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Welcome back to the Rate of Change with York Wealth Management.

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As advisors to some of the wealthiest families in the country, the Rate of 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 Gaddi and in today's broadcast we're speaking with Hugh Selby-Smith,

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Co-Chief Investment Officer at Talaria Capital.

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Talaria Capital is a fundamental bottom-up value manager with a unique implementation

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process of fire options.

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They run a single global ex-Australian investment strategy with 25 to 35 companies, max 40.

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They have a hedged and an unhedged portfolio and this portfolio is executed across developed

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markets.

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Talaria roughly oversees $2.1 billion of funds under management since December, so that could

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have changed.

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For me, I enjoyed hearing Hugh break down their option strategy, which creates income from

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option premiums, diversifies returns, but most interestingly was its ability to smooth

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out returns in volatile markets.

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Hugh's going to dig into it quite a bit and he's substantially better than myself at explaining

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it, but in particular on average they capture 71% of an upside move and they target to reduce

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roughly on average 34% less of a downside move.

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So how does this translate into returns?

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As of recording, the Talaria Unhedged Global Equity Wholesale Fund has returned on average

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7.55% since inception, 10.43% over five years, 14.46% three years, 15.07% for the past 12

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months and 4.54% over the past six months.

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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 it.

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Hugh Selby-Smith, welcome to the Rate of Change with York Wealth Management.

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Madhav, delighted to be here and thanks for having me on.

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Yeah, really, really good to have you here.

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Why don't we begin as we always do by telling us a little bit about yourself and how you

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got into the wild world of financial markets.

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Well, I grew up in Canberra and I had a summer job sort of in last two weeks of December

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and early January where I would post through the letterbox, you know, that I would come

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and cut people's lawn and do their pool and collect their mail while they're away and,

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you know, all for the princely sum of, I don't know, $3 a week or something like that.

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So this was in the late 70s.

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And I did that for a summer.

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So it saved up some money and I bought my first two shares.

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And I guess that was a function of seeing my father who was interested in the stock

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market and didn't really know where to put the savings.

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So I could have probably got about 17% in the bank though at that time didn't really

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recognize the relative value between the stock market, the bond market and cash rates in

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the same way that maybe I do now.

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And yeah, then I bought Repco and Mount Isa Mines and I then watched Mount Isa Mines in

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the back of the paper, you know, the AFR where it was plus one minus one.

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So it was sort of like the sports pages and Mount Isa Mines promptly just went nowhere

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for about, you know, seven or eight years, but plus one was a really good day and down

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one was a negative day.

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So that was sort of the start of an interest and then, you know, I started to get subscriptions

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to potential new equity raising.

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So things like Highland Gold, I remember taking Woodside in the initial public offering.

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And then as I sort of moved forward, I was always interested in economics.

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I was always interested in decisions under uncertainty, though I probably wouldn't have

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been able to phrase it in those terms at the time.

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And in the 90s, I'd moved to the UK, I moved to Oxford and then I got a job in London and

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I moved into financial markets.

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And really, that's been my journey ever since.

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Isn't it interesting how most people's journeys start with either a mail run or I remember

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my old man, you know, ended up getting me a job both in the next door neighbor's lawn

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and that pretty much paid my phone bill for like six years to reporting school.

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Isn't it incredible how like, you know, just starts from the simplest things, then you

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get a hunger for it and then off you go.

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Would you say that the main interest for yourself was the entrepreneur side as in like, you

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know, building the business or did you just find the markets just fast now and he's wanting

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to get involved?

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I think, you know, right at the start, it was probably a function of wanting to grow

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my wealth, you know, I mean, I didn't call it well then I wanted a bit more money than

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I had, you know, six weeks in the summer sun, dealing with pool chemicals and things like

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that.

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And listen, I was a really competitive person from a pretty young age.

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So I liked the idea that, you know, this was a place that everybody came and was able to

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put forward their ideas ultimately and, you know, as you as you develop in sophistication,

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your analysis and that there was ultimately an arbiter represented by the price.

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I think that was probably the first two components that got me into markets.

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And clearly my journey of education and of course, you know, one of the great things

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over the course of my career is and everybody I think who's taken an interest in markets

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is you do recognize that you're going to be better in five years time than you are today.

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And I'm better today than I was five years ago or 20 years ago.

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And I think that that's a tremendous privilege if you're interested in learning, ideas,

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development, because a lot of things in the world, certainly in professional world, but

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also personal world, you're the best you're ever going to be at 35 or 39.

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You know, my my swimming times are coming down.

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They're not going up, for example, or tennis, you know, you're not as good as you used to

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be might take as much pleasure from it.

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And in professional sense, you know, the top chefs in the world are really the top chefs

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in, you know, mid to late 30s, right?

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They might be the best restaurateurs in their 50s, but they're no better chefs.

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That's different to financial markets.

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So I will be better in the future than I am today, because it's a constant evolution about,

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you know, learning about yourself, your biases and your process.

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And that's it.

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That's a really exciting thing.

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You know, it's a lifelong pleasure and challenge.

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As they say, it's not the destination is the journey.

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And that's the other thing, which I've been doing this quite a bit, like speaking to clients,

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speaking to, you know, very good investors like yourself.

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And the one thing that I find so fascinating is, you know, if you just looked at paper,

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how someone is today, that's not how they got there.

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It's this wild, crazy, go path of a track of how they got there today.

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But if they didn't take that path, the lessons which they didn't learn before, they wouldn't

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be able to apply today and do as good as their job.

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So when you're in the UK, before, you know, Talaria became a thing, what were you actually

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doing?

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Is it the same role?

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Were you running the same type of strategy?

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And then, you know, it came across?

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Or how did it work?

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No, so I had, I moved into asset management at a company called TT International in London.

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I'd been previously working at Goldman Sachs in London and New York, and Tim Tacky, he

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had started Fidelity International, and then he'd run the European side of, or European

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portion of George Soros's capital.

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So he's one of the first macro hedge fund traders in Europe.

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And then I'd worked in the core team of which there was about five of us running the long

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only institutional side of the business.

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So it was still a fundamental bottom up driven investment house from that perspective.

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It had expertise in options, which I'm sure we'll get into in terms of the Talaria kind

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of process, but not explicitly in terms of the portfolios that I was running in or contributing

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to at TT.

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I think also, listen, as we talked about, you refine and develop your own process as

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you go along in a journey.

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And I think, you know, TT probably had a greater emphasis on the momentum factor in terms of

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earnings momentum and upgrades and so on.

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And that's somewhat different to, and I'm talking about, you know, to mid 2000s here,

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the process that, you know, from a bottom up part, bottom up fundamental point of view,

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that has developed over the last 15 years of my career.

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Yeah, let's let's definitely dig into that because there's probably a lot of listeners

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and you know, clients and fund managers that, you know, definitely delve in the momentum

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side and you know, investing companies, you know, bottom up.

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But the one reason why I wanted to have you guys and girls on is Talaria just does things

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differently.

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And it's a particular, and I'll look, I'll let you explain it.

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But the reason why I find this so interesting is with options, you do have the ability to

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do some very interesting things, protect your downside, you know, still participate, see

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you because no one knows what's happening in the next two months, right?

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You think it might happen, but will it happen?

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Right.

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But the other thing as well is it sounds really simple, but for people that have never done

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an option strategy before, it's quite complicated and difficult to use accurately and effectively

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and do it without, you know, and get sleep every single month when the rollover has come

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through.

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So do you mind giving everyone a bit of colour around who exactly is Talaria and the investment

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philosophy and what is the investment strategy, strategy which you guys and girls operate?

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Sure.

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There's quite a few different questions there.

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So do let's break it down.

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You know, what, what Talaria is a, is a global equity manager.

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We're a founder led business.

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Okay.

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We have a perpetual mindset where we only run a single strategy and the investable universe

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is everything X Australia that must have a developed market listing because of the options

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implementation, which we'll unpack in a minute.

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In terms of what we do then we run kind of a relatively concentrated portfolio, 25 to

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25 stocks, never more than 40 by mandate.

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We are all driven by the bottom up opportunity set.

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And what that means Murdoch is we never sit there and say, Hey, consumer staples is a

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good, good place to be in this environment.

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Let's go and find a consumer staples company that conforms to our kind of our bottom up

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valuation process or, you know, Switzerland's looking cheap.

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Let's find a Swiss equity.

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So it's really on a case by case basis.

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We're relatively anti short term.

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So the securities we own in the portfolio is about average tenure is about three and

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a half years.

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So that's sort of where to locate us in the zoo.

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Okay.

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And we run about 2.1, 2.2 billion dollars on behalf of our clients.

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Of course, at the end of the day, we're paid a fee to work on their behalf and, and you

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know, generate the consistent outcomes in which we entrust it with our clients money.

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So that's sort of who we are as a firm, what we do as a strategy.

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The point of unique difference is really how we enter into stocks.

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So our bottom up process, you know, we're, we're a value manager and what that means

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and why would we align strongly with value is there's seven of us in the investment team

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over 130 years collective experience.

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And like all value managers, what we're trying to do Murdoch has come up with our best estimate.

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We call it the normalized cash returns, but people use different phrases, right?

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The mid cycle earnings power and so on.

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Okay.

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Now that's all done through the annual reports and financial statements.

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But the key thing that means that we align strongly with value, both from a factor perspective,

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but also just philosophically is that whilst growth is an important component of valuation

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as a forward factor, it's relatively weak historically looking at the data.

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Okay.

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So we do a normalized cash return analysis off the existing asset base.

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And what that means is we won't pay for growth because that would show up in, in the asset

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base, right?

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Goodwill, be that tangibles or intangibles.

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So that sort of is a true to label value approach.

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To be honest, Murdoch, us and the other 24,000 smartest people in the room who are true to

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label value are doing the same thing.

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You know, the way that I talk to clients about that is, listen, if you Murdoch were looking

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for a new accountant, you're going to switch from Deloitte and Ernst & Young and came in

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and told you, hey, we do the accounts differently.

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That should not give you any confidence.

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I mean, numbers and process and numbers and process.

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So what I've talked about at the moment is really anybody true to label value.

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Okay.

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As you said, the point of difference is really how we enter stocks and that's the option

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component.

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So every global equity manager who, traditional long only global equity manager, however their

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process once they've decided they wish to buy the stock on behalf of their clients,

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would simply go into the market and buy their first, let's call it 1% position and they'd

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execute that trade in the market today.

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What we do is we sell a fully cash backed and exchange traded option, which is typically

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about two months in duration.

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Okay.

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So we're not making a decision when we sell it.

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It's a promise to take possession of a stock that we want to own.

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Okay.

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So this isn't an overlay, an options trading strategy.

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We're simply making a promise to take possession of the stock that, you know, is typically

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taken five to seven weeks work and we've socialized in the team that we think we want to put into

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the portfolio on behalf of our clients.

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And in return for providing that promise to own an equity that we want to take possession

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of, we get two things in return.

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Firstly, we get a lower, we get to commit to buy it at a lower price than it's trading

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at today.

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In a normalized environment, that's typically three to 5% lower.

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So you know, assuming a stock's trading at a hundred, we can commit to buy it at say

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$96.

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And secondly, we're paid a premium for providing that effective insurance.

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Okay.

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And we never do that at less than a 15% annualized rate of return.

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So let's say in stock trading at a hundred, we commit to buy it at 96 in two months time,

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we might get paid $3.

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So think about it in three on 96, effectively 3%.

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For two months, you know, that's about, so multiplied six times.

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So that would be an 18% annualized rate of return.

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And in two months time, simply only two things can happen.

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Either the market's gone down or the results are perceived poorly by the market and the

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stock's fallen over that two months from a hundred down to let's call it $94.

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In which case, the cash that's sitting there backing the commitment to buy the share moves

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across and we take possession of our first 1% of the position.

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And the premium of $3 goes into the cost price.

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So we're effectively bought our first 1% position in that instance at $93.

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And we would then write another option at, you know, $90 until we got our target position

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size in the area.

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Or the market's gone up or the results are well taken, in which case the stock's traded

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to 105.

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In which case, we simply keep, well, firstly, we would reroll that option at 102 as long

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as there was at least 20% upside from the strike price to our fundamental fair value.

