Letters #192/193: Dennis Lynch Jr. (2010/2021)
Letters #192/193: Dennis Lynch Jr. (2010/2021)
Head of Counterpoint Global (Morgan Stanley Investment Management) | Lynch Calls Holdings in Morgan Mid-Cap Fund 'Unique' | Dennis Lynch Memorial
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Today’s letter is a double header. The first letter is the transcript of an early Dennis Lynch interview where Dennis discusses his investment philosophy for managing the Morgan Stanley Mid-Cap Growth Fund, as well as three investment ideas: 1) Ultra Petroleum, 2) MSCI, and 3) Mead Johnson Nutrition. The second letter, particularly fitting as it is Father’s Day tomorrow, is the transcript of Dennis’ speech at his father’s memorial. This is a particularly interesting pairing because the first transcript shows how Dennis assesses investment opportunities, and the second, arguably more interesting transcript, shows what Dennis values in people.
Dennis Lynch is the Head of Counterpoint Global at Morgan Stanley Investment Management (MSIM). Prior to leading Counterpoint Global, Dennis was the Head of Small and Mid Cap Growth Investing at MSIM. He started his career as a Research Analyst at JP Morgan Chase.
I hope you enjoy these transcripts as much as I do!
[Both transcripts and any errors are mine.]
Related Resources:
Morgan Stanley Investment Management
Transcript 1
Host: Well, all week we'll be focusing on the top performing mutual funds. Today we start with one of our Bloomberg Best US Diversified Equities Funds. The Morgan Stanley Mid Cap Growth Fund makes the grade. It ranks in the top 3% for the past five years and top 2% in the last year, among its peers. Lead manager Dennis Lynch has been managing the fund since 2002, and he's joining us now to share some of his strategy and also to give us some picks, which people always of course want to know about. Dennis, welcome. Thanks for coming in.
It's great to be here. Thanks.
Host: So talk to me, first of all, about your strategy. I mean, this is mostly a growth fund looking at mid caps. What are some of the criteria that you use?
We take a very long term approach to investing. I think that's probably one of the things that differentiates us the most. The turnover, the products, the amount we change each year, is roughly 20-25%. So that implies we're taking a 4-5 type year outlook when we make our investments.
And we tend to invest in what we consider to be very high quality companies, ones that have very sustainable competitive advantages. We think they're truly unique. So in focusing on those parts of the growth market, we've, over time, achieved really strong results.
And we think that focusing on stock picking is the way to add value as opposed to trying to guess what's going to happen in the market each quarter or in the economy each quarter. We think that's a more steady approach overall to the investment process.
Host: One of the things I noticed when I was looking over some of your picks is that they either don't pay dividends or don't pay high dividends. And that's interesting, given the environment right now. We've heard from a lot of investors who say, Go for large cap stocks that yield a lot. But obviously, that's not something that you're terribly concerned about.
No, it's not that we don't like dividends--we actually prefer companies with strong free cash flow profiles. And most of our holdings actually have very strong after tax free cash flow yields, which means they could, if they wanted to, pay high dividends. It's just that they've chosen not to because we think, or they think, they have the opportunity to reinvest that money at a very high rate of return. And as an equity investor, that's something we would prefer for them to do, rather than give us the money back.
Host: Well, let's get to one of these picks. Ultra Petroleum is what this company is called. It's a natural gas exploration and production company, Green River Basin of Wyoming. And one of the things you like about this is its cost structure. Talk to us about that.
And as I mentioned up front, we're long term shareholders. We've owned Ultra Petroleum in our funds for over seven years now. We consider them to be the lowest cost provider of natural gas in the United States. If you look at their return on invested capital profile over time, they've achieved tremendous results. We think the combination of that, plus the fact that they can grow their production profile dramatically going forward gives it a very strong investment case.
Natural gas specifically has had been under fire more recently, but as a hydrocarbon, it's actually very compelling relative to oil for the environment. And we think that the disparity between natural gas and oil is at an all time high and probably won't remain there forever.
