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Hello, and welcome to the Rules of Investing. My name's
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James Marlay and I'm going to be your host for
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the final two episodes of twenty twenty three. My guest
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today is Ben Griffiths, founder and portfolio manager at Early
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Griffiths Group Eally. Griffith Group was founded in two thousand
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and three and has built a strong reputation as a
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specialist small companies investor over that time. Ben established his
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credentials as an investor at IMG and VT Financial Group,
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which is the breeding ground for what have become great
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investors names such as Ken Nielsen, Crispin Murray and Paul Moore. Today,
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Early Griffiths Group has a seven person investment team specializing
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in emerging small and MidCap stocks and managers in excess
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of one point six billion in assets under management. Early
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Griffiths Group's flagship Small Companies Fund has compounded returns at
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nine point three eight percent per annum since insection, which
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is four point two nine percent ahead of the benchmark. Ben,
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so note over the past year you've managed to generate
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a positive return when the small cap index is down
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roughly five percent. Welcome to the show, Ben, and congratulations
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on your twenty year anniversary.
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James, thanks very much for that warm introduction. It's great
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to be here.
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Now I want to chat about the big picture and
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specifically in the environment that investors will be facing as
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we head into twenty twenty four. But before we do,
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I'd love for you to give readers a download on
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how you use the macro factors as an equity investor.
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We often hear stock pickers talk about the fact that
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they only focus on company fundamentals. However, I've been an
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avid reader of your quarterly letter that draws on a
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range of factors, from macro to technicals and other indices.
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So ben as an opening question, I might hit you
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with what are two or three indices, data series or
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technicals that you reliably turn to to get your bearings
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and markets, and importantly, what are they telling you?
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Now?
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That's all all quite reasonable, James, and you're right, we
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do use and I've been drawing on macro macro elements
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in my preparation for a portfolio management and my appraisal
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of the market for a number of years.
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I think you need to set the backdrop.
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For where the stock market is trading, and you need
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to be aware of the pressure points before you can
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then work out which sector is a likely to perform
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and then build a portfolio from that. I the first
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thing I would typically do is before I look at that,
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when I'm assessing the health of the stock market, I
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want to know how credit spreads are behaving. And they're
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a great risk barometer. When credit spreads are elevated, so
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that gives reason, that gives rise for angst and some concern,
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and that has a direct bearing on risk assets. Well,
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in the case, at the moment, credit spreads are quite benign.
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They're not as low as they were, but they're probably
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closer to normal ranges. So it sort of is the
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first indication for me that the water is safe to
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swim in, if you will. I like to look at
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investor sentiment. I've been a student of investor sentiments since
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I started markets. You know, I crave front pages. I
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look for adverse eve, excessive ebulliance at the tops of
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markets and excessive bearishness at the bottoms, and so I
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like to measure sentiment. And probably the easiest one for
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investors like myself and I guess some of the listeners
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is the double A double I series in the US,
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which which gives a direct print on investor sentiment. And
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as we talk about the markets on our pod, we
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we'll discuss how extreme that setting got back in October.
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So I look at investor sentiment as an important precondition
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for whether stocks ought to be bought aught be sold.
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I've mentioned the credit spreads, and then, as you also
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pointed out, I'm somewhat of a fan and a student,
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I'm still a student, believe it or not, of technical analysis,
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and I always want to know where the primary trend
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is on a stock, or an index, or a commodity
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for that matter. I want to know where the primary
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trend is and whether there are any indications of exhaustion
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or whether the trend is suggesting that investment with the
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trend is the way to go. And there are various
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patterns that we haven't got time to discuss today, but
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as generally investing with the trend, and for me, the
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one hundred day moving average, or the investment line as
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it's often known, is probably the best trend indicator you
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can use as to where the markets are going up
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or markets are going down. So that they're just a
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couple of samples, they're the sort of some examples of
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the tools that I would regularly look at before I
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start framing an opinion of whether the stocks we can
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buy stocks or whether we should be sitting in cash
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for a while.
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It's interesting you mentioned the front page of the newspaper
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and what's been reported in the press, and when I
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was doing some background reading in preparation for our chat today,
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I jumped on Bloomberg and there are a few headlines
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that jumped off the page for me that The first
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one questioned how low the FED will go in twenty
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twenty four, and the other headline was that the bitcoin
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had rallied one hundred and forty two percent in the
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year today. Those two headlines are quite a big shift
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in the narrative compared to what we faced just twelve
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months ago. And so I'll put the question to you,
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is risk back and do you think that we've seen
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the peak in the current rate hiking cycle. I look
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at bitcoin as a proxy for risk, and you know,
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how low can they go is quite a big change.
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I think risk is back. Risk is back, but in
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a measured way. I think that the whole situation's changed.
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Late late October, that's when that's when I guess when
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the FED came out and basically presented a hawkish hold
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on rates was how I took the rhetoric and the
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market took it. Took it so as well. What we
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have is the beginning of We're underway, I should say,
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with a paws rally, and a pause rally is typical
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at this stage when when a central bank decides it's
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probably done on hiking, as I think most people agree
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the FED is done, and those paws rallies have plenty
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ad juice in them normally, and if history is any gauge,
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they can go for up to nine months. So I
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think we've got a pause rally underway. I think the
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investor sentiment that I referenced a minute ago, we had
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that double a double my survey printing net bullish reads
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at about twenty one percent in the early days of November.
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That told me that when you get sentiment readings that low,
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the market is set.
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The wrong way.
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And then in the middle of November I got especially
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excited when I noted on the NYSC we had a
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very rare ten to one update, ten stocks up for
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every one stock that fell. You rarely see that when
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you see that of an important low with volume, you
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get a ten to one update. I'm not saying to
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the listeners you can take that to the bank, but
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what I'm saying is it's the sort of confirmation I
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like to see ahead ahead of getting getting a little
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bit a little bit enthusiastic. So I think risk is on.
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You mentioned Bitcoin. That's a great arbiterere and a great
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barometer of whether risk is with us or not. And
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you're right, some very sharp moves in Bitcoin, so risk
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appetites back on. Have a look at the Meme index,
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the Meme ETF, which I keep a close high on,
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the trades on the n y C. That's up fifty
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percent this year, that's had a rocking great time since
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since late October. And non profitable text another benchmark and
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another little index that I follow off Bloomberg, and that's
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absolutely powering. So I'm not for a second suggesting the
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lunatics are out of the asylum. But what is happening
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is there's been some stability, and I think sentiment is
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such that you can sketch out a constructive path forward
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for equities, certainly for the next well i'll say nine months, ah,
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but certainly I think I think there's going to be
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a buoyant time ahead for.
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I imagine the meme index wasn't something you learned back
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in two thousand and three.
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Then look, I'd never heard of a name in two
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thousand and three. But certainly they are a feature of
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the market. Whether whether one to proves them or not,
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they're a feature of the market. And you saw Game
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Stop the other night had a big move as well.
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I mean, that's another classic stock that gets bombarded by
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the reddit mob. So all those things they sort of
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can point to FROT, but I think at this stage
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they're really pointing to the return of animal spirits, which
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are generally pretty positive. So I not getting two carried
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away right now, but suggesting that. But the conditions of
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reasonably fertile for a rally.
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You mentioned before that that day, I think it's the
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thirtieth of October when we saw markets really rephire. That
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whole week was really positive for equities. Just is it
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your take that that's when investors became comfortable that inflation
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was no longer the major can Zone or the fight
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that central bank has had on their hand.
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I think that's dead right, That's exactly what happened, and
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that of course, those sentiments have been building for a while.
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It's just all of a sudden the market twigs and
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the way it goes, it's funny when it comes.
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To risk and liquidity.
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It can be very negative and there's no liquidity about,
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and then it just seems to turn on something that
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gets said. It turns on a broken strategist report, it
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turns on something on the front page of the paper,
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and all of a sudden it's on, And you wonder,
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two weeks ago, how could things have been so bearish
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two weeks ago? So I think we've gone through one
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of those moments where the planets lined up at that time.
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I've mentioned the hawkish hold, I've mentioned credit spreads, the
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term premium started coming in fairly aggressively. Around that same time,
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the Bank of Japan announced it was going to stand
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off your curve control. There are a whole bunch of
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things that literally brought in a u turn with stock
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markets and a way it went so yeah, quite amazing.
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They do happen as quickly as that, and often there's
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there can be no apparent logic or reason to them.
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But that's how markets behave.
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Okay, I'd like to dive into what you're seeing and
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hearing on the ground, and if we talk specifically about
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the local market, we've talked about the fact that risk
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appetite has been exceptionally low for some time. The IPO
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market's been very quiet. Is the phone ringing yet to
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book you in for IPO meetings in early twenty twenty four.
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No, No, it hasn't started yet, And I just thought
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I wouldn't make one comment to James. A lot of
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talk about the smaller end of the market, where my
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business plays and where we've made our bones. That part
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of the market has been somewhat dormant and under pressure.
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And it's not just this rain small cap market. It's
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globally appetite for small companies. And that's whether that's in
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primary demand for IPOs as you're talking about, or secondary raisings,
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or even just the conduct of the market. Interest in
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small companies has been wanting. The MSCI World Index and
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the MSCI World Small Cap Index normally move in step,
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and they got immediately out of step, and the small
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or the small cap benchmark plunged and sold off right
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at the time the FED hike rates last March, so
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that was the immediate divergence point, and since that point,
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small caps globally have struggled. So my contention would be,
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as the market swings around and decides that were seen
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the last of the hikes, and perhaps if the bedding's
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right and were seen one hundred and thirty basis points
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of rate cut expectation has already factored in US bonds
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from about March next year, that should be positive for
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small caps of all ILK globally. Now, with that will
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come to your question, and I apologize for the long
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winded approach to the question. With that will come the
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restoration of IPOs, the interest in IPOs. We've already seen
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in this last week alone a number of equity transactions
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in the Australian share market. Whether they're fresh equity raisings
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for asset purchases or whether they're founder selldowns, those transactions
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have been reasonably well received. That's a sign that again
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the spirits are awakening. So I think IPOs, I think
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that's the next iteration. They've been a couple of IPOs
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in the last twelve to eight en months that have
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been forced on the market, and I mean that they've
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been forced on the market and they've performed fairly poorly.
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One or two have fought back and got above their
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IPO price, but most of wallowed. The mood hasn't been right,
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the appetite hasn't been right. But I think it feels
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to me like that's set to change. So I haven't
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been sound out. It's a bit early. It's a very
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seasonal thing, so I think IPOs now, if you have
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an iPod, you're not doing it now, And maybe March
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is when they come back on. Now, just because it's
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the other side of the reporting season, people assume, oh no, well,
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we'll have them penciled in for the first week of March.
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I can tell you when the market gets moving, IPOs
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and deals will happen in the middle of the reporting season.
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They'll happen the end of January. They'll happen whenever the
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deals need to be done. But we're nowhere near that yet,
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so I think it's all fairly, fairly cautious. It's all
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fairly sensible right now, so I have to wait and see.
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But no, I'm not being inundated. But there were a
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number jimmy up, pick you up. On that point, there
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were a number of IPOs that were slated for transacting
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and listing before Christmas that have now been pushed into March,
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and I think a couple of them would have gone
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quite well in any event, so they'll be extra well
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sought after in March, or certainly pre June.
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I think pre June is how we should be thinking
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pre June twenty four.
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So I'm keen to dig a little bit more into
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what's been happening in small caps. And we've seen that
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small caps have lagged their large cap yeers for quite
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some time, and I've had some of the investors that
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we speak to saying it's as bad as they've ever
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seen for someone that's been investing in small caps for
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the best part of thirty years. Keen to know, you know,
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what's your take on this divergence. What do you think
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is behind it? Is it structural or cyclical, and what
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will it take for it to turn Yes, well, it isn't.
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It isn't structural or secular. It's certainly cyclical, and small
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caps will sort of oscillate around being more expensive than
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big caps, and then small caps will be cheaper than
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big caps. And that is all and outworking of the
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mood of the market right now that the small cap
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part of the market's at about a seventeen and a
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half times PE, and that's about an eight percent discount
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to the large caps.
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The ten year.
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Average is about that, maybe it's closer to ten percent,
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So we're broadly tracking where we should be. I mentioned
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interest rates which have had a bearing, a heavy bearing
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down on sentiment, and rightly so, and we've seen that
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play out. What we've also seen has been an earning's
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downgrade cycle that's been running concurrent with that interest rates setting.
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We've had eighteen months of downgrades in the small ordinaries.
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It's been quite extraordinary, and that has also contributed to
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the bruised sentiment that you alluded to. But how about
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the recent AGM season. Why don't we talk about that
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very quickly? That came out that wasn't too bad in fact,
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and we had fewer negative surprises than we've had in
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previous reporting seasons or AGM seasons, and we had more
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upgrades versus downgrades by the time we'd finished with the agms.
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I'm just wondering whether is that somehow signaling that we've
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come to the end of the downgrade cycle. It's been
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eighteen months of using the AGM season suggested there's perhaps
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a little bit more resilience out there than we might
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have given credit for. Now there's some obvious hot spots
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and consumer discretionary. If you're in your parel business, you're
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probably doing it a little bit tough. But if you're
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if you're if you're Beacon Lighting or Nick Scarley, you
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might be faring not so bad. So we'll see it
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feels like the consumer is still under some pressure and
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those that will be will be probably on show and
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the results we see in February from the companies. But
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I just wonder as a as a as A as A,
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as an index, as a collective, whether we've seen perhaps
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the worst of the downgrades from from from from from
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from the small companies that we can invest in. Well,
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we're on the lookout to see whether have have margins bottomed?
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Have we been through that misery the last eight months
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and we're now going to see them coming out the
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other side, And they'll come out the other side, maybe
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revenue fall away, but maybe companies have been extra diligent
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and cutting costs quickly, and so you'll start to so
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you'll start to get restoration of margin, and so we're
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on the lookout for that. So we'll see. But it
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is playing out like any other cycle. I guess the
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RBA is a little behind the rest of the world,
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so we've I guess the pundits would suggest we've got
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another hike, probably in this and possibly too, so maybe
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we don't see. I mean, my personal view is that
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the US will stay high for longer and we won't
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get a cut as early as March as people are suggesting.
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It's probably closer to journish and I think Australia follows
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a little later, So maybe we're August before we see
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something and just thinking out loud. Of course, don't hold me.
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To these dates.
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And so the moment, there's a view that we'll start
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getting some interest rate relief that will also have positive
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effects for corporate profitability. So there are a growing list
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of positives you can put on the table. I guess
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six to twelve months ago you were sort of scratching
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around to find them.
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Ancient AGM season, Are there any companies that stand out
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from the meetings or the presentation that you and the
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team have heard from that you felt, you know, do
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less worse than feared updates or were particularly hanging it well.
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Are there any anecdotes that you can share with us?
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Oh, look, I think we always target quality names we
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invest in. We love investing in good quality industrial names
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with beautiful operating franchises. You know, Revel and bor All
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came out with certainly Boraal had a good update.
340
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Look, Ridley had a really impressive update.
