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Welcome to an invest Sense podcast with Ben Griffiths of
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ELI Griffiths Group. Now this was an interesting one for
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us for one specific reason, but before I get to that,
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he does say all the usual things he'd expect from
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an Aussie small cap manager, that it's a space that's
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ripe for active management, and particularly at this point in
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time because this areas has been out of focus so
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far this year, so from evaluation point.
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Of view, it probably is a reasonably good starting point.
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However, he does note a little bit of caution around
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upcoming results and a few things to navigate. So as usual,
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this isn't personal advice, and this is about how you
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manage a diversified portfolio of ELSIE small caps and how
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that sits within a multi asset portfolio, and obviously aimed
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at advisors. But the really interesting part was his observations
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on liquidity and basically the impact of some of these
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big flows that we've seen in and around tech and
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especially emanating from career.
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Now that's really interesting to.
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Us because it kind of triangulates with a few other
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things that we've been hearing from Hunt economics, from other
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managers that we follow in emerging markets, in global midcaps, etc.
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And it does seem that there's a trend here for
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these big global flows to have been sloshing around and
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going into certain areas. Now does he say that because
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maybe we've seen a little bit of a turnaround negative
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sentiment and liquidity around.
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Career, is now the time?
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Well, he does note a little bit of caution about
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upcoming results and wanting to see a few proof points.
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So as we end with we're going to talk to
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him again in a few months. He thinks, not this
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reporting season, but actually the next one will be the
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one that is the real tell. But in the meantime,
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we think some very interesting observations about the asset class
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and about the liquidity in and around global markets and
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how it's impacting local stocks.
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Hope you enjoy this.
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Thanks, I've been good to see you again.
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Oh Jonathan, nice to see you too.
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Good type a chat.
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We haven't sort of spoken for a while in this forum,
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but we like to get people like yourselves, you know, practitioners,
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get a view from the bottom up about some of
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the things that we're seeing in markets. And you know,
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also an opportunity time because you know, it has been
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a tough year for small caps I mean the Eli
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Griffith strategy no more than any others, but we've got
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exposure and we sort of observe that sometimes it's difficult
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to pin down exactly why that is when you look
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at the underlying companies and you know, we're sort of wondering,
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you know, how things look going forward. It seems to
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us that that maybe ob small CAP's been a bit
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of a backwater. But you know, looking at your portfolio
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of companies and I know that you focus on the
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macro a little bit.
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You know, what do you think has been going on
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so far this year?
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Sure, I mean it's it's interesting. You raise a good point.
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A small small caps and emerging companies have have sort
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of been spinning wheels, as they say in the last
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City calendar year to date. But that remember that follows
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on from a very strong period of performance last year
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where small caps austra small caps performed strongly through calendar
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twenty five. And what we're seen is the inevitable yin
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and yang, the pendulum swings back and the large end
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of the market, the Australian share market, the ASX twenty,
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which had a tough time last year. In fact, this
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year is performing particularly strongly, so you get a bit
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of yin and yang, so you should expect that, and
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in some ways there's a perfectly strong explanation for why
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that's happened. And when you're dealing in equities, Jonathan, you
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can't move too far away from liquidity, and liquidity is
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an important driver of stock prices, always has been, and
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that won't be changing. What we've seen in the Australian
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share market, which is a little known fact, is that
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we've seen the extraordinary volatility, in fact, the strong performance
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and subsequent volatility in the Korean stock market. And what
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has been happening is money has been plowing into that
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costy index and owning sk highex'es and Samsung's and the
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like up there, very big aggressive bets on this whole
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AI theme. And then what was happening is it's been funded.
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It had been funded last year from various sources. The
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moment volatility cut in profits were to be taken, the
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money's come straight out of that market, and we strongly
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are believing that it's been it's coming to the austrane
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share market as somewhat of a savings account for these
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hedge funds where it's stable, and they've been buying up
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our ASX twenty names in particularly the bank.
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Stocks BHP and RIO.
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So we're seeing this liquidity flow between Australia and Korea,
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and the moment it looks like the AI tech things
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back on, then the money will siphon out of our
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leaders and go straight back up to honk up to Korea.
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So that's been quite quite a phenomenon and it has
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absolutely played havoc with the performance of this strane market,
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but it's certainly supported big caps over small and don't
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forget also, of course small caps enjoy an environment ideally
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where interest rates are not rising. Small caps tend to
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do their best work when you've got a far more
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benign interest rates setting and you've got ideally interest rates
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in a sort of downward trajectory. Of course, we've been
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hiking Australia early in the hiking cycle. We've been hiking
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rates in this country, which has meant very simply that
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small caps have been not supported, and there's been concerns
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about how far the hiking cycle will go. It does
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appear that the Australian hiking hiking cycle has in fact concluded,
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so this cycle may well be done, which brings on
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and that's certainly been the case based on a number
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of the recent economic stats and inflation in particular, that
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that appears to have peaked, that the hiking cycle is done.
