Welcome back to The Rate of Change with York Wealth Management.
As advisors to some of the wealthiest families in the country, The Rate of Change is a podcast
designed to help you in the pursuit of building long-term wealth through the insights of some
of the brightest minds in asset management.
I'm your host Murdoch Gaddi and in today's broadcast we're speaking with Michael Frazes,
the managing director and portfolio manager of Frazes Capital Partners.
Keen listeners will remember Michael from last year.
We wanted to have him back on to see how the fund and his venture capital fund, which operates
in global growth, has been performing over the past year.
Michael also unpacks what he's looking at in the tech and biotech space, things that
he's purchased and sold, as well as he discusses his new AI-backed risk management tool he
has built from scratch to help lock in future profits from a timing perspective.
If you listen through the podcast, he says exactly what the URL is or the website and
we also take it for a test drive across some interesting companies.
So I enjoyed this conversation.
I always find these conversations so interesting because there's so much happening out there
in the AI space, the biotech space, names that you've never heard of that these guys
look at.
It's so interesting.
So if you listen all the way through to the end of the podcast, I recommend you do so
so you can hear the disclaimer and please keep your feedback coming and you can reach
me at mgatty at ywm.com.au.
So with that being said, I hope you enjoyed this conversation as much as I did.
So sit back, relax and enjoy it.
Michael Frazes, welcome back to the rate of change with your Qwerth management.
Hi Meruc, thanks so much for having me back on.
Yeah, what has been about 12 months?
Something like that.
How the year has flown.
I know.
Why don't we kick things off because there's a lot of people that have definitely heard
of you heard the podcast before but for our new listeners or new to the fund, why don't
you give everyone a little bit about who is Michael Frazes and what the fund does.
Yeah, sure.
So we have a global listed equity fund that invests in technology and the life sciences
focusing mostly on small and big cap companies with you know, explosive growth through customer
love and really focusing on those companies, you know, growing exceptionally fast, so 50
to 100% plus.
We also run a venture fund which focuses in on similar areas, so life sciences and technology,
mostly in Australia.
So they're the two funds we operate.
So for everyone, just to get everything off and running, how has the just looking back
the past 12 months, how's the performance been and you know, how was everything in the
latest update?
I think the latest update, we're up 40% for the calendar year to date.
It's been a small pullback since which has kind of been across the board.
I think the market has just been marching ahead, you know, pretty much since March.
I think as we went into this year, everyone was expecting something very different.
You know, there was a really bad 2022 for most asset classes, certainly ourselves included
with our focus on high growth stocks and healthcare.
But then really like the opposite of what everyone expected happened.
We didn't go into recession, spending held up, employment held up around the world.
And we also had in the technology space, which was really on its knees a year ago, this entire
new platform for these large language models, which have just triggered this immense round
of investment and not just investment, you know, genuine revenues coming from these new
companies or these new divisions and new companies.
And so I think that's really been the story of the last 12 months.
It has caused this huge diversion.
I mean, there's always a case in indices, there's always a handful of companies driving
returns.
That's not something that's unusual to this particular time, but it seems particularly
accentuated right now because most small and mid cap growth companies, you know, whether
you measure by cloud computing ETFs or biotech indices, most of them are still kind of very
depressed and very down from their highs two years ago.
So it's really been in our space, a tale of two markets.
You know, there's been a handful of companies that have been on the right side for that
AI shift.
And, you know, the recipients of those billions of dollars and also the beneficiaries of now
two years almost of cost cuts.
And then you've got the small and medium sized companies, which more often than not have
been on the receiving end of those cost cuts and haven't done so well and are not one of
the handful of companies that, you know, perfect position for this AI boom.
So that's kind of how we're seeing things at the moment.
Would you say it's like a two speed economy?
It's like you're in AI and the manufacturing side or you're just not and then essentially
they're underperforming or do you think essentially this AI just like a rising tide, you know,
has lifted all boats?
Yeah, definitely.
I mean, if you think about it, there's been, there's still kind of a freeze on VC investments.
There've been very, very few companies listed.
There's been a handful which we can talk about, including some that are relevant to us.
But, you know, there's like this capital freeze, capital drought for this huge part of the
market at the same time, there couldn't be more capital thrown at this new AI opportunity.
So there really is that two speed and that's just within AI.
You know, even before that took off, it was crystal clear that, you know, these big companies
were going to do rounds of layoffs and cost cuts.
And that was going to create or has created a down cycle in software and in all the small
companies that service those larger companies.
So when Meta lays off 10,000 staff, that's 10,000 office subscriptions, that's 10,000
times the 40 or 50 different software subscriptions every person will have.
And that created huge amounts of churn across the board.
And so, which by the way, is not what people are expecting.
So the whole promise of these software companies was that they weren't cyclical and it was
recurring revenue.
And it's really been the case that that has not turned out over the last kind of year.
It's been a red down cycle in that part of the market.
And that's still ongoing, though it does seem to be steadying now.
And you know, we're a year and a half into this, depending where you count from.
And it does seem that, you know, a lot of these companies have continued to grow and
are continuing to invest and are continuing to add headcount now as well.
So we could be, there is a green light at the end of the tunnel, finally.
Do you reckon that the increased cost of rates going up and the cost of money has had a big
impact on these companies?
Or do you think there's been enough growth, you know, in that particular space to kind
of offset that?
I think it was just a one-off big reset.
You know, you've basically had since the 80s, you know, falling interest rates.
And now for the first time, really since then, you've had a huge increase in interest rates.
And that caused, you know, huge contraction in valuations.
That's kind of happened.
But you know, there's been many times with high interest rates where the world's just
been fine.
You know, some of the biggest tech booms have happened in periods where interest rates were
quite high.
So there's nothing that says high interest rates means that growth stocks can't perform.
It does certainly affect the valuation of every asset class.
But I'd say that's kind of happened.
And also, it does seem like interest rates have shifted, have kind of peaked.
And you're seeing for the first time a little bit of weakness in the data in the United
States.
And you've certainly seen throughout this year inflation rolling over decisively around
the world.
So if interest rates have peaked, that means the value compression has peaked, which means
that the return of a growth stock is going to be much closer to its actual organic rate
of growth, which is good news for holders of those assets.
So I think what we're going to do is we'll definitely jump into tech and the growth side
there and then we'll rotate into the life sciences.
