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Welcome back to the Rated Change with York Wealth Management.

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As advice as to some of the wealthiest families in the country, Rated Change is a podcast

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designed to help you in the pursuit of building long-term wealth through the insights of some

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of the brightest minds in asset management.

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I'm your host Murdoch Gatty and in today's Rockcast, I'm speaking with Dr. David Allen,

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Plato Investment Management's co-head of research, head of long short strategies and portfolio

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manager of the Plato Global Alpha Fund.

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For keen rugby fans out there, you may be familiar with David as he was a professional

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rugby player and is currently the president of the Eastern Suburbs Rugby Club.

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For me, I enjoyed hearing David explain the unique structure and how the fund achieved

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a high alpha return without having a highly concentrated portfolio like a 2020 portfolio.

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There's something like 750 companies interchangeably in the strategy at any one given time, long

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and short, which is quite remarkable.

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He also unpacks the red flag process, which he used and gives a whole lot of examples,

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which is incredibly interesting.

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And also the return on the fund has generated roughly 8.5% over the MISCI World Index since

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inception.

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Before we get into the Rockcast, I'd also like to encourage you to listen to the disclaimer

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at the end of this Rockcast and to keep your feedback coming.

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If there's any other guests you'd like to have on, any specific fund managers or any

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particular thematic with current markets, please reach out to me at mgatti at ywm.com.au.

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So with that being said, I hope you enjoy this conversation as much as I did.

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So sit back, relax and enjoy.

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David Allen, welcome to the Rate of Change with York Wealth Management.

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Thank you guys.

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Thank you very much for having me.

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Looking forward to it.

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Why don't we kick things off by telling us a little bit about yourself and how you got

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into financial markets?

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Yes, sure thing.

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So I guess I actually originally went over right after university, went over to play

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40 overseas.

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And then within the first year I was playing over in Ireland, I injured my neck and that

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was kind of the end of my footy career.

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And it's probably a good thing because I think I ended up being a better fund manager than

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I was a rugby player.

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And went over to London, did the typical rite of passage where you, I thought I'd just be

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there for a couple of years as Aussies like to do.

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But in the end I was there for 15 years.

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So it was a great stint and I was incredibly lucky.

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I had some amazing mentors and incredible experiences over that time.

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And you know, life, you know, you need a bit of luck, right?

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And within two weeks I had a job at Jacob Morgan Asset Management, which over in the

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US and Europe, obviously is a hugely important group.

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And that was a group that was really on the rise.

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When we started, we had 18 billion euros under management and we reached a peak of 75 billion.

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So I was very much right place at the right time.

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I had some great mentors and learned a hell of a lot.

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Went through the sort of end of the tech bubble to the GFC, through Brexit, sovereign debt

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crisis.

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So lots of great experiences there where you learn more in two weeks than you do in two

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years.

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So that was a really exciting time of my life for sure.

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And then I guess I met an Aussie girl and she was a little bit sick of the weather,

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which is fair enough.

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We wanted to come back and start a family.

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That's exactly what we did.

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So I've been back at Play-Doh in Australia for five years now and really enjoying that

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and running some long short strategies here, which has been really exciting.

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Gotta love Europe, must say.

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100%.

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100%.

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Why don't you shine some light on what exactly is Play-Doh investment management, the philosophy

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of the investing process.

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And when we were chatting the other day, you mentioned that essentially the strategy is

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very similar.

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The Alpha strategy is very similar to what you were doing over in the UK.

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I was just curious, how is it similar and how is it different?

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Yeah, so for people who don't know Play-Doh, there's 11 billion under management and the

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process, it's deeply fundamental in nature.

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But that said, we extensively use data and systems and code to really drag the role of

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the traditional bottom-up fundamental manager kicking and screaming into the 21st century.

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So I think going to the days where you've got a few mates who are brokers that feed

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you some tips and then you put the tips on and go out for beers after lunch.

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Our process is being developed over a 20-year period and has huge similarities to what I

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was doing at Jake and Morgan.

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We did, when I joined Play-Doh, we did a drains up in the investment process here and I brought

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together all of my learnings over the years, synthesized that with the best of the Play-Doh

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investment edge.

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And more recently, we brought in some fantastic guys from the Macquarie Hedge Fund Group.

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That was a really successful group.

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They were generating over 100 million profit a year and we've brought a handful of those

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really top global investors, long short investors specifically into our group and bringing together

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the best ideas and the best thoughts from all those areas.

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The process, if you look at it, it's pretty straightforward.

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I'm a big believer that there's two things that are really difficult to do in markets.

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One is market timing.

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The second is style timing.

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Value shot the lights out last year, but who would have thought we'd be sitting here in

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October and that growth had gone phenomenally well.

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You had this AI frenzy, NASDAQ had gone through the roof in an environment where rates were

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rashing up so aggressively.

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Style timing is very, very difficult to consistently get right.

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So we're very much of the philosophy that at all times you want some fantastic value

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companies, some fantastic growth companies and some fantastic quality companies.

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And only by doing so can you give that all with a performance that's immune to a certain

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extent to changes in inflation and interest rates that are largely hard to predict and

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out of your control.

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So that's the first thing, really striving for all weather investment performance.

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The strategy since launch I think has outperformed in 88% of rolling quarters.

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The other really distinctive thing about our investment process Murdoch is the red flags.