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I don't think anyone's expecting a quick pivot to lower rates,
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and I think that thinking is that we won't see
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lowell rates in the Australian economy until the second half
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of next calendar year.
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But the fact that there's a pivot.
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Of sorts and a dubbish tilt from the RBA is
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enough to restore and rekindle interest in the smaller end
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of the market. And we've seen that from the small
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ordinary says calendar year being down about fourteen percent, it's
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now down about five or six percent and improving each day.
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So we're seeing broadening in the share market and that's
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being a large to a large extent dictated to by
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by the interest rates trajectory. And the final thing we
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talked about liquidity before, there's some internal liquidity going on.
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I'm talking about transition activity.
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Large fund managers who've had unsuccessful experiences in small caps
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and midcaps have been transitioning out of portfolios and even
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going into midcaps or offshore or large caps. That transition
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activity is compressed and bought quite a bit of selling
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across the small cap landscape for the last a good
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part of the last six.
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To twelve months.
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And you can see, especially if if you have a
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keen eye for share price charts, you can see in
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May during a number of very large lines in a
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number of small cap companies, we're going through the market
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as the tail end of these transition portfolios where we're
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processed and put through the market. And so there are
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a couple of reasons why small caps we start the
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yin ninyang of small caps just can't keep going up
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every year.
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This year it was a year to pause.
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We talk about liquidity with transition activity, and most importantly
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we talk about the.
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You know, the situation with interest rates.
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And the final point that I didn't make that I
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should make is that with this mild sell off in
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small caps or underperformance in small caps, we've seen the
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discount of small versus large open up. So todayre hot
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off the press, the discount between the small industrials and
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the large cap indust is about twelve percent.
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That's a reasonable discount, and you get to get into.
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Small industrial names, for instance, and a nice discount like that,
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Whilst there are superior growth earnings growth outcomes about fourteen
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percent earnings growth expected in the next twelve months for
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small caps versus about seven and a half to eight
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for large So you're paying a lesson.
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Rice for a superior growth outcome.
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So the timing really is the timing of this conversation's
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particularly good if you're looking at what to do with
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a small cap or an emerging company in this market today.
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Look, and that's fascinating.
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I wasn't expecting to talk to Elo Griffiths about our
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career and the costbe and some some etc. But it
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seems that, you know, in this sort of liquidity driven world,
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a lot of money slotting the rain. Everything is related somehow,
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and we observe that there's lots of sort of diverse
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strategies you wouldn't necessarily expect to be correlated. That seemed
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to be sort of shifting in the same way our
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conversations with Andrew Hunt about liquidity kind of correlates with
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a lot of this.
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So all of that makes absolute sense.
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As you said, the next thing is, you know, reasonable
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multiples cyclically, I'd say the consensus growth estimates are you know.
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Reasonably high.
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I think you know the cell side and you know,
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probably yourselves have a reasonable amount of conviction in the
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earnings momentum that we've got in the market. Can you
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talk to you know, maybe at a more granular level,
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what you see in your portfolio of companies and maybe
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just ahead of reporting season, what are the things that
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we're going to look out for, you know, maybe what
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are the risks to that you know, are those estimates
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kind of you know, could they be undercooked at the
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end of the day, And you know, what's the what
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does the sort of earnings momentum look like?
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Yeah, well that's and they are all the right question
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to ask.
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That's how envesteners need to be thinking about the space.
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And I think you're also correct in identifying the reporting
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season as the ideal opportunity for where investors, professional investors
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and analysts will be able to reset their expectations for
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callum to twenty self for financial year twenty seven. And
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that process is happening right now, so we'll get to
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see whether the market is in fact running a little
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too bullish or quite the opposite, is a little too
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conservative on where they see on where they see numbers,
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and then of course it isn't too long after reporting
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season that we move into October November, which is the
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AGM season, which we'll get further updates there. So there's
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plenty of information that will be coming our way in
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the next of the world. For US, it's been a
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time for a little bit of conservatism. We think that
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the market bottomed out in around May June, certainly in
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the teeth of interest rate hikes first issue. Second issue,
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of course was the budget, which was very poorly received
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and as unsettled investors businesses that for that like as
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well what exactly the future holds with the current fiscal policy.
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So that has certainly our nerve people. And let's talk
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about the Iran issues in the Gulf with a possible
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a possible sort of inflation scare, what happens does oil
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go back up through one twenty and it does it
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go to one fifty?
