, because he loves us all equally. And so anyways, I’m excited about that. Appreciate the opportunity, Patrick, to have you on, to hear your wisdom and just, the work that you guys are doing with Potomac Angel, it’s awesome. It’s inspiring. And, I think we need more organizations like it. And, super excited to see how God uses you, not just in the DC area, but also down in, the great state of Texas.

Patrick Farrell: Yeah, for sure. And this will be my plug to say thanks to you, Luke and you, Richard, for the work they are doing at sovereigns and FDI that are really paving the way for folks like me to step up and say, hey, I got this idea. I think that can fit in this in this faith driven ecosystem. And so it’s been inspiring to follow y’all’s lead. And I appreciate all the work you’re doing.

Richard Cunningham: Awesome. Well, Patrick Farrell Luke Roush, what a joy to get to do this. Friends. We will catch you next time.

Subscribe to the Podcast:

In Matthew 6, Jesus says to store our treasures in heaven, not earth, and in this episode of the Faith Driven Investor Podcast, Finny Kuruvilla joins John and Richard to talk about what that might mean for investors.

They’ll also discuss the importance of investing with a goal and supporting others, investing in the common good, and the role of wealth in the church. They also touch on market trends and Eventide’s perspective, as well as healthcare investing and innovations.

If you like what you heard, please share, review, and follow the show.

Episode Transcript

Joseph Honescko: In Matthew six, Jesus tells us to lay up our treasures in heaven, not earth. So how is that going to work for investors? In today’s episode of Finny Kuruvilla from Eventide joins Richard and John to unpack this teaching from the sermon on the Mount and to give investors some practical ways they can implement this in their own lives. He and John both will also hit on a few market trends that they’re seeing, and they’ll talk about the ways they are continually evaluating what it means to lead a faith driven culture. All that and more in this episode of the Faith Driven Investor podcast. Let’s get into it.

Rusty Rueff: Hey everyone! All opinions expressed on this podcast, including the team and guests, are solely their opinions. Host and guests may maintain positions in the companies of securities discussed, and this podcast is for informational purposes only and should not be relied upon as specific investment advice for any individual or organization. Thanks for listening.

Richard Cunningham: Well, hello everyone, and welcome to another episode of the Faith Driven Investor podcast. We are grateful to have you tuning in wherever this podcast might find you. My name is Richard Cunningham. I have the joy of serving on staff with faith driven investor. Joined today by one of our amazing mainstays in John Coleman and John Coleman. We are in for a treat today because it is not just you and I in the podcast studio.

John Coleman: Yeah, that’s right. We are very fortunate to have one of the brightest minds in the space and someone that I’ve come to admire a lot. Finny Kuruvilla from Eventide Asset Management, one of the founders, obviously lead portfolio manager over there. And, it’s always a thrill to have Finny on. Thanks for joining us, Finny.

Finny Kuruvilla: It’s great to be with you. Thanks, John. Thanks, Richard.

Richard Cunningham: Yeah. Finny I was looking back to your podcast archives, and this is your fifth official FDI podcast to be on. And, you know, if we were to go back and probably mined the data of all of the faith driven investor videos, conference, talks, podcast, I mean, you might be our most quoted individual. So it’s hard to think of many people who have done as much for the faith driven investing movement as you have. And I also just love, you know, John, I don’t know about you, but when they look at me, it’s Richard Cunningham, comma, you know, breathing adult. But for Finny Kuruvilla it is Finny Kuruvilla at medical doctor, PhD, co-chief investment officer, senior portfolio manager, managing director, founding member of Eventide. As you said, so just what a joy to have you on and thank you for all the contributions, Finny, that you make to the broader ecosystem.

Finny Kuruvilla: Well, hey, thanks, Richard. And one of the things that I want to say in response to that very, very flattering introduction is we have benefited so much from the collaborative spirit that especially a driven investor has brought to the field. I truly believe that that’s something that honors God in that we’re supposed to be supporting one another, encouraging one another. And I just want to thank all of you for setting a high bar and showing us leading the way and what that looks like. So kudos to you all.

Richard Cunningham: Appreciate that. Well, let’s have some fun today guys. Finny, you’re catching us in this kind of theme of we’re unpacking conference talks that we’re giving, you know, recording to say on March 20th. This podcast will drop on Monday, March 25th. But a couple months ago, at the end of January, you gave this remarkable talk titled Emptying the Storehouses at the Faith of an investor annual conference. And we get to bring you on to kind of pull out some of the threads of that talk. And so if maybe for those that weren’t with us at the conference or haven’t gotten to check out your video yet, which will be all over the internet soon, maybe kind of unpack it a little bit and we’ll camp out there for a while.

Finny Kuruvilla: Yeah, sure. So this is a talk that is very much deep in my heart. In the talk, I didn’t actually get to give some of the backstory to it, but maybe I’ll do some of that now before recapping some of the talk. I was born and raised in Southern California, and my dad worked for an organization called World Vision, which a lot of, you know, it’s a humanitarian, humanitarian relief and development organization. It actually was my first job that I had when I was 16 years old, answering the telephones there. And one of the things that I did while I was working there was, you get to have your eyes opened to the plight of the global poor, and you get to see through videos. In my case, I wasn’t there out on the field. But through videos you get to see how millions of people live in different places all over the developing world. And it was such an illuminating experience to be able to see that. And then you step out of your world from World Vision, and then you’re now in Southern California, in LA and Pasadena, and you see the disparity there. While I was in college, I was very involved in InterVarsity Christian Fellowship. I still am, but while I was there, we did a Bible study through a passage where people go to John the Baptist and they say, hey, John, what does it mean to repent? And he gives a few points of what repentance looks like. But one of the points that he mentions is you who have two tunics should give to the one who has none. And I remember when I read that and study that, it just cut me to the heart because I thought, wow, am I really living like that? And I remember going, thinking about that passage in the light of what I was doing about vision and thinking again about the disparity, opening my closet, seeing that I wasn’t living consistent with that teaching from John the Baptist, who’s talking about the beginning of repentance. This is an advanced Christianity. Advance on God is the beginning of repentance. And so that ended up setting me on a trajectory of asking questions. Why don’t we talk about this as much as I think we should in the church today? And are we potentially sweeping under the rug some of the harder teachings that in some ways are? Be the most pressing for us who are living in one of the most prosperous, if not the most prosperous, economies of all time. So that was some of the background that formed me when I was in college. Specifically, the talk that I gave at this Empty the Storehouses FDI conference was on the sermon on the Mount and basically advocating that the sermon on the Mount is the place where we see the most direct teaching on how we’re supposed to be looking at money and the concept of treasures on Earth. One of the things that Jesus tells us is he says very plainly, very clearly, do not lay up for yourselves treasures on earth. And he says, that’s where moth consumes or rust destroys, where thieves break in and steal. He says, instead we’re supposed to put our treasures in heaven. And then he explains the rationale by saying, where your treasure is, there your heart is also. He goes on to say, no one can serve two masters. Either hate the one and love the other, or be devoted to the other one and despise the other. Can’t serve God and mammon. So that was the main text that I focused on. And one of the things that we took away and unpacked out of that is we ought to be taking that as face value as we possibly can. So I mentioned a couple of direct applications. So number one is we want to be investing in a way that’s directed at a goal. So if we’re investing we shouldn’t be just accumulating these piles of money. I think that’s something that’s easy to fall into if one is a prosperous individual. And if one lives in a place like the United States, where people are just kind of hoarding money and it’s easy to stop it in this place, or that we are supposed to be goal directed with our investing. If somebody says, hey, I’m saving to buy a house or start a business, great, let’s have that mentality. Let’s not have the mentality of the person who’s building the second bar. The second application that I talked about was we don’t want to be investing and take advantage of other people. And it’s hopefully something that especially. With Faith Driven Investors. We’ve talked a lot about this theme over the years, and I know you all thought very deeply about this as well, which is that investing, it should be something where we’re blessing others through that, not merely extracting value from others. And one of the passages that I think is very illuminating here is from Deuteronomy, where God says, don’t bring the earnings of prostitution into the temple because it’s an abomination to him. So God wants money that comes in his treasury not from sinful activities, but from activities that are building up the community. And so putting into practice love your neighbor, even in our investing, is a first order activity. And then I also mentioned investing just isn’t about the negatives. It ought to be about the positives as well. And we can support with our investing both the redemptive good and the common good. The redemptive good is, of course, advancing the church, advancing the kingdom, furthering the gospel, evangelism, discipleship. Common good would be helping people to be clothed, to be fed, to be whole in terms of not suffering from disease. And so that at a high level was the goal of the talk and some of the key points there. And that’s something that I think we always need to be pressing into and always reminding ourselves of some of those basics.

John Coleman: Yeah. And that’s you know, what’s really interesting is this is a topic I’ve been thinking about a little bit lately as well, and I actually started thinking about it for a World Fishing conference. So we’ve gotten to know Edgar Sandoval a little bit and just love Edgar, love world fishing. I mean, the mission that they’re on is phenomenal. And their leadership right now, I think is extraordinary. And they asked me to come and give a talk on money, how believers should look at money. And I love that sermon on the Mount passage. You know, there are well over 2000 references to money in the Bible. Many of them are cautionary statements like the love of money is the root of all kinds of evil. And yet God also clearly gives certain people in the Bible money to steward for his purposes. And it’s actually one of the blessings or tools that he offers them in order to forward his purpose. Abraham would be one of the first big examples of that, for example, or David in the New Testament. The examples are a bit more scarce, but even someone like Nicodemus could use financial resources for God’s purposes. And so the question I think for believers is what are you doing with that? And are you paying as conscious a set of attention to money as one of the blessings that God can give you as your other talents? And I think one of the things that I find at least is consistently people neglect this investing area. You know, there are really only three things you can do with money. You can give it away, you can help others with it, you can spend it or you can invest it. There’s not I mean, savings is just investing without any return. So there’s not much else you can do with it. And Christians spend a ton of time thinking about how they give away their money, even if it’s not a lot of what they give away. We spend a decent amount of time thinking about how we spend it, but I think the average Christian doesn’t think as much about the way in which they invest it, even though for many people that’s actually a bigger pool of capital than they’re giving or spending, right, for a lot of people. And anyway, I just think it’s a fascinating distinction that many Christians have drawn where they just they seek return, maybe even just to build this pile without purpose, as you described it, with their investments. But at the same time, I think God has really called us to pay attention every dollar and to make it purposeful, both in terms of the use that you’d have for it. But also, if I’m deploying this capital, like there should be some intersection with the Great Commandments or the Great Commission in the way that I deploy that capital as you’re referencing, whether that’s just staying away from the bad things, prostitution, trafficking, gambling, you know, things that are addictive, but also leaning into creating a more flourishing world for others. And I think that’s where Eventide has been such a leader in that space. But I think it’s just fascinating that Christians have not reflected deeply on that historically, or maybe as deeply as we need to.

Finny Kuruvilla: Yeah. You know, it’s fascinating what you mentioned there about some of those examples of individuals who did have financial resources. You pointed to Abraham, and he certainly be a good example of that. There is actually, in the New Testament, a fascinating passage. It’s in First Timothy chapter six, where Paul specifically addresses the wealthy that are in the church, and he tells them what they’re supposed to do. He says, don’t be haughty. And he says, don’t put your hopes in your money, but instead do good. Be rich in good works. Be generous and ready to share. So, you know, he’s contemplating the fact that there are already, at that time, plenty of people who have wealth. Another example would be John Mark, and we know that it was his home that the believers gathered in while they were in Jerusalem. And these individuals who had these larger homes tended to be those who would be the hosts, the patrons of the church. There was a very, very important function that the church required and needed in those early years. There were no church buildings or things like that for centuries to come. And so I think it’s something that is very good for us to remember. Which is that we’re not saying wealth is evil or bad or anything like that. This is not a call to condemn people or anything like that, but it’s a call to ask and hopefully challenge one another to say, are we truly doing good? Are we truly rich in good works with our wealth, and our wealth is on us now, has tremendous capacity to be a force for good or force for evil. And so I think even in the New Tetament, we see some of those admonitions and encouragements.

John Coleman: And I’ll let Richard push us forward. But I will say, you know, the one thing that occurs to me even in that passage that you’re referencing, or the two passages that you reference, is it’s not necessarily a bad thing or mindsets around wealth and the way in which we use it can be evil or can be a bad thing, but there’s never really a call to just store it up. And then at the end of your life, do something good with it. I think this is one of the traps we do fall into, like you said, is building this big pile saying, oh, what I’m good at is making it as big as possible. And then at the end of my life, I’m going to give it away over time. And I think rather everyone is called to start right this moment, thinking about the way wealth is used for the kingdom in the way it’s stewarded for God’s purposes, rather than just, you know, those of us who have proven some proficiency at kind of making wealth bigger, which is what investments is, you know, doing that for no purpose, right? Rather than deploying it according to those precepts right away.

Finny Kuruvilla: Yeah, that’s exactly right. I think it’s Ron Ballou who has this quote where he says, do your giving while you’re living, so you’re knowing where it’s going. And I like that concept because we know there are so many examples of individuals who have a lot of wealth, and instead of deploying it while they’re alive, they put it in some foundation. And this is something that I was actually just reading about. The foundations take a life of their own and often end up doing activities contrary to the wishes of the person who left the wealth to that foundation in the beginning. It’s actually the rule, not the exception. Or often things go haywire, and straying from the purposes that the individual who acquired the wealth really intended there. So I think it’s a great reminder for us, and I truly believe that that is the paradigm that Jesus is setting here is like, now give now while you’re alive. So in that treasure ahead of you, I don’t let it be corrupted here on this earth. Send it ahead and store it up for a bright future in the life to come.

Richard Cunningham: Yeah, finance that. You use the word at the end of your conference talk. It’s the arbitrage opportunity, right? Our stores of treasure here on Earth are in decay. So trade it now for something that lasts forever and just the ultimate arbitrage opportunity. I love the way you put it. All right, guys, well, that’s fun to hear you riff on just for the sake of time. Let’s keep on moving down the line. And so we’ll go back to some of those practical applications at the end, talking about those opportunities to promote good and flourishing, the common good, the redemptive good. Finny you were kind of alluding to. But for now, we want to hit on Finny. Your last FDI podcast appearance was roughly seven months ago, August of 2023. You and John had this wonderful conversation on all that was taking place in the world of health care investing and M&A markets being drier. But yet the S&P was, you know, just charging on with the likes of Meta and Amazon and Google, among others, the AI frenzy. But just love to kind of hear you guys. You know, this is not a marks in the market podcast. But Vinnie, we’d be remiss not to have you at least weigh in kind of with what, Eventide. Seeing what you’re seeing and kind of maybe since your last FDI podcast appearance as we closed out 2023, have kind of made it into the first quarter here of 24 of just what’s going on from the Eventide vantage point. What are you guys seeing? I know health care has always been a massive focus of you all. So maybe camp out there a little bit as well.

Finny Kuruvilla: Yeah, a high level. We’ve seen a lot even in the early months of 2024. Just a couple of themes and notable points here. You correctly noted that there was a lot of uncertainty in 2023, and the general consensus was that there would be a recession, but instead there was no recession and the S&P just motored higher. That was one of the stories of the year that it motored higher, despite the fact that there was high inflation in the fed kept raising interest rates. There’s still a lot of uncertainty with the economy and consensus right now is that there’ll be about a 40% chance of recession over the next 12 months. I put that with the giant asterisks because the economists were generally wrong last year. And there’s a reason why economics is called the dismal science. It’s often just very, very difficult to forecast the economy. And the joke is, of course, that economists have predicted nine of the last five recessions.

Richard Cunningham: That’s awesome, I love that.

Finny Kuruvilla: Yeah. And right now what we’re seeing is an interesting phenomenon where inflation is certainly come down compared to last year. But the S&P continues to track higher. It’s almost at 5200 as we speak right now really defying most expectations. There’s still a lot of debate about why that’s happening and why the economy is as resilient as it’s been. We’ve been in the camp that you shouldn’t buy the rhetoric of there’s going to be recession, partly because it’s such a novel, such. We’ve been in in the last couple of years, with the economy being released from all the Covid restrictions, and there’s just not good models that anybody can point to, in our view, that have the kind of confidence that should make us pound the table in either direction. So that, thankfully has worked pretty well. And overall we’ve seen that. Generally speaking, the economy, if there aren’t shocks, tends to do pretty well. And the innovation and the skills of the free market and what we know about businesses, they do pretty well about navigating through hard times. And when everybody’s talking about a recession, usually it’s not going to happen because there’s a lot of belt tightening that’s already gone on. One of the great I think, questions that we’re going to understand over the next year is what has been the role of this productivity number. So there’s this very mysterious number. It’s actually easy to understand conceptually, but it’s hard to measure empirically. So productivity is how much does a given worker how much does their output increase year over year. So I use the analogy of a person who works at a donut store and they’re making donuts. And if they can make 100 donuts a day in 2023 and in 2024, and they can make 103 donuts a day, their productivity has grown by 3% year over year, and it seems like one of the reasons that the economy has been able to do well, despite the inflation, is that we’ve been more productive than people have anticipated than economists anticipated. There’s a whole lot of reasons why that might be true, but I think one of them is not so much. AI is starting to play a role, but it’s probably a bit early to attribute the productivity improvements to AI. But it’s that there was so much belt tightening and so much concern about a recession, and companies were getting lean and mean through all of the doom and gloom rhetoric there. In that type of setting, you can actually and you typically would expect even that productivity would do well because everybody is ready and there’s not a lot of excess. And so that type of phenomenon is probably what’s been at play and why the economy has done so well, and in general, why the more people talk about recession and the more people that are fearful out there, you actually in the back of your head should be thinking, okay, good. I’m glad that there’s that fear that’s out there. And the other famous adage is that the market likes to climb the wall of worry, and it descends the slope of hope. And there’s definitely been a robust wall of worry that the market has been climbing over the last couple of years.

John Coleman: Between that and the blue quota, I’m getting a new appreciation for Finney’s ability to rhyme and create memorable markets.

Finny Kuruvilla: You know.

John Coleman: Finney, I would just say I don’t know how you think about it in general. I’m so skeptical of people trying to time markets without a specific reason, a time. Right, like, you know, right now, for example, we’re super cautious about office real estate, but there’s this specific set of context around that that makes you nervous about that sector, that particular asset class where you can identify, I think, generalized concerns about recession, market timing, cash on hand. It’s so difficult to predict in my mind. And if you look historically, by and large, just continuing to allocate in the way that you would with the tranches of, you know, you want to diversify your asset classes, you want to be thoughtful about the way in which you position a portfolio. But if you do that and you just stay in markets, typically that’s the best solution over the long run, rather than seeking to time more aggressively without a specific conclusion. And that’s been my push to folks right now. I mean, this is not financial advice on this podcast, obviously, but, you know, it’s very easy to get whipsawed by all these predictions. Market timing is notoriously difficult. And just as often as you get out and avoid a downswing, you miss a major upswing. And I’m with you. There are just so many long term reasons to be confident that, at least in the United States and in a fair number of other economies, the long term trends are oriented towards greater productivity, whether that’s AI, robotics, which is more of a real time thing. I think even in the industrial space, things like that, all these technological innovations are oriented towards improving productivity and output, and there’s really been no major setback on those. So I continue to feel the way that you feel, which is don’t overthink the timing of markets, or at least that’s the way that I would put it. Stick to what you feel confident in in your allocations, and make bets on those specific things where you feel you have a good understanding of where things are headed.

Finny Kuruvilla: Yeah, I couldn’t agree more. One of my mentors, who I’ve actually never met but I call my mentor because he made such a big impact on me through his books is Peter Lynch, and Peter Lynch has this great concept, which is that more money has been lost trying to time and dance around corrections than in the corrections themselves, that all of the artful positioning is not actually hostile and adverse to one’s net returns. I mean, there’s so many ways that one can show that we’ve got a lot of charts, and I have a whole lot, actually. We’ll talk about addresses this, but you’re absolutely right. And rather than timing the market, it’s time in the market that’s a better predictor of your long term returns. And you correctly noted that there are typically a handful of days. In a year that are going to be these massive upside drivers. But if you miss those days and I actually gave a talk on this, that this entire archive, if you miss those days, those handful of days in the year, I don’t have the exact number on top of my head, but your returns are a fraction of what it would be then if you are just simply staying in the market throughout it all. So yeah, it’s it’s a very important lesson to learn that most people haven’t learned really well. And I hope those timeless principles would be things that we would go back to again and again and remind ourselves that despite the fear, despite all of the rhetoric out there in general, it’s the more boring strategies that tend to outperform the more sophisticated ones.

Richard Cunningham: Yeah, I’ve heard it before. You got to be right a lot of times in terms of when to get out, when to get back in, the highs and lows and all of it. Might as well just be right once and stay in. What about on the health care side of things in terms of a very capital intensive, highly innovative field? You know, this is something you and John got into in your recent podcast. These fields tend to be hit pretty hard by the interest rate environment, as they need capital infusion as they’re oftentimes not profitable. Even tide has a big focus in that space on the health care side of things. What are you guys seeing there?

