1
00:00:00,000 --> 00:00:08,080
Welcome to the Finance Garage Podcast, your go-to podcast for navigating the world of
2
00:00:08,080 --> 00:00:09,080
finance.
3
00:00:09,080 --> 00:00:13,680
I'm Jonathan, your financial guide bringing the latest market trends, investment strategies
4
00:00:13,680 --> 00:00:16,160
and financial news that matters to you.
5
00:00:16,160 --> 00:00:21,720
And by the way, I'm also going to share my other passion, which is cars.
6
00:00:21,720 --> 00:00:26,080
At the SW Woo Group, we help everyday families achieve financial success.
7
00:00:26,080 --> 00:00:30,200
Our integrated services include financial planning, accounting, credit advisory and
8
00:00:30,200 --> 00:00:31,200
estate planning.
9
00:00:31,200 --> 00:00:36,640
We are here to guide and support you every step of the way, from custom investment strategies
10
00:00:36,640 --> 00:00:38,920
to maximising tax efficiency.
11
00:00:38,920 --> 00:00:42,000
We ensure your financial goals are met with peace of mind.
12
00:00:42,000 --> 00:00:52,440
Visit SimonWoo.com.au for more information.
13
00:00:52,440 --> 00:00:53,980
So welcome back everybody.
14
00:00:53,980 --> 00:00:56,840
This is the second episode of the Finance Garage.
15
00:00:56,840 --> 00:01:02,400
I'm Jonathan Woo, principal and senior financial advisor here at the SW Woo Group.
16
00:01:02,400 --> 00:01:09,080
So for my second episode, I have Tobias Bux, who's a portfolio manager at Ausbill.
17
00:01:09,080 --> 00:01:12,840
He's a portfolio manager for the Ausbill Global Small Caps Fund.
18
00:01:12,840 --> 00:01:16,960
I've known Tobias for about two and a half, three years.
19
00:01:16,960 --> 00:01:19,400
And so welcome, Toby.
20
00:01:19,400 --> 00:01:20,400
Thanks very much.
21
00:01:20,400 --> 00:01:21,400
Glad to be here.
22
00:01:21,400 --> 00:01:22,400
Cheers, Jonathan.
23
00:01:22,400 --> 00:01:26,880
So just to kick things off, we call this the Finance Garage for a reason.
24
00:01:26,880 --> 00:01:33,400
Before we talk about the garage and some cars, give us a bit about your background.
25
00:01:33,400 --> 00:01:34,960
Thanks.
26
00:01:34,960 --> 00:01:39,600
I've been doing small caps my whole career, which is coming up 20 years now.
27
00:01:39,600 --> 00:01:45,200
I'm from the UK originally and I've been in Australia for almost 14 years.
28
00:01:45,200 --> 00:01:49,800
The Ausbill Fund, the Ausbill Global Small Cap Fund that I run has been going coming
29
00:01:49,800 --> 00:01:50,800
up six years.
30
00:01:50,800 --> 00:01:55,640
And my real passion is these global small caps, I think because they're just really
31
00:01:55,640 --> 00:01:59,120
exciting businesses and you get the best returns out of them.
32
00:01:59,120 --> 00:02:02,320
So you can make a lot of money and there's always a bull market somewhere.
33
00:02:02,320 --> 00:02:05,680
So you can always find something interesting to invest in.
34
00:02:05,680 --> 00:02:10,020
Outside of work, I'm a father to two great kids.
35
00:02:10,020 --> 00:02:11,960
And I try to enjoy the finer things in life.
36
00:02:11,960 --> 00:02:12,960
I like sport.
37
00:02:12,960 --> 00:02:16,920
I like automobiles, which we're going to talk about, which is a keen thing for me.
38
00:02:16,920 --> 00:02:19,120
And I like investing.
39
00:02:19,120 --> 00:02:26,000
I think one of the reasons that markets are so interesting is they always just show you
40
00:02:26,000 --> 00:02:29,680
how small and how little you know.
41
00:02:29,680 --> 00:02:31,560
That's one of the things that I really enjoy.
42
00:02:31,560 --> 00:02:36,280
So I guess that's part of me is hoping to learn more out of markets going forward.
43
00:02:36,280 --> 00:02:38,200
I'm a bit of a market junkie.
44
00:02:38,200 --> 00:02:39,200
Sounds good.
45
00:02:39,200 --> 00:02:41,640
Now, let's talk quickly about cars.
46
00:02:41,640 --> 00:02:46,080
So just before we started recording, we talked about something quite interesting because
47
00:02:46,080 --> 00:02:52,280
both of us recently went to Sydney Motorsport Park, but with a slightly different mode of
48
00:02:52,280 --> 00:02:54,080
transportation.
49
00:02:54,080 --> 00:03:01,800
So for those of you on the podcast that have ever gone to Sydney Motorsport Park, I think
50
00:03:01,800 --> 00:03:07,320
it was actually primarily originally built for motor GP.
51
00:03:07,320 --> 00:03:13,680
And so I went down in my Porsche Cayenne, which is a very, very heavy car.
52
00:03:13,680 --> 00:03:19,160
And I was really proud of myself for hitting the straight VMAX 220.
53
00:03:19,160 --> 00:03:24,360
And then you said something, Toby, that I just went, I can't do that.
54
00:03:24,360 --> 00:03:26,280
Can you share with the audience what you did?
55
00:03:26,280 --> 00:03:28,960
Yeah, you can go a lot faster on a motorbike.
56
00:03:28,960 --> 00:03:31,000
So yeah, I was, I hit 266.
57
00:03:31,000 --> 00:03:35,660
I almost got to 270, but not quite very close.
58
00:03:35,660 --> 00:03:39,560
Next time I go, I'm going to go through 270 for sure.
59
00:03:39,560 --> 00:03:40,880
And what was your mode of transportation?
60
00:03:40,880 --> 00:03:45,400
We see, I was on a Suzuki generation one Hayabusa.
61
00:03:45,400 --> 00:03:48,400
So they're a lot faster than cars.
62
00:03:48,400 --> 00:03:52,560
And I think you're right on that track being built for GP because I don't know if it's
63
00:03:52,560 --> 00:03:54,840
at corner four or corner five.
64
00:03:54,840 --> 00:03:55,840
There's a camber.
65
00:03:55,840 --> 00:03:56,840
Yes.
66
00:03:56,840 --> 00:03:59,600
And obviously the camber on a bike's a lot better than a camber on a car.
67
00:03:59,600 --> 00:04:04,280
I know your cars capture more of the camber because you're wider, but you need a camber
68
00:04:04,280 --> 00:04:07,360
on a bike if you're really going to go for the corner.
69
00:04:07,360 --> 00:04:09,600
And so yeah, it's a great track.
70
00:04:09,600 --> 00:04:10,920
It is a great track.
71
00:04:10,920 --> 00:04:16,840
And my comment, if you recall, I said that if you hit the wrong part of, well, if you
72
00:04:16,840 --> 00:04:20,640
get to the wrong part of the apex on turn one, and you find yourself in an area that
73
00:04:20,640 --> 00:04:24,120
you let's call it less desirable.
74
00:04:24,120 --> 00:04:27,960
I believe that your Suzuki is going to be wearing you for protection as you hit the
75
00:04:27,960 --> 00:04:28,960
wall.
76
00:04:28,960 --> 00:04:29,960
Yeah, for sure.
77
00:04:29,960 --> 00:04:30,960
For sure.
78
00:04:30,960 --> 00:04:35,360
I had to, I've missed that corner a few times and been up the gravel, had been up the gravel
79
00:04:35,360 --> 00:04:39,480
strip into towards the ties and then had to, it's really sad.
80
00:04:39,480 --> 00:04:42,720
You have to go on this little ride of shame.
81
00:04:42,720 --> 00:04:46,320
You have to do this zigzag behind the tires and they have to go all the way around on
82
00:04:46,320 --> 00:04:51,880
the back road and join after corner, whatever it is, corner two, cause they won't or corner
83
00:04:51,880 --> 00:04:52,880
one.
84
00:04:52,880 --> 00:04:54,560
So it's this whole little, little lap of shame.
85
00:04:54,560 --> 00:04:57,720
And then all the guys in the pits can see you doing it.
86
00:04:57,720 --> 00:05:02,040
And of course, you know, when you're there on a race day, you don't, you know, it's a
87
00:05:02,040 --> 00:05:04,320
natural fear that you're the biggest monkey there.
88
00:05:04,320 --> 00:05:08,960
Like you know the least and you're the least cool and you don't know anything about engines
89
00:05:08,960 --> 00:05:09,960
then yeah.
90
00:05:09,960 --> 00:05:13,760
And then when you have to do the little, the ride of shame, it's even more embarrassing.
91
00:05:13,760 --> 00:05:17,480
But yeah, that's if you miss it because if you don't, yeah, cause obviously you want
92
00:05:17,480 --> 00:05:18,480
to go as fast as possible.
93
00:05:18,480 --> 00:05:23,960
That's the whole point of going to the motorsport park and that means just gassing it.
94
00:05:23,960 --> 00:05:29,080
And if you've got gears, then that just means trying to get to top gear as you know, smoothly
95
00:05:29,080 --> 00:05:30,080
and as possible.
96
00:05:30,080 --> 00:05:33,560
You don't really think, I think my biggest problem is I don't really think about braking.
97
00:05:33,560 --> 00:05:38,240
I'm like, I just want to get, get up, up to the highest gear and as fast as possible.
98
00:05:38,240 --> 00:05:41,960
And then you see the grandstand just like start flying past you on the right and you
99
00:05:41,960 --> 00:05:46,880
see the 150 brake sign and they're like, Oh, I really should have started breaking by now.
100
00:05:46,880 --> 00:05:47,880
Yeah.
101
00:05:47,880 --> 00:05:52,280
The good news on a bike versus a car is on a bike you can get from 270 to like 170 within
102
00:05:52,280 --> 00:05:55,520
like 50 meters.
103
00:05:55,520 --> 00:05:57,000
You can slow down a lot quicker.
104
00:05:57,000 --> 00:06:02,320
I'm just thinking about at what point if you speed down, if you slow down far too quickly,
105
00:06:02,320 --> 00:06:07,960
you, what, well what speed at which you slow down too quickly, you'll end up over the bike.
106
00:06:07,960 --> 00:06:09,560
Yeah, yeah, yeah, yeah, yeah.
107
00:06:09,560 --> 00:06:15,120
Well, and that's luckily, you know, not something I'm going to push the limits on and find out.
108
00:06:15,120 --> 00:06:18,240
I mean, I'm trying to ride within, within, within oneself.
109
00:06:18,240 --> 00:06:19,240
I've got kids.
110
00:06:19,240 --> 00:06:22,080
And obviously I think it's important to note to all the listeners out there, there's two
111
00:06:22,080 --> 00:06:23,440
fund managers on this fund.
112
00:06:23,440 --> 00:06:29,000
I've been running money with, with the guy called Simon Wood since 2007 in the UK and
113
00:06:29,000 --> 00:06:30,000
then we run money here.
114
00:06:30,000 --> 00:06:35,280
So the key man risk is much reduced by having two senior portfolio managers.
115
00:06:35,280 --> 00:06:36,520
That is very, very, very good.
116
00:06:36,520 --> 00:06:40,080
What's it like on the, on the car though, when you, when you start breaking, like when
117
00:06:40,080 --> 00:06:42,840
do you, where do you start breaking on the car?
118
00:06:42,840 --> 00:06:49,160
So I think I, at the, I think it's the hundred meter, I think it's a hundred meter sign.
119
00:06:49,160 --> 00:06:55,240
I start hitting it and that's where I hit sort of 220 and then I'm hitting turn one
120
00:06:55,240 --> 00:06:57,480
at about 130.
121
00:06:57,480 --> 00:06:58,600
I think I maxed out it.
122
00:06:58,600 --> 00:07:00,320
I couldn't, I couldn't get any faster.
123
00:07:00,320 --> 00:07:04,640
And the main reason was because at turn two, as you know, you go around and then up.
124
00:07:04,640 --> 00:07:05,640
Yeah, yeah, yeah.
125
00:07:05,640 --> 00:07:12,680
So I, I, the, the physical limits of the car I felt now, to be fair, I hadn't done a track
126
00:07:12,680 --> 00:07:13,680
date about 12 years.
127
00:07:13,680 --> 00:07:19,520
I did one with Mercedes about over a decade ago, but the issue was I then Porsche was
128
00:07:19,520 --> 00:07:20,520
really good.
129
00:07:20,520 --> 00:07:23,680
They've got coaches and then you have coaches that can come in at any time if you request
130
00:07:23,680 --> 00:07:25,100
them to jump in.
131
00:07:25,100 --> 00:07:28,120
And I said, can you sort of tell me if I'm pushing the limits?
132
00:07:28,120 --> 00:07:30,240
And he said, just do a lap.
133
00:07:30,240 --> 00:07:34,880
I did a lap and then, and then he said, and I asked the coach, how do you feel about it?
134
00:07:34,880 --> 00:07:40,920
And he said, well, you have not lost any traction.
135
00:07:40,920 --> 00:07:45,320
So even though you feel that you're in this big gigantic SUV and as you're cornering,
136
00:07:45,320 --> 00:07:48,360
you feel like you're going to roll, the car's not going to roll.
137
00:07:48,360 --> 00:07:51,240
It will never roll unless you actually leave the tarmac.
138
00:07:51,240 --> 00:07:52,440
Right.
139
00:07:52,440 --> 00:07:56,200
And even before you roll, you will lose traction.
140
00:07:56,200 --> 00:07:57,800
The back end will fly out.
141
00:07:57,800 --> 00:07:58,800
Right.
142
00:07:58,800 --> 00:08:03,640
And if you haven't felt that at any point during the day, you won't have any trouble.
143
00:08:03,640 --> 00:08:04,640
Right.
144
00:08:04,640 --> 00:08:06,000
And it does feel very heavy.
145
00:08:06,000 --> 00:08:07,880
We're talking about camber, right?
146
00:08:07,880 --> 00:08:13,520
Getting into that, whatever that corner was, like getting round, it's very, you feel the
147
00:08:13,520 --> 00:08:16,360
limits of your car, like just.
148
00:08:16,360 --> 00:08:17,360
It's four.
149
00:08:17,360 --> 00:08:18,360
It's corner four.
150
00:08:18,360 --> 00:08:19,360
I think it's four.
151
00:08:19,360 --> 00:08:20,360
Yeah.
152
00:08:20,360 --> 00:08:23,960
Because when you go really hard on the brakes in my can, it is really the front end just
153
00:08:23,960 --> 00:08:25,840
basically just stomps down.
154
00:08:25,840 --> 00:08:26,840
Yeah.
155
00:08:26,840 --> 00:08:30,680
You feel it like really, and I've got air suspension on mine and it's still just basically
156
00:08:30,680 --> 00:08:32,640
throws the car down really aggressively.
157
00:08:32,640 --> 00:08:34,560
You've got that much weight transfer, right?
158
00:08:34,560 --> 00:08:35,560
You're moving two tonnes.
159
00:08:35,560 --> 00:08:36,560
Yeah.
160
00:08:36,560 --> 00:08:37,560
So 2.6 tonnes.
161
00:08:37,560 --> 00:08:38,560
Yeah.
162
00:08:38,560 --> 00:08:39,560
Whereas 250 kilograms is battery.
163
00:08:39,560 --> 00:08:40,560
Right.
164
00:08:40,560 --> 00:08:42,200
Now that's, there's a good part to that, right?
165
00:08:42,200 --> 00:08:45,360
Because your centre of gravity, because the way the bat, the bat packs are loaded up is
166
00:08:45,360 --> 00:08:46,880
at the bottom of the vehicle, right?
167
00:08:46,880 --> 00:08:47,880
Yeah.
168
00:08:47,880 --> 00:08:51,760
So it lowers your centre of gravity, but you genuinely feel a lot of weight coming through.
169
00:08:51,760 --> 00:08:53,560
I reckon you'd go faster on the straight.
170
00:08:53,560 --> 00:08:54,920
Not trying to tell you how to suck eggs.
171
00:08:54,920 --> 00:08:59,440
It was a different, but that, that corner one is a slow corner.
172
00:08:59,440 --> 00:09:00,440
So it's a fast corner.
173
00:09:00,440 --> 00:09:01,560
I mean, super fast corner.
174
00:09:01,560 --> 00:09:05,720
I've seen, I've seen a guy take it at over 215 on a Ducati.
175
00:09:05,720 --> 00:09:06,720
Yikes.
176
00:09:06,720 --> 00:09:11,800
He was really hanging off like shoulder on the tarmac, but he had it at 215 on that corner
177
00:09:11,800 --> 00:09:12,800
one.
178
00:09:12,800 --> 00:09:15,640
Lots of people can pull 190.
179
00:09:15,640 --> 00:09:19,720
I reckon you've got more grip in a corner than a bike.
180
00:09:19,720 --> 00:09:24,040
I reckon, I reckon cars can get up to 150 on that corner, 160.
181
00:09:24,040 --> 00:09:25,880
Yeah, I think so.
182
00:09:25,880 --> 00:09:29,520
The thing is on a bike, you can feel, cause I don't have any traction control to turn
183
00:09:29,520 --> 00:09:33,880
off or on, but you can feel a bit of give and you're like, Oh, okay.
184
00:09:33,880 --> 00:09:35,920
I'm already, yeah, you feel it.
185
00:09:35,920 --> 00:09:40,520
And you're like, okay, this is, I need to rain this in a tiny bit.
186
00:09:40,520 --> 00:09:41,520
Yeah.
187
00:09:41,520 --> 00:09:45,160
But I love all the different forms of cars.
188
00:09:45,160 --> 00:09:46,480
What cars have you got?
189
00:09:46,480 --> 00:09:52,600
So, so I, I'm, I mean my wife's right BMW X3 cause you know, it's a shuffle kids around.
190
00:09:52,600 --> 00:09:54,840
I've got my KM.
191
00:09:54,840 --> 00:10:00,720
I've had my previous car to that was at Audi SQ5, which is nice.
192
00:10:00,720 --> 00:10:05,360
Prior to that was what did five years with Lexus, which we talked about previously.
193
00:10:05,360 --> 00:10:10,880
And if there's any audience members that own Lexus LC 500, I'm very interested because
194
00:10:10,880 --> 00:10:12,960
I think that's going to be a vintage car one day.
195
00:10:12,960 --> 00:10:13,960
All right.
196
00:10:13,960 --> 00:10:15,400
We were talking about this, right?
197
00:10:15,400 --> 00:10:16,400
Even you were surprised.
198
00:10:16,400 --> 00:10:20,820
There is almost no modern production car that's still being produced today.
199
00:10:20,820 --> 00:10:23,920
That is a naturally aspirated five litre V8, right?
200
00:10:23,920 --> 00:10:26,760
It's electrified, turbocharged, supercharged, right?
201
00:10:26,760 --> 00:10:30,560
To effectively deal with the euros, emission standards, right?
202
00:10:30,560 --> 00:10:32,520
So you just don't get the sound out of it.
203
00:10:32,520 --> 00:10:36,560
And I, and everyone that, or the rumble or just the rumble, correct.
204
00:10:36,560 --> 00:10:40,000
Cold starts, the whole, you know, the whole kit and caboodle.
205
00:10:40,000 --> 00:10:45,320
And the issue is that when you flick on, most of the people that have bought the newest
206
00:10:45,320 --> 00:10:49,660
generation and we'll talk about this, the C 63 AMG from Mercedes, right?
207
00:10:49,660 --> 00:10:51,280
It's a two litre four pot, right?
208
00:10:51,280 --> 00:10:55,560
Okay, it's electrified and then it's turbocharged and whatever.
209
00:10:55,560 --> 00:10:59,960
And but there's a lot of people now that actually want to sell the cars and the secondhand market
210
00:10:59,960 --> 00:11:06,360
for C 63s have plummeted because 10 years ago you got a 6.2 litre naturally aspirated
211
00:11:06,360 --> 00:11:10,220
V8 and now you've got a, you know, two litre four pot.
212
00:11:10,220 --> 00:11:14,800
It produces more kilowatts because you got no turbo lag, right?
213
00:11:14,800 --> 00:11:18,480
So your zero to a hundred is technically faster, but it's just not the feel.
214
00:11:18,480 --> 00:11:21,800
And you buy an LC 500 not because it's the fastest car in the world.
215
00:11:21,800 --> 00:11:26,840
My Porsche Cayenne is faster than the, faster than the LC 500, but it's just the feel.
216
00:11:26,840 --> 00:11:27,840
Yeah.
217
00:11:27,840 --> 00:11:28,840
Right.
218
00:11:28,840 --> 00:11:32,600
And I think that's probably the issue that I have with buying a pure electric car as
219
00:11:32,600 --> 00:11:36,160
well is that, so what if you do it in two and a half seconds?
220
00:11:36,160 --> 00:11:37,800
It doesn't, there's no sound.
221
00:11:37,800 --> 00:11:42,160
I asked that question of the, I took my bike in to be serviced and they tried to sell me
222
00:11:42,160 --> 00:11:45,240
and not sell me, they tried to pique my interest in an electric bike.
223
00:11:45,240 --> 00:11:46,960
And I was, they were telling me about the acceleration.
224
00:11:46,960 --> 00:11:49,640
I'm like, well, I've got a higher booster.
225
00:11:49,640 --> 00:11:50,640
I've got acceleration.
226
00:11:50,640 --> 00:11:53,240
I don't need any more of that.
227
00:11:53,240 --> 00:11:54,880
It's already dangerous enough as it is.
228
00:11:54,880 --> 00:11:58,760
And then he started saying, well, it makes, I was like, what sound does it make?
229
00:11:58,760 --> 00:12:02,400
And he said, and then he got me because they said it makes it sound like a jet engine.
230
00:12:02,400 --> 00:12:04,080
And then he played me the video and it turned it on.
231
00:12:04,080 --> 00:12:10,240
And it did as much as anyone who likes motorbikes probably likes the whole Top Gun side of motorbikes,
232
00:12:10,240 --> 00:12:11,600
that whole sort of side of fun.
233
00:12:11,600 --> 00:12:12,600
And I definitely do.
234
00:12:12,600 --> 00:12:16,120
And then when I heard the engine go, it does sound like a fighter plane.
235
00:12:16,120 --> 00:12:18,960
And I was like, okay, well, that's the four year old boy in me.
236
00:12:18,960 --> 00:12:19,960
Okay.
237
00:12:19,960 --> 00:12:23,360
It doesn't sound like my higher booster with two massive exhausts.
238
00:12:23,360 --> 00:12:24,360
That's awesome.
239
00:12:24,360 --> 00:12:28,560
But at the same time, it's a different sort of cool, you know, and that got me because
240
00:12:28,560 --> 00:12:30,760
it's like, yeah, yeah.
241
00:12:30,760 --> 00:12:31,760
That got me excited.
242
00:12:31,760 --> 00:12:35,800
I think the sounds, everything, like, you know, your body is the centre of your identity
243
00:12:35,800 --> 00:12:40,280
and also your car is in the modern world now, like your horse probably was before and now
244
00:12:40,280 --> 00:12:41,520
it's your car.
245
00:12:41,520 --> 00:12:44,080
So your vehicle.
246
00:12:44,080 --> 00:12:49,360
So yeah, the sound super important, the look super important and the feel when you're sitting,
247
00:12:49,360 --> 00:12:52,280
like when it goes, how you can have it.
248
00:12:52,280 --> 00:12:57,360
I haven't sat in one of those new 63s, but it not to have the whole thing rumble would
249
00:12:57,360 --> 00:12:58,360
upset me.
250
00:12:58,360 --> 00:13:02,920
I had an old ML500 that I used to really enjoy just because the engine, like I say, it's
251
00:13:02,920 --> 00:13:05,520
that naturally aspirated five-liter just goes, hmm.
252
00:13:05,520 --> 00:13:06,520
Correct.
253
00:13:06,520 --> 00:13:07,520
Yeah.
254
00:13:07,520 --> 00:13:08,520
W63 or whatever, 163.
255
00:13:08,520 --> 00:13:09,520
They're good cars.
256
00:13:09,520 --> 00:13:10,520
Correct.
257
00:13:10,520 --> 00:13:13,680
And the fact of the matter is it doesn't matter how fast it goes from zero to a hundred,
258
00:13:13,680 --> 00:13:16,960
we'll basically lose our license with anything that we drive nowadays, right?
