Welcome back to the Rated Change with York Wealth Management. As
advisors to some of the wealthiest families in the country, the
Rated Change is a podcast designed to help you in the
pursuit of building long term wealth through the insights of
some of the brightest minds and asset management. I'm your host
Murdoch Gaddy and in today's broadcast is speaking with James
Williamson, the Chief Investment Officer at Wentworth Williamson
about their equity fund and their stable income private
credit fund. The equity fund is a go into a strategy investing in
deep value Australian listed companies with roughly 60
million of funds under management, whilst their stable
income fund, which is a private credit fund targets are a
return of 5% above RBO cash rate and has roughly 100 million of
funds under management. If you're a value investor, then
you may have had a very tough number of years investing in
current markets with all this funny money being printed, and
the growth that we're seeing. On this point, I think you're
really going to benefit from James's experience and insights
in this area. For me, the biggest question I've been
wondering for years is has the winter finally finally thawed
for Aussie deep value companies? James digs into how he thinks
the health of a number of these companies in deep value territory
and now healthier than ever. He discusses some specific
companies like surf, or Fleetwood and other commodities
like uranium, copper and gas. He also shares his outlook and
what he thinks it means when value companies begin seeking
mergers and acquisitions at the bottom of the market cycle,
which they're currently doing right now for a number of them.
Before we get into this conversation, please remember,
this podcast is made for entertainment purposes only and
not to be construed as any form of advice. I encourage you to
listen to the disclaimer at the end of the broadcast and to keep
your feedback coming. You can reach me at mgatty at ywm.com.au
So with that being said, I hope you enjoy this conversation as
much as I did. So sit back, relax and enjoy it. James
Williamson from Wentworth Williamson. Welcome to the rate
of change with York Wealth Management.
Thanks, Merak. Very nice to be here.
Great weekend, wasn't it?
Yeah, absolutely. Wonderful weather. Let's enjoy it.
Autumn's the best. Oh, it's fantastic. Yeah, we disappeared
up the Kolo River, found a little creek. Kids had fun.
Some absolute gentlemen put up a rope swing. What a fantastic
weekend.
Man brings back memories. My mind is not older now, but those
are the best days. Soak it in.
Absolutely. All right. Well, why don't you tell us a little bit
about who James Williamson is?
Yeah, perfect. And I think it will probably help to explain
who I am because you are your genetics, and also your
circumstances and environment. And so I came to this Australia
in the late 90s. And I joined Mercatel mutual investment
management. And in those days, they were golf manager, they
were actually a growth manager. And not a surprise that for
those couple of years, I mean, they were actually the best
performing fund manager and they had a Z score. You know, the
old Z score where you looking at earnings per share growth and
averaging out the brokers and so forth. And it was the mark.
It's the market environment. The late 90s is just work for that
style. And I remember there wasn't all the fund manager
there called Rainer Lubinsky. And I say, Rainer, please, can I
do can I please do a models for you? Can I please do that's
very interested in the nitty gritty. And he was a fabulous
mentor. Very aggressive sort of young man always wanted to jump
faster than what they were allowing me to do. And I
couldn't jump here quick enough, but I was offered to run some
sectors out of South Africa. So I did it and I've got an
Australian wife so I convinced her it was a good idea. So
hopped on a plane, had a little baby back then and we went to
South Africa and arrived there. And of course, the whole tech
boom blew up. And at the time, I covered consumer sectors. And I
remember this whole thing and the Reserve Bank of Australia.