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But we would keep the premium, which that 3%, say on a 1% position, let's call our size

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of the fund, you know, $2 billion.

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So literally we're keeping $600,000 of premium.

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And that's really the point of differentiation in terms of how we enter.

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But as you say, it drives three key outcomes, which I'll come on to.

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But you also asked, hey, why do it this way?

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What's the rationale and what's the philosophical backing?

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The key reason we're using the options is to reduce risk.

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Okay, there's two things here.

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Firstly, it really comes out of an asset and liability mindset.

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So the smoothness of returns, you've got fixed kind of spending down the line, be that retirement,

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be that things that you want to be able to do with the money, be that a charity foundation

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or kids school fees or holiday, whatever it is.

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And you've got this greater certainty of being able to match those liabilities.

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It's not relying on the capital component.

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And the second key reason is philosophically, listen, forget equities alone.

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In any asset class, when you put money into that asset class, you're putting capital at

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risk.

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And the things that can drive that risk are very difficult and unknowable effectively on

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an ongoing basis.

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What am I talking about here?

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You're talking about, well, unfortunately, geopolitics is in the top of a lot of people's

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minds, but you're talking about interest rate risk, you're talking about growth risk, regulation,

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taxation, cross border policy, and so on.

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It's all these big macro risks.

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And we want to be paid explicitly for putting our clients and our own capital at risk.

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And then we want to generate an idiosyncratic return in the individual security.

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And that's really the philosophical reason that we do what we do.

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It's quite interesting.

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And for a lot of people out there, they're not familiar with how options strategy work

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or they've heard about them.

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It's quite an interesting ability to take a view and then go, you know what, don't know

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what's going to happen in the next two months.

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Many things can happen.

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Look at what's happened with COVID and black swan events everywhere.

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And then also, in that interim, to go, well, we're still holding our clients' money.

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We still want to be earning any income for that potential two months, if something may

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occur.

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So it's quite interesting.

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But in saying that, the obvious question, which I always get is, Murdoch, that sounds

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great.

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Strategy sounds fantastic.

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But how does that actually translate into performance and past performance?

283
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What does that actually mean?

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So commonly, people refer that in our world as beta.

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How does that relate to how do you perform in comparison to the market underlying the

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benchmark which you use?

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And then more importantly, is this strategy very, very good in a bullish market?

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Is it better in a bearish market?

289
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And then what's been your average returns since inception?

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00:19:45,560 --> 00:19:47,520
And how's the past couple of years been?

291
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Okay, great.

292
00:19:48,520 --> 00:19:52,240
Quite simply, how does that translate into what's going into my pocket if I stick money

293
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with your firm?

294
00:19:53,240 --> 00:19:54,240
Yeah, absolutely.

295
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Listen, I would obviously love to answer that.

296
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But equally, I think there's also, let's stop.

297
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Can I dial it back from that slightly?

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Because listen, all employees at Talaria are invested in the firm.

299
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Like I said, it's a founder-owned and led business.

300
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So we own the firm.

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We think it's the single best way to run our own money, which is why we do it.

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But we recognise in the greater sense of our clients, we play a role in portfolios.

303
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No one has a single kind of strategy or all their money in one basket, as it were.

304
00:20:26,300 --> 00:20:32,880
So I think before getting into the numbers, which I'd love to answer, we have three distinct

305
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outcomes which actually help in portfolio construction.

306
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And a lot of clients of ours, I think, judge us on those outcomes.

307
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Now the three things that we get from this implementation strategy, you name-check one,

308
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we have a second lever of returns, which is about this payment in terms of the aggregation

309
00:20:53,400 --> 00:20:55,960
of those premiums I was talking about.

310
00:20:55,960 --> 00:21:01,560
And typically, that's been around about 600 basis points of return per random in a normalised

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environment.

312
00:21:02,560 --> 00:21:07,120
So in the last three years, for example, we've made a little over 600 basis points of return

313
00:21:07,120 --> 00:21:10,680
for our investors from this second lever of return.

314
00:21:10,680 --> 00:21:14,720
Now crucially, that lever goes up when uncertainty rises.

315
00:21:14,720 --> 00:21:19,640
Because obviously, the cost of insurance is really dictated by the level of uncertainty

316
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model.

317
00:21:21,080 --> 00:21:27,900
So that happens to be the case where uncertainty rises typically in equity markets results

318
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in capital values falling.

319
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So we've got this offsetting return driver.

320
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So that's a first key thing, which means in terms of our downside capture and upside capture,

321
00:21:40,760 --> 00:21:48,760
over the life of the fund since the unit trust in 08, that's been about a 34% downside capture.

322
00:21:48,760 --> 00:21:51,800
And the upside capture has been comfortably over 70.

323
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So we lose less when the market goes down, and we capture the majority of the market's

324
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gains.

325
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The second key thing, which is in and of itself is this structurally lower downside capture

326
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that I talked about.

327
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And the third key thing, because you've got this contracted rate of return, you have materially

328
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lower volatility.

329
00:22:10,920 --> 00:22:11,920
Okay.

330
00:22:11,920 --> 00:22:16,560
Now, I think for a lot of listeners, you know, talking about 300 basis points, lower volatility

331
00:22:16,560 --> 00:22:19,640
than an index won't really resonate.

332
00:22:19,640 --> 00:22:23,400
Let's take it back to real world examples here.

333
00:22:23,400 --> 00:22:27,440
Most fund managers and fund management houses, they're in the business of raising assets,

334
00:22:27,440 --> 00:22:28,440
right?

335
00:22:28,440 --> 00:22:34,040
That's actually the incentive of the industry for fund managers.

336
00:22:34,040 --> 00:22:39,800
What advisors and people who have the savings care about is not this sort of time series

337
00:22:39,800 --> 00:22:40,800
return.

338
00:22:40,800 --> 00:22:43,440
So here's my five year number or my 10 year number.

339
00:22:43,440 --> 00:22:48,320
What they care about is how does a strategy perform when they've got their money in it?

340
00:22:48,320 --> 00:22:51,840
Now, that's a small nuance, but it's crucially different.

341
00:22:51,840 --> 00:22:56,280
And I think if you go back to that really famous Magellan story, so Peter Lynch, who

342
00:22:56,280 --> 00:23:01,120
built Fidelity really off the Magellan fund, you know, he compounded over 20% for well

343
00:23:01,120 --> 00:23:02,120
over 20 years.

344
00:23:02,120 --> 00:23:07,960
And yet, when you build up the flows, the aggregate investor experience was less than

345
00:23:07,960 --> 00:23:08,960
zero.

346
00:23:08,960 --> 00:23:09,960
Right?

347
00:23:09,960 --> 00:23:12,920
It's really hard to believe that.

348
00:23:12,920 --> 00:23:17,880
If you do the same analysis of the largest four global fund managers by assets raised

349
00:23:17,880 --> 00:23:22,680
in Australia over the last five years, and you look at the time series returns, but then

350
00:23:22,680 --> 00:23:28,080
you look at the discrepancy between when people put their money in, they're vastly different.

351
00:23:28,080 --> 00:23:38,880
And the point of that description or example is to say, if you do 10%, 10%, 10%, 10%, every

352
00:23:38,880 --> 00:23:40,240
client gets 10%.

353
00:23:40,240 --> 00:23:48,640
If you do up 30, down 10, up 20, etc., to get a five year annualized number of 10%,

354
00:23:48,640 --> 00:23:52,840
the money in aggregate, the IRR effectively won't be 10%.

355
00:23:52,840 --> 00:23:57,160
And that's the value of lower volatility in a practical sense to your listeners.

356
00:23:57,160 --> 00:24:00,760
Okay, so they're the three key outcomes that we generate.

357
00:24:00,760 --> 00:24:04,800
And a lot of people use this for a range of those outcomes.

358
00:24:04,800 --> 00:24:09,600
So that second lever of returns, that can be actually distributed as income.

359
00:24:09,600 --> 00:24:15,720
So we have a pretty high, sustainable, differentiated source of income, which is paid quarterly.

360
00:24:15,720 --> 00:24:20,240
So for a lot of people who are looking to diversify away from the Australian share market,

361
00:24:20,240 --> 00:24:24,040
which obviously has a relatively high dividend yield compared to the rest of the world, plus

362
00:24:24,040 --> 00:24:31,640
some tax advantages, that means foregoing income potentially for capital.

363
00:24:31,640 --> 00:24:35,200
Whereas actually, that's not the case for investors who are using the Talaria Global

364
00:24:35,200 --> 00:24:40,600
Equity Strategy as an income engine and diversification from income, because it's not dependent on

365
00:24:40,600 --> 00:24:41,600
the business cycle.

366
00:24:41,600 --> 00:24:46,120
Remember, dividends are ultimately at the discretion of management, and quite often

367
00:24:46,120 --> 00:24:52,120
when you need income the most, they're sensibly reducing that payout to shareholders because

368
00:24:52,120 --> 00:24:55,720
of the level of uncertainty or the cash requirements in the business.

369
00:24:55,720 --> 00:25:00,640
That's not the case if you're relying on income from the strategy that we employ.

370
00:25:00,640 --> 00:25:01,640
Okay.

371
00:25:01,640 --> 00:25:07,100
But the second key thing in that volatility and downside capture, as someone who runs

372
00:25:07,100 --> 00:25:13,960
an overall portfolio or a saver who's got multiple investments, you may feel that long-term

373
00:25:13,960 --> 00:25:16,160
growth equities will do much better than value.

374
00:25:16,160 --> 00:25:21,240
The world's changing, AI, all the stuff that we're probably pretty familiar with at the

375
00:25:21,240 --> 00:25:27,400
moment, or you may feel that small caps ultimately are much better valued and ability to generate

376
00:25:27,400 --> 00:25:30,840
you much greater capital growth over the medium term.

377
00:25:30,840 --> 00:25:34,600
But actually, I need to be able to hold that journey because it's a lot more volatile.

378
00:25:34,600 --> 00:25:38,640
So I need to blend that with something that allows me to stick to that because of that

379
00:25:38,640 --> 00:25:43,040
requirement to be able to compound and hold the position.

380
00:25:43,040 --> 00:25:44,960
So we blend up pretty well with that.

381
00:25:44,960 --> 00:25:50,360
And actually, we're humble enough to recognize a lot of people who've trusted us with their

382
00:25:50,360 --> 00:25:51,360
money.

383
00:25:51,360 --> 00:25:56,280
It's ultimately to free up some more of their risk budget because I need to blend it with

384
00:25:56,280 --> 00:25:57,400
a whole range of things.

385
00:25:57,400 --> 00:26:01,120
So traditionally, that's the 60-40 portfolio, right?

386
00:26:01,120 --> 00:26:02,960
I'm going to have bonds so that I don't…

387
00:26:02,960 --> 00:26:07,440
Well, actually, the majority of history, bonds and equities have been positively correlated.

388
00:26:07,440 --> 00:26:12,560
And we've seen the havoc that that's wreaked on portfolios over the last three to four

389
00:26:12,560 --> 00:26:13,560
years, right?

390
00:26:13,560 --> 00:26:19,360
Whereas, hey, here's a strategy, low volatility, low drawdown, but actually allows me to stick

391
00:26:19,360 --> 00:26:20,360
to the path.

392
00:26:20,360 --> 00:26:25,680
So I think before the absolute returns, the vast majority of our clients, Murdoch, I think

393
00:26:25,680 --> 00:26:30,520
really judge us on the combination of those outcomes.

394
00:26:30,520 --> 00:26:33,240
Coming explicitly to your question, though, hey, what's…

395
00:26:33,240 --> 00:26:36,000
Okay, sounds interesting, a bit different.

396
00:26:36,000 --> 00:26:37,960
There's got to be an opportunity cost, right?

397
00:26:37,960 --> 00:26:42,120
And that's what you talked about in terms of the beta and the upside capture.

398
00:26:42,120 --> 00:26:45,560
So over the life of the fund, it's been about…

399
00:26:45,560 --> 00:26:46,560
We've had about…

400
00:26:46,560 --> 00:26:52,600
Per $100 of client money, we've had about 55 has been in direct stocks and shares.

401
00:26:52,600 --> 00:26:53,600
So we've owned.

402
00:26:53,600 --> 00:26:58,520
So we've got exercised and we own about $55 of direct equity.