Host: Whenever I talk to people about natural gas investments, I have to be curious about what just happened in San Bruno, California, for example. And whether you were talking about any type of petroleum product, there's been increased scrutiny on safety. Is that a concern for you at all?
It's a marginal concern. I think there's a misperception, at least for natural gas companies, that some of the drilling could lead to negative environmental impacts. But I think nothing to the degree that we witnessed in the Gulf. In fact, relative to some of the deep drilling in the Gulf, many of these companies have much more safe drilling profiles in our opinion.
Host: Let's get to your next pick. And this is a well known name in the investing community: MSCI. Although many people know it because of their products, not necessarily as an investment itself.
Host: This, of course, the operator of the MSCI, the various indices around the world that many people benchmark. So how does this company make money and how is it going to grow what it makes?
Well, as you said, this is a great business because they represent a standard in the investment community. And once you create a standard, kind of like the S&P 500, it's very hard to envision that changing, even 5, 10, 15 years from now.
So I think it's likely, going forward, that people investing money in the international arena will be using this benchmark simply because everyone else does. There's a network effect there. That's a huge benefit. And they get paid primarily for the usage of these benchmarks. So as more and more money over time is invested in international oriented funds, etc., they should be a primary beneficiary.
Host: And what about him in terms of growth, in terms of new products, and new indices--is it hard to--even though they have sort of the brand name out there, is it hard to get people on board for new products?
Sure. I mean, as the world becomes more international, there's more and more benchmarks that can be created that are more local. I think there's a benefit there. And in addition, there's analytics around these benchmarks that a lot of companies and investors find interesting and useful. So it's not just the data itself or the benchmarks themselves, but also some of the advice and analytics that come along with understanding those benchmarks. Very strong franchise with really no capital requirements.
Host: And let's get to your last pick: Mead Johnson Nutrition. Primarily a maker of infant formula: Enfamil.
It's interesting, because you think about sort of formula non-formula trends here in the US. But of course, you also have to think internationally and demand for formula. So what is the company saying on that front?
Well, particularly internationally, there's a big benefit that they have with the world becoming more urbanized with women coming back into the workforce in some of the emerging markets.
That leads to less breastfeeding and more need for products like Enfamil. And we all know that there's--the one major investment in all of our lives is our children. And the only thing you don't want to cut corners with is how you provide for their development. And Enfamil is the premium product for infant development.
Transcript 2
Thank you for making the effort to be with us today at one of dad's most favorite places. And thank you to the leadership of the club--especially Betsy Barrett, Anne Hawley, and Jeanne Shanley--for all their hard work and making sure that we could host this event here.
Dad loved to quote his dad's words of wisdom. His two favorites of grandpa's sayings were related to public speaking. The first was about speech length--never punish an active audience. And the second about speech content--know your audience. On this day that we honor dad, each of our speakers will do our best to follow these wise adages. But the standard they suggest seems daunting to me in this moment, when it feels like there's so much to say.
When I was a boy, my dad was like a superhero. There wasn't anything he couldn't do. Devoted husband and father, well friend, outstanding businessman, leader, athlete, and competitor. Dad even looked like a superhero. After seeing him in formal attire, more than a few of our childhood friends would swear that dad were a striking resemblance to Clark Kent.
Red Bank Catholic is where our parents' lifelong friendship began, with mom eventually becoming dad's Birth Angel. There's an awesome picture in one of their yearbooks of dad leaping high in the air to grab a jump ball in basketball. Under the photo is the caption: Does Dennis Lynch have springs in sneakers?
That image was a preview of what was going to happen over and over from that point forward. Dad rising to the occasion. And in the eyes of his children was further proof that he was larger than life.
Response to dad's passing by his broad community has been phenomenal. The two most common words people have used to describe him have been "legend," and "gentleman." We think that "gentle man" would also be a very apt description of dad. Gentle and kind.
I know that many of you have read his obituary, beautifully written by our mom, which highlights his many and diverse accomplishments. It's a resume that most of us read and think: What exactly have I been doing with my life?...Today we want to further highlight the wonderful qualities that dad possessed, and the important roles he played, which led to the enormous impact he had on those around him. The gentleman, and the gentle, kind man behind the legend. He would probably have called this focusing on the process as opposed to focusing on the outcome.