259
00:13:16,960 --> 00:13:17,960
With that speed.
260
00:13:17,960 --> 00:13:23,360
But talking about risk, let's move on to small caps.
261
00:13:23,360 --> 00:13:30,800
Now we met about, yeah, about two-ish years ago.
262
00:13:30,800 --> 00:13:38,120
And at that point, you talked about this particular dynamics of the market back then, and it was
263
00:13:38,120 --> 00:13:39,120
challenging, right?
264
00:13:39,120 --> 00:13:41,800
It's probably the best way to put it.
265
00:13:41,800 --> 00:13:44,080
Can you unpack that for me?
266
00:13:44,080 --> 00:13:48,040
Because I think that sort of sets the scene to where we are today and the opportunity
267
00:13:48,040 --> 00:13:50,920
set that presents itself is far more different.
268
00:13:50,920 --> 00:13:52,520
Can you sort of set the scene for us?
269
00:13:52,520 --> 00:13:57,240
Yeah, I think, I mean, I remember talking to you at the time and, you know, there'd
270
00:13:57,240 --> 00:14:01,000
been a big run since the COVID lows.
271
00:14:01,000 --> 00:14:05,440
I think we can get onto why small caps are attractive and stuff, but just in terms of
272
00:14:05,440 --> 00:14:11,120
where we were, I felt that the market had got a bit pricey and that the market was discounting
273
00:14:11,120 --> 00:14:17,280
quite a strong outlook and that it was going to be quite difficult for valuations to really
274
00:14:17,280 --> 00:14:22,480
improve that much to give you a really, a return worthy of the risk that you're taking
275
00:14:22,480 --> 00:14:26,400
because you're always taking risk investing and, you know, you've got to take on risk
276
00:14:26,400 --> 00:14:30,800
to enjoy life, to get returns, but you've also really got to understand and unpack that
277
00:14:30,800 --> 00:14:31,800
risk.
278
00:14:31,800 --> 00:14:35,760
I think we could see inflation coming, we could see interest rates going up, and I think
279
00:14:35,760 --> 00:14:41,840
that outlook, the first move in interest rates is going to be bad for growth, it's going
280
00:14:41,840 --> 00:14:49,720
to be bad for risk, and I think when you see valuations not offering that much upside,
281
00:14:49,720 --> 00:14:53,200
you know, it's about risk and return, you're just not getting that much return.
282
00:14:53,200 --> 00:14:57,280
And I think those are some of the things I was trying to explain to you.
283
00:14:57,280 --> 00:15:01,560
It's never the right thing to do as a fund manager not to ask people to give you money,
284
00:15:01,560 --> 00:15:06,640
but at the time and definitely within our chat, I think I was pushing back on you guys
285
00:15:06,640 --> 00:15:12,200
investing given what you are after and, you know, I want to do exactly what we say we
286
00:15:12,200 --> 00:15:17,320
do on the tin, which is give you the returns that we think we can at the risk that people
287
00:15:17,320 --> 00:15:18,480
take on.
288
00:15:18,480 --> 00:15:20,600
So yeah, the market had run really hard.
289
00:15:20,600 --> 00:15:25,400
And actually what happened luckily was that it wasn't a good time to put money in to the
290
00:15:25,400 --> 00:15:30,720
asset class or into equity markets, and I'm glad I was as brutally honest as I normally
291
00:15:30,720 --> 00:15:31,720
am.
292
00:15:31,720 --> 00:15:35,520
It can get me in trouble sometimes, but especially if your girlfriend asks you what she looks
293
00:15:35,520 --> 00:15:36,520
like and stuff.
294
00:15:36,520 --> 00:15:38,960
But I think at the time things were expensive.
295
00:15:38,960 --> 00:15:44,120
You roll forward to where we are now, and we're talking about late 22 there, right?
296
00:15:44,120 --> 00:15:51,320
We roll forward to where we are now August 2024, so two months shy of an election, potentially
297
00:15:51,320 --> 00:15:57,360
a few weeks, three weeks shy of what's expected to be the first rate cut.
298
00:15:57,360 --> 00:16:02,200
And that's expected to be a benevolent rate cut focusing on keeping real yields in an
299
00:16:02,200 --> 00:16:06,920
attractive area as inflations come down.
300
00:16:06,920 --> 00:16:11,200
Inflation was rising two years ago, which made it very difficult to handicap how high
301
00:16:11,200 --> 00:16:12,200
rates would get.
302
00:16:12,200 --> 00:16:16,120
Nowadays, inflation is falling, difficult to handicap, but I think we can assume in
303
00:16:16,120 --> 00:16:21,080
the near term for the foreseeable future roughly what it's going to do in the next six months,
304
00:16:21,080 --> 00:16:25,200
especially inflation with rent and shelter being such a big part of it.
305
00:16:25,200 --> 00:16:27,320
We can see where inflation is going.
306
00:16:27,320 --> 00:16:31,360
So pretty sanguine on where inflation is and also that rate cuts are coming, not as many
307
00:16:31,360 --> 00:16:33,560
rate cuts as the market.
308
00:16:33,560 --> 00:16:35,440
What does that mean in layman's terms?
309
00:16:35,440 --> 00:16:43,840
It's a better set up for higher market prices for equities.
310
00:16:43,840 --> 00:16:44,880
Why?
311
00:16:44,880 --> 00:16:50,160
Because the market is assuming continued growth, and I think that's going to come through,
312
00:16:50,160 --> 00:16:54,000
and that they're not going to get any liquidity headwinds.
313
00:16:54,000 --> 00:17:02,040
I think what happened when rates moved aggressively in the end of 22 and 23, for 20 years we've
314
00:17:02,040 --> 00:17:05,200
had low rates ever since Greenspan.
315
00:17:05,200 --> 00:17:10,200
Fixing the issues of the liquidity crisis of the GFC brought even lower rates, and then
316
00:17:10,200 --> 00:17:12,040
the euro crisis even lower rates.
317
00:17:12,040 --> 00:17:17,560
So we've had low rates, call them synthetically low, call them what you want, but they've
318
00:17:17,560 --> 00:17:19,640
been low.
319
00:17:19,640 --> 00:17:26,840
And if the risk free rate's zero, then the required rate of return for more risk steps
320
00:17:26,840 --> 00:17:27,840
up from that.
321
00:17:27,840 --> 00:17:33,000
So for investment grade quality bonds, you can expect 2% to 3% return, step through to
322
00:17:33,000 --> 00:17:39,360
junk at 10% return, and likewise for equities, large caps can probably give you a 5% to 8%
323
00:17:39,360 --> 00:17:43,680
return, and small caps can give you an 8% to 10% return.
324
00:17:43,680 --> 00:17:49,680
In an environment where interest rates, the risk rates are 3%, the required return from
325
00:17:49,680 --> 00:17:54,560
riskier assets steps up with it, and small caps are riskier than large caps.
326
00:17:54,560 --> 00:17:56,000
Not very much, but they are tiny bits.
327
00:17:56,000 --> 00:17:59,800
So now you're expecting a 12% to 15% return.
328
00:17:59,800 --> 00:18:02,920
So when valuations are too high, and back when I was saying, look, there's probably
329
00:18:02,920 --> 00:18:06,000
a better time to dump to give me money to make you more money, and there's a better
330
00:18:06,000 --> 00:18:12,320
time to do it, what I'm saying is that markets have to adjust here for the change in interest
331
00:18:12,320 --> 00:18:16,040
rate environment, and they haven't.
332
00:18:16,040 --> 00:18:22,560
So I think what I'm interested in as well is we've gone from, if you think back just
333
00:18:22,560 --> 00:18:28,240
eight, nine months ago to the beginning of this calendar year, we went from predicting
334
00:18:28,240 --> 00:18:33,720
what six to seven rate cuts to zero in, was it June?
335
00:18:33,720 --> 00:18:34,720
Hikes.
336
00:18:34,720 --> 00:18:36,260
Hikes, sorry, hikes, right?
337
00:18:36,260 --> 00:18:37,260
Six to seven hikes.
338
00:18:37,260 --> 00:18:43,320
And then six months later, we went to zero hikes, because soft landing, to now, I think
339
00:18:43,320 --> 00:18:46,240
that it's about 100, the market's pricing 150 base points.
340
00:18:46,240 --> 00:18:51,680
I saw something from JP Morgan yesterday, 150 base points in the next sort of 12 months,
341
00:18:51,680 --> 00:18:54,880
I think 52 weeks was their scale.
342
00:18:54,880 --> 00:19:00,540
How does that impact, given the fact opinions are literally changing by the day, and 10
343
00:19:00,540 --> 00:19:06,360
year bond yields are being repriced every second, does that factor a huge part into
344
00:19:06,360 --> 00:19:08,160
what you end up investing in?
345
00:19:08,160 --> 00:19:12,840
Because that in itself can generate a whole lot of volatility for you, right?
346
00:19:12,840 --> 00:19:20,040
If you're having to pick your portfolios based on basically going each side of duration violently
347
00:19:20,040 --> 00:19:22,880
or moving violently constantly, right?
348
00:19:22,880 --> 00:19:23,880
Does that sort of make sense?
349
00:19:23,880 --> 00:19:26,060
Is that an issue for you?
350
00:19:26,060 --> 00:19:27,060
Not a huge issue.
351
00:19:27,060 --> 00:19:33,840
I mean, duration affects all pricing of risk because duration affects pricing of future
352
00:19:33,840 --> 00:19:34,840
returns.
353
00:19:34,840 --> 00:19:37,800
That's the very nature of it.
354
00:19:37,800 --> 00:19:38,800
But for us, not really.
355
00:19:38,800 --> 00:19:44,000
I think it's when the environments change, you have to be aware of what's going on.
356
00:19:44,000 --> 00:19:49,240
I think the real question an investor has to ask yourself is, duration is a measure
357
00:19:49,240 --> 00:19:51,280
of sensitivity to interest rate risk.
358
00:19:51,280 --> 00:19:55,160
If interest rates move by this much, what's going to happen to the valuations of the businesses
359
00:19:55,160 --> 00:19:56,160
in my portfolio?
360
00:19:56,160 --> 00:19:58,020
And that's sort of the key question.
361
00:19:58,020 --> 00:20:07,160
At the moment, yes, we've seen expectations of interest rate five to six hikes move to
362
00:20:07,160 --> 00:20:10,600
no hikes, like you say, to now cuts and now even more cuts.
363
00:20:10,600 --> 00:20:15,600
But in that time, the outlook for sort of the 10 and the 30-year interest rate environment
364
00:20:15,600 --> 00:20:16,760
hasn't really changed.
365
00:20:16,760 --> 00:20:20,600
That's the sort of my understanding with my way of thinking would be the investment market
366
00:20:20,600 --> 00:20:25,840
saying pretty easy to handicap the interest rate environment over the next 30 years, quite
367
00:20:25,840 --> 00:20:28,480
difficult to handicap in the next two years.
368
00:20:28,480 --> 00:20:29,480
And that's what's happened.
369
00:20:29,480 --> 00:20:39,120
So what we saw in 22, it was at the end of 21, actually, that we first started talking.
370
00:20:39,120 --> 00:20:40,120
Not 22.
371
00:20:40,120 --> 00:20:41,120
Sorry, it was 21.
372
00:20:41,120 --> 00:20:42,120
Yeah, that's right.
373
00:20:42,120 --> 00:20:43,120
Yeah.
374
00:20:43,120 --> 00:20:49,040
If you look at what happened in 21, the whole yield curve moved because expectations for
375
00:20:49,040 --> 00:20:51,920
the price of borrowing further out moved.
376
00:20:51,920 --> 00:20:57,760
The whole environment changed because we've been stuck in a different period for 20 years.
377
00:20:57,760 --> 00:21:01,520
The last, so there's been a lot of volatility in interest rates, but the volatility in interest
378
00:21:01,520 --> 00:21:06,120
rates really has been about near-term interest rate expectations, not about the real yield.
379
00:21:06,120 --> 00:21:12,100
And I think what scares the market about the Fed is when the market thinks the Fed has
380
00:21:12,100 --> 00:21:19,200
lost control or lost focus on the real yield.
381
00:21:19,200 --> 00:21:25,080
When the market thinks the Fed's too complacent, that's when it gets scared.
382
00:21:25,080 --> 00:21:28,760
So you saw that in the autopilot comment in 2019.
383
00:21:28,760 --> 00:21:33,320
And you saw it a bit this year when the market was concerned that the Fed wasn't that focused
384
00:21:33,320 --> 00:21:35,080
on unemployment numbers or the real yield.
385
00:21:35,080 --> 00:21:36,760
They were just too focused on inflation.
386
00:21:36,760 --> 00:21:41,160
And then Powell adjusted what he said, and I think he's done a great job.
387
00:21:41,160 --> 00:21:46,280
The market sanguine that the Fed's going to focus on real yield and not going to let the
388
00:21:46,280 --> 00:21:47,680
economy tank.
389
00:21:47,680 --> 00:21:48,680
Yeah.
390
00:21:48,680 --> 00:21:52,200
So it's a very different environment now.
391
00:21:52,200 --> 00:21:53,920
And you've seen that in asset prices.
392
00:21:53,920 --> 00:21:59,560
So you've seen volatility in the 10-year yield, but it's not caused the same effect on growth
393
00:21:59,560 --> 00:22:04,340
businesses as it did sort of in the back end of 21.
394
00:22:04,340 --> 00:22:07,200
Let's talk about your ideal investor.
395
00:22:07,200 --> 00:22:13,760
And we talked about this concept of momentum and the risk as a small cap manager.
396
00:22:13,760 --> 00:22:18,360
Can you sort of unpack briefly if you're going to invest in small caps?
397
00:22:18,360 --> 00:22:25,560
Because I don't think investors sit with their financial advisor like myself or just Googling
398
00:22:25,560 --> 00:22:28,600
the next best investment opportunity.
399
00:22:28,600 --> 00:22:32,000
Excitement doesn't equate good investment.
400
00:22:32,000 --> 00:22:39,320
If you are willing to accept the risk that small caps come with it, we discussed briefly
401
00:22:39,320 --> 00:22:44,360
that the biggest risk is momentum in a portfolio.
402
00:22:44,360 --> 00:22:49,920
So if you were considering and the audience is considering small caps, what's the type
403
00:22:49,920 --> 00:22:54,760
of person or what do you need to bear in mind if you're going to invest in this because
404
00:22:54,760 --> 00:22:57,920
you want that longer term return profile?
405
00:22:57,920 --> 00:23:00,120
That's a great question.
406
00:23:00,120 --> 00:23:07,920
I think when you look at investment opportunities over the last 100 years, you get a different
407
00:23:07,920 --> 00:23:13,260
picture than when you look at investment asset classes over the last 20 years.
408
00:23:13,260 --> 00:23:19,840
So I would look and regard small caps as an asset class based on the last 100 years of
409
00:23:19,840 --> 00:23:24,960
their history of risk and returns, not what you've seen in the last 20 years.
410
00:23:24,960 --> 00:23:29,720
In the last 20 years with very low interest rates, it's been about globalization of financial
411
00:23:29,720 --> 00:23:37,200
engineering and that's benefited sort of amalgamation of debt plays and amalgamation of asset plays.
412
00:23:37,200 --> 00:23:45,480
Big growth opportunities that are very heavily levered that can maximize on scale.
413
00:23:45,480 --> 00:23:50,200
If you look back over 100 years, the businesses that have tended to provide the best returns
414
00:23:50,200 --> 00:23:54,200
of capital whether you hold a bit of the debt or a bit of the equity or how you're invested
415
00:23:54,200 --> 00:24:00,380
in that business, it's the businesses that have the ability to continue making and servicing
416
00:24:00,380 --> 00:24:06,120
customers, making products, serving customers, continue to grow and stay ahead of changes.
417
00:24:06,120 --> 00:24:08,560
Those are generally small and medium sized businesses.
418
00:24:08,560 --> 00:24:09,800
They're rarely big businesses.
419
00:24:09,800 --> 00:24:16,180
In fact, you see business businesses really struggle with change.
420
00:24:16,180 --> 00:24:25,860
If you look at the returns and the risk of equities going back in history, what you see
421
00:24:25,860 --> 00:24:33,000
is that small caps provide a much better risk return than global large caps.
422
00:24:33,000 --> 00:24:36,920
Equities also provide a much better risk of return than a lot of other asset classes.
423
00:24:36,920 --> 00:24:40,600
Now, there's lots of differing research and everyone wants to put forward their own asset
424
00:24:40,600 --> 00:24:44,200
class and I've been an equity guy my whole life so I'm always going to push forward
425
00:24:44,200 --> 00:24:46,960
equity.
426
00:24:46,960 --> 00:24:50,960
There are a lot of investments that are made at the moment that aren't liquid, that aren't
427
00:24:50,960 --> 00:24:55,800
marked to market where a lot of people have put money in private debt in real estate and
428
00:24:55,800 --> 00:24:59,880
they don't know what they hold and they can't get it back and if they asked for it, they
429
00:24:59,880 --> 00:25:03,560
might not be able to get it back at the price they think.
430
00:25:03,560 --> 00:25:09,240
Equities and debt markets are very attractive, the ability to be liquid and return money
431
00:25:09,240 --> 00:25:13,080
to people and I think if someone's wanting to give you their money, the first question
432
00:25:13,080 --> 00:25:15,800
is when do you need it?
433
00:25:15,800 --> 00:25:20,160
If you need your money at any time in the next six months, I'd advise investing in a
434
00:25:20,160 --> 00:25:23,560
liquid market, so an equity manager or a debt manager.
435
00:25:23,560 --> 00:25:27,040
That would be someone, if you want your money tied up for a long time or a short time, that's
436
00:25:27,040 --> 00:25:29,000
someone who can come and see us.
437
00:25:29,000 --> 00:25:31,480
That's important and overlooked I think.
438
00:25:31,480 --> 00:25:34,120
Then return, why are you giving them money?
439
00:25:34,120 --> 00:25:37,880
Do you want to be able to draw on the same amount of money later or are you hoping to
440
00:25:37,880 --> 00:25:40,160
create some sort of positive return as well?
441
00:25:40,160 --> 00:25:45,040
Then that's the whole area that your expertise fall into, Jonathan, not mine.
442
00:25:45,040 --> 00:25:50,480
If you are investing money to grow and that's basically debt markets and equity markets,
443
00:25:50,480 --> 00:25:57,800
then you should want the highest return for the most attractive risk and you should diversify.
444
00:25:57,800 --> 00:26:01,000
This is pretty basic stuff.
445
00:26:01,000 --> 00:26:06,640
The best risk adjusted return in equities is small caps, it's global small caps.
446
00:26:06,640 --> 00:26:11,440
That's been proven by S&P and lots of other research that we can quote and deliver and
447
00:26:11,440 --> 00:26:14,080
we've spoken about that before many times.
448
00:26:14,080 --> 00:26:18,400
So for clients who want to invest money and want it to be liquid would be my ideal client
449
00:26:18,400 --> 00:26:22,240
and then a client who wants a good return and who's already invested in equities.
450
00:26:22,240 --> 00:26:27,040
If you have any money in equities, if you invest in the NASDAQ or you invest in BHP
451
00:26:27,040 --> 00:26:32,040
or CBA or any business in Australia and you want to have money invested in equities, you
452
00:26:32,040 --> 00:26:34,240
should have money in global small caps.
453
00:26:34,240 --> 00:26:37,200
The actuarial science proves it.
454
00:26:37,200 --> 00:26:44,040
What we've seen in the last 20 years is the NASDAQ and large cap tech stocks have outperformed
455
00:26:44,040 --> 00:26:49,520
because people have wanted that growth but they also want that security of growth, that
456
00:26:49,520 --> 00:26:56,760
they're willing to get smaller returns for a more assured growth.
457
00:26:56,760 --> 00:27:01,520
Small caps have traditionally delivered higher growth than large caps, which makes sense
458
00:27:01,520 --> 00:27:03,660
because they're smaller.
459
00:27:03,660 --> 00:27:08,160
They have a much better risk adjusted return than large caps and mid caps.
460
00:27:08,160 --> 00:27:12,900
Essentially they provide only a smaller bit more risk but for much more return.
461
00:27:12,900 --> 00:27:16,100
So generally 3% higher return a year.
462
00:27:16,100 --> 00:27:21,960
So I think my ideal client would be someone who is concerned about their money, doesn't
463
00:27:21,960 --> 00:27:25,840
want to just throw money away and not find out where it's gone, wants to check on their
464
00:27:25,840 --> 00:27:29,640
investments, wants to be able to access their investments and I think they've probably already
465
00:27:29,640 --> 00:27:34,040
got money invested in equities and I think global small caps is actually the place they
466
00:27:34,040 --> 00:27:37,120
should have started but no one ever does start there.
467
00:27:37,120 --> 00:27:42,720
They should be adding global large caps and domestic small caps and domestic large caps
468
00:27:42,720 --> 00:27:45,680
to their global small cap portfolio.
469
00:27:45,680 --> 00:27:50,040
Now that's a biased opinion, that's my opinion, but it's based on the things I've read and
470
00:27:50,040 --> 00:27:51,040
seen.
471
00:27:51,040 --> 00:27:58,960
So you shouldn't view small caps as something that's more risky than large cap materially.
472
00:27:58,960 --> 00:28:00,880
It's not materially more risky.
473
00:28:00,880 --> 00:28:02,520
It's risky.
474
00:28:02,520 --> 00:28:06,760
You can explain all that to your clients but once you're in equities, whether you're in
475
00:28:06,760 --> 00:28:12,320
a large cap or a small cap, yes your company can suffer company specific stuff but if you
476
00:28:12,320 --> 00:28:16,320
walk into a GFC or a dot com it doesn't matter really what you're holding, they're going
477
00:28:16,320 --> 00:28:20,680
to get hit and you want to be in something liquid then.
478
00:28:20,680 --> 00:28:22,200
It's sort of interesting you bring up this point.
479
00:28:22,200 --> 00:28:27,640
So in the last, we always tell our clients that there's only one free lunch in the world
480
00:28:27,640 --> 00:28:33,520
and that's diversification and in the last four years we have allocated some of our clients
481
00:28:33,520 --> 00:28:37,220
money into private debt which has been good.
482
00:28:37,220 --> 00:28:43,680
The issue then has also then become that they go oh to your point, oh well private debt's
483
00:28:43,680 --> 00:28:49,600
great like it doesn't move around, unit price stays at a dollar, get my monthly income.
484
00:28:49,600 --> 00:28:55,200
I just want that because I don't really want equities because this stuff's volatile and
485
00:28:55,200 --> 00:29:03,920
I don't like up and down and I recently spoke to another advisor and said do you use private
486
00:29:03,920 --> 00:29:04,920
debt?
487
00:29:04,920 --> 00:29:07,160
He goes oh yeah we use a ton of it and I go oh why is that?
488
00:29:07,160 --> 00:29:10,800
Because crap hits the fan and equities fall.
489
00:29:10,800 --> 00:29:13,040
The clients don't see that the private debt went bad.
490
00:29:13,040 --> 00:29:18,040
That's probably the worst thing you could ever do when you actually communicate this
491
00:29:18,040 --> 00:29:20,440
stuff to clients.
492
00:29:20,440 --> 00:29:24,840
You have to at the end of the day, everyone needs to find a way to make money.
493
00:29:24,840 --> 00:29:28,680
If you're investing in private debt, I use this term, let's say private debt gives you
494
00:29:28,680 --> 00:29:34,920
8, 9% depending on what type of risk profile you're willing to take.
495
00:29:34,920 --> 00:29:35,920
Manager needs to make money.
496
00:29:35,920 --> 00:29:38,760
Let's call that 150 basis points.
497
00:29:38,760 --> 00:29:44,760
So that takes you if the return to a client is 8, that's 9.5% at least that the person
498
00:29:44,760 --> 00:29:50,220
at the end point, the corporation or whoever is going to borrow 9% and willing to happily
499
00:29:50,220 --> 00:29:53,720
pay 9.5% interest per year.
500
00:29:53,720 --> 00:29:55,160
That guy's not an idiot.
501
00:29:55,160 --> 00:29:59,160
He's not borrowing 9.5% to make less than 9.5%.