Finny Kuruvilla: Yeah, the space thankfully has come back a lot since we spoke last, and it’s been really good to see that we’re starting to come out of some of that very fearful capitulation that was happening, particularly in the October 2023 time period. So it’s been nice to see that. I still think we have a long way to go to come back to even be average. So we have this odd situation right now where the so-called Magnificent Seven, Meta, Amazon, Google, those types of companies are trading at very rich multiples and very lofty valuations. But we’re still in the situation that a lot of those smaller cap, more capital intensive industries like biotech are still considerably lower than they would normally be valued. And so that’s a first observation there. Second observation, I would say, is that on the innovation side, it continues to actually accelerate. And so even in the last couple of months, there have been a number of significant advances on the obesity front. So we’re closely watching this field. I think everybody knows now about [….] and all that. That’s just the very first gen medications. Those are injectable. We know that those medications have pretty serious liabilities, chief of which is that when you lose weight, you lose both fat and muscle. And it’s widely appreciated that you don’t want to be losing muscle mass in the same way as losing fat. But that’s what these medications do, is they’re dropping both together. There’s some very interesting innovations that are happening there where it’ll still take some time to work out a lot of the details, but. I’m confident that over time, we’re actually to get to medications that are going to be actually enhancing or at least stabilizing muscle mass, and it’ll be selective loss of fat. So that’s a pretty exciting development that is still in the clinical trial stage, but it’s something that we’re actively investing in. Another highlight here that I’d like to touch on just briefly, because I mentioned this last time, was we talked about this Car-T concept, which is to remind everyone that is. But Car-T is basically a way where you engineer your own immune cells to attack cancer cells. And I told the story of a little girl named Emily Whitehead, who was the first pediatric patient ever treated with one of these Car-T approaches where basically they do a blood draw, they take out your immune cells, they infect your immune cells with a virus in a dish, and that virus retrains your immune system to attack the cancer that’s inside of the body. You grow up those cells and then re infuse them back into the patient. And I told that story about her and she literally had her leukemia. She was going to die. She was on her way to go to hospice. And within 23 days her leukemia disappeared after receiving treatment. So that has now been extended. And this is like hot off the press just last month. So February of 2024, somebody said, hey, maybe we can use that technology to go and attack the cells that are creating autoimmune disease and in particular the disease called lupus. And they published in the New England Journal of Medicine, which is the top journal in the medical world that they were able to induce these patients into remission for one year. No disease, no steroids. It’s pretty amazing that now we can train the immune system to attack the bad cells of the immune system that are causing these autoimmune conditions. So it’s not FDA approved yet. It’s it’s still in clinical trials. And so we’ll hope that this crosses the finish line. But how exciting is that? I mean, just amazing. And then just last week. So again very hot off the press just down the street [….] At Mass General Hospital right here in downtown Boston. They use that same technology for brain cancer. So brain cancer is one of the more deadly forms of cancer that’s very difficult to treat. And what we know now is that this same type of therapy, works not just for liquid tumors like leukemia, which is what Emily had, but now we’re seeing it work for solid tumors as well. So again, it’s early stage, not FDA approved, but incredibly exciting here. And so we are in and I think what is easily characterized as the golden age of taking immunology and harnessing our immune system to address very serious diseases like cancer and autoimmunity. So I am just thrilled to see this innovation that’s happening at a very brisk pace. And my full hope and confidence is that as this accelerates, we’re going to get more and more of these therapies that cross the finish line to FDA approval, and our health care is going to continue to get better and better. So very exciting days for us here in the biotech and health care world.

John Coleman: Man, I always leave these conversations like very encouraged. Finny not all of our investment topics are quite this encouraging, both in terms of, you know, it’s such a natural intersection with this idea of human flourishing. Right? And even, you know, even when I like, think about the New Testament in such a simplistic and stupid way, a lot of what Jesus did when he was working miracles was helping people with their physical ailments, right? As almost an analogy to what could be done for the soul. Right? But also to just care for people physically here on earth. And you get to work in a space where that’s the goal every single day for everyone who’s working in this market is to try and make human life better. Maybe that’s a nice way to transition into the way that you guys think about faith and values in the context of the portfolios that you’re building. Again, there is this natural intersection with human flourishing, particularly in health care, which you’re so focused on. But how does Eventide think about the incorporation of values? Think about the promotion of human flourishing investing that makes the world rejoice in the context of your portfolios. And how are you all thinking about innovating on that every day?

Finny Kuruvilla: Yeah, it’s a great question, John, and it’s something that all of us who work in asset management, in any kind of faith driven way, ought to be constantly challenging us to. We would all concede that we’re in the early days of figuring all this out, and we’re trying to develop frameworks that are better and better and stronger and stronger, that respond to all of the dynamism of the markets. And we all know that markets are living, breathing animals, and we better be responding as well and sharpening our tools and our ethics. There’s a lot to be said here. There’s both issues, specific areas that we’re investing a lot of time in. And then there’s frameworks and heuristics that we’re trying to refine in terms of how we look at management. So. On the issues specific side of things. There’s a lot of talk right now about IVF and stem cells, all that which is in the news. And how do we bring pro-life values into these questions here. So we’ve been doing interviews with different ethicists. This week, in fact, I interviewed a well-known ethicists on the issue of life and how to think about that. I would say a lot of people who would say that life begins at conception. Haven’t thought very deeply about the implications of that. For example, stem cells and IVF, things like that. So we want to be really good and sharp in that. It’s an area where I think we’re probably just underdeveloped in general. We collectively the church are underdeveloped in general there. So there’s issue specific sets, and we would like to hopefully put out some whitepapers and videos as we learn more about how to hopefully elevate the whole field and community with us as we learn together. And then there’s the framework and heuristic side of things. How do we take our own learnings and bring that to bear and how we assess, for example, management teams or how different companies are interacting with? Save the environment or broader society, even the environment. We have a fantastic panelist here who covers energy. And how do we think about, as Christians all the questions around pollution and carbon and all of that. And it’s of course a huge field here, but we need to have views on that. And it’s easy to be reactive and to say, well, you know, this group over there, they’re hyper concerned about carbon credits or what have you. And they’re maybe not like minded to us in terms of some of their values. And so they must be wrong. So we’re going to go to some other side. How do we come up with good values here on some of these and good heuristics around what does it look like to be responsible with respect to some of these environmental questions? And I think that we’ve done some fantastic work even in the last six months, I would say especially probably be a topic of a whole podcast to get into some of the innards of that. But we’ve been investing quite a bit of time and energy, and to being able to assess our company well in terms of how they are interacting with the environment there. So those would be two of the areas that we’re refining and improving on.

John Coleman: Yeah. One of the topics you touched on, and I know there a lot of folks prefer this avoid embrace engage framework. There are a bunch of different frameworks. I think they’re helpful. But you know, there are different ones that work. We’ve been thinking a lot more about this engagement topic, which you’re highlighting, which is, you know, we have the ability, particularly in public markets, I think, to speak into societal wide questions, both generally, as you mentioned, through thought leadership, but specifically through the shareholding that we have in companies. Right, which has been a focus for us on the public equity side. The price for that is, I think you have to be really excellent at what you do to build a voice on the engagement topics from an investment point of view, which is why I think Eventide almost has the permission to speak into these. It’s what we’re seeking to cultivate as well. But I think my observation is that in cling more to the avoid side of the spectrum, historically, Christians have often missed an opportunity for what I’ll call constructive engagement. We’ve been willing to beat up on topics aggressively, but we haven’t been willing to engage in the really thoughtful debates about these topics to articulate a cogent perspective. And, you know, this idea of stem cells and IVF, for example, is one where there are obviously a huge number of well-meaning people on different sides of this debate who are going through extremely difficult life circumstances. Right. This is not a light topic and apart from it maybe the Catholic Church, which has actually articulated some principles around this in a reasonably thoughtful way. I think many of those of us in other branches, as a church, I’m a Protestant, have not been as thoughtful about our intellectual positions. And so I think one of the things I’m encouraged about that you’re talking about Finny, and even your own personal thought leadership that I hope others will take up, is how do we lean into these big issues of the day in the areas in which we’re investing, and be thoughtful about articulating a cogent set of principles for human flourishing around those, as we are our investment thesis. And I think if the great investors in the Christian worlds could do that, our ability to influence culture in a positive way would be enhanced greatly.

Finny Kuruvilla: Yeah. I will say a couple of things on this. And like you, I’m not a Catholic. I have a lot of respect for the Catholic Church, but I’m not personally one who would be considered as Roman Catholic. It’s something where one of the things that I have seen, that they have done well, and they could teach the rest of us some good lessons, and especially those of us who work on the investing side, is they have a way of thinking that I would call maybe more historically aware and more of a sense of building on that what’s come before us, you know, some of the times because of a false understanding of sola scriptura, it’s not actually legit it’s sola scripture to say the Bible is the only authority. True sola scripture says the Bible is the only infallible authority. But there are plenty of other authorities, hopefully the pastors and teachers in your home, your parents. We read books. We listen to people online. I mean, there’s varying levels of authority here. The correct understanding of soul scriptura, which I do subscribe to, is that the Bible is the only infallible authority. And I think sometimes because we’ve misunderstood sola scriptura, we believe that we kind of have to like, reinvent the wheel or just like read the Bible and come up with something, you know, spontaneously, as opposed to what’s actually a more faithful understanding of the Scripture, which the reformers and the radical reformers and everybody pointed to, which is that Scripture is the only infallible authority. But we are fools if we don’t try to learn from those who come before us. And I think that’s where the Catholic Church is, ahead of the Protestant community, in the sense that they’ve learned and they’ve built and they’ve developed frameworks and pressure tested them. And that’s something that I want to see more of in the Protestant world in general, is us give more thought to, hey, let’s learn from those who’ve gone before us and not be so chronologically arrogant that we believe that. We’ve got it all right. And everybody who’s gone before us hasn’t thought through those issues, because they have. There’s been very, very good work on these issues before us. And I think first, to make the investment of time to read and understand well what those who’ve gone before us have done and said is step number one, noting. Step number two is to somehow put together as best as we can and memorialize our understandings and whitepapers and podcasts and different discussions so that we can continue to move the ball forward in the process. And world is occasionally done that the Chicago statement would be an example of that. And biblical inerrancy is an example of where people will come together and put together these working group statements like, hey, this is what we think inerrancy means. And and even that will get revised and pressure tested. And that’s not violating sola Scriptura. That’s actually honoring the forefathers of the faith that have come before us. And so I think those will be some of the challenges that I would give to the investing community.

Richard Cunningham: Man, this is awesome. Do you guys riff on it? Kind of reminds me in ways where, hey, I’m the individual investor right now listening to you guys riff on this and it’s like, I wish I had access to John Coleman or Finny Kuruvilla on my shoulders. I’m thinking about the investment decisions I’m making, and I think eventide put out this post about engaging with Pinkston to interview Christians out there. And it’s just I think the push to everyone is, hey, you can engage with your advisor on these topics, and I think your survey results said 63% of Christians have never discussed values based investing with their financial advisor, even though 88% want to align their investments with their values. And so I think, you know, before we close here and FInny talk about what you’re kind of learning in Scripture, I think it’s just a great push to the every day and faith driven investor or the advisor out there to say, hey, these aren’t conversations that you have to reserve. Just to John and Finny on the Faith Driven Investor podcast, these are things you can lean into and your next kind of financial advisor update meeting.

Finny Kuruvilla: Yeah. The other part of that survey was that 62% of Christians are willing to make a switch to another adviser who offer investments that resonate with their values. And so it’s hopefully a wake up call that this is a time where people want their investments to be in line with their values. And you might even lose business as they go to another firm or individual who can speak to their heart values. Their most investors are more interested in those higher level conversations than they are hearing about beta and alpha and sharp values and things like that. Like that’s not necessarily where people’s hearts out. Of course, everybody wants competency. People want to know that their finances are being deployed and invested in a responsible way. But I think where the faith driven community, including the financial advisory community, ought to step up is to say, like, let’s differentiate ourselves from the robo advisors and everybody else by being able to engage at a heart level with some of these issues that are very, very important to clients.

Richard Cunningham: Yeah, that’s so good. Good words. Well, Finny, take us home. What’s the Lord been teaching you in Scripture lately? Maybe for you. All of team Kuruvilla and your wonderful family would love to hear that.

Finny Kuruvilla: I love this question, and I really appreciate that you all end the podcast with this question. Yeah, I’ll give you a short distillation of one of the themes of the last as a year of my life, but I went to a seminar. It was an all day seminar a few months ago that was put on by a group that specializes in going into hard situations where there’s been some kind of a breakdown, a church split, or a business that’s falling apart as a Christian group. And they go in and they do about 30 of these engagements a year, and they go in and try to mediate reconciliation, healing and unity to where there’s brokenness. And I’m in my late 40s right now, and I have sadly been watching a lot of my college friends go through divorces and a lot of hard experiences there. It’s sad to watch, and these are people who are in the church and know well the teachings of Scripture here. One of the things that I’ve learned is that. True conflict resolution and true unification of the church and families is a skill. It’s not something that comes naturally to any of us. It’s something that we need to be trained and prepared. And again, I wish I could talk about this for a lot longer here, but just very, very briefly. We are supposed to be the ministers of reconciliation. That’s our job description, if you will, that Paul uses in second Corinthians is that Jesus even says, blessed are the peacemakers, for they will be called children of God. How do you know that we’re children of God? The children look like the father, right? They look like the parents. They had the same skin color, hair, all that. Our resemblance to the father is that we’re supposed to be agents of peace. Because the father brings peace to the world. That’s supposed to be one known for. Unfortunately, it’s not usually the case. That’s what people think of reflexively. When they think of the Christians. They often think of divisions and splits and fightings and all that. And I am more and more convinced that because it’s a when not an if we’re all going to be having conflict in our organizations or families, etc., this ought to be a skill that is part of Christianity one on one, and we ought to be pressing so far into this that you can’t be a person who’s been sitting in a church for more than a year or two without having gone through some kind of formal, rigorous training on this. I know that sounds like a bold claim, but I really believe it. And that as I’ve gone through this training and read a book on it and really had my eyes open to the fact that here I am, in my late 40s, being raised in the church, that I hadn’t gone through this. And as I’ve gone through this, I thought, wow, I could have had a more successful 20s, 30s and early 40s had I had these skills in my tool bag. And there are very much learnable skills that require growth and challenge. But I think this is one of the great needs of our world today, is to have the Christian community rise up to the challenge of being peacemakers and ministers of reconciliation, and treating it like a discipline, just like we would treat any other discipline. You don’t learn naturally medicine, you get mentored and trained, and that you have to go through classes and exams and all that. It’s the same thing with this. Maybe not as daunting as having to go through medical school, but it’s a skill that we need to embrace there. So I’ve been thinking a lot about that and how we and the church ought to be much, much stronger on that and encourage that early on.

John Coleman: And I love that concept, and I know you’re talking about that at the individual level, but I even think at the social level, if you think about the instances over the last, you know, 30, 40 years where Christians were deeply respected for the work that they did, it was often in reconciliation, whether that’s Bishop to in South Africa, whether it’s the US civil rights movement where Reverend King and Andrew Young and others leaned into their faith and as a tool for reconciliation across differences. And it can be, you know, just such an inspiring thing for Christians to navigate.

Finny Kuruvilla: It really can. John. And let me just say one final comment on this. Jesus right after that says, you’re going to be the city on the hill, salt of the earth. They will see your good works and glorify the father in heaven. It’s through that kind of activity that the world is mesmerized with the power of Jesus, right? We live in a very broken, divided, hostile world. There’s poor dialog. It’s just it’s a mess. This is winsome. This is attractive. This is something that we can actually gain a social capital that we currently don’t have. So yeah. Amen to what you just said.

John Coleman: Finny Kuruvilla Eventide Asset Management. Awesome work you guys continue to do. Finny you’ve just been such a almost a founder in this space beyond even tide in such a pioneer here. I’m always humbled by your ability to reference scripture, usually in the original languages, which I know I definitely can’t do, I’m sure Richard can do, and it’s just such a blessing to our audience to have you on. Thank you so much for being here. And thank you, Richard, for hosting.

Finny Kuruvilla: Thank you John.

Subscribe to the Podcast:

In this edition of Marks on the Markets, Richard and John are joined by Bob Doll, the newly appointed President and CEO of Crossmark and a staple in the Faith Driven Investing movement. 

Each year, Bob outlines 10 market predictions for the coming months, and in this episode, he shares what he sees happening in 2024, how his predictions are looking after the first quarter, and how the election might affect the markets.

Episode Transcript

Richard Cunningham: You’re listening to Fate Driven Investor, a podcast that highlights voices from a growing movement of Christ following investors who believe that God owns it all and cares deeply about the heart posture behind our stewardship. Thanks for listening.

Hey everyone! All opinions expressed on this podcast, including the team and guests, are solely their opinions. Host and guests may maintain positions in the companies of securities discussed, and this podcast is for informational purposes only and should not be relied upon as specific investment advice for any individual or organization. Thanks for listening.

Richard Cunningham: Well. Hello everyone, and welcome to another episode of the Faith Driven Investor Podcast. My name is Richard Cunningham. I have the joy of being on staff with Faith Driven Investor. And I’m your host today, joined, as always by one of our incredible mainstays in John Coleman, managing partner at Sovereign Capital. And John, if we’re doing a marks on the markets episode, I couldn’t think of someone better than newly appointed president and CEO of Crossmark Global Investments, Bob Doll, formerly the CIO of Crossmark for the last three years. Bob, I’m pretty sure you’re supposed to be retired as of 2021, but here you are having quite a busy last three years. What a joy to have both of you on the show. How are we doing, gentlemen?

John Coleman: Man, I’m just excited to be here with Bob. I mean, he’s someone I’ve known about for many years. Since my, since my last position in investment management had a lot of admiration for him over the years, the various firms he’s worked at, and, of course, just one of the best guests on a podcast out there. Bob, you’re on TV all the time. Everybody’s looking for your insights. We’re pretty fortunate to get him today. Thanks for coming on.

Bob Doll: Richard. And John. Thanks for those kind words. They’re humbling because we know markets are the great equalizer. If people aren’t, the markets certainly will, hit us across the face from time to time. So it’s a thrill to be with you folks and share things as we find them at this moment. On the retirement bit, I was eligible for retirement, so took retirement, but had no intention of retiring. Making the decision to move to a faith based money manager was a joy. And since I’ve done that, I’ve looked in the mirror literally several times and saying, what took you so long? So it’s been a joy.

John Coleman: Man. I feel the same way. Bob, you and I are in the same boat in that we spent most of our careers in kind of mainstream investment management organizations, and I’d say the last three, you and I came into this space about the same time. Actually, you came in just a bit after I did, I think. And, it’s been the most fun three years of my career, so I’m glad to hear it’s been the same for you.

Bob Doll: Sure has. It’s as I know you will agree. Yes, it’s a job and it’s a career and it’s investments, but it’s a ministry as well. And that is part of the joy for sure.

Richard Cunningham: Awesome. Well, for just anyone who doesn’t know Bob’s background though, you can look it up and it is quite detailed. This is a guy who spent time at Blackrock, Merrill, Oppenheimer, Nuveen and then to kind of paint the story for you there as a listener. Bob retired in March of 2021, but then it didn’t take long for him to join back up into the workforce with Crossmark Global Investments served as the chief investment officer for three years, and then now as the newly appointed CEO and president. Crossmark is a Houston, Texas based $6.2 billion asset manager investing out of the Stuart family of mutual funds across equity, fixed income, liquid alternatives and derivative income asset classes. And so it is some retirement you are enjoying, Bob, but what a joy to have you on the podcast. We are grateful the faith driven investor ecosystem is grateful. And so to kind of set today up because this is a marks in the markets episode. If you didn’t know Bob Doll every year does this amazing thing where he releases ten predictions for the upcoming year. And so coming into 2024, Bob released these ten predictions he had for the markets and kind of the broader economy for 2024. And, Bob, if I’m not mistaken, before I get into reading off those predictions and you and John respond to those and we kind of have some kind of commentary now that we’re one quarter into the year, what’s the story behind those predictions? Am I not mistaken that these started like 30 years ago or something like that?

Bob Doll: Yeah, I’ve done them for at least 30 years. Richard. You know, a blog I had at the time was doing it, got tired of it and said, Bob, you want to try this. And I’ve been doing it ever since. I think among the things that have given us some credibility is every quarter we write up how we’re doing and then get someone to score us at the end of the year. I don’t change them during the year. I’m not a strategist like so. Side strategists change their mind and evolve over time, so we live with them all year long. We get some right, we get some wrong. And, hopefully we learn from them.

Richard Cunningham: I mean, that’s awesome. I mean, you, John, and I all come from kind of the asset management space. So my respect and admiration that you do this is high because we know how leery compliance and marketing can be of predictions that get kind of put out there. And then you have to explain them. If they didn’t go, you know, perfectly correct. How did 2023 go before we go into 2024?

Bob Doll: Not great. I tried my worst. I think it was the third time I got only five right. You know? So I despair of the year when I get three right. Three out of ten and, you know, come here. What Bob says about next year, that’s not going to go over well. We’ve average. The good news is 72% over the many years we’ve been doing it. So the problem is we never know which seven out of ten we might get. Right. If we did know which ones, we could all make a bloody fortune. I guess.