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Lots of people talk about value, growth, quality, but the red flags is something that is pretty

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distinctive but we've actually got 130 different red flags that we look at before we make any

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investment either on the long side or on the short side.

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It's a bit corny, but Buffett was always one to saying that there's only two things you

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need to know.

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Rule number one, don't lose money.

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Rule number two, don't forget rule number one.

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And that's really what the red flags process is all about, making sure there's no landmines

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lurking on the long side of our portfolio.

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But also identifying companies that are great shorting opportunities that we really expect

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to underperform materially.

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And it is very interesting, like the strategy we're talking about today is a 150-50 strategy,

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so it's 150% long and 50% short.

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Typically, the net exposure to the market is always 100%.

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This will rise and fall like the traditional long-only equity funding competes in that

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morning's bucket.

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But the red flag is something that's actually our most potent alpha signal.

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The genesis of this was actually I was invested in back in 2014, a Spanish tech company.

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This company had gone up 45-fold since we held it.

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So it was a phenomenal investment for us.

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But the Spanish prime minister was coming out and hailing this tech company.

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They did public Wi-Fi as the next unicorn in Europe.

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And sure enough, after you get a kiss of death of that kind of politician, then we should

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have known there is time to sell.

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The stock price was uncovered as a huge accounting fraud.

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Stock price goes to zero.

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CEO gets indicted.

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And we said, damn, well, let's make damn sure.

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It's okay to make mistakes, but let's make damn sure we don't make that same mistake

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twice.

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So we did a post-mortem and said, okay, what did we miss?

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And we missed a couple of things that were pretty straightforward.

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The first one, they were using an auditor that nobody else was using.

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The second thing is they're paying their auditors a really, really small amount, only 0.02%

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of revenue.

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Typical for a company like this, you'd expect around, say, a percent.

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So being evidence-based investors, we said, okay, let's identify every company we can

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over the last decade across 10 different countries, so tens of thousands of companies that have

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a really obscure auditor.

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And sure enough, those companies do go on to be more risky and often do blow up.

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So on average, you do want to stay away from those companies.

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And there's countless examples where from Bernie Madoff using his uncle up in Queens

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to do the books, where the quality of those service providers is really important.

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And Darnie, a recent one where they had a very junior auditing firm that didn't have

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the capability to deal with a company of that complexity and the web of transactions.

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So really, that was the first red flag.

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And over the years, we've built up this toolkit.

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So there's now 130.

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So we looked at Enron, the poster childs for special purpose vehicles and related party

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transactions that are present in pretty much every accounting manipulation that you see.

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We look at the history of all the directors of companies we invest in.

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Have they been involved in a corporate failure in the past?

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What are the directors doing with their own money?

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Are they suddenly selling equity in the companies?

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We look at what's the hedge fund community saying?

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Do they have some big short positions in names?

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Maybe they know something that we don't know.

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The interesting thing is each one of these red flags in isolation is not actually that

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powerful.

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It might give you a 51% edge.

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So not much better than a coin toss.

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And often, with something that's low edge like that, you might just ignore it and just

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move on and just get on with the investment anyway.

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But what you find when you add together this very large group of eclectic different red

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flags across governance, forensic accounting, financial distress, that the whole is much,

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much greater than the sum of the parts.

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And you get a situation where if a company has eight or more red flags, they tend to

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underperform the market by about 20% a year.

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And that's been a big driver of our alpha today, where we've actually made 90% of the

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alpha on the short side.

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So investment...

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Well, let's talk about that alpha, because the thing I found really quite interesting

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about your approach and your strategy is, I think I was on your website and it was a

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comment or an article made, which is you have the return is quite good.

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And normally, essentially a return associated with that type of portfolio is a concentrated

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portfolio like 20 stocks, right?

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But how many holdings are in the portfolio?

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Yes.

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So this will probably surprise you.

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Even though we've managed to outperform the index by almost 9% per year after fees, we

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actually have a lot of holdings in the portfolio.

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There's about 500 names long and about 250 short.

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So 500 names long, 250 short.

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And what's been the average return?

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So the average return of the portfolio overall has been about 9% above the MSCI world benchmark

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since launch.

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So people say they struggle to get their head around it.

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They go, how does that make sense?

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You're so diversified.

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But the reality is that there's no one right way to make outsized returns.

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Like Buffett's done it for a number of years using a very concentrated portfolio at one

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end of the spectrum.

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But the most successful hedge fund of all time, Renaissance, generated 35% returns after

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fees for almost 30 years.

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They've got thousands of positions in their portfolios.

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So there's no one right or wrong way.

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We tend to be more diversified.

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A lot of your listeners are probably familiar with the concept of active share.

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So that's how different I am from the benchmark, which is the kind of important thing.

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Our active share is about 100%.

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So that's similar even more than the active shares you get with your 20 stock all in portfolio.

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So why are we quite diversified?

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Well, it's certainly not by accident.

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A top course of our manager, when you look at it statistically, we only get 55% of our

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stock picks right.

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It's pretty depressing, right?

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You spend your lifetime doing it and you're not much better than a coin toss, right?

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But our models and our process, we think we can get in the high 50s, almost 60%.

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But even so, we're getting four out of 10 wrong.

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So if we have a 20 stock portfolio, you can easily be, even if you're skillful, you can

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be unlucky and underperform.