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You know, you've had.
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L and G terminals taken out, What is it going
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to do the gas price? So there's all these variables
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which have meant conservatism is probably the.
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Way to go.
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It's becoming a little clear and just taking the US market.
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As an example, the inflation break evens. We keep an eye,
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which is the market's best stab at where inflation's going.
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We've seen the break evens move low across one, two, five,
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and ten year time horizons, so there's been some settling
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down that maybe inflation won't.
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Actually be the issue that we were fearing.
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But just on local stocks. As I said, our portfolio
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has been positioned reasonably conservatively. We've let cash build up
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a little bit ahead of reporting season intentionally, and we
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tend to invest in names and stories that we are
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familiar with that have got their own their own little
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stories happening. We don't buy just as you'd expect a
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shotgun approach to small companies. The portfolio is the sum
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total of about sort of fifty two stocks that make
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for the portfolio where we don't and that's how we
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build it from ground up. I mean that we have
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stocks that will be well known to many of your
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to many of your investors. Channel infrastructure is an important name.
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There's a there's a great situation of a conservative infrastructure
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stock that's a monopoly operator in New Zealand. It basically
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operates a fleet of a network of pipelines and processing facilities.
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It's been a very sleepy, overlooked a piece of infrastructure
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business that we've got a big position that's been a
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tremendous performer, that's actually taking baby steps towards investing in
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Australia in infrastructure assets. And they bought bought a twenty
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five percent stake in the Melbourne Airport pipeline as well.
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So there's an example of a stock service. Stream is
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another business that we have a large shareholding in and
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that's essentially a meter ring business and a services business
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for looking after our assets, asset management business by way
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for a better term, and that's very conservative, looking after defense,
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housing and looking after sort of public assets and the like.
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Performing very strongly. Businesses operating well. We'll find out how
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strongly when it reports its results in the next week
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or two. And we've picked the eyes out of a
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few little mining service companies that the mining industry all
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comes to no surprise to you as performing is busy,
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activities and volumes are growing, and so we've got some
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positions across a couple of mining service groups that should
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should benefit there. So I think really the name of
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the game has been high conviction bets in high comfort names,
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getting a little high head of reporting seasons, so we've
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got some firepower to deploy. We are not afraid of
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investing in resource names. In fact, we're quite We're quite
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bullish on the commodity cycle and where we think it's
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heading over the next one to three years, and so
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many of our competitors are gun show of investing in.
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That part of the market. But if the part of
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the market we're happy to invest in. You've seen the
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copper price.
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Whether it's all AI related demand and theorizing and hypothesizing
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on where we're demand for copper will go, it doesn't
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really matter.
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The fact is demand for copper. It's getting harder.
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And more difficult and more expensive to get new mine
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approvals and to construct a mind. It takes as long
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as I can ever remember now to get to get
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a mine out of the ground. So the value of
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incumbent producers and existing existing mining companies is growing, and
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we're seeing consolidation internationally of mining groups.
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So I think we are.
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Are well exposed, quite well exposed in the in the
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mining space.
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Again, it's always a challenge on finding quality names, but
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we'll we'll see how we go there.
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But our intention is to is to is to up
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the exposure to commodity type names. Which yeah, so that's
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that's essentially where we're at. Where we're generally bullish on stocks,
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so we want to we want to be long.
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We think we think.
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Equities that have got have got a great a great
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one to three years ahead, but we're not naively bullish.
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We think there's if we need to navigate and so
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and and be careful with how we how we position
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our exposure.
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Mhm.
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Like what was sort of entering my mind then, especially
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when talking about individual stuff And obviously it's not advice,
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and you know, these are small caps that are you know,
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sit better in a diversified portfolio, and of course you'd
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say this as an active manager, but it feels like
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a type when you sort of lay in that sort
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of liquidity driven environment that we're kind of coming out
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of and arguably in the middle, it's arguably you know,
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an environment where there, as you said, there's sort of
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good platform from a valuation point of view, but you've
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got to sort of pick your way through that, and
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you know, the index might have a lot of other
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things that you don't necessarily need.
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A few things that have done very well.
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And I guess what I'm taking from you is, you know,
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you've got this good platform from a valuation point of view,
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but you're a little bit cautious.
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You need to see a few proof points.
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And you know, maybe it's not like I'm saying, it's
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a stockpickers market, but it's a market where you have
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to be a stockpicker to pick your way through and
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look for those proof points and then lay on the
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conviction when when you see these things coming through.
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So that's sort of fair summary. Look, I think that's
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very very fair.
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It's very fair, and I like the fact that I
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think the household investor, the mums and dads out there,
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I'm not being disrespectful with that with that tag, the
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mums and dad investors, they.
