After graduating with a degree in mathematics and pursuing a job as a teacher, Steve Labbe could have never predicted he would spend the next 16 years working for a sell-side research firm and eventually become a portfolio manager at Prospector Partners.
Like many people, his non-traditional journey led him to accumulate experiences that ultimately made him a terrific fit on his current team. Having been an analyst covering the insurance industry during catastrophes such as 9/11, Hurricane Katrina and the COVID-19 pandemic, his unique perspective is an invaluable piece of Prospector’s research efforts.
Today, we invite you to join us as we look beyond the portfolio and listen to the story of Steve Labbe, CFA, Portfolio Manager and Analyst at Prospector Partners.
In this podcast, Steve was joined by Havener Capital Partners Founder & CEO Stacy Havener in which he talks about his unorthodox career path, the culture at Prospector and their bottom-up investment mindset.
This podcast (21 minutes) was previously recorded in October 2020.
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INTERVIEW – (FULL TRANSCRIPT) – PROSPECTOR PARTNERS PORTFOLIO MANAGER STEVE LABBE, CPA
Speakers:
Steve Labbe, CFA & Portfolio Manager/Analyst at Prospector Partners
Stacy Havener, Founder & CEO, Havener Capital Partners
Stacy Havener: Hello everyone. I'm Stacy Havener of Havener Capital Partners, and I'm pleased to welcome Steve Labbe of Prospector Partners to our studio today. Steve has recently been promoted to the portfolio management team at Prospector. And as I often say on these interviews, our goal here is to give investors a chance to get to know the people behind the portfolio. So we're thrilled to have you with us today, Steve, thank you for being here.
Steve Labbe: Thank you for having me.
Stacy Havener: Alright. So we're going to start at the beginning. We are going to start with your story. Everybody has a backstory and we want to hear yours. How did you end up at Prospector what was that path?
Steve Labbe: Well, I did not take a traditional route by any means. I actually went to college to be a math teacher, and I had the unique position of graduating in December after the student teaching semester and so I was without a job at the time where they do not hire teachers, they do not hire teachers until the spring. So I was in the market for a job because I needed one and I applied for a research assistant at a insurance boutique in Hartford, Connecticut, and I knew nothing about what they did, but they said math or finance majors can apply. I applied, it was my first and only interview and 16 years later, I was still covering insurance companies at this sell side shop with the same four analysts that I started with.
Stacy Havener: No way. That is awesome.
Steve Labbe:... and in 2012, when Prospector was in the search for an insurance analyst, it was probably an easy phone call for them to make, because Prospector was one of my longest and most important accounts when I was working at this sell side boutique. And I got to know the team well over the years. And we worked together on a lot of insurance, both long and short ideas during my time there. And they were-
Stacy Havener: I love that story, that's great.
Steve Labbe:... and they were a small firm, which I was used to. They were in a, in a region in Connecticut where I was already living, so I didn't have to make too big, a move on that front. And I respected their long-term track record and process having seen it somewhat from afar, but having worked with them for so long. And it became an opportunity to make the career change to a buy-side position. And as they say, the rest is history.
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Stacy Havener: That's a great story, I love it. Thank you so much for sharing that. And the next time I have you on here, I'm going to ask you to talk about what the training as a math teacher, kind of how that informs being a portfolio manager. So keep that one in the back of your, uh, of your mind, but for today, just a couple more on story. I want to stay with this a little bit. So you've been at Prospector for a while, even though you've just recently kind of made this leap onto the official portfolio management team. What are you most proud of in your time at the firm?
Steve Labbe: I'm most proud of my professional development in these eight years. For context, as I shared before 16 years following one sector - insurance, and that was it, and that was everything and anything in any given day for a very long time to the same clients, with the same approach and to join Prospector, make the change from sell side to buy side. It was a big change at the time for me and my family. And over time, they gave me opportunities to look at other sectors, learn other industries. It seemed like every year I was picking up another subsector or some group to help in the portfolio. And before too long, I guess, because I didn't screw things up too much. They were asking me for help across many areas of the portfolio and my impact had grown. And I guess this metamorphosis, if you will, culminated with my promotion at portfolio manager this summer.
Stacy Havener: Yeah.
Steve Labbe: And thinking about it now and thinking about the days where I began at Prospector and now being a part of the portfolio management team is really a great feeling.
Stacy Havener: Well, it's awesome. Congratulations again. We're glad to have an opportunity to work more closely with you and your story is a great one. Let's end this topic with more of a philosophy question. And you know, one of the things that investors love about boutiques is that typically they're employee owned and typically the employees are investing right alongside the investors. And I know that's something that's very true and very important to the team at Prospector, can you talk about that? Why is that it's so important?