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So so feel pretty good about the prospects for Ridley
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and then I mean they're the ones that sort of
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sort of stood out, to be honest, there are a
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few disappointing ones, but you know, Ridley is a stock
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that the Guffords group owned and have owned for some time,
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and they're doing They're doing pretty well everything they said
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they do given that given the restrictions and the impacts
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on their operating environment. So I think it's safe to
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look Att's look at the AGM season as a whole
350
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and you'll see that on balance, Australian corporates updated the
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market quite favorably.
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Ben. In discussions past, you've talked about how you like
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to think about what your portfolio setting wants to be
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get positioned and hold that line for a period of time,
355
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and you've sort of talked about your views on what's
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happening with rates and where we might be because you're
357
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talk me through some of the sectors that or the
358
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types of companies that you want to own as we
359
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head into the environment that you've set out for for
360
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us in twenty twenty four. And maybe you could take
361
00:19:44.119 --> 00:19:46.799
an example from something that might feature in your mid
362
00:19:46.880 --> 00:19:51.079
cap fund and maybe something down the microcap, down the
363
00:19:51.160 --> 00:19:53.759
smaller cap spectrum. But you know what sort of things
364
00:19:53.799 --> 00:19:56.400
do you want to own in that in that sort
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of the current and slightly high interest rate environment. But
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it's being starts slow down a bit.
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Sure, sure, well, Look, as I said, we have we
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00:20:05.839 --> 00:20:10.039
are naturally attracted. We're drawn to good quality businesses, and
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so you should expect to see good quality names that
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are probably household names to everyone listening to the pod today.
371
00:20:17.720 --> 00:20:20.119
Mono Delphus, a name like that, which is a leader
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in mining services. ARB Corporation is another great example of
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00:20:26.839 --> 00:20:30.920
a homegrown business that's taking a taking an auto product
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to the world with with with great success. And that's
375
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that's the stock we've owned off and on for years
376
00:20:35.559 --> 00:20:40.519
and it's in the portfolio now. So you'll nearly always
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see those sorts of names, the rebels, the borrels. Look,
378
00:20:45.440 --> 00:20:48.480
we also are from time to time, we'll own resource names,
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00:20:48.680 --> 00:20:52.640
and we'll own resource companies, not because we've got necessarily
380
00:20:52.640 --> 00:20:55.039
a bullish view and a commodity, but we actually own
381
00:20:55.079 --> 00:20:57.759
them because we've we happen to believe their growth story
382
00:20:57.880 --> 00:21:03.880
and we believe the undertakings that management have are correct
383
00:21:04.079 --> 00:21:06.200
and that you'll see a great earnings growth story. And
384
00:21:06.759 --> 00:21:11.640
Capricorn Metals and Genesis Minerals of two examples of resource
385
00:21:11.720 --> 00:21:13.960
companies that happened to be in the gold space. They've
386
00:21:14.000 --> 00:21:17.000
each got their own modus operandi as to what they're
387
00:21:17.039 --> 00:21:19.640
trying to achieve ultimately, But ultimately it's going to be
388
00:21:20.119 --> 00:21:23.000
diversified assets. It's going to be production growth, it's going
389
00:21:23.079 --> 00:21:26.839
to be profitable profitable growth, it's going to be potentially
390
00:21:26.880 --> 00:21:30.920
expiration upside. But generally in the case of resource stocks
391
00:21:30.960 --> 00:21:33.240
and Crewent Energy is another one that that that that
392
00:21:33.400 --> 00:21:37.599
that you'll see amongst Illlie Griffiths Group Holdings. That's that's
393
00:21:37.599 --> 00:21:40.240
another example of a business that's being methodically put together
394
00:21:40.440 --> 00:21:43.920
and built for the long term with very very sensible management.
395
00:21:45.400 --> 00:21:48.119
So that's they're they're the sort of stocks that that
396
00:21:48.960 --> 00:21:52.200
you'll see in the portfolio. And as I said, there
397
00:21:52.240 --> 00:21:54.920
will also be some caution with us around stocks who
398
00:21:55.119 --> 00:21:59.720
we think there there their operating margins haven't bottom. It
399
00:21:59.839 --> 00:22:04.000
is beck to see you know, stocks like Auckland International
400
00:22:04.079 --> 00:22:07.039
Airport and Warley. I mean, Walley is a great example
401
00:22:07.079 --> 00:22:11.759
of a of a engineering services group that's that yes,
402
00:22:11.880 --> 00:22:15.440
provides services the hydrocarbon industry, but it also provides valuable
403
00:22:15.480 --> 00:22:18.079
services to the to the renewable space and are doing
404
00:22:18.119 --> 00:22:22.000
great work. Naturally, the stocks that are that are in
405
00:22:22.119 --> 00:22:24.680
our emerging company portfolio will be different to those that
406
00:22:24.759 --> 00:22:29.759
are in the MidCap portfolio. But stocks like Ordinate TEMpl
407
00:22:29.799 --> 00:22:33.599
and webstem Code and there's sorts of businesses that that
408
00:22:33.759 --> 00:22:37.119
that take pride and pride of place in the portfolio.
409
00:22:38.799 --> 00:22:41.400
So so as you can see, we it's a it's
410
00:22:41.440 --> 00:22:44.279
a it's a it's a sensible portfolio. We have strict
411
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rules around the number of stocks we have. We we
412
00:22:46.839 --> 00:22:48.720
we keep an eye on our cash balances. The last
413
00:22:48.720 --> 00:22:50.240
thing we want to do is have a portfolio that
414
00:22:50.599 --> 00:22:52.160
all of a sudden has got too much cash when
415
00:22:52.160 --> 00:22:58.160
we've got ourselves a strong, strong tailwind inequities. So yes,
416
00:22:58.240 --> 00:23:01.400
so that's we feel pretty pretty comfortable about how the
417
00:23:01.440 --> 00:23:04.960
portfolio is positioned for the market we see coming up.
418
00:23:05.039 --> 00:23:09.039
Jimmy just on on Borrel Ben namely called out there earlier.
419
00:23:09.119 --> 00:23:12.000
If you look at the narrative around that, you've you've
420
00:23:12.079 --> 00:23:16.119
got higher input costs, you know, sort of business that
421
00:23:16.119 --> 00:23:18.759
would have been exposed to margin pressure, you know, with
422
00:23:19.440 --> 00:23:24.319
labor costs going up, and you know, it seems like
423
00:23:24.720 --> 00:23:28.279
the construction industry housing that side of things looks to
424
00:23:28.359 --> 00:23:31.759
be slowing. How do you build the case around a
425
00:23:31.839 --> 00:23:34.799
company like Borrel that's you know, the past few years
426
00:23:34.799 --> 00:23:35.799
actually a pretty tough time.
427
00:23:36.680 --> 00:23:39.119
Yeah, No, Look I can if I took my shirt
428
00:23:39.160 --> 00:23:41.880
off now, you'd see the welts on my back from
429
00:23:42.079 --> 00:23:45.799
from previous outings with Borrel. Look, I think I can.
430
00:23:45.960 --> 00:23:49.279
I can almost name the five CEOs that have preceded Vic.
431
00:23:50.200 --> 00:23:53.480
So I'm well aware of, I guess, historically the failings
432
00:23:53.519 --> 00:23:58.480
that the business has endured. Yes, But but Borrel today
433
00:23:58.640 --> 00:24:02.039
has a new CEO, a CEO that we're well familiar with.
434
00:24:02.240 --> 00:24:07.000
And Vic Bansel and Vic Wee first invested alongside Vic
435
00:24:07.039 --> 00:24:10.359
when he was the CEO at Cleanaway, and we took
436
00:24:10.400 --> 00:24:12.559
an early, formed to very early view on Vic when
437
00:24:12.599 --> 00:24:15.240
he was at Cleanaway and he had a turnaround. He
438
00:24:15.319 --> 00:24:21.039
had a genuine, a genuine repair job on his hands
439
00:24:21.079 --> 00:24:23.799
at Cleanaway, and I think he arrived, in fact, almost
440
00:24:23.799 --> 00:24:26.680
certainly he arrived at Borrel with a similar job to
441
00:24:27.279 --> 00:24:29.680
reset the business, and he's doing.
442
00:24:29.519 --> 00:24:30.000
A good job.
443
00:24:30.160 --> 00:24:33.400
So it's less about the cycle, which of course is
444
00:24:33.559 --> 00:24:37.079
providing some headwinds for everyone who's involved in construction right now,
445
00:24:37.720 --> 00:24:40.880
But it's probably more about self help and bringing in
446
00:24:41.039 --> 00:24:46.240
some proper operating disciplines, whether that's divisional p and ls,
447
00:24:46.640 --> 00:24:50.079
whether that's making sure you've got the a team in
448
00:24:50.200 --> 00:24:52.880
place and which they may or may not have had
449
00:24:53.359 --> 00:24:56.279
along the journey. I think it's self help. On the
450
00:24:56.359 --> 00:24:59.599
case of Borrel, it's putting that business in the sort
451
00:24:59.640 --> 00:25:02.960
of match fits state that it should always have been in,
452
00:25:03.039 --> 00:25:05.240
and Vick's getting underway doing that, and the market has
453
00:25:05.279 --> 00:25:08.720
respect has responded accordingly. So yes, I mean, it'd be
454
00:25:08.839 --> 00:25:12.559
very easy for me, as a seasoned investor to just
455
00:25:12.599 --> 00:25:15.000
simply switch the switch the stock off and not even
456
00:25:15.039 --> 00:25:18.279
open the folder. Given the history, and the history has
457
00:25:18.319 --> 00:25:24.240
gone from times of misery to two times of shier monotony.
458
00:25:25.400 --> 00:25:29.000
Today Borrel has become a quite exciting business with an
459
00:25:29.000 --> 00:25:32.200
exciting management team, and if the cycle.
460
00:25:31.960 --> 00:25:36.599
Turns, we should we should see some which we should see.
461
00:25:36.440 --> 00:25:39.400
Some good times for Borrel, just disciplines generally in an
462
00:25:39.480 --> 00:25:42.880
in an industry that is renowned for for poor practice
463
00:25:42.920 --> 00:25:46.119
and poor discipline. I think I think Vick has already
464
00:25:46.440 --> 00:25:50.599
made some great strides there, an exciting story, and honestly,
465
00:25:50.799 --> 00:25:53.559
if you'd have told me, asked me three years ago
466
00:25:53.599 --> 00:25:56.319
with it, i'd be talking like this regarding a building
467
00:25:56.359 --> 00:25:59.880
material stock in particular Borral out of literally ask you
468
00:26:00.079 --> 00:26:02.559
to stop the interview now, we couldn't go any further.
469
00:26:02.759 --> 00:26:04.799
It's quite a revolution that's happening there.
470
00:26:05.160 --> 00:26:07.240
Well, but I want to stay on some of that
471
00:26:07.799 --> 00:26:10.440
will dig into some unloved parts of the market because
472
00:26:10.440 --> 00:26:13.759
one of the things that we've seen Reats has been
473
00:26:13.799 --> 00:26:17.480
a classic example where investors have not wanted to touch
474
00:26:17.519 --> 00:26:21.160
the sector with a barge pole. Concerns around GEBT repayments
475
00:26:21.640 --> 00:26:23.640
and leverage, and then you've got some of the macro
476
00:26:23.759 --> 00:26:27.880
factors around what's happening in office, et cetera. Keen to
477
00:26:27.960 --> 00:26:31.240
know from your perspective, do you look at some of
478
00:26:31.279 --> 00:26:36.200
these distress match distress opportunities because I think some of
479
00:26:36.279 --> 00:26:38.720
the comfortable names or the well run names are the
480
00:26:38.759 --> 00:26:41.039
obvious place for investors to go. But at a point
481
00:26:41.160 --> 00:26:44.119
like this, where companies have been pushed to the limit
482
00:26:44.519 --> 00:26:48.519
or pushed to point a discomfort, and there's some uncertainty
483
00:26:48.559 --> 00:26:52.200
and gray areas that can also present opportunities. So I'm
484
00:26:52.240 --> 00:26:56.119
came for someone that's been through multiple cycles. Just is
485
00:26:56.160 --> 00:26:58.640
that an area that's interesting to you? Finding some parts
486
00:26:58.640 --> 00:27:00.759
of distress where the story might not just be as
487
00:27:00.799 --> 00:27:01.839
bad as people expect.
488
00:27:02.559 --> 00:27:06.359
Look certainly, and one thing I've learned too, James, there's
489
00:27:06.400 --> 00:27:11.160
no prizes. There's no prize for being first there. You
490
00:27:11.240 --> 00:27:15.119
can identify a favorite rate and then it could take
491
00:27:15.279 --> 00:27:18.960
eight aen months before we actually begin to see the
492
00:27:19.039 --> 00:27:22.039
bond market behaving is the right backdrop then the company
493
00:27:22.119 --> 00:27:24.519
doing what it needs to do and whether it's delevering
494
00:27:25.079 --> 00:27:29.039
or addressing valuations. There is guaranteed to be no prize
495
00:27:29.079 --> 00:27:31.039
for us being first there. But that doesn't mean we
496
00:27:31.079 --> 00:27:33.160
shouldn't be looking. It doesn't mean we're not looking, and
497
00:27:33.200 --> 00:27:35.480
it doesn't mean we're not taking a ton of meetings
498
00:27:36.039 --> 00:27:38.920
around these sorts of distress sectors. So REACHS is a
499
00:27:38.960 --> 00:27:42.160
good example we don't feel like we need to do
500
00:27:42.240 --> 00:27:48.200
something yet, to be honest, but certainly reads are an
501
00:27:48.200 --> 00:27:50.599
obvious place where some money will be made at the
502
00:27:50.680 --> 00:27:54.759
right time. The other area where there is some distress,
503
00:27:54.839 --> 00:27:57.480
and there's certainly some well there's no distress, I don't think,
504
00:27:57.559 --> 00:27:59.640
but there's certainly some angst around it. Of course, some
505
00:27:59.680 --> 00:28:02.960
of the can Humer finance names. You know, Judo joined
506
00:28:03.039 --> 00:28:05.640
the joined the boards not too long ago and it's
507
00:28:05.680 --> 00:28:08.880
really been one way traffic since an iPod and probably
508
00:28:08.920 --> 00:28:13.400
the same with Liberty Financials had a tough investor reception,
509
00:28:14.319 --> 00:28:17.920
latitude and pepper money. So these are these are really
510
00:28:18.640 --> 00:28:22.440
solid little business franchises that are well managed in the
511
00:28:22.559 --> 00:28:27.200
main but are just two point d end for investors. Now,
512
00:28:27.240 --> 00:28:29.720
we're keeping an eye on them, we're doing the meetings.
513
00:28:31.279 --> 00:28:33.200
In some cases we do own one or two of them,
514
00:28:33.400 --> 00:28:35.359
and we might even be nibbling it one or two
515
00:28:35.359 --> 00:28:38.839
of them. But at the end of the day, we
516
00:28:39.000 --> 00:28:41.559
do need to recycle our portfolio, and we do know
517
00:28:41.799 --> 00:28:44.200
we do need to buy stocks and sectors that are
518
00:28:44.240 --> 00:28:46.680
out of fashion. We just need to be very measured
519
00:28:46.720 --> 00:28:49.000
as to how we do that. You can be long
520
00:28:49.039 --> 00:28:53.279
time wrong buying a Reek twelve months early, so we
521
00:28:53.400 --> 00:28:55.920
just need to be measured on that. But certainly part
522
00:28:55.960 --> 00:28:59.319
of part of our business as fund manager is recognizing
523
00:28:59.359 --> 00:29:04.079
pockets of excess value and switching the proceeds into pockets
524
00:29:04.119 --> 00:29:07.079
of relative undervalue. And that is the name of the game.