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So a good analogy, if you like, is the roulette wheel, where the house has a pretty small

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edge, right?

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But because players are playing at thousands, hundreds of thousands of times, the law of

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large numbers, the house is guaranteed to come out on the right side of that, even though

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they have a very small edge.

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Okay, so the, well, I don't want to compare us to gambling here, unless we are the house,

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of course.

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If your edge isn't that large and no one's edge is that large because markets are quite

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efficient, you do want to be diversified to ensure that you just don't have unlucky periods

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of low-key performance.

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No, it makes a lot of sense.

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And the other thing which I wouldn't mind understanding is it's a lot of direct holdings,

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are they defined, they sometimes concentrate in a particular sector of the market or?

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Yes.

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As an example, right?

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You know, AI has been moving, you know, would you potentially allocate five or 10% of the

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portfolio to AI, but that might encompass, you know, 10, 20 direct companies.

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Yeah, sure.

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So yeah, we absolutely do that.

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You know, whereas a traditional 20 stock portfolio might have two or three thematics in the portfolio,

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you know, that are really driving things, you know, we might have 50 thematics, 50 micro

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thematics and AI will be one of them and we've held Nvidia, Broadcom and ASML as part of

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that thematic.

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But we certainly don't want to go all in on any one investment trend because I just don't

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think that's good risk management.

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We saw the Cathie Wood ARK funds that were all in and then they had a horrific drawdowns.

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I think investors have moved on from wanting something that's super concentrated, that's

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going to be up 30%, down 30%.

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You know, they want a bit of a more of a consistent journey.

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You know, a nice sort of simple analogy that I just heard for the first time the other

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day actually was the great Don Bradman.

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How many sixes he hit in his career and I don't know if you're a cricket fan, but he

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hit only four or five sixes in his entire career.

246
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Everyone's a Bradman fan.

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Even if you don't like cricket, you're a Bradman fan.

248
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Well, that's right.

249
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That's right.

250
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And yeah, that's pretty, pretty extraordinary.

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The batsman with the greatest average of all time, almost a hundred, barely hit any sixes.

252
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So how do you square that?

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Well, his philosophy is you don't get out if you only hit the ball on the ground looking

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for singles.

255
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And that's more our approach.

256
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We only go all in on the big kill.

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You know, it's got to be all in this biotech stock or whatever.

258
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You know, further, you know, to express lots and lots of different views in the portfolio.

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And if you hug the index, that's obviously you're never going to generate any alpha,

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but we have nothing like the index and what we hold in the portfolio.

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And that's what allows us to generate those really robust terms.

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Yeah, and it's interesting you mentioned like funds like Cathie Wood.

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I'd actually say that there's no one hard, fast way for fund managers to operate.

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And I kind of respect what fund managers like Cathie Wood or, you know, some funds that

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have one specific thematic because it is literally that rises and falls depending on macroeconomics.

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Like they can't control, they can do is pick the best internally at that time and then

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risk manage accordingly.

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But the reason they all have their place.

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So we've seen what's happened with gas, commodities, you know, all different areas.

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But the reason why it's good to talk to yourself, David, is a lot of people out there in the

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market are looking for old classifiers.

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You'll find as a stable, solid entity, which you can kind of just hold consistently.

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Right.

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Meanwhile, you have these satellites where essentially you are some investors are looking

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to take positions and, you know, take a bet or a view on a particular thematic for a period

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of time based on, you know, fiscal and macroeconomic policy, which is fine in itself because there

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is a level of volatility we haven't seen for the past seven years for like 50 years.

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So it's quite interesting.

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Wouldn't you agree?

280
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Yeah, yeah, definitely.

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Like if you're a savvy investor and you can risk manage well, then yeah, by all means,

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investing in different thematics is absolutely a way that you can add value.

283
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The timing as with everything is all important.

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There's an interesting study that came out of Journal of Portfolio Management this year,

285
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which is one of the preeminent journals.

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And they did a study in the US and said that every time a new thematic ETF is launched,

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so think of robotics ETF or infrastructure ETF or lithium batteries, etc.

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So what they did a very, very simple study that's quite instructive.

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They said, okay, if you'd done nothing, but every time a new thematic ETF has been launched

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on the day the launch you buy it, that's your investment strategy.

291
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Okay.

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00:20:40,080 --> 00:20:44,160
And then you hold it for a period after that.

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On average, that strategy underperforms the market by 20%.

294
00:20:51,720 --> 00:20:55,760
So just rather than just going into like the S&P 500, right?

295
00:20:55,760 --> 00:21:01,000
Underperforms the S&P 500 by 20% over a five-year holding period.

296
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And why is that?

297
00:21:02,800 --> 00:21:03,800
Well-

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That's quite remarkable.

299
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It's really remarkable.

300
00:21:06,160 --> 00:21:08,160
And we replicated the study for Australia.

301
00:21:08,160 --> 00:21:11,320
We looked at all of the thematic ETFs in Australia.

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And we found that the numbers are even worse, that if you just bought every thematic ETF,

303
00:21:17,320 --> 00:21:23,920
the day it launched, then you underperformed the ASX 300 by 20% over the first 12 months.

304
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So more extreme.

305
00:21:25,320 --> 00:21:27,320
So this is incredible.