403
00:26:58,520 --> 00:27:03,400
We've had about $30, which is this cash backing the commitment to buy shares we want to own

404
00:27:03,400 --> 00:27:07,160
at this never less than 15% contracted rate of return.

405
00:27:07,160 --> 00:27:10,560
So the options implementation to reduce risk.

406
00:27:10,560 --> 00:27:16,160
And we've had about 15% cash as you would understand it in any other strategy.

407
00:27:16,160 --> 00:27:20,640
And that varies obviously over the cycle and at various points, but that's in aggregate

408
00:27:20,640 --> 00:27:21,640
what's happened.

409
00:27:21,640 --> 00:27:27,720
If you look at our rolling three-year return profile, you know, I mean, month to month

410
00:27:27,720 --> 00:27:29,440
or year to year is a relatively short.

411
00:27:29,440 --> 00:27:30,880
So that's our average holding period.

412
00:27:30,880 --> 00:27:34,240
So we look at that over the rolling three-year period.

413
00:27:34,240 --> 00:27:36,920
When markets start to be…

414
00:27:36,920 --> 00:27:42,600
If the index was to give you, you know, double digit per annum returns over a rolling three-year

415
00:27:42,600 --> 00:27:49,880
period, the truth mathematically is that that $30 where we get this contracted rate of return

416
00:27:49,880 --> 00:27:54,420
would be better off if you had perfect foresight directly exposed to the equity market.

417
00:27:54,420 --> 00:27:59,640
So the opportunity cost is higher than the benefit that we generate.

418
00:27:59,640 --> 00:28:02,800
And that is ultimately the opportunity cost.

419
00:28:02,800 --> 00:28:08,680
Now that means that our investors are getting the highest absolute experience, the best

420
00:28:08,680 --> 00:28:11,440
absolute experience in those moments.

421
00:28:11,440 --> 00:28:15,000
It's just that with perfect foresight, if you were sitting in Delphi, you know, Oracle

422
00:28:15,000 --> 00:28:18,480
on the Mount, you could have done better.

423
00:28:18,480 --> 00:28:21,840
And that's really the opportunity cost of the strategy.

424
00:28:21,840 --> 00:28:28,080
As soon as you drop down to, you know, 8%, 9% per annum in terms of annualized returns

425
00:28:28,080 --> 00:28:33,200
in equity markets over three years, that opportunity cost completely starts to drop away.

426
00:28:33,200 --> 00:28:37,840
And the more negative the returns, the greater the relative contribution because of the second

427
00:28:37,840 --> 00:28:40,160
labor where you're not just dependent on…

428
00:28:40,160 --> 00:28:46,080
You talked about beta, as you captured the beta as an index, but also if you're in a

429
00:28:46,080 --> 00:28:52,280
managed fund, you're not just relying on the alpha generation of the smartest person

430
00:28:52,280 --> 00:28:59,240
in the room to be able to offset that beta component of coming down.

431
00:28:59,240 --> 00:29:00,560
And I really appreciate that.

432
00:29:00,560 --> 00:29:03,880
And I think it even comes back to why I call this podcast the rate of change.

433
00:29:03,880 --> 00:29:05,760
The rate of change is a mathematical formula.

434
00:29:05,760 --> 00:29:10,920
It just refers to the speed at which something changes from going up to down and then back

435
00:29:10,920 --> 00:29:11,920
up again.

436
00:29:11,920 --> 00:29:12,920
Right.

437
00:29:12,920 --> 00:29:16,280
And the main reason why I do these podcasts, I just find it so interesting speaking to

438
00:29:16,280 --> 00:29:22,040
people like yourself and to shine some light on different strategies is exactly what you're

439
00:29:22,040 --> 00:29:23,040
talking about.

440
00:29:23,040 --> 00:29:27,120
This 60-40 portfolio, which we all started, we've all told this is gospel.

441
00:29:27,120 --> 00:29:28,120
This is how it is.

442
00:29:28,120 --> 00:29:29,120
Well, guess what?

443
00:29:29,120 --> 00:29:33,160
Coming into COVID, interest rates near zero, bonds didn't pay anything.

444
00:29:33,160 --> 00:29:35,840
Then we've seen this gigantic boom of private lending.

445
00:29:35,840 --> 00:29:36,840
Right.

446
00:29:36,840 --> 00:29:39,600
And then there's another expression in life.

447
00:29:39,600 --> 00:29:42,760
The only constant thing in life is change or one of the only constant things in life

448
00:29:42,760 --> 00:29:43,760
is change.

449
00:29:43,760 --> 00:29:50,080
So when we speak with investors or clients or high-end family offices, it's very interesting

450
00:29:50,080 --> 00:29:53,920
the point that you're making as in some people just want stability.

451
00:29:53,920 --> 00:30:00,200
They want stability, certainty, or the ability to participate in some upside whilst leasing

452
00:30:00,200 --> 00:30:01,200
out the other side.

453
00:30:01,200 --> 00:30:02,200
That's fantastic.

454
00:30:02,200 --> 00:30:03,200
That's where the call comes into it.

455
00:30:03,200 --> 00:30:04,200
Right.

456
00:30:04,200 --> 00:30:08,600
But then the other thing which I've never enjoyed is when one investor or manager goes,

457
00:30:08,600 --> 00:30:09,800
oh, this strategy is horrendous.

458
00:30:09,800 --> 00:30:12,040
We go, hold on a second.

459
00:30:12,040 --> 00:30:14,200
That particular strategy did very, very well.

460
00:30:14,200 --> 00:30:15,200
Why?

461
00:30:15,200 --> 00:30:19,000
Because they were printing money and assets.

462
00:30:19,000 --> 00:30:20,000
It went through the roof.

463
00:30:20,000 --> 00:30:23,680
But now considering that that money has been withdrawn from the market, those assets don't

464
00:30:23,680 --> 00:30:24,680
do well anymore.

465
00:30:24,680 --> 00:30:25,680
Right.

466
00:30:25,680 --> 00:30:30,600
So I would actually, the reason we do this is I want to shine a light on there are cards

467
00:30:30,600 --> 00:30:36,840
which you can play depending on the global macroeconomic and macro environment.

468
00:30:36,840 --> 00:30:40,720
And people just need to know, okay, in the back of my mind, if conditions are doing this

469
00:30:40,720 --> 00:30:44,720
particular way, where, as you said, who's who in the zoo, first of all, everyone needs

470
00:30:44,720 --> 00:30:50,880
to understand who we can choose from and then understand when to play the cards.

471
00:30:50,880 --> 00:30:56,760
So from my understanding correctly, Talaria fits in that band where essentially you can

472
00:30:56,760 --> 00:31:03,160
use them continuously and which is great.

473
00:31:03,160 --> 00:31:04,160
So any thoughts to that?

474
00:31:04,160 --> 00:31:10,200
Well, listen, I mean, the way that I think about it is if you're doing 10.5% per annum,

475
00:31:10,200 --> 00:31:12,920
you're going to double your money every seven years.

476
00:31:12,920 --> 00:31:14,320
Okay.

477
00:31:14,320 --> 00:31:20,240
So I think, you know, particularly in such a large savings pool in Australia in retail,

478
00:31:20,240 --> 00:31:26,460
thanks to the good kind of governance of superannuation, ultimately, I think it's got to be a goals

479
00:31:26,460 --> 00:31:27,720
based approach.

480
00:31:27,720 --> 00:31:28,720
Right.

481
00:31:28,720 --> 00:31:33,640
And I think if you can work out so how to have, I mean, I'm not saying that everyone

482
00:31:33,640 --> 00:31:36,800
will be happy with doubling it only every seven years, I want to double it in five years

483
00:31:36,800 --> 00:31:39,360
or you know, maybe I'll double it in nine years.

484
00:31:39,360 --> 00:31:46,480
But you know, I'm 50, life expectancy, you know, whatever it is for once you get to 50

485
00:31:46,480 --> 00:31:47,480
is 85.

486
00:31:47,480 --> 00:31:49,120
So I've got another 35 years.

487
00:31:49,120 --> 00:31:53,600
So you know, my wealth will be fivefold compound of fivefold, right?

488
00:31:53,600 --> 00:31:55,000
It's not 500%.

489
00:31:55,000 --> 00:31:58,800
It's double every seven years from that to when I die.

490
00:31:58,800 --> 00:31:59,800
Right.

491
00:31:59,800 --> 00:32:00,800
If I do 10.5%.

492
00:32:00,800 --> 00:32:09,680
And if I can start with 600 basis points and where I lose less money when the market goes

493
00:32:09,680 --> 00:32:11,800
down.

494
00:32:11,800 --> 00:32:16,020
And let's say that I'm adept from a personality point of view from losing that it doesn't

495
00:32:16,020 --> 00:32:17,200
worry me about losing money.

496
00:32:17,200 --> 00:32:19,320
I understand markets go up and down.

497
00:32:19,320 --> 00:32:22,160
But the key thing is I've got more money working for me in the ups.

498
00:32:22,160 --> 00:32:23,160
That's why it's important.

499
00:32:23,160 --> 00:32:28,360
You know, I mean, let's go back, you asked about the recent experience of the fund.

500
00:32:28,360 --> 00:32:34,800
You know, 2022, a lot of the, you know, a lot of the big seven, right, that people were

501
00:32:34,800 --> 00:32:41,760
talking about, you know, a stock going down, down, stock doubling sounds like a sounds

502
00:32:41,760 --> 00:32:43,720
a whole lot better than a stock that halved.

503
00:32:43,720 --> 00:32:45,680
But they're the same thing, right?

504
00:32:45,680 --> 00:32:48,920
I mean, a lot of those stocks halved in 2022, and they doubled last year.

505
00:32:48,920 --> 00:32:54,640
Where do you end up on that math, you end up at the same level that you started at?

506
00:32:54,640 --> 00:33:02,400
Whereas because of some of the tailwinds of 2022, you know, this is a strategy, the Talara

507
00:33:02,400 --> 00:33:06,280
Global Equity Strategy was able to generate eight and a half, eight and a half percent

508
00:33:06,280 --> 00:33:08,400
absolute return.

509
00:33:08,400 --> 00:33:10,720
Now last year, the market did 20.

510
00:33:10,720 --> 00:33:13,680
And let's forget about leadership and why that is.

511
00:33:13,680 --> 00:33:16,240
That's what it was, you know, sort of about 20.

512
00:33:16,240 --> 00:33:18,680
We did about 12 and a half.

513
00:33:18,680 --> 00:33:25,960
Now 12 and a half on 108.50 versus, you know, 20 on 85, if you just went in line with the

514
00:33:25,960 --> 00:33:31,440
benchmark in terms of indexes down in 2022, you don't have to be genius at math to work

515
00:33:31,440 --> 00:33:35,720
out that you've got a lot more money doing 12 and a half on 108.50 than you do doing

516
00:33:35,720 --> 00:33:38,520
20 on 85.

517
00:33:38,520 --> 00:33:43,660
So I think, you know, setting your goals, working out a portfolio.

518
00:33:43,660 --> 00:33:45,320
So that's the first thing, right?

519
00:33:45,320 --> 00:33:47,160
Where am I trying to get to?

520
00:33:47,160 --> 00:33:50,680
And I think this strategy gives you as good a chance as any to be able to compound your

521
00:33:50,680 --> 00:33:51,680
real wealth over time.

522
00:33:51,680 --> 00:33:57,720
And we've run the strategy, as I said, in the unit trust since 08 and, you know, the

523
00:33:57,720 --> 00:34:01,720
firm strategy in terms of using this options component started in 05.

524
00:34:01,720 --> 00:34:03,920
So we've done it for quite a long time.

525
00:34:03,920 --> 00:34:10,120
I think the second key thing I'd say then is, hey, you know, we touched on uncertainty.

526
00:34:10,120 --> 00:34:14,440
All investors are dealing with uncertain, by definition, the future is uncertain.

527
00:34:14,440 --> 00:34:20,240
So what you're trying to do then is you're trying to, where possible, and you know, this

528
00:34:20,240 --> 00:34:25,920
sounds like what you're doing on behalf of your clients is you're trying to build a portfolio

529
00:34:25,920 --> 00:34:32,560
that gets rid of as much diversifies away all the possible risks that it can.