525
00:29:08.200 --> 00:29:10.200
Rest assured. That's that's what we do every day.
526
00:29:10.880 --> 00:29:13.440
And what are some of the things that would need
527
00:29:13.559 --> 00:29:17.039
to happen for you to start? You know, for those
528
00:29:17.480 --> 00:29:21.680
unloved sectors, is it an easy in the interest rate environment?
529
00:29:21.799 --> 00:29:24.079
Is it them renegotiating their debt. What are some of
530
00:29:24.119 --> 00:29:25.720
the things that get you closer to or wanting to
531
00:29:25.799 --> 00:29:26.680
own those companies?
532
00:29:27.759 --> 00:29:30.599
Yes, well it's it's certainly that it can be. It
533
00:29:30.640 --> 00:29:33.480
can be a more favorable interest rate backdrop. It could
534
00:29:33.519 --> 00:29:38.200
be a company deciding to address it's the market's valuation concerns,
535
00:29:38.240 --> 00:29:41.039
that that that that properties on balance sheet aren't being
536
00:29:41.079 --> 00:29:43.200
held at the appropriate valuation. It could be addressing that.
537
00:29:44.359 --> 00:29:46.799
It could be all of a sudden forming an opinion
538
00:29:46.880 --> 00:29:49.200
that the consumer perhaps is in better shape than he
539
00:29:49.279 --> 00:29:51.880
might have thought. It can be as simple as really
540
00:29:52.279 --> 00:29:55.640
thinking that, you know, industrial property has been a boom
541
00:29:55.720 --> 00:29:58.680
area and it's done particularly well. You might frame the
542
00:29:58.720 --> 00:30:03.079
opinion that the tremendous rental growth that industrial parks have enjoyed,
543
00:30:03.119 --> 00:30:04.799
maybe that's coming to an end and maybe it's time
544
00:30:04.880 --> 00:30:08.960
to buy office again. Heaven forbid when people start heading
545
00:30:09.000 --> 00:30:12.960
back and returning to the office. So look, we're on
546
00:30:13.039 --> 00:30:15.680
the lookout for those sorts of things. It will be
547
00:30:16.160 --> 00:30:20.319
invariably the It will be the restoration of consumer confidence,
548
00:30:20.519 --> 00:30:25.720
no doubt about that. It'll be a general improvement and
549
00:30:25.799 --> 00:30:32.359
animal spirits around around the operating environment for owners of property.
550
00:30:34.000 --> 00:30:37.240
And it will also be balance sheet refreshes in the
551
00:30:37.359 --> 00:30:40.759
case often often the low is marked by a major
552
00:30:40.880 --> 00:30:45.039
equity raising to to cleanse a balance sheet, or a
553
00:30:45.119 --> 00:30:48.559
major acquisition where someone where an operator steals an asset
554
00:30:48.640 --> 00:30:52.240
from another operator that's in distress that can offer me
555
00:30:52.319 --> 00:30:55.960
the flash point for a for a revival. So all
556
00:30:56.000 --> 00:30:57.519
of those things we're sort of looking for, we're not
557
00:30:57.720 --> 00:31:01.880
really seeing just yet, so we can be patient, I
558
00:31:01.960 --> 00:31:05.039
think with some of those sectors that are under a
559
00:31:05.039 --> 00:31:08.480
bit of pressure. And also we do keep an eye
560
00:31:08.519 --> 00:31:10.039
on I mean, I'm not embarrassed to say it.
561
00:31:10.119 --> 00:31:11.039
I'm there.
562
00:31:11.079 --> 00:31:13.759
I say, maybe a couple of competitors will be tuned
563
00:31:13.759 --> 00:31:17.519
in on the pod, but you know what competitors are
564
00:31:17.599 --> 00:31:19.839
up to too. If we have some competitors that we
565
00:31:20.039 --> 00:31:22.279
rate highly, which there are many, all of a sudden
566
00:31:22.359 --> 00:31:25.839
deciding to move into reads or moving into a number
567
00:31:25.839 --> 00:31:29.799
of these consumer finance names, it might sort of spark
568
00:31:29.880 --> 00:31:31.799
something with us that maybe we need to go and
569
00:31:31.880 --> 00:31:32.400
have a look at them.
570
00:31:32.519 --> 00:31:34.119
So, and we don't.
571
00:31:34.160 --> 00:31:36.359
We don't necessarily follow what our competitors do, but I
572
00:31:36.519 --> 00:31:37.960
like to keep an eye on what they're doing, because
573
00:31:38.039 --> 00:31:38.240
you know.
574
00:31:39.440 --> 00:31:43.599
They get a few You know, Ben, We're going to
575
00:31:43.640 --> 00:31:47.039
get into our regular questions in just a moment. But
576
00:31:47.720 --> 00:31:52.480
I do note that Eli Griffiths Groupers has recently welcomed
577
00:31:52.960 --> 00:31:54.839
a new strategy to the family. Not that long ago,
578
00:31:55.480 --> 00:31:57.640
you went down the market cap scale from your your
579
00:31:57.720 --> 00:32:00.640
course more caps offering into emerging companies. How you're stepping
580
00:32:00.720 --> 00:32:04.319
up into the mid cap part of the markets. What's
581
00:32:04.359 --> 00:32:08.559
the appeal in mid caps for the yearly Griffiths Group No, you're.
582
00:32:08.440 --> 00:32:10.240
Right, I mean, well, the.
583
00:32:12.160 --> 00:32:14.880
Logic for it is for us, has been compelling for
584
00:32:15.000 --> 00:32:18.960
some time. Twenty eight of the fifty stocks that live
585
00:32:19.000 --> 00:32:22.960
in that MidCap space we've owned before. Okay, so we're
586
00:32:23.119 --> 00:32:27.400
very familiar with the business model. We're very familiar with management.
587
00:32:27.960 --> 00:32:31.599
We think we know what we're going to get if
588
00:32:31.680 --> 00:32:34.759
we choose to own them. It's logical in many cases
589
00:32:34.799 --> 00:32:37.519
that we've surrendered some of these names. Unfortunately we've had
590
00:32:37.519 --> 00:32:40.359
to surrender these names, but it's logical that we've bought
591
00:32:40.559 --> 00:32:42.640
that we can be able to own these stocks and
592
00:32:42.799 --> 00:32:45.359
buy them back as they move up the market cap tree.
593
00:32:45.480 --> 00:32:48.240
So we've been sort of a forced seller. Given given
594
00:32:48.279 --> 00:32:51.200
the rules of how the small cap product works, it's
595
00:32:51.240 --> 00:32:53.720
a shame to let them go. So we've had a
596
00:32:53.839 --> 00:32:56.799
chance to get back on and back involved in companies
597
00:32:56.799 --> 00:32:59.200
that we know and are very fond of, so that
598
00:32:59.599 --> 00:33:03.559
waste motivation. The MidCap part of the market's been sort
599
00:33:03.559 --> 00:33:06.279
of that quiet sweet spot that just year in, year
600
00:33:06.319 --> 00:33:09.440
out grinds out nicely. It's a part of the market
601
00:33:09.519 --> 00:33:13.200
that is so much a part of how we do things,
602
00:33:13.279 --> 00:33:17.440
and yet we haven't actually had a retail product, an
603
00:33:17.519 --> 00:33:22.279
equity product for people to invest in, so it makes
604
00:33:22.279 --> 00:33:26.240
sense our skill sets there. There's strong familiarity with the businesses.
605
00:33:26.640 --> 00:33:28.519
We know that part of the market to be a
606
00:33:28.599 --> 00:33:33.680
sweet spot, and in a cyclical sense, the MidCap sector.
607
00:33:33.880 --> 00:33:37.359
MidCap industrials have derated about forty five percent on our
608
00:33:37.440 --> 00:33:40.240
numbers back to around fifteen and a half times, and
609
00:33:40.359 --> 00:33:43.680
that brings them bang in line with the ASX fifty industrials.
610
00:33:43.839 --> 00:33:48.240
So you've got MidCap industrials as cheap as large cap industrials,
611
00:33:48.440 --> 00:33:52.920
which is ridiculous given the overwhelmingly more bullish growth prospects
612
00:33:52.960 --> 00:33:56.240
for mids versus large So we think midcaps have gone
613
00:33:56.279 --> 00:34:00.640
on sale and that's completely overdone. Part of the market
614
00:34:00.720 --> 00:34:03.480
that holds great appeal. There's a there's a there's a
615
00:34:03.599 --> 00:34:06.440
significant resource component to that part of the market, of
616
00:34:06.440 --> 00:34:09.639
which we have some great skills in. So it's it's
617
00:34:09.639 --> 00:34:10.960
an area we need to we need to be in.
618
00:34:11.719 --> 00:34:14.880
You're right, we start with smalls. We've gravitated down the
619
00:34:14.960 --> 00:34:18.480
market cap tree. We've got a successful product there and
620
00:34:18.559 --> 00:34:19.000
we think.
621
00:34:18.880 --> 00:34:19.920
We know our way around there.
622
00:34:20.440 --> 00:34:23.679
This this really rounds out the offering and I think
623
00:34:24.079 --> 00:34:26.719
and rounds out our skill set. So that's the rationale
624
00:34:26.719 --> 00:34:30.719
for doing it. And we launched very recently and we've
625
00:34:30.760 --> 00:34:32.360
got to say the reception has been quite good.
626
00:34:33.000 --> 00:34:35.079
And then what was the what were some of the
627
00:34:35.599 --> 00:34:37.480
early holdings that went into that, but you mentioned it
628
00:34:37.599 --> 00:34:39.800
the launch recently, What's what's big in the portfolio.
629
00:34:40.880 --> 00:34:43.039
Yeah, well we've been we've been big fans for a
630
00:34:43.119 --> 00:34:45.679
long time of Car Sales or Car Group as it's
631
00:34:45.719 --> 00:34:49.760
known now, So that so that no surprise that Car
632
00:34:50.280 --> 00:34:53.800
is in the portfolio. I touched on Genesis before I
633
00:34:53.960 --> 00:34:59.840
touched on Borrel, g QG. We're great fans of that,
634
00:35:00.079 --> 00:35:04.800
of that investment management model, and Auckland International Airport and Walley.
635
00:35:05.000 --> 00:35:07.199
Just just a handful of names that have that have
636
00:35:07.320 --> 00:35:10.159
gone in there. I mean, of course there are many,
637
00:35:10.400 --> 00:35:12.519
many more. There's a decent tale of stocks there, but
638
00:35:12.599 --> 00:35:14.480
they're the sort of there's some of the bigger names
639
00:35:14.519 --> 00:35:16.440
at the top of the portfolio that that that we
640
00:35:16.599 --> 00:35:19.360
believe fit the bill that come out of our process
641
00:35:19.519 --> 00:35:20.159
looking good.
642
00:35:20.280 --> 00:35:23.480
And and and we believe we'll serve unit hold as well.
643
00:35:23.639 --> 00:35:27.760
Hopefully as a good a good run and build a
644
00:35:27.840 --> 00:35:29.760
record similar to that of the small companies.
645
00:35:29.840 --> 00:35:32.800
Fun listen, I'll send you a PDS after the interview.
646
00:35:32.920 --> 00:35:37.000
No problems, all right? Well at that point, why don't
647
00:35:37.000 --> 00:35:41.679
we jump into our three regular questions. The first one, Ben,
648
00:35:42.360 --> 00:35:45.199
what's the one thing that you think investors are getting
649
00:35:45.280 --> 00:35:47.079
wrong or missing in today's market?
650
00:35:47.559 --> 00:35:52.599
Yeah, well, it's I think what investors regularly make mistakes
651
00:35:52.639 --> 00:35:54.760
of and and then and then, and they're making and
652
00:35:54.800 --> 00:35:57.199
they have made it in this market. Is when you've
653
00:35:57.239 --> 00:35:59.199
done the work on a stock, and you've built your
654
00:35:59.239 --> 00:36:03.760
conviction and the model, you've gotten comfort with management, you
655
00:36:04.400 --> 00:36:07.119
convince the board are great stewards and great shepherds of
656
00:36:07.159 --> 00:36:11.480
the business, and you've scoped out the revenue opportunity. What
657
00:36:11.679 --> 00:36:15.519
you now need to not do is dropped drop the
658
00:36:15.559 --> 00:36:18.840
ball right, and get anxious because the share price is
659
00:36:18.920 --> 00:36:20.760
legged down. It's down another five percent a day, and
660
00:36:20.760 --> 00:36:23.159
they were down three percent. I think a loss of
661
00:36:23.239 --> 00:36:26.679
conviction is easy when you get rattled by what's going
662
00:36:26.679 --> 00:36:29.599
on in the press, how the share price is trading.
663
00:36:30.119 --> 00:36:32.519
And I think people who've done the work, who are
664
00:36:32.559 --> 00:36:34.800
strong believers in a certain stock or business model, and
665
00:36:34.880 --> 00:36:37.599
then lose their way, and we're seen, we certainly saw
666
00:36:38.239 --> 00:36:41.400
I believe evidence of that where towards the end of October,
667
00:36:41.519 --> 00:36:44.239
where as I said, stocks appeared or bottomed, but coming
668
00:36:44.239 --> 00:36:46.559
into October there was somewhat of a give up. So
669
00:36:46.599 --> 00:36:50.280
I think investors have I think we're seeing investors have
670
00:36:50.400 --> 00:36:54.039
basically lost lost conviction at precisely the wrong time, and
671
00:36:54.119 --> 00:36:57.159
they'll be buying stocks back those very stocks that they
672
00:36:57.239 --> 00:36:58.880
had the conviction, and they'll be buying them back much
673
00:36:58.960 --> 00:36:59.400
high later.
674
00:37:00.239 --> 00:37:02.559
Let's move on to the next question. This is a
675
00:37:02.639 --> 00:37:05.920
bit more of a retrospective and hopefully you can tease
676
00:37:05.960 --> 00:37:08.440
out a few lessons. But I was hoping you could
677
00:37:08.440 --> 00:37:12.360
share a win or a loss from your career, talks
678
00:37:12.360 --> 00:37:15.280
through the gruesome details around what happened, or talks through
679
00:37:15.320 --> 00:37:17.920
the highlights. So it was a win, and importantly, what
680
00:37:18.039 --> 00:37:19.039
was the lesson that you took from it?
681
00:37:19.199 --> 00:37:20.880
Well, I know you asked me about this before we
682
00:37:21.000 --> 00:37:23.679
came in, and I've thought long and hard about it,
683
00:37:23.800 --> 00:37:27.280
and I thought I'd do something that most most guests
684
00:37:27.320 --> 00:37:28.800
probably don't do it, And I thought I'd reflect on
685
00:37:28.840 --> 00:37:33.039
a loss and what it taught me. And I have
686
00:37:33.119 --> 00:37:35.880
to the wine the clock right back to the late
687
00:37:36.000 --> 00:37:38.719
nineteen nineties when I was when I was managing money
688
00:37:39.480 --> 00:37:42.079
and back at Iron g in fact, when I was
689
00:37:42.119 --> 00:37:45.400
a portfolio manager there, and we had a substantial shareholding
690
00:37:45.440 --> 00:37:49.239
in a company that many on the pod won't even
691
00:37:49.679 --> 00:37:53.440
have recalled, but it was known as Discovery Petroleum and
692
00:37:53.519 --> 00:37:56.800
as a substantial gas producer in the Perth Basin of WA.