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Really haven't got into the market yet.
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We've seen the first first evidence that they are awakening
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from a deep slumber. And I'm referring to SpaceX, which
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of course was the first was the first USIPO that's
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been allowed to be marketed locally and so assex approval
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and so SpaceX was located, sorry, it was marketed locally,
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and of course a number of the leading Aussie stockbrokers
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were able to market that fascinating statistics and fascinating press
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release from Comsex, where Comsex said that ahead of the
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SpaceX ipo, they opened up thirty seven thousand new accounts
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and ladged twenty eight thousand applications for new shares and SpaceX.
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It's not so much much that they thought, well, well,
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I'm excited that they were buying SpaceX, because I personally
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wouldn't have made that trade. But it's the fact that
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that part of the market, which has been generally not
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written off but has been dismissed, has been kind of impotent.
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That that end of the market's asleep. I think that
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was an indication that the smaller end of the market,
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the household retail investor, is alive and well and is
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waiting to come back into the market and has placed
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to bet with SpaceX. That level of interest is all ahead.
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I think of our benchmark and what we're doing. We
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haven't even began to see any real exciting moves in smalls.
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We haven't seen.
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We've sent a couple of small IPOs in our space
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that almost haven't even attracted any media attention. Yet they've
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been really well received, So I think you talk about liquidity, well,
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you know, as I think I might have said, the
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household of sector is about twenty percent of the Australians
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share market liquidity pool. If they're coming back in and
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they're arriving in small companies where they're not presently that active,
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I think that's all ahead of us. So I like
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to look at that as well when they're awakening to
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what's happening in our space. The evaluation disparity, as I mentioned,
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and the prospects, I think, without again without trying to
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sound too bullish and too run away excited about things,
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that the backdrop is pretty good.
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We just need a few things to fall into place.
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We don't need another inflation scare where the RBA all
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of a sudden decides that we may not have seen
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the high in this hiking cycle. We don't need to
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see an escalation in the Gulf where oil prices go
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to one hundred and fifty dollars a barrel.
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We don't need to see that.
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And we don't need to see any more aggressive unnerving
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tech sell offs in the US, and a big sell
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off in those AI semiconducted names would just be unsettling
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for sentiment generally, so just they're the usual caveats and
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provide that we live with at the end of the day.
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We don't run a Russell two thousand portfolio.
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We're not investing in in Korean based technology businesses. We're
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investing in well managed, conservatively funded, proper business models, small companies.
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That's where we invest in, and that's where we made
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our bones, and that's where our performances built on and
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has been for twenty three years.
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Jonathan. Where let's say we've been one in those portfolios.
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Well, look, actually that's a kind of neat way to
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finish it off because I think the SpaceX example, there's
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two sides for that. It's good to see the animal
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spirit's maybe awakening, but also that hasn't been a great
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trade for retail investors. You know, a lot of people
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probably got in, you know, and you couldn't make this up.
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A lot of people have said, you know, that could
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be a turning point in liquidity. But we kind of
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like the idea that there are these you know, well
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valued you know, we've been calling them back order trades.
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Where they're quite perspective.
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If you actually have to do your homework, that equidity
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hasn't been there.
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But if you add you.
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Know, some flows, some sentiment, some earnings momentum, you know,
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those are all the ingredients where hopefully a strategy like
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yours should be able to flourish. So, you know, I
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think I think that's a sort of good message to
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leave it on that that you know, sometimes if you
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can have the fundamentals and you know you're looking forward
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and you know, going to where the puck is going
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rather than where it's been, maybe everything comes together and
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you know, maybe after reporting season or after the next one,
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we can sort of check in and I think that'll
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be the next part of the story went it is,
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you know, what does that earning's momentum look like? And
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you know, is that where the money is going? And
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maybe that's something we can talk about in the next
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few months.
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Well, I'd love to do that.
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I think the ideal time for yourself and your investors
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to put in their diaries might be end of November one,
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we will have concluded the AGM SAS and the Annual
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General Meeting season, and that's where companies come out and
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update trading out lock they update how.
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Performances in post A June thirty we'll get a.
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Little bit of an update within the current reporting seas
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and they'll give the first the first seven or eight
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weeks of trading, but by by end of November we'll
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have a proper look in to see to see what
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exactly is what's going on in corporate Australia. So that'll
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be a good time to double double down, meet back
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and you and I can, you can you and I
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can have another conversation about where things are at. We'll
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all will be all the wiser with a couple more
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months of I guess data and observations under our belt.
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But I'd be happy to speak then.
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Thanks Ben it today, look forward to talking then.