530
00:34:32,560 --> 00:34:33,800
Okay.

531
00:34:33,800 --> 00:34:39,300
And then of course, there's a residual of risk and uncertainty that that is just what

532
00:34:39,300 --> 00:34:43,160
makes being human brilliant, but makes kind of being an investor difficult.

533
00:34:43,160 --> 00:34:46,720
You can't alchemy away all risk and so on, right?

534
00:34:46,720 --> 00:34:50,160
We're not at a craps table where the odds mean that you could actually hedge out everything,

535
00:34:50,160 --> 00:34:51,160
but you'll make nothing.

536
00:34:51,160 --> 00:34:54,560
I mean, nobody's in the market for that.

537
00:34:54,560 --> 00:34:58,880
So I think it's about constructing portfolios where you recognise the inherent uncertainty

538
00:34:58,880 --> 00:35:05,600
of the future and use the benefits of diversification to be able to reduce relying on having some

539
00:35:05,600 --> 00:35:09,840
view or other of the future because broadly, I don't think anybody's got a crystal ball

540
00:35:09,840 --> 00:35:11,700
that works, right?

541
00:35:11,700 --> 00:35:17,120
And I think the third key component where we sort of fit in in that is that we actually

542
00:35:17,120 --> 00:35:18,880
benefit from uncertainty.

543
00:35:18,880 --> 00:35:24,560
So I think intuitively, I find the strategy easier, just as just me, there's a clever

544
00:35:24,560 --> 00:35:29,480
of people who are invested with us and me, is that I really think about it as an insurance

545
00:35:29,480 --> 00:35:31,680
analogy, right?

546
00:35:31,680 --> 00:35:35,620
And you know, we're spending all our time analysing the collateral.

547
00:35:35,620 --> 00:35:38,880
So that's the company's opportunity set, right?

548
00:35:38,880 --> 00:35:41,040
Before writing the insurance.

549
00:35:41,040 --> 00:35:46,000
But insurance generally as a whole industry is tremendously profitable.

550
00:35:46,000 --> 00:35:51,940
And in equity markets is tremendously profitable because it's a sustainable risk premium.

551
00:35:51,940 --> 00:35:56,720
And the reason it's sustainable as a risk premium, and this helps you diversify, is

552
00:35:56,720 --> 00:35:59,600
because it's behaviourally driven.

553
00:35:59,600 --> 00:36:03,000
So investors in equity markets always have a positive skew.

554
00:36:03,000 --> 00:36:04,000
It's a growth asset, right?

555
00:36:04,000 --> 00:36:05,000
They're looking for the upside.

556
00:36:05,000 --> 00:36:07,400
Otherwise, you wouldn't be in equities, right?

557
00:36:07,400 --> 00:36:10,200
So they overpay for the downside protection.

558
00:36:10,200 --> 00:36:17,560
The second key thing is we know that dealing with uncertainty is psychologically difficult.

559
00:36:17,560 --> 00:36:22,280
You know, so I've travelled an awful lot over the course of my life professionally,

560
00:36:22,280 --> 00:36:25,280
but also I've been lucky enough to travel a bit personally as well.

561
00:36:25,280 --> 00:36:27,440
I took the kids to New Zealand last year.

562
00:36:27,440 --> 00:36:30,120
So I've never claimed travel insurance.

563
00:36:30,120 --> 00:36:33,160
I took the kids to New Zealand last year.

564
00:36:33,160 --> 00:36:37,320
And you know, of course, I paid the 250 bucks travel insurance because the idea of watching

565
00:36:37,320 --> 00:36:40,760
my daughter on the trampoline and thinking, oh my gosh, if she breaks her leg, how am

566
00:36:40,760 --> 00:36:43,360
I going to get her out of here and blah, blah, blah.

567
00:36:43,360 --> 00:36:47,480
It's just not worth dealing with from an uncertainty point of view, or we're going to go whitewater

568
00:36:47,480 --> 00:36:48,960
rafting and she's uninsured.

569
00:36:48,960 --> 00:36:51,640
I'm just not going to do that.

570
00:36:51,640 --> 00:36:56,080
You know, and in the same way in equity markets that the majority of investors are very poor

571
00:36:56,080 --> 00:36:57,320
at dealing with uncertainty.

572
00:36:57,320 --> 00:37:01,480
So they overcompensate to take them out of that psychologically difficult place.

573
00:37:01,480 --> 00:37:05,800
And then the third key thing, which you know professionally, but also your listeners know,

574
00:37:05,800 --> 00:37:10,200
is losing $10 is psychologically very different from making $10.

575
00:37:10,200 --> 00:37:12,680
Okay, they're not the same thing.

576
00:37:12,680 --> 00:37:18,640
And therefore they overpay you for providing the perception that you insulate them from

577
00:37:18,640 --> 00:37:19,960
that risk.

578
00:37:19,960 --> 00:37:26,180
And that's why that risk premium is very, very, very stable in terms of that.

579
00:37:26,180 --> 00:37:30,600
It's called the volatility risk premium, the difference between the implied volatility

580
00:37:30,600 --> 00:37:31,600
and the realized.

581
00:37:31,600 --> 00:37:37,960
And the implied volatility is all those anxieties ultimately that are driven, that mean that

582
00:37:37,960 --> 00:37:41,000
the implied volatility is higher than the realized volatility.

583
00:37:41,000 --> 00:37:47,240
And it's that spread that allows us to make that 600 basis point stable return that goes

584
00:37:47,240 --> 00:37:49,640
up when uncertainties go up.

585
00:37:49,640 --> 00:37:51,740
We get paid for doing more of the same.

586
00:37:51,740 --> 00:37:54,040
We get paid more for doing the same thing.

587
00:37:54,040 --> 00:37:58,840
So I think that's the third kind of way that I think about that.

588
00:37:58,840 --> 00:38:03,880
It's very interesting you're making these points because we discussed the 60-40 portfolio

589
00:38:03,880 --> 00:38:06,120
and then someone said to me, and it just made so much sense.

590
00:38:06,120 --> 00:38:07,440
I've been doing this ever since.

591
00:38:07,440 --> 00:38:14,480
So I actually refer to it now as correlated part of the bucket, which is offense.

592
00:38:14,480 --> 00:38:18,440
And then the defense, which is we're trying to generate an income, which is uncorrelated

593
00:38:18,440 --> 00:38:21,320
to market volatility.

594
00:38:21,320 --> 00:38:26,000
And as you said, goal-based investing, well, we need to look at it backwards, as in people

595
00:38:26,000 --> 00:38:27,000
have costs.

596
00:38:27,000 --> 00:38:28,000
What are your bills?

597
00:38:28,000 --> 00:38:29,000
What are your families?

598
00:38:29,000 --> 00:38:30,000
It's not cheap.

599
00:38:30,000 --> 00:38:31,000
Joey's down the road.

600
00:38:31,000 --> 00:38:32,000
It's 50 grand.

601
00:38:32,000 --> 00:38:35,400
When I left Joey's, it was 22,000 for year 12.

602
00:38:35,400 --> 00:38:38,040
Like bills are just racking up with inflation.

603
00:38:38,040 --> 00:38:43,480
So when you're looking at someone's life, having the ability to go, right, I need to

604
00:38:43,480 --> 00:38:44,760
pay these bills.

605
00:38:44,760 --> 00:38:49,600
What assets do I have available that have the ability, as you said, with insurance or

606
00:38:49,600 --> 00:38:57,640
a level of protection where we know roughly we can generate this level of result in, depending

607
00:38:57,640 --> 00:38:59,720
on their risk, what their percentage they want to take.

608
00:38:59,720 --> 00:39:01,000
Someone might want to do 80% of it.

609
00:39:01,000 --> 00:39:03,240
Some person might want to do 20%.

610
00:39:03,240 --> 00:39:04,520
That's everyone else's prerogative.

611
00:39:04,520 --> 00:39:08,640
But then let's be honest, human beings like having a view, like having a flutter.

612
00:39:08,640 --> 00:39:11,160
That's Australia, which is gamblers, unfortunately.

613
00:39:11,160 --> 00:39:13,280
Good or bad, the ugly love of races.

614
00:39:13,280 --> 00:39:19,360
But that's the reason why as well, the offensive part of the world is important because no

615
00:39:19,360 --> 00:39:20,800
one knows what's going to happen tomorrow.

616
00:39:20,800 --> 00:39:21,800
And that's hope.

617
00:39:21,800 --> 00:39:24,080
And that's exciting, which I've always found.

618
00:39:24,080 --> 00:39:29,800
But yeah, look, back to Talaria, again, I do think what you guys are doing is very,

619
00:39:29,800 --> 00:39:34,440
very interesting in the uncorrelated, as you said, you get a low beta to markets where

620
00:39:34,440 --> 00:39:40,240
we can have a conversation with someone and then potentially forecast out from a goals-based

621
00:39:40,240 --> 00:39:44,920
perspective what they can potentially get, which I always find quite interesting.

622
00:39:44,920 --> 00:39:52,860
So in saying that, let's dig into the fun part, which is what opportunities you're seeing.

623
00:39:52,860 --> 00:39:57,000
Is there anything interesting that you've been buying or anything on the horizon?

624
00:39:57,000 --> 00:40:03,280
First, you just said to engage, I'll answer that, but just to engage a couple of things

625
00:40:03,280 --> 00:40:04,280
you said there.

626
00:40:04,280 --> 00:40:05,280
Absolutely.

627
00:40:05,280 --> 00:40:09,400
When you talk about your clients and school fees, I mean, that there's these wellness

628
00:40:09,400 --> 00:40:10,960
liabilities, right?

629
00:40:10,960 --> 00:40:14,080
And they're all personally defined, but you went school fees or whatever.

630
00:40:14,080 --> 00:40:15,520
And that's exactly what I was talking about.

631
00:40:15,520 --> 00:40:16,520
And I've got a certain asset.

632
00:40:16,520 --> 00:40:20,920
And you know, our biggest asset, depending on your age, is obviously your human capital.

633
00:40:20,920 --> 00:40:25,480
You know, I have an income and generate kind of returns from my human capital.

634
00:40:25,480 --> 00:40:29,000
I'm a really well-respected plumber or lawyer.

635
00:40:29,000 --> 00:40:31,440
You know, I have a capital base in that sense.

636
00:40:31,440 --> 00:40:33,200
Plus I have these savings.

637
00:40:33,200 --> 00:40:38,160
But it's exactly that mindset that really was right there at the inception of the strategy.

638
00:40:38,160 --> 00:40:41,040
I've got an asset and I've got a liability.

639
00:40:41,040 --> 00:40:46,840
And you know, if the liability, if the asset doesn't perform at the wrong moment, then

640
00:40:46,840 --> 00:40:50,520
maybe a kid can't go to accept that university place, right?

641
00:40:50,520 --> 00:40:53,160
I mean, these are real things.

642
00:40:53,160 --> 00:40:59,960
Or I couldn't afford to go to my brother's wedding in Brazil, right?

643
00:40:59,960 --> 00:41:00,960
Whatever it is.

644
00:41:00,960 --> 00:41:06,240
So I absolutely agree with what you're saying in that regard.

645
00:41:06,240 --> 00:41:12,400
In terms of the opportunity set, this in the reality is it's relatively slow for us at

646
00:41:12,400 --> 00:41:15,040
the moment.

647
00:41:15,040 --> 00:41:18,080
And I think that that's to be expected.

648
00:41:18,080 --> 00:41:23,740
So just going right back to our sort of core bottom-up process, you know, if we're talking

649
00:41:23,740 --> 00:41:28,120
about a normalised level of kind of returns in individual securities, and of course, we

650
00:41:28,120 --> 00:41:32,200
analyse the nearest two or three peers to get a sense of the industry, but also the

651
00:41:32,200 --> 00:41:35,840
profitable dynamic of the nearest competitors.

652
00:41:35,840 --> 00:41:41,200
You know, we're in a world where, you know, whole economy profits as a percentage of GDP

653
00:41:41,200 --> 00:41:43,360
are pretty close to record.

654
00:41:43,360 --> 00:41:44,360
Okay?

655
00:41:44,360 --> 00:41:48,960
And secondly, you know, profit margins at companies are pretty close to the record.