693
00:37:57.960 --> 00:38:00.480
We owned six percent of the company, maybe even said percent.
694
00:38:01.039 --> 00:38:03.360
But the problem with it was it was it was
695
00:38:03.440 --> 00:38:07.239
a perfect, perfectly predictable, well managed business that traded in
696
00:38:07.320 --> 00:38:10.719
a trading range, and I went from fifty five cents
697
00:38:10.760 --> 00:38:13.239
to sixty two cents and back and between fifty and
698
00:38:13.280 --> 00:38:13.840
sixty cents.
699
00:38:13.880 --> 00:38:14.360
For years.
700
00:38:15.239 --> 00:38:18.840
We owned six percent of it, and I remember just
701
00:38:20.039 --> 00:38:23.039
being so bored with it and anxious that the opportunity
702
00:38:23.119 --> 00:38:25.280
cost of holding this stock was so great it could
703
00:38:25.280 --> 00:38:28.280
be in other things. And the moment the stock broke
704
00:38:28.320 --> 00:38:30.599
out of that fifty to sixty cent range, it broke
705
00:38:30.679 --> 00:38:33.519
top side and was trading at sixty five to seventy cents.
706
00:38:33.880 --> 00:38:34.599
I sold the lot.
707
00:38:35.199 --> 00:38:37.800
I sold them all out and felt fantastic, and I
708
00:38:37.880 --> 00:38:41.440
sold them pretty well in one ticket, and which gave
709
00:38:41.480 --> 00:38:43.519
me a fright, I guess after I'd done the business.
710
00:38:44.599 --> 00:38:48.119
And the reason that happened was, of course, a corporate
711
00:38:48.199 --> 00:38:51.440
raider had turned up, recognizing the same value that we'd seen,
712
00:38:52.079 --> 00:38:53.920
and had decided that they were happy to pay a
713
00:38:54.039 --> 00:38:57.679
modest premium to secure a position. And it was Premiere
714
00:38:57.800 --> 00:39:00.639
Oil of the UK, and they turned up and bought
715
00:39:00.719 --> 00:39:04.119
all our stock. And when it was revealed it was Premiere,
716
00:39:04.360 --> 00:39:07.679
the stock popped again, and then Oil Search were rumored
717
00:39:07.679 --> 00:39:10.960
to be interested in buying Premiere and I just sat
718
00:39:11.039 --> 00:39:14.440
there with my hands on my head, saying, I held
719
00:39:14.519 --> 00:39:18.840
this stock, this beautiful company for three years. It gave
720
00:39:18.920 --> 00:39:21.679
me nothing but angst because it just didn't really go up.
721
00:39:21.960 --> 00:39:25.000
It paid a modest evit end and I sold it
722
00:39:25.079 --> 00:39:27.519
a precisely the wrong time, and I look like a
723
00:39:27.639 --> 00:39:28.519
complete fool.
724
00:39:29.239 --> 00:39:29.920
Why did I do that?
725
00:39:30.039 --> 00:39:31.719
And I guess the lesson that I learned from that
726
00:39:33.000 --> 00:39:36.039
was it never sell a stock that's long been inactive
727
00:39:36.880 --> 00:39:39.440
just at the moment it begins to move up. There's
728
00:39:39.480 --> 00:39:42.280
a reason why that stock is broken out of that
729
00:39:42.360 --> 00:39:46.079
trading range. And of course it was corporate activity, and
730
00:39:46.199 --> 00:39:49.119
it was Premiere Oil's good fortune to steal that business.
731
00:39:50.760 --> 00:39:53.400
I've never forgotten that story. And the moment I see
732
00:39:53.440 --> 00:39:57.840
a stock move erradically or unusually out of what has
733
00:39:57.920 --> 00:40:01.960
been a boring set of trade circumstances, rather than just
734
00:40:02.079 --> 00:40:05.079
react if I want to sell them, I hold off
735
00:40:05.119 --> 00:40:08.559
and seek an explanation. So I think that's the lesson
736
00:40:08.599 --> 00:40:11.079
I learned from a loss. And whilst we didn't lose
737
00:40:11.239 --> 00:40:14.559
money on the on the actual position, I forewent some
738
00:40:14.800 --> 00:40:17.000
nice gains, so I handled them to Premiere Oil of
739
00:40:17.079 --> 00:40:17.400
the UK.
740
00:40:17.719 --> 00:40:19.920
They were going to thank me the British shareholder.
741
00:40:20.239 --> 00:40:22.079
If you're wrong, you're wrong. If you if you leave
742
00:40:22.079 --> 00:40:23.559
it on the table, it almost hurts more.
743
00:40:24.480 --> 00:40:24.880
No I did.
744
00:40:24.960 --> 00:40:27.440
That was an awful but I learned. I haven't forgotten it.
745
00:40:27.519 --> 00:40:29.039
Not a day Well, that's not right, just so not
746
00:40:29.039 --> 00:40:30.840
a day goes but I don't think about it. It's
747
00:40:30.880 --> 00:40:34.960
not quite that bad, but certainly as it always comes
748
00:40:35.000 --> 00:40:36.519
to mind when people ask me what I've learned in
749
00:40:36.519 --> 00:40:36.880
the market.
750
00:40:37.199 --> 00:40:39.119
Right Ben, Well, listen, this has been great. We're nearly
751
00:40:39.159 --> 00:40:42.440
done now our final question. Just a quick note to
752
00:40:43.119 --> 00:40:46.719
listeners out there, This is a hypothetical question. We're obviously
753
00:40:46.760 --> 00:40:50.000
not advocating. You put all your or your money into
754
00:40:50.119 --> 00:40:55.039
a single stock and Ben runs carefully riskmanaged diversified portfolios.
755
00:40:55.119 --> 00:40:58.039
This is meant to be an exercise in long term
756
00:40:58.119 --> 00:41:00.760
thinking and also a bit of fun. So Ben, for
757
00:41:00.840 --> 00:41:03.880
our final question. If markets were to close tomorrow and
758
00:41:04.000 --> 00:41:06.480
stay shut for five years, and you could only own
759
00:41:06.519 --> 00:41:09.599
shares in one company, which company would that be and
760
00:41:09.679 --> 00:41:10.440
why would you own it?
761
00:41:10.880 --> 00:41:12.039
I thought that was a great question.
762
00:41:12.679 --> 00:41:15.039
James, and you you're email with the other day, and
763
00:41:15.119 --> 00:41:17.320
so I'm going to ask you that question and give it,
764
00:41:17.440 --> 00:41:19.840
give it your best, your best consideration. And I thought
765
00:41:19.840 --> 00:41:21.920
about it long and hard, and I went through went
766
00:41:21.960 --> 00:41:25.400
through a whole bunch of shortlisted names, and I've landed
767
00:41:25.440 --> 00:41:31.159
on a New Zealand stock of all stocks, and it's
768
00:41:31.239 --> 00:41:35.199
main freight and main freight. Many of you are seeing
769
00:41:35.360 --> 00:41:37.320
the trucks, have seen the trucks rattling up and down
770
00:41:37.320 --> 00:41:41.760
the highway. It's an integrated freight handling, warehousing logistics operator,
771
00:41:43.079 --> 00:41:46.079
not that old, really established in nineteen seventy eight, and
772
00:41:46.239 --> 00:41:50.760
it's a it's a superbly managed business. That's that is,
773
00:41:51.119 --> 00:41:56.320
without being cliche. It is taking on the world. Operates
774
00:41:56.360 --> 00:42:00.639
in I think it's twenty five twenty six countries with
775
00:42:00.840 --> 00:42:06.639
the most seasoned management team, and they are basically hell
776
00:42:06.760 --> 00:42:09.840
bent on taking the main freight message and the main
777
00:42:09.920 --> 00:42:11.440
freight way to the rest of the world.
778
00:42:11.800 --> 00:42:13.119
And they're getting great traction.
779
00:42:13.440 --> 00:42:13.519
Now.
780
00:42:13.559 --> 00:42:16.760
They're big in Australia, they're growing in Asia where they've
781
00:42:16.800 --> 00:42:20.400
hardly really got started. They've just turned soil in India,
782
00:42:21.239 --> 00:42:23.599
which is going to be an enormous opportunity, but they've
783
00:42:23.599 --> 00:42:24.599
only just landed there.
784
00:42:25.920 --> 00:42:27.800
In the United states. They've turned up.
785
00:42:28.239 --> 00:42:31.480
They're getting a great reception and their revenue lines about
786
00:42:31.480 --> 00:42:34.880
a billion dollars. The biggest competitor in their space is
787
00:42:34.920 --> 00:42:37.840
a revenue line of twenty bill so you can see
788
00:42:37.920 --> 00:42:40.800
there's some there's some market share and some volume to
789
00:42:40.880 --> 00:42:43.840
be had. They're opening up in well, they're in Europe already,
790
00:42:44.119 --> 00:42:47.000
but Europe's opening up to them. And they've got a
791
00:42:47.039 --> 00:42:50.639
balance sheet that's net cash. With the management team that
792
00:42:50.719 --> 00:42:54.159
you've got there, which is amongst the highest caliber I
793
00:42:54.280 --> 00:42:58.760
think in Australasia, with the growth trajectory that the business
794
00:42:58.800 --> 00:43:02.039
it has, and they've only made one acquisition. The last
795
00:43:02.079 --> 00:43:04.320
acquisition they made was back in twenty eleven, which I
796
00:43:04.360 --> 00:43:06.199
think was a little business in New Zealand. I think
797
00:43:06.719 --> 00:43:09.920
the rest of it's been grown organically. Speaking to the
798
00:43:10.000 --> 00:43:12.599
CEO while ago and asked him about the number of
799
00:43:12.639 --> 00:43:14.400
board meetings you have and how to conduct them, and
800
00:43:14.440 --> 00:43:17.079
he said that a typical board meeting goes for about
801
00:43:17.119 --> 00:43:20.039
three or four days where they literally go from center
802
00:43:20.119 --> 00:43:23.119
to center and review the operations of the business. It's
803
00:43:23.119 --> 00:43:26.559
an extraordinary business that pays dividends. If I had to
804
00:43:27.280 --> 00:43:29.559
if I had to do exactly that, Jimmy and basically
805
00:43:29.639 --> 00:43:32.159
buy the stock and then hibernate for five years. I
806
00:43:32.280 --> 00:43:36.000
know while I'm sleeping, the business would be paying dividends
807
00:43:36.559 --> 00:43:39.320
and growing organically as you'd expected to and with all
808
00:43:39.360 --> 00:43:41.960
the management disciplines you want to see. So that's my
809
00:43:42.079 --> 00:43:45.599
stock Hypothetically, I'll see in five years and we'll we'll
810
00:43:45.599 --> 00:43:48.599
see where how it's fortune is unfolded.
811
00:43:48.920 --> 00:43:52.360
Well, hopefully it won't be five years to next catch up, Ben,
812
00:43:52.480 --> 00:43:55.519
but May and Frank definitely one to keep on the radar.
813
00:43:56.199 --> 00:43:57.480
It's all you was is out there. I hope you
814
00:43:57.599 --> 00:44:00.800
enjoyed the chat with Ben Griffiths, who's under and portfolio
815
00:44:00.880 --> 00:44:02.519
manager at You're good for this group. Ben, thank you
816
00:44:02.679 --> 00:44:05.639
very much for coming on the podcast. Happy twenty year
817
00:44:05.639 --> 00:44:07.400
anniversary and all the best with a new fund.
818
00:44:07.960 --> 00:44:10.360
Thanks James, thanks for having me on today. I've really
819
00:44:10.480 --> 00:44:11.440
enjoyed it. Thanks mate,
1
00:00:03.000 --> 00:00:05.879
Hello, and welcome to the Rules of Investing. My name's
2
00:00:05.919 --> 00:00:08.320
James Marlay and I'm going to be your host for
3
00:00:08.359 --> 00:00:11.960
the final two episodes of twenty twenty three. My guest
4
00:00:11.960 --> 00:00:15.919
today is Ben Griffiths, founder and portfolio manager at Early
5
00:00:16.000 --> 00:00:19.480
Griffiths Group Eally. Griffith Group was founded in two thousand
6
00:00:19.519 --> 00:00:22.359
and three and has built a strong reputation as a
7
00:00:22.359 --> 00:00:26.760
specialist small companies investor over that time. Ben established his
8
00:00:26.800 --> 00:00:30.559
credentials as an investor at IMG and VT Financial Group,
9
00:00:31.079 --> 00:00:33.880
which is the breeding ground for what have become great
10
00:00:33.880 --> 00:00:38.399
investors names such as Ken Nielsen, Crispin Murray and Paul Moore. Today,
11
00:00:38.479 --> 00:00:42.359
Early Griffiths Group has a seven person investment team specializing
12
00:00:42.359 --> 00:00:46.119
in emerging small and MidCap stocks and managers in excess
13
00:00:46.159 --> 00:00:49.119
of one point six billion in assets under management. Early
14
00:00:49.119 --> 00:00:53.079
Griffiths Group's flagship Small Companies Fund has compounded returns at
15
00:00:53.159 --> 00:00:56.320
nine point three eight percent per annum since insection, which
16
00:00:56.399 --> 00:00:59.560
is four point two nine percent ahead of the benchmark. Ben,
17
00:01:00.079 --> 00:01:02.679
so note over the past year you've managed to generate
18
00:01:02.759 --> 00:01:05.760
a positive return when the small cap index is down
19
00:01:06.000 --> 00:01:10.280
roughly five percent. Welcome to the show, Ben, and congratulations
20
00:01:10.359 --> 00:01:11.599
on your twenty year anniversary.
21
00:01:11.959 --> 00:01:14.200
James, thanks very much for that warm introduction. It's great
22
00:01:14.239 --> 00:01:14.599
to be here.
23
00:01:14.879 --> 00:01:17.319
Now I want to chat about the big picture and
24
00:01:17.560 --> 00:01:20.719
specifically in the environment that investors will be facing as
25
00:01:20.799 --> 00:01:23.560
we head into twenty twenty four. But before we do,
26
00:01:24.120 --> 00:01:26.560
I'd love for you to give readers a download on
27
00:01:27.120 --> 00:01:30.040
how you use the macro factors as an equity investor.
28
00:01:30.239 --> 00:01:32.120
We often hear stock pickers talk about the fact that
29
00:01:32.200 --> 00:01:35.640
they only focus on company fundamentals. However, I've been an
30
00:01:35.719 --> 00:01:38.400
avid reader of your quarterly letter that draws on a
31
00:01:38.560 --> 00:01:42.480
range of factors, from macro to technicals and other indices.
32
00:01:43.159 --> 00:01:45.400
So ben as an opening question, I might hit you
33
00:01:45.519 --> 00:01:48.439
with what are two or three indices, data series or
34
00:01:48.480 --> 00:01:52.079
technicals that you reliably turn to to get your bearings
35
00:01:52.120 --> 00:01:54.439
and markets, and importantly, what are they telling you?