The governor Christos he up the interest rates by 400 basis
points to protect the currency and of course, just blew up the
economy, but it was and yet this tech bus too. But I was very
lucky for two respects. The one is as a sales side analyst,
young one, I was doing it all sales side analysts do. I you
watch the share price and you kind of manage your way you
value them to be in touch with the share price and no disrespect
to them is because if you you're out for too long, you're going
to get fired. And so I was doing I was doing 10 year DCFs I
thought I could forecast cash flows for 10 years and then I
was doing P and then that was tanking even more and I was
doing price to book all sorts of things. And that's what happens
is you just try to explain what is going on at the time. And
while I was there watching this very interesting time, this fun
manager Alan Gray, you know, you're in Australia too. And
they were the only one who stuck to their value strategy and they
almost went bankrupt. And I think with this in perspective, I
think Alan Gray when he passed away was the second which is
South African. So it went from one extreme to the other and
one client my understanding stayed with him, which was the
Lewis family. And from what I hear the Lewis family was
saying, please, just buy one tech stock, can't you just put
one in your portfolio, just to try to hedge your position
because they were getting carved out. And and they stuck to
their knitting and you know, now I've gone back and I've assessed
all the data but clearly after that 2000 era, there was a boom
period for value. And I saw that as a young man and it was all
those years. And and I was always very interested in the
nitty gritty and that style. And from what I saw influenced me.
The interesting thing is during those years, a lot of the young
people wanted to be value managers because they saw this of
course. And what we've just gone through, we've just seen the
complete reverse. If you can find a young 20 something who
really wants to be a value manager properly. They're like
hen's teeth, you won't find them. But that for a few years,
I was transferred to London by Societe Generale, the French,
and I ran some consumer teams there, I did luxury goods, I
did beverages, ran the beverage global team, the Diageo,
Heineken, those sort of companies and traveled the
world very interesting because they were consolidating the
world, especially the beer companies going to emerging
markets, that's where the growth was. And it worked extremely
well for that period of time. And declining interest rates,
they're leveraging up taking out costs, buying growth,
essentially, and great experience. But then after a
while with my children, then we're sort of nine, four years
age, you need to make a decision where you want to live. And I
came back to Australia just clean again, just no links. And
you always think you've done well in your career until you
come here as an immigrant, and then you back on your learners,
you are, you know your place. And interviewed with this guy,
Jeff Levy, who was CEO of Investec Bank, and is my is our
chairs, my mentor for many, many years. And the chairman there
was David Gonski at the time. And I remember interviewing
with Jeff, and he said, What do you know? And I said, Well,
pretty good at consumer and he goes, What the f would I need
you? I'm not a consumer. But anyway, we actually hit it off.
He's very, he's Jeff's very straight guy, he'll test you.
And it's been a great learning experience. And back then, you're
you're quite theoretical when you sit as a sales hard analyst,
you just you're doing you're making calls, but you're not
running money and you're not doing deals. So it gives gives
you that edge. And so long story short, set up with the JV with
Investec, opened a fund manager, value one, and actually the
results were excellent for a couple of years and Investec had
an Investec had an option to buy it and they bought it. And as
soon as they bought it, they had a disagreement with London about
who should they really own a value manager. And probably
actually right not to own a value manager that point in
time, but long story short, I knew the late Simone Marie quite
well and effectively swallowed those funds. And I stepped across
to Alan Gray for just a year. And you know, good friends told
him that that's really once my own show and stepped out again,
effectively with Jeff Levy and David Gonski supporting the
initials and set up a joint venture and set the business up
as an equity business, equity value. And you know, if you're
going to set up a product, and you say you can do x y z in your
information memorandum or your offer document, do that. You and
I think that's how you you know, people can do as allocation and
change from this to that. Great, they must do that. But your
product, if you say you're gonna do this, stick to it. And so I'm
a diehard value guy in there. That's what I do. And with
hindsight, probably not great timing for that strategy, but I
couldn't have done it any other way. And I did that for several
years. And of course, interest rates were screaming down. And
about six years ago, I saw interest rates coming down, I was
selling my yield assets already, because I mean, I entered ale
even after it had gone up a lot, and I made another 100% just
quickly. And such an easy asset to own. And so I was putting out
of those type of assets and had an opportunity to start which is
very popular area now private credit funds. And it was my way
of saying to my clients, I can give you yield. But I'm shifting
out of my yield in this fund in equity fund, but I can give it
to you here in a lot of clients. You know, you know, there's a big
market for that a lot of clients just want stable unit price and
just to get their monthly check, which is fair, but the equity
fund is, is not that it's a different risk profile. And yeah,
so you know, these are two, two quite niche strategies. And I'm
very, very happy with with what I've got. I think if you're
going to run a boutique business, you got to have
something that's different. Otherwise, it'll be difficult to
survive long term, I think.