Richard Cunningham: That’s incredible. Well, I mean, it kind of reminds me, I think I’m in, like, the fifth percentile in my March Madness bracket. So as we record this, it’s March 25th, Monday of Holy Week. This will be released after Easter in April. So I hope all of our listeners have a wonderful Easter celebration. But, you know, I’m down there in the March Madness rankings. But I believe these year’s predictions and we’ll show you just how astute Bob is. So I’m going to read off the ten predictions, and then we’ll dive in letting you to kind of respond where you are first, kind of feeling compelled by. So here are Bob Doll’s ten predictions for 2024. Number one, the US economy will experience a mild recession as the unemployment rate rises above 4.5%. Number two, the 2 to 3% inflation ceiling of the 2010 becomes the 2 to 3% inflation floor of the 2020s. Number three, the fed cuts rates fewer than six times suggested by the fed funds futures curve number four credit spreads widen as interest rates decline. Number five earnings growth falls short of the double digit percentage consensus expectation prediction number six stocks record a new all time high early in the year, but then experience a fade number seven. Energy financials and consumer staples outperform utilities, health care and real estate. Number eight. And this is a final one that will return to kind of Bob talking about his movement to a faith based asset manager. This is faith based share of industry AUM rises for the eighth year in a row. Number nine geopolitical crosscurrents multiply but have little impact on markets. And number ten the white House, Senate and House all switched parties come election time in November. So there are Bob Doll’s ten predictions for 2024. Bob, as you hear that, what immediately kind of jumps out to you and allow you guys some time to just respond to those.

Bob Doll: Sure comes to my mind is the theme that envelops all these, and then I’ll let John figure out which ones we want to go after. In particular, the theme is Goldilocks remains a fairy tale. What do we mean by that? Coming into the year and to some degree, still, the expectation by the consensus is that we’re going to get double digit earnings growth. That is, the economy is going to be good and earnings are going to grow nearly double the normal rate. But on the other hand, and at the same time, inflation is going to continue to fall and the Fed’s going to cut rates. At the start of the year, the expectation was six times. Our view is one side or the other or both get disappointed. Goldilocks remains a fairy tale. Or you can have your cake and eat it too. That’s the theme for these predictions that caused us since the beginning of the year and still now to be cautious. Not bearish, but cautious. We are in a momentum driven bull market, and predicting the end of the momentum is a fool’s game and therefore you ride the momentum. But you have, you know, short leash on the market or stops not too far below the market should, in fact, the high risks associated with PE ratios of 21.5 times be a concern for the market, which I think they will become at some point. So that’s the broad panoply of this, set of predictions.

John Coleman: Yeah. You know, as I think about that, Bob, if I think about my own position at the beginning of last year, I was probably a bit too pessimistic. I thought going into last year, the chances of recession were much higher. I thought the fundamentals of the economy were likely to deteriorate in a more substantial way. I didn’t think we’d hold as strong as we have, honestly, and I certainly didn’t predict that markets would rebound in quite the way that they did. Obviously a lot driven by the Magnificent Seven. And we’ve seen technology trends and we can come to that. Now it does feel like markets are potentially overshooting a little bit, or getting too optimistic that there is a little bit of a Goldilocks syndrome. And what I’m wondering is, you know, is the fundamental economy able to continue to chart a relatively positive course this year? Maybe not in line with the expectations that you’re mentioning, but at least continuing positive momentum. And there I tend to maybe have, maybe chastened by last year or more optimistic view, which is it doesn’t seem like we’re going to have a serious recession. You mentioned a mild recession here, and maybe that’s a place to dive in. It doesn’t seem like we’re going to have to dramatically raise rates anymore, although I am skeptical that we’re even going to be able to lower them at all, potentially the Federal Reserve. And so maybe as we dive into this, Bob, let’s start with the fundamentals of the economy. You’re predicting kind of a mild recession with unemployment rising, which is not where we are right now. I think we’re effectively below frictional unemployment right now, are below what you would predict for frictional unemployment. How do you see that beginning to kick in? And are there any early warning signs that that might materialize?

Bob Doll: Yeah. First of all, 4.5% inflation, as you know, is still a very low number. In fact, in the slides I used to back this up, I show long term unemployment rates. And four and a half is barely above.

John Coleman: Right. That’s right.

Bob Doll: As you, both probably know, when inflation has moved up one half of 1%, 5/10 following that has always led to a recession. We’re up 4/10. So there’s not much room left. Of course we can break the rule. Nobody sets their rules in the economy, in the markets. But you ask, what signs are we seeing? The unemployment rate has ticked up modestly. I think we will see more of that. I would point out, while the government measures lots of things, one of the things that they do not measure well is people working multiple jobs. Yeah, a lot of people that were working three jobs and believe it or not, they’re a bunch of people are only working two now. Many are working, two are only working one now, not because they’ve chosen to, but because the job is not available to them anymore. And what I would add to your good question is the bifurcation we’re seeing in the economy and with the consumer. High end consumers are doing just fine. They’re loving life. Stock markets up a bunch, their home prices up a bunch. And, you know, taking money off the table in those areas to live if they need to, which most of them don’t is quite good. Lower level consumers clearly struggling. Their Covid money is gone and there’s evidence they’re upping their credit card balances to live. And recently in the last month, evidence that they’re taking money out of their 401 case with a tax penalty in order to live. So, again, I don’t want to be a bear on the economy, but I think there are increasing number of signs. Maybe I add this, John, if I might. Most people, myself included, expected a recession last year begging the question why didn’t a recession happen? Yeah, I think there’s several answers one, most of us. I know I did. Underestimated how much the Covid cash kept the economy going. That is money that hiring consumers accumulated because they were in their pajamas for four months and didn’t go out and spend money, or at the other end of the spectrum, got a lot of checks from the government. Took a while to spend those. Second reason is even post the Covid stimulus. Last year, the government put a lot of money into the economy, more than most of us thought. And thirdly, and this is the one I’m still researching. Private credit. Private credit exploded kind of from a decade ago, almost 0 to $2 trillion in half that expansion in the last two years. Those three things provided so much cash for our economy. That’s mainly why we didn’t have recession. So yeah, we’re going to get a recession this year. Yeah. Who knows. I do think we will get a slowdown, perhaps a noticeable slowdown that will cause this double digit earnings expectation not to make it.

John Coleman: Well, and I think just in terms of the unemployment rate, Bob. And check me if you think this is wrong. I do think some of the deflation in in the unemployment rate or at coming down was related to a decline in labor force participation during Covid as well. And all of the trends that you just highlighted would lead us to believe that that will begin to take up again. People are burning through savings. They’re having to live more on credit. Those who left the workforce are getting impacted by higher prices and by inflation and by a real affordability crisis, not just an inflationary crisis, but in things like housing, you know, a real affordability crisis spurred by continued constraints in supply. And so it does feel like more people are going to get back in the workforce. Fewer people are going to be dropping out of the workforce. And unemployment is likely to increase, at least because of that. In addition to the idea that there may be some frictions in the economy spurred by artificial intelligence or by firms continuing to cut their workforces to kind of lean up for potential troubles that could cause that number to rise.

Bob Doll: I fully agree with all of your points. There are good points to me, and underscoring what you just said is a bigger picture thought Covid has stressed and strained normal relationships. So economists have really struggled because the rule book does not include a pandemic and the experience pattern. So it’s really difficult to understand sometimes what these relationships are and what they have done and what they might do.

Richard Cunningham: Up in real quick. Bob, one of the predictions is prediction number six. Stocks record a new all time high earlier in the year, but then experience a fade. We are once again recording this at the end of Q1 2024. Has that checked out? Too early to tell to my knowledge, feels like things have been marching on and everyone’s kind of sitting there. As you guys have alluded to, scratching their head at the momentum that’s at play.

Bob Doll: Yeah. You know, the jury’s still out. We don’t know if the stock market continues straight up for the rest of the year. We’ll have to mark this one wrong. But my guess is at some point here in the first half, our guess might have been the first quarter, although we didn’t state that explicitly. We see a high for the year and then a fade. And it doesn’t mean a big bear market necessarily. And I come back to earnings probably aren’t going to make the double digit percentage gain. And we’ve already moved from six down to three expected fed cuts. And some people now are moving to two. And they’re even some people say we’re not going to get any and all of that for a PE of 21.5 times, you know, if the PE was 15 or 16 or 17, I might say that’s okay. But when PEs are, you know, in the 20s, I’m an old man. I’ve only seen PEs over 20 – 3 times. Tech bubble, Covid and now and the first two times the outcome wasn’t pretty. Let’s hope it’s different this time. But valuation when it’s this high demands almost perfection and we don’t have perfection. There are a lot of flies in the ointment.

John Coleman: Can we talk about. I do want to circle back to this idea of the interest rates and inflation in a moment, because I think, you know, that’s an important topic to touch on. But one of the things we’re monitoring. If you go one click below in the market right now is this divergence between the Mega-cap stocks, especially the Mega-cap technology stocks and small cap and mid-cap stocks. And you mentioned this price to earnings ratio at 21.5, I think was what you were talking about. And obviously that’s substantially higher for some of the Magnificent Seven or those that have been driving markets right now. For those not as familiar. There’s a group of stocks that people refer to as The Magnificent Seven lately, which is almost always a harbinger of doom. I think when you get a label like that, but includes firms like Nvidia, meta, Apple, Amazon, these big technology players that have rapidly grown, that people view as safe technology stocks with really strong earnings and revenue that have been almost all of the upside performance of the S&P 500 from an asset weighted perspective recently. And those mega caps have diverged quite substantially from the small and mid-cap stocks. What’s your perspective on that and how sustainable is that? I know on our side, we’ve been predicting that small and mid-cap have to make up some of that difference at some point, seeing that there has to be more of a return to norm. But these mega caps keep running. What are you seeing right there? What do you think might happen?

Bob Doll: You know, several observations. First of all, November, December when we got the big fed says I’m done quote unquote rally. We got a good broadening in the market and down cap or equally weighted portfolios or small cap certainly did better than we come into the new year. And it fades again. So we’re having this tug of war of late last few weeks. Small is doing a little bit better again. I agree with you. For the market to be sustained to the upside, we need more broadening, which we very well might get. And where I thought you were going, and worth pointing out, is the PE of the 493 in the S&P, those seven is lower, noticeably lower, but still not low. And that reminds you when people bring that up is you know, the stock market is always cheap. If you take whatever the bubble is out of the bull market, you know, he will do that all the time. So I tend to look at the overall and then understand the differences inside. To The Magnificent Seven. John, we’ve obviously seen some splintering. Tesla has been an awful stock. It’s had some fundamental problems and some valuation compression. And my guess there’s more to come. Apple Amazon. Those stocks have flagged a bit. They’ve broken some technical uptrend lines etc. so it’s no longer monolithic as it was for much of last year for the Magnificent Seven, which I think is healthy for the market, meaning we need that broadening to take place. So I think that, look, technology and AI is certainly among the reasons the stock market has done well. It is among the reasons bulls on the economy think it will do well. And look, AI is making a difference. It will continue to make a difference. But I wonder a bit if the stock market’s not overdone that theme.

John Coleman: You know, maybe we could touch on this topic of interest rates and inflation really quickly because inflation has come down, although it remains persistent. And the history of inflation tells us it’s always more persistent than we think it will be, or it’s almost always more persistent than we think it will be. And count me among those who thinks the likelihood that we don’t get an interest rate decrease this year is pretty high, that actually the fed has to maintain rates, I don’t know that they’ll have to raise them, but they’ll have to maintain them. And the only thing that causes me to question that a little bit is the possibility of political pressure headed into an election season where the fed will be under enormous pressure to keep the economy humming, rather than allowing it to slip into a recession because of the electoral process. Say, a little bit more just about what you think will factor into the Fed’s decision of whether to raise or cut rates or hold them steady, and whether you think inflation is actually kind of stamped out now, although it may stay a little bit higher or whether there’s real danger.

Bob Doll: So let’s put some numbers on it. As we all know, headline inflation got to 9%, core inflation to about six. Let’s stick with core inflation. Core inflation has come from six to just under four. Remember the Fed’s target is 2. It’s a lot easier to get inflation from 6 to 4 down two points than it is 4 to 2. Two more points. So I like you, John. I’m dubious. I don’t think we’re going to get to 2% inflation. If we do, we will be in a recession. Now, can it go a bit lower? We’ve just had two months of disappointing inflation numbers. Many economists argue that that would happen. And maybe that’s ending. And now we’ll begin a downdrift again. And I’m in that school. But I think we’re not going to get below three. And look is there a big difference for two and three for interest rates and PE ratio. You bet there is for the economy to some degree. It will the fed get it to three and wave a checkered flag and say yeah it’s close enough. That’s not out of the question. You know the dual mandate is firmly in their mind. Keep inflation under control and watch the unemployment rate. So like you sounds like doubtful. We’re going to have many if any cuts this year. The fed would love to cut rates for a whole bunch of reasons. And with foreign central banks beginning to cut rates, the pressure will be more from that on the fed than it will be from the politics of the U.S. election, in my view. So fed funds rate probably a little lower at the end of the year, but not much.

Richard Cunningham: What about looking at things like geopolitical crosscurrents? You know, we’ve seen, you know, a pretty devastating headline in Russia. And what could that result in, in terms of just tensions and disputes kind of in foreign markets? What does that looked like in terms of what’s going on here in our local economy, but also on a global level?

Bob Doll: It seems like every time you make a list of geopolitical issues, every 2 or 3 months, it gets a little longer. So why is that happen? My thesis is because the U.S. has lost hegemony. My analogy, is like way back when when you went out at 10:00 in the morning for school recess, you had 15 minutes to go play on the playground. It was the three of us. And John’s the big guy, the bully. We hold back a little bit from our misbehavior, because we’re just a little worried about how this bully might react. Conversely, when there’s no bully on the playground, everybody does what they feel like. And that’s where we are. The world is a messy place. And yo, Russia of late. And where did that come from in the U.S.? Warns Russia? I mean, it’s just an amazing and complicated world. So I think that list will continue to grow. And so far it’s not affected markets any way at all. A lot of the reasons, because the guts of the economy has not been touched. Take the Middle East. People said, oh, conflagration in the Middle East. Oil prices are going to go through the roof and the economy is going. That didn’t happen. And it doesn’t mean it won’t happen at some point. But most of these things have been contained not to affect the economy of the world, and therefore markets have been fine.

John Coleman: Yeah. You know, I think this is super fascinating, actually, because we’ve had these two proof points in the Russian invasion of Ukraine as well as in the war in Israel, obviously, the terrorist attack in Israel and then the war in Gaza. And they have been contained to those regions. Right. By and large, I mean, there have been some impacts. Part of that is I think world energy markets are a bit more stable, especially with the US energy output being so high right now. I would say the one conflict I think that could throw the international markets into more disarray would be if something happened with China and Taiwan. I don’t believe there’s an incredibly high chance of that. But because of the Taiwanese centrality to processors at the moment, because of the role those play in artificial intelligence and in a lot of the other operations that we’d see. And to your point, the US losing hegemony, we really live in a bipolar world right now between China and the United States. I think Russia is a player. You know, there are other players, but if you think it’s superpowers, it’s really the United States and China at the moment. Absent that, I think I agree with you. I don’t think these international conflicts, unless something super dramatic happens, are likely to play a role. I do want to get your thoughts on domestic politics, because obviously that tends to have a much bigger role in markets. I’m interested in the switch parties comment because we have a one seat Republican majority in the House right now. That obviously could be expanded in November. It could switch. We’ve got a strange white House race right now where there’s broad dissatisfaction with both major candidates, honestly, particularly because of the age issue. And the Senate, structurally, is the one that looks a bit more straightforward in that it’s a friendlier GOP map than Democratic map right now, just in terms of the states and the seats that are coming up. Talk to us a little bit more about your prediction that all parties switch in November. I’m interested. Does that mean you think it’ll be a Democratic House and a Republican White House and Senate, or is it a is it a broad based Republican? And what’s driving that? What impact do you think that will have on markets if that materializes?

Bob Doll: Yes, I think we’ll wake up in November after the election. Republican president, Republican, Senate, Democratic House, all three switching. And that’s not just, you know, reaching into the air. Nine of the last ten elections in the U.S., we have booted out the incumbents. That kind of string has not happened since after reconstruction, which is a long time ago. We are in the mood in this country that whoever is in the chair. I don’t like him or her. I’ll take the other guy, the challenger. And so we’re booting regularly those folks out. Yes. You have to right the Senate. Given the GOP friendliness, I would put 70% chance that the Republicans take the Senate, maybe 75. The House and the white House are obviously much more difficult. I think with the number of Republicans retiring and being frustrated with the operations in the House, some of the demographics, etc., I think it’s, you know, 55, 60 that the Democrats take the House, the white House. Obviously, you use the word strange election. That’s one word I can think of. A bunch of others do. It’s a crazy world in which we live. And nobody wants either guy. You’re absolutely right. Look, if anybody strong or medium was running against, I’m going to use the phrase a doddery old man who has trouble finishing sentences and has a record on a lot of things that are suspect. You’d think that guy would be winning in a landslide, but not the case because Donald Trump has his problems just like Joe Biden does. So this probably goes down to the wire back, connecting this to the last subject about geopolitical things. Donald Trump has made it clear that if he gets elected, he’s going to put a 60% tariff on Chinese goods. That. It’s like a massive tax increase to Americans. And I think that could exasperate the domestic economy, not to mention the geopolitical issues that would come from that. So keep your eye on this space.

John Coleman: Well, and I’ll make one prediction that’s not on your list. That’s just perpetually on my mind. And then Richard can get us back on track with additional predictions. I actually think there’s substantially more weakness in China right now than people believe. I’ve been in China bear for some time, and part of that’s just a structural conviction that it’s nearly impossible to have a dynamic economy or political system as restrictive as China’s. They’ve tried to split the difference in having more of a free market approach to the economic system, with more of a totalitarian political system. And I just think that leads to a lot of stasis in the way in which resources get distributed in autocracies means that they’re much more fragile than we think. And I think there have been some early warning signs that the Chinese economy and political system is weaker than we think. Obviously, data is difficult to trust. That comes out of China at the moment. But if I had one prediction this year, I’d say over the next 12 to 18 months, I wouldn’t be surprised if real substantive weakness in the Chinese economic and political system begins to leak out. And then the way in which that manifests in the broader world, whether that’s hostility towards Taiwan, whether it’s domestic political turmoil, I’m not exactly sure, but I wouldn’t be surprised if we start to see that soon. Given what I think are some headwinds that the Chinese economy is facing.

Bob Doll: Richard, let’s add that is prediction 11. I agree with John. I’d, I just add two points. One, short term or this could last for a while is the real estate problem. Yeah. There’s too many 100 plus story buildings in China that nobody’s living in, and they’re financed on debt. I mean, how do you square that circle? And then the long term demographic problem. Demographers argue that China’s population at the end of this century is likely to be about half what it is today. Hard to fathom. You know, the one birth policy, even though it doesn’t exist anymore, has become a way of life. So the Chinese folks fewer get married when they do. It’s later in life. Many of them have no kids. If they do, it’s one. If you have two, you have a big family. Crazy.

Richard Cunningham: Well, John Coleman, let the record show you made the Bob Doll 2024 predictions […..]

Richard Cunningham: Well, gents, I want to. First off, a blast to hear you guys riff on all of this. I want to close here because, Bob, you’ve got this really compelling prediction number eight. And that is faith based share of industry. AUM rises for the eighth year in a row. So first off, I think it’d be fun to hear you kind of. Paint the picture of how that prediction is created, what we’re measuring like, you know, kind of what’s the baseline, what specific industry AUM is it just public markets, as you know, include private markets and things like that? I mean, just talk about kind of that trend we’re seeing in this faith based space that all of us are really passionate about.

Bob Doll: Yeah. It’s curious that folks that ask about this are not just people of faith. I have a lot of people go through these predictions and that’s where they go. Tell me about this one. So depending on who you talk to, most argue that faith based money management is 40 to $50 billion, which is a tiny little speck in the overall asset management industry. So we are part of a very small industry. But when you look at the market share of that total, well, it’s a very low number. It has grown seven years in a row. So the prediction is based on the fact that I observe more. And you guys, do too more and more people and institutions wanting to line up their investments with their beliefs, whether they’re faith based or not. And, that cause I think getting this one right is going to be like shooting fish in a barrel. I think this will continue to grow. And I think part of our collective opportunity and you both know this is education. A lot of people are not aware that this little sliver of the money management industry even exists. And when they do, light bulbs go on. In my three short years at Crossmark, one of my biggest surprises is a how much education we have to do of strong faith based people, and b how many non faith based people are willing to do business with us. And when I ask why, they say something to the effect that, you’re good people, we’ve been watching you. We trust you. Would you manage our money? Which is just a real joy and an opportunity and frankly, a mission field.