36
00:01:54.519 --> 00:01:54.680
Now?
37
00:01:55.280 --> 00:02:01.120
That's all all quite reasonable, James, and you're right, we
38
00:02:01.719 --> 00:02:06.079
do use and I've been drawing on macro macro elements
39
00:02:06.159 --> 00:02:10.719
in my preparation for a portfolio management and my appraisal
40
00:02:10.759 --> 00:02:12.400
of the market for a number of years.
41
00:02:12.759 --> 00:02:15.319
I think you need to set the backdrop.
42
00:02:17.360 --> 00:02:20.360
For where the stock market is trading, and you need
43
00:02:20.439 --> 00:02:23.000
to be aware of the pressure points before you can
44
00:02:23.039 --> 00:02:25.360
then work out which sector is a likely to perform
45
00:02:25.680 --> 00:02:29.039
and then build a portfolio from that. I the first
46
00:02:29.080 --> 00:02:33.840
thing I would typically do is before I look at that,
47
00:02:34.000 --> 00:02:35.680
when I'm assessing the health of the stock market, I
48
00:02:35.719 --> 00:02:38.919
want to know how credit spreads are behaving. And they're
49
00:02:38.960 --> 00:02:44.000
a great risk barometer. When credit spreads are elevated, so
50
00:02:44.120 --> 00:02:48.680
that gives reason, that gives rise for angst and some concern,
51
00:02:48.960 --> 00:02:51.680
and that has a direct bearing on risk assets. Well,
52
00:02:51.719 --> 00:02:53.879
in the case, at the moment, credit spreads are quite benign.
53
00:02:53.919 --> 00:02:56.159
They're not as low as they were, but they're probably
54
00:02:56.240 --> 00:02:58.599
closer to normal ranges. So it sort of is the
55
00:02:58.639 --> 00:03:02.800
first indication for me that the water is safe to
56
00:03:02.840 --> 00:03:05.400
swim in, if you will. I like to look at
57
00:03:05.479 --> 00:03:08.639
investor sentiment. I've been a student of investor sentiments since
58
00:03:08.680 --> 00:03:12.919
I started markets. You know, I crave front pages. I
59
00:03:13.000 --> 00:03:16.719
look for adverse eve, excessive ebulliance at the tops of
60
00:03:16.800 --> 00:03:20.800
markets and excessive bearishness at the bottoms, and so I
61
00:03:21.000 --> 00:03:23.560
like to measure sentiment. And probably the easiest one for
62
00:03:24.280 --> 00:03:28.199
investors like myself and I guess some of the listeners
63
00:03:29.400 --> 00:03:31.479
is the double A double I series in the US,
64
00:03:31.560 --> 00:03:34.639
which which gives a direct print on investor sentiment. And
65
00:03:35.560 --> 00:03:37.800
as we talk about the markets on our pod, we
66
00:03:38.000 --> 00:03:40.599
we'll discuss how extreme that setting got back in October.
67
00:03:40.759 --> 00:03:44.120
So I look at investor sentiment as an important precondition
68
00:03:44.319 --> 00:03:46.919
for whether stocks ought to be bought aught be sold.
69
00:03:47.879 --> 00:03:50.199
I've mentioned the credit spreads, and then, as you also
70
00:03:50.360 --> 00:03:53.400
pointed out, I'm somewhat of a fan and a student,
71
00:03:53.560 --> 00:03:56.319
I'm still a student, believe it or not, of technical analysis,
72
00:03:56.560 --> 00:03:58.639
and I always want to know where the primary trend
73
00:03:58.800 --> 00:04:02.919
is on a stock, or an index, or a commodity
74
00:04:02.960 --> 00:04:04.800
for that matter. I want to know where the primary
75
00:04:04.840 --> 00:04:08.159
trend is and whether there are any indications of exhaustion
76
00:04:08.479 --> 00:04:12.560
or whether the trend is suggesting that investment with the
77
00:04:12.639 --> 00:04:15.000
trend is the way to go. And there are various
78
00:04:15.400 --> 00:04:17.600
patterns that we haven't got time to discuss today, but
79
00:04:17.680 --> 00:04:21.079
as generally investing with the trend, and for me, the
80
00:04:21.079 --> 00:04:23.360
one hundred day moving average, or the investment line as
81
00:04:23.399 --> 00:04:26.360
it's often known, is probably the best trend indicator you
82
00:04:26.399 --> 00:04:28.839
can use as to where the markets are going up
83
00:04:29.000 --> 00:04:31.399
or markets are going down. So that they're just a
84
00:04:31.480 --> 00:04:34.160
couple of samples, they're the sort of some examples of
85
00:04:34.240 --> 00:04:37.639
the tools that I would regularly look at before I
86
00:04:37.759 --> 00:04:40.839
start framing an opinion of whether the stocks we can
87
00:04:40.879 --> 00:04:43.319
buy stocks or whether we should be sitting in cash
88
00:04:43.360 --> 00:04:43.680
for a while.
89
00:04:44.360 --> 00:04:48.480
It's interesting you mentioned the front page of the newspaper
90
00:04:48.560 --> 00:04:51.360
and what's been reported in the press, and when I
91
00:04:51.439 --> 00:04:54.360
was doing some background reading in preparation for our chat today,
92
00:04:54.800 --> 00:04:57.160
I jumped on Bloomberg and there are a few headlines
93
00:04:57.199 --> 00:04:59.079
that jumped off the page for me that The first
94
00:04:59.120 --> 00:05:02.560
one questioned how low the FED will go in twenty
95
00:05:02.639 --> 00:05:06.000
twenty four, and the other headline was that the bitcoin
96
00:05:06.040 --> 00:05:08.120
had rallied one hundred and forty two percent in the
97
00:05:08.240 --> 00:05:11.639
year today. Those two headlines are quite a big shift
98
00:05:11.680 --> 00:05:13.839
in the narrative compared to what we faced just twelve
99
00:05:13.879 --> 00:05:16.560
months ago. And so I'll put the question to you,
100
00:05:16.720 --> 00:05:19.000
is risk back and do you think that we've seen
101
00:05:19.480 --> 00:05:22.279
the peak in the current rate hiking cycle. I look
102
00:05:22.319 --> 00:05:24.720
at bitcoin as a proxy for risk, and you know,
103
00:05:25.040 --> 00:05:27.279
how low can they go is quite a big change.
104
00:05:28.639 --> 00:05:32.319
I think risk is back. Risk is back, but in
105
00:05:32.399 --> 00:05:37.079
a measured way. I think that the whole situation's changed.
106
00:05:37.199 --> 00:05:40.839
Late late October, that's when that's when I guess when
107
00:05:41.160 --> 00:05:46.240
the FED came out and basically presented a hawkish hold
108
00:05:46.519 --> 00:05:49.920
on rates was how I took the rhetoric and the
109
00:05:50.000 --> 00:05:52.920
market took it. Took it so as well. What we
110
00:05:53.079 --> 00:05:56.319
have is the beginning of We're underway, I should say,
111
00:05:56.360 --> 00:05:58.959
with a paws rally, and a pause rally is typical
112
00:05:58.959 --> 00:06:01.959
at this stage when when a central bank decides it's
113
00:06:02.000 --> 00:06:04.920
probably done on hiking, as I think most people agree
114
00:06:04.920 --> 00:06:08.639
the FED is done, and those paws rallies have plenty
115
00:06:08.680 --> 00:06:12.480
ad juice in them normally, and if history is any gauge,
116
00:06:12.519 --> 00:06:14.720
they can go for up to nine months. So I
117
00:06:14.800 --> 00:06:19.199
think we've got a pause rally underway. I think the
118
00:06:19.279 --> 00:06:21.959
investor sentiment that I referenced a minute ago, we had
119
00:06:22.000 --> 00:06:25.800
that double a double my survey printing net bullish reads
120
00:06:25.839 --> 00:06:28.720
at about twenty one percent in the early days of November.
121
00:06:28.839 --> 00:06:32.519
That told me that when you get sentiment readings that low,
122
00:06:33.240 --> 00:06:34.160
the market is set.
123
00:06:34.040 --> 00:06:34.600
The wrong way.
124
00:06:36.079 --> 00:06:38.360
And then in the middle of November I got especially
125
00:06:38.360 --> 00:06:41.839
excited when I noted on the NYSC we had a
126
00:06:41.959 --> 00:06:44.439
very rare ten to one update, ten stocks up for
127
00:06:44.519 --> 00:06:47.879
every one stock that fell. You rarely see that when
128
00:06:47.920 --> 00:06:51.199
you see that of an important low with volume, you
129
00:06:51.279 --> 00:06:54.279
get a ten to one update. I'm not saying to
130
00:06:54.360 --> 00:06:56.160
the listeners you can take that to the bank, but
131
00:06:56.319 --> 00:06:58.319
what I'm saying is it's the sort of confirmation I
132
00:06:58.560 --> 00:07:02.079
like to see ahead ahead of getting getting a little
133
00:07:02.079 --> 00:07:04.720
bit a little bit enthusiastic. So I think risk is on.
134
00:07:05.399 --> 00:07:08.600
You mentioned Bitcoin. That's a great arbiterere and a great
135
00:07:08.600 --> 00:07:11.000
barometer of whether risk is with us or not. And
136
00:07:11.879 --> 00:07:15.360
you're right, some very sharp moves in Bitcoin, so risk
137
00:07:15.399 --> 00:07:18.160
appetites back on. Have a look at the Meme index,
138
00:07:18.399 --> 00:07:20.560
the Meme ETF, which I keep a close high on,
139
00:07:20.959 --> 00:07:22.920
the trades on the n y C. That's up fifty
140
00:07:22.959 --> 00:07:26.959
percent this year, that's had a rocking great time since
141
00:07:27.279 --> 00:07:31.319
since late October. And non profitable text another benchmark and
142
00:07:31.399 --> 00:07:35.199
another little index that I follow off Bloomberg, and that's
143
00:07:35.439 --> 00:07:39.480
absolutely powering. So I'm not for a second suggesting the
144
00:07:39.600 --> 00:07:42.720
lunatics are out of the asylum. But what is happening
145
00:07:42.879 --> 00:07:46.519
is there's been some stability, and I think sentiment is
146
00:07:46.639 --> 00:07:52.279
such that you can sketch out a constructive path forward
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for equities, certainly for the next well i'll say nine months, ah,
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but certainly I think I think there's going to be
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a buoyant time ahead for.
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I imagine the meme index wasn't something you learned back
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in two thousand and three.
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Then look, I'd never heard of a name in two
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thousand and three. But certainly they are a feature of
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the market. Whether whether one to proves them or not,
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they're a feature of the market. And you saw Game
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Stop the other night had a big move as well.
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I mean, that's another classic stock that gets bombarded by
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the reddit mob. So all those things they sort of
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can point to FROT, but I think at this stage
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they're really pointing to the return of animal spirits, which
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are generally pretty positive. So I not getting two carried
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away right now, but suggesting that. But the conditions of
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reasonably fertile for a rally.
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You mentioned before that that day, I think it's the
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thirtieth of October when we saw markets really rephire. That
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whole week was really positive for equities. Just is it
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your take that that's when investors became comfortable that inflation
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was no longer the major can Zone or the fight
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that central bank has had on their hand.
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I think that's dead right, That's exactly what happened, and
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that of course, those sentiments have been building for a while.
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It's just all of a sudden the market twigs and
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the way it goes, it's funny when it comes.
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To risk and liquidity.
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It can be very negative and there's no liquidity about,
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and then it just seems to turn on something that
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gets said. It turns on a broken strategist report, it
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turns on something on the front page of the paper,
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and all of a sudden it's on, And you wonder,
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two weeks ago, how could things have been so bearish
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two weeks ago? So I think we've gone through one
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of those moments where the planets lined up at that time.
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I've mentioned the hawkish hold, I've mentioned credit spreads, the
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term premium started coming in fairly aggressively. Around that same time,
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the Bank of Japan announced it was going to stand
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off your curve control. There are a whole bunch of
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things that literally brought in a u turn with stock
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markets and a way it went so yeah, quite amazing.
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They do happen as quickly as that, and often there's
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there can be no apparent logic or reason to them.
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But that's how markets behave.
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Okay, I'd like to dive into what you're seeing and
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hearing on the ground, and if we talk specifically about
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the local market, we've talked about the fact that risk
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appetite has been exceptionally low for some time. The IPO
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market's been very quiet. Is the phone ringing yet to
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book you in for IPO meetings in early twenty twenty four.
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No, No, it hasn't started yet, And I just thought
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I wouldn't make one comment to James. A lot of
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talk about the smaller end of the market, where my
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business plays and where we've made our bones. That part
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of the market has been somewhat dormant and under pressure.
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And it's not just this rain small cap market. It's
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globally appetite for small companies. And that's whether that's in
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primary demand for IPOs as you're talking about, or secondary raisings,
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or even just the conduct of the market. Interest in
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small companies has been wanting. The MSCI World Index and
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the MSCI World Small Cap Index normally move in step,
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and they got immediately out of step, and the small
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or the small cap benchmark plunged and sold off right
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at the time the FED hike rates last March, so
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that was the immediate divergence point, and since that point,
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small caps globally have struggled. So my contention would be,
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as the market swings around and decides that were seen
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the last of the hikes, and perhaps if the bedding's
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right and were seen one hundred and thirty basis points
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of rate cut expectation has already factored in US bonds
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from about March next year, that should be positive for
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small caps of all ILK globally. Now, with that will
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come to your question, and I apologize for the long
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winded approach to the question. With that will come the
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restoration of IPOs, the interest in IPOs. We've already seen
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in this last week alone a number of equity transactions
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in the Australian share market. Whether they're fresh equity raisings
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for asset purchases or whether they're founder selldowns, those transactions
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have been reasonably well received. That's a sign that again
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the spirits are awakening. So I think IPOs, I think
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that's the next iteration. They've been a couple of IPOs
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in the last twelve to eight en months that have
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been forced on the market, and I mean that they've
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been forced on the market and they've performed fairly poorly.
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One or two have fought back and got above their
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IPO price, but most of wallowed. The mood hasn't been right,
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the appetite hasn't been right. But I think it feels
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to me like that's set to change. So I haven't
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been sound out. It's a bit early. It's a very
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seasonal thing, so I think IPOs now, if you have
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an iPod, you're not doing it now, And maybe March
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is when they come back on. Now, just because it's
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the other side of the reporting season, people assume, oh no, well,
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we'll have them penciled in for the first week of March.
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I can tell you when the market gets moving, IPOs
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and deals will happen in the middle of the reporting season.
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They'll happen the end of January. They'll happen whenever the
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deals need to be done. But we're nowhere near that yet,
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so I think it's all fairly, fairly cautious. It's all
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fairly sensible right now, so I have to wait and see.
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But no, I'm not being inundated. But there were a
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number jimmy up, pick you up. On that point, there
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were a number of IPOs that were slated for transacting
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and listing before Christmas that have now been pushed into March,
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and I think a couple of them would have gone
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quite well in any event, so they'll be extra well
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sought after in March, or certainly pre June.
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I think pre June is how we should be thinking
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pre June twenty four.