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Good on you. Thanks Johnny,
1
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Welcome to an invest Sense podcast with Ben Griffiths of
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ELI Griffiths Group. Now this was an interesting one for
3
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us for one specific reason, but before I get to that,
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he does say all the usual things he'd expect from
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an Aussie small cap manager, that it's a space that's
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ripe for active management, and particularly at this point in
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time because this areas has been out of focus so
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far this year, so from evaluation point.
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Of view, it probably is a reasonably good starting point.
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However, he does note a little bit of caution around
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upcoming results and a few things to navigate. So as usual,
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this isn't personal advice, and this is about how you
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manage a diversified portfolio of ELSIE small caps and how
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that sits within a multi asset portfolio, and obviously aimed
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at advisors. But the really interesting part was his observations
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on liquidity and basically the impact of some of these
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big flows that we've seen in and around tech and
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especially emanating from career.
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Now that's really interesting to.
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Us because it kind of triangulates with a few other
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things that we've been hearing from Hunt economics, from other
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managers that we follow in emerging markets, in global midcaps, etc.
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And it does seem that there's a trend here for
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these big global flows to have been sloshing around and
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going into certain areas. Now does he say that because
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maybe we've seen a little bit of a turnaround negative
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sentiment and liquidity around.
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Career, is now the time?
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Well, he does note a little bit of caution about
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upcoming results and wanting to see a few proof points.
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So as we end with we're going to talk to
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him again in a few months. He thinks, not this
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reporting season, but actually the next one will be the
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one that is the real tell. But in the meantime,
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we think some very interesting observations about the asset class
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and about the liquidity in and around global markets and
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how it's impacting local stocks.
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Hope you enjoy this.
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Thanks, I've been good to see you again.
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Oh Jonathan, nice to see you too.
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Good type a chat.
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We haven't sort of spoken for a while in this forum,
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but we like to get people like yourselves, you know, practitioners,
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get a view from the bottom up about some of
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the things that we're seeing in markets. And you know,
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also an opportunity time because you know, it has been
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a tough year for small caps I mean the Eli
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Griffith strategy no more than any others, but we've got
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exposure and we sort of observe that sometimes it's difficult
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to pin down exactly why that is when you look
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at the underlying companies and you know, we're sort of wondering,
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you know, how things look going forward. It seems to
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us that that maybe ob small CAP's been a bit
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of a backwater. But you know, looking at your portfolio
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of companies and I know that you focus on the
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macro a little bit.
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You know, what do you think has been going on
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so far this year?
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Sure, I mean it's it's interesting. You raise a good point.
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A small small caps and emerging companies have have sort
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of been spinning wheels, as they say in the last
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City calendar year to date. But that remember that follows
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on from a very strong period of performance last year
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where small caps austra small caps performed strongly through calendar
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twenty five. And what we're seen is the inevitable yin
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and yang, the pendulum swings back and the large end
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of the market, the Australian share market, the ASX twenty,
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which had a tough time last year. In fact, this
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year is performing particularly strongly, so you get a bit
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of yin and yang, so you should expect that, and
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in some ways there's a perfectly strong explanation for why
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that's happened. And when you're dealing in equities, Jonathan, you
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can't move too far away from liquidity, and liquidity is
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an important driver of stock prices, always has been, and
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that won't be changing. What we've seen in the Australian
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share market, which is a little known fact, is that
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we've seen the extraordinary volatility, in fact, the strong performance
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and subsequent volatility in the Korean stock market. And what
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has been happening is money has been plowing into that
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costy index and owning sk highex'es and Samsung's and the
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like up there, very big aggressive bets on this whole
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AI theme. And then what was happening is it's been funded.
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It had been funded last year from various sources. The
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moment volatility cut in profits were to be taken, the
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money's come straight out of that market, and we strongly
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are believing that it's been it's coming to the austrane
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share market as somewhat of a savings account for these
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hedge funds where it's stable, and they've been buying up
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our ASX twenty names in particularly the bank.
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Stocks BHP and RIO.
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So we're seeing this liquidity flow between Australia and Korea,
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and the moment it looks like the AI tech things
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back on, then the money will siphon out of our
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leaders and go straight back up to honk up to Korea.
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So that's been quite quite a phenomenon and it has
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absolutely played havoc with the performance of this strane market,
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but it's certainly supported big caps over small and don't
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forget also, of course small caps enjoy an environment ideally
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where interest rates are not rising. Small caps tend to
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do their best work when you've got a far more
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benign interest rates setting and you've got ideally interest rates
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in a sort of downward trajectory. Of course, we've been
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hiking Australia early in the hiking cycle. We've been hiking
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rates in this country, which has meant very simply that
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small caps have been not supported, and there's been concerns
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about how far the hiking cycle will go. It does
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appear that the Australian hiking hiking cycle has in fact concluded,
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so this cycle may well be done, which brings on
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and that's certainly been the case based on a number
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of the recent economic stats and inflation in particular, that
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that appears to have peaked, that the hiking cycle is done.