John Coleman: Yeah, what I add to that. So I think we’re both a little bit biased here, Bob. So it’s always, challenging to make predictions where you’re heavily incented on one side of the prediction. But I do think you’re right. I mean, I’ve been really encouraged. The growth over the last few years has been extraordinary. I think there’s more interest than ever in taking a hard look at the values of investments, partially because there’s been this reaction against a relatively monolithic set of values that had been a part of the industry that people are now questioning, and they’re taking a look at how their providers match up with that and whether they really reflect their values. So it’s just putting a ton of money in motion. And the faith based share of the marketplace is so small that there’s almost unlimited amount of upside right now to that asset growth. So I think all that works in the favor of growth in this faith based market. I think the other component of that is just the number of quality providers or the supply of faith based asset management that’s out there right now. I know Richard and colleagues at Faith Driven Investor have been central to trying to encourage people to get in the game, to try and get really good people in the game. And frankly, I think the more people like Bob Doll we have come over, the more that that increases the credibility of this space. I mean, you were a legend in your own right in the mainstream world, and the fact that you’ve contributed your talents and time to the faith driven world, I think, is exactly what we need across the board in multiple asset classes to just increase the quality and the reputation of the space. And the more that we have that, the more the supply improves, the more incredibly talented people move over to try and make this a priority in their own work. I think inevitably people will be drawn to the space and hopefully the performance of the space will warrant continued growth.

Bob Doll: Fully agree. And you folks have faith driven investors. Sovereigns capital more generally have been to contribute to that as well. You’ve educated people, you’ve brought people together, and we just need to continue to do that because, together we can grow the pie separately, will sub optimize our individual and collective opportunity.

Richard Cunningham: Man, that’s really well said. Yeah. There’s a lot of pie out there as John, you were alluding to. And so let’s not get so siloed in kind of our own individual lanes that we’re running in and just remind ourselves that, man, this is kingdom purposes here. What an opportunity. What a privilege. All right, Bob, let’s close with this. One of the questions we love to ask. And I’m sure we’ve asked that before, as I believe this is your third ever official FDI podcast appearance is just man, we’ve covered a lot of ground here, a lot of it, you know, rightfully sober minded in terms of just what’s happening across markets and across the world, but maybe share a little bit of encouragement with us in terms of what’s God has been teaching you personally, just whether it be in your work, in your quiet times with him, that’s folks. Tune into this post Easter. What encouragement might Bob Doll share about what the Lord’s been teaching him lately in his word?

Bob Doll: You prompted me on this, so I thought for a bit. And the simple but profound concept of God’s sovereignty struck me. It’s been ringing in my mind, in my heart, in my devotional life. My job, as you pointed out, the front end. You know I have more responsibility than I intended, asked for or wanted. God had a different plan. Family. We have three kids. Two walking with the Lord. One not the one that’s not having professed faith and a lot of fruit earlier in life, but walked away and my wife renewal time. Bob stopped trying to be God. God is sovereign. He knows what he’s doing and personally the same thing day by day. So that leads to greater peace, greater joy, which comes out of the peace and contentment that the day by day. He knows the future, and we just need to attempt to understand and walk in his will. And then God’s sovereignty just rings loud and clear.

Richard Cunningham: Amen. Well, friends, thank you so much for tuning in. This has been Bob Doll on a marks on the markets Faith Driven Investor podcast episode. Bob, what a joy and a privilege to have you on. Thank you for your incredible work, John. As always, thank you for being such a key part of this show. And friends, we’ll catch you next time.

Subscribe to the Podcast:

In this episode, John Coleman is joined by Tony Minopoli and Andrew Abela to explore faith driven investing in the Catholic world and in the Catholic Church. 

Tony is the President and Chief Investment Officer of the Knights of Columbus Asset Advisors. In that capacity, Tony oversees all elements of the investment strategy and operations for the Knights, predicated on nearly two decades with that institution and a prior career in investment consulting with the Valuation Associates. Through his role with the Knights, he’s also helping the Catholic Church more broadly continue to advance its thinking on faith based investing. 

Andrew is a professor of marketing and the founding dean of the Bush School of Business at Catholic University. In addition to a storied academic career, which we may delve into, Andrew has worked with institutions like McKinsey and Company and Procter and Gamble, published broadly, and as a leading thinker on faith based, faith based and principled entrepreneurship and investing alike.

The two join John to share about what it looks like for Catholics to engage in Faith Driven Investing both in the modern day and throughout history.

Knights of Columbus Asset Advisors: https://www.kofcassetadvisors.org/

Busch School of Business: https://business.catholic.edu/

Episode Transcript

Richard Cunningham: You’re listening to Fate Driven Investor, a podcast that highlights voices from a growing movement of Christ following investors who believe that God owns it all and cares deeply about the heart posture behind our stewardship. Thanks for listening.

Rusty Rueff: Hey everyone! All opinions expressed on this podcast, including the team and guests are solely their opinions host and guests may maintain positions in the companies of securities discussed, and this podcast is for informational purposes only and should not be relied upon as specific investment advice for any individual or organization. Thanks for listening.

John Coleman: Welcome back to the Faith Driven Investor podcast. This is John Coleman hosting solo today without my co-host Richard Cunningham, but with a very, very special episode. Today we are going to explore faith driven investing in the Catholic world and in the Catholic Church. And we have two extraordinary people to help us do that today. The first guest is Tony MInopolI, who’s the president and chief investment officer of the Knights of Columbus Asset Advisors. In that capacity, Tony oversees all elements of the investment strategy and operations for the Knights, predicated on nearly two decades with that institution and a prior career in investment consulting with the Valuation Associates. Through his role with the Knights, he’s also helping the Catholic Church more broadly continue to advance its thinking on faith based investing. Secondly, we have Andrew Abela with us today. He’s a professor of marketing at the founding dean of the Bush School of Business at Catholic University. In addition to a storied academic career, which we may delve into, Andrew has worked with institutions like McKinsey and Company and Procter and Gamble publish broadly, and is a leading thinker on faith based and principled entrepreneurship and investing alike. Andrew and Tony, we are really grateful to have you on today. Welcome to the show.

Tony Minopoli: Thank you. What glad to be here.

Andrew Abela: Thank you

John Coleman: Awesome. Well, to kick off, I was hoping that we could just level set a bit on what this looks like in the Catholic Church today. You’re each working on that in your own ways, in your different spheres. But maybe you could start off by just setting the table for what is the Catholic Church’s current approach to faith aligned or faith driven investing? And maybe, Tony, we could start with you and then you Andrew.

Tony Minopoli: I was going to defer to the professor among us first, but I’m happy to take a shot at it. You know, for us John, the key is, is that the Knights of Columbus is an entity. We don’t create Catholic doctrine. We never have. We followed Catholic doctrine very closely. And as a result, particularly for our investment strategy, we’re not going to talk about our funds individually. But in the sphere of managing a family of Catholic compliant mutual funds, we had an anchor to something, because among Christianity, there’s a wide different range of beliefs and acceptances among the different groups of Christians. But the Catholic Church, still 51 million people in the US claim connection to the Catholic faith. It’s in varying degrees, but within that church. And Andrew knows this better than I. There’s even a wide array of attitudes and beliefs, even among those that are supposedly in the more narrow defined Catholic faith. So as a result, we had an anchor to something, because the last thing I could do was try to explain, you know, well, we’ll do this for this here. What we believe this here that’s different. So we essentially work and we’ve worked very closely with Catholic view to take the teachings of the bishops and define them into investment rules, into a usable, screenable methodology to which to invest. But in a nutshell, and and Andrew certainly could speak more to this in broad terms, things to do with abortion, contraceptives, embryonic stem cell research, human cloning, weapons of mass destruction, things of like cluster bombs and landmines, things of that nature. Pornography doesn’t really come in. There’s not many opportunities to invest in pornography in the publicly traded market. So that really doesn’t weigh in. And then for profit health care that really pays for any of the others, I would say from a practical matter. And I’ll end on this hand it to Andrew, is a practical matter. The things that we run into most often, whether we’re managing the Knights of Columbus assets or the mutual fund assets, are things to do with abortive action and contraceptives and an embryonic stem as it relates to biotechnology. Those are the real sort of places we can delve into this more as we chat today. But I would say those are the areas where you run into the most things that you have to review. So, Andrew, I’d turn it over to you for your view on that.

Andrew Abela: Thank you Tony. Yes, everything Tony said. And in terms of what’s driving our interest now, about 20 some years ago, the Conference of Bishops, which is the group that brings all of the Catholic bishops in the United States together, published their kind of guidelines on faith based investing, and then they updated those in 2021. The first set of guidelines was mainly about excluding the kinds of stocks that Tony was just talking about this time around this in 21, they also asked the faithful to not just exclude stocks that would be compromising, but also to exercise your votes and to engage with management to try to kind of move people in the right direction. And so there’s a big conversation now about how to do that. So Tony and I have been working together with a few other asset managers to figure out the best way to do that, the most practical way to do that, and that is the state of the art. I would say at this point in the Catholic investing world.

Tony Minopoli: Andrew would it be worth, maybe if both of us took a second? And the most recent white paper, the main summum bonum white paper that came out for the […] So John, one of the […] within the Vatican, wrote a paper, and I had forgotten all the Latin I learned when I was in Jesuit prep school. But then summum bonum, which translates to the good measure, was a paper that came from the […] of Science within the Vatican, and really took this notion of investing in a way that is not detrimental to the environment, investing in a way that is helpful to the less fortunate. Also engaging it’s not just about negative screening, and that is a lot of the work that Andrew is mentioned, that we’re teaming up together with some other really fine professionals is how best you engage, you know, the proxy voting, which any shareholder can think about. But do you do a, you know, a shotgun approach of just carpet bombing letters to all these CEOs, or do you really try to get engaged in meaningful engagement with individual companies? I think most of the people involved at that conference and involved in this thought process are not so naive is to think that they’re going to move publicly traded companies into the realm of acting like good Christians, but if we could just get them to be neutral. Right. Sell your product, sell your service. But don’t be antithetical to Christianity. From my corner, I think that would be a win. And there’s a lot of companies that go a lot further and are espousing things that are sort of antithetical to Christianity. So this was interesting because to my knowledge and Andrew, please correct me. This was the first time the Vatican was as sort of forceful on this topic by issuing the main summum bonum and white paper. So just another thought to add into the conversation, John.

John Coleman: Yeah. And, you know, there’s a parallel conversation happening in the faith driven investor movement that we’re most familiar with that’s exemplified by this podcast. And people frame it a couple of different ways. And then, Andrew, maybe you could react to some of this one. It’s a very simple framework that a lot of folks use, which is avoid, embrace, engage, avoid being more negative screening, embrace means positive screening or leaning into certain thematic things, which Tony might even be environmental concerns like you just highlighted. And engage means even where something’s not explicitly faith forward or positively screened. Since you have a voice as a shareholder in that company, how do you encourage positive movements in that company? Something we’ve seen lobby for quite a lot lately, for example, or adoption benefits in the midst of the noise around abortion as a topic, you know, how do we encourage companies to include adopt adoption benefits in their health care? Another framework we’ve leaned into a bit, trying to span both public and private markets is exactly what you highlighted. You’ve got negative screening. You’ve got positive screening, again, where you do thematic engagement according to something you think is redemptive, right? A redemptive purpose either in public or private markets. The third we talk about often is cultural formation. So as private equity investors or venture investors, we often have an opportunity, not just invest thematically, but to lean into the actual culture and operations of business, to shape it in a way that’s more faith aligned, which could include the supply chain, making sure that that’s properly accounted for and handled appropriately, including chaplaincy in the company or organization, employee resource groups that are religious family friendly policies like maternity and paternity leave, adoption benefits. But you get to shape a culture in a way that encourages human flourishing. And then we’ll often talk about all of those can be done with a high return. But there is this concessionary impact space right where you may choose to engage in things like Microlending or, we’ve seen charter school financing, for example, in the US, where you may trade off some return in order to engage in something you find particularly redemptive. So it sounds like the Catholic Church is having a debate right now about the various ways you can positively lean into faith and investing. That’s very similar to the one that we’re seeing carried out more broadly in Christianity. But, Andrew, I don’t know if you’re seeing some of the same things that we’re talking about now in the research that you’re doing.

Andrew Abela: Yeah, there’s a lot of parallels. And in fact, the parallels are such that I’m so glad we’re having this conversation, right. Because we just need to work together more. What we have heard from, CEOs and executives is it’s helpful to them to receive the countervailing pressure from our side. So, as Tony said, even if we just get folks to being neutral on the cultural issues, that’s a big win, because too many corporations have been advocates for a very sort of secularists kind of anti-life perspective. And so kind of pushing back against that. And the more we can be kind of working together, I think that really helps. The, employee resource group movement has become really strong. We’re happy to host every summer since its initial launch about five years ago, the Religious Freedom and Business Conference, which is the annual gathering of all the leaders of the ERGs that are focused on religious liberty. And so it’s like a very ecumenical gathering, not just all flavors of Christians, but also Muslims and Hindus and so on, just arguing that corporations need to make space for people of faith in a corporation. Which I think is a very positive move. I know that, John, you and I have had this conversation already about the role of virtue in the workplace, a very Christian idea that is nevertheless rooted in Aristotelian philosophy and so accessible to pretty much any thinking person, you know. So this is another area that we want to encourage and help, because I think it’s not just our society, but our corporations are realizing the consequences of living in a post-Christian world where things we used to be able to take for granted, like basic human decency, honesty, and so on just seem to be eroding and need to be those back. So I think this is an opportunity for people of faith to say, hey, we have some good ideas here to share.

John Coleman: So would you say a bit more, Andrew? And then I’m going to come back to you, Tony, about this concept of virtues, because we also have the faith driven entrepreneur organization that we work with. And it’s we talked about we have a very strong belief that for the performance of a company, culture is the greatest competitive advantage in business, that top performing cultures will regularly outcompete others in the marketplace, something that’s been affirmed by research from McKinsey and company, from the London Business School and others. And we think that this idea of virtues and values in a business are essential to that culture. Say more about what you mean by virtues and why that’s different than values in a business.

Andrew Abela: Yeah. So we make a big distinction between values and virtues. So many businesses talk about their corporate values, but values are just talking the talk. Whereas virtues are walking the walk. The virtue is the action or particularly the habits specifically. So you could value honesty, for example. But to have honesty as a virtue means you’re in the habit of always acting with honesty, always speaking the truth. To have self discipline as a value is one thing, but to actually be in the habit of acting with self-discipline is another thing entirely. I remember so I was last at McKinsey 25 years ago, so it’s been a while. But even back then we were talking about the power of corporate culture as a competitive advantage. You could imagine a corporation’s, we often referred to it when we were talking to our students, the set of human virtues as the human operating system. Right? Particularly the four big ones, the cardinal virtues. So practical wisdom or prudence, justice, fortitude or courage and temperance or self-discipline, those four together make up, if you will, a sort of a human operating system. And just like the operating system on your iPhone, if you don’t updated regularly, things start to slow down or not work or crash, you know, same with human beings, same with a corporate culture. If a corporate culture has a particular vice or defect, and I say a lack of honesty or a lack of justice, then that’s going to undermine pretty much everything that the corporation tries to do. And the execution of your strategy could be terrific, but the execution is not going to be as effective because you’re missing an essential part of human flourishing.

John Coleman: I love the way y’all are approaching that in the intellectual history. For nerd like me, dating back to Aristotle and the discussion of habits and virtues, and obviously to the Israelites before that, I think it’s so incredibly rich. Tony, I want to dig into the Knights a little bit more, if you don’t mind. One, I would love for you to just tell people who are the Knights of Columbus for those who aren’t Catholic and what’s the history? And then maybe secondly, dovetail into what does this look like in a portfolio as large as yours? How do you just think about tactically bringing this in to the work you’re doing in asset management?

Tony Minopoli: Sure. So without reading all the pages of history, the Knights of Columbus was founded right here in New Haven, Connecticut, in 1882 by, Blessed Michael McGivney. In our world, in the Catholic world, blessed means he’s one miracle on his way to his second miracle of being canonized a saint. And on another podcast, we’ll talk about those. But father McGivney started this because at the time, there were a lot of Catholic men in the area that were building a lot of the infrastructure and a lot of blue collar folks that were dying and leaving widows and orphans. And as a man of action, as a young man in his 30s, he thought he would create this organization that started off literally as a mutual benefit society. And we became what you would call an actuarially based life insurance company, probably around 1900 and 1901. So we now boast over 2 million members worldwide. We’re the largest Catholic lay organization in the world. We have about 1.4 million members in the US. It’s our biggest jurisdiction and we’re basically men of service. So the thought processes is that we work in our local communities to provide charity. In a typical year from the parent, we will donate about $40 million to a variety of charities, our subsidiary councils. We have 10,000 councils here in the United States, but our subsidiary councils collectively donate about 140 million. So across the order, it’s about $180 million of actual dollars pre-COVID. And now we’re working back up to it John. We were donating as a fraternity north of 70,000,000 hours of community service. So we’re now knights of action, I would say as well. So I’m very proud to have been a knight since 1994. I joined the company in 05, so I didn’t become a knight for the expediency of a job, but I was very swayed by the work that we do. The general account for the Knights of Columbus on a market value basis, about a $27 billion portfolio. Right outside of my office is our bond trading floor. We manage about $25 billion of fixed income. We have our equity team up in Boston managing north of a billion in equities. And we have followed the USCCB teachings for longer than I’ve been here. One of the things I brought to the Knights when I was an advisor, I served when I was in evaluation Associates. The Knights were a client, which is how I ended up getting here. But one of the things I brought was to bring a bit more rigor to how we screen company. So we brought in a third party to help us decipher the USCCB teachings and to develop screen lists. We now work with a professor, Professor John Grabowski from Catholic You, who’s on retainer to the Knights. Where else can you have a moral theologian and your team when you’re investing? But at the Knights of Columbus. So we really do incorporate what John helps us to do. Again, he’s not writing Catholic Doctrine, but our screening advisor is a consult, and they’re not Catholic, but they’re they have a very good screening program. So John sometimes serves as an umpire calling balls and strikes. If we determine that, hey, this company actually shouldn’t be screened out, John will help evaluate it. Between us, the screening agent and John will determine what the right move is. As I said earlier, you know, John, the challenge, if it is one, it’s really in biotech and health care that we find the most in. Typically, it’s a big pharma company that may have had an abortive fashion or contraceptive. Then they divested the drug. Many big pharmaceutical companies find the most efficient way to develop a pipeline is to go acquire a smaller company. So then they acquire a smaller company in their drug pipeline. And when you go down the list, you may find a they have a drug that’s now out of bounds. So out they go. And we go through the screening rigorously every 90 days. So as I tell our board, whether it’s for the general account of the insurance company or our shareholders of our mutual funds, you’re never more than 90 days for scrubbing the portfolio. And in equities it’s easy, you know, if it’s a big cap company, you can move out of it quickly. You know, if it’s a middle sized bond, you know, post a financial crisis. Wall Street doesn’t have proprietary trading desks anymore. It can take you a little bit longer to divest. We try to keep a foot in both camps being critically adherent to the faith. But also, you know, I guess in a doctor’s sense, trying to do no harm to our shareholders. So we’ll develop a plan to move that security out. It’s never taken more than a few weeks, but, you know, you develop a divestiture plan. I have to say, in 18 years of being here 18.5 years now, it’s never caused a problem to where we could not evaluate another name or a different way of investing or a different company to purchased. And one of the things I’m very happy about is that we’ve been able to compete in the return space, but while also adhering to the Catholic teaching. Today, as I say to our board, all the way we are walking the walk, but we’re living proof that you can do well and you can do good all at the same time. So maybe it takes a little bit longer, but you eventually get there. We’re very, very proud of that.

John Coleman: Yeah, I love to hear that, Tony. And we tend to have a firm belief in that. And I want to let you in on this as well, that when you’re behaving in a way that we believed in the truth of our faith, and we believe that it’s in touch with something really important about human nature and what creates human flourishing. And then if you’re leading companies in alignment with that, that those companies can actually perform, that they can succeed because they’re in touch with something deeply true about people, about the people that work within a company, about those who purchase their products and services that allow them to perform even greater than those who are anchored in some sort of truth or who are detached from that. But, Andrew, I think I cut you off. You were going to jump in.

Andrew Abela: Not at all. So you’ve heard the old joke about the professors who argue. Yes, that may work in practice, but it doesn’t work in theory. You know, that used to be the argument about faith based investing, right? That portfolio theory says if you’re going to exclude a bunch of stocks, then your returns are necessarily going to have to be lower. You’re both experience [….] that’s that’s not true. And I’m a little hesitant because we’re not done with the research yet. But we’ve been working through a study looking at portfolio returns of faith based portfolio versus non and over extended period of time. And I’m finding that in theory, yes, it does work that you can be selective and screen out certain stocks and still not cost anything in terms of returns. Which sort of makes sense. There’s a there’s a beautiful line in the letter of Pope Leo the 13th from 1887. We remember him fondly because he was the founder of Catholic University. So. He wrote when Christian virtue is observed. That leads to a measure of prosperity, in a sense, because we’re behaving in the way God intended. So of course things should work out right. So it’s not a terrible shock, but it’s good to say to the average Christian investor, you don’t have to take a big hit, or you don’t have to take any hit on your returns. To be a faith based investor. Now, you might want to, as you pointed out, because there are certain sectors that you might. But now that becomes part of your charitable giving in a sense, right. By taking out a reduced return. But that’s a that’s a particular deliberate choice.