502
00:29:59,160 --> 00:30:05,200
So longer term I've always told clients that equities will outperform debt because it fundamentally
503
00:30:05,200 --> 00:30:06,200
has to.
504
00:30:06,200 --> 00:30:08,000
I try to keep things simple.
505
00:30:08,000 --> 00:30:10,880
It's borrowing 9.5% to make 7%.
506
00:30:10,880 --> 00:30:12,840
They'd be an idiot to do so.
507
00:30:12,840 --> 00:30:17,080
But you have to understand equities and public debt have this magical thing called mark to
508
00:30:17,080 --> 00:30:18,080
market.
509
00:30:18,080 --> 00:30:23,920
It is a place where buyers and sellers come to meet to determine a market price.
510
00:30:23,920 --> 00:30:25,680
That's all it is.
511
00:30:25,680 --> 00:30:30,140
But being well diversified and you hit the nail on the head, you shouldn't be scared
512
00:30:30,140 --> 00:30:32,960
of small caps just because of the term small caps.
513
00:30:32,960 --> 00:30:38,560
To be honest, if you look at the small cap industry globally, they're a lot bigger than
514
00:30:38,560 --> 00:30:40,000
the Aussie small caps.
515
00:30:40,000 --> 00:30:44,400
Can you talk about that, what's your market cap?
516
00:30:44,400 --> 00:30:48,960
That's something that is important to get across.
517
00:30:48,960 --> 00:30:52,000
Once society has chosen the names, you can't change it.
518
00:30:52,000 --> 00:30:54,680
So we're global small cap.
519
00:30:54,680 --> 00:30:59,440
That effectively the smallest part of global equity market.
520
00:30:59,440 --> 00:31:03,840
So global small caps would typically have a market capitalization between 500 million
521
00:31:03,840 --> 00:31:06,840
and 10 billion US dollars.
522
00:31:06,840 --> 00:31:13,520
So that would put you firmly between the ASX 200 and the ASX 100 if I'm not mistaken.
523
00:31:13,520 --> 00:31:15,080
I'm pretty sure.
524
00:31:15,080 --> 00:31:23,280
So in terms of risk and return, in terms of risk, be similar to your domestic large cap
525
00:31:23,280 --> 00:31:25,160
offering that you're already invested in.
526
00:31:25,160 --> 00:31:31,600
However, over time, historically we've produced a higher return and I think we should in the
527
00:31:31,600 --> 00:31:32,600
future.
528
00:31:32,600 --> 00:31:38,000
Businesses are well researched and well invested, Ausbill, the company that I proudly work for,
529
00:31:38,000 --> 00:31:43,560
has got over a 25 year track record investing domestically and then globally.
530
00:31:43,560 --> 00:31:48,380
And our domestic funds have got an excellent market leading track record that we're very
531
00:31:48,380 --> 00:31:52,240
pleased to show and talk about.
532
00:31:52,240 --> 00:31:57,640
As well, we do believe offshore should provide a higher return to the Australian market.
533
00:31:57,640 --> 00:31:59,640
People are already invested in the Australian market.
534
00:31:59,640 --> 00:32:02,640
They're already invested in small caps in Australia.
535
00:32:02,640 --> 00:32:09,440
This is why they should be very keen and have their interest peaked by what's on offer globally.
536
00:32:09,440 --> 00:32:14,360
What's on offer globally is a lot more of all the different industries.
537
00:32:14,360 --> 00:32:20,960
So we've got a lot of exposure to the grid upgrade and the electrification of the world.
538
00:32:20,960 --> 00:32:23,720
Different markets, and there's always a bull market in global small caps.
539
00:32:23,720 --> 00:32:28,120
So obviously we've got Europe, broadly Europe, Asia and the States, whereas domestically
540
00:32:28,120 --> 00:32:31,840
it's much more focused on the Aussie market and the Chinese economy, which is driving
541
00:32:31,840 --> 00:32:33,280
it.
542
00:32:33,280 --> 00:32:37,240
And I think the biggest one is that the management teams have improved quality.
543
00:32:37,240 --> 00:32:40,760
There's some fantastic management teams in Australia, but when you go offshore there's
544
00:32:40,760 --> 00:32:45,320
some even better management teams, particularly coming out of the US.
545
00:32:45,320 --> 00:32:50,280
And then another point that's sort of missed is domestic businesses sometimes in Australia
546
00:32:50,280 --> 00:32:54,940
have struggled to go overseas and there becomes a point in a growth cycle where a business
547
00:32:54,940 --> 00:32:58,440
has to keep growing, has to expand its geography.
548
00:32:58,440 --> 00:33:02,240
And that's been quite difficult for Australian companies.
549
00:33:02,240 --> 00:33:07,800
Companies in Europe and in America, particularly America, have a lot easier run rate to go
550
00:33:07,800 --> 00:33:14,160
through that revenue scale to become a bigger, maybe small cap company.
551
00:33:14,160 --> 00:33:18,960
Because if they're in Texas they can just go across the border to Oklahoma.
552
00:33:18,960 --> 00:33:21,680
You've got a much easier expansion.
553
00:33:21,680 --> 00:33:26,000
Also your reach is implicitly a lot bigger as a global company because once you've got
554
00:33:26,000 --> 00:33:30,360
an office in the US and you're servicing an industry in the US, it's not that hard to
555
00:33:30,360 --> 00:33:36,080
move to another state.
556
00:33:36,080 --> 00:33:39,440
Ready to take the first step in investing or just looking to continue growing your wealth
557
00:33:39,440 --> 00:33:42,140
without being inundated with financial information?
558
00:33:42,140 --> 00:33:46,640
With SWU Online Invest, we offer a range of expertly managed portfolios designed to match
559
00:33:46,640 --> 00:33:47,640
your investment needs.
560
00:33:47,640 --> 00:33:52,360
Whether you're a seasoned investor or just getting started, know that we will work tirelessly
561
00:33:52,360 --> 00:33:56,240
to ensure your investments are strategically positioned to maximise your goals.
562
00:33:56,240 --> 00:34:03,880
Visit swuonlinvest.com.au today.
563
00:34:03,880 --> 00:34:08,680
Talking about grid upgrading capex, which I know is a theme within your portfolio, as
564
00:34:08,680 --> 00:34:14,160
most audience members know, I'm quite familiar with investing in Asia and particularly China.
565
00:34:14,160 --> 00:34:21,320
And so in 2023, China led the world in new energy by adding 65% of all new solar capacity
566
00:34:21,320 --> 00:34:24,600
globally, which is equivalent of about 250 gigawatts.
567
00:34:24,600 --> 00:34:30,140
And by the end of 2022, the global total was only about 1,100 gigawatts.
568
00:34:30,140 --> 00:34:35,440
Now the US and European grids have got legacy issues.
569
00:34:35,440 --> 00:34:36,440
They're very old, right?
570
00:34:36,440 --> 00:34:40,640
Generally their industrial age was, you know, youngs ago, right?
571
00:34:40,640 --> 00:34:44,720
So how do you see that as an opportunity to house that feed through?
572
00:34:44,720 --> 00:34:49,180
Now just noting to everyone that if we do talk about any companies, that these are only
573
00:34:49,180 --> 00:34:51,280
for illustrative purposes only, right?
574
00:34:51,280 --> 00:34:54,500
Some people love to listen to this podcast and just buy the names that, you know, Toby
575
00:34:54,500 --> 00:35:00,480
may say, but just be warned, this is all about investing in a diversified portfolio, not
576
00:35:00,480 --> 00:35:01,760
just in individual stocks.
577
00:35:01,760 --> 00:35:02,760
So Toby.
578
00:35:02,760 --> 00:35:03,760
Yeah, thanks for that.
579
00:35:03,760 --> 00:35:06,960
I don't want to tell everyone to buy a good stock when it goes down.
580
00:35:06,960 --> 00:35:07,960
Yep.
581
00:35:07,960 --> 00:35:08,960
It rarely happens though.
582
00:35:08,960 --> 00:35:09,960
Never.
583
00:35:09,960 --> 00:35:16,560
Look, I think just very broadly at the outset, we generally run about 60 positions in our
584
00:35:16,560 --> 00:35:17,560
fund.
585
00:35:17,560 --> 00:35:18,560
That's what we think is a good idea.
586
00:35:18,560 --> 00:35:23,200
At the moment, about 40% of the funds invested in industrials, that's sort of double the
587
00:35:23,200 --> 00:35:24,200
index weight.
588
00:35:24,200 --> 00:35:33,120
And at the moment, about sort of 25% of that 40% is directly related to the grid upgrade.
589
00:35:33,120 --> 00:35:34,440
So that's just generally where we are.
590
00:35:34,440 --> 00:35:36,120
We've got a lot of uncorrelated ideas.
591
00:35:36,120 --> 00:35:41,320
We're a core manager, we make a lot of money out of grocers, out of consumer discretionary
592
00:35:41,320 --> 00:35:45,920
and healthcare as well as we do IT and industrials.
593
00:35:45,920 --> 00:35:48,920
So I think the grid's really interesting.
594
00:35:48,920 --> 00:35:53,160
I think one of the key things about global small caps is there's always a bull market
595
00:35:53,160 --> 00:35:54,160
somewhere.
596
00:35:54,160 --> 00:35:59,780
And as an investor, I found over time is that your portfolio wants to be centered around
597
00:35:59,780 --> 00:36:06,360
some core stocks that can deliver over time and lack volatility in their end demand.
598
00:36:06,360 --> 00:36:11,240
They tend to be more of the industrial healthcare nature or grosser staple nature of those types
599
00:36:11,240 --> 00:36:13,080
of businesses.
600
00:36:13,080 --> 00:36:17,320
But you want to have some of those in your portfolio because you need some steady performers.
601
00:36:17,320 --> 00:36:20,880
And at the same time, there's always an area of excitement.
602
00:36:20,880 --> 00:36:24,720
And that's great if there's really tight capacity, highly profitable businesses.
603
00:36:24,720 --> 00:36:28,200
It's not great if there's any capacity you want, very profitable businesses.
604
00:36:28,200 --> 00:36:32,120
But there is always a bull market in global somewhere.
605
00:36:32,120 --> 00:36:40,840
And I think with energy, to my way of thinking, all roads lead to Rome more than I've ever
606
00:36:40,840 --> 00:36:43,440
seen in my entire career.
607
00:36:43,440 --> 00:36:47,280
So the grid has to be upgraded.
608
00:36:47,280 --> 00:36:51,440
And there's a number of things going on in the world that are going to mean that's going
609
00:36:51,440 --> 00:36:53,480
to happen in a price taking way.
610
00:36:53,480 --> 00:36:58,000
They are not going to be discerning on how much they pay for the equipment to upgrade
611
00:36:58,000 --> 00:36:59,480
this grid.
612
00:36:59,480 --> 00:37:00,800
Why?
613
00:37:00,800 --> 00:37:05,080
The move towards net zero, regardless of who wins the US election or that election, we
614
00:37:05,080 --> 00:37:09,920
are moving towards net zero in the US and in Europe, and spoken about it in China as
615
00:37:09,920 --> 00:37:12,200
well as centrally planned economy.
616
00:37:12,200 --> 00:37:18,960
There is legislation in place to make the move towards net zero happen with the grid.
617
00:37:18,960 --> 00:37:21,140
The grid is going to be upgraded.
618
00:37:21,140 --> 00:37:27,160
And as the CEO of M-Core said, one of our holdings, this isn't the energy transition.
619
00:37:27,160 --> 00:37:30,920
This is the energy expansion.
620
00:37:30,920 --> 00:37:32,240
And I think that's really true.
621
00:37:32,240 --> 00:37:37,320
We're going to need double to three times the amount of gigawatts that we used to.
622
00:37:37,320 --> 00:37:40,780
More importantly, we're going to need grids that are not able to move stuff around.
623
00:37:40,780 --> 00:37:43,560
So we've got this move towards net zero happening.
624
00:37:43,560 --> 00:37:49,280
We need to make the world decarbonize energy generation, consumption, and mobility.
625
00:37:49,280 --> 00:37:50,280
That's a general need.
626
00:37:50,280 --> 00:37:56,000
Then as you just mentioned, without any of the change in demand for gigawatts and geography
627
00:37:56,000 --> 00:38:01,720
of gigawatt demand, in Japan, the US, and Europe, the grid is the oldest compared to
628
00:38:01,720 --> 00:38:05,280
the rest of the world, almost twice as old as the Chinese grid that you mentioned.
629
00:38:05,280 --> 00:38:10,680
It averages between 20 and 40 years age, depending on what parts of distribution and transmission
630
00:38:10,680 --> 00:38:11,680
you're looking at.
631
00:38:11,680 --> 00:38:13,200
So that needs to be replaced anyway.
632
00:38:13,200 --> 00:38:14,480
It's just reached its useful life.
633
00:38:14,480 --> 00:38:16,920
And it's all built in the 50s and 60s.
634
00:38:16,920 --> 00:38:20,240
And now it's coming south.
635
00:38:20,240 --> 00:38:21,240
Now it needs repairing.
636
00:38:21,240 --> 00:38:23,040
So you've got those two major reasons.
637
00:38:23,040 --> 00:38:28,960
And then we've got the need for renewable and decarbonized consumption.
638
00:38:28,960 --> 00:38:34,520
So renewable generation and charging your cars at home is the major driver.
639
00:38:34,520 --> 00:38:36,280
Then we have the fact that the grid is just really old.
640
00:38:36,280 --> 00:38:41,000
And then the third factor we have for the grid is this demand for AI.
641
00:38:41,000 --> 00:38:46,020
The AI is currently in an arms race to produce general intelligence.
642
00:38:46,020 --> 00:38:48,280
So it's not about return on investment.
643
00:38:48,280 --> 00:38:51,080
It's a first past the line story here.
644
00:38:51,080 --> 00:38:56,920
So I'd caution people on looking on return on investment at the corporate level for AI,
645
00:38:56,920 --> 00:39:00,640
which I think if you look at the Dell comments is coming much closer than people think.
646
00:39:00,640 --> 00:39:03,760
So we do invest in the picks and shovel of AI in the grid.
647
00:39:03,760 --> 00:39:05,960
And we would advise people to.
648
00:39:05,960 --> 00:39:08,880
I think this early innings chat is accurate.
649
00:39:08,880 --> 00:39:11,360
And as I say, it's not about return on investment.
650
00:39:11,360 --> 00:39:14,560
It's an arms race to the finish line here, or the first finish line.
651
00:39:14,560 --> 00:39:15,560
At the moment, yeah, correct.
652
00:39:15,560 --> 00:39:17,520
Base camp.
653
00:39:17,520 --> 00:39:24,720
So this huge demand for data centers, expected to be sort of go from 4% to 8% of US energy
654
00:39:24,720 --> 00:39:26,640
demand in the next 10 years.
655
00:39:26,640 --> 00:39:32,640
And global data center demand to be equivalent to the energy demand of Japan within the next
656
00:39:32,640 --> 00:39:34,960
10 years, as well as another quote being thrown around.
657
00:39:34,960 --> 00:39:41,320
So huge increase now in amount of generation and where it's going to go.
658
00:39:41,320 --> 00:39:45,480
And this is being driven, as I said, by things that are going on in society that I don't
659
00:39:45,480 --> 00:39:46,480
think are going to change.
660
00:39:46,480 --> 00:39:50,960
One, that we need to decarbonize is the general belief.
661
00:39:50,960 --> 00:39:53,960
Two, we want electric cars.
662
00:39:53,960 --> 00:39:55,720
They have more torque.
663
00:39:55,720 --> 00:39:56,720
They go faster.
664
00:39:56,720 --> 00:40:02,200
They have fewer moving parts, so less likely to break down on you in cold weather.
665
00:40:02,200 --> 00:40:06,160
So that's why from a garage and finance point of view, we need electric cars.
666
00:40:06,160 --> 00:40:07,640
We've got to charge those cars.
667
00:40:07,640 --> 00:40:13,640
And at the same time now, we've got AI rapidly increasing demand for data centers.
668
00:40:13,640 --> 00:40:19,600
And the data center demand is increasing at the moment from the trends we've seen in the
669
00:40:19,600 --> 00:40:24,920
IT sector from the last 10 years, not because of so much because of AI yet.
670
00:40:24,920 --> 00:40:27,040
So because of these things, we've got to upgrade the grid.
671
00:40:27,040 --> 00:40:28,560
It doesn't matter who's in power.
672
00:40:28,560 --> 00:40:30,000
It doesn't matter how much it costs.
673
00:40:30,000 --> 00:40:31,520
And we'll get onto that.
674
00:40:31,520 --> 00:40:32,920
We've got to upgrade the grid.
675
00:40:32,920 --> 00:40:39,680
And I think that's where it's interesting is getting into the nitty gritty.
676
00:40:39,680 --> 00:40:47,480
ENSO in Europe legislates new grid capex plans from all the members of Europe.
677
00:40:47,480 --> 00:40:52,680
And the state's local grids are also forward planning their capex for the demand that's
678
00:40:52,680 --> 00:40:53,680
coming.
679
00:40:53,680 --> 00:40:57,640
When you look through those plans, they're quite detailed in terms of kilometers at the
680
00:40:57,640 --> 00:41:00,300
moment, but not in terms of substations.
681
00:41:00,300 --> 00:41:03,800
We have to change the transmission highways first.
682
00:41:03,800 --> 00:41:06,120
So we need to build new motorways.
683
00:41:06,120 --> 00:41:13,960
The transition highways are these big high voltage transmission routes in countries.
684
00:41:13,960 --> 00:41:16,120
We've got to rebuild those cables first.
685
00:41:16,120 --> 00:41:19,200
And after that, we can change distribution.
686
00:41:19,200 --> 00:41:25,520
So just to stop there, I mean, just so people understand, these ultra high voltage, because
687
00:41:25,520 --> 00:41:31,600
I've looked at the ones in China, right, effectively, it's the ability to transmit energy from the
688
00:41:31,600 --> 00:41:32,600
source.
689
00:41:32,600 --> 00:41:33,600
Let's call it renewables, right?
690
00:41:33,600 --> 00:41:37,800
That's what I'm used to looking at in China, solar and wind, where it's sort of efficient
691
00:41:37,800 --> 00:41:39,640
around the Gobi Desert.
692
00:41:39,640 --> 00:41:43,760
The biggest challenge is actually getting that energy that's being generated to the
693
00:41:43,760 --> 00:41:45,760
coast, right?
694
00:41:45,760 --> 00:41:52,240
And so I've seen these maps comparing US and China, where the ultra high voltage, I think,
695
00:41:52,240 --> 00:41:54,240
is 800 gigawatt lines.
696
00:41:54,240 --> 00:41:56,280
I think that's the term.
697
00:41:56,280 --> 00:42:01,460
Because the more the bigger the hose, the more energy you can put through it.
698
00:42:01,460 --> 00:42:06,040
But you also lose less energy through the transmission mechanism as well, right?
699
00:42:06,040 --> 00:42:07,040
That's the key.
700
00:42:07,040 --> 00:42:08,040
That's the key.
701
00:42:08,040 --> 00:42:09,040
So look, I've had heaps of fun.
702
00:42:09,040 --> 00:42:11,280
As I said, there's always a bull market somewhere in global small caps.
703
00:42:11,280 --> 00:42:16,200
I spent the last four years learning, relearning a lot of physics and electronics.
704
00:42:16,200 --> 00:42:22,760
So effectively, the higher voltage, the power is the same.
705
00:42:22,760 --> 00:42:25,460
The power transmitted is the same.
706
00:42:25,460 --> 00:42:28,000
But the higher the voltage, the less resistance.
707
00:42:28,000 --> 00:42:31,520
The lower the voltage, the more resistance.
708
00:42:31,520 --> 00:42:37,800
So on these transmission highways, where we want to transmit electricity a long way, we
709
00:42:37,800 --> 00:42:42,760
need to run it at 540,000 kilovolts, so huge amounts of volts.
710
00:42:42,760 --> 00:42:48,400
And then you move that energy to a place, into a substation, and then you step it down
711
00:42:48,400 --> 00:42:55,060
with a transformer to medium voltage for the local areas and then low voltage for the buildings
712
00:42:55,060 --> 00:42:56,120
and stuff.
713
00:42:56,120 --> 00:43:02,200
So yeah, you need that really, really high voltage cable to not lose.
714
00:43:02,200 --> 00:43:04,120
The efficiency of the grid is a huge area.
715
00:43:04,120 --> 00:43:07,040
So that's a really interesting question.
716
00:43:07,040 --> 00:43:08,040
I find it really interesting.
717
00:43:08,040 --> 00:43:11,360
And if you're a nerd and you're into cars, you might find it interesting as well.
718
00:43:11,360 --> 00:43:16,200
Because at a base level, the way to make the grid more efficient is to make sure that you're
719
00:43:16,200 --> 00:43:19,960
always transmitting at the right super high voltage and then dissipating it.
720
00:43:19,960 --> 00:43:23,800
But actually, what we've got going on in the grid in the next 10 years, 20 years is so
721
00:43:23,800 --> 00:43:25,580
much more exciting than that.
722
00:43:25,580 --> 00:43:27,440
There's different types of power.
723
00:43:27,440 --> 00:43:30,880
There's standard power, what we call real power.
724
00:43:30,880 --> 00:43:37,080
And a real power is effectively a load, like a heating element, an iron or something.
725
00:43:37,080 --> 00:43:40,720
And then we have something called reactive power or inductive power.
726
00:43:40,720 --> 00:43:48,840
And inductive power is the power that's required to create a magnetic field to allow something
727
00:43:48,840 --> 00:43:50,320
to happen.
728
00:43:50,320 --> 00:44:00,720
So induction is basically an effect of the magnetic effect of the electricity being passed
729
00:44:00,720 --> 00:44:06,040
through something at a certain type of resistance or a certain way.
730
00:44:06,040 --> 00:44:10,920
In the olden days, we used to have a big coal station that had a big power line that went
731
00:44:10,920 --> 00:44:16,560
through some houses and some offices to a zinc melter or to some massive industrial asset
732
00:44:16,560 --> 00:44:17,560
load.
733
00:44:17,560 --> 00:44:22,600
There was induction in the line because the line carried a lot of volts, but not that
734
00:44:22,600 --> 00:44:23,600
in much induction.
735
00:44:23,600 --> 00:44:29,440
So you need capacitors at certain points of the way.
736
00:44:29,440 --> 00:44:35,000
What happens with inductive power is that if it's not used in the right way or understood
737
00:44:35,000 --> 00:44:42,360
in the right way, you can require a lot more gigawatts to do the same amount of work.
738
00:44:42,360 --> 00:44:47,560
Why that's important in the new grid is we're going to have a lot of renewables.
739
00:44:47,560 --> 00:44:51,800
So instead of having a lot of generation assets that are nuclear or gas or coal, it's still
740
00:44:51,800 --> 00:44:52,800
going to be gas.
741
00:44:52,800 --> 00:44:56,800
We're going to have a lot of battery, which is direct current, not alternating current,
742
00:44:56,800 --> 00:44:57,800
and that's going to need an inverter.
743
00:44:57,800 --> 00:45:02,080
And we're also going to have a lot of renewable transmission.
744
00:45:02,080 --> 00:45:09,300
And that's going to change the inductive nature of the grid.
745
00:45:09,300 --> 00:45:12,840
What does that mean and what's the opportunity?
746
00:45:12,840 --> 00:45:18,680
People are starting to grasp the fact of why transformers and industrial scale grid scale
747
00:45:18,680 --> 00:45:24,600
inverters are important because they can see that you can make the grid more efficient,
748
00:45:24,600 --> 00:45:25,600
you can harden it.
749
00:45:25,600 --> 00:45:30,160
But what I don't think the market's really understood yet is the need for inverters and
750
00:45:30,160 --> 00:45:36,280
capacitors at an industrial substation scale to manage the different types of assets and
751
00:45:36,280 --> 00:45:39,960
all these different types of power we have.
752
00:45:39,960 --> 00:45:46,400
Why that is is because the difference between having a grid that doesn't have the right
753
00:45:46,400 --> 00:45:50,240
amounts of inverters and capacitors in the right area versus a grid that does have the
754
00:45:50,240 --> 00:45:56,480
capacitors in the right substation could mean two or three times the amount of power because
755
00:45:56,480 --> 00:45:59,960
real power and inductive power affect each other.