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I don't think anyone's expecting a quick pivot to lower rates,
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and I think that thinking is that we won't see
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lowell rates in the Australian economy until the second half
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of next calendar year.
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But the fact that there's a pivot.
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Of sorts and a dubbish tilt from the RBA is
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enough to restore and rekindle interest in the smaller end
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of the market. And we've seen that from the small
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ordinary says calendar year being down about fourteen percent, it's
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now down about five or six percent and improving each day.
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So we're seeing broadening in the share market and that's
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being a large to a large extent dictated to by
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by the interest rates trajectory. And the final thing we
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talked about liquidity before, there's some internal liquidity going on.
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I'm talking about transition activity.
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Large fund managers who've had unsuccessful experiences in small caps
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and midcaps have been transitioning out of portfolios and even
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going into midcaps or offshore or large caps. That transition
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activity is compressed and bought quite a bit of selling
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across the small cap landscape for the last a good
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part of the last six.
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To twelve months.
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And you can see, especially if if you have a
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keen eye for share price charts, you can see in
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May during a number of very large lines in a
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number of small cap companies, we're going through the market
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as the tail end of these transition portfolios where we're
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processed and put through the market. And so there are
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a couple of reasons why small caps we start the
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yin ninyang of small caps just can't keep going up
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every year.
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This year it was a year to pause.
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We talk about liquidity with transition activity, and most importantly
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we talk about the.
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You know, the situation with interest rates.
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And the final point that I didn't make that I
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should make is that with this mild sell off in
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small caps or underperformance in small caps, we've seen the
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discount of small versus large open up. So todayre hot
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off the press, the discount between the small industrials and
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the large cap indust is about twelve percent.
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That's a reasonable discount, and you get to get into.
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Small industrial names, for instance, and a nice discount like that,
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Whilst there are superior growth earnings growth outcomes about fourteen
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percent earnings growth expected in the next twelve months for
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small caps versus about seven and a half to eight
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for large So you're paying a lesson.
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Rice for a superior growth outcome.
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So the timing really is the timing of this conversation's
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particularly good if you're looking at what to do with
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a small cap or an emerging company in this market today.
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Look, and that's fascinating.
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I wasn't expecting to talk to Elo Griffiths about our
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career and the costbe and some some etc. But it
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seems that, you know, in this sort of liquidity driven world,
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a lot of money slotting the rain. Everything is related somehow,
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and we observe that there's lots of sort of diverse
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strategies you wouldn't necessarily expect to be correlated. That seemed
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to be sort of shifting in the same way our
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conversations with Andrew Hunt about liquidity kind of correlates with
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a lot of this.
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So all of that makes absolute sense.
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As you said, the next thing is, you know, reasonable
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multiples cyclically, I'd say the consensus growth estimates are you know.
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Reasonably high.
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I think you know the cell side and you know,
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probably yourselves have a reasonable amount of conviction in the
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earnings momentum that we've got in the market. Can you
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talk to you know, maybe at a more granular level,
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what you see in your portfolio of companies and maybe
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just ahead of reporting season, what are the things that
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we're going to look out for, you know, maybe what
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are the risks to that you know, are those estimates
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kind of you know, could they be undercooked at the
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end of the day, And you know, what's the what
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does the sort of earnings momentum look like?
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Yeah, well that's and they are all the right question
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to ask.
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That's how envesteners need to be thinking about the space.
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And I think you're also correct in identifying the reporting
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season as the ideal opportunity for where investors, professional investors
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and analysts will be able to reset their expectations for
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callum to twenty self for financial year twenty seven. And
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that process is happening right now, so we'll get to
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see whether the market is in fact running a little
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too bullish or quite the opposite, is a little too
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conservative on where they see on where they see numbers,
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and then of course it isn't too long after reporting
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season that we move into October November, which is the
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AGM season, which we'll get further updates there. So there's
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plenty of information that will be coming our way in
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the next of the world. For US, it's been a
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time for a little bit of conservatism. We think that
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the market bottomed out in around May June, certainly in
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the teeth of interest rate hikes first issue. Second issue,
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of course was the budget, which was very poorly received
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and as unsettled investors businesses that for that like as
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well what exactly the future holds with the current fiscal policy.
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So that has certainly our nerve people. And let's talk
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about the Iran issues in the Gulf with a possible
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a possible sort of inflation scare, what happens does oil
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go back up through one twenty and it does it
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go to one fifty?