John Coleman: Yeah. We always think of the uses of capital, not literally black and white, but on a spectrum between pure philanthropy and high return investing. And as long as you’re conscious of where you’re playing there, it’s a conscious decision and you’re behaving in a way that’s aligned with the wishes of those whose capital you’re stewarding. It’s open, that spectrum is open, and you can really just Tony, as you would play in a risk return spectrum in fixed income to equities, to private equity. You can kind of choose at what point on that spectrum between philanthropy and return to play. One topic that we haven’t explicitly addressed, I’d be so curious to get your feedback on is ESG, and a question that we get frequently, if you’re willing to address it, is, is ESG aligned with faith driven investing or where are they align and where are they different? And so I’d be curious, as you all have reflected on specifically Catholic, faith based or faith driven investing and the points of similarity or difference with ESG? Just how do you view those intersections right now and whether that’s an active discussion or not for y’all, or you just have your own approach that’s completely different from that, and it’s not really a topic of discussion.

Tony Minopoli: I’ll kick off just how we thought about it particularly, you know, the environmental concerns I think are aligned, particularly with the current pope. Pope Francis is very concerned about the environment and has spoken extensively about it. Not to say that past popes weren’t concerned about the environment, but Pope Francis has written and spoken about it extensively. Some of the things that fall under the s are not necessarily aligned with the Catholic faith, so it’s a little difficult to align purely with them. And on the governance side, in many cases, a lot of the things that come up under governance, you know, single type of shared class, making sure things are disclosed properly. Those, I think are just common sense investment themes. But broadly, the way that we think about ESG, our first priority is Catholic social teaching. We need to be compliant there. ESG in the capital market sense. You need to understand how a company is perceived. So all of our securities, right, whether it’s debt or equity, we do think about the ESG factors. And greatest example as an energy company, just because an energy company is an energy company, it doesn’t mean it’s necessarily you can’t touch it. Because if you think about a company that manages their industrial or environmental impact well and follows all the governance rules, they may score poorly, but they may actually be a solid investment. So in broad terms, we will not invest in something because it scores high in ESG. We will not avoid something purely because it ranks low on ESG factors. But as a prudent investment manager, it’s incumbent upon me and my team that we understand the context of how a company is perceived with the real I, John. Is that company going to have an ability, for example, to tap the capital markets? Will they can they raise capital or have they violated environmental regulations in so many states that now their management is going to be tied up in lawsuits. And, and I always it’s a tired and old example, but I use it all the time and not to pick on GE. But when GE got in trouble all those many years ago for the PCBs in the Hudson River in New York, it took them forever between law, the lawyers and regulators and fines and then shareholder lawsuits. So management was management able to truly execute on their management strategy? No, they were distracted. So that’s we want to understand the context of ESG in a company. Because again, somebody that follows the right way, they’re going to be able to execute their management strategy. And we think that will lead to a better investment outcome. But for us, Catholic social teaching outtrump ESG. Andrew.

Andrew Abela: Yeah, couldn’t agree more. We have vigorous debates both within our school and with colleagues outside Catholic and other Christian, about the purpose of a business. The classic debate between sort of stockholder stakeholder. This gets a little more abstract. You know, professors like to talk about these. Abstract. Okay. So it’s what we do, you know, we bring it back to practice. And my perception is that we went from one extreme to another, where in the 80s and the 90s, we were all talking about profit maximization as the o, the sole goal. You know, it’s kind of like a, you know, an extreme form of Milton Friedman, kind of that the purpose of this is to maximize. Profits and nothing else. You know, he did go on to say, but to stay within the norms and, you know, and rules and so on. People forget that part. And ESG in some sense has gone to the other extreme where, you know, set aside the fact that, you know, one reading group can agree with another about what exactly ESG is, you know, said so totally agree with Tony, is you don’t abandon a stock just because it’s rated low, or you don’t buy it because it’s rated high, because those ratings can often be close to meaningless. But with the reason we think Catholic social teaching is so helpful is you’re looking at the good of a business. And is that not limited solely to profitability? But it doesn’t exclude profitability in the way some kind of ESG kind of perspectives take. So if you asked us kind of [….] what is the purpose of a business, we would say the purpose of a business is to do some good for some group of people and to do it profitably because you’re not doing it profitably. You’re just not a business. You’re yet another organization that has to be funded philanthropically or through taxation. Right? So business is the only self-sustaining, self-funding enterprise. And so to do that, you have to basically have a clear vision of the good that you’re doing, and then you have to do that with virtue to do that virtuously. And if you follow through on that, all the evidence is that you would be very profitable, successful. And so you would satisfy both the shareholder and the stakeholders is that’s kind of that’s the win win aspiration. I think that we should all have, instead of pitting kind of social justice versus profitability, you know, makes one good and one bad. No, those things don’t have to be in opposition.

John Coleman: Yeah, I think I love what you’re saying there, Andrew, because I do think there’s a way in which the free enterprise system, upon which capital markets rests or upon which investment rests, actually does contain kernels that can promote human flourishing. Obviously, it can be used for bad, it can be used for good. But actually embracing the right principles combined with that system can help to unleash human flourishing, which is one of the reasons we’ve seen this explosion in, people escaping poverty, for example, around the we’ve seen an explosion in the ability of people to escape their circumstances if they’re born into poor circumstances, economic mobility, the ability to pursue their own talents and merits. And so we think that certainly the system can and often is used to promote human flourishing, but it also has to exist within a set of values or virtues, as you would say, that allow it to function properly. And with regards to investments around here at FDI, we often say all investing is impact investing. Every dollar you put to work has an impact on the world for positive or negative. The only question is what kind of impact will it have? And I think the pushback against ESG has been a good thing, and that there are many valid criticisms from both the right and the left. And we don’t have to get into those. But it’s also forced, I think, Christians to say, what is our distinctive set of values that we want to pursue? What is it unique about the Christian faith that we want to see expressed in investment capital? And how can we now define something that’s distinctively Christian faith aligned, rather than simply falling in line with framework? That to your point, Tony has some similarities, but some differences, I think, from what dominant Christian doctrine, would be. I have a question. It may be on our listeners minds because, I’m a Protestant. We are notoriously hard to organize, I would say, as it’s a set of church denominations, you both had mentioned that you’re working with various denominations or orders within the Catholic Church to forward thinking about what this looks like. Could you explain to us what is collaboration look like within the church, across the various pools of assets that you all have? And how does that work? I mean, you’re both in the center of it. What does that look like for y’all?

Tony Minopoli: Andrew, please kick this off. But, John, I’ll just say, if you can visualize herding cats and wild cats, that’s sort of the start of it.

Andrew Abela: Tony is exactly right. Because here’s this is just a descriptive statement. Yeah. So the Conference of Bishops guidelines, which I mentioned before for faith based investing, faith driven investing, apply to the funds of the conference itself. Now. The conference is made up of the 200 and some bishops of the United States. Each has his own diocese. Many of them have their own foundations which invest their own association. The conference’s rules don’t apply to the to the bishops own, foundations. They are purely voluntary. So some bishops well, as a matter of course they will follow those others would say we have a better way to do it. We’ll do it differently. So even among the brother bishops themselves, there are some differences. But I say that purely descriptively, to say that there is coordination, but it’s not monolithic, you know, and in some sense, I think I would rather have it that way than have a top down. Usually I’ll do it this way, because when it’s that dictatorial, you can make some really, really big mistakes, right? Whereas when it’s more distributed in this way, if you make mistakes, they tend to be a bit more localized, you know? So I think there’s room for more collaboration, not just among Catholics but among all Christians, you know, because goodness knows the forces of secularism tend to sometimes seem to be really coordinated. And so if we’re going to provide any kind of countervailing power, but I think the best way to do that is through communication, kind of sharing of ideas, kinds of meetings. John, that you’ve organized, that we’ve organized, that the Knights that Tony, you participated in, in several of ours. Right. The more kind of discussion we have, the more aligned we can become around the same vision. It’s kind of how I would put it.

Tony Minopoli: The few things that I mean, one of the joys working with these disparities is it brought me into Andrew’s orbit, and the Knights have had a close relationship with Catholic University forever, but it’s allowed me to collaborate with Andrew. Andrew has become a friend. We chat about these kinds of things all the time. We’ve done. We’ve done a lot of work together, and there’s a lot more work that we’re planning on doing together. But Andrew makes a very key point that even across the various Christian denominations, the commonality of whether it’s an Episcopalian Catholicism or the various different parts of Christianity, of the Protestants, there’s a lot more similarity than there is difference. And if we leave the differences to the side, the core things matter, right? The things on life, the things on family. So I always joke, I have a young man, he’s not so young anymore because I’m not so young anymore. But he used to work for me. And when I was organizing the Knights of Columbus mutual funds, he and I were chatting, and he’s an Orthodox Jew. And he said to me, you were talking about the diocesan structure. And he said, if we ever had that structure in the Jewish faith, we would have raised $10 billion before you even open the door. And it struck me, because certainly as Catholics and I’m going to take the rest of my Christian brothers with me in the canoe, we never act in concert and imagine the change that we could forge if we actually did. Because again, though, there are differences in the faith denominations. Man, the similarity is a heck of a lot stronger than the differences. And I’m hopeful. And Andrew is right. I think the fact that there’s room for interpretation may bring more people into thinking about faith based investing, because it isn’t this dogmatic thou shalt do this and thou shalt not do that. But it allowed for us to say, you know what? We’re going to anchor to the central tenants of the bishops. We’re going to work with those clients. We have clients with separate accounts that’ll be a bit nuanced. And as my former pastor said, Tony, it’s a very large church with many different people in it. And I think when you move beyond Catholicism into Christianity as a whole, man, it’s an even bigger tent with a lot of very disparate, disparate opinions. But we can do better together.

John Coleman: Amen. I couldn’t agree more. And we’ve often had this discussion that man, the people who believe deeply in the Christian faith, we share so many of the same commitments. Right? I mean, we really believe in the dignity of all human being. We believe that every person on earth is created in the image of a loving God, and that everything that we build should be oriented towards helping those folks connect with their creator, live out their human dignity, really pursue something that can bring them well, having purpose and flourishing. And there’s really a crisis for that in the world today, right? If you look around the world, people are struggling, they’re unhappy, that are lonely, that they’re disconnected from that sense of purpose. And we have an opportunity as investors and business leaders every day to either help bring them closer to their creator and to understanding their own dignity and purpose or further away from it. And if we could just work together in concert more, to try and forward that shared vision, I think it could be really powerful as we wrap today, because that was such an inspiring call from both of you. I would love to just maybe ask a personal question, which is obviously, both of you are men of deep faith. You’ve been motivated by your faith, even in your careers, what you’ve pursued. Maybe just each of you individually. Tell me, what is it in your personal faith life that keeps you motivated about this, that keeps calling you into your profession, that you’d want to share with others.

Tony Minopoli: Quickly for me, John, my my younger brother has special needs, and he is in. I have to stop at my parents. We still have my mom and dad. They’re 85 and 83, and I have to stop at my dad’s house to sign a piece of paper for an investment that he’s making, and I’ll go in there this evening to go see my parents and have my dad sign this paper. And my little brother is literally the living, breathing, walking embodiment of Christ’s unconditional love. He’ll want to know, how did my day go? He wants to know that you’re okay. If he met you, John, chances are you probably give you a hug. And secondly, he’d want to know how your day went. Is everything okay? And watching the Knights of Columbus, its Special Olympics with him when he was a little boy is what motivated me to say. There’s something to this faith piece that needs to be part of my life. And when I got to work at the Knights of Columbus at the time, I had two competing offers one from a mega, mega large hedge fund that will go unnamed, and the Knights of Columbus. From an economic standpoint, I made probably the least wise decision of of a guy pursuing a financial career, but knowing that the money that I helped generate allows Patrick Kelly, our Supreme Knight, for wheelchairs, for coats, for kids, for food, for families, for disaster relief, and a very good friend of mine that works at a big Wall Street firm, said, it must be nice going to work someplace every day where the purpose for why you make money is just not to make someone that’s wealthy, wealthier, and people that know me well know how important my Catholic faith is and what a part of my identity is. And frankly, to come to a place where we have a chapel on the fourth floor and I can go to mass when you know it’s available, I can go down there and spend a few minutes in quiet, contemplate a prayer. It means an immense amount. And, and to be able to live my faith in my profession and, and know the good that comes from the work that the Knights do, it pretty much makes it makes it a life worth living. And I got to grow with it for, for many years. And my first job was working for the Knights of Columbus and Council 16 at their duckpin bowling alley when I was a ten year old as a pin setter, and hopefully my last job as CIO of the Knights of Columbus. The second job paid better than the first. But, I’ve had an involvement with the Knights of Columbus for for a long, long time Andrew.

Andrew Abela: That it’s hard to top. But whoever says that Catholics can’t share about their spiritual life, you just proved them wrong, Tony, so I do. So mine comes to a different place. I as a teenager, I fell away from the church, was a practical kind of atheist and went through some kind of dark and meaningless times. You know, it just kind of reached a point where I was very successful. I as you mentioned, I started my career at Procter and Gamble. I was at the time the youngest brand manager worldwide at Procter and Gamble. I thought I had the world ahead of me. I was a McKinsey, traveling around the world, working for them in Russia, just after Russia opened up, when when we all thought that it was going to become a great democracy and so on. And then a certain point, I just realized the emptiness of it all and was called back and kind of gave my life to Christ, came back into the church. And that was almost 30 years ago. And life just keeps getting better each year as I get closer to him, you know, everything makes more sense, everything works out better, and you just start to realize that this is the way we’re supposed to live, you know? So 11 years ago, I had a dream come true, and the university asked me to start a business school. And I’d had a vision of what? What would it be like to have a business school that was from the very ground up, focused on teaching and doing research about what does it mean to be a Christian in business? And that’s what we’ve been doing for now, 11 years. We’re 700 students and growing. We’ve been actually double digit growth the last four years, which is not rare in higher education, you know, nowadays. And that’s just been a real treat. And so just being able to work with folks like Tony and others and then to kind of bring them to the younger people and say here, this is what you’re striving for, is you want to go out and serve Christ in the world of business. You know, it’s been a real gift to me, I have to say. Yeah.

John Coleman: Well, gentlemen, that was an inspiring way to end Andrew Abela of Catholic University. Tony Minopoli of the Knights of Columbus Asset Advisors. We’re really grateful for you guys for being on the podcast, for the work that you’re doing every day on behalf of our shared faith. And, just really encouraged by this conversation and hopeful to see what’s next. Thank you so much for joining the Faith Driven Investor podcast today.

Subscribe to the Podcast:

How would you finish this sentence?

“Today’s real estate market is…”

On today’s Marks on the Markets episode, words like “hopeful” get thrown in as well as “apocalyptic.” 

There are a lot of moving parts and here to help us make sense of how we think through them with a Kingdom lens is Ben Erskine and Tom Hahn.

Each of them have been longtime leaders in the redemptive real estate space. They join us to talk about what they’re seeing right now in the market and what they expect it to look like in the future. 

They also discuss ways we can redeem this industry, which our team explores in a new video series “Redemptive Real Estate.” Find it here: https://www.faithdriveninvestor.org/video-library#real-estate

Like this episode? Don’t forget to review, follow, and share the show with others.

Episode Transcript

John Coleman: Welcome back to the Faith Driven Investor podcast. This is our monthly Mark’s on the Market podcast. I’m John Coleman, one of the managing partners at Sovereigns Capital and a host of the Faith Driven Investor podcast. And today we have a very interesting marks on the market focus on real estate, which has become a boogeyman in the markets right now, whether that be soaring mortgage rates, falling home sales, vacancies in office. There are so many things to talk about right now and also a lot of innovations happening in the way that faith driven investing happens in real estate. Led by two of the gentlemen we have on the podcast today. Our first guest everyone is familiar with, Ben Erskine was the founder of Callus Capital. After a lengthy career in real estate. He launched a fund one a few years ago and is now leading the real estate function with sovereign’s capital. And then alongside Ben, we have Tom Hahn. Tom Hahn founded a real estate firm called Prudent Growth in 2015. He’s now the president of that organization, which invests across the real estate markets, but with some interest, particularly in places like retail. And these two gentlemen have deep expertise in the real estate market. So we’re very happy to welcome you on. Tom and Ben, thanks so much for coming.

Ben Erskine: Glad to be here.

Tom Hahn: Thank you for having us

John Coleman: So I want to start at a very high level. You know, marks on the market is about just taking the temperature of an asset class or of markets. Right now. We’re filming this right at the beginning of July. This will air on July 10th. What in your mind is top of mind in real estate markets right now? Obviously, there are a lot of dynamics, but what are the headlines that you’re paying attention to right now? And Tom, we may just start with you, if you don’t mind.

Tom Hahn: Sure. Absolutely. So thanks for having me. You know, and we’ve primarily focus on neighborhood retail and smaller bay Industrial Flex and multifamily in the Southeast and the southern Midwest. So in our area, what we’re primarily talking about and what we’re seeing in the markets are obviously higher borrowing costs, which are having some, you know, pretty significant impact on the ability of buyers to get into a deal at the same kind of valuations they were achieving, say, 12 months ago. I think that we’re certainly seeing a lot of talk in the retail and industrial space around more of a bullish side around just very low vacancy rates. We’ve had very strong leasing activity and new construction certainly in retail, new construction is at like two decade lows. So you sort of have low vacancy, very little new construction. I think you’re going to have even less new construction with these higher borrowing costs, which are really hampering the ability of developers to get projects started. So we’re sort of cautiously optimistic. I think it’s a good time to buy. We like to say that if we can make a deal work at today’s borrowing costs, you know, we’re like six, six and a quarter percent on a lot of our debt. We’re really going to like the deal in two or three years when rates are moderating again. You know, we look at the yield curve every day. We look at the interest rates every day. And you can certainly see the pricing of the two years and the one year notes versus the five years. You know, you’re going to probably have a 200 basis point cut in rates in the next 24 months or so. You know, certainly that’s what’s priced into the market. So we think it’s a great time to buy and kind of get out in front of that and, you know, take advantage of some slightly higher cap rates.

John Coleman: Super interesting, Tom. And I know we’re going to circle back and focus on retail in a moment, because I do think the dynamics are fascinating there, especially given I remember four or five years ago retail was actually the big question mark in real estate from my experience. But before we dive in, Ben, what’s top of mind for you? What are you focused on at the moment?

Ben Erskine: Yeah, I mean, I’d echo a lot of what Tom said. Certainly the interest rate environment has done a lot to slow down transaction volume. We see volumes down, you know, 40, 50, 60% depending on the asset class, depending on the part of the country. So higher borrowing costs and just a little bit of dislocation or a bid ask spread is slowing down volumes and it is very much a kind of sector by sector analysis. You know, the kind of big, ugly gorilla in the room is office. That’s where fundamentally there’s been such a loss or uncertainty around where is demand really going in that asset class, what is the need? But in other areas, there’s plenty of brightness and hope around demand. I mean, we still think that fundamentally there’s a lot of support for the housing sector. You’ve got to be really thoughtful about how you buy. But we think that the housing sector still has fundamental support. And, you know, I think Tom will talk more about retail in particular. So, you know, it’s a tale of several cities now.

John Coleman: Well, I want to start where you ended then, because real estate is such a fascinating segment of the market and that it’s one of the few that touches everyone very personally. And I know neither of you is a residential housing investor necessarily. You’re not rolling up residential, single family homes, etc.. But I do think it’s relevant to the audience now to start there because it’s such a big segment of the economy. I read an article just this morning that referred to the real estate market for single family homes in the US as stagflation. Right now, you know, mortgage rates have risen. Folks are not selling their homes. There’s really a dearth of availability of existing homes in the market. We’ve seen new housing starts tick up. I think it was like 12% in the last month, just as developers are starting to build new housing. But we haven’t seen pricing coming down and we’re not seeing a lot of sales because mortgages are so high. Can you give us some insight into what you’re seeing in the residential housing market and what you think the next 12 or 24 months might look like? And then maybe since you brought it up, we’ll just start with you.

Ben Erskine: Yeah, I mean, gosh, single family home ownership affordability is so dramatically different today than it was, you know, a year ago when mortgage rates go from 3% to six and a half percent. That just changes things dramatically in home price appreciation. As you alluded to, home prices haven’t really adjusted and it’s largely driven by a lack of inventory. So it’s this funny thing going on in the market right now. You know, construction costs are still pretty high. Certainly financing costs are high, yet a lot of developers are pretty active because there’s such a shortfall of supply of inventory to buy that there’s room for new construction. It’s a funny dynamic, but all of that to say, you know, we’re more active in the multifamily space. We typically think that demand rises and falls for housing, driven by things like household formation, whether rental or ownership. But those two things really move in concert for the most part. But right now, you know, given just how difficult it is for new home ownership, we actually think it’s a support for rental housing, at least in the near term. So it’s a part of our thesis around multifamily housing investing right now.

John Coleman: Tom, are you seeing anything different there?