306
00:21:27,320 --> 00:21:28,320
Why is this the case?

307
00:21:28,320 --> 00:21:31,040
Well, thematic ETFs, when are they launched?

308
00:21:31,040 --> 00:21:35,320
They're launched when public excitement about a theme is at its peak.

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00:21:35,320 --> 00:21:43,840
Or Uber driver is talking to you about crypto or batteries or lithium or marijuana, that's

310
00:21:43,840 --> 00:21:46,600
right when the valuations are really, really stretched.

311
00:21:46,600 --> 00:21:49,560
And it's when a lot of the investors can jump in.

312
00:21:49,560 --> 00:21:53,200
But that's just reverting to my point about timing.

313
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Absolutely a place for those sort of thematics.

314
00:21:56,040 --> 00:22:00,920
But you just can be very careful about when you're jumping into that.

315
00:22:00,920 --> 00:22:03,320
Speak to your advisor and professional.

316
00:22:03,320 --> 00:22:06,320
See counsel.

317
00:22:06,320 --> 00:22:11,200
See, you know, and always, always, you know, invest within your means and all that as well.

318
00:22:11,200 --> 00:22:14,160
But yeah, let's get into the mechanics.

319
00:22:14,160 --> 00:22:16,760
I really do like how everything's structured.

320
00:22:16,760 --> 00:22:20,640
Do you mind letting everyone know how you've structured the fund?

321
00:22:20,640 --> 00:22:26,200
You know, the alignment, you know, just give everyone a bit of an overview of how it all

322
00:22:26,200 --> 00:22:27,200
operates.

323
00:22:27,200 --> 00:22:34,800
The structure is quite simply, it's a 150 50 fund.

324
00:22:34,800 --> 00:22:39,920
So that means that it's it's a lot more complicated.

325
00:22:39,920 --> 00:22:46,560
It says all that means is you've got 50% more firepower, because you're 150% long, 50% more

326
00:22:46,560 --> 00:22:51,840
firepower for you, you're attractive ideas, okay, that you really like that juices up

327
00:22:51,840 --> 00:22:52,840
the returns, right?

328
00:22:52,840 --> 00:22:59,640
But you've also got this 50% short component to generate alpha on on the short side.

329
00:22:59,640 --> 00:23:04,880
So you've got these almost like these two different alpha engines that can add into

330
00:23:04,880 --> 00:23:05,880
the portfolio.

331
00:23:05,880 --> 00:23:10,880
Sometimes the longs are driving all of the alpha and periods of, you know, free money,

332
00:23:10,880 --> 00:23:13,120
like you talked about before, it's great for the longs.

333
00:23:13,120 --> 00:23:17,760
But in periods like this, where interest rates have ratcheted up very, very aggressively,

334
00:23:17,760 --> 00:23:23,080
then it's a great environment for shorting and you know, 80 or even 90% of our offers

335
00:23:23,080 --> 00:23:28,600
come from the shorts and and a lot in Australia, actually, Australia had names like brain chip,

336
00:23:28,600 --> 00:23:35,320
for example, they had a market cap of two or three billion not so long ago, had 23 red

337
00:23:35,320 --> 00:23:38,280
flags on our investment process.

338
00:23:38,280 --> 00:23:45,600
We were short and subsequently the fall, I think the 80 90% off their page.

339
00:23:45,600 --> 00:23:53,360
This is a company that with such a huge market cap, they've got less revenue than some cafes.

340
00:23:53,360 --> 00:23:58,960
And it's purely based on speculation, hype and hope.

341
00:23:58,960 --> 00:24:04,240
So when we see companies like that, then they're great opportunities for us to make alpha on

342
00:24:04,240 --> 00:24:05,240
the short side.

343
00:24:05,240 --> 00:24:10,160
And, you know, going back a ways, I still remember Volkswagen had 17 red flags, which

344
00:24:10,160 --> 00:24:11,600
most companies only have one or two.

345
00:24:11,600 --> 00:24:13,080
So they have 17 is huge.

346
00:24:13,080 --> 00:24:14,080
And that was before diesel.

347
00:24:14,080 --> 00:24:19,560
So they're an incredible tool for identifying which companies are vulnerable and could end

348
00:24:19,560 --> 00:24:24,280
up blowing up and and then you definitely want to avoid and hopefully want to have a

349
00:24:24,280 --> 00:24:28,040
small short position.

350
00:24:28,040 --> 00:24:35,200
Interestingly, in Australia, there's quite a lot of really good Australians and 130 30

351
00:24:35,200 --> 00:24:39,400
strategies, you know, which are similar to almost identical to what we're talking about

352
00:24:39,400 --> 00:24:40,400
here.

353
00:24:40,400 --> 00:24:41,900
We've got the

354
00:24:41,900 --> 00:24:46,360
share plus fund that booty runs, there's the Tribeca funds, there's the hospital funds,

355
00:24:46,360 --> 00:24:48,920
there's your billion dollar fund.

356
00:24:48,920 --> 00:24:55,680
But in the global space in Australia, global one 30 30 or 150 50, there's virtually nothing.

357
00:24:55,680 --> 00:25:01,120
So there's a it's a great opportunity to be able to generate alpha because I fundamentally

358
00:25:01,120 --> 00:25:11,320
believe that this setup this structure where you 150 long 50 short, it it really magnifies

359
00:25:11,320 --> 00:25:14,840
your ability to generate great returns.