But I love behavioral psychology.
And one thing I wouldn't mind asking you is with essentially what we've seen in the past
couple of years, do you think there's been a shift in customer behavior?
Is that due to the customers, their lives changing?
And I don't know, maybe the cost of, or they have less disposable income to spend or as
an example, right?
For a number of years, Silicon Valley was the beacon.
That's where you go.
But then all of a sudden, agendas changed, politics changed, people didn't want to live
there.
The actual having that, your business in Silicon Valley became way too freaking expensive in
the likes of Tesla, even Joe Rogan.
People moved to Texas because just using America as an example, the tax structures, they're
offering various things to these companies that actually made the cost of running the
business easier, simpler, more efficient, we can make more money out of it.
And then there's been a relocation.
Are you finding that there's been a shift in the consumer and the business behavior
in various areas where you're looking at these companies?
I mean, I think everything's changed.
I think everybody who's spending money, whether you're in charge of a budget of a software
company or family, you've had to really adjust on what you're spending and how you're thinking
about that, both on the business side and the consumer side.
Even in Australia, I think that huge lift in interest rates or mortgage rates from 2%
to 6% roughly, that's a huge impact on everybody's budget.
It's not like the world stopped or people stopped buying things they need to buy.
Everyone just had to make hard decisions and shifted their own spending.
And it certainly made everybody sharpen their pencil and make sure they're really spending
on the things that they absolutely need to spend.
Whereas there was a period where, you know, strange look back, money was flying around.
Everybody seemed to be so cashed up.
Everybody was looking for new investments.
Everyone was looking for new things to spend money on.
It couldn't be more different to that now.
Again, like from the smallest, from a single person in Australia, like the largest company
in the United States, everybody's had to make that calculation.
Money's just worth so much more now.
Everybody's being so much more careful.
And it'll probably be like that.
I imagine at the end of 2000, 2002, it was exactly the same.
Then post the GFC.
And it kind of took 10 years for that to heal and for everybody to get really excited again.
So as a base case, probably looking at five to 10 years of this kind of environment.
That's not to say that great companies aren't going to do extremely well.
So where globally do you see the growth coming from now?
Look, I think there's two really exciting parts.
There's obviously individual companies that are doing exceptionally well.
I think in the life sciences, there's been this kind of revolutionary new class of drugs,
which is the GLP-1 agonists for weight loss.
And these injectables, they'll soon be oral forms.
And the next generation is even stronger.
And this is just going to change, have huge impacts on health statistics and also spending.
There hasn't been a drug that caused people to lose 15% to 25% of their weight in the
past.
And if you think about the trends in health care, they've all been very clear and very
one way.
It's been aging population and growing obesity and growing health issues related to obesity,
whether it's sleep apnea, heart disease, huge, huge conditions, demand for heart valves,
demand for resmeds, CPAP, Darth Vader masks.
It's all been one sided for many, many years.
But now there's this new treatment and it's not quite clear how that's going to play out.
My view is, obviously people still sadly going to have health problems.
And if you kind of lose a lot of weight, it's not like you're not going to pass away, again,
sadly, or have a heart attack at some point.
It just might be much further when you're much older.
So I don't think it's going to have a huge impact long term, but there will be pockets.
For example, if you're doing weight loss bariatric surgery, which typically gives 15 to 25% effective
weight loss, why would you undertake that severe painful surgery if you can just take
a pill once a week?
So there will be parts of the life sciences space that are completely turned on their
heads and there'll be huge opportunities there as well.
And one of the opportunities will be that in the last month or so, a lot of companies
that even tangentially related to obesity related conditions, which applies to a huge
number of companies, they've all sold off significantly.
There's definitely a lot of diamonds in the rough.
Those growth med tech companies are probably as cheap as they've been in five years.
Yeah, we're talking off air.
I was listening to Sean Baker, people listen to Joe Rogan.
There's a huge amount of conversation out there.
You're on one side of the fence to the other.
Don't offend anyone, but some people are in the medical camp.
Some people are on the only greens.
I personally went on the carnivore and dropped 15 kilos in five weeks because essentially
just removing everything that created an immune response in my body that was just angry with
me, kind of removed all that and just pretty much lived off rib eye stacks.
It was fantastic.
But also there is definitely a need for having these types of products available for people
to improve their lives.
I think we're discussing off air as well something crazy.
If you're looking at since what, 45, the preservation of food, the amount of chemicals and everything
in your food.
I think I walked through Coles and Woolworths and you read what's on the back of these packets.
I think there was only one thing which was prosciutto that only had salt and meat.
Everything had some form of preservative in it.
You kind of wonder what you're consuming.
Yeah, there's a great article that did the rounds.
I think it was about a year ago that kind of highlighted why are people getting fatter?
Why was everybody so skinny 100 years ago?
Why has that been one way?
It's actually a really hard question to answer because it's not obvious that it's come from
increasing availability of calories or anything like that.
In many cases, some people used to eat a lot more butter.
You need a lot more fatty foods, things like that.
There's a few kind of people have pointed their finger at a few different things, whether
it's seed oils or it's kind of hard to say.
One thing for sure is these drugs kind of do work.
Actually, one of the things I find most interesting about them is these receptors that they work
on are in your stomach, but they're all over your body, including your brain.
They found firstly with monkeys actually, who are getting drunk off rotten fruit.
When they gave them these injectable drugs, they also repeated this experiment in the
lab.
There's lucky monkeys that got that instead of the Ebola division.
When they gave people these drugs, they stopped drinking as much.
Anecdotally, that seems to be a kind of universal effect of these things that you become less
impulsive in other parts of your life, whether it's drinking, gambling, spending money, online
shopping.
What does it actually do?
So it's an injectable, right?
We're discussing this, but there's not many pins around which are out of demand, but there's
quite a lot of them.
Yeah.
There's certain rhythms that you see in life that just keep repeating.
Obviously, these things became popular and immediately the exact same doctors in mom's
groups you'd expect say, oh no, this is unhealthy.
We can't do this.
Do everything natural.
Then there was a publicized shortage.
Of course, these are the biggest companies in the world.
There's plenty of supply available.
You can order these things online in Australia.
Actually, one of the big shortages was the pens that they're in, which need to be replaced
I think every month.
Yeah, it's injected once a week.
It's painless.
