Jailene Sinchi (JS): Financial services cover everything from banking and insurance to asset management and fintech. From your perspective, what areas of industry are most critical to understand in today’s environment?

Anurag Dhanwantri (AD): Within the context of financial services, we prefer businesses that do not commit their balance sheets, avoid excessive credit and/or catastrophic event risks, and generate sustained returns on capital. Businesses we like include:

• Payment networks: They have enormous scale, connecting thousands of financial institutions and billions of credit card holders with millions of merchants worldwide. Their business models generate high returns on capital and attractive free cash flow per share growth.
• Rating agencies: We believe these are a solid investment because ratings are practically mandated for fixed income investing, making the business model essential and highly profitable.
• Insurance brokers: Insurance brokers benefit from the growing and complex landscape of the insurance industry, providing valuable intermediary services. Globally, insurance is now a $7 trillion industry, and the complexity of insurance is escalating. For example, cyber insurance is a complicated space that many companies do not understand. They need an intermediary to help them navigate the complex insurance landscape, which is where brokers come in.

Businesses we avoid include:

• Insurance companies: Insurance companies often don’t cover the cost of capital and face significant catastrophic risk.
• Banks: Like insurers, banks face strict regulatory constraints, aside from a handful of very large players, most operate at the sub-scale level. Regulatory headwinds seem to be benign at the moment, but we worry that this favorable regulatory environment will not last long, eventually impacting bank valuations.

JS: How do you anticipate the Federal Reserve’s rate cut in September will influence financial institutions?

AD: The 25-basis point (bp)¹ rate cut by the Federal Reserve is a good start, but in our opinion, it doesn't significantly impact consumers, investors, or financial institutions behavior – for now.

Consumption is 70% of our economy, so consumers drive the bus. The vast majority of consumer debt is in mortgages followed by auto loans, student loans, and credit card debt. While mortgage rates have come down a bit, they are still very elevated relative to levels over the last 15 years. Student loans and credit card debt are not highly sensitive to interest rate changes. It’s unlikely that the 25-bp rate cut alone will change consumer behavior.

Investor sentiment is interesting because investors have anticipated the Fed cutting rates now for a long time. The cut was a good reaffirmation of their expectations, especially with tentative signs of weakening employment. But again, for investor sentiment or investor actions to change materially, we need more follow-up action.

JS: How do you see technological innovations like AI impacting the financial services industry in the next five years?

AD: Financial services firms are heavily regulated, so innovation tends to be slower and often happens outside the regulated system before being absorbed. AI and stablecoins offer significant potential for innovation, but it is still early days. Banks and insurance companies will eventually integrate these technologies, but the process will be evolutionary rather than revolutionary.

JS: In an environment marked by ongoing uncertainty, how do you differentiate between short-term market noise and longer-term opportunities across the sector?

AD: I believe in investing for the long term and focusing on businesses with durable advantages – companies that won’t be disrupted by the next technological innovation, regulatory shift, or geopolitical event. Potential disruptive challenges are inevitable over the course of any investment. The key is to avoid chasing shiny objects and instead concentrate on the fundamentals, particularly free cash flows rather than reported earnings. For me, that’s the real mantra for sustainable, long-term investing.

JS: What advice would you give to young investors looking to develop their careers in investing, or otherwise?

AD: Just as investors avoid chasing investments based off the short-term, you should avoid chasing the latest fads. Embrace the need to reinvent yourself and stay proactive in learning new ways of doing things Embrace being in an uncomfortable place in your life. If you are coasting throughout your career, you're doing something wrong. Challenge yourself to continue to achieve, embrace this process proactively, and most important, invest in yourself over the long term.

JS: Thank you for your insights, Anurag.