Tom Hahn: No, I would chime in and say 100% agree with Ben on that. I mean, a lot still depends on where you are in the country. But if you’re in, you know, the southeast, maybe the southern Midwest, some of the states that, you know, are business friendly, there’s strong household formation and strong migration patterns into those states or still a shortage of housing. And I think one of the challenges for the Fed is, you know, the occupancy costs, rent or mortgage are about 40% of the CPI. So it’s like every time they raise interest rates, they actually are then, you know, making it more expensive for people to buy homes, which means people tend to stay in rentals longer, which means there’s even fewer available rental apartments or homes to look at. And then that drives occupancy costs even higher. So it’s a bit of a vicious cycle that they’re in, and I think it takes a lot of time for that to work through the system. But we’re certainly seeing the same thing. I mean, we do have 11 or 1200 units of multifamily. We’ve been in and out of thousands in the past. But, you know, we’re certainly seeing rental increases that we can pass along that are, you know, quite a bit higher than where they used to be, especially when you’re in the Class B and C space where all of the new availability, all the new construction is obviously Class A, And so when you’re in small town America and you’ve got a suburban garden style apartment, there’s just a severe lack of that product, period, and nobody’s really making that anymore. So it’s an issue. It’s a tough one for people that have to live in more like workforce housing, kind of, you know, that lower income bracket. And they’re unfortunately really getting hit hard right now with rising rates and prices.

Ben Erskine: Just an interesting statistic, too, John. I think that I read it yesterday that more than two thirds of current homeowners have mortgage rates of less than 4%. Right. So you think about how far they have to come in before it makes sense to sell and relocate. That’s what’s tying up the inventory right now.

John Coleman: Well, what’s scary about that is it’s so far below the structural average. Over time, you know, 4% would be well below the average for mortgage rates if you look over a 40 or 50 year period. And so the question is really, do we actually get back to that level or does this just have to shake out where people normalize and a new set of rates?

Tom Hahn: And I’ll say to a lot of parts of the country, particularly in the southeast, in towns like Nashville or Raleigh or and Austin or Atlanta, you know, ten years ago you had a lot of just natural movement around jobs and like, hey, I need to spend more time now in Texas or California. I’m going to move, relocate. And with the hybrid work environment, the ability for people to work from home more easily, I think you’re definitely seeing I haven’t seen a lot of statistics on this, but just anecdotally, you don’t really have to move as frequently now, even if your job or maybe your manager you’re reporting to is bouncing around the different cities in the country. So I think it’s just a really interesting dynamic. And I mean, I don’t see any short term change to that.

John Coleman: Well, and I think we could see regional differences shake out. The other stat I saw yesterday that I thought was absolutely fascinating was for the first time in history, the. GDP of the Southeast. So kind of Texas over to North Carolina, down to Florida outpaced the GDP of the Acela corridor. So kind of D.C. up to New York, Boston, you know, forever. That’s been kind of the leading GDP area of the country. And now the southeast is actually greater in terms of GDP. There was $100 billion switch during COVID with people migrating. And so, especially in the Southeast, it’s just been this boom. And so I could definitely see a situation in which the segments of the U.S. just diverge in terms of the dynamics that we’ve been talking about. One thing I’ll touch on briefly, just because I know, again, it might be relevant to some of the folks listening, even though it’s not quite a focus for you all. I find it fascinating. You know, during COVID and shortly thereafter, there was a boom in the sale of second homes. People who lived in New York or who lived in Atlanta went and bought homes in rural areas or in New Hampshire. You know, all these places. And there was a boom in Airbnb, right? Because over the last five or six years, VRBO, Airbnb became so easy that there was this huge cottage industry in that. And Ben, you and I both saw yesterday Airbnb released results for I think their revenue is down 50% or something of that nature. You know, as we think about housing supply and what might happening with dynamics, obviously with those collapsing, you could potentially see a scenario where these Airbnb VRBO owners begin to sell or try and get out of properties because they can’t make the mortgage payments anymore or people just abandon the second home idea. You know, they thought, I’m going to go live in Vermont instead of staying in New York or staying in D.C.. And maybe that reality is not quite what they thought it was. And so I didn’t know if you guys had any perspective on whether you think that might be taking place. And if so, does that have a meaningful impact on the market or do you think that’s pretty marginal?

Ben Erskine: Yeah, I’m happy to jump in for a second, Tom. I know that’s not where either of us spend most of our time, but I did read a lot about that same stuff and have been over the past month or two. I think the article yesterday suggested that some of the worst hit markets have seen 50% declines in revenue. Not necessarily sweeping. Yeah, but still significant. Yeah, and plenty of markets that were, you know, 25, 30, 40% down. And I think that it could be interesting. I think it’d be easy to conclude that, hey, there’s going to be this glut of inventory that comes back on the market because the model doesn’t work anymore to hold it as a rental. The last number I saw was that I think there’s about a million and a half units of those kinds of rentals around the country. So even if ten, 20, 30% of those come back online, I don’t think it’s a major flood of inventory in the market, but it will be interesting to see. And then, you know, the reading that we’ve done and the research that we’ve done into the short term rental space, fundamentally in the right markets, it is a really attractive option in particular for families or groups that are traveling economically. They can usually just a short term rental or an Airbnb or their competitors can offer a home or three rooms or five rooms for a much lesser cost than you could get in a traditional hotel. And so I do think that there is a segment of that demand that’s not going anywhere. But it was certainly on fire through COVID for obvious reasons. And maybe the second and third home rentals will temper.

Tom Hahn: Yeah, I was just there real quick. I’d jump in and agree with that. I do think to me, that’s the canary in the coal mine that I kind of like to watch is at what point do people start to say, I’m so financially stressed that I love having the beach house and mountain house, but let’s just see if we can dump it. And we do talk to we have a decent network of some of these brokers. And, you know, I look at people that list houses up in coastal Maine and down in Florida and in the coastal areas of Carolina. And it is still interesting and the demand is still really good. I mean, houses are hitting the market and they’re getting viewings and they’re selling. But yeah, you do wonder how long will that persist if rates stay this high? It is a very expensive luxury. Good, you know, for sure.

John Coleman: Yeah. I will say just this for you then. This is not a promotion of any stock or anything, but I’ve got a family of. I’ve got four kids, basically. So we’re a traveling army whenever we go anywhere, and they’re often in-laws staying with us. And I don’t think we’ve stayed as a family in a hotel in probably five or six years for exactly what you said, because we don’t want the kids down the hall. They’re young, you know, we want them kind of in a contained space. So that innovation in the market has been really positive for us. But I can also see how it’s kind of probably gone a bit overboard over the course of the last couple of years. I want us to now dig into a couple of topics that I think are much more central to the models of prudent growth and of your strategy. Then want to start with multifamily housing. You guys have both touched on this right now. I know it’s something you both pay close attention to. You know, there are competing dynamics here with rising rates, with rising rents, but also with this structural housing shortage. What do you think is the. Near-term outlook for multifamily housing and what are the risks and opportunities that you’re paying attention to right now?

Tom Hahn: Well, I’ll jump in first, and I know Ben’s going to have some additional perspective on this. I mean, big picture, kind of the two city kind of theme or the best of times. Worst of times. There’s a huge difference in my mind between urban and rural, no matter what the product type is. We’re talking about kind of urban. Suburban, I guess, is a better way to say. I think that there’s a big difference in apartments between class-A new construction, which tends to be the highest price point. Right. And more existing Class B B minor stuff. And what we talked about like a Class B picture, like the suburban apartment building that was probably built in the nineties, maybe the early 2000 is the way, say, apartments used to look before now. And everybody can picture this, you know, their four stories, flat roof kind of modern looking that might have retail on the ground floor and apartments up top and and a parking garage you know kind of built into the structure. So you’re seeing these pop up all over the southeast, whether it’s Austin, Atlanta, Raleigh, Charlotte. You know, I think the risk is a lot of these developers and a lot of these guys that were buying maybe early 2000 vintage deals and pumping tons of money into them to improve them, or in the case of developer to complete the construction, they utilize bridge financing. Right. So you would typically get a three year loan with a couple of one year extensions and bridge was ridiculously inexpensive. The 12 to 18 months ago, you know, you could borrow at three and a half or 4%, maybe a couple hundred points over LIBOR and lock that in for three years by an interest rate cap. And you know, on a $30 million project, your cap would be a few hundred thousand dollars. And as that debt is now starting to come due, if you have not executed very quickly on, let’s say it’s a value add deal, if you haven’t gotten in there and really significantly invested in the asset boosted rents turned over units, your interest rate costs are skyrocketing. Those same caps that you could buy for two or $300,000 are now, you know, 2 to $3 million. And your monthly debt service is really going to be strong. So, you know, I don’t think we’ve seen the full impact of that yet. But I do think you’re going to start to see guys having to get out. There was the big story in Texas, right, The 3200 units that kind of got given back. I think that operator had some significant issues beyond just, you know, the interest rate environment. But, you know, he bought a ton of property for absurdly low rates and did not do any real value add. And as the rates were getting ready to reset, I mean, you know, it just didn’t work. So you’re going to see good operators separated from bad operators, guys that were able to get in there and improve and drive rents higher and OI higher. You know, I think they’re going to be okay. But yeah, I don’t think we’ve seen the full impact yet of these higher rates. But I mean, I think that what’s happening now is the cap rates on the new stuff, particularly in some of the cities where there’s a little bit of oversupply, they’re starting to widen out. Right. So, guys, if you got to get out of a property, you’re going to sell to a five or five and a half cap. The stuff that was trading at a 4% cap rate, which for your listeners is simply the net operating income divided by the purchase price. And now that’s going to ripple into the suburban market. So you’re going to say, well, if I can buy downtown Charlotte at a five cap, do I want to buy a suburb of Charlotte like, you know, 30 minutes outside of town at a five cap? I think I want to get a six cap for that or a six and a half cap for that. You know, so we’ve certainly started to see pricing improve. But an old friend of mine told me one time, if you’re going to catch a falling knife, you really need to grab it by the handle. And I don’t know if we’re quite there yet on a lot of the suburban stuff, so we’re sort of taking more of a wait and see approach. On acquiring more multifamily. I think next year is going to be a really good year to be a buyer.

Ben Erskine: Yeah, I mean, I won’t add a whole lot to that. I think that Tom speaks to it well. We’ve been really, really patient, really slow to deploy over the past, you know, really 15, 18 months now, you know, kind of reading the writing on the wall early last year and then certainly have felt like there would be an opportunity on the back end of everything that’s happening. And it’s maybe been a little slower than we thought it would be to kind of be realized. I do think that there’s patience. There has been some patience on the part of lenders, Right. A lot of lenders have said, hey, fundamentally, we do see the support here. We do see the [….] growth. We understand that debt service is going to eat into a lot of that. But if we can kind of get through the woods, we’d rather not take possession of the asset. Right. There’s been some patience. How long that will last, I don’t know. But I think, you know, putting it simply, there will be a separation of good operators from some operators that have just hopped into a market that was benefiting from constantly compressing cap rates for a decade where, you know, you could kind of limp through a business plan and make it work. That’s not really the case anymore. So we do think that there will be really good opportunity probably in 24 a lot of it in 24 maybe. And in the 25 as well.

John Coleman: Hey, Ben, before we leave that topic, I know that this is the faith driven investor podcast. And I know that one of the things you’ve been so great about doing and perhaps you as well, Tom, is pioneering this spiritual integration within multifamily area. Could you talk to us, apart from the financial dynamics of multifamily right now, what are some of the opportunities for faith driven investors for spiritual integration in multifamily that you’re seeing emerge?

Ben Erskine: Yeah, I mean, there are groups that have been doing great work for a long time. I think we’ve discussed groups like Apartment Life in the past, which is a not for profit that partners with the owners of apartment buildings and is really tasked with developing community right point into the fabric of community, ultimately using that to develop relationships and just have an onsite presence that’s pretty distinct relative to a lot of property owners. And ultimately that accrues to the business plan because you know better community translates to better retention, often better attraction of tenants. They’ve got some incredible statistics. You know, a tenant with deep relationships in their apartment building is between 30 and 60% more likely to renew their lease. And reducing turnover is such a driver of margins in apartment investing. So that kind of stuff has been happening. I mean, things that get us really excited are starting to see creative applications in other corners of the housing market. You know, senior living is an example. How is that market of tenants and community members different and what would loving on those folks look like? How could you be kind of curate a plan around an assisted living in a memory care community that looks different than an apartment community? And on the other end of the spectrum, what about student housing? Right. There are some really cool opportunities in student housing. On campus, Off campus. Pouring into the lives of those students with the same heart right. And it can all accrue to the benefit of a really excellent business plan. Those two things can can work together.

Tom Hahn: Yeah, and I’ll chime in and 100% agree. I think what we’ve tried to do is so we recently expanded our staff and brought on several people that are really tasked with community engagement events across all of our holdings. And you know, on the multifamily, we tend to own more of these kind of B, B minus properties. So we call that like workforce housing. It’s not really affordable like, you know, voucher or section eight, the older models like that. But you know, you have a lot of families, have a lot of people that tend to stay in place for a while. It’s difficult to attract like an apartment life model works a little bit better in newer products. That tends to be where their teams would prefer to live, you know, But we’ll go down and do food trucks, we’ll do backpack. We partnered with the local school district down in Tupelo, Mississippi, on a project we have there and gave out a lot of backpacks. And it was really cool, you know, And this little girl comes up to Jason Autrey, who runs like an engagement and said, why is this backpack so heavy? And said, oh, you need to open it up and look inside and there’s notebooks and stuff. And she was just blown away. And, you know, we’ve had residents come up and pray with us and just talk about how the other owners have never done this before. A lot of it is just how you do your business, you know, just taking care of things the right way. It’s very easy to slap a band aid on a problem or take a shortcut. And a lot of these operators just want to get in, improve and get out, and then they leave behind a lot of, you know, half fixed things. And residents that have just been residents have come to expect that their stuff’s not going to get fixed. And when we can come in and do it the right way the first time, which I think is our call to do as part of loving the poor and working for justice, you know, it leaves a big impact. We’ve had residents reach out to us even while we’re raising rents and say, I’m proud to live here now, and they don’t want to move because they’re worried they’re going to go down the street and, you know, try to save 30 bucks a month on their rent. But going to be back in a situation where stuff’s not fixed. So, you know, it’s a real holistic approach.

John Coleman: That’s awesome. And producer Joey has reminded me that we should engage in some shameless self-promotion here and that the faith driven investor website has a redemptive real estate series live on video in the library right now with the stories of places like Launch Capital, Walden Fields in the Marsh Collective. And so if you’re interested in this topic, apart from the expertise of these two fine gentlemen here, there is an entire video series where you can delve into this more deeply, Ben, I think you want to do jump in with the closing work.

Ben Erskine: Yeah, you know, I was just going to chime in and brag on Tom and PDP Prudent growth for a second because he won’t, you know, the work that they have done. He and he mentioned Jason Autry is really innovative and exciting in terms of how they’re viewing retail real estate in a way that has really been pioneered already in multifamily. Right. So what does community investment look like in a retail center? It looks different than it does in an apartment building, But when you’ve got, you know, the nail salon and the coffee shop and. A local restaurant and the Taekwondo studio, and you’ve got people coming in. Can you hold an event there? Can you invite residents and community members in? Can you love on them in a distinctly Christian way? It’s really exciting to just think about the way that they are pouring into the lives of these people, investing socially and spiritually in retail, real estate. They’re leaders in the space.

John Coleman: Let’s stay on this topic for a minute on retail, because I remember pre-COVID in my old firm when we were talking about real estate. The most frightening area of real estate was retail, right? The big trend or one of the big trends everyone was talking about was the collapse of retail. People don’t go to malls anymore. They don’t go, you know, they don’t go shopping in physical stores. There was the rise of Amazon, etc., and all the skepticism about retail. Let’s stay on that topic, because, Tom, I know you’re deeply now, what does that look like now? Is that still the case or have those dynamics shifted? And then I would love to hear more of your insights on what Ben just mentioned, how retail can actually serve a redemptive purpose in development.

Tom Hahn: Yeah, no, thank you. You know, retail has been I’ve invested in retail for 20 plus years, both personally and with prudent growth since 15. And you always feel like you’re the underdog trying to convince people that, hey, we can actually do this and do this profitably. So, you know, you don’t get the respect right that the multifamily and the industrial guys get. But it’s been very interesting. I mean, I think that going back over 20 years leading up to the great financial crisis of 08 to 10, we were building in this country a little over 200 million square feet of retail every single year. I mean, it was I think we had a huge amount of oversupply. Everybody was building strip shopping centers, grocery anchored centers, and in 08 that really fell off the cliff. Right. And I think we dropped like 40 million square feet and 50 million square feet a year. We kind of recovered, got close to a hundred, but we’re back down now. Last year, according to Costar, we delivered the least amount of new constructed retail space in over 20 years. And I think what’s happened is household formation. You know, people continue to move to the suburbs and we’re that supply demand imbalance has really started to correct. So we now have the lowest vacancy rate that we’ve had in 20 years. COVID, we like to think about the fact that we’re buying a shopping center in small town America in a secondary tertiary market. You’re really buying the community where people go. So if there’s a Walmart and you’re buying the Wallmart […….] center, which is, you know, typically in the parking lot of a Walmart, there’s a shopping center, right, with like a great club and a pizza place and so on and so forth. You think about small town America, particularly in the Southeast. I mean, that’s where you go to get your kid’s first haircut. That’s where you’re going to grab and get lunch. You’re going to stop by the bank. You’re going to you know, you see your neighbors. You know, it’s a that is an activity that people will continue to do with or without Amazon. And during COVID, obviously, COVID was scary at first with this is it, you know, it’s over. And I’ll say real quick, the crazy thing about COVID was leading up to COVID. We all wanted to buy stuff that was Amazon proof, right? There was Internet resistance. So that meant what? Gyms, restaurants, service based stuff as opposed to people selling things like a clothing store and then boom, all that stuff got shot down during COVID. There was a little tough sledding there for, you know, 4 to 6 months. But coming out of that, what all of a sudden happened was everybody stayed home. So suddenly, suburban retail has real and there’s lots of articles on this. The Wall Street Journal had some great reporting on just the return of the open air shopping center, the neighborhood strip centers. So lots of different names for them in the suburbs. Right. And there’s a real disconnect now between urban core downtown where, you know, you still have 25, 30% vacancy and the offices. And it’s a big difference. You don’t want to own a sandwich shop in the lobby of a 40 storey building in San Francisco. But you’re quite happy to own a sandwich shop in a suburb of Charlotte, let’s say. So we’ve seen really strong foot traffic. I’d say our leasing activity has never been stronger. We have about 45 retail shopping centers in ten or 11 states right now. When you say 600 or so tenants and our vacancy rate is less than 5% and some of it’s planned vacancy because maybe you had to carve out a space to put a tenant in and you have this straggling 500 square feet that’s never really worth finishing out. So our true vacancy is very, very low. So we like the dynamic. And getting back to the spiritual integration model, like Ben said, we love knowing that if we’re going to own a shopping center in a community, we want to try to bless that community right on back to like Jeremiah, working for the good of the city. It’s like, Hey, I own this thing. How do you do that? And we found it’s a combination of reaching out to tenants. A lot of our centers, we might have a church, we might have a, I don’t know, a consignment shop that’s linked with a Christian ministry or just a general secular ministry. You know, if there’s an entry point like that, we’ll try to springboard off of that. Say, Hey, do you guys want to help, too? We want to help to underwrite and host a community day. Bring people out or a sidewalk sale or We have like a youth theater. It’s run by a Christian family moving into a center that we own outside of Hilton Head. And we’re going to be grand opening down there for them. Like roll out the red carpet, welcome them. The other tenants are excited about it, you know, so they’ll participate. And there’s lots of interesting conversations that come up when you start to do that. So the tenants love it, the community loves it. We make great relationships with important people in the community, right? Whether it’s a planning board or we’ve even had lenders come to us. This was kind of blew me away when you thought about this. But we do borrow from banks and some of the local banks. They like that publicity, right? So they’ve come and offered to underwrite the cost of the event. We got financing on a property outside of Virginia Beach terms that were probably 50 basis points lower than market because it was a credit union and they saw what we were doing to some of the brothers centers and they said, We want to lend to you guys. So anyway, it’s a virtuous cycle, which is what you would expect if you’re doing the right thing. You know, it kind of comes back around. So, yeah, that’s our feeling.

John Coleman: That’s an awesome overview, Tom, and a very rosy picture in the spirit of going now apocalyptic. Let’s bring up the elephant in the room, guys, which I think everybody’s concerned about, which is office. You know, gosh, between the interest rate environment and the fundamental dynamics of rising remote work, hybrid work, you know, people borrowing at very low rates, which are now resetting even as vacancies rise. I have seen some absolutely terrifying predictions about the office market. Then maybe to start with you, what is your outlook for office? And are things quite as bad as people are characterizing them or is there some hope on the horizon?