Sister Nina, who taught mom and dad at Red Bank Catholic, referred finally to dad as a "good boy." He was mild mannered, thoughtful and confident, but not arrogant. And he treated everyone he encountered with respect. My sister Nora recalls that dad looked for the good in others and always went out of his way to give them credit. She and my sister Kathy both emphasize his tremendous generosity in all its forms. My wife Marshall fully appreciates how polite he was. And my brother Will proudly notes that despite his Alzheimer's, dad maintained his positive and easygoing demeanor. He was never promotional or boastful about his successes.
The recurring refrain in his life was people being amazed when discovering them. Hearing dad's long list of achievements during his RBC Hall of Fame induction, my children, Eleanor and Colely, had a suddenly new appreciation for just how cool their grandfather was. His genuine humility made him an incredible role model. Dad was a big believer in balance and perspective. His wide range of interests, activities, and experiences enabled him to see things from many different vantage points--or what he called "frames of reference."
But they were also a source of his high emotional intelligence, keen self awareness, and ability to connect with all kinds of people. Dad seemed to always know the right thing to say, regardless of the circumstances. A clever comment, the intentionally corny joke, a perceptive question, or necessary feedback--but always in a manner most likely to resonate with his audience.
Very occasionally, when something extraordinary happened--sports miracle, a selfless act of giving, someone doing something truly unique--Dad would just shake his head and say, "unbelievable." And that's partly how we knew we just witnessed something truly rare--when even dad couldn't find anything more to say.
His insightfulness and relatability made him an amazing sounding board for so many of us here today. Dad was there for you. He had an unwavering belief in, and commitment, to his family, friends, and colleagues. Dad was not a pusher of his interests, philosophies, or methods, and he was constructive and patient when your plans and ideas did not play out as quickly as you'd hoped.
Unsurprisingly, the culture at his investment firm, Lynch & Mayer, is open, friendly, and collegial. My brother Will was impressed with the natural dialogue and mutual respect that dad had with everyone who worked there. There is no sense of fear, formality, or hierarchy. At his retirement party, dad poignantly referred to the high quality group at Lynch & Mayer as his second family.
His flexibility, patience, and loyalty made him a great leader. His goal was to put you in a position to succeed. Dad loved puzzles, riddles, brain teasers, and mysteries. Finishing the Sunday New York Times crossword was a core part of his weekly routine. He was a voracious reader of nonfiction, from historical biographies to books on financial theory--with the occasional Agatha Christie "whodunit" mixed in.
Dad was the consummate Irishman, but he had a strong affinity for the German language that he learned in school. My brother Will recalls how he often would yell out, "Ach du lieber," or "Oh my gosh," during many exciting Federer-Nadal matches. Even when speaking an entirely different language, dad was able to avoid using obscenities and the Lord's name in vain. If he thought you were going too far with your attempts of humor or sarcasm, dad would admonish you with the German saying, "Don't be a wise nut."
Looking back, I believe I have the dubious distinction of most all time wise... My sister Kathy knows dad's appreciation and consistent support of educational institutions. How enthusiastic he was about the schools that he, his children, and grandchildren attended. His intellectual curiosity made him a lifelong learner. As a teenager, dad worked in the summertime at Monmouth Park, where he fell in love with horses, racing, and handicapping. This experience served as a stepping stone to his passion for financial markets and investment.
He kept a quote on his desk at the office that said, "Money lost, nothing lost. Courage lost, everything lost." For him, this was not just aspirational. His entrepreneurial spirit was apparent when he took a calculated chance in leaving Smith, Barney and cofounding Lynch & Mayer when he was 35.
Dad was creative and disciplined in his risk-taking, even when it was just for fun. Each week during the fall, he used a newspaper to create a system for making football picks against the spread for his office pool. Dad would count up which team each game the majority of the sports writers support, and then you take the other team. He never deviated from that strategy, and he won more than his fair share of those weekly contests. Many years later, that same discipline was evident when Dad was banned from the Trump Casino in Atlantic City for winning too much at Blackjack.