So Wentworth Williamson's got two funds, correct? Yes, it's
got the equities. And it's got the landing. Yes. All right. So
just I know you gave a very good overview, but just anyone
listening so specifically, with the equity fund, what does it
actually do? How does it run? And what are the mechanics of
the fund?
So I set this fund up quite interesting to say, because you
always got to look at things commercially and how big you
want to get it and so forth. And the equity fund wasn't like
that. Equity fund. When I was talking to David and Jeff, and I
remember David saying to me at the time, James, just run it
like you run your own money. It is like that. And so how would
you run your own monies? And I always said, well, if I could
rattle off 10 plus companies that I really like, I'm
probably doing quite well. It's not easy to do that. So I wasn't
trying to be a typical small cap portfolio manager where his
biggest position is 3%. And he owns 100 plus companies in
there. And that's not right. And then you're turning quite often
and you're moving it around. It wasn't like that at all. It was
more like, okay, I'm going to, I'm looking at this company,
it's got some assets on its balance sheet that are hidden,
its ROE is quite low. I can see maybe on the cycle, I'm going to
work with this company in three, four years time, I'm going to
sell it out, but like private equity style. And that did, it
did work for a time before before the pandemic, you know,
half of my exits were takeouts. So play that and we definitely
pushed, pushed it towards some of them getting taken out and we
would do what is necessary on the board or whatever we needed
to do to, to move it along. But yeah, so it was two things.
Companies go through different cycles and you go through a
period sometimes we've had a bad year and so forth. And then you
can come back to what is a normal ROE. And then we either
sell out or somebody comes and buys them. And we didn't have to
buy small cap, we could buy anything. It just the cycle was
small caps are just getting cheaper and cheaper and cheaper
and cheaper. And we were just going, going, going, going for
them. And our strategy is to be very fundamental. You know, with
our IC, I can't, I can't take a paper. And I'm saying, well,
this company is on 25 times earnings. It's growing
modestly. And I think this is the best deal since last bread
and it's generating very little cash flow. I'm just completely
shot out of there. It's not what this fund is supposed to do.
This fund is very old school. It's got to be trading on a
decent earnings multiple must have a history of making money.
Ideally, some assets on balance sheet and must be making real
cash flow and I must be able to see that it could grow. That's
it. And then I've got to go to my investment committee and
persuade them. It's a great idea. So it's not a quick
decision, where every day I'm just buying in certain stocks.
It's not like that at all.
So we'll get into the lending in a minute, but why don't we just
unpack and dive into the equity strategy. So the equity
strategies are go anywhere strategy, correct? Correct. And
focuses predominantly on value, but in the small, smaller to
mid sized companies. Okay, so what, how much money is
currently in the fund now?
And so about 60 odd million, and we've got no well over 100
million in the credit fund.
Okay. And then with the equities fund, what's capacity?
You know, I always thought somewhere around 200 would be
more than enough. And I would probably close it well well
before then. And the reason is, if you want to go anywhere, like
times like now, I feel you've got to go quite deep to get the
numbers we want the multiples we want. And if you really want to
do that, you're going to your size will kill you. It's okay,
you might be able to get in, but then you probably won't be able
to get out quick enough like you want to. So it is constrained.
I always knew it was going to be constrained.
To paint the picture for people that don't understand this,
probably the easiest way to discuss it is probably so the
market cap of some of those companies, right. And another
way to potentially discuss it is some of these become thinly
traded. So you can go stick, you know, you know, 100 200,
half a million dollars on the position which want to get out.