756
00:45:59,960 --> 00:46:04,200
So if you don't have a capacitor in the right place, you could need three gigawatts or three
757
00:46:04,200 --> 00:46:05,200
megawatts.
758
00:46:05,200 --> 00:46:08,760
But if you had the right capacitor in place, you could only need half a gigawatt or half
759
00:46:08,760 --> 00:46:09,760
a megawatt.
760
00:46:09,760 --> 00:46:11,080
They're that important.
761
00:46:11,080 --> 00:46:13,600
Now, we know about capacitors in phones and stuff.
762
00:46:13,600 --> 00:46:15,640
We don't really see them in industrial assets.
763
00:46:15,640 --> 00:46:20,360
And the inverters and the capacitors you're going to need for the new grid is a huge area.
764
00:46:20,360 --> 00:46:22,440
And we're invested in it and we're already making money.
765
00:46:22,440 --> 00:46:26,880
And I think it's a huge opportunity for clients here to invest in the Osborne Global Small
766
00:46:26,880 --> 00:46:30,520
Cap Fund because of the energy transition.
767
00:46:30,520 --> 00:46:35,840
Grid is not discounting the future growth that's going to come from some of these key product
768
00:46:35,840 --> 00:46:37,280
components.
769
00:46:37,280 --> 00:46:42,640
We do own the high voltage cable manufacturers, the ones that we like and they've been profitable.
770
00:46:42,640 --> 00:46:47,120
And transmission's coming first and the market's getting its head around transmission.
771
00:46:47,120 --> 00:46:49,460
Distribution doesn't start till 2030.
772
00:46:49,460 --> 00:46:54,360
So we're still a good five years away from that real demand on the substation distribution
773
00:46:54,360 --> 00:46:55,360
stuff.
774
00:46:55,360 --> 00:47:00,720
So we've got performers, inverters, capacitors, surge protectors and all the equipment you
775
00:47:00,720 --> 00:47:01,720
need.
776
00:47:01,720 --> 00:47:02,840
So the grid's changing.
777
00:47:02,840 --> 00:47:04,240
The components are changing.
778
00:47:04,240 --> 00:47:05,840
We're going to need a flexible grid.
779
00:47:05,840 --> 00:47:07,400
They're going to call it a FACTS.
780
00:47:07,400 --> 00:47:08,520
You're going to see FACTS.
781
00:47:08,520 --> 00:47:13,520
It's flexible alternating current transmission system.
782
00:47:13,520 --> 00:47:17,240
The difference you can get in efficiency is huge.
783
00:47:17,240 --> 00:47:21,160
Why that's important, again, and I think there's just so much in this rabbit hole.
784
00:47:21,160 --> 00:47:22,560
So I mean all roads lead to Rome.
785
00:47:22,560 --> 00:47:25,360
To do all the things we want to do in society, we've got to do the grid first.
786
00:47:25,360 --> 00:47:26,800
You can't have an electric car.
787
00:47:26,800 --> 00:47:28,080
You can't have AI.
788
00:47:28,080 --> 00:47:29,760
You can't have a wind turbine.
789
00:47:29,760 --> 00:47:33,200
You can't have a carbon neutral building until you fix the grid.
790
00:47:33,200 --> 00:47:35,640
So all the things everyone wants, they've got to be done.
791
00:47:35,640 --> 00:47:41,800
Then we're moving to a new type of grid as well, which is going to require new components.
792
00:47:41,800 --> 00:47:49,560
And I think the third bit on that is markets currently talking about dollar values for
793
00:47:49,560 --> 00:47:54,560
things to be spent and why it's important to have an efficient grid and put in capacitors
794
00:47:54,560 --> 00:48:00,200
and put in inverters is because there's a huge amount of money that needs to be spent,
795
00:48:00,200 --> 00:48:02,240
more money than I think people realise.
796
00:48:02,240 --> 00:48:03,480
And it's going up every year.
797
00:48:03,480 --> 00:48:04,480
We can come back.
798
00:48:04,480 --> 00:48:07,360
The two Aussie transmission projects are already up 300%.
799
00:48:07,360 --> 00:48:11,860
We've got the copper project in Queensland and the renewable project through an Energy
800
00:48:11,860 --> 00:48:13,120
Connect in South Australia.
801
00:48:13,120 --> 00:48:15,400
It's massively over budget.
802
00:48:15,400 --> 00:48:19,240
It's about the kilometres and the pieces of equipment need to be put in, not the current
803
00:48:19,240 --> 00:48:20,240
way.
804
00:48:20,240 --> 00:48:22,400
Not the current dollar amount people are currently estimating.
805
00:48:22,400 --> 00:48:27,040
The current dollar amount is completely wrong because it's based on what it cost them five
806
00:48:27,040 --> 00:48:30,880
to 10 years ago to get a transformer or get a capacitor or build a new substation.
807
00:48:30,880 --> 00:48:34,040
But that money is going to be way more now.
808
00:48:34,040 --> 00:48:37,160
That's really important, I think, for an investor for two reasons.
809
00:48:37,160 --> 00:48:42,960
One, it's a price taking capex program in tight capacity, which is music to my ears
810
00:48:42,960 --> 00:48:44,680
as a small cap investor.
811
00:48:44,680 --> 00:48:48,160
Two, the market's got the amount of money to be spent completely wrong.
812
00:48:48,160 --> 00:48:50,120
So I know there's a huge amount of money to be made.
813
00:48:50,120 --> 00:48:52,360
Or I believe there's a huge amount of money to be made.
814
00:48:52,360 --> 00:48:54,800
I don't know anything, but I believe that.
815
00:48:54,800 --> 00:49:00,760
And talking to the companies that we invest in and talking to their peers, we can see
816
00:49:00,760 --> 00:49:07,360
demand for capacity increasing and that the capacity is very limited and the players are
817
00:49:07,360 --> 00:49:11,480
building new facilities, but they're doing it in a controlled manner to make more and
818
00:49:11,480 --> 00:49:13,920
more money.
819
00:49:13,920 --> 00:49:19,240
This is sort of tying everything together.
820
00:49:19,240 --> 00:49:23,200
Everything you've just outlined at a very macro level, so not the nuts and bolts and
821
00:49:23,200 --> 00:49:26,560
the picks and shovels level about capacitors, substations, stuff.
822
00:49:26,560 --> 00:49:32,360
I don't think it's news to anybody that we need a ridiculous amount of power and that
823
00:49:32,360 --> 00:49:34,960
the current capacity is not fit for purpose.
824
00:49:34,960 --> 00:49:38,520
I think even here in Sydney, we've had this argument that if everyone bought an electric
825
00:49:38,520 --> 00:49:44,000
car, which is like the government's dream, and all of us finish work and all plug our
826
00:49:44,000 --> 00:49:49,040
cars into our homes between six or seven, we will take out the grid effectively.
827
00:49:49,040 --> 00:49:52,880
We'd take out the grid if everyone made a cup of tea when they went home.
828
00:49:52,880 --> 00:49:53,880
Exactly.
829
00:49:53,880 --> 00:49:57,920
So in California, I know I was speaking to another manager recently and he's based in
830
00:49:57,920 --> 00:50:01,920
California and obviously we know in California, everyone's got a frigging Tesla, right?
831
00:50:01,920 --> 00:50:05,880
They were like the first mover advantage, whatever, the greenies.
832
00:50:05,880 --> 00:50:14,480
And the government has told the citizens of LA not to plug their cars in at the same time
833
00:50:14,480 --> 00:50:18,520
at night because they know that's what's going to happen and they've had rolling blackouts.
834
00:50:18,520 --> 00:50:23,720
So I think it's sort of captain obvious that this needs to happen.
835
00:50:23,720 --> 00:50:35,040
So why is the valuations of the stuff that you're buying for the portfolio not recognized?
836
00:50:35,040 --> 00:50:38,960
And is that just purely the inefficiency of the market, you think?
837
00:50:38,960 --> 00:50:39,960
There's a bit of that.
838
00:50:39,960 --> 00:50:44,320
I think on average, the stocks that we invest in global small caps have zero to two analysts
839
00:50:44,320 --> 00:50:46,600
covering them from the sell side.
840
00:50:46,600 --> 00:50:49,520
And when you look at mid and large cap, they've got 20 to 30 analysts covering them.
841
00:50:49,520 --> 00:50:51,360
So there is some inefficiency.
842
00:50:51,360 --> 00:50:54,520
I think the other point is that people look at the large caps and they don't look at the
843
00:50:54,520 --> 00:50:55,520
small caps.
844
00:50:55,520 --> 00:50:58,440
And this opportunity is for small cap investing.
845
00:50:58,440 --> 00:51:04,800
If you look at the large cap serving the electrical upgrade like GE, like Legrand, like Schneider,
846
00:51:04,800 --> 00:51:09,560
like Siemens, like ABB, they're delivering no solid earnings growth.
847
00:51:09,560 --> 00:51:15,040
There aren't a decent material earnings upgrades and the stock prices are not going up.
848
00:51:15,040 --> 00:51:19,760
Whereas if you look at the stocks that we own, they're delivering 50% earnings upgrades
849
00:51:19,760 --> 00:51:21,180
and their prices are going up.
850
00:51:21,180 --> 00:51:26,440
So I think the market's looking too much at the large names and not at the small names.
851
00:51:26,440 --> 00:51:31,440
Our top two holdings in the fund, Powell Industries and Hammond Power Solutions.
852
00:51:31,440 --> 00:51:38,540
So Powell Industries is a leading maker of switchgear for substations and data centers.
853
00:51:38,540 --> 00:51:43,480
And Hammond Power Solutions is a leading producer of transformers for substations and data centers,
854
00:51:43,480 --> 00:51:45,400
but also harmonic equipment.
855
00:51:45,400 --> 00:51:49,200
So I was talking about the two different types of power.
856
00:51:49,200 --> 00:51:54,280
They're very good at harmonizing that sine wave to making sure that they don't get any
857
00:51:54,280 --> 00:51:58,580
bad peaks or troughs from induction.
858
00:51:58,580 --> 00:52:03,200
So those two businesses have delivered record earnings growth.
859
00:52:03,200 --> 00:52:08,960
They're delivering record quarterly operating margins and EPS and they're expanding manufacturing
860
00:52:08,960 --> 00:52:09,960
facilities.
861
00:52:09,960 --> 00:52:14,720
The market's pricing them, in my belief, based on my models, like that earnings growth is
862
00:52:14,720 --> 00:52:16,600
going to stop in two years.
863
00:52:16,600 --> 00:52:21,000
They're going to go back to a world where, so this is something that for 30 years the
864
00:52:21,000 --> 00:52:23,540
grid was a terrible place to invest in.
865
00:52:23,540 --> 00:52:29,160
One of our large holdings, NKT, which is a leading provider of high voltage transmission
866
00:52:29,160 --> 00:52:33,040
cables, the leading player in the world, been a strong product for us.
867
00:52:33,040 --> 00:52:38,080
They had a negative return on invested capital three years in a row in the late teens.
868
00:52:38,080 --> 00:52:41,600
So we're talking 2018, 19, 17.
869
00:52:41,600 --> 00:52:42,600
Very recently.
870
00:52:42,600 --> 00:52:43,600
Very recently.
871
00:52:43,600 --> 00:52:47,880
Same clients, same utility clients, same manufacturing facilities.
872
00:52:47,880 --> 00:52:49,320
That's just how bad demand was.
873
00:52:49,320 --> 00:52:54,480
And they were telling people at the time there's a huge surge coming, excuse the pun, but
874
00:52:54,480 --> 00:52:56,280
they were telling people people weren't paying attention.
875
00:52:56,280 --> 00:52:58,520
That same company will tell you right now what's coming.
876
00:52:58,520 --> 00:53:02,240
They just signed a 15-year agreement with the National Grid in the UK.
877
00:53:02,240 --> 00:53:03,800
So they know what's coming.
878
00:53:03,800 --> 00:53:07,680
I think generally the market says this thing's rolling over in two and a half years.
879
00:53:07,680 --> 00:53:09,840
It's a mini cycle.
880
00:53:09,840 --> 00:53:12,400
I know the grid's got to double by 2050.
881
00:53:12,400 --> 00:53:16,260
I'm looking at the projects right now and the components going into them and speaking
882
00:53:16,260 --> 00:53:21,600
to electrical engineers who design these things, the delays are going to increase.
883
00:53:21,600 --> 00:53:24,720
So we're behind schedule and we're going to fall further behind.
884
00:53:24,720 --> 00:53:28,480
And we're over budget and we're going to go more over budget, which is not news to
885
00:53:28,480 --> 00:53:31,000
anyone who's tried to build anything bigger than a bread box.
886
00:53:31,000 --> 00:53:34,000
Which is great for the price-taking strategy, right?
887
00:53:34,000 --> 00:53:36,640
Which is great for the guys who make the goods.
888
00:53:36,640 --> 00:53:41,720
And I think when you look at the guys who purchase those goods, they have to build this
889
00:53:41,720 --> 00:53:42,720
line.
890
00:53:42,720 --> 00:53:44,640
They have to upgrade the grid.
891
00:53:44,640 --> 00:53:49,720
With electrical engineering, although it's complex, there are only certain solutions.
892
00:53:49,720 --> 00:53:53,640
You can change where you put the substations on the grid and where you put the load and
893
00:53:53,640 --> 00:53:56,000
the generation a little bit.
894
00:53:56,000 --> 00:53:59,240
But there's only really going to be one main solution.
895
00:53:59,240 --> 00:54:01,920
And you need transformers.
896
00:54:01,920 --> 00:54:05,500
Transformer technology hasn't changed in over 100 years.
897
00:54:05,500 --> 00:54:09,600
It's a steel box with copper wrapped around one side and copper wrapped around the other
898
00:54:09,600 --> 00:54:10,600
side.
899
00:54:10,600 --> 00:54:11,600
It's not changed.
900
00:54:11,600 --> 00:54:16,680
And new technology is involved in helping those hardware.
901
00:54:16,680 --> 00:54:19,520
It's not changing the hardware, if that makes sense.
902
00:54:19,520 --> 00:54:22,920
It's software helping the hardware, not the hardware changing.
903
00:54:22,920 --> 00:54:25,680
So the price-takers, they're going to have to buy the stuff.
904
00:54:25,680 --> 00:54:31,360
Also, I just note transmission and distribution is like 2% of your electricity bill.
905
00:54:31,360 --> 00:54:34,200
Tax and government's 10%.
906
00:54:34,200 --> 00:54:36,160
Generation's about 40% to 50%.
907
00:54:36,160 --> 00:54:38,880
So and marketing and the company expenses, the rest.
908
00:54:38,880 --> 00:54:44,640
So this 2% that we pay on our bill to transition and distribution, it's going to double or
909
00:54:44,640 --> 00:54:45,640
triple.
910
00:54:45,640 --> 00:54:47,960
The end consumer's not going to see it.
911
00:54:47,960 --> 00:54:48,960
And they're going to do it.
912
00:54:48,960 --> 00:54:51,740
So I think it's a great place to invest for clients.
913
00:54:51,740 --> 00:54:54,000
We're not always going to be invested here.
914
00:54:54,000 --> 00:54:58,640
It's just like here right now is where it is.
915
00:54:58,640 --> 00:54:59,640
Last question.
916
00:54:59,640 --> 00:55:04,440
So one of the most unique things, I mean, fund managers come and see me every which
917
00:55:04,440 --> 00:55:05,440
day, right?
918
00:55:05,440 --> 00:55:06,440
Pitching the next best thing.
919
00:55:06,440 --> 00:55:08,960
I've met a fund manager that doesn't sell a good story, right?
920
00:55:08,960 --> 00:55:10,160
That's the reality of life, right?
921
00:55:10,160 --> 00:55:12,880
We're all here for a reason.
922
00:55:12,880 --> 00:55:18,760
Now, one thing that I picked up in our catch up just before we started recording was that
923
00:55:18,760 --> 00:55:22,960
most fund managers would come in and say, hey, I built a portfolio, right?
924
00:55:22,960 --> 00:55:27,200
And our EPS growth and our earnings growth is higher than the benchmark, right?
925
00:55:27,200 --> 00:55:30,800
The forecasted future earnings growth.
926
00:55:30,800 --> 00:55:33,200
You're different, right?
927
00:55:33,200 --> 00:55:38,320
And we were referencing a chart here where, you know, while your price to book is higher
928
00:55:38,320 --> 00:55:39,800
than benchmark, right?
929
00:55:39,800 --> 00:55:45,760
For a certain reason, your earnings growth forecast is lower than the bench.
930
00:55:45,760 --> 00:55:52,920
Why would I give you money to invest in earnings growth that's lower than the bench?
931
00:55:52,920 --> 00:55:54,720
Does it have something to do with risk?
932
00:55:54,720 --> 00:55:55,720
Yes.
933
00:55:55,720 --> 00:55:58,600
And the amount of work I do.
934
00:55:58,600 --> 00:56:02,200
Most fund managers can put in a style bucket.
935
00:56:02,200 --> 00:56:06,080
You can go and buy that style bucket in a passive product that's going to give you roughly
936
00:56:06,080 --> 00:56:09,040
the same return.
937
00:56:09,040 --> 00:56:14,480
If you're an active manager and you're selling a product that's higher growth in the market
938
00:56:14,480 --> 00:56:21,240
and higher price, you can get an ETF for that at 25, 30 basis points.
939
00:56:21,240 --> 00:56:22,480
They're not providing you any value.
940
00:56:22,480 --> 00:56:25,440
They might beat one year, but they'll come bad the next year.
941
00:56:25,440 --> 00:56:28,180
You know what fund managers are like on the active ones.
942
00:56:28,180 --> 00:56:29,680
So it's not providing you any value.
943
00:56:29,680 --> 00:56:35,160
You're basically buying a souped up, you're just buying a car that's been a souped up
944
00:56:35,160 --> 00:56:36,520
version of something else, right?
945
00:56:36,520 --> 00:56:40,320
We can name quite a few car models that just a souped up version of a rubbish car.
946
00:56:40,320 --> 00:56:42,960
But that's what I think you're getting.
947
00:56:42,960 --> 00:56:44,160
We're an active manager.
948
00:56:44,160 --> 00:56:46,480
So I'm trying to buy growth.
949
00:56:46,480 --> 00:56:48,760
You know, we've held in the fund.
950
00:56:48,760 --> 00:56:55,680
We've successfully bought and invested in the trade desk, Invertive, in MedPace, Capcom,
951
00:56:55,680 --> 00:57:00,280
Hubbell, I can keep going on about them.
952
00:57:00,280 --> 00:57:02,360
We're growth investors.
953
00:57:02,360 --> 00:57:06,600
But if you're a growth investor, don't go out and buy the shiniest toy on the street
954
00:57:06,600 --> 00:57:09,880
because there's going to be no unrecognised growth in that.
955
00:57:09,880 --> 00:57:12,720
The market is about being smarter than the market.
956
00:57:12,720 --> 00:57:15,040
If you want to be a passive investor, that's great.
957
00:57:15,040 --> 00:57:16,040
Be a passive investor.
958
00:57:16,040 --> 00:57:19,240
If you want to be an active investor, you've got to be smart and you've got to use your
959
00:57:19,240 --> 00:57:20,240
judgment.
960
00:57:20,240 --> 00:57:22,880
Otherwise, there's no point being there because you're taking on risk.
961
00:57:22,880 --> 00:57:26,880
And if you're not smart enough to deal with that risk, then don't be there.
962
00:57:26,880 --> 00:57:30,640
Being a growth investor, which I am, I'm in small caps to buy the next mid cap, to buy
963
00:57:30,640 --> 00:57:31,640
the next large cap.
964
00:57:31,640 --> 00:57:32,880
I want to buy the next trade desk.
965
00:57:32,880 --> 00:57:34,800
I want to buy the next Vertiv.
966
00:57:34,800 --> 00:57:35,800
That's why I'm here.
967
00:57:35,800 --> 00:57:38,360
That's why all my money is in the fund.
968
00:57:38,360 --> 00:57:41,480
But I can't go and buy the sexiest thing because I'm not going to make any money.
969
00:57:41,480 --> 00:57:43,120
It's not unrecognised growth.
970
00:57:43,120 --> 00:57:47,680
We sold Vertiv at around 100 bucks a couple of months ago because the growth was recognised
971
00:57:47,680 --> 00:57:49,240
by the market.
972
00:57:49,240 --> 00:57:50,680
It's got to be unrecognised.
973
00:57:50,680 --> 00:57:55,520
So my philosophy is go out there and buy much higher quality businesses in the market because
974
00:57:55,520 --> 00:57:56,520
you want to buy the niche leaders.
975
00:57:56,520 --> 00:57:59,560
You want to buy the best management teams, the best products, the best services because
976
00:57:59,560 --> 00:58:05,480
they're the most likely to be the leader in the future and grow into big companies.
977
00:58:05,480 --> 00:58:08,640
But then you've got to buy it when no one's expecting stuff to happen.
978
00:58:08,640 --> 00:58:11,280
Otherwise, how are you being smarter than the market?
979
00:58:11,280 --> 00:58:15,480
I always figured that if you're buying companies that are expected to grow more than the market
980
00:58:15,480 --> 00:58:19,040
and they're more expensive than the market, then what do you got?
981
00:58:19,040 --> 00:58:23,400
And likewise, if you buy companies that are super high quality and they're cheaper than
982
00:58:23,400 --> 00:58:28,080
the market, which is what I like to do, then there's got to be some give, which is that
983
00:58:28,080 --> 00:58:29,520
market's not completely inefficient.
984
00:58:29,520 --> 00:58:31,360
Market doesn't expect them to grow.
985
00:58:31,360 --> 00:58:33,280
So that's where I like to play.
986
00:58:33,280 --> 00:58:37,160
And that's why I always focus on having a lower expected growth than the market so that
987
00:58:37,160 --> 00:58:38,840
we get those earnings upgrades.
988
00:58:38,840 --> 00:58:43,360
And I think what really buoyed performance this year was the big upgrades that we've
989
00:58:43,360 --> 00:58:44,360
had.
990
00:58:44,360 --> 00:58:47,240
We've spoken about that in some of our main holdings.
991
00:58:47,240 --> 00:58:50,040
Right now, small caps are really cheap.
992
00:58:50,040 --> 00:58:53,920
And I don't think the market's rewarding the earnings growth that I see coming in our holdings
993
00:58:53,920 --> 00:58:55,880
and more broadly across the market.
994
00:58:55,880 --> 00:58:56,880
OK.
995
00:58:56,880 --> 00:59:00,320
Well, Toby, that comes to the end of our time.
996
00:59:00,320 --> 00:59:02,240
Thanks very much for joining me on the podcast.
997
00:59:02,240 --> 00:59:07,960
Next time, maybe we'll do it on Sydney Motor Sport Park, where I'll see you smoking my
998
00:59:07,960 --> 00:59:13,920
rear end down the straight because I cannot do to what, 260 down the straight.
999
00:59:13,920 --> 00:59:14,920
Yeah.
1000
00:59:14,920 --> 00:59:15,920
We'll see you then.
1001
00:59:15,920 --> 00:59:16,920
See you then.
1002
00:59:16,920 --> 00:59:17,920
Cheers.
1003
00:59:17,920 --> 00:59:18,920
Thanks.
1004
00:59:18,920 --> 00:59:28,600
This podcast is not financial product advice and is intended to provide information only.
1005
00:59:28,600 --> 00:59:32,600
It does not take into account the investment objectives, financial situation or needs of
1006
00:59:32,600 --> 00:59:33,600
any person.
1007
00:59:33,600 --> 00:59:37,120
You should assess whether the information is appropriate for you and consider talking
1008
00:59:37,120 --> 00:59:40,880
to a financial advisor before making any investment decisions.
1009
00:59:40,880 --> 00:59:43,960
Any investment examples are for illustrative purposes only.
1010
00:59:43,960 --> 00:59:47,400
The information is taken from sources which are believed to be accurate, but Simon Wu,
1011
00:59:47,400 --> 00:59:52,520
Jonathan Wu, SMU Financial Planning and Personal Financial Services Limited accept no liability
1012
00:59:52,520 --> 00:59:57,480
of any kind to any person who relies on the information contained in the podcast.
1013
00:59:57,480 --> 01:00:01,840
Unless expressively stated, none of the information should be taken as a recommendation.
1014
01:00:01,840 --> 01:00:15,360
For more information, please visit www.simonwu.com.au.