What does it actually do?
Once it goes in, what does it actually do to the body?
It hits these receptors, these GLP-1 receptors and blocks them basically.
It basically says that you're full amongst other effects.
For example, it's been an open question why is surgery literally cut parts of your stomach.
It sounds a lot less effective than gastric band or like removed.
Gastric band.
Why is that so effective?
It's not just because you feel fuller.
It all seems to have an impact on these receptors as well.
It'll slow down the rate at which food leaves your stomach.
It'll also make you feel fuller.
Because probably some mix of those two things, it all seems to reduce the spikes in insulin
levels, which alone is enough to have some pretty significant health benefits.
These were ultimately developed as diabetes drugs, not as weight loss drugs.
Do you find that actually reduces your cravings for sugar?
I tried these.
What was my experience with them?
I would say it's bizarre because you do feel full.
They're extremely powerful.
I can't imagine taking anything more powerful than what I did.
I tried a Zempi.
I really couldn't imagine trying anything more powerful.
So I've tried to think of what these new generation will do, but I'm sure they'll be extremely
effective.
But yeah, you can't have more than two or three beers.
You'll feel full.
Yeah, right.
I think Novo is being sued in the United States for not being clear enough that you can have
like really bad stomach conditions.
I kind of find that hilarious because it means that people are just continuing to eat enormous
amounts no matter how much it kind of hurts and how full they feel.
But yeah, it really does have those effects and it's really powerful.
So if anyone's on the fence, I think it's something that's interesting and worth trying.
The only reason I say that, and I'm not a doctor, so speak to a doctor, but there has
been 10-year studies of these drugs that have been in the market for a long time.
We don't know the 20-, 30-, 40-year effects and there probably will be effects, but we
do know in those long-term studies, they did have overall strongly beneficial outcomes,
including less heart attacks or most notably less heart attacks.
So that was some data that was released.
It was only a few weeks ago from Novo from a very expensive large study that showed they
did have the effects that you would assume that people losing weight and having lower
blood sugar spikes would have.
So I think it's probably one of the biggest things that's happened in medicine in a while.
Yeah, and interestingly, Eli Lilly, which is, so you've got Novo that does a Zempik.
Eli Lilly, which does Monjaro.
And Eli Lilly seems to be winning in the next generation in terms of oral drugs.
And we always talk about GLP-1s.
There's two other receptors that their next generation hits.
They'll hit three receptors, so it must be pretty powerful.
And that's the drug that's kind of showing the most weight loss.
They also came out with an Alzheimer's treatment.
That's two huge wins for that company.
And there's no doubt they'll probably become now one of the most, they already are, but
will become even more.
Also one of the most valuable companies in the world.
There's definitely some interesting stuff going on in the healthcare space.
Yeah.
And then, well, theoretically, healthier organs, which actually brings me onto the next thing
we're discussing, which is, is it transmedics?
You ordered the organs.
Yes, this is one of those.
That was very interesting.
Do you want to run everything through transmedics?
It's fascinating.
So this is a company in the United States that's trying to create a national, I think
markets probably the wrong word, but national distribution for donated organs.
So in the past, organs were kind of carried around in ice buckets effectively, very unsophisticated
and they only lasted about four hours.
So if you think about the time it takes to get that to a patient that's needed and then
conduct the surgery, there's a very small window and you can only be transformed in
very short distances.
What they do is they actually keep liver, heart and lungs, they actually kind of connect
them up, keep them warm, keep the hearts beating, keep blood flowing through these organs effectively
in these transportable boxes.
And this dramatically extends the lifetime of them.
Sounds like a little transfusion device.
So the blood's continuously pumping or something's pumping through that organ to make sure it's
popping.
Yeah.
I mean, if you Google transmedics, like beating heart in box and you will see a heart beating,
you can see it because it's all visible.
And they've got, I think last year they had something like 7% market share growing in
triple digits.
It's clearly superior to the existing.
What's the market cap?
It's about a $2 billion company.
You can draw, if they actually take significant market share, you can draw a line to 1 billion
plus of revenue.
So does a hospital purchase these or do they lease them out?
What's the business model?
I think they make about 100,000 per donation.
So yeah, of course you have to pay to have this.
And they've also bought, recently they just bought a small airline.
They bought an airline.
So they're having trouble getting enough capacity on planes because there'll be an accident
or somebody would have brain death or heart death and they would need to transport it
to where it needs to go immediately.
So there might not be a way to get it to where it needs to go.
So they were kind of losing organs, so to speak.
And actually this idea of losing organs is a real issue because most organs that are
available to be donated aren't able to get anywhere in time.
And there's a huge wait list for all of these organs.
So by increasing the time that these things can stay alive, they're actually going to
be able to increase the total number of transplants that can be done and really make a dent in
that major medical issue.
Is there any studies that are being done to say exactly what the loss, like the improvement
of the loss rate is from this?
Yeah, they have done those studies.
I don't have the numbers off the top of my head, but it'd be over 75% of some organs
would not be used.
They're available because they just can't get somewhere in time.
Whereas with transmedics, that can go up to...
The reason I find this really interesting, there's a lot of people out there that have
fairly rare blood types and such.
And they might be on a list for no fault of their own for a particular reason and they
need that in order to survive.
And unfortunately, there's a sad incident, a car accident, something equivalent and someone's
generous enough to make those organs go to somewhere and they need them.
But if it's one side of the country and that one person has been waiting for like 10 years
or something equivalent to five years for that particular surgery and doesn't get there
because they missed a plane, it gives us an ice box.
It literally saves lives.
Well, that's the idea of them building this nationwide or US-wide network where they can
just transport organs anywhere on their own planes with reserve capacity for what they're
trying to do.
So if you do have that...
So an organ on one end of the country that becomes available that needs to be transported
somewhere else, they can actually make that happen in a way that just wasn't possible
when organs were kind of cooled.
I think they've also been able to demonstrate they can improve the outcomes of the transplantations
as well because there is some damage that goes on when you put things in organs in ice,
which doesn't happen with them.
This is a company, by the way, that dropped about 30%, 35% in the last few weeks.
So it's fallen 35% in the last few weeks.
It's probably one of the top performers the last 12, 24 months.
But yeah, it had a big pullback along with a lot of these med tech companies.
Why did it get pulled back?
Across everything we looked at.