Because by the sound of you running a high conviction fund,
right, small amount of companies, highly consolidated in
those names. So if you're running $60 million, you know, I
don't know what the average position is, what's the average
percentages in a company?
Yeah, yeah, absolutely. High single digit.
Yeah, right. So it could be anywhere from 3 million to $6
million in some of these companies. And then you have to
manage that risk. So what's the market cap of some of these
companies?
So managing that risk to if you look at our top three positions,
as example, they're all net cash balance sheets. You we manage
our risk about okay, so we, you know, we don't want to go into
these leverage companies, especially in the small cap
land, because that's extremely dangerous. So we go there, we've
got some hidden assets, you know, we go there, we've got
levers, we've got things we can work with. And we know worst
case if after two odd years, three years or so, and the
management teams not getting to where we want them to go fast
enough will agitate for a sale. So you protect your downside.
From those kind of things. And often we have seen tremendous
accidents, it's a lot of it's got to do with debt, which even
when you want to talk globally, what will get you at the end is
leverage. That's often the little thing that's going to
come and take you out. So yeah, you got to be exceptionally
careful, exceptionally careful with that. But you know, people
are greedy, Murdoch, we all are. People like to make money if
they can see a deal, and they can get enough momentum. You
just you know, the it arrives, the volume arrives, you just
got to get past that inflection point and people start and it
is a bit like sheep, a couple go and then the others follow. I'm
not a chartist, but I can understand why some of them can
get it right, because they're picking up on these little
nuances. And that's what happens.
Well, let's let's just dig into a couple more of the numbers. So
what's the beta of the of the portfolio? Do you think?
Gosh, I'm probably people that don't know what beta is better is
you know, how correlated the fund behaves in accordance with
the probably quite,
quite high, but interested in the first fund, which is
exactly the same thing, it was very low. So so what I'm going
back to it does depend on the environment. And
and I think another thing to keep in mind is it's a bit of a
silly comparison from an Australian context. And I did a
lot of my career overseas. I mean, we are banks, big resource
companies, and then probably a lot of property and that's it.
Actually, that's that's a that's a good point. And we'll
probably discuss a bit better. So in the portfolio, I'm just
looking at Morningstar here. So the sectors you're in is basic
materials, consumer cyclical, financial services, real estate,
and then you got communication services, energy, industrial
technology, and then consumer defense, healthcare utility. So
you literally can go anywhere,
which is quite interesting, interesting, but the what I
wouldn't mind discussing, I need to paint the picture here a
little bit for people listening is
see, James is a very, very experienced manager, otherwise,
I wouldn't have him on right, you know, respect him quite a
lot. But what's interesting is if you go on to say Morningstar
or anyone else, we're looking at the numbers, the one
conversation which I really want to dig into today is the
conversation about value managers, right? And then Warren
Buffett is famous, a value manager. But what's been so
interesting is ever since COVID happened, the launch of funny
money into the market, everyone's like, Oh, this should
be a reception or a recession. But, you know, technically, we
haven't had one for a while, even though we technically did.
Because I personally believe the phrase where, you know, a dead
man doesn't pay his debts, right? So I don't know, as if
the bigger players to be, you know, running this global, like
the Black Rocks of the world, the Van Guys, the state streets,
you know, have this thing, well, if we just keep everyone alive a
little bit enough, you know, we can get more money out of them.
So we're not going to kill them before the market goes again,
I'd love to hear your opinion, what's really, really happening
in that space. But to give you the numbers, James's portfolio
2014 did 10.25% whilst the market in 1.29. 2015, they did
20.31% whilst the market at 18.1. 2016, they did 15.64%. The
market at 8.17, you know, six market in 18. 2018. Everyone was
down, so down 20%. But the 2019, they bounced back at 20%. But as
soon as the funny money came in, you just see the difference of
the portfolio, the valuation, the valuation portfolio is done
to 0.4 minus 10. Oh, yeah, you will please give the numbers.