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You know, you've had.
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L and G terminals taken out, What is it going
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to do the gas price? So there's all these variables
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which have meant conservatism is probably the.
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Way to go.
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It's becoming a little clear and just taking the US market.
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As an example, the inflation break evens. We keep an eye,
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which is the market's best stab at where inflation's going.
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We've seen the break evens move low across one, two, five,
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and ten year time horizons, so there's been some settling
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down that maybe inflation won't.
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Actually be the issue that we were fearing.
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But just on local stocks. As I said, our portfolio
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has been positioned reasonably conservatively. We've let cash build up
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a little bit ahead of reporting season intentionally, and we
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tend to invest in names and stories that we are
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familiar with that have got their own their own little
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stories happening. We don't buy just as you'd expect a
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shotgun approach to small companies. The portfolio is the sum
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total of about sort of fifty two stocks that make
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for the portfolio where we don't and that's how we
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build it from ground up. I mean that we have
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stocks that will be well known to many of your
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to many of your investors. Channel infrastructure is an important name.
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There's a there's a great situation of a conservative infrastructure
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stock that's a monopoly operator in New Zealand. It basically
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operates a fleet of a network of pipelines and processing facilities.
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It's been a very sleepy, overlooked a piece of infrastructure
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business that we've got a big position that's been a
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tremendous performer, that's actually taking baby steps towards investing in
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Australia in infrastructure assets. And they bought bought a twenty
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five percent stake in the Melbourne Airport pipeline as well.
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So there's an example of a stock service. Stream is
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another business that we have a large shareholding in and
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that's essentially a meter ring business and a services business
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for looking after our assets, asset management business by way
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for a better term, and that's very conservative, looking after defense,
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housing and looking after sort of public assets and the like.
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Performing very strongly. Businesses operating well. We'll find out how
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strongly when it reports its results in the next week
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or two. And we've picked the eyes out of a
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few little mining service companies that the mining industry all
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comes to no surprise to you as performing is busy,
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activities and volumes are growing, and so we've got some
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positions across a couple of mining service groups that should
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should benefit there. So I think really the name of
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the game has been high conviction bets in high comfort names,
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getting a little high head of reporting seasons, so we've
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got some firepower to deploy. We are not afraid of
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investing in resource names. In fact, we're quite We're quite
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bullish on the commodity cycle and where we think it's
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heading over the next one to three years, and so
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many of our competitors are gun show of investing in.
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That part of the market. But if the part of
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the market we're happy to invest in. You've seen the
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copper price.
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Whether it's all AI related demand and theorizing and hypothesizing
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on where we're demand for copper will go, it doesn't
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really matter.
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The fact is demand for copper. It's getting harder.
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And more difficult and more expensive to get new mine
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approvals and to construct a mind. It takes as long
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as I can ever remember now to get to get
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a mine out of the ground. So the value of
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incumbent producers and existing existing mining companies is growing, and
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we're seeing consolidation internationally of mining groups.
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So I think we are.
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Are well exposed, quite well exposed in the in the
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mining space.
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Again, it's always a challenge on finding quality names, but
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we'll we'll see how we go there.
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But our intention is to is to is to up
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the exposure to commodity type names. Which yeah, so that's
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that's essentially where we're at. Where we're generally bullish on stocks,
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so we want to we want to be long.
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We think we think.
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Equities that have got have got a great a great
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one to three years ahead, but we're not naively bullish.
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We think there's if we need to navigate and so
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and and be careful with how we how we position
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our exposure.
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Mhm.
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Like what was sort of entering my mind then, especially
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when talking about individual stuff And obviously it's not advice,
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and you know, these are small caps that are you know,
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sit better in a diversified portfolio, and of course you'd
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say this as an active manager, but it feels like
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a type when you sort of lay in that sort
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of liquidity driven environment that we're kind of coming out
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of and arguably in the middle, it's arguably you know,
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an environment where there, as you said, there's sort of
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good platform from a valuation point of view, but you've
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got to sort of pick your way through that, and
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you know, the index might have a lot of other
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things that you don't necessarily need.
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A few things that have done very well.
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And I guess what I'm taking from you is, you know,
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you've got this good platform from a valuation point of view,
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but you're a little bit cautious.
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You need to see a few proof points.
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And you know, maybe it's not like I'm saying, it's
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a stockpickers market, but it's a market where you have
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to be a stockpicker to pick your way through and
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look for those proof points and then lay on the
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conviction when when you see these things coming through.
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So that's sort of fair summary. Look, I think that's
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very very fair.
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It's very fair, and I like the fact that I
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think the household investor, the mums and dads out there,
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I'm not being disrespectful with that with that tag, the
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mums and dad investors, they.