360
00:25:14,840 --> 00:25:19,880
And you know, a traditional long only fund that doesn't have that additional juice on

361
00:25:19,880 --> 00:25:24,240
the longs or the ability to generate it's almost like going to war with water.

362
00:25:24,240 --> 00:25:25,240
It's hard.

363
00:25:25,240 --> 00:25:30,040
This is if you're if you're a skilled manager who can pick longs and short, then you will

364
00:25:30,040 --> 00:25:35,800
generate much better returns in in this type of 150 50 structure.

365
00:25:35,800 --> 00:25:42,840
They're massively popular in Europe massively popular in the US but not as well known in

366
00:25:42,840 --> 00:25:43,840
Australia.

367
00:25:43,840 --> 00:25:51,640
Yeah, no, we can definitely see the advantages in this volatile economy we're currently in

368
00:25:51,640 --> 00:25:52,640
right now.

369
00:25:52,640 --> 00:25:57,080
I'm on that point, I would love to hear your thoughts on we have had quite a big recovery,

370
00:25:57,080 --> 00:26:00,800
I suppose, been held up by the Magnificent Seven.

371
00:26:00,800 --> 00:26:02,560
But I'm reading everywhere.

372
00:26:02,560 --> 00:26:06,840
This is underbelly current what's happening in the bond market and then essentially the

373
00:26:06,840 --> 00:26:10,840
rising inflation, the impact on commercial debt.

374
00:26:10,840 --> 00:26:15,760
They're starting to say they're rolling over the contracts for 2024 through to 2028.

375
00:26:15,760 --> 00:26:21,040
You know, CBD, the saying occupancy is down, you know, and the roll on impact and then

376
00:26:21,040 --> 00:26:26,480
I think someone commented that the chart looks very similar to 1987.

377
00:26:26,480 --> 00:26:30,200
The other day on LinkedIn, I'm just very curious.

378
00:26:30,200 --> 00:26:33,440
Since you cover you technically have a go anywhere strategy, right.

379
00:26:33,440 --> 00:26:37,840
So I'm very curious to hear your thoughts on where we are and what do you believe is

380
00:26:37,840 --> 00:26:38,840
around the corner?

381
00:26:38,840 --> 00:26:49,000
Yeah, like in terms of the macro, like, I think the increasing rate environment is really

382
00:26:49,000 --> 00:26:55,520
going to expose a lot of companies, the default cycle is really kicking into to gear.

383
00:26:55,520 --> 00:27:02,960
And China has a huge amount of debt and isn't going to be able to just pump liquidity to

384
00:27:02,960 --> 00:27:07,480
get out of its problems as easily as it's done in the past.

385
00:27:07,480 --> 00:27:11,920
So I think it's going to be harder to for many, many companies.

386
00:27:11,920 --> 00:27:16,800
And if you remember, like, you know, going back to Japan in the 1990s, this phrase was

387
00:27:16,800 --> 00:27:21,680
coined zombie companies, the companies that for year after year, they can't even generate

388
00:27:21,680 --> 00:27:27,600
enough cash flow to pay their interest bills, but I sort of kept on life support.

389
00:27:27,600 --> 00:27:34,240
And there was a lot of that record number of zombie companies in Australia in particular.

390
00:27:34,240 --> 00:27:40,480
And when ranks jack up, these companies can no longer that have often grown by acquisition,

391
00:27:40,480 --> 00:27:43,880
never really made positive operating cash flow.

392
00:27:43,880 --> 00:27:46,120
These companies can get torched.

393
00:27:46,120 --> 00:27:51,200
And so it's a great environment for shorting.

394
00:27:51,200 --> 00:27:57,320
It means that higher rates is obviously tends to be a negative for growth, although we saw

395
00:27:57,320 --> 00:28:01,680
growth do well this year when interest rates have gone up.

396
00:28:01,680 --> 00:28:06,560
But it comes back to you've got to have like some great value names in the portfolio as

397
00:28:06,560 --> 00:28:07,560
well.

398
00:28:07,560 --> 00:28:11,320
Because if rates go up and growth suffers, you don't want to be like an all out growth

399
00:28:11,320 --> 00:28:12,320
manager.

400
00:28:12,320 --> 00:28:15,680
And we've seen this, there's so many of these growth star managers have been hammered over

401
00:28:15,680 --> 00:28:20,400
the last couple of years, concentrated high growth, high beta portfolios.

402
00:28:20,400 --> 00:28:22,560
So we've got some great value names in the portfolio.

403
00:28:22,560 --> 00:28:27,960
So one of my favorites, it's been a great investment for us is BMW.

404
00:28:27,960 --> 00:28:35,760
So BMW, they traded six and a half times next year's earnings.

405
00:28:35,760 --> 00:28:39,760
And they've got a lot of pent up demand.

406
00:28:39,760 --> 00:28:45,360
And people say, oh, and the long term PE for the BMW going back 30 years is 12.

407
00:28:45,360 --> 00:28:49,480
So they're trading half the price of the they normally do.

408
00:28:49,480 --> 00:28:51,680
And so well, they're not growing very fast.

409
00:28:51,680 --> 00:28:59,720
They're not like a Tesla that's growing 35% a year for their revenues.