But it's just been you've had, you know, artificial
intelligence, you've had all this, you know, growth at any
price, you know, this this disparity between one side of
the market compared to the other. And the other thing which
I would love to hear your opinion as well, we've also seen
the IPO and the deal raise sort of market completely dry up. And
I was listening to a very respected another fund manager
the other day at an event, who said that we really need a
bull market in small valuation, you know, mid caps to happen
again, before the deal side of the market gets up and going
again. So I think the conversation which I really
want to hear about is what is happening in the market? And
where do you think it's going considering we're going to need
a bull run for, you know, a lot of these deals to start coming
through again.
So I think that from the numbers will tell you that from 2013
onwards, and especially from 2016, interest rates played a
massive role, up until the pain up into the pandemic, that was
the driving force of large cap, especially the tech, which is a
which is kind of a boom period in VC was going off right. Everybody
investing in VC that do the first round and then this second
round, it'd be three times higher. Everybody was making
enormous amounts of money seemingly. And that's what was
happening. But I don't think from 20 from late 2019 or early
2020 onwards, that was necessarily an interest rate
driven thing for us. It certainly wasn't. I would say
that we were, we were traveling, just traveling along before
they hang in there with our numbers in with a wind in our
face. But the pandemic, the pandemic was absolutely brutal
for us. Because if you look at the way we invest in the way the
way we say we're going to invest, we invest in business
with a profitable history, low earnings, multiple assets on
balance sheet, these kind of businesses generally require
staff to come to work. And we are portfolios loaded with them.
So when the pandemic came, and you know, you made the point
that you need is fine margins on these things, I would say you
can have very good results as long as seven out of 10 of your
entities are doing well. You always know there's going to be
a portion that's not doing well. That's your odds. When you have
a thing like the pandemic come which, which hits all of your
companies, your odds are over, you can kiss a goodbye. And then
the first wave came through and then we were hanging on now you
can say you can decide you can try and sell your assets small
cap companies down when they've gone down and do that or you can
wait and see how this thing goes. And then you had your
second wave and we were all getting vaccinated and I was
like, I don't know about these vaccinations, man, but I was
like, Jesus vaccinate yourself because I need, I need these
people to go back to work. And then they, they did that. And
that took what two years. And then everybody got vaccinated
two odd years. And I was like, thank God for that. Absolutely
brutal. We lost one of our entities that does provide
drugs to surgeries, I mean, he thought surgeries would go to
zero. And they did. And in fact, haven't even recovered but and
then Omicron was the worst. It was actually the worst of the
lot is because people didn't go to work on their own. They made
that decision. And it all got extended out and you didn't have
governments, any government support. And I went in with net
cash balance sheets and I exit off that three years of debt on
my balance sheets. That's what happened. And with survival, it
was just like, absolute, absolute survival, just hanging
in there. And as I was saying now, looking at my companies,
this last reporting season, I'm finally back. I have net cash
balance sheets again, and my companies are growing. But it,
it took time. It took time because you got to recover,
you got to recover your positions. We had obviously,
then the raging inflation came for a while too. But, but it's
back and I go to the point about what what will make it move. I
thought I honestly thought in late 2019, the market was going
to be the environment was going to get tougher. It's all slightly
ticking up at the 10 year bond rates, it just felt that things
were tightening up. And the pandemic came and of course,
they loosened monetary policy and everything just went wild.