So we bought quite a fair bit in the last couple of weeks of fast growing med tech companies,
including TransMedics.
I've been watching it, really just bought it in the last couple of weeks.
Been watching it for the better part of a year.
I think there's two things.
I think it was a general pullback in med tech.
And med tech has just had a charmed existence, really.
It's been 10 years in one direction for a lot of these companies.
I'm not just talking about small companies, big companies like Medtronic, Abbott, companies
that make heart valves, companies that make these kinds of things.
They all sold off significantly.
And I think part of that was due to GLP ones.
You know what investors are like?
They see a theme and everybody jumps on it, whether it's long AI or short anything that's
related to weight loss.
Let's look at the portfolio that's not really working and let's take that capital and repurpose
it.
Yeah.
And these are big ideas that you can really sink your teeth into that get people excited
in one way or another.
And I think there was an element of that with these GLP ones.
It got to the point where I think it was only a week ago or two weeks ago where the Wall
Street Journal wrote an article about companies that were stocks that were falling because
they were GLP one related, which included Intuitive Surgical, Inspire, which is a sleep
apnea.
So you certainly got to the point where it was that newspaper article level of investor
awareness, which sometimes marks reversals.
What's the profit margin with GLP one?
Pretty exceptional.
I've got my notes somewhere, but you know, these things are on patents, they're extremely
high.
Yeah, right.
Anything else happening in the life sciences?
Yeah, I think one thing that's kind of we've been focused on is we had a company that we
invested in our venture fund list on the ASX and it was kind of obviously a bit nerve wracking
because very few companies are listing.
A handful that have not performed well.
This curve being kind of opened down significantly as well.
Fortunately, over a few days, it's really back to its listing price, which was encouraging
broadly because now we know that for the right company, the IPO market is in fact open.
That capital market is not dead.
And there's actually been a number of cap raisings in life sciences on the ASX in the
last week or so.
But I actually think this is one of the most exciting things that we're...
What does Curvebeam do?
Curvebeam develops weight bearing CT machines.
So it's part of this trend, you know, if you step back a bit of, you know, if you go into
an orthopedic surgeon and you need to get a scan, they'll generally send you off to
somewhere else.
And also typically you'll be lying down for this scan.
So if you have a problem that relates to the way when you're standing up or moving around
on your feet, which is actually how most things manifest, you won't be able to see that lying
down.
Curvebeam has created these high rise devices and they've sold 45 of them.
They did 11 and a half million revenue last year.
It can basically fit in orthopedics office and they can just do the scan there and charge
for it and earn revenue from it as well.
So it's kind of happened in dentistry where actually the CTO of Curvebeam, technological
founder, developed things, device that could scan, 3D cone imaging it's called, that could
scan you in the dentist clinic and very quickly get a 3D image of your face and your dental
structure.
It was extremely effective, sold thousands of units.
And if you go to a dentist now, they'll probably image you in the clinic rather than send you
off to some imaging center.
So they're basically trying to do the same thing in orthopedics.
I mentioned the 11 and a half mil of sales, that was done with a handful of sales staff.
So one of the reasons it's exciting is they've done a deal with Striker, which is the number
one provider of orthopedic equipment and it's also most of their revenues.
They've done a deal where Striker will distribute their product and as part of that, will also
offer extremely attractive financing terms to Curvebeam.
So they'll go from a situation where you have a handful of people selling the device to
over 500 reps globally pushing the device.
The handful of people could sell 45 of these things, how many could 500 people sell?
And that's kind of the interesting thing that we want to watch.
So we're going to hold this as they roll out globally.
And the other interesting aspect of it is they have some pretty interesting software
modules that they can tack on to the device.
Well that's what I was going to ask you.
Are they just physically selling the devices as a one ticket item or is there an ongoing
maintenance with a software program off the back or are they leasing?
What's their business model?
Yeah, so they sell them for $410,000 US.
This is their flagship HiRise device.
They have other devices, but this is where they get almost all their revenue at the moment.
And the idea is they can actually scan people and charge.
They will charge for the scan and actually the clinic will also charge for this.
The clinic will charge for the scan.
A lot of that will go to Curvebeam, but the clinic itself will make more revenue from
having this device.
So the payback period could be as low as one and a half years from that $410,000 or longer
if you're doing less scans obviously.
So it's a pretty compelling pitch for the orthopaedic surgeons to bring that revenue
in-house.
The other module they're developing, or key module they're developing is bone mineral
density testing.
So the moment that largely goes undiagnosed, even though it would have an effect on the
way people are treated.
So if a surgeon knows you have high fragility, they'll generally treat you differently.
Maybe they'll put an extra plate in.
It will certainly change the way they treat.
Generally that testing is not done.
So Curvebeam wants to basically add that as a module to their existing machines and also
a new machine in development.
So you basically put your hand in it and it runs that test.
And then we'll very quickly give you a readout and a score that will enable people to diagnose
you effectively for that.
Bone mineral density is something that it's kind of got two issues.
The first one is population-wide screening.
So people know where they stand in this issue.
And secondly, before surgery, you really want to get that data before surgery.
And again, the beauty is they'll be selling these machines and they'll be able to do these
tests off these machines, generate extra revenue for themselves, increase the economics for
the people they're selling it to.
And they've really just started rolling out.
They've literally sold only 45 of these machines.
I just recently watched the movie The Pursuit of Happiness of Will Smith and I was running
around trying to sell those things.
And I think he said that they're twice the cost of an x-ray and everyone was happy with
an x-ray.
So what's changed?
Is that what it is?
The bone density scanners?
I'm not sure what he was referring to.
Bone density scanners have been around for a while.
Yeah, you can get these tests, but you could also, this just makes it much easier and the
orthopaedic surgeon can do it in their clinic whilst they're testing for other things as
well.
So I think that's the beauty of bone density.
I would describe it probably like an arm span wide, maybe a bit bigger than an arm span.
And if you look at the high rise machine, it's kind of like a CT machine that kind of
whizzes around you.
It can be done in all kinds of different angles and orientations.
But the key selling point or key point of differentiation is really that you're standing
on it.
So if you're scanning an ankle, you can see how the bones and tendons are aligned whilst
you're actually standing on it, which is very different to when you're lying down.
Yeah, right.
That's interesting.
Anything else in the life sciences you were saying or investing in or anything that's
not working out that you're looking to get out of?