656
00:41:48,960 --> 00:41:51,560
I mean, they've come down over the last 18 months.

657
00:41:51,560 --> 00:41:54,040
They're still very, very high.

658
00:41:54,040 --> 00:41:57,720
And if you think about what's driven that over the last decade, it's not really been

659
00:41:57,720 --> 00:42:02,560
about, well, some of it's been about growth, but some of it's really been about 100 basis

660
00:42:02,560 --> 00:42:06,960
points of what's around about an 11% bottom line margin is because of falling interest

661
00:42:06,960 --> 00:42:07,960
charges.

662
00:42:07,960 --> 00:42:12,280
Well, you don't have to be a genius to think that that's not going to be a tailwind going

663
00:42:12,280 --> 00:42:13,800
forward.

664
00:42:13,800 --> 00:42:15,640
We can argue about whether it's going to be a big headwind.

665
00:42:15,640 --> 00:42:18,720
That's a different thing, but it's not going to be the tailwind.

666
00:42:18,720 --> 00:42:25,680
We've had about 100 basis points of falling charges from tax.

667
00:42:25,680 --> 00:42:27,280
You know, that's contributed.

668
00:42:27,280 --> 00:42:31,060
And then you've had falling depreciation charges because companies haven't actually been investing

669
00:42:31,060 --> 00:42:34,200
in the fixed asset base, really in aggregates.

670
00:42:34,200 --> 00:42:35,200
Okay?

671
00:42:35,200 --> 00:42:39,920
So all of those things, when you work in a process, it's about normalised means that

672
00:42:39,920 --> 00:42:44,120
if you're looking at whole economy profits at the aggregate, pretty high relative to

673
00:42:44,120 --> 00:42:47,520
history, how is it then that I could come on and tell you, Merde, we're generating

674
00:42:47,520 --> 00:42:49,240
hundreds of ideas?

675
00:42:49,240 --> 00:42:51,440
That would be not commensurate, right?

676
00:42:51,440 --> 00:42:57,840
And the reason that the corporate profits pool has been so high is really just an accounting

677
00:42:57,840 --> 00:42:58,840
identity.

678
00:42:58,840 --> 00:43:04,800
Just remember that corporate profits are really just a reflection of net national savings

679
00:43:04,800 --> 00:43:06,680
minus investment.

680
00:43:06,680 --> 00:43:08,160
That's not an interpretation.

681
00:43:08,160 --> 00:43:09,400
That's an accounting identity.

682
00:43:09,400 --> 00:43:10,400
That's math.

683
00:43:10,400 --> 00:43:17,320
And of course, we've been running record deficits in terms of post pandemic, and we really haven't

684
00:43:17,320 --> 00:43:19,320
wound any of that back.

685
00:43:19,320 --> 00:43:23,640
The rate of change has gone, but of course, the absolute deficit is still going up higher.

686
00:43:23,640 --> 00:43:28,280
And that's allowed the corporate profit pool to be abnormally high.

687
00:43:28,280 --> 00:43:33,200
So in aggregate, no, we're not generating a lot of ideas, new ideas.

688
00:43:33,200 --> 00:43:37,280
We continue, we've had about 15% of the portfolio in Japan.

689
00:43:37,280 --> 00:43:45,320
That continues to be a relatively fertile ground for ideas that move through the process.

690
00:43:45,320 --> 00:43:50,240
Doesn't necessarily mean that they move into the portfolio when we socialize the idea,

691
00:43:50,240 --> 00:43:56,040
but we continue to see more ideas that progress further in Japan than pretty much any other

692
00:43:56,040 --> 00:43:57,040
region.

693
00:43:57,040 --> 00:44:03,920
So do you mind if I just ask you, you mentioned Japan, and I grew up in playing games.

694
00:44:03,920 --> 00:44:04,920
It's just our generation, right?

695
00:44:04,920 --> 00:44:06,920
Nintendo, Pokemon, all this type of stuff.

696
00:44:06,920 --> 00:44:12,360
There's a new game launched called Power World World, which is completely ripped off Pokemon.

697
00:44:12,360 --> 00:44:16,920
And there's another, the old Nintendo, which is out of Japan, like someone built one through

698
00:44:16,920 --> 00:44:17,920
all the games in it.

699
00:44:17,920 --> 00:44:22,920
But I was reading somewhere that in the past, when someone's ripped off a game, it's in

700
00:44:22,920 --> 00:44:26,040
America and the West community, everyone gets sued $4 million.

701
00:44:26,040 --> 00:44:27,560
They're completely harpooned.

702
00:44:27,560 --> 00:44:32,040
Is it true that in Japan, there's something about no copyright?

703
00:44:32,040 --> 00:44:39,800
Because I've heard there's companies literally in Japan ripping off, say, Nintendo or the

704
00:44:39,800 --> 00:44:42,600
gaming industry, and there's just no recourse.

705
00:44:42,600 --> 00:44:44,560
I don't know much about the Japanese market.

706
00:44:44,560 --> 00:44:47,880
And you said you got 15% of the portfolio in the Japanese market.

707
00:44:47,880 --> 00:44:48,880
I was just curious.

708
00:44:48,880 --> 00:44:52,880
Is it just a whole different playing field in Japan?

709
00:44:52,880 --> 00:44:57,000
Yeah, I wouldn't be comfortable actually talking about that in terms of publisher rights, Merdek.

710
00:44:57,000 --> 00:45:00,840
I would like to hear more about, you sound a bit defensive about Pokemon being ripped

711
00:45:00,840 --> 00:45:01,840
off though.

712
00:45:01,840 --> 00:45:02,840
I'm not going to get into it.

713
00:45:02,840 --> 00:45:03,840
You're almost, you know, the nerve there.

714
00:45:03,840 --> 00:45:04,840
Yeah, I just did nothing.

715
00:45:04,840 --> 00:45:05,840
It was just like as a kid.

716
00:45:05,840 --> 00:45:08,840
Listen, I don't know in terms of publishing rights.

717
00:45:08,840 --> 00:45:17,480
I mean, you know, clearly Sony's, Sony and Nintendo's big publishers, I'd be very surprised.

718
00:45:17,480 --> 00:45:21,520
You know, they've got embedded kind of platforms, haven't they, from the consoles and so on.

719
00:45:21,520 --> 00:45:23,680
But yeah, that I don't know.

720
00:45:23,680 --> 00:45:28,380
I mean, clearly there's global patents on, you know, Takeda is a pharmaceutical company.

721
00:45:28,380 --> 00:45:30,280
It's not like they're unprotected.

722
00:45:30,280 --> 00:45:33,240
It's Mitsubishi Electric who does factory automation.

723
00:45:33,240 --> 00:45:34,520
They would have patents.

724
00:45:34,520 --> 00:45:35,880
But in terms of publishing rights, I don't know.

725
00:45:35,880 --> 00:45:36,880
I have a look into that.

726
00:45:36,880 --> 00:45:37,880
No, I was just curious.

727
00:45:37,880 --> 00:45:38,880
Sorry.

728
00:45:38,880 --> 00:45:40,880
As soon as you said 15%, my brain went Japan.

729
00:45:40,880 --> 00:45:42,880
I know you're brain went.

730
00:45:42,880 --> 00:45:46,680
But no, please, please continue about what you're seeing as opportunities instead of

731
00:45:46,680 --> 00:45:47,680
me going on.

732
00:45:47,680 --> 00:45:51,680
You know, obviously something got under my goat.

733
00:45:51,680 --> 00:45:58,440
Yeah, we've, I mean, obviously last year, US utilities in particular, really, really

734
00:45:58,440 --> 00:45:59,440
poor sector.

735
00:45:59,440 --> 00:46:02,440
A few things have started to come through the screen that are worthwhile there.

736
00:46:02,440 --> 00:46:07,440
So we've recently initiated a position in a Midwest utility.

737
00:46:07,440 --> 00:46:09,440
So called WEC.

738
00:46:09,440 --> 00:46:12,960
You know, they're pretty much dominant in Wisconsin.

739
00:46:12,960 --> 00:46:16,200
They're a little bit in Illinois as well.

740
00:46:16,200 --> 00:46:18,040
You know, that's a regulated asset base.

741
00:46:18,040 --> 00:46:22,000
They're allowed to grow that around about 5% to 7% per annum.

742
00:46:22,000 --> 00:46:26,000
They've got a 70% payout ratio.

743
00:46:26,000 --> 00:46:29,160
You know, so you're getting, and then they're levered about three times, right, between

744
00:46:29,160 --> 00:46:31,520
the debt and equity side.

745
00:46:31,520 --> 00:46:37,080
So you know, you've got a dividend yield of, you know, over 4%.

746
00:46:37,080 --> 00:46:42,080
They've had an excellent track record as an operator, and they're allowed to take, and

747
00:46:42,080 --> 00:46:48,160
the payout ratio is about 70 cents on the dollar to underpin that 4.3% dividend yield.

748
00:46:48,160 --> 00:46:52,920
And then that 30 cents in the dollar is levered about three times into the regulated asset

749
00:46:52,920 --> 00:46:58,200
base where they're allowed to get about a 10.5% regulated rate of return.

750
00:46:58,200 --> 00:47:00,880
And that should drive, you know, 5% to 7% growth.

751
00:47:00,880 --> 00:47:05,800
So you know, that's a pretty stable good business that should be able to generate in a fair

752
00:47:05,800 --> 00:47:08,760
value sense, you know, 25% upside.

753
00:47:08,760 --> 00:47:12,400
And as you hold it for a period of time, you know, you're just going to be compounding

754
00:47:12,400 --> 00:47:14,000
in that high single digit figure.

755
00:47:14,000 --> 00:47:17,720
So this isn't something that I'm going to tell your listeners is going to double.

756
00:47:17,720 --> 00:47:20,240
But that looks a pretty good investment.

757
00:47:20,240 --> 00:47:22,640
It haven't come down from around about 100.

758
00:47:22,640 --> 00:47:26,340
You know, we're committing to buy it in about 75.

759
00:47:26,340 --> 00:47:28,400
So that's kind of the first thing.

760
00:47:28,400 --> 00:47:35,200
The second thing I talked about, we've just taken a small initial position in Subaru,

761
00:47:35,200 --> 00:47:41,160
which has about 40% on our forecast going forward on the cash side, or have about 40%

762
00:47:41,160 --> 00:47:44,040
of the market cap in cash.

763
00:47:44,040 --> 00:47:49,000
They are a relatively small producer, obviously, in total number of cars.

764
00:47:49,000 --> 00:47:53,920
So they have about a 10% market share in the SUV category in North America.

765
00:47:53,920 --> 00:47:57,040
That's really where they're extremely strong.

766
00:47:57,040 --> 00:48:05,240
So that's a category that has been growing pretty consistently about 50% of light vehicles

767
00:48:05,240 --> 00:48:09,040
and cars sold in North America in the SUV category.

768
00:48:09,040 --> 00:48:14,680
So actually, they've got a really strong position in one of the better markets globally.

769
00:48:14,680 --> 00:48:21,160
The company has been extremely profitable in the past and the margins have come down.

770
00:48:21,160 --> 00:48:27,080
That's a function really of not they haven't lost any market share, but slightly in terms

771
00:48:27,080 --> 00:48:28,920
of their product mix.

772
00:48:28,920 --> 00:48:33,720
But also they've been investing, obviously, in rolling over into the electric vehicle

773
00:48:33,720 --> 00:48:39,040
market that JV'd with Toyota there really on the battery side.

774
00:48:39,040 --> 00:48:42,300
And one of the things that makes us much more comfortable because the issue around a lot

775
00:48:42,300 --> 00:48:47,040
of traditional automakers is they're actually huge financial services companies with a manufacturing

776
00:48:47,040 --> 00:48:48,040
business attached.

777
00:48:48,040 --> 00:48:54,280
It's all about financing and so on and so bad loans and the leverage in that side can

778
00:48:54,280 --> 00:48:56,200
be a really difficult place to analyze.

779
00:48:56,200 --> 00:49:01,640
Say something like BMW is tough to analyze that and opens up our investors to greater

780
00:49:01,640 --> 00:49:03,840
levels of uncertainty and risk.