And you saw those tech or large cap tech and anything that
sells anything online, obviously, rightfully so. I
guess just went up a lot and some of them have come down
except for the large cap. But I'm going to go back to people
like greedy. Our companies did badly during that period of
time because they deserve to do badly. That's the truth. Earnings
were going backwards, negative cash flow and net cash balance
sheets went into not carrying debt. It was it was right. It
was I can say that it was an absolute shit show. And I look
at those numbers and I'm saying what a miracle, honestly. And so
if they can come back now, now that even more marginalized, if
they were trading at 1112 P multiples now, now they're
trading on nine, you know, leading into the pandemic. So
they're more marginalized now, but now the cash flows coming
back. And you guess what? When you go through a difficult
time, you know what you do. You cut costs, you run lean, your
CEO is probably not getting paid as much as he used to. He
hasn't in manager five down, probably doesn't have got his
personal PA anymore. They're watching their flights. They're
not cutting down on their flights, going for deals. That's
what people do. It's human nature. So their cost
structures are they're running lean. It's an ideal situation
when they have to run have the board, they really want to go
by an expensive company right now and do a stupid acquisition.
It's always possible. But the odds are now that they're
looking to pay out his dividends, sometimes 100% straight
out his dividend, fully frank, just to pay it out, be more
sensible. Let's get our return on equity up. Let's go for a
couple of years running this business really, really well.
For a guy like me, that's music to my ears. So I've got to hang
there with that. So even if we don't even if the big ass
allocators don't say because I get it from them, I get it.
They say, shucks, if I if I go back last year, I should have
been in small caps already. You know, the data would tell me
that. But they say, no, I don't want to be first. I mean, I
could die for you. You know, this is their jobs. They don't
want to go first. So I don't really mind somebody's going to
go first and it will change. I don't know when I don't know if
it's now I don't know if it's tomorrow's next month. But I do
know that my company is on a vastly different position than
what they were during that period of time. And if they do
the right thing, and they pay dividends fully frank dividends,
and they trade on those multiples, I'm going to be okay,
my clients are going to be okay. And and we'll probably,
probably do much better than some of the other things I see
around there too. Because even if we go to this index that we
are referring to, which is completely lopsided, you got to
you got to have a look at the banks and have a look at some
areas. I mean, this is absolute wonder that the consumer can
survive like they are surviving. And even in my private equity
space, a private credit space where you're playing, I mean,
areas are ticking up, you can you can see it and depending
where you are, if you sitting very exposed to the consumer
side, I mean, you can see some signs. So it's going to be very,
very interesting. On the resource side. I know, you know,
like me, what almost impossible to determine where the iron
oil price is going to go. So you tell me what the Chinese
central government is going to do. But I'm not playing that
game. It's too hard. Well, the people that I've had on and
Marissa, with their opinion, I can see exactly what they're
talking about. China might not be the, you know, the ugliest
griller in the market are the biggest one, like the the
demand that's coming out of India, with their growth, and
the amount of met cold demand they have as well in the steel
mills that they're burning their demands that they produce
their own, but their demand is outpaced what they're producing
domestically. So one one fund manager pointed out that last
year that if you're in iron ore, you're very, very happy,
even though, you know, all the headlines in China are quite
ugly, courtesy of India. So, you know, sliding doors, one door
closes and other door opens. But let's, I really want to
call the Chinese Chinese punished call and they found
other markets, as you know. Well, this is what I really
want to discuss. And that's why I've got you on is I've always
got a very simple philosophy when it comes to investing,
which is markets are like elastic bands. The more you push
something down, and and another fun manager, which I quite like
phrased it very, very well. He goes, I love ESG. And they go,
why do you love ESG? It makes no sense. He goes, No, no, no, I
love ESG, because it makes no sense. And it makes people
behave in ways which they shouldn't. And they sell assets
like coal down to buggery, because it's the most ethical
thing to do when it makes absolutely no sense. Because if
you're forcing BHP or rare to sell coal assets, where are they
going? They're just going into private equity. Do you think
this private equity you're going to have, you know, much,
you know, eco friendly logic at the end of this mind? No BHP,
Rio, these big guys and girls who have the assets are probably