I mean, our biggest loser this year, recently, has probably been one that's been kind of
turning a hole in us for a while.
It's funny how some of your best-performing one, stocks become your worst.
But we held on to see limited, which proved to be certainly a short-term error because
they just reported a result.
We were kind of excited because they went from losing money to making money.
It was a billion-dollar profit turnaround, adding roughly 500 million cash to the balance
sheet each quarter from losing that amount.
And in the latest result, they grew gross profits by 33%, which is not that bad.
They had a huge cut in sales and marketing.
They generate any growth at all when you're kind of cutting your sales and marketing by
the extent that they did.
It's quite an achievement.
But they also made comments that they're going to return to growth strategy.
In other words, they're going to spend some more money, which in their instance, which
is kind of an e-commerce model, generally means discounts and kind of offers and basically
money going or value going, more value going to consumers.
So stocks sold off significantly.
But at the same time, it looks like they're going to re-enter India with their gaming
division.
So if you're not familiar with this company, they had e-commerce division, extremely profitable
gaming.
Both of those divisions suffered from that post-COVID hangover, which hit both gaming
and e-commerce.
They also got banned from India, which is one of their biggest markets.
And all of a sudden, they almost immediately lost all their gaming profits from India.
Now they're going back.
What was the game again?
Wasn't it PUBG they owned the rights to?
And then Fortnite came out and they figured, let's just mess with the two.
Free fire.
Yeah, and let's just marry the two and stick it on a mobile device.
Because what they worked out is there's more people in the world with mobile devices than
essentially a standalone PC or an Xbox.
So they hit that second or third world market hard, played that game once.
It's actually not bad for handheld devices.
Not as good as Fortnite, but it's pretty good.
The key opportunity that they saw was that they optimized it for low-end smartphones.
Yeah, that's the one.
They optimized it for low graphics.
So let's say you want to make the best game possible, you're going to come up with something
more like Fortnite.
If you want to optimize it for lower end smartphones, you're going to come up with something like
free fire.
And that was a huge success throughout the developing world, India, Africa, South America,
Asia.
Yeah.
And the good thing about that particular business model is it's not pay to win, it's pay to
play.
So it's cosmetic.
So say the new Star Wars comes out or whatever's running at the time and you want to have that
cosmetic character like cosplay, essentially.
Kids would just purchase.
So by kids, I mean, I'm 37.
We grew up with all the Playstations and the Gameboys.
So essentially our generation, when you're on a bus, you just want to do something.
That's essentially the market and it doesn't stop.
As long as the mechanics of the game is fine, if they continue to change, what's coming
up, Father's Day, I don't know, pull out a freaking Father's Day, just go to something
equivalent and off it goes.
But so the biggest issue with that company was that was their main source of revenue,
right?
And they got banned from.
Yeah, well, that was their main source of profits.
So they did make some strategic errors.
So at the top of the market, good thing they did, they raised a lot of money.
The bad thing they did, they decided to go from Southeast Asia company and see to basically
a global company.
So they entered like Europe, e-commerce in India, big push into South America, and then
all kind of went wrong all at once.
Banned from India, lost those profits, gaming turned down, e-commerce turned down, and they
just committed to this immense spending on investment.
That was kind of the crunch that they got held up in.
And then basically they slashed sales and marketing expense, but I think it was well
over 50%.
What needs to happen for that company to make a dramatic turnaround from the current?
Well, it's going to be interesting because let's say they're annualizing 2 billion of
profit at the moment.
It's not clear yet what they mean by return to growth and how much they're going to spend.
Will they spend all that in growing?
And if so, the big question is, are they going to grow or is it just going to create a war
with Alibaba and other people that compete with Southeast Asia?
Yeah, in South America, Macadalibra.
To be honest, that's probably an area they should probably exit.
If the bull case is, it certainly helps that India is coming back.
Gaming for the first time since this growth self began has returned to growth in the last
few weeks.
They are making a ton of money.
They do have money they can invest and still be profitable.
And they are number one in most of those countries in Southeast Asia that they operate in, in
e-commerce.
And these are young growing populations with increasingly high but still relatively undeveloped
in terms of internet connection, mobile usage, e-commerce penetration.
And so there's still that long-term thematic where C is probably best positioned to capture
that.
And now they're profitable and extremely well positioned to do that.
So all the reasons that people did buy the stock originally are there.
And I think the company is basically trading for where we bought it at.
Well, here's a fun question.
If you didn't own it, would you buy it today?
I kind of wish I didn't own it until today.
Yeah, that whole story, you know, went up eightfold.
We've all owned it, I've owned that PA as well.
And I swear what we bought it at, it sounds like something around all the way up to four
dollars.
Yeah, it was like, we bought it at 43 and it went up to 360 I think.
And then it went down to 37, so basically down 90%.
Yeah.
But that run up was massive.
And then essentially what Tencent got banned.
And there was all that Hawaii stuff as well.
And essentially it was just like, you know, we don't want to be associated with, West
doesn't be associated with China and then it just got hammered.
Yeah, well, I think, yeah, I mean, it's Singapore based company.
I think it's one of those, the challenges of the last couple of years is that company
has grown, you know, eightfold whilst we've owned it.
And it's probably down, I think we bought it, our first shares were bought at 43.
I think I read an article years ago, it was the fastest growing company, not just in China,
like in the world at like for every particular year.
Yeah, it was.
And if you told me they were going to then be generating the profits they're generating
now, the actual profits, forget the revenue and the user growth, you wouldn't have thought
it would be down over those two years.
But it is.
It just makes me think it's mainly political that essentially drove that.
So the reason I think it's markets, I think it's, if I describe it was just, it was just
everybody's favorite stock.
And it just had to like, it got way too hyped and then it got unwound.
And a lot of us, myself included, that were like very committed, you know, we're going
to be high conviction and we're going to take a five to 10 year view and hold them.
And then companies like C just kind of really punished that view.
And you know, fundamentally it's ahead of where you thought it would be.
Well, let's use that lovely word hype and let's talk about what is the most hype thing
in the market, which we kind of touched on before.
And probably in my opinion, one of the only reasons the NASDAQ is up is this artificial
intelligence.
And I remember the beginning of the year, I was turning to my mates, you know, as advisors
looking at where we're going to allocate for, you know, funds, et cetera.