00:00:00,000 --> 00:00:08,080
Welcome to the Finance Garage Podcast, your go-to podcast for navigating the world of
2
00:00:08,080 --> 00:00:09,080
finance.
3
00:00:09,080 --> 00:00:13,680
I'm Jonathan, your financial guide bringing the latest market trends, investment strategies
4
00:00:13,680 --> 00:00:16,160
and financial news that matters to you.
5
00:00:16,160 --> 00:00:21,720
And by the way, I'm also going to share my other passion, which is cars.
6
00:00:21,720 --> 00:00:26,080
At the SW Woo Group, we help everyday families achieve financial success.
7
00:00:26,080 --> 00:00:30,200
Our integrated services include financial planning, accounting, credit advisory and
8
00:00:30,200 --> 00:00:31,200
estate planning.
9
00:00:31,200 --> 00:00:36,640
We are here to guide and support you every step of the way, from custom investment strategies
10
00:00:36,640 --> 00:00:38,920
to maximising tax efficiency.
11
00:00:38,920 --> 00:00:42,000
We ensure your financial goals are met with peace of mind.
12
00:00:42,000 --> 00:00:52,440
Visit SimonWoo.com.au for more information.
13
00:00:52,440 --> 00:00:53,980
So welcome back everybody.
14
00:00:53,980 --> 00:00:56,840
This is the second episode of the Finance Garage.
15
00:00:56,840 --> 00:01:02,400
I'm Jonathan Woo, principal and senior financial advisor here at the SW Woo Group.
16
00:01:02,400 --> 00:01:09,080
So for my second episode, I have Tobias Bux, who's a portfolio manager at Ausbill.
17
00:01:09,080 --> 00:01:12,840
He's a portfolio manager for the Ausbill Global Small Caps Fund.
18
00:01:12,840 --> 00:01:16,960
I've known Tobias for about two and a half, three years.
19
00:01:16,960 --> 00:01:19,400
And so welcome, Toby.
20
00:01:19,400 --> 00:01:20,400
Thanks very much.
21
00:01:20,400 --> 00:01:21,400
Glad to be here.
22
00:01:21,400 --> 00:01:22,400
Cheers, Jonathan.
23
00:01:22,400 --> 00:01:26,880
So just to kick things off, we call this the Finance Garage for a reason.
24
00:01:26,880 --> 00:01:33,400
Before we talk about the garage and some cars, give us a bit about your background.
25
00:01:33,400 --> 00:01:34,960
Thanks.
26
00:01:34,960 --> 00:01:39,600
I've been doing small caps my whole career, which is coming up 20 years now.
27
00:01:39,600 --> 00:01:45,200
I'm from the UK originally and I've been in Australia for almost 14 years.
28
00:01:45,200 --> 00:01:49,800
The Ausbill Fund, the Ausbill Global Small Cap Fund that I run has been going coming
29
00:01:49,800 --> 00:01:50,800
up six years.
30
00:01:50,800 --> 00:01:55,640
And my real passion is these global small caps, I think because they're just really
31
00:01:55,640 --> 00:01:59,120
exciting businesses and you get the best returns out of them.
32
00:01:59,120 --> 00:02:02,320
So you can make a lot of money and there's always a bull market somewhere.
33
00:02:02,320 --> 00:02:05,680
So you can always find something interesting to invest in.
34
00:02:05,680 --> 00:02:10,020
Outside of work, I'm a father to two great kids.
35
00:02:10,020 --> 00:02:11,960
And I try to enjoy the finer things in life.
36
00:02:11,960 --> 00:02:12,960
I like sport.
37
00:02:12,960 --> 00:02:16,920
I like automobiles, which we're going to talk about, which is a keen thing for me.
38
00:02:16,920 --> 00:02:19,120
And I like investing.
39
00:02:19,120 --> 00:02:26,000
I think one of the reasons that markets are so interesting is they always just show you
40
00:02:26,000 --> 00:02:29,680
how small and how little you know.
41
00:02:29,680 --> 00:02:31,560
That's one of the things that I really enjoy.
42
00:02:31,560 --> 00:02:36,280
So I guess that's part of me is hoping to learn more out of markets going forward.
43
00:02:36,280 --> 00:02:38,200
I'm a bit of a market junkie.
44
00:02:38,200 --> 00:02:39,200
Sounds good.
45
00:02:39,200 --> 00:02:41,640
Now, let's talk quickly about cars.
46
00:02:41,640 --> 00:02:46,080
So just before we started recording, we talked about something quite interesting because
47
00:02:46,080 --> 00:02:52,280
both of us recently went to Sydney Motorsport Park, but with a slightly different mode of
48
00:02:52,280 --> 00:02:54,080
transportation.
49
00:02:54,080 --> 00:03:01,800
So for those of you on the podcast that have ever gone to Sydney Motorsport Park, I think
50
00:03:01,800 --> 00:03:07,320
it was actually primarily originally built for motor GP.
51
00:03:07,320 --> 00:03:13,680
And so I went down in my Porsche Cayenne, which is a very, very heavy car.
52
00:03:13,680 --> 00:03:19,160
And I was really proud of myself for hitting the straight VMAX 220.
53
00:03:19,160 --> 00:03:24,360
And then you said something, Toby, that I just went, I can't do that.
54
00:03:24,360 --> 00:03:26,280
Can you share with the audience what you did?
55
00:03:26,280 --> 00:03:28,960
Yeah, you can go a lot faster on a motorbike.
56
00:03:28,960 --> 00:03:31,000
So yeah, I was, I hit 266.
57
00:03:31,000 --> 00:03:35,660
I almost got to 270, but not quite very close.
58
00:03:35,660 --> 00:03:39,560
Next time I go, I'm going to go through 270 for sure.
59
00:03:39,560 --> 00:03:40,880
And what was your mode of transportation?
60
00:03:40,880 --> 00:03:45,400
We see, I was on a Suzuki generation one Hayabusa.
61
00:03:45,400 --> 00:03:48,400
So they're a lot faster than cars.
62
00:03:48,400 --> 00:03:52,560
And I think you're right on that track being built for GP because I don't know if it's
63
00:03:52,560 --> 00:03:54,840
at corner four or corner five.
64
00:03:54,840 --> 00:03:55,840
There's a camber.
65
00:03:55,840 --> 00:03:56,840
Yes.
66
00:03:56,840 --> 00:03:59,600
And obviously the camber on a bike's a lot better than a camber on a car.
67
00:03:59,600 --> 00:04:04,280
I know your cars capture more of the camber because you're wider, but you need a camber
68
00:04:04,280 --> 00:04:07,360
on a bike if you're really going to go for the corner.
69
00:04:07,360 --> 00:04:09,600
And so yeah, it's a great track.
70
00:04:09,600 --> 00:04:10,920
It is a great track.
71
00:04:10,920 --> 00:04:16,840
And my comment, if you recall, I said that if you hit the wrong part of, well, if you
72
00:04:16,840 --> 00:04:20,640
get to the wrong part of the apex on turn one, and you find yourself in an area that
73
00:04:20,640 --> 00:04:24,120
you let's call it less desirable.
74
00:04:24,120 --> 00:04:27,960
I believe that your Suzuki is going to be wearing you for protection as you hit the
75
00:04:27,960 --> 00:04:28,960
wall.
76
00:04:28,960 --> 00:04:29,960
Yeah, for sure.
77
00:04:29,960 --> 00:04:30,960
For sure.
78
00:04:30,960 --> 00:04:35,360
I had to, I've missed that corner a few times and been up the gravel, had been up the gravel
79
00:04:35,360 --> 00:04:39,480
strip into towards the ties and then had to, it's really sad.
80
00:04:39,480 --> 00:04:42,720
You have to go on this little ride of shame.
81
00:04:42,720 --> 00:04:46,320
You have to do this zigzag behind the tires and they have to go all the way around on
82
00:04:46,320 --> 00:04:51,880
the back road and join after corner, whatever it is, corner two, cause they won't or corner
83
00:04:51,880 --> 00:04:52,880
one.
84
00:04:52,880 --> 00:04:54,560
So it's this whole little, little lap of shame.
85
00:04:54,560 --> 00:04:57,720
And then all the guys in the pits can see you doing it.
86
00:04:57,720 --> 00:05:02,040
And of course, you know, when you're there on a race day, you don't, you know, it's a
87
00:05:02,040 --> 00:05:04,320
natural fear that you're the biggest monkey there.
88
00:05:04,320 --> 00:05:08,960
Like you know the least and you're the least cool and you don't know anything about engines
89
00:05:08,960 --> 00:05:09,960
then yeah.
90
00:05:09,960 --> 00:05:13,760
And then when you have to do the little, the ride of shame, it's even more embarrassing.
91
00:05:13,760 --> 00:05:17,480
But yeah, that's if you miss it because if you don't, yeah, cause obviously you want
92
00:05:17,480 --> 00:05:18,480
to go as fast as possible.
93
00:05:18,480 --> 00:05:23,960
That's the whole point of going to the motorsport park and that means just gassing it.
94
00:05:23,960 --> 00:05:29,080
And if you've got gears, then that just means trying to get to top gear as you know, smoothly
95
00:05:29,080 --> 00:05:30,080
and as possible.
96
00:05:30,080 --> 00:05:33,560
You don't really think, I think my biggest problem is I don't really think about braking.
97
00:05:33,560 --> 00:05:38,240
I'm like, I just want to get, get up, up to the highest gear and as fast as possible.
98
00:05:38,240 --> 00:05:41,960
And then you see the grandstand just like start flying past you on the right and you
99
00:05:41,960 --> 00:05:46,880
see the 150 brake sign and they're like, Oh, I really should have started breaking by now.
100
00:05:46,880 --> 00:05:47,880
Yeah.
101
00:05:47,880 --> 00:05:52,280
The good news on a bike versus a car is on a bike you can get from 270 to like 170 within
102
00:05:52,280 --> 00:05:55,520
like 50 meters.
103
00:05:55,520 --> 00:05:57,000
You can slow down a lot quicker.
104
00:05:57,000 --> 00:06:02,320
I'm just thinking about at what point if you speed down, if you slow down far too quickly,
105
00:06:02,320 --> 00:06:07,960
you, what, well what speed at which you slow down too quickly, you'll end up over the bike.
106
00:06:07,960 --> 00:06:09,560
Yeah, yeah, yeah, yeah, yeah.
107
00:06:09,560 --> 00:06:15,120
Well, and that's luckily, you know, not something I'm going to push the limits on and find out.
108
00:06:15,120 --> 00:06:18,240
I mean, I'm trying to ride within, within, within oneself.
109
00:06:18,240 --> 00:06:19,240
I've got kids.
110
00:06:19,240 --> 00:06:22,080
And obviously I think it's important to note to all the listeners out there, there's two
111
00:06:22,080 --> 00:06:23,440
fund managers on this fund.
112
00:06:23,440 --> 00:06:29,000
I've been running money with, with the guy called Simon Wood since 2007 in the UK and
113
00:06:29,000 --> 00:06:30,000
then we run money here.
114
00:06:30,000 --> 00:06:35,280
So the key man risk is much reduced by having two senior portfolio managers.
115
00:06:35,280 --> 00:06:36,520
That is very, very, very good.
116
00:06:36,520 --> 00:06:40,080
What's it like on the, on the car though, when you, when you start breaking, like when
117
00:06:40,080 --> 00:06:42,840
do you, where do you start breaking on the car?
118
00:06:42,840 --> 00:06:49,160
So I think I, at the, I think it's the hundred meter, I think it's a hundred meter sign.
119
00:06:49,160 --> 00:06:55,240
I start hitting it and that's where I hit sort of 220 and then I'm hitting turn one
120
00:06:55,240 --> 00:06:57,480
at about 130.
121
00:06:57,480 --> 00:06:58,600
I think I maxed out it.
122
00:06:58,600 --> 00:07:00,320
I couldn't, I couldn't get any faster.
123
00:07:00,320 --> 00:07:04,640
And the main reason was because at turn two, as you know, you go around and then up.
124
00:07:04,640 --> 00:07:05,640
Yeah, yeah, yeah.
125
00:07:05,640 --> 00:07:12,680
So I, I, the, the physical limits of the car I felt now, to be fair, I hadn't done a track
126
00:07:12,680 --> 00:07:13,680
date about 12 years.
127
00:07:13,680 --> 00:07:19,520
I did one with Mercedes about over a decade ago, but the issue was I then Porsche was
128
00:07:19,520 --> 00:07:20,520
really good.
129
00:07:20,520 --> 00:07:23,680
They've got coaches and then you have coaches that can come in at any time if you request
130
00:07:23,680 --> 00:07:25,100
them to jump in.
131
00:07:25,100 --> 00:07:28,120
And I said, can you sort of tell me if I'm pushing the limits?
132
00:07:28,120 --> 00:07:30,240
And he said, just do a lap.
133
00:07:30,240 --> 00:07:34,880
I did a lap and then, and then he said, and I asked the coach, how do you feel about it?
134
00:07:34,880 --> 00:07:40,920
And he said, well, you have not lost any traction.
135
00:07:40,920 --> 00:07:45,320
So even though you feel that you're in this big gigantic SUV and as you're cornering,
136
00:07:45,320 --> 00:07:48,360
you feel like you're going to roll, the car's not going to roll.
137
00:07:48,360 --> 00:07:51,240
It will never roll unless you actually leave the tarmac.
138
00:07:51,240 --> 00:07:52,440
Right.
139
00:07:52,440 --> 00:07:56,200
And even before you roll, you will lose traction.
140
00:07:56,200 --> 00:07:57,800
The back end will fly out.
141
00:07:57,800 --> 00:07:58,800
Right.
142
00:07:58,800 --> 00:08:03,640
And if you haven't felt that at any point during the day, you won't have any trouble.
143
00:08:03,640 --> 00:08:04,640
Right.
144
00:08:04,640 --> 00:08:06,000
And it does feel very heavy.
145
00:08:06,000 --> 00:08:07,880
We're talking about camber, right?
146
00:08:07,880 --> 00:08:13,520
Getting into that, whatever that corner was, like getting round, it's very, you feel the
147
00:08:13,520 --> 00:08:16,360
limits of your car, like just.
148
00:08:16,360 --> 00:08:17,360
It's four.
149
00:08:17,360 --> 00:08:18,360
It's corner four.
150
00:08:18,360 --> 00:08:19,360
I think it's four.
151
00:08:19,360 --> 00:08:20,360
Yeah.
152
00:08:20,360 --> 00:08:23,960
Because when you go really hard on the brakes in my can, it is really the front end just
153
00:08:23,960 --> 00:08:25,840
basically just stomps down.
154
00:08:25,840 --> 00:08:26,840
Yeah.
155
00:08:26,840 --> 00:08:30,680
You feel it like really, and I've got air suspension on mine and it's still just basically
156
00:08:30,680 --> 00:08:32,640
throws the car down really aggressively.
157
00:08:32,640 --> 00:08:34,560
You've got that much weight transfer, right?
158
00:08:34,560 --> 00:08:35,560
You're moving two tonnes.
159
00:08:35,560 --> 00:08:36,560
Yeah.
160
00:08:36,560 --> 00:08:37,560
So 2.6 tonnes.
161
00:08:37,560 --> 00:08:38,560
Yeah.
162
00:08:38,560 --> 00:08:39,560
Whereas 250 kilograms is battery.
163
00:08:39,560 --> 00:08:40,560
Right.
164
00:08:40,560 --> 00:08:42,200
Now that's, there's a good part to that, right?
165
00:08:42,200 --> 00:08:45,360
Because your centre of gravity, because the way the bat, the bat packs are loaded up is
166
00:08:45,360 --> 00:08:46,880
at the bottom of the vehicle, right?
167
00:08:46,880 --> 00:08:47,880
Yeah.
168
00:08:47,880 --> 00:08:51,760
So it lowers your centre of gravity, but you genuinely feel a lot of weight coming through.
169
00:08:51,760 --> 00:08:53,560
I reckon you'd go faster on the straight.
170
00:08:53,560 --> 00:08:54,920
Not trying to tell you how to suck eggs.
171
00:08:54,920 --> 00:08:59,440
It was a different, but that, that corner one is a slow corner.
172
00:08:59,440 --> 00:09:00,440
So it's a fast corner.
173
00:09:00,440 --> 00:09:01,560
I mean, super fast corner.
174
00:09:01,560 --> 00:09:05,720
I've seen, I've seen a guy take it at over 215 on a Ducati.
175
00:09:05,720 --> 00:09:06,720
Yikes.
176
00:09:06,720 --> 00:09:11,800
He was really hanging off like shoulder on the tarmac, but he had it at 215 on that corner
177
00:09:11,800 --> 00:09:12,800
one.
178
00:09:12,800 --> 00:09:15,640
Lots of people can pull 190.
179
00:09:15,640 --> 00:09:19,720
I reckon you've got more grip in a corner than a bike.
180
00:09:19,720 --> 00:09:24,040
I reckon, I reckon cars can get up to 150 on that corner, 160.
181
00:09:24,040 --> 00:09:25,880
Yeah, I think so.
182
00:09:25,880 --> 00:09:29,520
The thing is on a bike, you can feel, cause I don't have any traction control to turn
183
00:09:29,520 --> 00:09:33,880
off or on, but you can feel a bit of give and you're like, Oh, okay.
184
00:09:33,880 --> 00:09:35,920
I'm already, yeah, you feel it.
185
00:09:35,920 --> 00:09:40,520
And you're like, okay, this is, I need to rain this in a tiny bit.
186
00:09:40,520 --> 00:09:41,520
Yeah.
187
00:09:41,520 --> 00:09:45,160
But I love all the different forms of cars.
188
00:09:45,160 --> 00:09:46,480
What cars have you got?
189
00:09:46,480 --> 00:09:52,600
So, so I, I'm, I mean my wife's right BMW X3 cause you know, it's a shuffle kids around.
190
00:09:52,600 --> 00:09:54,840
I've got my KM.
191
00:09:54,840 --> 00:10:00,720
I've had my previous car to that was at Audi SQ5, which is nice.
192
00:10:00,720 --> 00:10:05,360
Prior to that was what did five years with Lexus, which we talked about previously.
193
00:10:05,360 --> 00:10:10,880
And if there's any audience members that own Lexus LC 500, I'm very interested because
194
00:10:10,880 --> 00:10:12,960
I think that's going to be a vintage car one day.
195
00:10:12,960 --> 00:10:13,960
All right.
196
00:10:13,960 --> 00:10:15,400
We were talking about this, right?
197
00:10:15,400 --> 00:10:16,400
Even you were surprised.
198
00:10:16,400 --> 00:10:20,820
There is almost no modern production car that's still being produced today.
199
00:10:20,820 --> 00:10:23,920
That is a naturally aspirated five litre V8, right?
200
00:10:23,920 --> 00:10:26,760
It's electrified, turbocharged, supercharged, right?
201
00:10:26,760 --> 00:10:30,560
To effectively deal with the euros, emission standards, right?
202
00:10:30,560 --> 00:10:32,520
So you just don't get the sound out of it.
203
00:10:32,520 --> 00:10:36,560
And I, and everyone that, or the rumble or just the rumble, correct.
204
00:10:36,560 --> 00:10:40,000
Cold starts, the whole, you know, the whole kit and caboodle.
205
00:10:40,000 --> 00:10:45,320
And the issue is that when you flick on, most of the people that have bought the newest
206
00:10:45,320 --> 00:10:49,660
generation and we'll talk about this, the C 63 AMG from Mercedes, right?
207
00:10:49,660 --> 00:10:51,280
It's a two litre four pot, right?
208
00:10:51,280 --> 00:10:55,560
Okay, it's electrified and then it's turbocharged and whatever.
209
00:10:55,560 --> 00:10:59,960
And but there's a lot of people now that actually want to sell the cars and the secondhand market
210
00:10:59,960 --> 00:11:06,360
for C 63s have plummeted because 10 years ago you got a 6.2 litre naturally aspirated
211
00:11:06,360 --> 00:11:10,220
V8 and now you've got a, you know, two litre four pot.
212
00:11:10,220 --> 00:11:14,800
It produces more kilowatts because you got no turbo lag, right?
213
00:11:14,800 --> 00:11:18,480
So your zero to a hundred is technically faster, but it's just not the feel.
214
00:11:18,480 --> 00:11:21,800
And you buy an LC 500 not because it's the fastest car in the world.
215
00:11:21,800 --> 00:11:26,840
My Porsche Cayenne is faster than the, faster than the LC 500, but it's just the feel.
216
00:11:26,840 --> 00:11:27,840
Yeah.
217
00:11:27,840 --> 00:11:28,840
Right.
218
00:11:28,840 --> 00:11:32,600
And I think that's probably the issue that I have with buying a pure electric car as
219
00:11:32,600 --> 00:11:36,160
well is that, so what if you do it in two and a half seconds?
220
00:11:36,160 --> 00:11:37,800
It doesn't, there's no sound.
221
00:11:37,800 --> 00:11:42,160
I asked that question of the, I took my bike in to be serviced and they tried to sell me
222
00:11:42,160 --> 00:11:45,240
and not sell me, they tried to pique my interest in an electric bike.
223
00:11:45,240 --> 00:11:46,960
And I was, they were telling me about the acceleration.
224
00:11:46,960 --> 00:11:49,640
I'm like, well, I've got a higher booster.
225
00:11:49,640 --> 00:11:50,640
I've got acceleration.
226
00:11:50,640 --> 00:11:53,240
I don't need any more of that.
227
00:11:53,240 --> 00:11:54,880
It's already dangerous enough as it is.
228
00:11:54,880 --> 00:11:58,760
And then he started saying, well, it makes, I was like, what sound does it make?
229
00:11:58,760 --> 00:12:02,400
And he said, and then he got me because they said it makes it sound like a jet engine.
230
00:12:02,400 --> 00:12:04,080
And then he played me the video and it turned it on.
231
00:12:04,080 --> 00:12:10,240
And it did as much as anyone who likes motorbikes probably likes the whole Top Gun side of motorbikes,
232
00:12:10,240 --> 00:12:11,600
that whole sort of side of fun.
233
00:12:11,600 --> 00:12:12,600
And I definitely do.
234
00:12:12,600 --> 00:12:16,120
And then when I heard the engine go, it does sound like a fighter plane.
235
00:12:16,120 --> 00:12:18,960
And I was like, okay, well, that's the four year old boy in me.
236
00:12:18,960 --> 00:12:19,960
Okay.
237
00:12:19,960 --> 00:12:23,360
It doesn't sound like my higher booster with two massive exhausts.
238
00:12:23,360 --> 00:12:24,360
That's awesome.
239
00:12:24,360 --> 00:12:28,560
But at the same time, it's a different sort of cool, you know, and that got me because
240
00:12:28,560 --> 00:12:30,760
it's like, yeah, yeah.
241
00:12:30,760 --> 00:12:31,760
That got me excited.
242
00:12:31,760 --> 00:12:35,800
I think the sounds, everything, like, you know, your body is the centre of your identity
243
00:12:35,800 --> 00:12:40,280
and also your car is in the modern world now, like your horse probably was before and now
244
00:12:40,280 --> 00:12:41,520
it's your car.
245
00:12:41,520 --> 00:12:44,080
So your vehicle.
246
00:12:44,080 --> 00:12:49,360
So yeah, the sound super important, the look super important and the feel when you're sitting,
247
00:12:49,360 --> 00:12:52,280
like when it goes, how you can have it.
248
00:12:52,280 --> 00:12:57,360
I haven't sat in one of those new 63s, but it not to have the whole thing rumble would
249
00:12:57,360 --> 00:12:58,360
upset me.
250
00:12:58,360 --> 00:13:02,920
I had an old ML500 that I used to really enjoy just because the engine, like I say, it's
251
00:13:02,920 --> 00:13:05,520
that naturally aspirated five-liter just goes, hmm.
252
00:13:05,520 --> 00:13:06,520
Correct.
253
00:13:06,520 --> 00:13:07,520
Yeah.
254
00:13:07,520 --> 00:13:08,520
W63 or whatever, 163.
255
00:13:08,520 --> 00:13:09,520
They're good cars.
256
00:13:09,520 --> 00:13:10,520
Correct.
257
00:13:10,520 --> 00:13:13,680
And the fact of the matter is it doesn't matter how fast it goes from zero to a hundred,
258
00:13:13,680 --> 00:13:16,960
we'll basically lose our license with anything that we drive nowadays, right?