Steve Labbe: Sure. Well, as everyone knows, incentives are powerful factors in human nature. We eat our own cooking Prospector. We focus on balance sheets, cash flow, downside protection, and we're very tax conscious as you'd expect when you're managing your own money alongside your investors. I can't imagine any investor wanting to have a manager manage their money with a different philosophy.
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Stacy Havener: That's a great point. And the taxes piece is really a big point because I know that it becomes ingrained in your process, right? It's not an afterthought. And to your point, Steve, if it's your money, you know, you're darn right, I'm going to be focused on the taxes. So, I like that you hit on that component as well. Okay, so let's move into strategy and outlook. And of course you mentioned your 16 years, you know, literally, you know, eating, breathing, drinking, living insurance companies, we're gonna go to the insurance sector with you. But, before we get there, one of the things that's unique and different about Prospector is that you are not afraid of a complex balance sheet as a team. You've invested in financials in all markets and have stayed invested throughout some of the most difficult markets. We've obviously gone through quite an interesting year here in 2020. Can you talk about what you're seeing right now in insurance? What is the market missing?
Steve Labbe: So insurance is a cyclical business and not in the typical cyclicality, usually thought of in terms of the economy. It's a cyclical business because it's a business where companies don't know their cost of goods sold until well after the time they've sold the product. And as it turns out, the industry, the property casualty industry was under pricing for its product and started to raise prices last year, after years of cumulative price competition. That coincided with an acceleration in their losses, as well as a part of just social inflation. So we entered 2020 with quite a bit of pricing momentum, and then COVID happened. COVID is a catastrophe. And for the insurance industry, it's a mega catastrophe. Much like what we saw 20 years ago with the terrorist attack on 9-11. And what we saw in 2005 with hurricane Katrina, as well as many other hurricanes in a 12, in a three- or four-month time span.
And as we've seen over our long careers in looking at insurance companies, these mega catastrophes give investors pause, and investors spend a great deal of time trying to ascertain the ultimate losses and the impact of those losses and the capital hits associated with those losses. And they will not look forward until they can get comfortable that they know the ramifications of that event. We very much think that this event will play out similarly to the others we've seen in our careers. And that once investors gain some level of comfort with the industry's ultimate costs investors will shift focus to the prospective pricing power and likely improvement in earnings and returns as those price increases are earned, we just have to be patient.
Stacy Havener: It's great insight. And you've seen this before, right? We had a call with you not too long ago when you were taking us through the concept of hard markets, and you talked about what happened post 9-11. Do you want to kind of give us a little history lesson?
Steve Labbe: Sure. So again, with these mega catastrophes, sometimes it's pretty quick in terms of you being able to determine who has exposure and where and how significant it is and what the regulators think and so on and so forth. And that's what we saw with the cat events over the last 20 years that were not of the ones I mentioned two seconds ago. In other words, 9-11 was very different because that was a terrorist event, which was new. And so when you have an event that has not occurred yet previously, it makes it that much harder for investors to get to that comfort level I alluded to, to then focus on the prospective benefits of pricing power and so forth.
COVID is similar to that event in that it's still a catastrophe that's occurring. It's a live cat, if you will. And that is why it's been a tough year for insurance stocks because the investment community does not yet have a handle on these losses, but whether it's 9-11 or whether it's hurricane Katrina or whether it's COVID, it seems certain to us that once people can get comfortable, that the companies know what they're dealing with and how they can manage with it prospectively, they will shift their attention.
Stacy Havener: So that obviously must present a massive opportunity for you, right? Because if I read between the lines or just maybe need to connect some dots for myself, you're basically saying that what the market's missing is the opportunity in insurance that they're still so afraid of the uncertainties. So does that create buying opportunities for you? I mean, are you guys, I don't want to say kids in a candy store, but it's got to be a place that you're really seeing a lot of potential.
Steve Labbe: We would agree. We like the space quite a bit. We recognize that patience is required, but we've played this game before. And it is a great time for people who have historically invested in insurance to make incremental investments today.
Stacy Havener: Yeah. Given the complexity, I think your experience is - not only you personally, but you as a team are certainly in a position to guide us through that, which you think I set that up on purpose, but I didn't. Because the next thing I want to move to is actually a concept that comes from Donald Miller has this company and a book called StoryBrand and it's great. It's a great framework for storytelling as an English major speaks near and dear to my heart. But one of the things that he proposes in that is that when you're the Prospector in this case, is not the hero of your story. The hero of your story is the investor and Prospector is the guide. So if we use that as our framework, putting ourselves in the shoes of our hero, who's the investor, what problems are they facing right now? And how can you help them as the guide?