And I was like, this AI trade makes so much sense.
But the question always is just like with any gold rush, you know, are you going to
make more money in the tools or, you know, hunting that beautiful gold shiny ore?
So what do you reckon now?
It's had a huge run up.
I'm seeing a number of people saying that Nvidia and Compasata were potentially more
or less than they should be.
Do you think it's a bubble forming or do you think this is only up and coming or do you
think the play is predominantly, you know, in the manufacturing side on the chips like
Nvidia or do you think the play is actually in the language models like Microsoft?
What's your opinion?
Look, I think there's a couple of things and that tools versus, you know, like the gold
miners or the tool sellers or whatever our analogy is.
It's kind of a split between the people who the companies that people are spending money
on and the people raising money and spending that money.
And so to this extent, there's a bubble that's probably in the companies that are raising,
you know, hundreds of millions, billions of dollars and then spending it on chips.
And then where you really want to be is the people who that money is being spent on.
And there's reasons for that.
I mean, it's very unlikely, I think, that there's going to be more than a few big winners
here.
And it's almost like instead of tools versus miners, it's probably more like David's versus
Goliath's.
And, you know, in tech, often it's been the Davids that have won.
You know, you've had, think about like software.
It was like these small, nimble software companies just making much more friendly consumer products
winning over against these big, steady, you know, Oracle's and Microsoft's and things
like that.
Often, sometimes, often the Davids actually win.
But in this case, it's crystal clear to me anyway, my personal view, it's an increasingly
strong one is it's the Goliaths that are going to win.
And the reason I think that happens is there's just, I think it's going to be, there's going
to be three big winners.
There's going to be Microsoft and OpenAI, and they're going to roll out, Microsoft will
roll out AI across all of its products, you know, recommendations, ways to improve your
slides, ways to summarize meetings with teams.
They're going to use OpenAI's technology and increasingly others, but they're going to
have a lock on that ecosystem.
They're going to charge hundreds of millions of people, whatever it is, $30 a month.
That's going to be an enormous revenue stream.
They're going to invest that in, most likely in video, they'll foster a number two in AMD.
Then you've got Google, which is kind of the sleeping giant who actually has their own,
who developed all this, you know, foundational science behind this.
And it was ex-Google people that then went and founded, or were mostly behind OpenAI.
But Google is the only company that has like in a computing capacity to kind of compete
with anybody at the moment in this space.
They're developing their own chips called TPUs instead of GPUs.
Instead of using Nvidia, they're using Broadcom for these.
But there's a lot of people who use Gmail, Google Docs, and you know, that kind of Google
suite of products.
And so Google is a clear winner there.
I don't think any of the other large language models are going to penetrate either of those
domains, whether it's business, which mostly uses Microsoft or people or startups using
startups, you know, kind of forward looking companies locked into Google's ecosystem.
So I think they win there.
And then the third player is like Meta, which is investing a huge amount and is open sourcing
the whole thing.
They're open sourcing all their models, which will, the next generation will probably be
better than chat GPT or GPT-4.
Which means that there's like a free source backed by one of these hyper scaling, you
know, internet giants.
And if there's a free source, then where does that leave everybody else?
If you're trying to develop a language model or even a tool to compete with Microsoft that
improves productivity, or even like say an image, are you going to compete with Adobe?
You know, it's really hard.
I really think that Goliaths are going to have a lock on this technology.
In terms of where you want to invest, the good news is that the risk reward in these
companies is generally pretty exceptional.
You know, they're particularly because they have relatively low risk given cash bounces
and profitability.
What companies are you holding in the portfolio that's exposed to this space?
We have a fair bit in the biggest ones we hold are ASML, AMD, and we did hold a lot
of Nvidia.
They've recently reduced that.
The reason for AMD is we think they're going to, we're confident that big purchases of
these chips are going to foster a number two.
ASML we own because they make the machines that kind of make the chips.
They did a lithography, like the really, which is really advanced technology.
There's nobody else that does it.
We thought really hard about Taiwan Semiconductor.
In terms of where these chips are being made, they might be designed by Nvidia, AMD, or
in the case of Google's GPUs or Meta's chips, they'll be designed by Broadcom.
They're almost all going to be made by Taiwan Semiconductor.
We don't own it.
The reason we don't own it is because over the last two years we've been buffeted by
headlines so many times.
I'm just not comfortable yet about how you actually weigh up that risk of China and Taiwan
flaring up.
If you had to pick another one, the next biggest manufacturer is Samsung and Taiwan Semiconductor
does four to five times as much.
Well, I went to a fund manager, I don't know who it was, and he was discussing that essentially
manufacturing in this space was his play.
He was referencing a couple of companies I've never even heard of in Korea that are essentially
making these chips for this particular space.
I can't remember the names of them.
The supply chain is pretty incredible.
There's companies that just do cleaning of various phases of fabrication, or maybe they
make the lenses, or they make the wafers.
There's been a period of consolidation over the last probably even 20 years where there's
really often only one.
So, ASML, there's literally one person that makes this key machine that you need to make
these advanced chips.
Often, there'll only be two.
These are extremely profitable companies that are all going to be the beneficiaries of this
spend and it's going to be one of the biggest CapEx drives in history.
I can completely understand why people do that, how people focus on those different
companies.
Funny enough, it's probably one way even a semiconductor index is probably a good way
to play for most people because you get a mix of all those companies.
So you will capture the winners.
Invariably now, given the performance, it was going to be heavily weighted towards companies
like Nvidia, which ultimately is probably...
Yeah, I've been doing this for so long, but still always make the mistake of focusing
on the number two and not the number one.
Every time, almost every time you're almost bet off with the number one, it looks like
Nvidia is trading on a 4P of something like 29.
It's not expensive given the revenue growth that's going to come.
And it's quite likely that the right call in semiconductors is the obvious call.
It will be the number ones.
It's the ASML, Taiwan semiconductor, Nvidia.
If you go down the supply chain, it's probably people that have monopolies on key components
where the money will have to go and they will capture some of that value.
It's a very cyclical industry as well.
So a lot of the purchase orders, many of them are real and be continued.
So the hyperscalers, the Teslas buying Nvidia chips, Microsoft buying Nvidia chips, everyone
buying these clusters, that's going to continue.