259
00:13:16,960 --> 00:13:17,960
With that speed.
260
00:13:17,960 --> 00:13:23,360
But talking about risk, let's move on to small caps.
261
00:13:23,360 --> 00:13:30,800
Now we met about, yeah, about two-ish years ago.
262
00:13:30,800 --> 00:13:38,120
And at that point, you talked about this particular dynamics of the market back then, and it was
263
00:13:38,120 --> 00:13:39,120
challenging, right?
264
00:13:39,120 --> 00:13:41,800
It's probably the best way to put it.
265
00:13:41,800 --> 00:13:44,080
Can you unpack that for me?
266
00:13:44,080 --> 00:13:48,040
Because I think that sort of sets the scene to where we are today and the opportunity
267
00:13:48,040 --> 00:13:50,920
set that presents itself is far more different.
268
00:13:50,920 --> 00:13:52,520
Can you sort of set the scene for us?
269
00:13:52,520 --> 00:13:57,240
Yeah, I think, I mean, I remember talking to you at the time and, you know, there'd
270
00:13:57,240 --> 00:14:01,000
been a big run since the COVID lows.
271
00:14:01,000 --> 00:14:05,440
I think we can get onto why small caps are attractive and stuff, but just in terms of
272
00:14:05,440 --> 00:14:11,120
where we were, I felt that the market had got a bit pricey and that the market was discounting
273
00:14:11,120 --> 00:14:17,280
quite a strong outlook and that it was going to be quite difficult for valuations to really
274
00:14:17,280 --> 00:14:22,480
improve that much to give you a really, a return worthy of the risk that you're taking
275
00:14:22,480 --> 00:14:26,400
because you're always taking risk investing and, you know, you've got to take on risk
276
00:14:26,400 --> 00:14:30,800
to enjoy life, to get returns, but you've also really got to understand and unpack that
277
00:14:30,800 --> 00:14:31,800
risk.
278
00:14:31,800 --> 00:14:35,760
I think we could see inflation coming, we could see interest rates going up, and I think
279
00:14:35,760 --> 00:14:41,840
that outlook, the first move in interest rates is going to be bad for growth, it's going
280
00:14:41,840 --> 00:14:49,720
to be bad for risk, and I think when you see valuations not offering that much upside,
281
00:14:49,720 --> 00:14:53,200
you know, it's about risk and return, you're just not getting that much return.
282
00:14:53,200 --> 00:14:57,280
And I think those are some of the things I was trying to explain to you.
283
00:14:57,280 --> 00:15:01,560
It's never the right thing to do as a fund manager not to ask people to give you money,
284
00:15:01,560 --> 00:15:06,640
but at the time and definitely within our chat, I think I was pushing back on you guys
285
00:15:06,640 --> 00:15:12,200
investing given what you are after and, you know, I want to do exactly what we say we
286
00:15:12,200 --> 00:15:17,320
do on the tin, which is give you the returns that we think we can at the risk that people
287
00:15:17,320 --> 00:15:18,480
take on.
288
00:15:18,480 --> 00:15:20,600
So yeah, the market had run really hard.
289
00:15:20,600 --> 00:15:25,400
And actually what happened luckily was that it wasn't a good time to put money in to the
290
00:15:25,400 --> 00:15:30,720
asset class or into equity markets, and I'm glad I was as brutally honest as I normally
291
00:15:30,720 --> 00:15:31,720
am.
292
00:15:31,720 --> 00:15:35,520
It can get me in trouble sometimes, but especially if your girlfriend asks you what she looks
293
00:15:35,520 --> 00:15:36,520
like and stuff.
294
00:15:36,520 --> 00:15:38,960
But I think at the time things were expensive.
295
00:15:38,960 --> 00:15:44,120
You roll forward to where we are now, and we're talking about late 22 there, right?
296
00:15:44,120 --> 00:15:51,320
We roll forward to where we are now August 2024, so two months shy of an election, potentially
297
00:15:51,320 --> 00:15:57,360
a few weeks, three weeks shy of what's expected to be the first rate cut.
298
00:15:57,360 --> 00:16:02,200
And that's expected to be a benevolent rate cut focusing on keeping real yields in an
299
00:16:02,200 --> 00:16:06,920
attractive area as inflations come down.
300
00:16:06,920 --> 00:16:11,200
Inflation was rising two years ago, which made it very difficult to handicap how high
301
00:16:11,200 --> 00:16:12,200
rates would get.
302
00:16:12,200 --> 00:16:16,120
Nowadays, inflation is falling, difficult to handicap, but I think we can assume in
303
00:16:16,120 --> 00:16:21,080
the near term for the foreseeable future roughly what it's going to do in the next six months,
304
00:16:21,080 --> 00:16:25,200
especially inflation with rent and shelter being such a big part of it.
305
00:16:25,200 --> 00:16:27,320
We can see where inflation is going.
306
00:16:27,320 --> 00:16:31,360
So pretty sanguine on where inflation is and also that rate cuts are coming, not as many
307
00:16:31,360 --> 00:16:33,560
rate cuts as the market.
308
00:16:33,560 --> 00:16:35,440
What does that mean in layman's terms?
309
00:16:35,440 --> 00:16:43,840
It's a better set up for higher market prices for equities.
310
00:16:43,840 --> 00:16:44,880
Why?
311
00:16:44,880 --> 00:16:50,160
Because the market is assuming continued growth, and I think that's going to come through,
312
00:16:50,160 --> 00:16:54,000
and that they're not going to get any liquidity headwinds.
313
00:16:54,000 --> 00:17:02,040
I think what happened when rates moved aggressively in the end of 22 and 23, for 20 years we've
314
00:17:02,040 --> 00:17:05,200
had low rates ever since Greenspan.
315
00:17:05,200 --> 00:17:10,200
Fixing the issues of the liquidity crisis of the GFC brought even lower rates, and then
316
00:17:10,200 --> 00:17:12,040
the euro crisis even lower rates.
317
00:17:12,040 --> 00:17:17,560
So we've had low rates, call them synthetically low, call them what you want, but they've
318
00:17:17,560 --> 00:17:19,640
been low.
319
00:17:19,640 --> 00:17:26,840
And if the risk free rate's zero, then the required rate of return for more risk steps
320
00:17:26,840 --> 00:17:27,840
up from that.
321
00:17:27,840 --> 00:17:33,000
So for investment grade quality bonds, you can expect 2% to 3% return, step through to
322
00:17:33,000 --> 00:17:39,360
junk at 10% return, and likewise for equities, large caps can probably give you a 5% to 8%
323
00:17:39,360 --> 00:17:43,680
return, and small caps can give you an 8% to 10% return.
324
00:17:43,680 --> 00:17:49,680
In an environment where interest rates, the risk rates are 3%, the required return from
325
00:17:49,680 --> 00:17:54,560
riskier assets steps up with it, and small caps are riskier than large caps.
326
00:17:54,560 --> 00:17:56,000
Not very much, but they are tiny bits.
327
00:17:56,000 --> 00:17:59,800
So now you're expecting a 12% to 15% return.
328
00:17:59,800 --> 00:18:02,920
So when valuations are too high, and back when I was saying, look, there's probably
329
00:18:02,920 --> 00:18:06,000
a better time to dump to give me money to make you more money, and there's a better
330
00:18:06,000 --> 00:18:12,320
time to do it, what I'm saying is that markets have to adjust here for the change in interest
331
00:18:12,320 --> 00:18:16,040
rate environment, and they haven't.
332
00:18:16,040 --> 00:18:22,560
So I think what I'm interested in as well is we've gone from, if you think back just
333
00:18:22,560 --> 00:18:28,240
eight, nine months ago to the beginning of this calendar year, we went from predicting
334
00:18:28,240 --> 00:18:33,720
what six to seven rate cuts to zero in, was it June?
335
00:18:33,720 --> 00:18:34,720
Hikes.
336
00:18:34,720 --> 00:18:36,260
Hikes, sorry, hikes, right?
337
00:18:36,260 --> 00:18:37,260
Six to seven hikes.
338
00:18:37,260 --> 00:18:43,320
And then six months later, we went to zero hikes, because soft landing, to now, I think
339
00:18:43,320 --> 00:18:46,240
that it's about 100, the market's pricing 150 base points.
340
00:18:46,240 --> 00:18:51,680
I saw something from JP Morgan yesterday, 150 base points in the next sort of 12 months,
341
00:18:51,680 --> 00:18:54,880
I think 52 weeks was their scale.
342
00:18:54,880 --> 00:19:00,540
How does that impact, given the fact opinions are literally changing by the day, and 10
343
00:19:00,540 --> 00:19:06,360
year bond yields are being repriced every second, does that factor a huge part into
344
00:19:06,360 --> 00:19:08,160
what you end up investing in?
345
00:19:08,160 --> 00:19:12,840
Because that in itself can generate a whole lot of volatility for you, right?
346
00:19:12,840 --> 00:19:20,040
If you're having to pick your portfolios based on basically going each side of duration violently
347
00:19:20,040 --> 00:19:22,880
or moving violently constantly, right?
348
00:19:22,880 --> 00:19:23,880
Does that sort of make sense?
349
00:19:23,880 --> 00:19:26,060
Is that an issue for you?
350
00:19:26,060 --> 00:19:27,060
Not a huge issue.
351
00:19:27,060 --> 00:19:33,840
I mean, duration affects all pricing of risk because duration affects pricing of future
352
00:19:33,840 --> 00:19:34,840
returns.
353
00:19:34,840 --> 00:19:37,800
That's the very nature of it.
354
00:19:37,800 --> 00:19:38,800
But for us, not really.
355
00:19:38,800 --> 00:19:44,000
I think it's when the environments change, you have to be aware of what's going on.
356
00:19:44,000 --> 00:19:49,240
I think the real question an investor has to ask yourself is, duration is a measure
357
00:19:49,240 --> 00:19:51,280
of sensitivity to interest rate risk.
358
00:19:51,280 --> 00:19:55,160
If interest rates move by this much, what's going to happen to the valuations of the businesses
359
00:19:55,160 --> 00:19:56,160
in my portfolio?
360
00:19:56,160 --> 00:19:58,020
And that's sort of the key question.
361
00:19:58,020 --> 00:20:07,160
At the moment, yes, we've seen expectations of interest rate five to six hikes move to
362
00:20:07,160 --> 00:20:10,600
no hikes, like you say, to now cuts and now even more cuts.
363
00:20:10,600 --> 00:20:15,600
But in that time, the outlook for sort of the 10 and the 30-year interest rate environment
364
00:20:15,600 --> 00:20:16,760
hasn't really changed.
365
00:20:16,760 --> 00:20:20,600
That's the sort of my understanding with my way of thinking would be the investment market
366
00:20:20,600 --> 00:20:25,840
saying pretty easy to handicap the interest rate environment over the next 30 years, quite
367
00:20:25,840 --> 00:20:28,480
difficult to handicap in the next two years.
368
00:20:28,480 --> 00:20:29,480
And that's what's happened.
369
00:20:29,480 --> 00:20:39,120
So what we saw in 22, it was at the end of 21, actually, that we first started talking.
370
00:20:39,120 --> 00:20:40,120
Not 22.
371
00:20:40,120 --> 00:20:41,120
Sorry, it was 21.
372
00:20:41,120 --> 00:20:42,120
Yeah, that's right.
373
00:20:42,120 --> 00:20:43,120
Yeah.
374
00:20:43,120 --> 00:20:49,040
If you look at what happened in 21, the whole yield curve moved because expectations for
375
00:20:49,040 --> 00:20:51,920
the price of borrowing further out moved.
376
00:20:51,920 --> 00:20:57,760
The whole environment changed because we've been stuck in a different period for 20 years.
377
00:20:57,760 --> 00:21:01,520
The last, so there's been a lot of volatility in interest rates, but the volatility in interest
378
00:21:01,520 --> 00:21:06,120
rates really has been about near-term interest rate expectations, not about the real yield.
379
00:21:06,120 --> 00:21:12,100
And I think what scares the market about the Fed is when the market thinks the Fed has
380
00:21:12,100 --> 00:21:19,200
lost control or lost focus on the real yield.
381
00:21:19,200 --> 00:21:25,080
When the market thinks the Fed's too complacent, that's when it gets scared.
382
00:21:25,080 --> 00:21:28,760
So you saw that in the autopilot comment in 2019.
383
00:21:28,760 --> 00:21:33,320
And you saw it a bit this year when the market was concerned that the Fed wasn't that focused
384
00:21:33,320 --> 00:21:35,080
on unemployment numbers or the real yield.
385
00:21:35,080 --> 00:21:36,760
They were just too focused on inflation.
386
00:21:36,760 --> 00:21:41,160
And then Powell adjusted what he said, and I think he's done a great job.
387
00:21:41,160 --> 00:21:46,280
The market sanguine that the Fed's going to focus on real yield and not going to let the
388
00:21:46,280 --> 00:21:47,680
economy tank.
389
00:21:47,680 --> 00:21:48,680
Yeah.
390
00:21:48,680 --> 00:21:52,200
So it's a very different environment now.
391
00:21:52,200 --> 00:21:53,920
And you've seen that in asset prices.
392
00:21:53,920 --> 00:21:59,560
So you've seen volatility in the 10-year yield, but it's not caused the same effect on growth
393
00:21:59,560 --> 00:22:04,340
businesses as it did sort of in the back end of 21.
394
00:22:04,340 --> 00:22:07,200
Let's talk about your ideal investor.
395
00:22:07,200 --> 00:22:13,760
And we talked about this concept of momentum and the risk as a small cap manager.
396
00:22:13,760 --> 00:22:18,360
Can you sort of unpack briefly if you're going to invest in small caps?
397
00:22:18,360 --> 00:22:25,560
Because I don't think investors sit with their financial advisor like myself or just Googling
398
00:22:25,560 --> 00:22:28,600
the next best investment opportunity.
399
00:22:28,600 --> 00:22:32,000
Excitement doesn't equate good investment.
400
00:22:32,000 --> 00:22:39,320
If you are willing to accept the risk that small caps come with it, we discussed briefly
401
00:22:39,320 --> 00:22:44,360
that the biggest risk is momentum in a portfolio.
402
00:22:44,360 --> 00:22:49,920
So if you were considering and the audience is considering small caps, what's the type
403
00:22:49,920 --> 00:22:54,760
of person or what do you need to bear in mind if you're going to invest in this because
404
00:22:54,760 --> 00:22:57,920
you want that longer term return profile?
405
00:22:57,920 --> 00:23:00,120
That's a great question.
406
00:23:00,120 --> 00:23:07,920
I think when you look at investment opportunities over the last 100 years, you get a different
407
00:23:07,920 --> 00:23:13,260
picture than when you look at investment asset classes over the last 20 years.
408
00:23:13,260 --> 00:23:19,840
So I would look and regard small caps as an asset class based on the last 100 years of
409
00:23:19,840 --> 00:23:24,960
their history of risk and returns, not what you've seen in the last 20 years.
410
00:23:24,960 --> 00:23:29,720
In the last 20 years with very low interest rates, it's been about globalization of financial
411
00:23:29,720 --> 00:23:37,200
engineering and that's benefited sort of amalgamation of debt plays and amalgamation of asset plays.
412
00:23:37,200 --> 00:23:45,480
Big growth opportunities that are very heavily levered that can maximize on scale.
413
00:23:45,480 --> 00:23:50,200
If you look back over 100 years, the businesses that have tended to provide the best returns
414
00:23:50,200 --> 00:23:54,200
of capital whether you hold a bit of the debt or a bit of the equity or how you're invested
415
00:23:54,200 --> 00:24:00,380
in that business, it's the businesses that have the ability to continue making and servicing
416
00:24:00,380 --> 00:24:06,120
customers, making products, serving customers, continue to grow and stay ahead of changes.
417
00:24:06,120 --> 00:24:08,560
Those are generally small and medium sized businesses.
418
00:24:08,560 --> 00:24:09,800
They're rarely big businesses.
419
00:24:09,800 --> 00:24:16,180
In fact, you see business businesses really struggle with change.
420
00:24:16,180 --> 00:24:25,860
If you look at the returns and the risk of equities going back in history, what you see
421
00:24:25,860 --> 00:24:33,000
is that small caps provide a much better risk return than global large caps.
422
00:24:33,000 --> 00:24:36,920
Equities also provide a much better risk of return than a lot of other asset classes.
423
00:24:36,920 --> 00:24:40,600
Now, there's lots of differing research and everyone wants to put forward their own asset
424
00:24:40,600 --> 00:24:44,200
class and I've been an equity guy my whole life so I'm always going to push forward
425
00:24:44,200 --> 00:24:46,960
equity.
426
00:24:46,960 --> 00:24:50,960
There are a lot of investments that are made at the moment that aren't liquid, that aren't
427
00:24:50,960 --> 00:24:55,800
marked to market where a lot of people have put money in private debt in real estate and
428
00:24:55,800 --> 00:24:59,880
they don't know what they hold and they can't get it back and if they asked for it, they
429
00:24:59,880 --> 00:25:03,560
might not be able to get it back at the price they think.
430
00:25:03,560 --> 00:25:09,240
Equities and debt markets are very attractive, the ability to be liquid and return money
431
00:25:09,240 --> 00:25:13,080
to people and I think if someone's wanting to give you their money, the first question
432
00:25:13,080 --> 00:25:15,800
is when do you need it?
433
00:25:15,800 --> 00:25:20,160
If you need your money at any time in the next six months, I'd advise investing in a
434
00:25:20,160 --> 00:25:23,560
liquid market, so an equity manager or a debt manager.
435
00:25:23,560 --> 00:25:27,040
That would be someone, if you want your money tied up for a long time or a short time, that's
436
00:25:27,040 --> 00:25:29,000
someone who can come and see us.
437
00:25:29,000 --> 00:25:31,480
That's important and overlooked I think.
438
00:25:31,480 --> 00:25:34,120
Then return, why are you giving them money?
439
00:25:34,120 --> 00:25:37,880
Do you want to be able to draw on the same amount of money later or are you hoping to
440
00:25:37,880 --> 00:25:40,160
create some sort of positive return as well?
441
00:25:40,160 --> 00:25:45,040
Then that's the whole area that your expertise fall into, Jonathan, not mine.
442
00:25:45,040 --> 00:25:50,480
If you are investing money to grow and that's basically debt markets and equity markets,
443
00:25:50,480 --> 00:25:57,800
then you should want the highest return for the most attractive risk and you should diversify.
444
00:25:57,800 --> 00:26:01,000
This is pretty basic stuff.
445
00:26:01,000 --> 00:26:06,640
The best risk adjusted return in equities is small caps, it's global small caps.
446
00:26:06,640 --> 00:26:11,440
That's been proven by S&P and lots of other research that we can quote and deliver and
447
00:26:11,440 --> 00:26:14,080
we've spoken about that before many times.
448
00:26:14,080 --> 00:26:18,400
So for clients who want to invest money and want it to be liquid would be my ideal client
449
00:26:18,400 --> 00:26:22,240
and then a client who wants a good return and who's already invested in equities.
450
00:26:22,240 --> 00:26:27,040
If you have any money in equities, if you invest in the NASDAQ or you invest in BHP
451
00:26:27,040 --> 00:26:32,040
or CBA or any business in Australia and you want to have money invested in equities, you
452
00:26:32,040 --> 00:26:34,240
should have money in global small caps.
453
00:26:34,240 --> 00:26:37,200
The actuarial science proves it.
454
00:26:37,200 --> 00:26:44,040
What we've seen in the last 20 years is the NASDAQ and large cap tech stocks have outperformed
455
00:26:44,040 --> 00:26:49,520
because people have wanted that growth but they also want that security of growth, that
456
00:26:49,520 --> 00:26:56,760
they're willing to get smaller returns for a more assured growth.
457
00:26:56,760 --> 00:27:01,520
Small caps have traditionally delivered higher growth than large caps, which makes sense
458
00:27:01,520 --> 00:27:03,660
because they're smaller.
459
00:27:03,660 --> 00:27:08,160
They have a much better risk adjusted return than large caps and mid caps.
460
00:27:08,160 --> 00:27:12,900
Essentially they provide only a smaller bit more risk but for much more return.
461
00:27:12,900 --> 00:27:16,100
So generally 3% higher return a year.
462
00:27:16,100 --> 00:27:21,960
So I think my ideal client would be someone who is concerned about their money, doesn't
463
00:27:21,960 --> 00:27:25,840
want to just throw money away and not find out where it's gone, wants to check on their
464
00:27:25,840 --> 00:27:29,640
investments, wants to be able to access their investments and I think they've probably already
465
00:27:29,640 --> 00:27:34,040
got money invested in equities and I think global small caps is actually the place they
466
00:27:34,040 --> 00:27:37,120
should have started but no one ever does start there.
467
00:27:37,120 --> 00:27:42,720
They should be adding global large caps and domestic small caps and domestic large caps
468
00:27:42,720 --> 00:27:45,680
to their global small cap portfolio.
469
00:27:45,680 --> 00:27:50,040
Now that's a biased opinion, that's my opinion, but it's based on the things I've read and
470
00:27:50,040 --> 00:27:51,040
seen.
471
00:27:51,040 --> 00:27:58,960
So you shouldn't view small caps as something that's more risky than large cap materially.
472
00:27:58,960 --> 00:28:00,880
It's not materially more risky.
473
00:28:00,880 --> 00:28:02,520
It's risky.
474
00:28:02,520 --> 00:28:06,760
You can explain all that to your clients but once you're in equities, whether you're in
475
00:28:06,760 --> 00:28:12,320
a large cap or a small cap, yes your company can suffer company specific stuff but if you
476
00:28:12,320 --> 00:28:16,320
walk into a GFC or a dot com it doesn't matter really what you're holding, they're going
477
00:28:16,320 --> 00:28:20,680
to get hit and you want to be in something liquid then.
478
00:28:20,680 --> 00:28:22,200
It's sort of interesting you bring up this point.
479
00:28:22,200 --> 00:28:27,640
So in the last, we always tell our clients that there's only one free lunch in the world
480
00:28:27,640 --> 00:28:33,520
and that's diversification and in the last four years we have allocated some of our clients
481
00:28:33,520 --> 00:28:37,220
money into private debt which has been good.
482
00:28:37,220 --> 00:28:43,680
The issue then has also then become that they go oh to your point, oh well private debt's
483
00:28:43,680 --> 00:28:49,600
great like it doesn't move around, unit price stays at a dollar, get my monthly income.
484
00:28:49,600 --> 00:28:55,200
I just want that because I don't really want equities because this stuff's volatile and
485
00:28:55,200 --> 00:29:03,920
I don't like up and down and I recently spoke to another advisor and said do you use private
486
00:29:03,920 --> 00:29:04,920
debt?
487
00:29:04,920 --> 00:29:07,160
He goes oh yeah we use a ton of it and I go oh why is that?
488
00:29:07,160 --> 00:29:10,800
Because crap hits the fan and equities fall.
489
00:29:10,800 --> 00:29:13,040
The clients don't see that the private debt went bad.
490
00:29:13,040 --> 00:29:18,040
That's probably the worst thing you could ever do when you actually communicate this
491
00:29:18,040 --> 00:29:20,440
stuff to clients.
492
00:29:20,440 --> 00:29:24,840
You have to at the end of the day, everyone needs to find a way to make money.
493
00:29:24,840 --> 00:29:28,680
If you're investing in private debt, I use this term, let's say private debt gives you
494
00:29:28,680 --> 00:29:34,920
8, 9% depending on what type of risk profile you're willing to take.
495
00:29:34,920 --> 00:29:35,920
Manager needs to make money.
496
00:29:35,920 --> 00:29:38,760
Let's call that 150 basis points.
497
00:29:38,760 --> 00:29:44,760
So that takes you if the return to a client is 8, that's 9.5% at least that the person
498
00:29:44,760 --> 00:29:50,220
at the end point, the corporation or whoever is going to borrow 9% and willing to happily
499
00:29:50,220 --> 00:29:53,720
pay 9.5% interest per year.
500
00:29:53,720 --> 00:29:55,160
That guy's not an idiot.
501
00:29:55,160 --> 00:29:59,160
He's not borrowing 9.5% to make less than 9.5%.