781
00:49:03,840 --> 00:49:07,720
Whereas they've got, Subaru has got the lowest level of customer financing of any of the

782
00:49:07,720 --> 00:49:10,000
consumer brands in North America.

783
00:49:10,000 --> 00:49:15,520
So clients are buying the product rather than being induced through a financial incentive

784
00:49:15,520 --> 00:49:17,080
really to buy the product.

785
00:49:17,080 --> 00:49:23,400
So regarding purchasing the product, COVID had very, very extensive wait times.

786
00:49:23,400 --> 00:49:29,600
Have you, since you've been doing a lot of work in this, has those wait times been reduced

787
00:49:29,600 --> 00:49:32,520
or is that now just a legacy problem which we have to deal with?

788
00:49:32,520 --> 00:49:39,120
No, that's the supply chain issues that really dominated COVID and this is why we saw, I

789
00:49:39,120 --> 00:49:40,120
drive a 1999 car.

790
00:49:40,120 --> 00:49:42,120
We're going to go one in the family.

791
00:49:42,120 --> 00:49:44,280
I'm just not really a car person.

792
00:49:44,280 --> 00:49:49,200
And when I bought that about six years ago, so it was, I thought, do you know what?

793
00:49:49,200 --> 00:49:50,760
This is only about 17 years old.

794
00:49:50,760 --> 00:49:51,760
This is a bargain.

795
00:49:51,760 --> 00:49:53,480
It was like about six grand.

796
00:49:53,480 --> 00:49:58,840
And when I bought the car and it's tripled, you know, in terms of the COVID, but no, the

797
00:49:58,840 --> 00:50:00,840
supply chain issues are starting to work through.

798
00:50:00,840 --> 00:50:03,480
They're not completely done.

799
00:50:03,480 --> 00:50:09,480
We had Toyota results fairly recently saying that they were coming to the end of them,

800
00:50:09,480 --> 00:50:11,880
but it's really the componentry, I think that's still the issue.

801
00:50:11,880 --> 00:50:18,360
And of course, you've got an overlay as well where because of what happened in COVID, if

802
00:50:18,360 --> 00:50:22,560
you think about the last 20 years in business and, you know, people who do MBA, it was really

803
00:50:22,560 --> 00:50:25,680
about cash management.

804
00:50:25,680 --> 00:50:30,720
So it was about getting supply chains as long and as thin as singular as possible so that

805
00:50:30,720 --> 00:50:34,720
your working capital management was much, much tighter.

806
00:50:34,720 --> 00:50:40,440
And the reality now, of course, is they recognise if there was a company in, you know, Taiwan,

807
00:50:40,440 --> 00:50:47,640
or Ukraine that just did the washer for the windscreen wiper for the car, well, if you

808
00:50:47,640 --> 00:50:50,200
can't get that, then the whole car can't go out.

809
00:50:50,200 --> 00:50:54,600
So it's been slightly about re-engineering the supply chain as well as access to the

810
00:50:54,600 --> 00:50:57,760
product, I think, but that has pretty much worked its way through.

811
00:50:57,760 --> 00:51:01,040
And we're seeing, I wouldn't want to give you the exact number of inventory days that

812
00:51:01,040 --> 00:51:05,880
we're seeing in global auto, but historically I know is around about 59 to 60 was fairly

813
00:51:05,880 --> 00:51:06,880
typical.

814
00:51:06,880 --> 00:51:08,760
So I just want to check that.

815
00:51:08,760 --> 00:51:10,640
Yeah, it's normalising.

816
00:51:10,640 --> 00:51:15,720
Yeah, I mean, another stock that's relatively new in the portfolio is Medtronic, which is

817
00:51:15,720 --> 00:51:18,440
a US medical devices company.

818
00:51:18,440 --> 00:51:21,440
It's been a dividend aristocrat.

819
00:51:21,440 --> 00:51:26,040
They had, funny enough, some supply chain issues within the company, which really impacted

820
00:51:26,040 --> 00:51:29,240
both the earnings, but also the sort of cash management of the business.

821
00:51:29,240 --> 00:51:35,080
And effectively, the stock's derated off the back of the supply chain issues.

822
00:51:35,080 --> 00:51:44,480
They've recently hired a new manager to really run the whole logistics and supply chain and

823
00:51:44,480 --> 00:51:49,640
re-engineer that and reduce down the number of sites in which they're operating.

824
00:51:49,640 --> 00:51:55,560
So it's really, it's recently, kind of at the point, traded down to a five year low

825
00:51:55,560 --> 00:51:56,560
PE evaluation.

826
00:51:56,560 --> 00:52:01,320
There's no, they've got market leading positions, either number one or two in everything they

827
00:52:01,320 --> 00:52:02,320
do.

828
00:52:02,320 --> 00:52:07,800
So they're really strong in the heart, Medtronic, and clearly that's a growth area over time

829
00:52:07,800 --> 00:52:09,840
and demographics.

830
00:52:09,840 --> 00:52:14,200
So that's a recent addition as well, where some of the issues that we're talking about

831
00:52:14,200 --> 00:52:18,880
in the auto industry have been able to afford us an opportunity in different sectors.

832
00:52:18,880 --> 00:52:25,200
And we think they'll be able to take control of them from a medium term point of view,

833
00:52:25,200 --> 00:52:31,120
but their market position, pricing and product portfolio is totally unimpacted.

834
00:52:31,120 --> 00:52:35,240
So it's really a function that their earnings momentum in a world where you started to see

835
00:52:35,240 --> 00:52:40,920
some sectors get up or individual stocks get upgrades and some get downgrades and relatively

836
00:52:40,920 --> 00:52:41,920
punished or rewarded.

837
00:52:41,920 --> 00:52:45,400
They've been punished, but we don't think the earnings power of the company has really

838
00:52:45,400 --> 00:52:47,400
fundamentally changed.

839
00:52:47,400 --> 00:52:52,080
Yeah, it's quite interesting you discussing the specifics of companies.

840
00:52:52,080 --> 00:52:56,200
And I suppose the one question I really have is looking at the past five years, do you

841
00:52:56,200 --> 00:53:02,680
think that CEOs are now looking at the balance sheet and going not about how much growth

842
00:53:02,680 --> 00:53:07,420
can we get at any price, but not even growth at a reasonable price, but they're just trying

843
00:53:07,420 --> 00:53:11,620
to get cash flow and improve the profit margins of these businesses.

844
00:53:11,620 --> 00:53:15,620
So they're going to be around or when the next opportunities arise, do you think the

845
00:53:15,620 --> 00:53:21,080
mentality has changed with how these CEOs are running their businesses?

846
00:53:21,080 --> 00:53:26,840
Well, I should say that as part of our process, we deliberately don't meet management.

847
00:53:26,840 --> 00:53:27,840
I didn't know that.

848
00:53:27,840 --> 00:53:29,840
So you don't mean management at all?

849
00:53:29,840 --> 00:53:31,920
No, we think that there's as many.

850
00:53:31,920 --> 00:53:32,920
Why is that?

851
00:53:32,920 --> 00:53:36,440
Because a lot of people say, hey, you know, we get to meet the managers and etc, etc.

852
00:53:36,440 --> 00:53:39,240
Yeah, so there's a couple of reasons I could talk about.

853
00:53:39,240 --> 00:53:44,120
Let's go back though to, you know, we were talking about portfolio construction, the

854
00:53:44,120 --> 00:53:49,000
diversification and then this unquantifiable kind of risk component residual that you left

855
00:53:49,000 --> 00:53:50,000
with.

856
00:53:50,000 --> 00:53:55,800
So, you know, the traditional, there's still an awful lot of money left with active managers,

857
00:53:55,800 --> 00:53:59,120
albeit, you know, the market share has been reducing with passive.

858
00:53:59,120 --> 00:54:04,360
But if you're using an active manager, right, the vast majority of the pitch by the active

859
00:54:04,360 --> 00:54:09,160
manager is that I'm a very clever person.

860
00:54:09,160 --> 00:54:14,760
And my competitive advantage is that I have some different degree of access.

861
00:54:14,760 --> 00:54:17,040
And quite often that access to knowledge, right.

862
00:54:17,040 --> 00:54:21,760
And typically that access is, is couch in terms of management, you know, we do 3000

863
00:54:21,760 --> 00:54:25,360
management meetings a year and so on.

864
00:54:25,360 --> 00:54:30,680
If you statistically distribute who's performed how, and who how many meetings they've done,

865
00:54:30,680 --> 00:54:33,920
I would challenge anybody to suggest that there's a strong pattern.

866
00:54:33,920 --> 00:54:39,200
So the person who did no meeting, so let's think Renaissance Capital.

867
00:54:39,200 --> 00:54:44,600
Like, you know, yeah, I only just can't believe I haven't learned about that one.

868
00:54:44,600 --> 00:54:48,600
I found out about Renaissance Capital about six or seven months ago, and someone told

869
00:54:48,600 --> 00:54:54,080
me that they've averaged what nearly 30% since inception for how long and they've got how

870
00:54:54,080 --> 00:54:58,520
many stocks in the portfolio is 750 like 1000.

871
00:54:58,520 --> 00:55:01,320
It's incredible.

872
00:55:01,320 --> 00:55:05,120
But the point is even within active management.

873
00:55:05,120 --> 00:55:10,800
Do you, you know, is there is there a line of best fit that's positively sloping between

874
00:55:10,800 --> 00:55:13,200
most meetings and least meetings?

875
00:55:13,200 --> 00:55:14,680
Okay.

876
00:55:14,680 --> 00:55:18,360
So we like everybody else have 24 hours in a day Murdoch.

877
00:55:18,360 --> 00:55:23,320
And it's really from our point of view, where do we get the highest return on our time in

878
00:55:23,320 --> 00:55:27,720
terms of, you know, we're all we have in this in this industry and that's a lot of human

879
00:55:27,720 --> 00:55:28,720
capital.

880
00:55:28,720 --> 00:55:33,800
So everything's you can learn from everything and everything can be a value.

881
00:55:33,800 --> 00:55:40,440
But we think that the behavioral risks around meeting management relative to how else we

882
00:55:40,440 --> 00:55:42,620
can spend our time are much higher.

883
00:55:42,620 --> 00:55:44,960
So what do I mean by that?

884
00:55:44,960 --> 00:55:48,440
You know, you think about all the issues about meeting management.

885
00:55:48,440 --> 00:55:53,520
Firstly, we know some of the worst atrocities of human history have been created because

886
00:55:53,520 --> 00:55:58,480
of, you know, people's preponderance to follow and believe authority figures.

887
00:55:58,480 --> 00:56:05,600
Well, you know, if I'm meeting the CFO or CEO of Microsoft, I mean, they're clear or

888
00:56:05,600 --> 00:56:08,200
senior management at any of the companies that we invest in, you know, they're real

889
00:56:08,200 --> 00:56:12,160
authority figures in their industry.

890
00:56:12,160 --> 00:56:18,240
The second thing is, you know, studies show that it's not only that we hear confirmation

891
00:56:18,240 --> 00:56:20,040
bias, so we hear what we want to hear.

892
00:56:20,040 --> 00:56:24,560
It's that everything that is said merely reconfirms what we want to know.

893
00:56:24,560 --> 00:56:29,760
Okay, so that's a sort of second example of a bias.

894
00:56:29,760 --> 00:56:34,560
You know, third thing, listen, it's, you know, psychological studies have shown that people

895
00:56:34,560 --> 00:56:38,360
are almost impossible at determining who's telling the truth and who's lying.

896
00:56:38,360 --> 00:56:42,360
And so you get in the situation of saying, okay, the, you know, the capex phase or the

897
00:56:42,360 --> 00:56:45,800
acquisition phase is over and we're going to start returning cash to shareholders.

898
00:56:45,800 --> 00:56:49,200
And then, you know, six weeks time, they go and do a big acquisition.

899
00:56:49,200 --> 00:56:50,200
You say, oh, they lied to me.

900
00:56:50,200 --> 00:56:53,120
It's like, yeah, well, they did, you know.

901
00:56:53,120 --> 00:56:57,440
And the fourth thing is very different from when I started in the industry.

902
00:56:57,440 --> 00:56:58,720
You know, there is regulations.