410
00:28:59,720 --> 00:29:05,720
Well, BMW from a lower base is actually growing their EV revenue at 100%.

411
00:29:05,720 --> 00:29:10,080
If they wanted to be, they can be fully electric in five or so years.

412
00:29:10,080 --> 00:29:16,720
So I think that's a much safer investment and margin of safety is there relative to

413
00:29:16,720 --> 00:29:17,720
Tesla at 72.

414
00:29:17,720 --> 00:29:20,960
Don't get me wrong, Tesla is a great company, great cars.

415
00:29:20,960 --> 00:29:26,840
But so much of that doesn't necessarily mean it's great value at this point.

416
00:29:26,840 --> 00:29:31,280
There's not much margin for error baked into that stock price.

417
00:29:31,280 --> 00:29:37,040
So having in this macro environment we're going into, having the shorts and the red

418
00:29:37,040 --> 00:29:42,440
flags allows us to drive alpha because we may not get those returns to equity markets

419
00:29:42,440 --> 00:29:43,800
in general, just trending upwards.

420
00:29:43,800 --> 00:29:48,200
So you need to be able to generate alpha through something else such as the short, but you

421
00:29:48,200 --> 00:29:53,560
also need to be in companies that do tend to do better in rising rate environments like

422
00:29:53,560 --> 00:29:57,280
the value names like BMW.

423
00:29:57,280 --> 00:30:03,200
What do you think's happening with the banks in Australia?

424
00:30:03,200 --> 00:30:04,200
It's not my specialty.

425
00:30:04,200 --> 00:30:12,960
The banks are, in terms of how well sort of regulated and capitalized, like I was obviously

426
00:30:12,960 --> 00:30:19,360
in Europe, the GSC and so on, a lot of very poorly run and managed banks over there that

427
00:30:19,360 --> 00:30:21,360
were incredibly leveraged.

428
00:30:21,360 --> 00:30:28,480
Australia, I think is much safer in terms of their books.

429
00:30:28,480 --> 00:30:34,680
And it's not something that is not one of the things that keeps me keeps me awake at

430
00:30:34,680 --> 00:30:35,680
night.

431
00:30:35,680 --> 00:30:38,880
Again, Australia is only a couple of percent of our investment universe.

432
00:30:38,880 --> 00:30:44,280
So it's not a massive area of focus, we're not long or short any of the Aussie banks.

433
00:30:44,280 --> 00:30:45,800
Yeah, right.

434
00:30:45,800 --> 00:30:51,480
So actually, the other day, Qantas popped up, it was quite talked about.

435
00:30:51,480 --> 00:30:56,200
So I'm just curious, like with the red flags system, did that pop up on the radar at all?

436
00:30:56,200 --> 00:30:57,680
Yeah, it did actually.

437
00:30:57,680 --> 00:31:01,120
So Qantas, I think, of top of my head has seven red flags.

438
00:31:01,120 --> 00:31:03,000
So it's not insignificant, right?

439
00:31:03,000 --> 00:31:12,160
So there's the red flags were they've got, like obviously, CEO and CFO just leaving two

440
00:31:12,160 --> 00:31:20,600
red flags that can mean nothing but can be problematic for some companies.

441
00:31:20,600 --> 00:31:29,400
We also saw one of the alternative data sources we use looks at employee morale and satisfaction

442
00:31:29,400 --> 00:31:35,560
because the Burek Levin shows that's actually correlated with future company performance.

443
00:31:35,560 --> 00:31:41,280
And no surprises here, like out of the 20 global listed airlines, stocks Qantas is right down

444
00:31:41,280 --> 00:31:45,560
the very bottom in terms of employee morale and the trend of that morale and satisfaction

445
00:31:45,560 --> 00:31:48,560
with management.

446
00:31:48,560 --> 00:31:52,960
So that's a key red flag.

447
00:31:52,960 --> 00:31:57,800
Carbon emissions is obviously poor, but that's not sort of specific to Qantas, pretty much

448
00:31:57,800 --> 00:32:03,280
all airlines have very poor carbon ratings.

449
00:32:03,280 --> 00:32:04,280
What else is there?

450
00:32:04,280 --> 00:32:12,320
Remuneration structures totally out of whack with brand value, if you like, performance.

451
00:32:12,320 --> 00:32:15,920
So there are plenty of red flags there.

452
00:32:15,920 --> 00:32:21,240
But against that, I wouldn't be going short, Qantas.

453
00:32:21,240 --> 00:32:28,600
Qantas have 62% market share, bringing Jetstar into it.

454
00:32:28,600 --> 00:32:31,280
They're massively on the nose.

455
00:32:31,280 --> 00:32:33,800
I'm no fan of Qantas.

456
00:32:33,800 --> 00:32:40,360
They left me sitting with my family at Waikiki Beach when they lost all my bags in my tracksuit

457
00:32:40,360 --> 00:32:43,480
pants that I had worn on the plane.

458
00:32:43,480 --> 00:32:48,080
So I'm definitely no fan, but do I believe that they can reset?

459
00:32:48,080 --> 00:32:55,200
And there's such a part of the global identity that I think that they will be able to get

460
00:32:55,200 --> 00:32:56,520
it right.

461
00:32:56,520 --> 00:33:01,200
And the valuation multiple is so undemanding at the moment.