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So I'm keen to dig a little bit more into
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what's been happening in small caps. And we've seen that
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small caps have lagged their large cap yeers for quite
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some time, and I've had some of the investors that
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we speak to saying it's as bad as they've ever
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seen for someone that's been investing in small caps for
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the best part of thirty years. Keen to know, you know,
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what's your take on this divergence. What do you think
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is behind it? Is it structural or cyclical, and what
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will it take for it to turn Yes, well, it isn't.
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It isn't structural or secular. It's certainly cyclical, and small
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caps will sort of oscillate around being more expensive than
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big caps, and then small caps will be cheaper than
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big caps. And that is all and outworking of the
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mood of the market right now that the small cap
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part of the market's at about a seventeen and a
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half times PE, and that's about an eight percent discount
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to the large caps.
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The ten year.
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Average is about that, maybe it's closer to ten percent,
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So we're broadly tracking where we should be. I mentioned
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interest rates which have had a bearing, a heavy bearing
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down on sentiment, and rightly so, and we've seen that
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play out. What we've also seen has been an earning's
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downgrade cycle that's been running concurrent with that interest rates setting.
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We've had eighteen months of downgrades in the small ordinaries.
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It's been quite extraordinary, and that has also contributed to
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the bruised sentiment that you alluded to. But how about
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the recent AGM season. Why don't we talk about that
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very quickly? That came out that wasn't too bad in fact,
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and we had fewer negative surprises than we've had in
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previous reporting seasons or AGM seasons, and we had more
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upgrades versus downgrades by the time we'd finished with the agms.
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I'm just wondering whether is that somehow signaling that we've
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come to the end of the downgrade cycle. It's been
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eighteen months of using the AGM season suggested there's perhaps
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a little bit more resilience out there than we might
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have given credit for. Now there's some obvious hot spots
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and consumer discretionary. If you're in your parel business, you're
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probably doing it a little bit tough. But if you're
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if you're if you're Beacon Lighting or Nick Scarley, you
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might be faring not so bad. So we'll see it
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feels like the consumer is still under some pressure and
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those that will be will be probably on show and
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the results we see in February from the companies. But
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I just wonder as a as a as A as A,
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as an index, as a collective, whether we've seen perhaps
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the worst of the downgrades from from from from from
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from the small companies that we can invest in. Well,
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we're on the lookout to see whether have have margins bottomed?
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Have we been through that misery the last eight months
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and we're now going to see them coming out the
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other side, And they'll come out the other side, maybe
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revenue fall away, but maybe companies have been extra diligent
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and cutting costs quickly, and so you'll start to so
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you'll start to get restoration of margin, and so we're
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on the lookout for that. So we'll see. But it
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is playing out like any other cycle. I guess the
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RBA is a little behind the rest of the world,
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so we've I guess the pundits would suggest we've got
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another hike, probably in this and possibly too, so maybe
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we don't see. I mean, my personal view is that
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the US will stay high for longer and we won't
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get a cut as early as March as people are suggesting.
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It's probably closer to journish and I think Australia follows
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a little later, So maybe we're August before we see
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something and just thinking out loud. Of course, don't hold me.
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To these dates.
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And so the moment, there's a view that we'll start
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getting some interest rate relief that will also have positive
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effects for corporate profitability. So there are a growing list
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of positives you can put on the table. I guess
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six to twelve months ago you were sort of scratching
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around to find them.
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Ancient AGM season, Are there any companies that stand out
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from the meetings or the presentation that you and the
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team have heard from that you felt, you know, do
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less worse than feared updates or were particularly hanging it well.
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Are there any anecdotes that you can share with us?
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Oh, look, I think we always target quality names we
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invest in. We love investing in good quality industrial names
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with beautiful operating franchises. You know, Revel and bor All
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came out with certainly Boraal had a good update.
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Look, Ridley had a really impressive update.
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So so feel pretty good about the prospects for Ridley
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and then I mean they're the ones that sort of
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sort of stood out, to be honest, there are a
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few disappointing ones, but you know, Ridley is a stock
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that the Guffords group owned and have owned for some time,
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and they're doing They're doing pretty well everything they said
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they do given that given the restrictions and the impacts
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on their operating environment. So I think it's safe to
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look Att's look at the AGM season as a whole
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and you'll see that on balance, Australian corporates updated the
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market quite favorably.
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Ben. In discussions past, you've talked about how you like
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to think about what your portfolio setting wants to be
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get positioned and hold that line for a period of time,
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and you've sort of talked about your views on what's
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happening with rates and where we might be because you're
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talk me through some of the sectors that or the
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types of companies that you want to own as we
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head into the environment that you've set out for for
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us in twenty twenty four. And maybe you could take
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an example from something that might feature in your mid
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cap fund and maybe something down the microcap, down the
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smaller cap spectrum. But you know what sort of things
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do you want to own in that in that sort
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of the current and slightly high interest rate environment. But
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it's being starts slow down a bit.
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Sure, sure, well, Look, as I said, we have we
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are naturally attracted. We're drawn to good quality businesses, and
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so you should expect to see good quality names that
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are probably household names to everyone listening to the pod today.
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Mono Delphus, a name like that, which is a leader
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in mining services. ARB Corporation is another great example of
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a homegrown business that's taking a taking an auto product
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to the world with with with great success. And that's
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that's the stock we've owned off and on for years
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and it's in the portfolio now. So you'll nearly always
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see those sorts of names, the rebels, the borrels. Look,
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we also are from time to time, we'll own resource names,
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and we'll own resource companies, not because we've got necessarily
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a bullish view and a commodity, but we actually own
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them because we've we happen to believe their growth story
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and we believe the undertakings that management have are correct
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and that you'll see a great earnings growth story. And
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Capricorn Metals and Genesis Minerals of two examples of resource
385
00:21:11.720 --> 00:21:13.960
companies that happened to be in the gold space. They've
386
00:21:14.000 --> 00:21:17.000
each got their own modus operandi as to what they're
387
00:21:17.039 --> 00:21:19.640
trying to achieve ultimately, But ultimately it's going to be
388
00:21:20.119 --> 00:21:23.000
diversified assets. It's going to be production growth, it's going
389
00:21:23.079 --> 00:21:26.839
to be profitable profitable growth, it's going to be potentially
390
00:21:26.880 --> 00:21:30.920
expiration upside. But generally in the case of resource stocks
391
00:21:30.960 --> 00:21:33.240
and Crewent Energy is another one that that that that
392
00:21:33.400 --> 00:21:37.599
that you'll see amongst Illlie Griffiths Group Holdings. That's that's
393
00:21:37.599 --> 00:21:40.240
another example of a business that's being methodically put together
394
00:21:40.440 --> 00:21:43.920
and built for the long term with very very sensible management.
395
00:21:45.400 --> 00:21:48.119
So that's they're they're the sort of stocks that that
396
00:21:48.960 --> 00:21:52.200
you'll see in the portfolio. And as I said, there
397
00:21:52.240 --> 00:21:54.920
will also be some caution with us around stocks who
398
00:21:55.119 --> 00:21:59.720
we think there there their operating margins haven't bottom. It
399
00:21:59.839 --> 00:22:04.000
is beck to see you know, stocks like Auckland International
400
00:22:04.079 --> 00:22:07.039
Airport and Warley. I mean, Walley is a great example
401
00:22:07.079 --> 00:22:11.759
of a of a engineering services group that's that yes,
402
00:22:11.880 --> 00:22:15.440
provides services the hydrocarbon industry, but it also provides valuable
403
00:22:15.480 --> 00:22:18.079
services to the to the renewable space and are doing
404
00:22:18.119 --> 00:22:22.000
great work. Naturally, the stocks that are that are in
405
00:22:22.119 --> 00:22:24.680
our emerging company portfolio will be different to those that
406
00:22:24.759 --> 00:22:29.759
are in the MidCap portfolio. But stocks like Ordinate TEMpl
407
00:22:29.799 --> 00:22:33.599
and webstem Code and there's sorts of businesses that that
408
00:22:33.759 --> 00:22:37.119
that take pride and pride of place in the portfolio.
409
00:22:38.799 --> 00:22:41.400
So so as you can see, we it's a it's
410
00:22:41.440 --> 00:22:44.279
a it's a it's a sensible portfolio. We have strict
411
00:22:44.359 --> 00:22:46.599
rules around the number of stocks we have. We we
412
00:22:46.839 --> 00:22:48.720
we keep an eye on our cash balances. The last
413
00:22:48.720 --> 00:22:50.240
thing we want to do is have a portfolio that
414
00:22:50.599 --> 00:22:52.160
all of a sudden has got too much cash when
415
00:22:52.160 --> 00:22:58.160
we've got ourselves a strong, strong tailwind inequities. So yes,
416
00:22:58.240 --> 00:23:01.400
so that's we feel pretty pretty comfortable about how the
417
00:23:01.440 --> 00:23:04.960
portfolio is positioned for the market we see coming up.
418
00:23:05.039 --> 00:23:09.039
Jimmy just on on Borrel Ben namely called out there earlier.
419
00:23:09.119 --> 00:23:12.000
If you look at the narrative around that, you've you've
420
00:23:12.079 --> 00:23:16.119
got higher input costs, you know, sort of business that
421
00:23:16.119 --> 00:23:18.759
would have been exposed to margin pressure, you know, with
422
00:23:19.440 --> 00:23:24.319
labor costs going up, and you know, it seems like
423
00:23:24.720 --> 00:23:28.279
the construction industry housing that side of things looks to
424
00:23:28.359 --> 00:23:31.759
be slowing. How do you build the case around a
425
00:23:31.839 --> 00:23:34.799
company like Borrel that's you know, the past few years
426
00:23:34.799 --> 00:23:35.799
actually a pretty tough time.
427
00:23:36.680 --> 00:23:39.119
Yeah, No, Look I can if I took my shirt
428
00:23:39.160 --> 00:23:41.880
off now, you'd see the welts on my back from
429
00:23:42.079 --> 00:23:45.799
from previous outings with Borrel. Look, I think I can.
430
00:23:45.960 --> 00:23:49.279
I can almost name the five CEOs that have preceded Vic.
431
00:23:50.200 --> 00:23:53.480
So I'm well aware of, I guess, historically the failings
432
00:23:53.519 --> 00:23:58.480
that the business has endured. Yes, But but Borrel today
433
00:23:58.640 --> 00:24:02.039
has a new CEO, a CEO that we're well familiar with.
434
00:24:02.240 --> 00:24:07.000
And Vic Bansel and Vic Wee first invested alongside Vic
435
00:24:07.039 --> 00:24:10.359
when he was the CEO at Cleanaway, and we took
436
00:24:10.400 --> 00:24:12.559
an early, formed to very early view on Vic when
437
00:24:12.599 --> 00:24:15.240
he was at Cleanaway and he had a turnaround. He
438
00:24:15.319 --> 00:24:21.039
had a genuine, a genuine repair job on his hands
439
00:24:21.079 --> 00:24:23.799
at Cleanaway, and I think he arrived, in fact, almost
440
00:24:23.799 --> 00:24:26.680
certainly he arrived at Borrel with a similar job to
441
00:24:27.279 --> 00:24:29.680
reset the business, and he's doing.
442
00:24:29.519 --> 00:24:30.000
A good job.
443
00:24:30.160 --> 00:24:33.400
So it's less about the cycle, which of course is
444
00:24:33.559 --> 00:24:37.079
providing some headwinds for everyone who's involved in construction right now,
445
00:24:37.720 --> 00:24:40.880
But it's probably more about self help and bringing in
446
00:24:41.039 --> 00:24:46.240
some proper operating disciplines, whether that's divisional p and ls,
447
00:24:46.640 --> 00:24:50.079
whether that's making sure you've got the a team in
448
00:24:50.200 --> 00:24:52.880
place and which they may or may not have had
449
00:24:53.359 --> 00:24:56.279
along the journey. I think it's self help. On the
450
00:24:56.359 --> 00:24:59.599
case of Borrel, it's putting that business in the sort
451
00:24:59.640 --> 00:25:02.960
of match fits state that it should always have been in,
452
00:25:03.039 --> 00:25:05.240
and Vick's getting underway doing that, and the market has
453
00:25:05.279 --> 00:25:08.720
respect has responded accordingly. So yes, I mean, it'd be
454
00:25:08.839 --> 00:25:12.559
very easy for me, as a seasoned investor to just
455
00:25:12.599 --> 00:25:15.000
simply switch the switch the stock off and not even
456
00:25:15.039 --> 00:25:18.279
open the folder. Given the history, and the history has
457
00:25:18.319 --> 00:25:24.240
gone from times of misery to two times of shier monotony.
458
00:25:25.400 --> 00:25:29.000
Today Borrel has become a quite exciting business with an
459
00:25:29.000 --> 00:25:32.200
exciting management team, and if the cycle.
460
00:25:31.960 --> 00:25:36.599
Turns, we should we should see some which we should see.
461
00:25:36.440 --> 00:25:39.400
Some good times for Borrel, just disciplines generally in an
462
00:25:39.480 --> 00:25:42.880
in an industry that is renowned for for poor practice
463
00:25:42.920 --> 00:25:46.119
and poor discipline. I think I think Vick has already
464
00:25:46.440 --> 00:25:50.599
made some great strides there, an exciting story, and honestly,
465
00:25:50.799 --> 00:25:53.559
if you'd have told me, asked me three years ago
466
00:25:53.599 --> 00:25:56.319
with it, i'd be talking like this regarding a building
467
00:25:56.359 --> 00:25:59.880
material stock in particular Borral out of literally ask you
468
00:26:00.079 --> 00:26:02.559
to stop the interview now, we couldn't go any further.
469
00:26:02.759 --> 00:26:04.799
It's quite a revolution that's happening there.
470
00:26:05.160 --> 00:26:07.240
Well, but I want to stay on some of that
471
00:26:07.799 --> 00:26:10.440
will dig into some unloved parts of the market because
472
00:26:10.440 --> 00:26:13.759
one of the things that we've seen Reats has been
473
00:26:13.799 --> 00:26:17.480
a classic example where investors have not wanted to touch
474
00:26:17.519 --> 00:26:21.160
the sector with a barge pole. Concerns around GEBT repayments
475
00:26:21.640 --> 00:26:23.640
and leverage, and then you've got some of the macro
476
00:26:23.759 --> 00:26:27.880
factors around what's happening in office, et cetera. Keen to
477
00:26:27.960 --> 00:26:31.240
know from your perspective, do you look at some of
478
00:26:31.279 --> 00:26:36.200
these distress match distress opportunities because I think some of
479
00:26:36.279 --> 00:26:38.720
the comfortable names or the well run names are the
480
00:26:38.759 --> 00:26:41.039
obvious place for investors to go. But at a point
481
00:26:41.160 --> 00:26:44.119
like this, where companies have been pushed to the limit
482
00:26:44.519 --> 00:26:48.519
or pushed to point a discomfort, and there's some uncertainty
483
00:26:48.559 --> 00:26:52.200
and gray areas that can also present opportunities. So I'm
484
00:26:52.240 --> 00:26:56.119
came for someone that's been through multiple cycles. Just is
485
00:26:56.160 --> 00:26:58.640
that an area that's interesting to you? Finding some parts
486
00:26:58.640 --> 00:27:00.759
of distress where the story might not just be as
487
00:27:00.799 --> 00:27:01.839
bad as people expect.