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Really haven't got into the market yet.
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We've seen the first first evidence that they are awakening
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from a deep slumber. And I'm referring to SpaceX, which
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of course was the first was the first USIPO that's
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been allowed to be marketed locally and so assex approval
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and so SpaceX was located, sorry, it was marketed locally,
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and of course a number of the leading Aussie stockbrokers
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were able to market that fascinating statistics and fascinating press
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release from Comsex, where Comsex said that ahead of the
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SpaceX ipo, they opened up thirty seven thousand new accounts
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and ladged twenty eight thousand applications for new shares and SpaceX.
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It's not so much much that they thought, well, well,
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I'm excited that they were buying SpaceX, because I personally
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wouldn't have made that trade. But it's the fact that
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that part of the market, which has been generally not
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written off but has been dismissed, has been kind of impotent.
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That that end of the market's asleep. I think that
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was an indication that the smaller end of the market,
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the household retail investor, is alive and well and is
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waiting to come back into the market and has placed
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to bet with SpaceX. That level of interest is all ahead.
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I think of our benchmark and what we're doing. We
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haven't even began to see any real exciting moves in smalls.
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We haven't seen.
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We've sent a couple of small IPOs in our space
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that almost haven't even attracted any media attention. Yet they've
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been really well received, So I think you talk about liquidity, well,
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you know, as I think I might have said, the
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household of sector is about twenty percent of the Australians
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share market liquidity pool. If they're coming back in and
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they're arriving in small companies where they're not presently that active,
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I think that's all ahead of us. So I like
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to look at that as well when they're awakening to
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what's happening in our space. The evaluation disparity, as I mentioned,
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and the prospects, I think, without again without trying to
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sound too bullish and too run away excited about things,
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that the backdrop is pretty good.
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We just need a few things to fall into place.
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We don't need another inflation scare where the RBA all
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of a sudden decides that we may not have seen
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the high in this hiking cycle. We don't need to
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see an escalation in the Gulf where oil prices go
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to one hundred and fifty dollars a barrel.
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We don't need to see that.
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And we don't need to see any more aggressive unnerving
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tech sell offs in the US, and a big sell
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off in those AI semiconducted names would just be unsettling
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for sentiment generally, so just they're the usual caveats and
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provide that we live with at the end of the day.
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We don't run a Russell two thousand portfolio.
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We're not investing in in Korean based technology businesses. We're
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investing in well managed, conservatively funded, proper business models, small companies.
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That's where we invest in, and that's where we made
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our bones, and that's where our performances built on and
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has been for twenty three years.
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Jonathan. Where let's say we've been one in those portfolios.
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Well, look, actually that's a kind of neat way to
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finish it off because I think the SpaceX example, there's
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two sides for that. It's good to see the animal
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spirit's maybe awakening, but also that hasn't been a great
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trade for retail investors. You know, a lot of people
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probably got in, you know, and you couldn't make this up.
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A lot of people have said, you know, that could
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be a turning point in liquidity. But we kind of
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like the idea that there are these you know, well
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valued you know, we've been calling them back order trades.
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Where they're quite perspective.
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If you actually have to do your homework, that equidity
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hasn't been there.
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But if you add you.
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Know, some flows, some sentiment, some earnings momentum, you know,
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those are all the ingredients where hopefully a strategy like
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yours should be able to flourish. So, you know, I
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think I think that's a sort of good message to
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leave it on that that you know, sometimes if you
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can have the fundamentals and you know you're looking forward
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and you know, going to where the puck is going
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rather than where it's been, maybe everything comes together and
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you know, maybe after reporting season or after the next one,
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we can sort of check in and I think that'll
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be the next part of the story went it is,
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you know, what does that earning's momentum look like? And
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you know, is that where the money is going? And
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maybe that's something we can talk about in the next
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few months.
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Well, I'd love to do that.
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I think the ideal time for yourself and your investors
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to put in their diaries might be end of November one,
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we will have concluded the AGM SAS and the Annual
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General Meeting season, and that's where companies come out and
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update trading out lock they update how.
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Performances in post A June thirty we'll get a.
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Little bit of an update within the current reporting seas
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and they'll give the first the first seven or eight
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weeks of trading, but by by end of November we'll
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have a proper look in to see to see what
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exactly is what's going on in corporate Australia. So that'll
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be a good time to double double down, meet back
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and you and I can, you can you and I
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can have another conversation about where things are at. We'll
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all will be all the wiser with a couple more
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months of I guess data and observations under our belt.
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But I'd be happy to speak then.
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Thanks Ben it today, look forward to talking then.
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Good on you. Thanks Johnny,