462
00:33:01,200 --> 00:33:02,200
It's extreme.

463
00:33:02,200 --> 00:33:07,200
It's in the top 5% cheapest that it's ever been sort of thing.

464
00:33:07,200 --> 00:33:10,360
So yeah, it will have another leg down.

465
00:33:10,360 --> 00:33:13,920
But I think longer term, it's still going to be a good investment for most people.

466
00:33:13,920 --> 00:33:17,760
Yeah, it's just very interesting to hear your opinion, though, because there's red flags.

467
00:33:17,760 --> 00:33:23,080
But someone would say that the business is actually quite robust for what's happened,

468
00:33:23,080 --> 00:33:29,280
even though there's a whole lot of headline, not so great headlines, so to speak.

469
00:33:29,280 --> 00:33:34,480
I think airlines in general all have a tendency to leave someone in the lurch.

470
00:33:34,480 --> 00:33:37,680
My favorite thing, I laughed my head off when I was traveling through Europe and I hopped

471
00:33:37,680 --> 00:33:40,480
on a Delta flight and someone goes, you know what Delta stands for?

472
00:33:40,480 --> 00:33:41,480
I go, what?

473
00:33:41,480 --> 00:33:43,600
He goes, don't expect luggage to arrive.

474
00:33:43,600 --> 00:33:45,880
I'm like, well, there's a reputation.

475
00:33:45,880 --> 00:33:48,160
Yeah, yeah, there you go.

476
00:33:48,160 --> 00:33:57,080
And Buffett has this sort of shtick that he likes to roll off that if the best thing that

477
00:33:57,080 --> 00:34:02,760
they could have done for capitalism when they had the maiden flight of Kitty Hawk, back

478
00:34:02,760 --> 00:34:09,440
in the day, the first ever flight, they could have burned that plane down because the amount

479
00:34:09,440 --> 00:34:14,040
of money that airlines have torched over the years is extraordinary.

480
00:34:14,040 --> 00:34:19,240
So yeah, airlines on average, they're not a favorite of ours, but everything has a price.

481
00:34:19,240 --> 00:34:22,160
If something gets sufficiently cheap, it's still interesting.

482
00:34:22,160 --> 00:34:26,880
Well, look, I love asking this question, what keeps you up at night and what gets out of

483
00:34:26,880 --> 00:34:27,960
the bed in the morning?

484
00:34:27,960 --> 00:34:30,880
And specifically, what keeps you up at night just as a fund manager?

485
00:34:30,880 --> 00:34:33,160
There's so many moving parts happening in the world.

486
00:34:33,160 --> 00:34:39,160
We just heard the conflict that's happening in Gaza right now, Ukraine, and there are

487
00:34:39,160 --> 00:34:42,160
various conflicts around the world.

488
00:34:42,160 --> 00:34:44,160
What keeps you up at night?

489
00:34:44,160 --> 00:34:49,680
I've got like two year old and a four year old, so they're usually keeping me up at night.

490
00:34:49,680 --> 00:34:55,320
But we just had vomiting bug go through the whole household over the long weekend.

491
00:34:55,320 --> 00:35:02,000
But if it's not that, we are fundamental bottom-up managers.

492
00:35:02,000 --> 00:35:09,320
Yeah, we use a lot of quantitative analysis, but everything we do is fundamental, whether

493
00:35:09,320 --> 00:35:13,040
it's DCFs on companies, red flags.

494
00:35:13,040 --> 00:35:19,040
And I think the biggest shortcoming that fundamental managers have is they get blindsided by the

495
00:35:19,040 --> 00:35:20,040
macro.

496
00:35:20,040 --> 00:35:25,520
They're reading footnotes on a Friday night in annual reports or corporate filings.

497
00:35:25,520 --> 00:35:34,160
And then suddenly, a big macro event comes out like what we're the tragic news we're

498
00:35:34,160 --> 00:35:38,200
seeing on our screens overnight in Gaza.

499
00:35:38,200 --> 00:35:41,160
And so we're kind of a bit unusual.

500
00:35:41,160 --> 00:35:46,000
We probably spend 20 or 30% of our time on the risk management piece.

501
00:35:46,000 --> 00:35:49,560
Most fundamental managers, they're 99% picking stocks.

502
00:35:49,560 --> 00:35:52,840
They think it's all about picking stocks and you'll win or die like that.

503
00:35:52,840 --> 00:35:57,800
That's obviously critical, but you can easily screw up what should have been a good track

504
00:35:57,800 --> 00:36:01,320
record by suboptimal risk management.

505
00:36:01,320 --> 00:36:07,280
So we have, for example, 32 different stress tests we apply to the portfolio.

506
00:36:07,280 --> 00:36:09,280
All our portfolios every day.

507
00:36:09,280 --> 00:36:13,680
And these stress tests say that just like you stress test a bank, you stress test the

508
00:36:13,680 --> 00:36:14,680
portfolio.

509
00:36:14,680 --> 00:36:19,760
So if credit spreads were to go out or high yield credit spreads were to go out by 100

510
00:36:19,760 --> 00:36:25,920
basis points, what would be the impact on our P&L over the day?