488
00:27:02.559 --> 00:27:06.359
Look certainly, and one thing I've learned too, James, there's
489
00:27:06.400 --> 00:27:11.160
no prizes. There's no prize for being first there. You
490
00:27:11.240 --> 00:27:15.119
can identify a favorite rate and then it could take
491
00:27:15.279 --> 00:27:18.960
eight aen months before we actually begin to see the
492
00:27:19.039 --> 00:27:22.039
bond market behaving is the right backdrop then the company
493
00:27:22.119 --> 00:27:24.519
doing what it needs to do and whether it's delevering
494
00:27:25.079 --> 00:27:29.039
or addressing valuations. There is guaranteed to be no prize
495
00:27:29.079 --> 00:27:31.039
for us being first there. But that doesn't mean we
496
00:27:31.079 --> 00:27:33.160
shouldn't be looking. It doesn't mean we're not looking, and
497
00:27:33.200 --> 00:27:35.480
it doesn't mean we're not taking a ton of meetings
498
00:27:36.039 --> 00:27:38.920
around these sorts of distress sectors. So REACHS is a
499
00:27:38.960 --> 00:27:42.160
good example we don't feel like we need to do
500
00:27:42.240 --> 00:27:48.200
something yet, to be honest, but certainly reads are an
501
00:27:48.200 --> 00:27:50.599
obvious place where some money will be made at the
502
00:27:50.680 --> 00:27:54.759
right time. The other area where there is some distress,
503
00:27:54.839 --> 00:27:57.480
and there's certainly some well there's no distress, I don't think,
504
00:27:57.559 --> 00:27:59.640
but there's certainly some angst around it. Of course, some
505
00:27:59.680 --> 00:28:02.960
of the can Humer finance names. You know, Judo joined
506
00:28:03.039 --> 00:28:05.640
the joined the boards not too long ago and it's
507
00:28:05.680 --> 00:28:08.880
really been one way traffic since an iPod and probably
508
00:28:08.920 --> 00:28:13.400
the same with Liberty Financials had a tough investor reception,
509
00:28:14.319 --> 00:28:17.920
latitude and pepper money. So these are these are really
510
00:28:18.640 --> 00:28:22.440
solid little business franchises that are well managed in the
511
00:28:22.559 --> 00:28:27.200
main but are just two point d end for investors. Now,
512
00:28:27.240 --> 00:28:29.720
we're keeping an eye on them, we're doing the meetings.
513
00:28:31.279 --> 00:28:33.200
In some cases we do own one or two of them,
514
00:28:33.400 --> 00:28:35.359
and we might even be nibbling it one or two
515
00:28:35.359 --> 00:28:38.839
of them. But at the end of the day, we
516
00:28:39.000 --> 00:28:41.559
do need to recycle our portfolio, and we do know
517
00:28:41.799 --> 00:28:44.200
we do need to buy stocks and sectors that are
518
00:28:44.240 --> 00:28:46.680
out of fashion. We just need to be very measured
519
00:28:46.720 --> 00:28:49.000
as to how we do that. You can be long
520
00:28:49.039 --> 00:28:53.279
time wrong buying a Reek twelve months early, so we
521
00:28:53.400 --> 00:28:55.920
just need to be measured on that. But certainly part
522
00:28:55.960 --> 00:28:59.319
of part of our business as fund manager is recognizing
523
00:28:59.359 --> 00:29:04.079
pockets of excess value and switching the proceeds into pockets
524
00:29:04.119 --> 00:29:07.079
of relative undervalue. And that is the name of the game.
525
00:29:08.200 --> 00:29:10.200
Rest assured. That's that's what we do every day.
526
00:29:10.880 --> 00:29:13.440
And what are some of the things that would need
527
00:29:13.559 --> 00:29:17.039
to happen for you to start? You know, for those
528
00:29:17.480 --> 00:29:21.680
unloved sectors, is it an easy in the interest rate environment?
529
00:29:21.799 --> 00:29:24.079
Is it them renegotiating their debt. What are some of
530
00:29:24.119 --> 00:29:25.720
the things that get you closer to or wanting to
531
00:29:25.799 --> 00:29:26.680
own those companies?
532
00:29:27.759 --> 00:29:30.599
Yes, well it's it's certainly that it can be. It
533
00:29:30.640 --> 00:29:33.480
can be a more favorable interest rate backdrop. It could
534
00:29:33.519 --> 00:29:38.200
be a company deciding to address it's the market's valuation concerns,
535
00:29:38.240 --> 00:29:41.039
that that that that properties on balance sheet aren't being
536
00:29:41.079 --> 00:29:43.200
held at the appropriate valuation. It could be addressing that.
537
00:29:44.359 --> 00:29:46.799
It could be all of a sudden forming an opinion
538
00:29:46.880 --> 00:29:49.200
that the consumer perhaps is in better shape than he
539
00:29:49.279 --> 00:29:51.880
might have thought. It can be as simple as really
540
00:29:52.279 --> 00:29:55.640
thinking that, you know, industrial property has been a boom
541
00:29:55.720 --> 00:29:58.680
area and it's done particularly well. You might frame the
542
00:29:58.720 --> 00:30:03.079
opinion that the tremendous rental growth that industrial parks have enjoyed,
543
00:30:03.119 --> 00:30:04.799
maybe that's coming to an end and maybe it's time
544
00:30:04.880 --> 00:30:08.960
to buy office again. Heaven forbid when people start heading
545
00:30:09.000 --> 00:30:12.960
back and returning to the office. So look, we're on
546
00:30:13.039 --> 00:30:15.680
the lookout for those sorts of things. It will be
547
00:30:16.160 --> 00:30:20.319
invariably the It will be the restoration of consumer confidence,
548
00:30:20.519 --> 00:30:25.720
no doubt about that. It'll be a general improvement and
549
00:30:25.799 --> 00:30:32.359
animal spirits around around the operating environment for owners of property.
550
00:30:34.000 --> 00:30:37.240
And it will also be balance sheet refreshes in the
551
00:30:37.359 --> 00:30:40.759
case often often the low is marked by a major
552
00:30:40.880 --> 00:30:45.039
equity raising to to cleanse a balance sheet, or a
553
00:30:45.119 --> 00:30:48.559
major acquisition where someone where an operator steals an asset
554
00:30:48.640 --> 00:30:52.240
from another operator that's in distress that can offer me
555
00:30:52.319 --> 00:30:55.960
the flash point for a for a revival. So all
556
00:30:56.000 --> 00:30:57.519
of those things we're sort of looking for, we're not
557
00:30:57.720 --> 00:31:01.880
really seeing just yet, so we can be patient, I
558
00:31:01.960 --> 00:31:05.039
think with some of those sectors that are under a
559
00:31:05.039 --> 00:31:08.480
bit of pressure. And also we do keep an eye
560
00:31:08.519 --> 00:31:10.039
on I mean, I'm not embarrassed to say it.
561
00:31:10.119 --> 00:31:11.039
I'm there.
562
00:31:11.079 --> 00:31:13.759
I say, maybe a couple of competitors will be tuned
563
00:31:13.759 --> 00:31:17.519
in on the pod, but you know what competitors are
564
00:31:17.599 --> 00:31:19.839
up to too. If we have some competitors that we
565
00:31:20.039 --> 00:31:22.279
rate highly, which there are many, all of a sudden
566
00:31:22.359 --> 00:31:25.839
deciding to move into reads or moving into a number
567
00:31:25.839 --> 00:31:29.799
of these consumer finance names, it might sort of spark
568
00:31:29.880 --> 00:31:31.799
something with us that maybe we need to go and
569
00:31:31.880 --> 00:31:32.400
have a look at them.
570
00:31:32.519 --> 00:31:34.119
So, and we don't.
571
00:31:34.160 --> 00:31:36.359
We don't necessarily follow what our competitors do, but I
572
00:31:36.519 --> 00:31:37.960
like to keep an eye on what they're doing, because
573
00:31:38.039 --> 00:31:38.240
you know.
574
00:31:39.440 --> 00:31:43.599
They get a few You know, Ben, We're going to
575
00:31:43.640 --> 00:31:47.039
get into our regular questions in just a moment. But
576
00:31:47.720 --> 00:31:52.480
I do note that Eli Griffiths Groupers has recently welcomed
577
00:31:52.960 --> 00:31:54.839
a new strategy to the family. Not that long ago,
578
00:31:55.480 --> 00:31:57.640
you went down the market cap scale from your your
579
00:31:57.720 --> 00:32:00.640
course more caps offering into emerging companies. How you're stepping
580
00:32:00.720 --> 00:32:04.319
up into the mid cap part of the markets. What's
581
00:32:04.359 --> 00:32:08.559
the appeal in mid caps for the yearly Griffiths Group No, you're.
582
00:32:08.440 --> 00:32:10.240
Right, I mean, well, the.
583
00:32:12.160 --> 00:32:14.880
Logic for it is for us, has been compelling for
584
00:32:15.000 --> 00:32:18.960
some time. Twenty eight of the fifty stocks that live
585
00:32:19.000 --> 00:32:22.960
in that MidCap space we've owned before. Okay, so we're
586
00:32:23.119 --> 00:32:27.400
very familiar with the business model. We're very familiar with management.
587
00:32:27.960 --> 00:32:31.599
We think we know what we're going to get if
588
00:32:31.680 --> 00:32:34.759
we choose to own them. It's logical in many cases
589
00:32:34.799 --> 00:32:37.519
that we've surrendered some of these names. Unfortunately we've had
590
00:32:37.519 --> 00:32:40.359
to surrender these names, but it's logical that we've bought
591
00:32:40.559 --> 00:32:42.640
that we can be able to own these stocks and
592
00:32:42.799 --> 00:32:45.359
buy them back as they move up the market cap tree.
593
00:32:45.480 --> 00:32:48.240
So we've been sort of a forced seller. Given given
594
00:32:48.279 --> 00:32:51.200
the rules of how the small cap product works, it's
595
00:32:51.240 --> 00:32:53.720
a shame to let them go. So we've had a
596
00:32:53.839 --> 00:32:56.799
chance to get back on and back involved in companies
597
00:32:56.799 --> 00:32:59.200
that we know and are very fond of, so that
598
00:32:59.599 --> 00:33:03.559
waste motivation. The MidCap part of the market's been sort
599
00:33:03.559 --> 00:33:06.279
of that quiet sweet spot that just year in, year
600
00:33:06.319 --> 00:33:09.440
out grinds out nicely. It's a part of the market
601
00:33:09.519 --> 00:33:13.200
that is so much a part of how we do things,
602
00:33:13.279 --> 00:33:17.440
and yet we haven't actually had a retail product, an
603
00:33:17.519 --> 00:33:22.279
equity product for people to invest in, so it makes
604
00:33:22.279 --> 00:33:26.240
sense our skill sets there. There's strong familiarity with the businesses.
605
00:33:26.640 --> 00:33:28.519
We know that part of the market to be a
606
00:33:28.599 --> 00:33:33.680
sweet spot, and in a cyclical sense, the MidCap sector.
607
00:33:33.880 --> 00:33:37.359
MidCap industrials have derated about forty five percent on our
608
00:33:37.440 --> 00:33:40.240
numbers back to around fifteen and a half times, and
609
00:33:40.359 --> 00:33:43.680
that brings them bang in line with the ASX fifty industrials.
610
00:33:43.839 --> 00:33:48.240
So you've got MidCap industrials as cheap as large cap industrials,
611
00:33:48.440 --> 00:33:52.920
which is ridiculous given the overwhelmingly more bullish growth prospects
612
00:33:52.960 --> 00:33:56.240
for mids versus large So we think midcaps have gone
613
00:33:56.279 --> 00:34:00.640
on sale and that's completely overdone. Part of the market
614
00:34:00.720 --> 00:34:03.480
that holds great appeal. There's a there's a there's a
615
00:34:03.599 --> 00:34:06.440
significant resource component to that part of the market, of
616
00:34:06.440 --> 00:34:09.639
which we have some great skills in. So it's it's
617
00:34:09.639 --> 00:34:10.960
an area we need to we need to be in.
618
00:34:11.719 --> 00:34:14.880
You're right, we start with smalls. We've gravitated down the
619
00:34:14.960 --> 00:34:18.480
market cap tree. We've got a successful product there and
620
00:34:18.559 --> 00:34:19.000
we think.
621
00:34:18.880 --> 00:34:19.920
We know our way around there.
622
00:34:20.440 --> 00:34:23.679
This this really rounds out the offering and I think
623
00:34:24.079 --> 00:34:26.719
and rounds out our skill set. So that's the rationale
624
00:34:26.719 --> 00:34:30.719
for doing it. And we launched very recently and we've
625
00:34:30.760 --> 00:34:32.360
got to say the reception has been quite good.
626
00:34:33.000 --> 00:34:35.079
And then what was the what were some of the
627
00:34:35.599 --> 00:34:37.480
early holdings that went into that, but you mentioned it
628
00:34:37.599 --> 00:34:39.800
the launch recently, What's what's big in the portfolio.
629
00:34:40.880 --> 00:34:43.039
Yeah, well we've been we've been big fans for a
630
00:34:43.119 --> 00:34:45.679
long time of Car Sales or Car Group as it's
631
00:34:45.719 --> 00:34:49.760
known now, So that so that no surprise that Car
632
00:34:50.280 --> 00:34:53.800
is in the portfolio. I touched on Genesis before I
633
00:34:53.960 --> 00:34:59.840
touched on Borrel, g QG. We're great fans of that,
634
00:35:00.079 --> 00:35:04.800
of that investment management model, and Auckland International Airport and Walley.
635
00:35:05.000 --> 00:35:07.199
Just just a handful of names that have that have
636
00:35:07.320 --> 00:35:10.159
gone in there. I mean, of course there are many,
637
00:35:10.400 --> 00:35:12.519
many more. There's a decent tale of stocks there, but
638
00:35:12.599 --> 00:35:14.480
they're the sort of there's some of the bigger names
639
00:35:14.519 --> 00:35:16.440
at the top of the portfolio that that that we
640
00:35:16.599 --> 00:35:19.360
believe fit the bill that come out of our process
641
00:35:19.519 --> 00:35:20.159
looking good.
642
00:35:20.280 --> 00:35:23.480
And and and we believe we'll serve unit hold as well.
643
00:35:23.639 --> 00:35:27.760
Hopefully as a good a good run and build a
644
00:35:27.840 --> 00:35:29.760
record similar to that of the small companies.
645
00:35:29.840 --> 00:35:32.800
Fun listen, I'll send you a PDS after the interview.
646
00:35:32.920 --> 00:35:37.000
No problems, all right? Well at that point, why don't
647
00:35:37.000 --> 00:35:41.679
we jump into our three regular questions. The first one, Ben,
648
00:35:42.360 --> 00:35:45.199
what's the one thing that you think investors are getting
649
00:35:45.280 --> 00:35:47.079
wrong or missing in today's market?