502
00:29:59,160 --> 00:30:05,200
So longer term I've always told clients that equities will outperform debt because it fundamentally
503
00:30:05,200 --> 00:30:06,200
has to.
504
00:30:06,200 --> 00:30:08,000
I try to keep things simple.
505
00:30:08,000 --> 00:30:10,880
It's borrowing 9.5% to make 7%.
506
00:30:10,880 --> 00:30:12,840
They'd be an idiot to do so.
507
00:30:12,840 --> 00:30:17,080
But you have to understand equities and public debt have this magical thing called mark to
508
00:30:17,080 --> 00:30:18,080
market.
509
00:30:18,080 --> 00:30:23,920
It is a place where buyers and sellers come to meet to determine a market price.
510
00:30:23,920 --> 00:30:25,680
That's all it is.
511
00:30:25,680 --> 00:30:30,140
But being well diversified and you hit the nail on the head, you shouldn't be scared
512
00:30:30,140 --> 00:30:32,960
of small caps just because of the term small caps.
513
00:30:32,960 --> 00:30:38,560
To be honest, if you look at the small cap industry globally, they're a lot bigger than
514
00:30:38,560 --> 00:30:40,000
the Aussie small caps.
515
00:30:40,000 --> 00:30:44,400
Can you talk about that, what's your market cap?
516
00:30:44,400 --> 00:30:48,960
That's something that is important to get across.
517
00:30:48,960 --> 00:30:52,000
Once society has chosen the names, you can't change it.
518
00:30:52,000 --> 00:30:54,680
So we're global small cap.
519
00:30:54,680 --> 00:30:59,440
That effectively the smallest part of global equity market.
520
00:30:59,440 --> 00:31:03,840
So global small caps would typically have a market capitalization between 500 million
521
00:31:03,840 --> 00:31:06,840
and 10 billion US dollars.
522
00:31:06,840 --> 00:31:13,520
So that would put you firmly between the ASX 200 and the ASX 100 if I'm not mistaken.
523
00:31:13,520 --> 00:31:15,080
I'm pretty sure.
524
00:31:15,080 --> 00:31:23,280
So in terms of risk and return, in terms of risk, be similar to your domestic large cap
525
00:31:23,280 --> 00:31:25,160
offering that you're already invested in.
526
00:31:25,160 --> 00:31:31,600
However, over time, historically we've produced a higher return and I think we should in the
527
00:31:31,600 --> 00:31:32,600
future.
528
00:31:32,600 --> 00:31:38,000
Businesses are well researched and well invested, Ausbill, the company that I proudly work for,
529
00:31:38,000 --> 00:31:43,560
has got over a 25 year track record investing domestically and then globally.
530
00:31:43,560 --> 00:31:48,380
And our domestic funds have got an excellent market leading track record that we're very
531
00:31:48,380 --> 00:31:52,240
pleased to show and talk about.
532
00:31:52,240 --> 00:31:57,640
As well, we do believe offshore should provide a higher return to the Australian market.
533
00:31:57,640 --> 00:31:59,640
People are already invested in the Australian market.
534
00:31:59,640 --> 00:32:02,640
They're already invested in small caps in Australia.
535
00:32:02,640 --> 00:32:09,440
This is why they should be very keen and have their interest peaked by what's on offer globally.
536
00:32:09,440 --> 00:32:14,360
What's on offer globally is a lot more of all the different industries.
537
00:32:14,360 --> 00:32:20,960
So we've got a lot of exposure to the grid upgrade and the electrification of the world.
538
00:32:20,960 --> 00:32:23,720
Different markets, and there's always a bull market in global small caps.
539
00:32:23,720 --> 00:32:28,120
So obviously we've got Europe, broadly Europe, Asia and the States, whereas domestically
540
00:32:28,120 --> 00:32:31,840
it's much more focused on the Aussie market and the Chinese economy, which is driving
541
00:32:31,840 --> 00:32:33,280
it.
542
00:32:33,280 --> 00:32:37,240
And I think the biggest one is that the management teams have improved quality.
543
00:32:37,240 --> 00:32:40,760
There's some fantastic management teams in Australia, but when you go offshore there's
544
00:32:40,760 --> 00:32:45,320
some even better management teams, particularly coming out of the US.
545
00:32:45,320 --> 00:32:50,280
And then another point that's sort of missed is domestic businesses sometimes in Australia
546
00:32:50,280 --> 00:32:54,940
have struggled to go overseas and there becomes a point in a growth cycle where a business
547
00:32:54,940 --> 00:32:58,440
has to keep growing, has to expand its geography.
548
00:32:58,440 --> 00:33:02,240
And that's been quite difficult for Australian companies.
549
00:33:02,240 --> 00:33:07,800
Companies in Europe and in America, particularly America, have a lot easier run rate to go
550
00:33:07,800 --> 00:33:14,160
through that revenue scale to become a bigger, maybe small cap company.
551
00:33:14,160 --> 00:33:18,960
Because if they're in Texas they can just go across the border to Oklahoma.
552
00:33:18,960 --> 00:33:21,680
You've got a much easier expansion.
553
00:33:21,680 --> 00:33:26,000
Also your reach is implicitly a lot bigger as a global company because once you've got
554
00:33:26,000 --> 00:33:30,360
an office in the US and you're servicing an industry in the US, it's not that hard to
555
00:33:30,360 --> 00:33:36,080
move to another state.
556
00:33:36,080 --> 00:33:39,440
Ready to take the first step in investing or just looking to continue growing your wealth
557
00:33:39,440 --> 00:33:42,140
without being inundated with financial information?
558
00:33:42,140 --> 00:33:46,640
With SWU Online Invest, we offer a range of expertly managed portfolios designed to match
559
00:33:46,640 --> 00:33:47,640
your investment needs.
560
00:33:47,640 --> 00:33:52,360
Whether you're a seasoned investor or just getting started, know that we will work tirelessly
561
00:33:52,360 --> 00:33:56,240
to ensure your investments are strategically positioned to maximise your goals.
562
00:33:56,240 --> 00:34:03,880
Visit swuonlinvest.com.au today.
563
00:34:03,880 --> 00:34:08,680
Talking about grid upgrading capex, which I know is a theme within your portfolio, as
564
00:34:08,680 --> 00:34:14,160
most audience members know, I'm quite familiar with investing in Asia and particularly China.
565
00:34:14,160 --> 00:34:21,320
And so in 2023, China led the world in new energy by adding 65% of all new solar capacity
566
00:34:21,320 --> 00:34:24,600
globally, which is equivalent of about 250 gigawatts.
567
00:34:24,600 --> 00:34:30,140
And by the end of 2022, the global total was only about 1,100 gigawatts.
568
00:34:30,140 --> 00:34:35,440
Now the US and European grids have got legacy issues.
569
00:34:35,440 --> 00:34:36,440
They're very old, right?
570
00:34:36,440 --> 00:34:40,640
Generally their industrial age was, you know, youngs ago, right?
571
00:34:40,640 --> 00:34:44,720
So how do you see that as an opportunity to house that feed through?
572
00:34:44,720 --> 00:34:49,180
Now just noting to everyone that if we do talk about any companies, that these are only
573
00:34:49,180 --> 00:34:51,280
for illustrative purposes only, right?
574
00:34:51,280 --> 00:34:54,500
Some people love to listen to this podcast and just buy the names that, you know, Toby
575
00:34:54,500 --> 00:35:00,480
may say, but just be warned, this is all about investing in a diversified portfolio, not
576
00:35:00,480 --> 00:35:01,760
just in individual stocks.
577
00:35:01,760 --> 00:35:02,760
So Toby.
578
00:35:02,760 --> 00:35:03,760
Yeah, thanks for that.
579
00:35:03,760 --> 00:35:06,960
I don't want to tell everyone to buy a good stock when it goes down.
580
00:35:06,960 --> 00:35:07,960
Yep.
581
00:35:07,960 --> 00:35:08,960
It rarely happens though.
582
00:35:08,960 --> 00:35:09,960
Never.
583
00:35:09,960 --> 00:35:16,560
Look, I think just very broadly at the outset, we generally run about 60 positions in our
584
00:35:16,560 --> 00:35:17,560
fund.
585
00:35:17,560 --> 00:35:18,560
That's what we think is a good idea.
586
00:35:18,560 --> 00:35:23,200
At the moment, about 40% of the funds invested in industrials, that's sort of double the
587
00:35:23,200 --> 00:35:24,200
index weight.
588
00:35:24,200 --> 00:35:33,120
And at the moment, about sort of 25% of that 40% is directly related to the grid upgrade.
589
00:35:33,120 --> 00:35:34,440
So that's just generally where we are.
590
00:35:34,440 --> 00:35:36,120
We've got a lot of uncorrelated ideas.
591
00:35:36,120 --> 00:35:41,320
We're a core manager, we make a lot of money out of grocers, out of consumer discretionary
592
00:35:41,320 --> 00:35:45,920
and healthcare as well as we do IT and industrials.
593
00:35:45,920 --> 00:35:48,920
So I think the grid's really interesting.
594
00:35:48,920 --> 00:35:53,160
I think one of the key things about global small caps is there's always a bull market
595
00:35:53,160 --> 00:35:54,160
somewhere.
596
00:35:54,160 --> 00:35:59,780
And as an investor, I found over time is that your portfolio wants to be centered around
597
00:35:59,780 --> 00:36:06,360
some core stocks that can deliver over time and lack volatility in their end demand.
598
00:36:06,360 --> 00:36:11,240
They tend to be more of the industrial healthcare nature or grosser staple nature of those types
599
00:36:11,240 --> 00:36:13,080
of businesses.
600
00:36:13,080 --> 00:36:17,320
But you want to have some of those in your portfolio because you need some steady performers.
601
00:36:17,320 --> 00:36:20,880
And at the same time, there's always an area of excitement.
602
00:36:20,880 --> 00:36:24,720
And that's great if there's really tight capacity, highly profitable businesses.
603
00:36:24,720 --> 00:36:28,200
It's not great if there's any capacity you want, very profitable businesses.
604
00:36:28,200 --> 00:36:32,120
But there is always a bull market in global somewhere.
605
00:36:32,120 --> 00:36:40,840
And I think with energy, to my way of thinking, all roads lead to Rome more than I've ever
606
00:36:40,840 --> 00:36:43,440
seen in my entire career.
607
00:36:43,440 --> 00:36:47,280
So the grid has to be upgraded.
608
00:36:47,280 --> 00:36:51,440
And there's a number of things going on in the world that are going to mean that's going
609
00:36:51,440 --> 00:36:53,480
to happen in a price taking way.
610
00:36:53,480 --> 00:36:58,000
They are not going to be discerning on how much they pay for the equipment to upgrade
611
00:36:58,000 --> 00:36:59,480
this grid.
612
00:36:59,480 --> 00:37:00,800
Why?
613
00:37:00,800 --> 00:37:05,080
The move towards net zero, regardless of who wins the US election or that election, we
614
00:37:05,080 --> 00:37:09,920
are moving towards net zero in the US and in Europe, and spoken about it in China as
615
00:37:09,920 --> 00:37:12,200
well as centrally planned economy.
616
00:37:12,200 --> 00:37:18,960
There is legislation in place to make the move towards net zero happen with the grid.
617
00:37:18,960 --> 00:37:21,140
The grid is going to be upgraded.
618
00:37:21,140 --> 00:37:27,160
And as the CEO of M-Core said, one of our holdings, this isn't the energy transition.
619
00:37:27,160 --> 00:37:30,920
This is the energy expansion.
620
00:37:30,920 --> 00:37:32,240
And I think that's really true.
621
00:37:32,240 --> 00:37:37,320
We're going to need double to three times the amount of gigawatts that we used to.
622
00:37:37,320 --> 00:37:40,780
More importantly, we're going to need grids that are not able to move stuff around.
623
00:37:40,780 --> 00:37:43,560
So we've got this move towards net zero happening.
624
00:37:43,560 --> 00:37:49,280
We need to make the world decarbonize energy generation, consumption, and mobility.
625
00:37:49,280 --> 00:37:50,280
That's a general need.
626
00:37:50,280 --> 00:37:56,000
Then as you just mentioned, without any of the change in demand for gigawatts and geography
627
00:37:56,000 --> 00:38:01,720
of gigawatt demand, in Japan, the US, and Europe, the grid is the oldest compared to
628
00:38:01,720 --> 00:38:05,280
the rest of the world, almost twice as old as the Chinese grid that you mentioned.
629
00:38:05,280 --> 00:38:10,680
It averages between 20 and 40 years age, depending on what parts of distribution and transmission
630
00:38:10,680 --> 00:38:11,680
you're looking at.
631
00:38:11,680 --> 00:38:13,200
So that needs to be replaced anyway.
632
00:38:13,200 --> 00:38:14,480
It's just reached its useful life.
633
00:38:14,480 --> 00:38:16,920
And it's all built in the 50s and 60s.
634
00:38:16,920 --> 00:38:20,240
And now it's coming south.
635
00:38:20,240 --> 00:38:21,240
Now it needs repairing.
636
00:38:21,240 --> 00:38:23,040
So you've got those two major reasons.
637
00:38:23,040 --> 00:38:28,960
And then we've got the need for renewable and decarbonized consumption.
638
00:38:28,960 --> 00:38:34,520
So renewable generation and charging your cars at home is the major driver.
639
00:38:34,520 --> 00:38:36,280
Then we have the fact that the grid is just really old.
640
00:38:36,280 --> 00:38:41,000
And then the third factor we have for the grid is this demand for AI.
641
00:38:41,000 --> 00:38:46,020
The AI is currently in an arms race to produce general intelligence.
642
00:38:46,020 --> 00:38:48,280
So it's not about return on investment.
643
00:38:48,280 --> 00:38:51,080
It's a first past the line story here.
644
00:38:51,080 --> 00:38:56,920
So I'd caution people on looking on return on investment at the corporate level for AI,
645
00:38:56,920 --> 00:39:00,640
which I think if you look at the Dell comments is coming much closer than people think.
646
00:39:00,640 --> 00:39:03,760
So we do invest in the picks and shovel of AI in the grid.
647
00:39:03,760 --> 00:39:05,960
And we would advise people to.
648
00:39:05,960 --> 00:39:08,880
I think this early innings chat is accurate.
649
00:39:08,880 --> 00:39:11,360
And as I say, it's not about return on investment.
650
00:39:11,360 --> 00:39:14,560
It's an arms race to the finish line here, or the first finish line.
651
00:39:14,560 --> 00:39:15,560
At the moment, yeah, correct.
652
00:39:15,560 --> 00:39:17,520
Base camp.
653
00:39:17,520 --> 00:39:24,720
So this huge demand for data centers, expected to be sort of go from 4% to 8% of US energy
654
00:39:24,720 --> 00:39:26,640
demand in the next 10 years.
655
00:39:26,640 --> 00:39:32,640
And global data center demand to be equivalent to the energy demand of Japan within the next
656
00:39:32,640 --> 00:39:34,960
10 years, as well as another quote being thrown around.
657
00:39:34,960 --> 00:39:41,320
So huge increase now in amount of generation and where it's going to go.
658
00:39:41,320 --> 00:39:45,480
And this is being driven, as I said, by things that are going on in society that I don't
659
00:39:45,480 --> 00:39:46,480
think are going to change.
660
00:39:46,480 --> 00:39:50,960
One, that we need to decarbonize is the general belief.
661
00:39:50,960 --> 00:39:53,960
Two, we want electric cars.
662
00:39:53,960 --> 00:39:55,720
They have more torque.
663
00:39:55,720 --> 00:39:56,720
They go faster.
664
00:39:56,720 --> 00:40:02,200
They have fewer moving parts, so less likely to break down on you in cold weather.
665
00:40:02,200 --> 00:40:06,160
So that's why from a garage and finance point of view, we need electric cars.
666
00:40:06,160 --> 00:40:07,640
We've got to charge those cars.
667
00:40:07,640 --> 00:40:13,640
And at the same time now, we've got AI rapidly increasing demand for data centers.
668
00:40:13,640 --> 00:40:19,600
And the data center demand is increasing at the moment from the trends we've seen in the
669
00:40:19,600 --> 00:40:24,920
IT sector from the last 10 years, not because of so much because of AI yet.
670
00:40:24,920 --> 00:40:27,040
So because of these things, we've got to upgrade the grid.
671
00:40:27,040 --> 00:40:28,560
It doesn't matter who's in power.
672
00:40:28,560 --> 00:40:30,000
It doesn't matter how much it costs.
673
00:40:30,000 --> 00:40:31,520
And we'll get onto that.
674
00:40:31,520 --> 00:40:32,920
We've got to upgrade the grid.
675
00:40:32,920 --> 00:40:39,680
And I think that's where it's interesting is getting into the nitty gritty.
676
00:40:39,680 --> 00:40:47,480
ENSO in Europe legislates new grid capex plans from all the members of Europe.
677
00:40:47,480 --> 00:40:52,680
And the state's local grids are also forward planning their capex for the demand that's
678
00:40:52,680 --> 00:40:53,680
coming.
679
00:40:53,680 --> 00:40:57,640
When you look through those plans, they're quite detailed in terms of kilometers at the
680
00:40:57,640 --> 00:41:00,300
moment, but not in terms of substations.
681
00:41:00,300 --> 00:41:03,800
We have to change the transmission highways first.
682
00:41:03,800 --> 00:41:06,120
So we need to build new motorways.
683
00:41:06,120 --> 00:41:13,960
The transition highways are these big high voltage transmission routes in countries.
684
00:41:13,960 --> 00:41:16,120
We've got to rebuild those cables first.
685
00:41:16,120 --> 00:41:19,200
And after that, we can change distribution.
686
00:41:19,200 --> 00:41:25,520
So just to stop there, I mean, just so people understand, these ultra high voltage, because
687
00:41:25,520 --> 00:41:31,600
I've looked at the ones in China, right, effectively, it's the ability to transmit energy from the
688
00:41:31,600 --> 00:41:32,600
source.
689
00:41:32,600 --> 00:41:33,600
Let's call it renewables, right?
690
00:41:33,600 --> 00:41:37,800
That's what I'm used to looking at in China, solar and wind, where it's sort of efficient
691
00:41:37,800 --> 00:41:39,640
around the Gobi Desert.
692
00:41:39,640 --> 00:41:43,760
The biggest challenge is actually getting that energy that's being generated to the
693
00:41:43,760 --> 00:41:45,760
coast, right?
694
00:41:45,760 --> 00:41:52,240
And so I've seen these maps comparing US and China, where the ultra high voltage, I think,
695
00:41:52,240 --> 00:41:54,240
is 800 gigawatt lines.
696
00:41:54,240 --> 00:41:56,280
I think that's the term.
697
00:41:56,280 --> 00:42:01,460
Because the more the bigger the hose, the more energy you can put through it.
698
00:42:01,460 --> 00:42:06,040
But you also lose less energy through the transmission mechanism as well, right?
699
00:42:06,040 --> 00:42:07,040
That's the key.
700
00:42:07,040 --> 00:42:08,040
That's the key.
701
00:42:08,040 --> 00:42:09,040
So look, I've had heaps of fun.
702
00:42:09,040 --> 00:42:11,280
As I said, there's always a bull market somewhere in global small caps.
703
00:42:11,280 --> 00:42:16,200
I spent the last four years learning, relearning a lot of physics and electronics.
704
00:42:16,200 --> 00:42:22,760
So effectively, the higher voltage, the power is the same.
705
00:42:22,760 --> 00:42:25,460
The power transmitted is the same.
706
00:42:25,460 --> 00:42:28,000
But the higher the voltage, the less resistance.
707
00:42:28,000 --> 00:42:31,520
The lower the voltage, the more resistance.
708
00:42:31,520 --> 00:42:37,800
So on these transmission highways, where we want to transmit electricity a long way, we
709
00:42:37,800 --> 00:42:42,760
need to run it at 540,000 kilovolts, so huge amounts of volts.
710
00:42:42,760 --> 00:42:48,400
And then you move that energy to a place, into a substation, and then you step it down
711
00:42:48,400 --> 00:42:55,060
with a transformer to medium voltage for the local areas and then low voltage for the buildings
712
00:42:55,060 --> 00:42:56,120
and stuff.
713
00:42:56,120 --> 00:43:02,200
So yeah, you need that really, really high voltage cable to not lose.
714
00:43:02,200 --> 00:43:04,120
The efficiency of the grid is a huge area.
715
00:43:04,120 --> 00:43:07,040
So that's a really interesting question.
716
00:43:07,040 --> 00:43:08,040
I find it really interesting.
717
00:43:08,040 --> 00:43:11,360
And if you're a nerd and you're into cars, you might find it interesting as well.
718
00:43:11,360 --> 00:43:16,200
Because at a base level, the way to make the grid more efficient is to make sure that you're
719
00:43:16,200 --> 00:43:19,960
always transmitting at the right super high voltage and then dissipating it.
720
00:43:19,960 --> 00:43:23,800
But actually, what we've got going on in the grid in the next 10 years, 20 years is so
721
00:43:23,800 --> 00:43:25,580
much more exciting than that.
722
00:43:25,580 --> 00:43:27,440
There's different types of power.
723
00:43:27,440 --> 00:43:30,880
There's standard power, what we call real power.
724
00:43:30,880 --> 00:43:37,080
And a real power is effectively a load, like a heating element, an iron or something.
725
00:43:37,080 --> 00:43:40,720
And then we have something called reactive power or inductive power.
726
00:43:40,720 --> 00:43:48,840
And inductive power is the power that's required to create a magnetic field to allow something
727
00:43:48,840 --> 00:43:50,320
to happen.
728
00:43:50,320 --> 00:44:00,720
So induction is basically an effect of the magnetic effect of the electricity being passed
729
00:44:00,720 --> 00:44:06,040
through something at a certain type of resistance or a certain way.
730
00:44:06,040 --> 00:44:10,920
In the olden days, we used to have a big coal station that had a big power line that went
731
00:44:10,920 --> 00:44:16,560
through some houses and some offices to a zinc melter or to some massive industrial asset
732
00:44:16,560 --> 00:44:17,560
load.
733
00:44:17,560 --> 00:44:22,600
There was induction in the line because the line carried a lot of volts, but not that
734
00:44:22,600 --> 00:44:23,600
in much induction.
735
00:44:23,600 --> 00:44:29,440
So you need capacitors at certain points of the way.
736
00:44:29,440 --> 00:44:35,000
What happens with inductive power is that if it's not used in the right way or understood
737
00:44:35,000 --> 00:44:42,360
in the right way, you can require a lot more gigawatts to do the same amount of work.
738
00:44:42,360 --> 00:44:47,560
Why that's important in the new grid is we're going to have a lot of renewables.
739
00:44:47,560 --> 00:44:51,800
So instead of having a lot of generation assets that are nuclear or gas or coal, it's still
740
00:44:51,800 --> 00:44:52,800
going to be gas.
741
00:44:52,800 --> 00:44:56,800
We're going to have a lot of battery, which is direct current, not alternating current,
742
00:44:56,800 --> 00:44:57,800
and that's going to need an inverter.
743
00:44:57,800 --> 00:45:02,080
And we're also going to have a lot of renewable transmission.
744
00:45:02,080 --> 00:45:09,300
And that's going to change the inductive nature of the grid.
745
00:45:09,300 --> 00:45:12,840
What does that mean and what's the opportunity?
746
00:45:12,840 --> 00:45:18,680
People are starting to grasp the fact of why transformers and industrial scale grid scale
747
00:45:18,680 --> 00:45:24,600
inverters are important because they can see that you can make the grid more efficient,
748
00:45:24,600 --> 00:45:25,600
you can harden it.
749
00:45:25,600 --> 00:45:30,160
But what I don't think the market's really understood yet is the need for inverters and
750
00:45:30,160 --> 00:45:36,280
capacitors at an industrial substation scale to manage the different types of assets and
751
00:45:36,280 --> 00:45:39,960
all these different types of power we have.
752
00:45:39,960 --> 00:45:46,400
Why that is is because the difference between having a grid that doesn't have the right
753
00:45:46,400 --> 00:45:50,240
amounts of inverters and capacitors in the right area versus a grid that does have the
754
00:45:50,240 --> 00:45:56,480
capacitors in the right substation could mean two or three times the amount of power because
755
00:45:56,480 --> 00:45:59,960
real power and inductive power affect each other.
