Published on November 17, 2021

In this brief video, Nael Fakhry, Portfolio Manager at Osterweis, discusses supply chain reshoring, its effects on just-in-time inventory, and how some of our holdings may be beneficiaries of this trend.

Transcript

Nael: Over the last 30 years, supply chains have moved offshore, and the idea is you have this kind of just-in-time inventory, and that creates huge efficiencies in terms of profits, in terms of cash flows, and you have moved supply chains to Asia, to Latin America, Central America. And over the last few years, though, especially with the tariff war with China, we started seeing that these supply chains were coming under pressure, but you can see the trend in a really interesting chart. If you look at inventory's percentage of GDP over time, over the last 30 years, it went from about 14% to now about 9%.

So that trend is very evident. Covid laid bare the shortcomings in this approach. It makes a lot of sense in terms of efficiencies, but it also creates problems when you have big demand surges, and then on top of that, you have omnichannel and e-commerce really pushing supply chains. So we think that what started as a little bit of maybe a rumble a few years ago is turning into something more structural. And we're not saying that it's going to reverse entirely, that inventory is going to go back to 30-year low levels, but we do think that supply chains will be reconfigured to some extent.

And as that relates to our portfolio, there're several companies that would be beneficiaries. So Union Pacific is one of the two major Western rails. They have obviously, significant exposure to the ports here in Oakland, down in Long Beach and, and all the way out through the middle of the country to Chicago, and they would be a direct beneficiary, as you see this onshoring. Then Old Dominion Freight Line is a Western truckload company we've known for years. They have a major nation-wide footprint.

They've seen the benefits of this actually, going back to a few years, but certainly in the last several months, they've seen a real uptick in demand, as we're starting to see this trend reverse. And then PS Business Parks, it's an industrial real estate business that we've long tracked and owned for about a year now, and they have really high quality last mile infill real estate for industrial uses throughout the Bay Area, down through Southern California, out through Houston and Dallas, right by the ports and airports, through Miami, and then up through Baltimore by the ports there. And so they are a direct beneficiary of this trend, and they're seeing real pricing power and real demand for their space.


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