903
00:56:58,720 --> 00:57:07,200
I mean, travel previously, CFOs and CEOs would tell you non-public information that was market

904
00:57:07,200 --> 00:57:12,480
moving, as in, oh, you talked in the last quarter about, you know, 2% volume and 1%

905
00:57:12,480 --> 00:57:13,480
price.

906
00:57:13,480 --> 00:57:16,360
And the CFO would say to you mid-quarter, oh, no, no, no, it's much, it's going to be

907
00:57:16,360 --> 00:57:18,400
much better than that.

908
00:57:18,400 --> 00:57:22,280
Because that wasn't illegal, you know, and clearly, you know, public disclosure rules

909
00:57:22,280 --> 00:57:24,240
have changed over the course of my career.

910
00:57:24,240 --> 00:57:25,240
So-

911
00:57:25,240 --> 00:57:27,400
Newcrest Mine has changed all that.

912
00:57:27,400 --> 00:57:28,400
Yeah.

913
00:57:28,400 --> 00:57:33,000
So there's a whole range of issues where meeting management can be problematic.

914
00:57:33,000 --> 00:57:37,280
I guess the way that I would pithily sum it up is that we're numbers over narrative.

915
00:57:37,280 --> 00:57:45,080
The single best way to judge what company management and corporations do is by, you

916
00:57:45,080 --> 00:57:50,120
know, forensically looking at the annual reports, financial statements, and looking, you know,

917
00:57:50,120 --> 00:57:53,840
in the data of what they do rather than what they tell you what they do.

918
00:57:53,840 --> 00:57:59,640
Well, on the back of the run from the Magnificent Seven, and as you said, data-driven, I would

919
00:57:59,640 --> 00:58:05,880
be, it'd be terrible not to discuss the role that artificial intelligence is playing in,

920
00:58:05,880 --> 00:58:11,360
you know, the investing world, the ability to get information, process information, and

921
00:58:11,360 --> 00:58:12,360
analyze these things.

922
00:58:12,360 --> 00:58:18,040
I would love to hear your opinion on, you know, the role that AI is playing in, say,

923
00:58:18,040 --> 00:58:23,120
Tlari's business, or what you think the impact is going to have, for exactly the reasons

924
00:58:23,120 --> 00:58:24,120
which you just said.

925
00:58:24,120 --> 00:58:28,840
Yeah, there's a couple of things there in terms of clearly, you know, because of the

926
00:58:28,840 --> 00:58:34,880
valuations and our approach, you know, we don't own stocks specifically that may come

927
00:58:34,880 --> 00:58:36,960
to mind exposed to the AI theme.

928
00:58:36,960 --> 00:58:41,080
But I think the framework that we kind of look at it through, because clearly we're

929
00:58:41,080 --> 00:58:45,200
cognizant of it in terms of the potential positive and negative impacts on our portfolio

930
00:58:45,200 --> 00:58:50,160
companies, is firstly, I think, think of an X and Y axis.

931
00:58:50,160 --> 00:58:53,920
And one thing you've got rules versus discretion.

932
00:58:53,920 --> 00:59:03,200
Okay, so, you know, think about an accountant, or, you know, there's a tax code that is actually,

933
00:59:03,200 --> 00:59:09,240
you know, just hard rules compared to, you know, a lawyer involved in a civil case, where

934
00:59:09,240 --> 00:59:10,240
that's kind of much more subjective.

935
00:59:10,240 --> 00:59:13,760
And they may talk about, hey, we're going to argue it on this basis.

936
00:59:13,760 --> 00:59:16,920
There's not, there's not those hard rules.

937
00:59:16,920 --> 00:59:19,040
So there's a sliding scale.

938
00:59:19,040 --> 00:59:28,040
And clearly the more rules based kind of component or industries are more subjected to AI compared

939
00:59:28,040 --> 00:59:30,080
to those that are subjective.

940
00:59:30,080 --> 00:59:35,400
And then the second thing is the customer experience, you know, how much of that is,

941
00:59:35,400 --> 00:59:38,120
where on the scale is that between in person?

942
00:59:38,120 --> 00:59:43,080
And where is that on the scale of kind of, you know, mass delivery?

943
00:59:43,080 --> 00:59:49,360
Because, you know, so when you think about it in those terms, you know, a, you know,

944
00:59:49,360 --> 00:59:56,240
a US kind of listed restaurant group, for example, you know, clearly less at risk from

945
00:59:56,240 --> 01:00:02,520
AI in the sense of, you know, that their product is ultimately served in person one way or

946
01:00:02,520 --> 01:00:03,520
another.

947
01:00:03,520 --> 01:00:06,160
It's a, you know, customer experience.

948
01:00:06,160 --> 01:00:12,800
But on the other side, in terms of all the things that go into producing food in a profitable

949
01:00:12,800 --> 01:00:19,000
and efficient way, a lot of that is actually very much rules based, you know, delivery

950
01:00:19,000 --> 01:00:24,820
of quantities, ordering, supply chain management, accounting, cash management, and so on.

951
01:00:24,820 --> 01:00:26,120
So they can actually benefit.

952
01:00:26,120 --> 01:00:29,360
So that's often how we sort of think about that matrix.

953
01:00:29,360 --> 01:00:34,920
I did like the, so that that's from a portfolio and markets point of view in terms of our

954
01:00:34,920 --> 01:00:42,040
companies, in terms of the business, the more philosophical question in the industry.

955
01:00:42,040 --> 01:00:46,440
You know, I really liked the description recently where it says, you know, a fund manager's

956
01:00:46,440 --> 01:00:51,880
job is ultimately you're sitting at a bus stop and, you know, buses meant to come every

957
01:00:51,880 --> 01:00:55,840
15 minutes and, you know, no buses come for 45 minutes.

958
01:00:55,840 --> 01:00:58,080
So effectively three buses haven't come.

959
01:00:58,080 --> 01:01:02,920
Now, does that mean that the old adages that, you know, three buses will come along all

960
01:01:02,920 --> 01:01:03,920
at once?

961
01:01:03,920 --> 01:01:08,120
Or does it mean that the Flinders Street bridge has fallen down?

962
01:01:08,120 --> 01:01:14,440
And of course, AI is not going to help you understand which of those two things is true.

963
01:01:14,440 --> 01:01:16,080
And yet it has huge implications.

964
01:01:16,080 --> 01:01:23,240
So I do think that there's a role for, you know, subjective decision making, clearly

965
01:01:23,240 --> 01:01:26,360
in the investment process because of those things.

966
01:01:26,360 --> 01:01:31,200
But I think the speed of the market has sped up because of AI as well.

967
01:01:31,200 --> 01:01:35,000
You know, when I started the average holding period in the market was about six and a half

968
01:01:35,000 --> 01:01:39,160
years and I think it's down to about, oh, it's less than six months now is the average

969
01:01:39,160 --> 01:01:42,240
holding period of an equity in the US equity market.

970
01:01:42,240 --> 01:01:49,680
So clearly, you know, trading on information and the speed of calculation, funny enough,

971
01:01:49,680 --> 01:01:54,240
has opened up an opportunity for value managers like ourselves because value is playing a

972
01:01:54,240 --> 01:02:01,180
less and less cognizant role in a lot of investment processes than when I started.

973
01:02:01,180 --> 01:02:06,840
So I think there's threats and opportunities in terms of in terms of Talaria, the business

974
01:02:06,840 --> 01:02:10,240
itself.

975
01:02:10,240 --> 01:02:11,480
That's kind of a work in progress.

976
01:02:11,480 --> 01:02:17,280
I think that we're relatively recent in terms of the investment team.

977
01:02:17,280 --> 01:02:24,520
So things like meeting notes, I would write a weekly for myself, you know, the ability

978
01:02:24,520 --> 01:02:30,200
to be able to analyze the common traits in what I'm writing to myself every week on,

979
01:02:30,200 --> 01:02:34,480
you know, analyze what are the last year's things that you're kind of effectively able

980
01:02:34,480 --> 01:02:41,320
to learn or take out from what's kind of a journaling process really.

981
01:02:41,320 --> 01:02:44,080
And what can that tell you about the biases?

982
01:02:44,080 --> 01:02:48,600
We can analyze, you know, with a lot more speed and accuracy, I guess, our own decision

983
01:02:48,600 --> 01:02:54,360
making process of when we buy and sell things and how we scale and size things, which I

984
01:02:54,360 --> 01:02:58,600
think is an important development because clearly you're trying to iterate your process.

985
01:02:58,600 --> 01:03:03,240
I mean, we've always did that, but I think AI allows you to, you know, take a lot more

986
01:03:03,240 --> 01:03:10,560
data and counterfactual outcomes and analyze what they may be in a less data, human capital

987
01:03:10,560 --> 01:03:13,080
intensive way.

988
01:03:13,080 --> 01:03:17,320
But you know, and the distribution side and client service side, you know, that's still

989
01:03:17,320 --> 01:03:22,800
probably driven on that, you know, personally deliverable and mass customization.

990
01:03:22,800 --> 01:03:28,840
And I think we're still probably a lot more on the on the customer focus side of that.

991
01:03:28,840 --> 01:03:30,880
So I think that's a that's a work in progress.

992
01:03:30,880 --> 01:03:35,000
How do you use it in your own business, Murdoch?

993
01:03:35,000 --> 01:03:40,440
Oh, well, you know, it makes me look incredibly intelligent when writing articles.

994
01:03:40,440 --> 01:03:41,440
Right.

995
01:03:41,440 --> 01:03:44,860
But more importantly, I just like asking questions.

996
01:03:44,860 --> 01:03:48,640
And then the information when you get from it, you know, how many people have said that

997
01:03:48,640 --> 01:03:51,920
is potentially better than a master's degree.

998
01:03:51,920 --> 01:03:55,280
So I find it incredibly interesting across the board.

999
01:03:55,280 --> 01:03:58,840
Now it's thrown in the question, like, you know, we got kids, you both of us have kids,

1000
01:03:58,840 --> 01:04:00,680
like now they're being educated in the school systems.

1001
01:04:00,680 --> 01:04:03,600
Remember, we were coming up, it was like, here's a whole bunch of formats and hopefully

1002
01:04:03,600 --> 01:04:05,560
in life, you might need them.

1003
01:04:05,560 --> 01:04:10,600
But now it's actually holding the second, you know, it's more about understanding comprehension,

1004
01:04:10,600 --> 01:04:11,760
teamwork and how do you do this?

1005
01:04:11,760 --> 01:04:15,600
But unfortunately, education systems not catching up, hasn't caught up yet.

1006
01:04:15,600 --> 01:04:19,240
And the thing that I always think about is, you know, I've been doing a lot about speaking

1007
01:04:19,240 --> 01:04:22,240
to people who buy businesses and what they look for.

1008
01:04:22,240 --> 01:04:26,080
And one of the one person said to me very interestingly is, what's the number one thing

1009
01:04:26,080 --> 01:04:27,080
you look for when you buy a business?

1010
01:04:27,080 --> 01:04:29,080
He goes, a fax machine.

1011
01:04:29,080 --> 01:04:35,600
Just the entire concept of a fax machine, as in, they understand it, but the people

1012
01:04:35,600 --> 01:04:38,040
buying 20 yards, 30 yards, what's a fax machine?

1013
01:04:38,040 --> 01:04:39,040
No one's got a clue.

1014
01:04:39,040 --> 01:04:43,440
But if you still have a fax machine in your business, then that has the potential to be

1015
01:04:43,440 --> 01:04:47,800
modernized, improved, made more efficient, doing exactly the same thing, lower customer

1016
01:04:47,800 --> 01:04:51,320
base, improved all the way through and then potentially more profitable.

1017
01:04:51,320 --> 01:04:54,920
It's just something so simple, because you don't want to end up like Nokia.

1018
01:04:54,920 --> 01:04:59,560
And then the reason I'm asking the question now is, everyone's got chat GPT, we've got

1019
01:04:59,560 --> 01:05:00,560
access to it.

1020
01:05:00,560 --> 01:05:04,120
But unfortunately, the ones we have doesn't give you access to the internet or I can't

1021
01:05:04,120 --> 01:05:09,480
type in analyze, you know, the SAP 500 against Microsoft and you know, work out when to buy

1022
01:05:09,480 --> 01:05:11,400
and sell it hasn't got to that stage yet.