Ben Erskine: Well, first, I just want to say thank you for letting Tom talk about wonderful things in retail and spiritual integration. And I get to talk about the apocalypse in office. This is fun. Yeah. You know, we’re not active office investors at this point anyway. I’ve spent a lot of time in the office sector in my previous career, and I think it is it’s going to get a lot worse before it gets better. I think Tom mentioned on the front end that, you know, vacancy rates right now across the country are north of 20%. And that’s what I’ve been reading as well. The way that most office leases work, at least the big chunky ones for corporates, is there long dated write these are five, ten, sometimes 15 or longer year leases. And so, you know, when a big corporate user has a lease expiration in 2027 and realizes that they only need about half their space, they might just punt that problem to the lease expiration. And so there are big chunks of underutilized office space that will hit the market in the coming years based on those long dated leases. There’s a lot of pain yet to be felt. Fundamentally, I don’t know how this corrects. It’s very difficult to redevelop most office space to other uses. You know, a lot of people think, well, just convert it to housing, right. And kind of hand it from the left hand of the right hand. But the reality of those floor plates, the reality of that construction and the support systems for the building, it’s just very, very difficult in nine out of ten instances to convert. So I don’t know exactly where that is going. There are bright spots, right? Not totally dissimilar from what Tom talked about in retail. You know, you get into some secondary markets and smaller office buildings and there’s tightness, right? Small users that are now obviously in close to home. There are some bright spots. But by and large, you know, I think that the 20% number across the country is going to continue to go up for a little while. I think that urban cores like, you know, downtown San Francisco, downtown Chicago are going to be in a tough spot for a while. I mean, it’s hard to understand exactly how that corrects. Valuations are down dramatically.

John Coleman: When it does feel like they’re going to be massive winners and losers. To your point, and I’ll invite Tom into this. But, you know, you think about tech oriented cities like San Francisco that also have major city problems right now where people are moving out where there’s crime. It’s tough to understand who’s going to occupy all that office space in downtown San Francisco right now. And even in Atlanta. My observation would be, you know, Atlanta is a pretty booming market. There actually is a little bit more return to work than in some major metropolitan areas because Atlanta was shut down for less time than a lot of major cities. And there weren’t commute problems as there were in some of the big metro markets like New York. But there are winners and losers. When we were looking for office space, I go to some complexes that were 96% occupied and it was very vibrant and everybody wanted to get in. And then I’d go into some buildings where they would tell me their occupancy was 50%, you know, because that’s what the leases covered. But there was no one in the building. It was a ghost town. I would have guessed maybe 5% of people were actually. In the building. It was almost haunting to walk through to see how empty they were.

Ben Erskine: And there was a pre-COVID trend right there, kind of the arms race, the amenities race. Hey, tenants want to be in the new class a building with the sweetheart amenities and the gym and the, you know, the conference center and kind of a concierge service. I mean, there was an arms race of the best amenities. And I think that continues post-COVID. If you look at where net absorption is, again, broad strokes around the country, there’s actually been positive net absorption in class, A space like the tranche of buildings that were built after 2015 has had something like 100 million square feet of net absorption. But everything that’s dated earlier than that has had hundreds of million square feet of negative net absorption. So it’s there is kind of a traunching of quality and a flight to quality.

Tom Hahn: Yeah. And I’ll chime in. It’s a bit like once again, the suburban versus the urban, what we’ve found because we just got some new office space in Charlotte. We have seven people staffed out of there now. And you know, it sounds a little bit, John, like your experience. I mean, we were looking for space. When you look at a smaller space, you want to be walkable and kind of a nice part of town and you want to have inexpensive parking. Those spaces are still pretty much leased up. You know, there’s not a lot of that type of product out there. When you think 20,000 square feet of space in a 40 storey building in downtown, there’s going to be more of that. And I think workers want to live. They want to work near where they live. They want an easy commute, they want easy parking. Anyone can walk outside. So these cities, these downtown districts have the crime problems. They’ve started to lose some of their businesses. And then that’s another headwind now that they’re facing, like who wants to work downtown if like half the restaurants aren’t really open and it’s not like a cool, fine hip place, whereas like the south end of Charlotte, like booming, you know, Buckhead and areas like that in Atlanta are booming. So it’ll be interesting to see how it works out. And I agree, Ben, you’re right. I mean, the repositioning, you know, prewar buildings, I think one of the big things is do the windows open or not? You can’t really make an apartment if you don’t have it’s code violations. So prewar stuff, Yeah, you might be able to renovate that into, like lifestyle housing or apartments or hotel use. But all the new stuff with the fixed glass sides, there’s really not much else you can do with that. So it’ll be interesting.

John Coleman: Well, I know we’re coming up on the end of our time here, so we’re going to do two more questions We always end with what are the two of you learning through scripture that you’d want to share with folks before we do that, maybe a concluding question. We haven’t touched on industrial, we haven’t touched on a couple of other areas. Anything else that you’d highlight right now is an interesting dynamic in real estate broadly or potentially an interesting opportunity for those listening. And Tom, maybe just start with you briefly.

Tom Hahn: Yeah, I’ll say real quick, because I tend to be a glass half full kind of guy, but if I had to be, you know, just fair to the other side, I still think that we don’t know if we’ve seen the end of the banking crisis and the impact on lending. We’ve been a little bit saved in our space by non-bank lenders like insurance companies. Life goes are very active lenders on the kind of thing that we’re purchasing. But it would be I think your downside scenario would be there’s continued stress in the non systemically important banking sector which could really ripple through a lot of small town America and secondary markets. And I think that if you see a continued I mean banks are starting to lend again, but their rates are not very attractive and they want to see you put substantial deposits into their bank in order to get a loan. So, you know, most people are bypassing that because there’s still other avenues for borrowing. But, you know, that’s a potential risk is something we think about. Industrial real quick. Just we love industrial. We do prefer smaller pay multitenant kind of stuff as opposed to like, you know, 120,000 square foot single tenant warehouse. But there’s still pretty good demand. But even that is starting to soften just a little bit. It’ll be interesting to see. A lot of people have been building that for a long time and we might need a year or two to absorb the stuff that’s been built. But I still do believe that, particularly with the smaller base stuff, contractor stone and tile guys, carpet guys, they need the showroom or their offices in the front and the warehouse in the back, and we don’t really see a significant letup in that type of product right now.

Ben Erskine: Yes, built on that. I’d just say two things. One, kind of thinking about industrial, I think there’s six or 700 million square feet of industrial space under construction right now. So the supply keeps coming. To Tom’s point, the bulk of that is big. BLOCK industrial, right? These are quarter million, half million square foot developments that were supporting some of the major logistical needs around the country. That’s a very different part of the market than is small bay kind of flex industrial space, which as we have seen, continue to stay pretty strong even in the face of some softening kind of broad based industrial demand. And then the other thing I would highlight, I alluded to it earlier is just senior living. We think that when you look at the demographics go forward, you know, the population group over the age of 85 is going to double yet again. By 2040, it doubled from 2000 to 2020, it’s going to double again. And so we think that senior living is going to be well positioned in the decades to come, in particular, assisted living and memory care. It got hit hard during COVID and is still digging out of that hole a little bit. But we think that there’s some opportunity there.

John Coleman: Well, guys, this has been a fascinating discussion of real estate dynamics. I think real estate is one of the most interesting assets in the world right now because of all the dynamics we’ve talked about with interest rates, with the COVID fallout, with a number of other things, structural housing shortages in the U.S.. To conclude, The faith driven Investor podcast, maybe just a circle to spiritual matters, which we always like to do. We like to ask you just if there’s anything you’re learning from Scripture right now, even apart from real estate, that you’d want to share with our listeners. And Tom, maybe we’ll start with you, but is there anything on your heart right now that you’re learning you want to share?

Tom Hahn: I think I’ve been doing a deep dive over the last year or so into kind of anxiety and stress, and how do you manage that? Curtis Chang has a great new book. For those of you familiar with his work over at Good Faith podcast on Anxiety from a spiritual perspective. And you know, when you’re an entrepreneur, when you run a real estate, there’s always something to be anxious about, right? I mean, are the rents getting collected? Is this problem getting fixed? Like, what am I doing? What I like to do is read through the Psalms and really try to zero in. I recently read and really meditated on Psalm 91, for example. And when you see these great Psalms of David and references like Psalm 91, verse four, he will cover you with his feathers and under his wings you will find refuge. His faithfulness will be your shield and rampart. You know, one thing I’ll try to do when I’m mentoring and talking to young entrepreneurs is say, like, you need to learn to personify those types of writings, right? And reflect on the market forces are the, you know, the things that are coming up against you and how are you going to respond to that? And just like in the Old Testament times returning to Jehovah, you know, the Lord, your God will be your refuge and your strength. And so I often think about that and pray about that when we’re dealing with difficult issues and difficult stressors that come up. And I find that it really helps to alleviate some of the anxiety and the stress and kind of re ground you and remind you why you’re doing what you’re doing and that, you know, this too shall pass and we just try to do the right thing and push through.

Ben Erskine: Yeah. There’s a book I read about a decade ago called Anxious for Nothing by Max Lucado. It’s pretty good in that direction. And I’ve been reading through First Kings, and it’s bigger than just real estate. But there’s a passage where Solomon is just praying for wisdom and discernment, and that’s a prayer that is not unfamiliar to me. But it hit home when I was reading that this week. If there’s one thing that’s helpful in real estate in life, it’s wisdom. And so just pursuing kind of faithful, godly wisdom consistently is something I’ve been thinking about a lot now.

Tom Hahn: And John, I just want to give a shout out to Ben. He gave a nice shout out to me. But I will say that Ben, the work of the faith driven investor movement in particular and sovereigns capital, and there’s a lot of overlap there to encourage us. You know, Henry and I have talked about this for years, about how do you think about a spiritual impact around a nonresidential investment. And, you know, when we brought on Jason and the work that we were doing, I mean, Ben’s team was encouraging and really was a great resource for us to start to think about how do we do this, how do we do this well, how do you kind of measure things? So, yeah, we’re very, very happy that you guys encouraged us to take some more significant steps in that direction. So thank you.

John Coleman: Ben Erskine’s a pretty good guy. I would agree with you to say, well, listen, Tom Hahn Prudent Growth, Ben Erskine Sovereign capital. We are so grateful to you guys for coming on and sharing today and hopefully we’ll get you back in a rosier time. On Mark’s in the market in six months or so, we’ll all be able to talk about how there are better times ahead. But thank you very much for coming on today and for speaking with our listeners.

Tom Hahn: Thank you.

Ben Erskine: Thank you so much.

Subscribe to the Podcast:

Looking for a quick summary of recent market trends in various industries?

We’ve got you covered with our monthly Marks on the Markets series on the podcast.
This week, Finny Kurruvilla from Eventide Asset Management joins us to talk about public equities with a specific focus on biotech and healthcare.

Episode Transcript

John Coleman: Welcome back to the Faith Driven Investor podcast. This is John Coleman and this is our monthly marks on the Market series where we talk to experts in investing. Coming from a Christian perspective who can comment on current events in markets today, we have a very, very special episode and a very special guest. Finny Kuruvilla is with us today. Finny is the co chief investment officer and founding member of Eventide Asset Management with a couple of partners with whom he founded the firm. Eventide is a long standing member of the faith driven investing community, although they do a variety of different investments in both private and public markets, Finny has more degrees than I could possibly capture here, including MDs, PhDs and master’s degrees from a variety of awesome institutions like Harvard Medical School, Harvard University, MIT and Caltech. And he’s a leader in health care investing as well as broader investing. Finny, thanks so much for being on today.

Finny Kuruvilla: Great to be with you, John.

John Coleman: Well, I want to leap right in. We’ll get a chance to dig into more of your background later. But everybody’s been kind of whipsawed by markets over the last year. It’s been a pretty volatile time in markets, and I don’t think that health care investing has been any different. What is the latest? What’s the current state of the markets in health care investing now?

Finny Kuruvilla: Yeah, you’re right, John. It has been very challenging for markets broadly and in general. One of the things we’ve seen is that more interest rate sensitive domains in the market have been especially hit hard. So that tends to be domains that have growth farther out. So more high innovation, high financing type industries have been punished. And so that definitely includes aspects of health care. So one set of health care companies that has been especially hit hard is biotechnology companies. So they tend to be long duration. So most of the value is and many years from now, they also have high capital needs in terms of financing. So they often have to go to the market to raise more money given that they’re usually not profitable. So those have been challenged. There have been some bright spots in the middle of all of the difficulties. So in general, one of the things that we’ve seen is that cash flow positive companies have done relatively well. And so, for example, a lot of small medtech companies have done exceptionally well. This has been a great year for M&A. We can talk more about that. So we’ve seen a lot of companies appreciate on the back of very robust M&A from the larger companies. And then we’ve also seen domains like cancer screening do really well, Alzheimer’s disease, which has been something that has become a passion project for us here, has been another area of significant growth. So there has been some bright spots in the midst of what’s been a challenging market. And overall, we think that the long term drivers are positioned really, really well for health care. And so we continue to be excited about the space.

John Coleman: When you mentioned the duration of biotech investments and especially innovative health care companies that require a lot of capital and how they’ve been sensitive to markets recently, particularly, I imagine, interest rates and just the M&A markets having previously dried up. I’m interested to get into that. If you were to take a look today, do you think the air has been let out of those markets so far from a macro perspective, or do you actually think the macro environment still has more room for these securities to decline?

Finny Kuruvilla: Yeah. So generally speaking, those companies have had the stuffing knocked out of them to the point where they’re priced at very low valuations. And the typical company and especially in the biotech side, has declined somewhere in the 50 to 80% range. So it’s taking a very significant hit and that began a little bit more than two years ago when we’ll talk about this probably later. But when some of the covid enthusiasm went away, there are a few areas where some companies still look a little expensive. But I would say, broadly speaking, the industry looks very cheap. And if you use long term measures of is the industry expensive or is it fairly valued? It certainly looks fairly valued. One of the things that’s challenging in our space is how do you value companies where you can’t use price to earnings or price to free cash flow or EBITDA, but are some of the more classic measures of valuation given that most of them are not profitable? And so you can use measures instead like enterprise value divided by cash on the books. So that’s a measure of roughly how much enthusiasm there is in the space. And of course, you have to look at burn rates as well to make sure that you’ve normalized there. But on those measures, for example, last summer was actually an all time low in the space in terms of valuation. It’s gotten a little bit better since last summer. But on the whole, I would say that the companies are valued quite inexpensively.

John Coleman: And you touched on this previously. Look, I think most of us have the perspective that health care has pretty good fundamentals. Right now, broadly speaking, in the sense that it’s a greater proportion of us spend, at least internationally. It is. If you think about biotech and if you think about some of the areas in health care in which you’re focused, obviously markets have disconnected, but have you seen any change in the fundamental forward outlook for the companies themselves or for the industry? Or is that still universally positive as health care continues to increase?

Finny Kuruvilla: Yeah, in general, it’s gotten quite a bit stronger for these companies. So I’ll give you a few examples of what are the leading indicators of health for these companies. So the first is the demographics of the population. So one of the things that I think most of us know is that as you get older, you tend to use a lot more health care and those last 1 to 2 decades of your life use a lot more health care than you’ve used in the earlier younger portions of your life. And I think as almost everyone is aware, the world is getting a lot older where a lot more of a gray haired society. Last year was the first year in history that China’s population actually declined. Even in Western Europe, Japan. We’re seeing tremendous shifts in demographic structure there. So that bodes very favorably for the industry and that is likely to continue for years, decades to come. That’s number one. Number two is there has been tremendous technology innovations that have occurred in the last few years. I was a practicing physician up until roughly 2006 or so. And I look back at how we were treating patients, particularly with some of the diseases that we used to see, and it almost looks primitive. Just 20 years ago, what we were doing compared to what’s happening today, I mean, if you had told me in 2023, these are some of the therapies and how they’re going to be used, I would have said, sounds a little sci fi to me, but it’s happened and the pace of technological improvement has been just astounding. So just to give you a little bit of a flavor for this, when the human genome was first sequenced in roughly the year 2001, it cost about $3 billion to sequence that first individual, and it took roughly 12 years. So $3 billion in 12 years. Today, you can do that for less than $1,000 and it takes less than a day. So the costs have shrunk from 3 billion to less than a thousand. And then what used to take 12 years. Now it takes less than a day. And that pace of innovation far surpasses even what, for example, we’ve seen with Moore’s Law and semiconductors and computers getting faster and being able to have more memory on board. And that kind of just incredible gain in technology and then knowledge in terms of what are the parts of our genome that are responsible for health or disease. We have grown literally exponentially in the last 20 years or so, and most of those discoveries have yet to make their way into medicine. So there’s a lag of at least ten years or so between when someone comes up with a good idea before when it’s actually used in human populations. And so this kind of technological improvement is just incredible. And we are we’re right on the cusp of what promises to be a very exciting century of innovation. I sometimes say that we humanity in the year 2100, so most of us sadly will be dead and gone. But our grandchildren in the year 2100 will look at us today in terms of our health care, similar to how we look at cavemen who are using leeches and spears to slash their bodies for health care. Right. That’s going to be the degree of of improvement that happens in this century because we still, you know, even very basic questions like, you know, how does memory get made and stored? What is really the sustenance and the genesis of cancer? How do we really understand autoimmune disease? You know, we still don’t really understand at a deep level what causes those disease. And so we’re in this place now of how can we take these little seeds of insight that we’re getting from these genome studies into being real actionable therapies that can be useful in human populations. And so it takes time to develop that. And that’s going to be what happens over the decades to come. And so that shift to these more high tech type therapies using some of these insights from the genome technologies is what’s to come. And that’s only going to be accelerated. By, for example, AI which if we have time, we can talk about some of that. But another tremendous tailwind that the space has is we have more and more economies coming online that have the ability to access modern health care. And so you look at India, for example, that is slowly but surely starting to become more of a modern economy with access to something like what we have in the US. I mean, we’re talking about, you know, 1.4 billion people coming online. This doesn’t even count. For example, countries like Africa, a lot of Latin America that still really doesn’t have access to the kind of health care that we do in North America. And so that’s another tailwind now where we’re talking about massive populations. They’re going to be coming online in future decades. And then you layer on the fact that the diseases of, let’s call them addiction. And so this includes obesity. So, so much of obesity is really an addiction related problem. Tobacco of mental health, which is often tied in to a lot of issues of technology, loneliness, social media. Yeah, very profound structural reasons for that. These are going to be the kinds of diseases that biotech can at least partially address, maybe not fully address, but at least partially address. So we have a lot of reasons to be optimistic about some of these tailwinds that we have going into the century.

John Coleman: Well, just a small caveat, and then I want to pick up maybe with some examples. Going back to the areas that you’re most excited about that are near commercialization, those that you’re actually keeping an eye on. But I’m not a physician, but one of my children has a rare genetic disorder that only about 1600 people in the world have her family of disorder that they’ve actually sorted out now, that they can study genes. And only two people that we’ve discovered have her exact gene disorder. And what’s amazing to me is both the progress we’ve made to be able to even diagnose a thing like that, which wasn’t possible a handful of years ago, but also the progress we need to make to understand how to treat it or how to deal with these different disorders that aren’t well studied or don’t have a clear path. And so it is that dichotomy of just remarkable progress. But 100 years from now, you have to think our current approaches are going to look pretty primitive to whomever is practicing at that time. So many great threads to pick up on. But you had mentioned Alzheimer’s and cancer, for example, in your initial comments. And one of your themes here was the advances that are coming that people don’t even know about or that have lagged behind the research and are just coming to market. What are three or four areas that you’re keeping an eye on that you think are actually near to coming to market that are most exciting?

Finny Kuruvilla: Yeah, I would certainly include Alzheimer’s in that. So that is one that is just now coming to market like this year. And so I’m right now in Boston, Massachusetts. So just across the river, there’s a company called Biogen that got FDA approval for just last month, in fact, for the very first disease modifying treatment of Alzheimer’s disease. And so while in general, one of the sad but true facts of medicine is that a lot of what medications are doing is they’re addressing symptoms or manifestations of disease rather than the root cause. The root cause is often very difficult to address and sometimes technologically impossible. But one of the things that we have now just in the last six or nine months made progress and as a society is the root cause of Alzheimer’s disease. And so the way to think about Alzheimer’s is that in your brain, in an Alzheimer’s patient, what happens is there are these what are called plaques that are forms that just like you get a plaque on your tooth, you get a plaque in your brain, it’s a three dimensional ball. And this ball ends up killing the neurons that it touches. And if you go in under a microscope and take out this little ball and ask what’s inside of it, there’s two main proteins, two main components inside of that ball, and one of them is called a beta. And we’ve known this for decades and decades. This has been widely known. But how in the world you cleanse the brain from this? Well, somebody had a very clever idea. Which is to use our immune system to clear out these plaques from our brain. So our immune system, of course, we use all the time to fight off infections or to fight off cancer. Not a lot of people appreciate that. That’s a different story. But here somebody figured out, well, hey, why don’t we take an antibody? So an antibody you can think of, it looks like a Y. And the top part of the Y binds to it sticks to something that is dangerous, say, a virus or a bacteria. And when the top of that Y sticks to its target, it sends off a signal to the immune system saying, Hey, there’s something bad here, come and kill it or can’t clear it. And so these cells come in and they eat what’s at the tip of that Y, and they end up degrading it and thus getting rid of the infection. Well, somebody said, well, why don’t we develop an antibody against this, a beta, this component of these plaques, the chief component of this plaque, and then we’ll administer it to patients, give it to them in their veins, let the antibodies swim through the veins, go into the blood, and let the immune system clear out. And then let’s measure what if we can clear it out so you can do what’s called PET scanning or PET imaging just to see if the plaque is still there. And then let’s also measure cognitive function. So looking at memory, for example, executive function, some of the things that we all value that you lose, unfortunately, with Alzheimer’s disease. And so these data were presented last year, and it was very exciting that they showed in these PET scans, if you administer this antibody, it’s called the cannon MAB that is just given IV. Like I said, that indeed you get very profound, in fact, almost complete clearance of these plaques within a few months. And then more importantly, if you measure the clinical function of the brain, the executive function, memory, etc., you see a 27% improvement cloud there, which is a big deal. And I have a father in law who recently passed away from Alzheimer’s disease. And it’s a absolutely awful way to die because you lose so many of the functions that really make us human. And so when this came out, I mean, I was jumping up and down with joy here because Alzheimer’s is a disease that we don’t need to suffer from if we can get at this root cause. So there’s now a second company, Eli Lilly, that is going to hopefully get FDA approval soon. And now that the industry has a foothold, one of the things that biotech is really good at is once it gets a foothold, then it can iterate and improve, right? But you need something solid to be able to grab a hold of. And so that’s definitely the first area that I’m watching very carefully. And if you look at Alzheimer’s, morbidity and mortality, in other words, deaths and suffering both from patients as well as family and caregivers, this could be a real game changer.