756
00:45:59,960 --> 00:46:04,200
So if you don't have a capacitor in the right place, you could need three gigawatts or three
757
00:46:04,200 --> 00:46:05,200
megawatts.
758
00:46:05,200 --> 00:46:08,760
But if you had the right capacitor in place, you could only need half a gigawatt or half
759
00:46:08,760 --> 00:46:09,760
a megawatt.
760
00:46:09,760 --> 00:46:11,080
They're that important.
761
00:46:11,080 --> 00:46:13,600
Now, we know about capacitors in phones and stuff.
762
00:46:13,600 --> 00:46:15,640
We don't really see them in industrial assets.
763
00:46:15,640 --> 00:46:20,360
And the inverters and the capacitors you're going to need for the new grid is a huge area.
764
00:46:20,360 --> 00:46:22,440
And we're invested in it and we're already making money.
765
00:46:22,440 --> 00:46:26,880
And I think it's a huge opportunity for clients here to invest in the Osborne Global Small
766
00:46:26,880 --> 00:46:30,520
Cap Fund because of the energy transition.
767
00:46:30,520 --> 00:46:35,840
Grid is not discounting the future growth that's going to come from some of these key product
768
00:46:35,840 --> 00:46:37,280
components.
769
00:46:37,280 --> 00:46:42,640
We do own the high voltage cable manufacturers, the ones that we like and they've been profitable.
770
00:46:42,640 --> 00:46:47,120
And transmission's coming first and the market's getting its head around transmission.
771
00:46:47,120 --> 00:46:49,460
Distribution doesn't start till 2030.
772
00:46:49,460 --> 00:46:54,360
So we're still a good five years away from that real demand on the substation distribution
773
00:46:54,360 --> 00:46:55,360
stuff.
774
00:46:55,360 --> 00:47:00,720
So we've got performers, inverters, capacitors, surge protectors and all the equipment you
775
00:47:00,720 --> 00:47:01,720
need.
776
00:47:01,720 --> 00:47:02,840
So the grid's changing.
777
00:47:02,840 --> 00:47:04,240
The components are changing.
778
00:47:04,240 --> 00:47:05,840
We're going to need a flexible grid.
779
00:47:05,840 --> 00:47:07,400
They're going to call it a FACTS.
780
00:47:07,400 --> 00:47:08,520
You're going to see FACTS.
781
00:47:08,520 --> 00:47:13,520
It's flexible alternating current transmission system.
782
00:47:13,520 --> 00:47:17,240
The difference you can get in efficiency is huge.
783
00:47:17,240 --> 00:47:21,160
Why that's important, again, and I think there's just so much in this rabbit hole.
784
00:47:21,160 --> 00:47:22,560
So I mean all roads lead to Rome.
785
00:47:22,560 --> 00:47:25,360
To do all the things we want to do in society, we've got to do the grid first.
786
00:47:25,360 --> 00:47:26,800
You can't have an electric car.
787
00:47:26,800 --> 00:47:28,080
You can't have AI.
788
00:47:28,080 --> 00:47:29,760
You can't have a wind turbine.
789
00:47:29,760 --> 00:47:33,200
You can't have a carbon neutral building until you fix the grid.
790
00:47:33,200 --> 00:47:35,640
So all the things everyone wants, they've got to be done.
791
00:47:35,640 --> 00:47:41,800
Then we're moving to a new type of grid as well, which is going to require new components.
792
00:47:41,800 --> 00:47:49,560
And I think the third bit on that is markets currently talking about dollar values for
793
00:47:49,560 --> 00:47:54,560
things to be spent and why it's important to have an efficient grid and put in capacitors
794
00:47:54,560 --> 00:48:00,200
and put in inverters is because there's a huge amount of money that needs to be spent,
795
00:48:00,200 --> 00:48:02,240
more money than I think people realise.
796
00:48:02,240 --> 00:48:03,480
And it's going up every year.
797
00:48:03,480 --> 00:48:04,480
We can come back.
798
00:48:04,480 --> 00:48:07,360
The two Aussie transmission projects are already up 300%.
799
00:48:07,360 --> 00:48:11,860
We've got the copper project in Queensland and the renewable project through an Energy
800
00:48:11,860 --> 00:48:13,120
Connect in South Australia.
801
00:48:13,120 --> 00:48:15,400
It's massively over budget.
802
00:48:15,400 --> 00:48:19,240
It's about the kilometres and the pieces of equipment need to be put in, not the current
803
00:48:19,240 --> 00:48:20,240
way.
804
00:48:20,240 --> 00:48:22,400
Not the current dollar amount people are currently estimating.
805
00:48:22,400 --> 00:48:27,040
The current dollar amount is completely wrong because it's based on what it cost them five
806
00:48:27,040 --> 00:48:30,880
to 10 years ago to get a transformer or get a capacitor or build a new substation.
807
00:48:30,880 --> 00:48:34,040
But that money is going to be way more now.
808
00:48:34,040 --> 00:48:37,160
That's really important, I think, for an investor for two reasons.
809
00:48:37,160 --> 00:48:42,960
One, it's a price taking capex program in tight capacity, which is music to my ears
810
00:48:42,960 --> 00:48:44,680
as a small cap investor.
811
00:48:44,680 --> 00:48:48,160
Two, the market's got the amount of money to be spent completely wrong.
812
00:48:48,160 --> 00:48:50,120
So I know there's a huge amount of money to be made.
813
00:48:50,120 --> 00:48:52,360
Or I believe there's a huge amount of money to be made.
814
00:48:52,360 --> 00:48:54,800
I don't know anything, but I believe that.
815
00:48:54,800 --> 00:49:00,760
And talking to the companies that we invest in and talking to their peers, we can see
816
00:49:00,760 --> 00:49:07,360
demand for capacity increasing and that the capacity is very limited and the players are
817
00:49:07,360 --> 00:49:11,480
building new facilities, but they're doing it in a controlled manner to make more and
818
00:49:11,480 --> 00:49:13,920
more money.
819
00:49:13,920 --> 00:49:19,240
This is sort of tying everything together.
820
00:49:19,240 --> 00:49:23,200
Everything you've just outlined at a very macro level, so not the nuts and bolts and
821
00:49:23,200 --> 00:49:26,560
the picks and shovels level about capacitors, substations, stuff.
822
00:49:26,560 --> 00:49:32,360
I don't think it's news to anybody that we need a ridiculous amount of power and that
823
00:49:32,360 --> 00:49:34,960
the current capacity is not fit for purpose.
824
00:49:34,960 --> 00:49:38,520
I think even here in Sydney, we've had this argument that if everyone bought an electric
825
00:49:38,520 --> 00:49:44,000
car, which is like the government's dream, and all of us finish work and all plug our
826
00:49:44,000 --> 00:49:49,040
cars into our homes between six or seven, we will take out the grid effectively.
827
00:49:49,040 --> 00:49:52,880
We'd take out the grid if everyone made a cup of tea when they went home.
828
00:49:52,880 --> 00:49:53,880
Exactly.
829
00:49:53,880 --> 00:49:57,920
So in California, I know I was speaking to another manager recently and he's based in
830
00:49:57,920 --> 00:50:01,920
California and obviously we know in California, everyone's got a frigging Tesla, right?
831
00:50:01,920 --> 00:50:05,880
They were like the first mover advantage, whatever, the greenies.
832
00:50:05,880 --> 00:50:14,480
And the government has told the citizens of LA not to plug their cars in at the same time
833
00:50:14,480 --> 00:50:18,520
at night because they know that's what's going to happen and they've had rolling blackouts.
834
00:50:18,520 --> 00:50:23,720
So I think it's sort of captain obvious that this needs to happen.
835
00:50:23,720 --> 00:50:35,040
So why is the valuations of the stuff that you're buying for the portfolio not recognized?
836
00:50:35,040 --> 00:50:38,960
And is that just purely the inefficiency of the market, you think?
837
00:50:38,960 --> 00:50:39,960
There's a bit of that.
838
00:50:39,960 --> 00:50:44,320
I think on average, the stocks that we invest in global small caps have zero to two analysts
839
00:50:44,320 --> 00:50:46,600
covering them from the sell side.
840
00:50:46,600 --> 00:50:49,520
And when you look at mid and large cap, they've got 20 to 30 analysts covering them.
841
00:50:49,520 --> 00:50:51,360
So there is some inefficiency.
842
00:50:51,360 --> 00:50:54,520
I think the other point is that people look at the large caps and they don't look at the
843
00:50:54,520 --> 00:50:55,520
small caps.
844
00:50:55,520 --> 00:50:58,440
And this opportunity is for small cap investing.
845
00:50:58,440 --> 00:51:04,800
If you look at the large cap serving the electrical upgrade like GE, like Legrand, like Schneider,
846
00:51:04,800 --> 00:51:09,560
like Siemens, like ABB, they're delivering no solid earnings growth.
847
00:51:09,560 --> 00:51:15,040
There aren't a decent material earnings upgrades and the stock prices are not going up.
848
00:51:15,040 --> 00:51:19,760
Whereas if you look at the stocks that we own, they're delivering 50% earnings upgrades
849
00:51:19,760 --> 00:51:21,180
and their prices are going up.
850
00:51:21,180 --> 00:51:26,440
So I think the market's looking too much at the large names and not at the small names.
851
00:51:26,440 --> 00:51:31,440
Our top two holdings in the fund, Powell Industries and Hammond Power Solutions.
852
00:51:31,440 --> 00:51:38,540
So Powell Industries is a leading maker of switchgear for substations and data centers.
853
00:51:38,540 --> 00:51:43,480
And Hammond Power Solutions is a leading producer of transformers for substations and data centers,
854
00:51:43,480 --> 00:51:45,400
but also harmonic equipment.
855
00:51:45,400 --> 00:51:49,200
So I was talking about the two different types of power.
856
00:51:49,200 --> 00:51:54,280
They're very good at harmonizing that sine wave to making sure that they don't get any
857
00:51:54,280 --> 00:51:58,580
bad peaks or troughs from induction.
858
00:51:58,580 --> 00:52:03,200
So those two businesses have delivered record earnings growth.
859
00:52:03,200 --> 00:52:08,960
They're delivering record quarterly operating margins and EPS and they're expanding manufacturing
860
00:52:08,960 --> 00:52:09,960
facilities.
861
00:52:09,960 --> 00:52:14,720
The market's pricing them, in my belief, based on my models, like that earnings growth is
862
00:52:14,720 --> 00:52:16,600
going to stop in two years.
863
00:52:16,600 --> 00:52:21,000
They're going to go back to a world where, so this is something that for 30 years the
864
00:52:21,000 --> 00:52:23,540
grid was a terrible place to invest in.
865
00:52:23,540 --> 00:52:29,160
One of our large holdings, NKT, which is a leading provider of high voltage transmission
866
00:52:29,160 --> 00:52:33,040
cables, the leading player in the world, been a strong product for us.
867
00:52:33,040 --> 00:52:38,080
They had a negative return on invested capital three years in a row in the late teens.
868
00:52:38,080 --> 00:52:41,600
So we're talking 2018, 19, 17.
869
00:52:41,600 --> 00:52:42,600
Very recently.
870
00:52:42,600 --> 00:52:43,600
Very recently.
871
00:52:43,600 --> 00:52:47,880
Same clients, same utility clients, same manufacturing facilities.
872
00:52:47,880 --> 00:52:49,320
That's just how bad demand was.
873
00:52:49,320 --> 00:52:54,480
And they were telling people at the time there's a huge surge coming, excuse the pun, but
874
00:52:54,480 --> 00:52:56,280
they were telling people people weren't paying attention.
875
00:52:56,280 --> 00:52:58,520
That same company will tell you right now what's coming.
876
00:52:58,520 --> 00:53:02,240
They just signed a 15-year agreement with the National Grid in the UK.
877
00:53:02,240 --> 00:53:03,800
So they know what's coming.
878
00:53:03,800 --> 00:53:07,680
I think generally the market says this thing's rolling over in two and a half years.
879
00:53:07,680 --> 00:53:09,840
It's a mini cycle.
880
00:53:09,840 --> 00:53:12,400
I know the grid's got to double by 2050.
881
00:53:12,400 --> 00:53:16,260
I'm looking at the projects right now and the components going into them and speaking
882
00:53:16,260 --> 00:53:21,600
to electrical engineers who design these things, the delays are going to increase.
883
00:53:21,600 --> 00:53:24,720
So we're behind schedule and we're going to fall further behind.
884
00:53:24,720 --> 00:53:28,480
And we're over budget and we're going to go more over budget, which is not news to
885
00:53:28,480 --> 00:53:31,000
anyone who's tried to build anything bigger than a bread box.
886
00:53:31,000 --> 00:53:34,000
Which is great for the price-taking strategy, right?
887
00:53:34,000 --> 00:53:36,640
Which is great for the guys who make the goods.
888
00:53:36,640 --> 00:53:41,720
And I think when you look at the guys who purchase those goods, they have to build this
889
00:53:41,720 --> 00:53:42,720
line.
890
00:53:42,720 --> 00:53:44,640
They have to upgrade the grid.
891
00:53:44,640 --> 00:53:49,720
With electrical engineering, although it's complex, there are only certain solutions.
892
00:53:49,720 --> 00:53:53,640
You can change where you put the substations on the grid and where you put the load and
893
00:53:53,640 --> 00:53:56,000
the generation a little bit.
894
00:53:56,000 --> 00:53:59,240
But there's only really going to be one main solution.
895
00:53:59,240 --> 00:54:01,920
And you need transformers.
896
00:54:01,920 --> 00:54:05,500
Transformer technology hasn't changed in over 100 years.
897
00:54:05,500 --> 00:54:09,600
It's a steel box with copper wrapped around one side and copper wrapped around the other
898
00:54:09,600 --> 00:54:10,600
side.
899
00:54:10,600 --> 00:54:11,600
It's not changed.
900
00:54:11,600 --> 00:54:16,680
And new technology is involved in helping those hardware.
901
00:54:16,680 --> 00:54:19,520
It's not changing the hardware, if that makes sense.
902
00:54:19,520 --> 00:54:22,920
It's software helping the hardware, not the hardware changing.
903
00:54:22,920 --> 00:54:25,680
So the price-takers, they're going to have to buy the stuff.
904
00:54:25,680 --> 00:54:31,360
Also, I just note transmission and distribution is like 2% of your electricity bill.
905
00:54:31,360 --> 00:54:34,200
Tax and government's 10%.
906
00:54:34,200 --> 00:54:36,160
Generation's about 40% to 50%.
907
00:54:36,160 --> 00:54:38,880
So and marketing and the company expenses, the rest.
908
00:54:38,880 --> 00:54:44,640
So this 2% that we pay on our bill to transition and distribution, it's going to double or
909
00:54:44,640 --> 00:54:45,640
triple.
910
00:54:45,640 --> 00:54:47,960
The end consumer's not going to see it.
911
00:54:47,960 --> 00:54:48,960
And they're going to do it.
912
00:54:48,960 --> 00:54:51,740
So I think it's a great place to invest for clients.
913
00:54:51,740 --> 00:54:54,000
We're not always going to be invested here.
914
00:54:54,000 --> 00:54:58,640
It's just like here right now is where it is.
915
00:54:58,640 --> 00:54:59,640
Last question.
916
00:54:59,640 --> 00:55:04,440
So one of the most unique things, I mean, fund managers come and see me every which
917
00:55:04,440 --> 00:55:05,440
day, right?
918
00:55:05,440 --> 00:55:06,440
Pitching the next best thing.
919
00:55:06,440 --> 00:55:08,960
I've met a fund manager that doesn't sell a good story, right?
920
00:55:08,960 --> 00:55:10,160
That's the reality of life, right?
921
00:55:10,160 --> 00:55:12,880
We're all here for a reason.
922
00:55:12,880 --> 00:55:18,760
Now, one thing that I picked up in our catch up just before we started recording was that
923
00:55:18,760 --> 00:55:22,960
most fund managers would come in and say, hey, I built a portfolio, right?
924
00:55:22,960 --> 00:55:27,200
And our EPS growth and our earnings growth is higher than the benchmark, right?
925
00:55:27,200 --> 00:55:30,800
The forecasted future earnings growth.
926
00:55:30,800 --> 00:55:33,200
You're different, right?
927
00:55:33,200 --> 00:55:38,320
And we were referencing a chart here where, you know, while your price to book is higher
928
00:55:38,320 --> 00:55:39,800
than benchmark, right?
929
00:55:39,800 --> 00:55:45,760
For a certain reason, your earnings growth forecast is lower than the bench.
930
00:55:45,760 --> 00:55:52,920
Why would I give you money to invest in earnings growth that's lower than the bench?
931
00:55:52,920 --> 00:55:54,720
Does it have something to do with risk?
932
00:55:54,720 --> 00:55:55,720
Yes.
933
00:55:55,720 --> 00:55:58,600
And the amount of work I do.
934
00:55:58,600 --> 00:56:02,200
Most fund managers can put in a style bucket.
935
00:56:02,200 --> 00:56:06,080
You can go and buy that style bucket in a passive product that's going to give you roughly
936
00:56:06,080 --> 00:56:09,040
the same return.
937
00:56:09,040 --> 00:56:14,480
If you're an active manager and you're selling a product that's higher growth in the market
938
00:56:14,480 --> 00:56:21,240
and higher price, you can get an ETF for that at 25, 30 basis points.
939
00:56:21,240 --> 00:56:22,480
They're not providing you any value.
940
00:56:22,480 --> 00:56:25,440
They might beat one year, but they'll come bad the next year.
941
00:56:25,440 --> 00:56:28,180
You know what fund managers are like on the active ones.
942
00:56:28,180 --> 00:56:29,680
So it's not providing you any value.
943
00:56:29,680 --> 00:56:35,160
You're basically buying a souped up, you're just buying a car that's been a souped up
944
00:56:35,160 --> 00:56:36,520
version of something else, right?
945
00:56:36,520 --> 00:56:40,320
We can name quite a few car models that just a souped up version of a rubbish car.
946
00:56:40,320 --> 00:56:42,960
But that's what I think you're getting.
947
00:56:42,960 --> 00:56:44,160
We're an active manager.
948
00:56:44,160 --> 00:56:46,480
So I'm trying to buy growth.
949
00:56:46,480 --> 00:56:48,760
You know, we've held in the fund.
950
00:56:48,760 --> 00:56:55,680
We've successfully bought and invested in the trade desk, Invertive, in MedPace, Capcom,
951
00:56:55,680 --> 00:57:00,280
Hubbell, I can keep going on about them.
952
00:57:00,280 --> 00:57:02,360
We're growth investors.
953
00:57:02,360 --> 00:57:06,600
But if you're a growth investor, don't go out and buy the shiniest toy on the street
954
00:57:06,600 --> 00:57:09,880
because there's going to be no unrecognised growth in that.
955
00:57:09,880 --> 00:57:12,720
The market is about being smarter than the market.
956
00:57:12,720 --> 00:57:15,040
If you want to be a passive investor, that's great.
957
00:57:15,040 --> 00:57:16,040
Be a passive investor.
958
00:57:16,040 --> 00:57:19,240
If you want to be an active investor, you've got to be smart and you've got to use your
959
00:57:19,240 --> 00:57:20,240
judgment.
960
00:57:20,240 --> 00:57:22,880
Otherwise, there's no point being there because you're taking on risk.
961
00:57:22,880 --> 00:57:26,880
And if you're not smart enough to deal with that risk, then don't be there.
962
00:57:26,880 --> 00:57:30,640
Being a growth investor, which I am, I'm in small caps to buy the next mid cap, to buy
963
00:57:30,640 --> 00:57:31,640
the next large cap.
964
00:57:31,640 --> 00:57:32,880
I want to buy the next trade desk.
965
00:57:32,880 --> 00:57:34,800
I want to buy the next Vertiv.
966
00:57:34,800 --> 00:57:35,800
That's why I'm here.
967
00:57:35,800 --> 00:57:38,360
That's why all my money is in the fund.
968
00:57:38,360 --> 00:57:41,480
But I can't go and buy the sexiest thing because I'm not going to make any money.
969
00:57:41,480 --> 00:57:43,120
It's not unrecognised growth.
970
00:57:43,120 --> 00:57:47,680
We sold Vertiv at around 100 bucks a couple of months ago because the growth was recognised
971
00:57:47,680 --> 00:57:49,240
by the market.
972
00:57:49,240 --> 00:57:50,680
It's got to be unrecognised.
973
00:57:50,680 --> 00:57:55,520
So my philosophy is go out there and buy much higher quality businesses in the market because
974
00:57:55,520 --> 00:57:56,520
you want to buy the niche leaders.
975
00:57:56,520 --> 00:57:59,560
You want to buy the best management teams, the best products, the best services because
976
00:57:59,560 --> 00:58:05,480
they're the most likely to be the leader in the future and grow into big companies.
977
00:58:05,480 --> 00:58:08,640
But then you've got to buy it when no one's expecting stuff to happen.
978
00:58:08,640 --> 00:58:11,280
Otherwise, how are you being smarter than the market?
979
00:58:11,280 --> 00:58:15,480
I always figured that if you're buying companies that are expected to grow more than the market
980
00:58:15,480 --> 00:58:19,040
and they're more expensive than the market, then what do you got?
981
00:58:19,040 --> 00:58:23,400
And likewise, if you buy companies that are super high quality and they're cheaper than
982
00:58:23,400 --> 00:58:28,080
the market, which is what I like to do, then there's got to be some give, which is that
983
00:58:28,080 --> 00:58:29,520
market's not completely inefficient.
984
00:58:29,520 --> 00:58:31,360
Market doesn't expect them to grow.
985
00:58:31,360 --> 00:58:33,280
So that's where I like to play.
986
00:58:33,280 --> 00:58:37,160
And that's why I always focus on having a lower expected growth than the market so that
987
00:58:37,160 --> 00:58:38,840
we get those earnings upgrades.
988
00:58:38,840 --> 00:58:43,360
And I think what really buoyed performance this year was the big upgrades that we've
989
00:58:43,360 --> 00:58:44,360
had.
990
00:58:44,360 --> 00:58:47,240
We've spoken about that in some of our main holdings.
991
00:58:47,240 --> 00:58:50,040
Right now, small caps are really cheap.
992
00:58:50,040 --> 00:58:53,920
And I don't think the market's rewarding the earnings growth that I see coming in our holdings
993
00:58:53,920 --> 00:58:55,880
and more broadly across the market.
994
00:58:55,880 --> 00:58:56,880
OK.
995
00:58:56,880 --> 00:59:00,320
Well, Toby, that comes to the end of our time.
996
00:59:00,320 --> 00:59:02,240
Thanks very much for joining me on the podcast.
997
00:59:02,240 --> 00:59:07,960
Next time, maybe we'll do it on Sydney Motor Sport Park, where I'll see you smoking my
998
00:59:07,960 --> 00:59:13,920
rear end down the straight because I cannot do to what, 260 down the straight.
999
00:59:13,920 --> 00:59:14,920
Yeah.
1000
00:59:14,920 --> 00:59:15,920
We'll see you then.
1001
00:59:15,920 --> 00:59:16,920
See you then.
1002
00:59:16,920 --> 00:59:17,920
Cheers.
1003
00:59:17,920 --> 00:59:18,920
Thanks.
1004
00:59:18,920 --> 00:59:28,600
This podcast is not financial product advice and is intended to provide information only.
1005
00:59:28,600 --> 00:59:32,600
It does not take into account the investment objectives, financial situation or needs of
1006
00:59:32,600 --> 00:59:33,600
any person.
1007
00:59:33,600 --> 00:59:37,120
You should assess whether the information is appropriate for you and consider talking
1008
00:59:37,120 --> 00:59:40,880
to a financial advisor before making any investment decisions.
1009
00:59:40,880 --> 00:59:43,960
Any investment examples are for illustrative purposes only.
1010
00:59:43,960 --> 00:59:47,400
The information is taken from sources which are believed to be accurate, but Simon Wu,
1011
00:59:47,400 --> 00:59:52,520
Jonathan Wu, SMU Financial Planning and Personal Financial Services Limited accept no liability
1012
00:59:52,520 --> 00:59:57,480
of any kind to any person who relies on the information contained in the podcast.
1013
00:59:57,480 --> 01:00:01,840
Unless expressively stated, none of the information should be taken as a recommendation.
1014
01:00:01,840 --> 01:00:15,360
For more information, please visit www.simonwu.com.au.