His creativity and self restraint made him an exceptional investor. Dad had a certain innocence about him--not in the naive sense, but more of what some call a "beginner's mind"--an attitude of openness, eagerness, and a lack of preconceptions in life.
He shared a strong appreciation of music with his mom, who was an excellent piano player. His brothers, Tom and Vincent, and his sister Maureen. At Mass on Sundays, dad enjoyed singing the harmony parts of the hymns as much as he did the melodies.
He loved to play games of all kinds, but bridge and tennis above all. A great partner and teammate, dad was able to help bring out the best in those with whom he competed through his calm and focused mindset.
He was an excellent dancer--something my sister Kathy shared with him. Dad danced like he played tennis, and played tennis like he danced--with an effortless style and grace. My sister Nora recalls that while he and Grandpa firmly believed Fred Astaire to be the best dancer ever, Mom strongly favored Gene Kelley. Despite this ongoing dispute, together, mom and dad could really "cutter up." And dad never forgot how to dance. When he was living at the atrium, during music appreciation, he would pop right up and start dancing, on cue, when prompted by the energetic activity director.
His lightheartedness and beginner's mind made him a stellar player and dancer. Now, none of us are perfect, and even our heroes have weaknesses--like Superman has kryptonite.
Dad approached the process of food consumption with an abundance of caution. He had what my sister Nora likes to refer to as "Irish palette," a heavy preference for meat, potatoes, and other basics. When he had to travel to China for an extended business trip in the late 80s, Nora remembers being legitimately concerned for his well-being. What is he going to eat? If a bad actor was looking to set an elaborate trap for dad, this was it. A highly formal social setting and dad outside his comfort food zone. His polite, gentlemanly instincts at war with his Irish program.
When dad wasn't about conquering the business world, winning tournaments, and generally doing good in his community, he was most likely on the couch in the living room--if it was the morning--or on the couch in the den, probably smoking a cigar--if it was the afternoon or evening.
Let's just say that my family has some suspicions about where my own selective eating habits and general lack of handiness around the house may come from. Dad actually loved a great meal, especially at one of his preferred restaurants. My brother Will is very thankful for the many lunches around town that he was able to have with him before he passed away. And dad wasn't really just relaxing on those couches--he called it decompressing and processing.
He kept with him a large yellow notepad and a felt tip pen for constant note taking. Life was a giant equation dad was constantly trying to balance. Fortunately, for all of our sakes, mom also has a very particular set of special skills. Through her superlative planning and formidable organizational abilities, she delivered a steady flow of comforting meals and a tightly functioning household operation. Far more importantly, Mom was Dad's dependable partner and best friend, as well as his sounding board at the regular one on one dinners. He couldn't have done it all without her. Nor would he have ever dreamed of it.
My sister Kathy will never forget being inspired by so many of dad's successful efforts right here at Seabright. And the joyful time that she, her husband John, and boys Teddy and Nicky, spent with Dad at their beach and tennis club in San Diego during his mom's many business...
My sister Nora remembers Dad's devotion during her breast cancer treatment. How he religiously accompanied her to her chemotherapy appointments, and the strong impression he made on her doctors and nurses, who continue to ask about him, years later at her checkups.
On weekday nights, when he was in grade school, my brother Will would look out the window of North Rohallion Drive, watching the headlights go by, eagerly waiting for a pair to turn down our street, because it meant that dad was almost home. Will feels incredibly privileged to have been Dad's son. And in his words, "I will always cherish those moments I was lucky enough to have with him. I will take him with me wherever I go, every step of the way."
There are two things I especially hold onto: the great big hugs Dad and I shared each night right when he got home from work before I'd gone off to boarding school, college, and beyond. And as a boy, sitting at his feet while he lay on the couch in the den, watching other games on TV together. Dad has always felt like the safest place in the world to me--under his protection. Nothing could go wrong with my dad there to save the day.
Thank you Dad for making us feel safe. Thank you for believing in us, for being the kindest listener, and for setting the very best example. Thank you, Dad, for all of it. You were unbelievable.
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