Steve Labbe: Investors are staring at exceptionally low interest rates and very small risk premiums across asset classes everywhere. In this, there is no alternative world, there appears to be a reluctant acceptance that stocks are still a favorable proposition.
Stacy Havener: Mm-hmm (affirmative).
Steve Labbe: We're value investors. We spend a great deal of time and resources focused on industries and sectors that are not currently selling at the valuations you read about in the paper every day from the stocks that are currently in most favor. Additionally, we're focusing on balance sheets and cash flows and downside protection. And I would think that that would allow investors to feel comfortable that we're not taking asymmetric risks. We like to think of our investments as a sleep at night option for investors with that context in mind.
Stacy Havener: Yeah, I think that, so it's interesting because so many people, of course, so many portfolio managers want to say, oh, you know, we're focused on downside protection. And the difference here is that you have the numbers to back up that statement, right? And you've invested as a team through various downturns in the market. And then there's also this sort of, you know, if we really put ourselves in the shoes of the investor, I mean, they have an end client who gets a statement and they also have end clients and those end clients also have friends who are, you know, maybe not at cocktail parties in the way they used to be, but they're having Zoom conversations with their friends about how, you know, great this market is and it's just ripping. And- and so if you are the advisor here, there's kind of a lot of pressure on you to stay invested. Even if you think things are overvalued, it's going to be pretty challenging.
Steve Labbe: It is tough and we approach it and try to approach it the way we always have done it as a team. And we are bottoms up, not top down. And we are every day looking for the undervalued opportunity. And that's very different than buying things just because everybody else is buying.
Stacy Havener: Yeah. It's contrarian. And so even for the advisors who might want to invest in Prospector they have to take a little bit of that contrarian stance, I mean, not to get super basic, but you know, buy low, sell high, right? I mean, at some point you got to kind of go back to basics and say, if I'm, I put myself in the shoes of the investor, the RIA, it's a tough spot when you've got that end client pressure, you know, wanting to keep up with their friends and keep up with this raging market. It's nice to know though that you guys aren't changing your stripes as portfolio managers, as the guy that you still believe in value investing and you still believe there are those, you know, misunderstood mispriced opportunities out there.
Steve Labbe: Absolutely.
Stacy Havener: Alright. So let's end with a fun one. So I have a favorite question that I always ask, and that, that is the music question, um, which is what, you know, what's your walkout anthem if you were going to, you know, you're about to walk out onto a stage before thousands of adoring fans, and I'm not going to ask you that one today. So we're going to add that one to the list for next time you come back, we're going to talk about being a math teacher and we're going to do the walkout anthem. Today, we're going to go more literary and we did a call with an investor the other day, and they asked the question about books, which isn't an earth shattering question, but I thought, you know, this is relevant and important. If you put it in the context of what is the book that has had the most impact on you as an investor. So not what you're reading now, but- but what book has had the most impact on you as an investor?
Steve Labbe: I'm going to go a little off the path on this one, again.
Stacy Havener: No, I love it.
Steve Labbe: Moneyball by Michael Lewis.
Stacy Havener: I love that book.
Steve Labbe: I think if you hadn't read the book, you would assume that it's all about baseball and there's probably some people who didn't read it because they thought it was only about baseball.
Stacy Havener: Yeah.
Steve Labbe: In reality, it's very much a story about market inefficiency. A baseball organization was able to find incredible success by making investments in players whose specific skillsets weren't being recognized by the rest of the baseball community. And I think about that a lot as an investor, I think about some of the greatest opportunities being those where, you know, something that the rest of the world doesn't know yet.
Stacy Havener: Yeah.
Steve Labbe: And we try to do that every day at Prospector. And from the time I read that book, I've always had that on my mind when I'm searching and looking for these unfound ideas. I think it's a great lesson and guidepost for investing.
Stacy Havener: I love that it's a great... And is he not one of the best storytellers?
Steve Labbe: He's excellent. An excellent author.
Stacy Havener: Excellent. I mean his character development is just amazing. That's a great choice. And you know what I like about it? So we were chatting I was talking with one of your teammates, Kevin O'Brien, who also picked a sports-related book in our podcast. I won't do the spoiler alert, but it’s just is a great reminder of how much we can learn from other industries besides our own.
Steve Labbe: That's an excellent point and I agree.
Stacy Havener: Yeah, I love it. This has been a great conversation, Steve, thank you so much for chatting with us and letting us get to know you a little bit more. Congratulations again on joining the portfolio management team. It's a great promotion. And, um, going back to the thing you're most proud of at Prospector a great milestone in your professional development at Prospector and in your career. So thank you. It's been a pleasure.
Steve Labbe: Thank you, Stacy. This has been great.