650
00:35:47.559 --> 00:35:52.599
Yeah, well, it's I think what investors regularly make mistakes
651
00:35:52.639 --> 00:35:54.760
of and and then and then, and they're making and
652
00:35:54.800 --> 00:35:57.199
they have made it in this market. Is when you've
653
00:35:57.239 --> 00:35:59.199
done the work on a stock, and you've built your
654
00:35:59.239 --> 00:36:03.760
conviction and the model, you've gotten comfort with management, you
655
00:36:04.400 --> 00:36:07.119
convince the board are great stewards and great shepherds of
656
00:36:07.159 --> 00:36:11.480
the business, and you've scoped out the revenue opportunity. What
657
00:36:11.679 --> 00:36:15.519
you now need to not do is dropped drop the
658
00:36:15.559 --> 00:36:18.840
ball right, and get anxious because the share price is
659
00:36:18.920 --> 00:36:20.760
legged down. It's down another five percent a day, and
660
00:36:20.760 --> 00:36:23.159
they were down three percent. I think a loss of
661
00:36:23.239 --> 00:36:26.679
conviction is easy when you get rattled by what's going
662
00:36:26.679 --> 00:36:29.599
on in the press, how the share price is trading.
663
00:36:30.119 --> 00:36:32.519
And I think people who've done the work, who are
664
00:36:32.559 --> 00:36:34.800
strong believers in a certain stock or business model, and
665
00:36:34.880 --> 00:36:37.599
then lose their way, and we're seen, we certainly saw
666
00:36:38.239 --> 00:36:41.400
I believe evidence of that where towards the end of October,
667
00:36:41.519 --> 00:36:44.239
where as I said, stocks appeared or bottomed, but coming
668
00:36:44.239 --> 00:36:46.559
into October there was somewhat of a give up. So
669
00:36:46.599 --> 00:36:50.280
I think investors have I think we're seeing investors have
670
00:36:50.400 --> 00:36:54.039
basically lost lost conviction at precisely the wrong time, and
671
00:36:54.119 --> 00:36:57.159
they'll be buying stocks back those very stocks that they
672
00:36:57.239 --> 00:36:58.880
had the conviction, and they'll be buying them back much
673
00:36:58.960 --> 00:36:59.400
high later.
674
00:37:00.239 --> 00:37:02.559
Let's move on to the next question. This is a
675
00:37:02.639 --> 00:37:05.920
bit more of a retrospective and hopefully you can tease
676
00:37:05.960 --> 00:37:08.440
out a few lessons. But I was hoping you could
677
00:37:08.440 --> 00:37:12.360
share a win or a loss from your career, talks
678
00:37:12.360 --> 00:37:15.280
through the gruesome details around what happened, or talks through
679
00:37:15.320 --> 00:37:17.920
the highlights. So it was a win, and importantly, what
680
00:37:18.039 --> 00:37:19.039
was the lesson that you took from it?
681
00:37:19.199 --> 00:37:20.880
Well, I know you asked me about this before we
682
00:37:21.000 --> 00:37:23.679
came in, and I've thought long and hard about it,
683
00:37:23.800 --> 00:37:27.280
and I thought I'd do something that most most guests
684
00:37:27.320 --> 00:37:28.800
probably don't do it, And I thought I'd reflect on
685
00:37:28.840 --> 00:37:33.039
a loss and what it taught me. And I have
686
00:37:33.119 --> 00:37:35.880
to the wine the clock right back to the late
687
00:37:36.000 --> 00:37:38.719
nineteen nineties when I was when I was managing money
688
00:37:39.480 --> 00:37:42.079
and back at Iron g in fact, when I was
689
00:37:42.119 --> 00:37:45.400
a portfolio manager there, and we had a substantial shareholding
690
00:37:45.440 --> 00:37:49.239
in a company that many on the pod won't even
691
00:37:49.679 --> 00:37:53.440
have recalled, but it was known as Discovery Petroleum and
692
00:37:53.519 --> 00:37:56.800
as a substantial gas producer in the Perth Basin of WA.
693
00:37:57.960 --> 00:38:00.480
We owned six percent of the company, maybe even said percent.
694
00:38:01.039 --> 00:38:03.360
But the problem with it was it was it was
695
00:38:03.440 --> 00:38:07.239
a perfect, perfectly predictable, well managed business that traded in
696
00:38:07.320 --> 00:38:10.719
a trading range, and I went from fifty five cents
697
00:38:10.760 --> 00:38:13.239
to sixty two cents and back and between fifty and
698
00:38:13.280 --> 00:38:13.840
sixty cents.
699
00:38:13.880 --> 00:38:14.360
For years.
700
00:38:15.239 --> 00:38:18.840
We owned six percent of it, and I remember just
701
00:38:20.039 --> 00:38:23.039
being so bored with it and anxious that the opportunity
702
00:38:23.119 --> 00:38:25.280
cost of holding this stock was so great it could
703
00:38:25.280 --> 00:38:28.280
be in other things. And the moment the stock broke
704
00:38:28.320 --> 00:38:30.599
out of that fifty to sixty cent range, it broke
705
00:38:30.679 --> 00:38:33.519
top side and was trading at sixty five to seventy cents.
706
00:38:33.880 --> 00:38:34.599
I sold the lot.
707
00:38:35.199 --> 00:38:37.800
I sold them all out and felt fantastic, and I
708
00:38:37.880 --> 00:38:41.440
sold them pretty well in one ticket, and which gave
709
00:38:41.480 --> 00:38:43.519
me a fright, I guess after I'd done the business.
710
00:38:44.599 --> 00:38:48.119
And the reason that happened was, of course, a corporate
711
00:38:48.199 --> 00:38:51.440
raider had turned up, recognizing the same value that we'd seen,
712
00:38:52.079 --> 00:38:53.920
and had decided that they were happy to pay a
713
00:38:54.039 --> 00:38:57.679
modest premium to secure a position. And it was Premiere
714
00:38:57.800 --> 00:39:00.639
Oil of the UK, and they turned up and bought
715
00:39:00.719 --> 00:39:04.119
all our stock. And when it was revealed it was Premiere,
716
00:39:04.360 --> 00:39:07.679
the stock popped again, and then Oil Search were rumored
717
00:39:07.679 --> 00:39:10.960
to be interested in buying Premiere and I just sat
718
00:39:11.039 --> 00:39:14.440
there with my hands on my head, saying, I held
719
00:39:14.519 --> 00:39:18.840
this stock, this beautiful company for three years. It gave
720
00:39:18.920 --> 00:39:21.679
me nothing but angst because it just didn't really go up.
721
00:39:21.960 --> 00:39:25.000
It paid a modest evit end and I sold it
722
00:39:25.079 --> 00:39:27.519
a precisely the wrong time, and I look like a
723
00:39:27.639 --> 00:39:28.519
complete fool.
724
00:39:29.239 --> 00:39:29.920
Why did I do that?
725
00:39:30.039 --> 00:39:31.719
And I guess the lesson that I learned from that
726
00:39:33.000 --> 00:39:36.039
was it never sell a stock that's long been inactive
727
00:39:36.880 --> 00:39:39.440
just at the moment it begins to move up. There's
728
00:39:39.480 --> 00:39:42.280
a reason why that stock is broken out of that
729
00:39:42.360 --> 00:39:46.079
trading range. And of course it was corporate activity, and
730
00:39:46.199 --> 00:39:49.119
it was Premiere Oil's good fortune to steal that business.
731
00:39:50.760 --> 00:39:53.400
I've never forgotten that story. And the moment I see
732
00:39:53.440 --> 00:39:57.840
a stock move erradically or unusually out of what has
733
00:39:57.920 --> 00:40:01.960
been a boring set of trade circumstances, rather than just
734
00:40:02.079 --> 00:40:05.079
react if I want to sell them, I hold off
735
00:40:05.119 --> 00:40:08.559
and seek an explanation. So I think that's the lesson
736
00:40:08.599 --> 00:40:11.079
I learned from a loss. And whilst we didn't lose
737
00:40:11.239 --> 00:40:14.559
money on the on the actual position, I forewent some
738
00:40:14.800 --> 00:40:17.000
nice gains, so I handled them to Premiere Oil of
739
00:40:17.079 --> 00:40:17.400
the UK.
740
00:40:17.719 --> 00:40:19.920
They were going to thank me the British shareholder.
741
00:40:20.239 --> 00:40:22.079
If you're wrong, you're wrong. If you if you leave
742
00:40:22.079 --> 00:40:23.559
it on the table, it almost hurts more.
743
00:40:24.480 --> 00:40:24.880
No I did.
744
00:40:24.960 --> 00:40:27.440
That was an awful but I learned. I haven't forgotten it.
745
00:40:27.519 --> 00:40:29.039
Not a day Well, that's not right, just so not
746
00:40:29.039 --> 00:40:30.840
a day goes but I don't think about it. It's
747
00:40:30.880 --> 00:40:34.960
not quite that bad, but certainly as it always comes
748
00:40:35.000 --> 00:40:36.519
to mind when people ask me what I've learned in
749
00:40:36.519 --> 00:40:36.880
the market.
750
00:40:37.199 --> 00:40:39.119
Right Ben, Well, listen, this has been great. We're nearly
751
00:40:39.159 --> 00:40:42.440
done now our final question. Just a quick note to
752
00:40:43.119 --> 00:40:46.719
listeners out there, This is a hypothetical question. We're obviously
753
00:40:46.760 --> 00:40:50.000
not advocating. You put all your or your money into
754
00:40:50.119 --> 00:40:55.039
a single stock and Ben runs carefully riskmanaged diversified portfolios.
755
00:40:55.119 --> 00:40:58.039
This is meant to be an exercise in long term
756
00:40:58.119 --> 00:41:00.760
thinking and also a bit of fun. So Ben, for
757
00:41:00.840 --> 00:41:03.880
our final question. If markets were to close tomorrow and
758
00:41:04.000 --> 00:41:06.480
stay shut for five years, and you could only own
759
00:41:06.519 --> 00:41:09.599
shares in one company, which company would that be and
760
00:41:09.679 --> 00:41:10.440
why would you own it?
761
00:41:10.880 --> 00:41:12.039
I thought that was a great question.
762
00:41:12.679 --> 00:41:15.039
James, and you you're email with the other day, and
763
00:41:15.119 --> 00:41:17.320
so I'm going to ask you that question and give it,
764
00:41:17.440 --> 00:41:19.840
give it your best, your best consideration. And I thought
765
00:41:19.840 --> 00:41:21.920
about it long and hard, and I went through went
766
00:41:21.960 --> 00:41:25.400
through a whole bunch of shortlisted names, and I've landed
767
00:41:25.440 --> 00:41:31.159
on a New Zealand stock of all stocks, and it's
768
00:41:31.239 --> 00:41:35.199
main freight and main freight. Many of you are seeing
769
00:41:35.360 --> 00:41:37.320
the trucks, have seen the trucks rattling up and down
770
00:41:37.320 --> 00:41:41.760
the highway. It's an integrated freight handling, warehousing logistics operator,
771
00:41:43.079 --> 00:41:46.079
not that old, really established in nineteen seventy eight, and
772
00:41:46.239 --> 00:41:50.760
it's a it's a superbly managed business. That's that is,
773
00:41:51.119 --> 00:41:56.320
without being cliche. It is taking on the world. Operates
774
00:41:56.360 --> 00:42:00.639
in I think it's twenty five twenty six countries with
775
00:42:00.840 --> 00:42:06.639
the most seasoned management team, and they are basically hell
776
00:42:06.760 --> 00:42:09.840
bent on taking the main freight message and the main
777
00:42:09.920 --> 00:42:11.440
freight way to the rest of the world.
778
00:42:11.800 --> 00:42:13.119
And they're getting great traction.
779
00:42:13.440 --> 00:42:13.519
Now.
780
00:42:13.559 --> 00:42:16.760
They're big in Australia, they're growing in Asia where they've
781
00:42:16.800 --> 00:42:20.400
hardly really got started. They've just turned soil in India,
782
00:42:21.239 --> 00:42:23.599
which is going to be an enormous opportunity, but they've
783
00:42:23.599 --> 00:42:24.599
only just landed there.
784
00:42:25.920 --> 00:42:27.800
In the United states. They've turned up.
785
00:42:28.239 --> 00:42:31.480
They're getting a great reception and their revenue lines about
786
00:42:31.480 --> 00:42:34.880
a billion dollars. The biggest competitor in their space is
787
00:42:34.920 --> 00:42:37.840
a revenue line of twenty bill so you can see
788
00:42:37.920 --> 00:42:40.800
there's some there's some market share and some volume to
789
00:42:40.880 --> 00:42:43.840
be had. They're opening up in well, they're in Europe already,
790
00:42:44.119 --> 00:42:47.000
but Europe's opening up to them. And they've got a
791
00:42:47.039 --> 00:42:50.639
balance sheet that's net cash. With the management team that
792
00:42:50.719 --> 00:42:54.159
you've got there, which is amongst the highest caliber I
793
00:42:54.280 --> 00:42:58.760
think in Australasia, with the growth trajectory that the business
794
00:42:58.800 --> 00:43:02.039
it has, and they've only made one acquisition. The last
795
00:43:02.079 --> 00:43:04.320
acquisition they made was back in twenty eleven, which I
796
00:43:04.360 --> 00:43:06.199
think was a little business in New Zealand. I think
797
00:43:06.719 --> 00:43:09.920
the rest of it's been grown organically. Speaking to the
798
00:43:10.000 --> 00:43:12.599
CEO while ago and asked him about the number of
799
00:43:12.639 --> 00:43:14.400
board meetings you have and how to conduct them, and
800
00:43:14.440 --> 00:43:17.079
he said that a typical board meeting goes for about
801
00:43:17.119 --> 00:43:20.039
three or four days where they literally go from center
802
00:43:20.119 --> 00:43:23.119
to center and review the operations of the business. It's
803
00:43:23.119 --> 00:43:26.559
an extraordinary business that pays dividends. If I had to
804
00:43:27.280 --> 00:43:29.559
if I had to do exactly that, Jimmy and basically
805
00:43:29.639 --> 00:43:32.159
buy the stock and then hibernate for five years. I
806
00:43:32.280 --> 00:43:36.000
know while I'm sleeping, the business would be paying dividends
807
00:43:36.559 --> 00:43:39.320
and growing organically as you'd expected to and with all
808
00:43:39.360 --> 00:43:41.960
the management disciplines you want to see. So that's my
809
00:43:42.079 --> 00:43:45.599
stock Hypothetically, I'll see in five years and we'll we'll
810
00:43:45.599 --> 00:43:48.599
see where how it's fortune is unfolded.
811
00:43:48.920 --> 00:43:52.360
Well, hopefully it won't be five years to next catch up, Ben,
812
00:43:52.480 --> 00:43:55.519
but May and Frank definitely one to keep on the radar.
813
00:43:56.199 --> 00:43:57.480
It's all you was is out there. I hope you
814
00:43:57.599 --> 00:44:00.800
enjoyed the chat with Ben Griffiths, who's under and portfolio
815
00:44:00.880 --> 00:44:02.519
manager at You're good for this group. Ben, thank you
816
00:44:02.679 --> 00:44:05.639
very much for coming on the podcast. Happy twenty year
817
00:44:05.639 --> 00:44:07.400
anniversary and all the best with a new fund.
818
00:44:07.960 --> 00:44:10.360
Thanks James, thanks for having me on today. I've really
819
00:44:10.480 --> 00:44:11.440
enjoyed it. Thanks mate,