But the startups that have raised a ton of money, which my view is unlikely going to
have such a happy outcome, that looks like a hype cycle should probably end and that
demand will probably be much more short lived.
So you could easily be in a position in one, one and a half years where everybody is massively
over ordered these chips.
They come on the market and then as happened a number of times.
We've seen this before.
The crazy thing is we've seen this so many times in the last three years.
You see it across every single industry.
The good times, champagne pops, people doing deals at the top.
And then essentially it just kind of dries up and everything crashes.
And there's a couple of fund managers we quite like as well that only their entire business
model is they wait for essentially, they don't participate in the firm.
They wait for essentially the entire thing to crash and then the strongest member survives,
the rest die.
And as you said, they back the number one player in that space at ground zero and everyone
hates it.
And then they just wait patiently for five years and the thing rips.
It requires a lot of money and a lot of patience to play that strategy.
Yeah, I mean, even in...
What do you reckon, what are the valuations currently?
I haven't had a look this morning, but what's the valuations for these AI and computer chip
companies?
Are they to the point where they're overvalued currently?
Are they in the forties yet?
Whenever I hear valuations starting in the forties, I'm like, all right, boys, potentially
time lock is the profits now.
Like what's Taiwan's semiconductors trading at 9.5 times EBITDA.
Nvidia is a forward P of 29.
It's rich, but these kinds of thinking can be misleading.
It's one of those...
Because they're cyclical, so they'll always look great at the top and with amazing growth
at the top and amazing forward P's.
And often it's like when they're losing money that are the best times to own because it's
just been this...
Because that's when the industry is rationalizing and that's when there's much better years
ahead.
One thing we found is we obviously had one of the best track records and then had a horrific
2022.
So something that I've spent basically all this year is how could we have done better?
How could we have captured most of those gains but not had such a drawdown?
And it really comes down to risk management and developing really effective, simple risk
models and applying those kinds of things to semiconductors is extremely effective.
You actually generally generate much better returns throughout the cycle with lower drawdowns,
which is rare and hard to find in finance.
But the reason for that is they go through these enormous cycles.
So you really want to be in them in the bull markets and out of them in the bear markets.
If you tried that kind of strategy with a bank or utility, you would end up losing money.
Well, let's touch on that a bit more because we were discussing...
I think you showed me last week.
It's really quite cool.
You've actually developed a tool to tighten up that process.
Get us up the mountain and then get us down the other side of life.
So do you want to walk everyone through that?
Yeah, it's not something I've really talked about much but...
I'm not suggesting you have to make it public or anything.
I'm just saying...
I actually put it up on a website, chartchamp.ai.
So I've been playing around with it.
If you want to experiment with it, they can.
The idea is basically the kind of areas that we invest in generally have these extraordinary
rallies.
There might be one to five year periods where they are the best performing companies and
they've got three, four, five, 10 times.
But they're also the kind of sectors that drop 65 to 90% every now and then, which is
quite...
There's a number of these.
Bitcoin has done it.
Semiconductors do it all the time.
Commodities are very similar.
High growth tech displays these characteristics.
So what you really want to do is you're going to try and minimize your losses and then make
sure that you have something A, that gets you back in if you sell and B, that can potentially
keep you in if it is in fact one of those four year runs where everything goes up five
times where you make real money.
If you just do it because you think things are expensive or you think things are cheap,
that's kind of really hard to do and you're probably going to get it wrong.
Well, let's have a bit of fun with this.
If you have it up there, why don't we look at a company and say exactly where it says
you should be in, where you should be out.
Yeah, let me have a look.
So I'll put in one of these.
Why don't we do C, which is close to my heart because it's such a big returner and then
such a poor performer.
So this kind of told you to buy in 2019 at 13.
Then told you to sell it 255.
After it hit the high, it come off a bit.
It's well off the high.
Yeah.
But then obviously the market collapsed.
If you ran the strategy of the life of the stock, you'd have made 48% with a 50% drawdown.
The stock itself returned 18% from IPO per annum with a 90% drawdown.
So you cut the drawdown to 53, which is borderline manageable.
But you got a 48% CAGR and actually kept you out of the market for most of 2022, which
is where that kind of benefit came.
And you made 10 times your money instead of 2.7 times.
Does this suggest to enter in the past?
Actually, it said sell recently.
And we've actually running these models across most of portfolio didn't about that time and
then regretted it shortly after.
We did it with, there's another company that we've been kind of intrigued by, which is
Farfetch, which went from, I think we bought it 17.
It went up to 65 and then down.
And that gave a sell signal on this and we exited even though management was kind of
coming out with some pretty old statements and claims and that has completely collapsed
since.
So it has saved us at least once.
So how far had that stock fallen after you got it out of it?
I'd say it would be down by more than 50%.
Yeah, right.
So it's quite sizable.
The reason why this is so interesting is, as you said, this space is renowned for hot
money, hot ideas, you know, and it's where all the excitement comes from, but you make
money from getting out of it.
As much as what, look, to be honest, I would just love to be just an investor.
You buy these companies, leave them there for the grandkids and off you go.
But unfortunately with the cyclical nature of some of these industries, it doesn't really
behave that way, even though the company might be around for 30 years.
Yeah, definitely.
I mean, I think I was looking back at like some of the videos and stuff we put out a
few years ago and the message was kind of like, look, there will be drawdowns every
now and then.
You know, there was the tech record, two and a half years down and then probably a similar
amount of time up.
But then the returns over like 10, 20 years were exceptional.
And that's fine, but I'd say, you know, it's much easier said than done, isn't it?
Given the last couple of years, you know, that two and a half years from 2000, 2002,
I can see why, I can really see why that whole generation was scarred.
You meant talk about changing behaviors earlier.
Think about changing investors behavior.
Everybody who went through that, just had a completely different perspective on things.
Same with 2008, 2009.
You could go two ways.
You could go two negative and then miss the extraordinary boom afterwards.
I think which is what a lot of people have done as well.
Like you're too gunshot to get back in at the bottom, which is generally the wrong move
because we've seen it all the time with cycles.
The thing is, every cycle is exactly the same.
It's just the variables on the next way up will be completely different.
And what's crazy is everyone is discussing, oh, this one's going to go next.
What a fine is like nine times out of 10.
There's some random sector of the market that no one's even seen before.
Then after it happens, everyone's like, oh yeah, I told you that one was going to happen.