1023
01:05:11,400 --> 01:05:16,160
I'm assuming and I suppose in the back of my mind, I'm thinking to myself, well, maybe

1024
01:05:16,160 --> 01:05:19,120
do you have any mates that actually have access to that particular tool?

1025
01:05:19,120 --> 01:05:23,200
Like you know, maybe that's available for particular echelon that's not available for

1026
01:05:23,200 --> 01:05:24,200
the masses.

1027
01:05:24,200 --> 01:05:28,360
And the other thing in my mind is, could you imagine if an AI tool was available for the

1028
01:05:28,360 --> 01:05:30,620
masses about, you know, investing?

1029
01:05:30,620 --> 01:05:31,720
And what would that look like?

1030
01:05:31,720 --> 01:05:36,120
So yeah, there's a lot of philosophical questions that are in my mind.

1031
01:05:36,120 --> 01:05:40,400
And as you said, the one thing that's changed now is the pace at which these things are

1032
01:05:40,400 --> 01:05:41,400
accelerating.

1033
01:05:41,400 --> 01:05:48,880
I was just very interested to hear your opinion on what you're saying and you hear your thoughts.

1034
01:05:48,880 --> 01:05:53,800
Well, yeah, I mean, you know, I mean, I think you touched on something there that certainly

1035
01:05:53,800 --> 01:05:57,600
does kind of bear in my mind, but this is perhaps not as a tiller and this is just as

1036
01:05:57,600 --> 01:06:04,120
a citizen is, you know, clearly the pace of technological change is making it very hard

1037
01:06:04,120 --> 01:06:10,160
for democratic institutions to be able to move at the same pace.

1038
01:06:10,160 --> 01:06:15,360
I mean, there's no doubt that the studies have shown this, for example, and you've got

1039
01:06:15,360 --> 01:06:22,600
to believe in a degree of efficiency about capital allocation in global, you know, from

1040
01:06:22,600 --> 01:06:25,960
the capitalist system otherwise, and that incentives work and so on.

1041
01:06:25,960 --> 01:06:29,480
Otherwise, you're not going to be involved in financial markets in a professional sense

1042
01:06:29,480 --> 01:06:30,640
anyway.

1043
01:06:30,640 --> 01:06:36,080
And yet, you know, over the course of my career, it's undoubtedly a true, true statement to

1044
01:06:36,080 --> 01:06:44,360
say that consolidation and monopoly power has only increased.

1045
01:06:44,360 --> 01:06:46,680
You know, there's a whole range of reasons for that.

1046
01:06:46,680 --> 01:06:55,000
But you know, the ability for democratic institutions to be able to respond to that is much, much,

1047
01:06:55,000 --> 01:06:56,520
much slower.

1048
01:06:56,520 --> 01:07:04,400
You know, and on the other side of that, you know, with the rise of kind of data and our

1049
01:07:04,400 --> 01:07:12,080
degree in my view of technology fetishization, it means that technology can only and of itself

1050
01:07:12,080 --> 01:07:13,080
be a good.

1051
01:07:13,080 --> 01:07:18,000
I mean, you know, you look at Zuckerberg and his public statements are in many instances

1052
01:07:18,000 --> 01:07:20,520
fairly repulsive to the average person I would suggest.

1053
01:07:20,520 --> 01:07:23,840
And certainly some of them in Australia would be illegal.

1054
01:07:23,840 --> 01:07:28,840
And yes, he is sort of largely revered and thought of as someone who, you know, his answer

1055
01:07:28,840 --> 01:07:32,360
to most things is, hey, listen, you know, if I didn't do it, someone else would.

1056
01:07:32,360 --> 01:07:34,040
Well, that doesn't make something decent.

1057
01:07:34,040 --> 01:07:41,920
You know, so you talked about the pedagogy and the education system not being able to

1058
01:07:41,920 --> 01:07:49,480
keep up with the changing needs of our future colleagues and citizens tomorrow.

1059
01:07:49,480 --> 01:07:55,240
But I think that that's true in a whole range of kind of core institutions that, you know,

1060
01:07:55,240 --> 01:07:59,320
have been the foundation of front of democratic societies, right?

1061
01:07:59,320 --> 01:08:01,440
Of which education is one.

1062
01:08:01,440 --> 01:08:06,120
But that's true of the justice system, the legal system, the democratic system.

1063
01:08:06,120 --> 01:08:11,120
And I think we're seeing some of the challenges to that.

1064
01:08:11,120 --> 01:08:12,960
Yeah.

1065
01:08:12,960 --> 01:08:15,840
And well, this is what creates markets, right?

1066
01:08:15,840 --> 01:08:17,240
Yeah, it is.

1067
01:08:17,240 --> 01:08:18,240
It is.

1068
01:08:18,240 --> 01:08:20,680
I also think that speed doesn't necessarily mean better.

1069
01:08:20,680 --> 01:08:25,400
And that's where I was getting back to on investing with Sense per se is there is no

1070
01:08:25,400 --> 01:08:30,240
doubt that the change in the structure of the market and the speed of information has

1071
01:08:30,240 --> 01:08:35,760
meant that there's a tremendous amount of people in the market where valuation is a

1072
01:08:35,760 --> 01:08:41,080
completely secondary or irrelevant component of their investment process.

1073
01:08:41,080 --> 01:08:46,640
And that means that there'll be a whole range of securities that do not fulfill that criteria,

1074
01:08:46,640 --> 01:08:48,440
whatever that is.

1075
01:08:48,440 --> 01:08:50,320
We talked about not having any earnings momentum.

1076
01:08:50,320 --> 01:08:55,520
I mean, momentum over a long period of time has been about the fourth best, most efficient

1077
01:08:55,520 --> 01:08:59,520
factor over, you know, the last 30 years.

1078
01:08:59,520 --> 01:09:04,400
But if there's more and more capital that's moving, changing hands where valuation isn't

1079
01:09:04,400 --> 01:09:09,760
a component, then for people like ourselves that, you know, core competencies, really

1080
01:09:09,760 --> 01:09:14,760
estimating cash flows and coming up with an appropriate valuation for our clients' money,

1081
01:09:14,760 --> 01:09:16,920
that should provide more opportunities.

1082
01:09:16,920 --> 01:09:20,200
It's a fascinating world we live in.

1083
01:09:20,200 --> 01:09:23,100
And 2024 looks like it's going to be incredibly interesting.

1084
01:09:23,100 --> 01:09:26,880
So with that in mind, what's keeping you up at night and what gets you out of bed in the

1085
01:09:26,880 --> 01:09:29,300
morning?

1086
01:09:29,300 --> 01:09:36,800
What keeps you up at night, I guess, is the unsustainable level of government debt, where

1087
01:09:36,800 --> 01:09:42,080
we've seen, you know, the socialization of debt, really starting with the GFC and then

1088
01:09:42,080 --> 01:09:47,320
COVID, where it's gone from private sector and be that individuals or corporates, just

1089
01:09:47,320 --> 01:09:48,520
onto the public sector.

1090
01:09:48,520 --> 01:09:55,700
And what worries me about that is there is no maths that means it's possible that people,

1091
01:09:55,700 --> 01:10:00,840
as in the citizens and people in general, in many of the developed market countries,

1092
01:10:00,840 --> 01:10:05,300
will get what they feel they've been promised.

1093
01:10:05,300 --> 01:10:08,440
And I think that that keeps me up at night.

1094
01:10:08,440 --> 01:10:11,920
So people are sort of expecting that they're going to get a whole range of goods and services

1095
01:10:11,920 --> 01:10:14,200
in retirement or later in their life.

1096
01:10:14,200 --> 01:10:18,440
And, you know, there is just simply no money for that.

1097
01:10:18,440 --> 01:10:21,580
So that's probably what keeps me up at night.

1098
01:10:21,580 --> 01:10:25,880
And then the second key thing, what gets me up in the morning?

1099
01:10:25,880 --> 01:10:30,760
Oh, well, the first thing that really motivates me to get up in the morning is 25 minutes

1100
01:10:30,760 --> 01:10:34,520
of peace and quiet before everybody else gets up.

1101
01:10:34,520 --> 01:10:39,000
I mean, I'm living the best possible life.

1102
01:10:39,000 --> 01:10:40,480
You know, I don't have a work-life balance.

1103
01:10:40,480 --> 01:10:44,280
I've got 24 hours every day and I'm doing something that I absolutely love and is a

1104
01:10:44,280 --> 01:10:48,680
challenge and, you know, I feel privileged to be able to work on other people's behalf.

1105
01:10:48,680 --> 01:10:54,680
And, you know, I've got a wife who really loves me and I'm crazy about her and the kids

1106
01:10:54,680 --> 01:10:57,400
seem healthy and vaguely interested in both of us.

1107
01:10:57,400 --> 01:10:59,360
So I don't know.

1108
01:10:59,360 --> 01:11:01,480
Every day just feels good.

1109
01:11:01,480 --> 01:11:03,520
And they're vaguely interested in both of us.

1110
01:11:03,520 --> 01:11:06,800
I think that's the goal to achieve when the kids hit their teens.

1111
01:11:06,800 --> 01:11:07,800
That's fantastic.

1112
01:11:07,800 --> 01:11:14,360
Well, if anyone listening wants to learn more, what's the best way to get a hold of you or

1113
01:11:14,360 --> 01:11:15,360
find more information?

1114
01:11:15,360 --> 01:11:20,520
Yeah, I think the best place is to go to the Talaria Capital website.

1115
01:11:20,520 --> 01:11:24,400
We have a whole range of articles, insights, things that we've published out.

1116
01:11:24,400 --> 01:11:28,240
It gives you a bit of background to the team and the individuals in our strategy and returns

1117
01:11:28,240 --> 01:11:29,240
if you are interested.

1118
01:11:29,240 --> 01:11:33,120
So I think that's probably where I would direct most people.

1119
01:11:33,120 --> 01:11:38,720
And otherwise, listen, as I say, our contact details are on now.

1120
01:11:38,720 --> 01:11:44,120
I always tell people that we'll, you know, call me because no one ever does.

1121
01:11:44,120 --> 01:11:47,120
So yeah, a bit delighted to hear from anybody.

1122
01:11:47,120 --> 01:11:48,720
Call me because no one ever does.

1123
01:11:48,720 --> 01:11:49,960
I think I'll nick that one.

1124
01:11:49,960 --> 01:11:52,880
Well, Hugh, I really appreciate you coming on.

1125
01:11:52,880 --> 01:11:56,280
I found it incredibly interesting as always.

1126
01:11:56,280 --> 01:11:58,360
So thanks again and hope you have a great day.

1127
01:11:58,360 --> 01:11:59,360
Murdoch, same to you.

1128
01:11:59,360 --> 01:12:03,760
I felt like we were just getting going and yeah, I look forward to doing it again in

1129
01:12:03,760 --> 01:12:04,760
the future.

1130
01:12:04,760 --> 01:12:08,040
Well, the thing is, it's roughly about an hour, but you know, Joe Rogan does it for

1131
01:12:08,040 --> 01:12:10,000
three hours, maybe one day.

1132
01:12:10,000 --> 01:12:11,000
Yeah, exactly.

1133
01:12:11,000 --> 01:12:14,320
You'll have to buy the Cuban cigars.

1134
01:12:14,320 --> 01:12:16,920
Oh, apps are freaking lately.

1135
01:12:16,920 --> 01:12:17,920
All right.

1136
01:12:17,920 --> 01:12:18,920
Have a good day.

1137
01:12:18,920 --> 01:12:19,920
Yeah.

1138
01:12:19,920 --> 01:12:20,920
Thanks so much, Murdoch.

1139
01:12:20,920 --> 01:12:21,920
Be well.

1140
01:12:21,920 --> 01:12:36,920
Any views expressed in this recording do not represent the view of any other third party

1141
01:12:36,920 --> 01:12:39,440
and other sole personal opinions of the speaker.

1142
01:12:39,440 --> 01:12:43,440
Any reference to financial product does not constitute advice or recommendation and before

1143
01:12:43,440 --> 01:12:47,400
any action, you should seek proper advice from your financial professional.

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Australian listeners should head to www.moneysmart.gov.au to find more information on obtaining financial

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advice.

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To get in touch with York, head to our website www.yorkwelf.com.au.