511
00:36:25,920 --> 00:36:33,760
If inflationary expectations were to drop, if Chinese property was to get hammered, if

512
00:36:33,760 --> 00:36:39,720
oil price was to double, every scenario and stress you can imagine, and we're adding them

513
00:36:39,720 --> 00:36:46,800
all the time, we add into the portfolios because the macro is usually what will undo for a

514
00:36:46,800 --> 00:36:49,960
fundamental bottom-up manager.

515
00:36:49,960 --> 00:36:57,040
So that allows us to, any big macro risk that appears in the portfolio, we tend to try and

516
00:36:57,040 --> 00:36:58,040
limit.

517
00:36:58,040 --> 00:37:06,040
If the 100 PhDs at the Fed can't predict where inflation is going to go and interest

518
00:37:06,040 --> 00:37:09,960
rates are going to go, then I prefer to say, I can't either.

519
00:37:09,960 --> 00:37:16,040
Let's make sure the portfolios aren't unduly influenced by what interest rates do.

520
00:37:16,040 --> 00:37:20,400
So that allows me to sleep a lot better at night is the long-winded answer.

521
00:37:20,400 --> 00:37:24,280
No, look, I like it.

522
00:37:24,280 --> 00:37:26,240
And look, that's the reason why I suppose we're having this conversation.

523
00:37:26,240 --> 00:37:32,800
I find your phone quite interesting, which is in a volatile world, stability can be quite

524
00:37:32,800 --> 00:37:35,280
attractive to a lot of people out there.

525
00:37:35,280 --> 00:37:39,520
And it's just a very interesting approach which you have on that stability side.

526
00:37:39,520 --> 00:37:43,960
And I still find it quite interesting that you're running a high, it's called an alpha

527
00:37:43,960 --> 00:37:52,160
fund, but you just have such a wide array of companies within the portfolio from diversification

528
00:37:52,160 --> 00:37:53,160
perspective.

529
00:37:53,160 --> 00:37:56,800
It's been very interesting having you on and explaining how that works.

530
00:37:56,800 --> 00:37:58,600
Look, have I missed anything?

531
00:37:58,600 --> 00:38:02,600
Is there anything that anyone else loves to ask you that comes to mind?

532
00:38:02,600 --> 00:38:05,120
No, I don't think so.

533
00:38:05,120 --> 00:38:07,720
I know I really enjoyed the chat.

534
00:38:07,720 --> 00:38:16,120
And yeah, just every day we're working hard, trying to fight for every basis point and

535
00:38:16,120 --> 00:38:18,480
continue the strong performance that we had.

536
00:38:18,480 --> 00:38:23,560
Our upmarket captures about 1.25, so we're doing better in up markets.

537
00:38:23,560 --> 00:38:27,640
Down market captures 0.8, so we're preserving capital better in down markets.

538
00:38:27,640 --> 00:38:34,040
And we're just trying to give a consistent journey so I can sleep at night and our investors

539
00:38:34,040 --> 00:38:35,040
can too.

540
00:38:35,040 --> 00:38:36,720
So I really appreciate you having us on.

541
00:38:36,720 --> 00:38:39,440
It's been a great chat.

542
00:38:39,440 --> 00:38:44,600
If people want to learn more, what's the best way they can find you?

543
00:38:44,600 --> 00:38:46,320
Yeah, sure thing.

544
00:38:46,320 --> 00:38:55,520
So if they go to the Plato Investment Management website, there's information on the fund there.

545
00:38:55,520 --> 00:38:56,520
There's lots of insights.

546
00:38:56,520 --> 00:39:02,320
If you go to Livewire markets, we've got lots of articles that we've written on the fund

547
00:39:02,320 --> 00:39:05,080
and on investing.

548
00:39:05,080 --> 00:39:10,840
And obviously, if they want to invest directly, then they can do so through the website or

549
00:39:10,840 --> 00:39:12,840
their financial advisor as well.

550
00:39:12,840 --> 00:39:17,680
All right, David, well, thank you very much for being on the road to change with your

551
00:39:17,680 --> 00:39:18,680
QOLF management.

552
00:39:18,680 --> 00:39:22,440
It's been really, really interesting and I really appreciate the insights you've shared.

553
00:39:22,440 --> 00:39:24,360
Yeah, good man Murdoch.

554
00:39:24,360 --> 00:39:28,480
Always a pleasure, mate, and hope to catch you in person soon.

555
00:39:28,480 --> 00:39:29,480
Absolutely.

556
00:39:29,480 --> 00:39:30,480
All right.

557
00:39:30,480 --> 00:39:31,480
See you later.

558
00:39:31,480 --> 00:39:32,480
Bye.

559
00:39:32,480 --> 00:39:44,800
Bye.

560
00:39:44,800 --> 00:39:48,800
Any views expressed in this recording do not represent the view of any other third party

561
00:39:48,800 --> 00:39:51,440
and other sole personal opinions of the speaker.

562
00:39:51,440 --> 00:39:55,440
Any reference to financial product does not constitute advice or recommendation and before

563
00:39:55,440 --> 00:39:59,440
any action, you should seek proper advice from your financial professional.

564
00:39:59,440 --> 00:40:06,240
Australian listeners should head to www.moneysmart.gov.au to find more information on obtaining financial

565
00:40:06,240 --> 00:40:07,240
advice.

566
00:40:07,240 --> 00:40:29,960
To get in touch with York, head to our website, www.yorkwelf.com.au.