Research report

Q1 2024 3D Report: The really big thing

There are periods when knowing many things and skillfully implementing them is the main source of alpha, but that hasn’t been the case since the financial crisis.

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February 8, 2024

“The fox knows many things,
but the hedgehog
knows one big thing.”

— Isaiah Berlin, “The Hedgehog and the Fox”

I have long believed that, as an asset allocator and security selector, it is imperative to understand the difference between behaving like a fox and behaving like a hedgehog.

Isaiah Berlin’s thoughtful essay utilizes these two mammals to contrast competing philosophical approaches. There are periods when knowing many things—and thus, being a fox in Berlin’s world—and skillfully implementing them is the primary source of alpha. However, this has not been the case since the financial crisis. The emergence of the technology platform companies in the 2010s has substantially changed the paradigm. These companies have free cash flow generating attributes the market has not been exposed to before, compounding cash flow with a speed and consistency that makes them truly anomalous in market history.

This has made big tech the hedgehog’s “big thing”—the margins are so high (21% free cash flow margins for entrance into the top decile) that deviating from their massive weights in a portfolio carries huge implications, one way or another.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Ryan Caldwell

Managing Director, FS Investments

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