John Coleman: Well, an example, if any, just of what you described about the pace of technology. I’m reading a book called Outlive by a guy named Peter Attia. Right now. I don’t know if I’m pronouncing his last name properly. And I just finished a chapter on Alzheimer’s, which was honestly that the most hopeless of the diseases or disorders that he was discussing. Right. Because there was really no progress in preventing or treating it other than behavioral modifications, exercise, things like that. And what you’re describing seems to have manifested almost entirely since even that recent book came out. I mean, that’s a remarkable amount of progress against a disease that really had no, from what I understand, effective treatment until now other than preventative things like exercise and diet.

Finny Kuruvilla: That’s right. Yeah. And Peter Attia is someone who is a very smart physician and that book is not that old. It had just came out for this reason. Yeah. Yeah. And the fact that it’s already outdated, there is testament to how quickly the industry is changing. The other area that I am very excited about is cancer screening. So I think most people realize that if you can catch cancer early, then the probability that you can get it removed and live a long and normal life is much more viable. When people find cancer late at stage three or stage four, then that’s tend to be when you get the really bad outcomes. So this, for example, explains why pancreatic cancer or ovarian cancer, these are organs that are deep within your abdomen. They’re typically not caught until later on stage three or stage four. And so the mortality from those diseases is much higher than it is, for example, with diseases that it’s much more obvious, like, say, a basal cell carcinoma, something on a scan where you can just cut it out because you see it. And so early detection is half of the battle with cancer. And it will one day be the case that we’ll go in for our annual exam with our PCP and they’ll simply draw blood. And as it turns out, your cancer is shedding small amounts of DNA. Into your blood. It’s very, very trace amounts. But these small amounts of DNA have signatures of mutation on them that if you have the right technology, you can identify them and say, oh, you know what? This person who came into my office, they’ve got early stage prostate cancer or breast cancer or ovarian cancer and then go in and do scans and surgery to get rid of it much more early and getting ahead of the curve. So that’s really exciting. We’ve already made some headway in that. So one of the classic examples of a company that we’ve invested in now for a very long time is using stool to detect colon cancer. So the traditional way of looking for colon cancer is a colonoscopy, very unpleasant. I think most people know how you do that. You have to drink some very unpleasant solution that clears out your bowels and along to but the camera gets put up your rear end and you have to go under a form of anesthesia conscious sedation for that. Who wants that? I mean, that’s not very pleasant. But now that’s becoming much more standard of care is somebody mails a box to your home and you use the bathroom. You just take a piece of stool, fish it out of the toilet, put it in the box, mail the box back to the company. And what they will look for is in the stool a trace amount of this mutated cancer DNA and use that as an early warning system, so to speak. And we know that the sensitivity on detecting cancers there is greater than 90%. So it’s very good. And now it’s becoming standard of care that starting in age 45, you can do that instead of having to do a colonoscopy. Wow. So that’s pretty awesome for especially those of us who are in our forties or beyond that don’t necessarily want to do the whole colonoscopy ordeal. And so there are that company and then a couple of others that we’ve been investors in are looking at how can we make this purely blood based? Because even that’s got to deal with your own stool. That’s not the most pleasant. And why not have it be the case that when you go into your annual visit, just do the blood draw while you’re getting your cholesterol checked and your blood glucose and all that, that they’ll just additionally check for a panel of cancers. And so that’s very, very exciting. The blood based cancer screening is still yet at the experimental stage and it’s not yet prime time, but I think in the next 5 to 10 years it will be something that becomes much more routine. So I’m very, very excited about that as a way to address the second largest killer of people in America, which is cancer. Speaking of which, there’s so many other areas that I’m excited about, but I will say that cancer, for me is near and dear to my heart, primarily because when I was a physician, a lot of the patients that I saw had leukemia or lymphoma or one of these blood related malignancies. And I just think it is just awesome the kind of technology that we have enjoyed that is completely changing the way that the cancer is done. So let me illustrate here with an example of something that I think is very profound. So in general, with cancer, the most common cancer of childhood is leukemia. So a lot of us probably know individuals who had leukemia as a child or parents who have children who have had leukemia. It’s very common. And the way that leukemia therapy has progressed is astonishing. So in 1970, if you had a child with leukemia, he or she only had a 10% chance of making it to adulthood. So fairly bleak. Today, it’s somewhere around 85 to 90% chance of making adulthood so much, much better. Odds of survival there. And that’s on the back of a lot of great therapies that have been developed in the industry. And in particular, though, one of the things that we’ve known for a long time is that so much of what cancer therapy really is, is it’s giving basically poison to a person. And what you’re trying to do is you’re trying to poison the cancer faster than you’re poisoning the rest of their body. And there is a window that you can try to thread in order to make that happen. But it’s a narrow window. And it’s also why, for example, the side effects from chemotherapy are what they are. They will kill more rapidly dividing cells. So when you’re giving these poisons, the cells that are dividing the most quickly are going to be the ones that take the hit. So your hair will fall out. As it turns out, the hair cells are rapidly dividing your gut. Cells are turning over very rapidly. And so you’ll get nausea, vomiting, diarrhea, fatigue. A lot of these things are the consequence of these very crude. Let’s give them poisons. And in fact, a lot of chemotherapies are, in fact. Iterations of chemicals that were used in war in order to kill major populations. It’s kind of scary. So this is how a lot of chemotherapy is built on, is just let me give a fancy form of poison and try to thread that needle very carefully. Well, when I was a physician, as I said, that was the mainstay of what therapy would be is giving these glorified toxins or poisons. I’ll tell you a true story here of a little girl named Emily. She was diagnosed at five years old with this leukemia, the most common form of childhood cancer. 85% chance of cure. 85 to 90 parents were told, hey, if you’ve got to pick a cancer, this is the one to get. They’re all like, okay, let’s go through the therapy. She goes through the therapy and lo and behold, she relapses, and so does she’s in this 10 to 15% that aren’t likely to make it. And after this relapse, it comes back very aggressively. And as cancers often do, when they come back, you just feel really bad for the patient because you very quickly run out of other options. Parents are told she’s got weeks to live. They were told, just put her in hospice, make her comfortable. But unbeknownst to them, this was at CHOP at Children’s Hospital of Philadelphia. There was a brand new therapy that was being developed, and she was literally the very first patient to get it. So, wow, this therapy is so cool. Let me explain it to you. So I mentioned to you before that one of the jobs that our immune system has is to kill cancer. So a lot of us realize our immune system kills bugs, bacteria and viruses, but we don’t appreciate enough how our immune system is actually fighting cancer all the time. So as it turns out, every single one of us has some low grade cancer that’s brewing somewhere inside of us. But most of the time your immune system is scanning your whole body and it’s looking for something different than normal. And it’ll kill that cell because it recognizes it as foreign. And so that is something that we should wake up and thank God for every day, because our immune system is our number one anti-cancer prevention agent that we have. And this is the reason why, for example, HIV patients who’ve got weaker immune systems often die of cancer. Well, one of the things that somebody figured out to do is why not take someone’s own immune system and the T-cell in particular, and we’ll take it out of the body and we’re going to infect that T-cell with the virus. And what we’re going to do with this virus is it’s going to be a good virus, not a bad virus, but a good virus. And that virus is going to have a homing beacon on it that’s going to train that T-cell to go straight to the cancer and kill it. And so they did this with Emily. They just took out her blood, just a simple blood draw, isolated those T cells, treated them with this virus, and then re infused her own, now modified T cells back into her body. And guess what happened was that in 23 days, her leukemia was gone. And wow. Yeah, it’s amazing. And you could actually watch. And they did this. These scientists and physician did this. They would take regular blood draws and they would watch these modified T cells grow in terms of numbers in her blood as they were amplified and as they saw this cancer and they would go and kill the cancer. And so this particular therapy, it’s called CAR-T, is FDA approved now. And we will often see somewhere between 60 to 80% what’s called complete responses, meaning that the cancer is completely gone. So Emily, as I mentioned, was diagnosed at five years old. She’s in her twenties now. She’s very healthy, walking around, doing great. This is like awesome, right? Like we’re engineering our immune cells to do things that they otherwise wouldn’t do and train them to kill cancer. And so this whole frontier of using the immune system. Using things like CAR-T immuno oncology therapies to train it to get better at killing cancer in a more directed manner, as opposed to giving the simple and kind of toxic style chemotherapies is going to be the future. So that’s another area that I’m really excited about. So this will be three of my favorite areas Alzheimer’s disease, cancer screening, and then training the immune system to kill your cancer.

John Coleman: Finny Those are amazing examples. What a cool story about Emily as well. One thing you’re describing I’d love to dig into for investors is the life cycle of these medical innovations is quite long. Right. Starting with university research or basic research, culminating in commercialization through a pharmaceutical company, etc.. And across that spectrum, there are both private markets and public markets investors. Talk to us a little bit about the role that both private and public markets play in this space and also just any difference in the way markets are reacting in the current environment between those two. Like are you seeing as big a collapse in private markets as in public markets, for example, and valuations, or is that disconnected somewhat?

Finny Kuruvilla: Yeah. So there’s certainly a vital partnership that exists between the private and public markets. And so there’s this whole field of venture capital that goes and finds these promising ideas that incubates them from early stage all the way to a hand-off of an IPO into the public markets. And if it weren’t for America’s very vibrant venture capital industry, the world would be very impoverished. So some of those therapies that I just mentioned to you, like those CAR-T, those those trained immune cells came from venture backed companies and approaches. So this is an essential partnership. In general, public markets aren’t ready to receive these very early ideas yet until they have some validation. And so that validation takes place in the womb, if you will, of these private vehicles that are typically venture backed. And so in terms of where we are there, there’s this phenomenon that’s existed for many years where the public markets tend to lead the private markets. And so when there’s a lot of great opportunities for IPOs, then that tends to be a way that the private markets get their exits. You know this industry very well also, but the private markets need liquidity. They need some way to exit in order to raise more funds. And so when the public markets are open and the private companies can go IPO and eventually the private investors can generate a return on their capital. And so for that reason, there is this lead that the public markets have on the private markets. There’s certainly an interdependence there. But in general, that’s the relationship that we’ve seen right now. We’re in this place because of the public markets, as we talked about earlier, declining in their valuations. And in general, it’s harder to IPO when people are a little more fearful. That’s meant that private funding has also declined and there’s not nearly as much money that is going into Series A’s and B’s, as was the case a couple of years ago. And so that’ll change and things will eventually normalize and go back. But right now we’re on the private side. We’re about where we were in 2013. So we’ve actually taken quite a step back in terms of amount of funding there. So that’s quite unfortunate. But we’ve seen this happen before and in general, once we get a little more animal spirits, once we get more excitement in the public markets, then IPOs will open up and that will enable some of these private companies to IPO, which will then enable the private companies, the venture companies, to go and raise more capital. So that’s high level where we’re at right now.

John Coleman: Which is interesting because we’re closing in on highs again in public markets, but it still is lacking. I love the term animal spirits. It still is lacking animal spirits a little bit, right, Because we’re you know, the public equity markets have recovered, but you’re still not seeing an IPO market quite as active in an M&A market. There’s still a lot of caution, I think, right now.

Finny Kuruvilla: That’s right. And the reason that the public markets are doing well, especially the Nasdaq, but even the S&P 500 is because their market cap weighted and so or I think most people understand this, but in case someone doesn’t. If you look at the S&P 500 and that index, it’s not equally weighting across 500 companies. It’s overweighting on the companies that have a higher market cap. So Apple, Google, Amazon, Meta, those kinds of companies have a significantly larger weight in the index. And because there were such fears about recession really for the last year or so, what’s happened is that people have gone into these mega-cap names, especially mega-cap technology companies, and that has pushed up these indices. But where we’re at right now is the dispersion, meaning the spread and valuation between the largest cap companies and the smallest cap companies is actually two standard deviations wide of normal, meaning that that spread is very vast right now. So you’ve got really expensive companies on the high market cap side and then very inexpensive, very cheap companies on the small market cap side. And so it’s unusual that we have this kind of spread happen. In fact, often it’s the case that a lot of the big companies are regarded as sleepier companies that maybe don’t have as much growth ahead of them and the small companies, that’s where the action is because they’re going to grow and there’s a lot of excitement there. But right now, partly deserved the large cap companies have shown because of AI and some other reasons that there’s cause for excitement there. And in general, the very predictable defensive quality is that people now appreciate that Google and some of these other companies have they actually have done really well through even hard times where people have realized they’re not quite as cyclical as people once thought. So that’s the reason why we’ve seen some of this disparity in valuation.

John Coleman: So I want to hit a couple of other quick topics before we get to some of our concluding questions. One, I promised myself I was not going to ask because it felt like asking about Bitcoin like four years ago. But you mentioned artificial intelligence. So I am going to ask, where do you see the intersection of AI and health care right now? What are you most interested in at that intersection at the moment?

Finny Kuruvilla: Yeah, I recently did a call on this and AI in general and where it’s at. And one of the things that we need to differentiate is that AI is an umbrella term and there’s a lot of differing component technologies underneath it. The one right now that has everybody excited are the LAM, large language models. So ChatGPT is the most famous bard, which is Google’s version, is the second most well known. And these are not as sophisticated as a lot of people might think. They’re very impressive, no doubt. But basically what they’ve done is they’ve ingested huge amounts of text and they’re very good at predicting what will be the result of, say, an autocomplete. In a lot of ways they’re just glorified autocomplete functions. Certainly impressive, no doubt. And there’s good reason why there’s enthusiasm there. But in terms of really achieving the kind of. Judgment and rationale that humans have. They’re a long way away. Now, how can this breakthrough and LAM help the world of health care? It certainly can. And there’s a few dimensions of assistance that we can have. I mean, in general, I think these LAM will be a lift to most industries. Just because it’s I recently heard an analogy that it’s like you’ve got an assistant sitting next to you who’s passed the AP English test. Maybe their judgment isn’t that great yet. So maybe they’re like a high school student who’s just gotten a four or five on their AP English exam. That’s kind of what you have now as an assistant sitting next to you. And I use chat GPT for when I want to quickly get a digest of a lot of material because it is good at doing that, where I think it’s going to be helpful eventually and we’re going to need a few years of investment here. But besides that general uplift from having an assistant next to you, who is this AP English High School student who’s done well there, it’s going to be helpful for predicting things like what drugs will be especially effective to target certain medications and then what populations will be more precisely targeted from a particular therapy and receive greater benefit there. So for things like pattern detection, it’s going to be amazing. One of the areas that I think is one to watch and I’ve been saying this for like ten years, is if you take head to head a skilled physician and some kind of AI algorithm and you give it a bunch of patients who have a bunch of symptoms and you say who can predict what the patient really has, the handwriting is on the wall that AI is going to be the physician over time. And that’s something that is going to be very transformative to health care because computers are just way better than humans at doing pattern recognition much more rapidly. So you think about radiology looking for the spot on the lung as a cancer or not, or, as I said, kind of classic internal medicine diagnosing symptoms. And so what this means is that there’s going to be a replacement eventually, probably not that long from now, of a lot of traditional doctors who are basically doing pattern recognition with some of these AI engines that are going to completely trounce humans at that. And just like today in chess, we know the even the best chess players, Magnus Carlsen and Caruana and all these people, they can’t be the best chess algorithms. The best doctors will not be able to be these highly skilled and well trained AI algorithms. So look out for that and advise your children and those thinking about going into medicine to be cautious about how they choose their career and make sure that they’re choosing one that’s going to have some longevity.

John Coleman: That’s fantastic. Before we close with what you’re learning through Scripture, it’s kind of obvious the redemptive nature of the work you’re doing just from the stories that you’ve told so far. But maybe comment briefly on how you think redemptive investors or faith driven investors should think about participating in health care, because there obviously are some things like ethical quandaries that you encounter, etc.. But how do you think about your faith in the context of investing in this space?

Finny Kuruvilla: Yeah, there’s a lot to be said on this, and I know you’re also a deep thinker in this, but I would say that in general the world has gotten somewhat skeptical about progress. You know, if you go back and look in the early 20th century or mid 20th century, there was a lot of optimism about technology. And then eventually it turned, especially in the back half of the 20th century, to a lot of fear, you know, Terminator and things like that. And we have forgotten that the creation mandate that God gave to all humans starting in Genesis one, is something that we have yet to realize, and it is something that health care is probably, in my opinion, almost certainly the single greatest area of where technology and progress can manifest itself in positive ways. And so as investors, as we’re thinking about where to allocate our capital, this is an area that I think just screams out unmet need here. This is an area where we can feel really good about advancing the global common good. There are other areas where sometimes I look at and I think, wow, what is the true common good that this is promoting? How is human flourishing really going to come from this company? You know, not mentioning any specific companies here, but often it feels like people are simply chasing profits as opposed to thinking about how does God want us to be allocating capital to really meet the needs of humanity? And I think health care is a very special field and that if you have some basic screens in terms of, you know, for example, not promoting abortion and things like that, then I think we. Can feel really, really great about how we can better advance the lives of millions and millions of people all over the world.

John Coleman: Well, Finny, we want to conclude today with what we ask all our guests, which is just what you’re learning through scripture that you want to share. I know you’re a deep thinker on these topics, and you do have a very thoughtful spiritual life. So is there anything right now that you’re studying that you want to share with others?

Finny Kuruvilla: Yeah. So I recently have been doing a fairly deep dive as a family and a couple of Paul’s letters, namely his letters to the Thessalonians and then his letters to Timothy. And one of the concepts that I’ve been very captivated by and doing a lot of further biblical study on is a term that I got this from a commentary, but the term is mimetic discipleship. And so if you think about how Jesus did his discipleship, it was very much this process of following him. And then in the process of following him, we become transformed. And so you can summarize discipleship and the line from Jesus in Matthew 4 where it says Follow me and I will make you fishers of people or fishers of men, the older translation say, And so you follow. After Jesus, you imitate him. You have this. Essentially what the disciples had was a 24 seven school of imitating Jesus and following in his paths. And then there’s a promise attached to that following, which is, I will make you fishers of the people. And I think we’ve moved more into an informational based way of trying to do discipleship as opposed to a mimetic or following way of doing discipleship. And it’s in a sense like not surprising given how a lot of our education models are operating. But you give someone information via a sermon or a book or something like that which have their place. And I’m certainly a fan of good sermons and good books, but I think more often than not, we’re lacking that component of mimetic discipleship. And mimetic is, of course, the adjectival way of describing the word imitate. And here I would point to the example of the field of medicine. So can you imagine what medicine would be like if you just gave people some textbooks and you said, Go read these books and go be a doctor? Right. It would be like, I don’t want to be treated by someone who’s gone through that kind of training. Instead, what happens is your first two years of med school are the textbook years. The second two years you’re watching somebody else do something and you’re helping them. And then when you start internship and residency, they’re watching you. But you got somebody over your shoulder. And eventually, after four years of that, then they release you to be able to train somebody else in that process. And so it’s tilted much more at this aspect of mimetic training, you know, mimetic learning where you are. Yeah, you’ve got to know some information, of course, but you really don’t become a doctor until you’ve completed all of that. And I just think, how much of Christianity have we built on more of an information transfer type system as opposed to a mimetic system? And this came up because and especially first Thessalonians, it’s a dominant theme, which I had personally missed, of how Paul is describing how he establishes his church and in this case, Thessalonica. And it’s a great study to do to go through and trace out that theme of where is Paul appealing to this concept that really Jesus initiated what mimetic discipleship is all about. So yeah, I’m very excited about this and wanting to go deeper into this.

John Coleman: Finny Kuruvilla I wish we had 3 hours for today’s podcast instead of just this hour. I think you have left us with a lot to think about and a lot of positive hope for the future with innovations in health care. So we’re grateful to you for coming on the Faith Driven Investor podcast today and for all you’re doing it, Eventide and elsewhere. Thanks so much for being with us.

Finny Kuruvilla: Thanks, John. I appreciate being with you.