Well, the other issue is, and I think reason these price-based models can be so effective
on risk is that the prices do move so much earlier than anything before anything actually
really happens.
And it might be, you know, the market just got, there's just less buyers and sellers
all of a sudden.
It might also be that the insiders, maybe they're not selling, but they've stopped buying
or stopped telling their mates to buy because there's no, there's trouble coming.
All these things kind of like feed into the price.
Look, I think in terms of how we've changed our approach, we'll never go through a drawdown
like that ever again.
We really want to make sure that we're out of the market when we have to be.
But that comes with making sure that you have a clearly defined way of getting back in.
And then the good thing is all these tools, I built those with AI.
There's no way I could have done this kind of coding exercise by myself.
That's the most interesting thing.
I was going to say before, there's always, you know, they were talking about, you know,
manufacturing or the tool itself, but I was, I've actually found personally, even from
what I do is doing number three, even all my clients, which I speak to, they're all
in different areas.
So many people use AI to essentially take a task that might take four, eight hours down
to one, just officially improving their process.
So I think what doesn't get discussed enough is the, what's the actual impact of some of
these models just to improve normal human beings, day to day jobs.
And how's that improving the underbelly of efficiencies across not just one, but every
industry?
I find that mind blowing.
And I think also when it comes back to that demand side, like how real is it?
Is it a bubble or not?
You know, when, when all these, when everyone's using these AI, there's like a supercomputer
whizzing out basically, you know, the other side of the planet or potentially close to
us.
But that computing demand is real and that's going to come, there's a handful of beneficiaries
of that.
So I think in terms of like the beneficiaries of the trend, it's going to be the companies
that really capture the revenue from those and that immense increase in computing.
You know, honestly, computing was probably a pretty safe bet before this, that computing,
the demand for computing was going to go up over time.
And in fact, semiconductors have generally been one of the best performing sectors, Albi
also one of the most volatile.
But now there's, there's like this extra demand that's going to come on because these things
are so effective.
And, you know, you can actually see computers think like I'm on Google barred, which for
many things, cause it uses live data is much better than chat GPT.
Certainly if you're doing research, let's say you want to, we're talking about Ford
GLP ones.
You just ask it, give us, give me the latest GLP one drugs by revenue.
Give me the top five papers in 2022, 2023, 2022, 2021.
Were there any longterm studies lists those papers?
What were the key outcomes?
Um, tabulate all this data.
You know, Google barred will do that for you now.
Um, it's pretty, in fact, it's incredible.
And it'll save it all.
Well, it appears I'm about to switch from chat GPT to Google barred and give that a
go.
But the key point is you watch Google barred thing.
Like this is Google.
Imagine the compute power that Google has at its disposal.
I think about how fast and to make that more clear, think about how fast Google can like
index all of the world's knowledge.
You know, you type in something, it just happens almost instantly.
And now think of the fact where if I type the same thing that I typed into Google, but
literally went through basically, you know, crawled the world's information, type that
into their large language model and it takes them like 10, 20 seconds to think about it.
Like that's a computer.
That's the same speed, that same power computer probably is like thinking about that.
Um, which is why it's, which is why, you know, that, why we have such conviction on that
demand for computing power going forward.
It just blows my mind.
Any thing else that you've seen in reporting season that's performed well or something
that missed that you thought?
Look, I think reporting season was pretty solid across the board in the United States.
You know, the crazy thing is these, a lot of these companies are swung from being really
cheap in 2016 to like literally as expensive as they've ever been in 2021 to as cheap as
they've ever been some cases by a factor of 10, um, you know, over the last year, but
most of the companies we track and own every three months, they're 10 to 20% bigger than
they were.
And that has kind of continued.
Um, I think also you're now seeing pretty much every company in, or most of the, certainly
the companies that we like, uh, you're seeing huge increases in profitability over the reporting
season.
And actually some of that has come from high interest rates.
So sort of CrowdStrike and a couple of other companies.
A lot of these companies have billions of dollars of cash that are now earning five,
6%, which can be hundreds of millions of dollars, uh, which for a marginal company is all of
a sudden extremely meaningful.
So it's interesting to see that benefits of those high interest rates also flow through
to some of these companies.
Um, yeah, I guess locally we're most excited about curve beam, uh, and offshore we're really
tracking closely the semiconductor industry and the impact of the GLP ones.
Um, which I think is also really exciting and interesting.
Anything else?
Uh, that's probably about it.
I'm going to get him.
Well, favorite question I'd like to ask is, um, what keeps you up at night and what gets
you out of bed in the morning?
Uh, what keeps me up at night?
I mean, I feel like we went through, I feel like in our sector, the bomb kind of went
off last year.
You know, that was kind of like the, it was like the forest fire that burnt through like
20 years of undergrowth, you know, that had been building since 2000, 2002.
Um, it's a good question.
I think the way we're structuring things now, we've designed a process so that we're not
going to get caught in a drawdown the way we did in 2022.
So do sleep a bit easier in that regard.
Um, yeah, it's a good question.
I mean, personally we've seen inflation fall and interest rates stay extremely high, but
should that trend continue?
Interest rates will fall, the peak in valuations will be here, fast growing companies and you
know, we're typically investing in companies growing over 50%.
Their returns as they did for the 20 years prior to 2022 will be at least as good as
their organic growth rates have returned.
And that for us is a pathway out of this and, you know, being market leading performance
again.
Um, the downside of that would be if let's say for whatever reason, inflation continued
to spike up and actually interest rates had to go up another two, three, 400 basis points.
That would certainly give us another round of selling.
So that's probably, you know, one of the worst things that could happen.
So far we're not seeing that though.
You're actually seeing the opposite, seeing inflation fall and interest rates probably
peaking.
Um, is that helpful?
Is that enough?
I feel like I've done like two or three closing statements now.
Well that's great.
Um, well Michael, really good to have you on again.
And um, if anyone wants to learn more about Fraz's Capital Partners, where can they find
you?
Um, I'm on FrazCapitalPartners.com.
I'm on Twitter at Michael Frazes.
Uh, yeah.
Fantastic.
All right, Michael, we'll have you back on in 12 months to see how things are going and
really good to see you again.
Thanks, Murdoch.
We appreciate you having me on.
All right.
Have a good one.
Thanks for having me.
Thank you.