going to be a lot better at making that land, you know, go
back to the state before they got it. And the thing that from
an investing point of view, one family manager, I really quite
enjoy listening to they will only invest in a sector after
it's had a huge spike, and then it's crashed. And to your point,
which I'd love to hear more about your opinion, is, as you
said, people are tightening the belt, it's when you're nearly
dead. And you survive. And then you run lean, and then you
improve your bidders practice practices, that there is
probably the most interesting part about investing in a
company, which you agree. But what I know, if you find it
quite fascinating, but I find it fascinating, we do a lot of
private equity work as well. And some of the deals we're seeing
around now are so much better than covert times, all the
funding money is in, but everyone feels poor. Everyone
feels I can't take that risk. But you look back at the
multiples and the dual prices, you know, a number of years ago,
if you're a value guy, those numbers don't make sense. But
everyone was rich, everyone's throwing money in deals. It just
doesn't make sense. So, yeah, so and I suppose, yeah, I'll
give you a question, right. So the biggest question I've got
in my mind right now is we're looking at the Australian
market, we're looking at the international market. We're
seeing back to all time highs. It's frustrating, isn't it? Back
to all time highs. So the question everyone's asking is,
oh, my God, is it all time high? Should I buy and be
investing right now? But the underbelly of these companies,
which is, you know, why I've got you on James, I'd really like
to hear your opinion is, yes, one part of the markets at all
time highs. But do you think the health of the companies that
haven't moved yet, they're in a better position now than they
were during that COVID funny money times?
Absolutely. And the other thing is, when we say these markets
at all times high, it's very, it's very shallow. It's really
the big, the big industry weights, which are driving that
up, especially in the US. But we've seen it here too. I mean,
look at CBA. CBA is a great ROE company. I'm not saying it's
not an excellent bank, but it's not that good. There's other
banks around the world that also have a similar ROE. And it's
just wildly expensive on any metric and the money pours in
there and you say to people the expense they go, I know it is.
I don't want to click a capital gain. We have it here too. But I
would say that this boom period is really in a selected number
of companies that's driving the whole thing. I think if you dip
down further down, a lot of companies aren't doing anything
they're not the share prices are not moving, they haven't gone
anywhere. And interestingly, I think a lot of them are actually
doing okay. It's a little bit choppy. But there are a lot of
them that are doing okay and they can't catch a bit. There's
some big names that the same names you're always hearing and
they're just collecting money and that's what's happening. And
that's not healthy. That's not a healthy market. We know. I mean,
we've been schooled all through the years to say, okay, is it a
healthy bull run or is it an unhealthy bull run? And I will
say it's unhealthy because of that fact. And you know, the
same old my retail money falls in there last and you know,
for mom and dad, maybe it happens again. I'm sure the
market are going crackers now too, which is also interesting.
You know, what's all this passive investing, you know,
you just tick a box, I would like my money and growth
balance and then the money goes into these companies. So it's
just been gobbled up. But look, why don't we discuss a couple
of companies. So you know, I'd love to hear you know, what
you're holding in your portfolio. And more importantly,
around this topic that, as you said, there is a lot of
businesses that have been doing a tough they survived, they've
come out the other side, probably substantially healthier.
But as you said, they're finding it difficult to even
catch a bit in this market. So I'd love to hear you know, what
you're buying away, see the opportunities.
So I'll give one which I still own, but I'm being told up in
extenant. I'm sure they don't mind. Great management team
done exceptionally well. But I want to explain how it works
and how the more fun the margins are. We did MRM on the
recapitalization in late 2019, I think it was. And this was a
one billion market cap company, it was a darling. And you have
these cycles. And of course, during the boom cycles in your
your it's on ships, almost like a lot of the ships are almost
like the freight trucks on the road that are transporting goods
from one to another, but except you, you transporting goods to
your oil rigs. And boom time, if you go back to 2012 was peak
oil. Remember those days? Everybody, everybody said peak
oil. And it's almost completely reversed. Now it's amazing how
people just have this group think that and of course, this
company was just getting better. And the CEO at the time
decided it was a fabulous, fabulous time to do an
acquisition and load up with debt. And and of course, it's
the completely the wrong time to do an acquisition like that
when your ROE is extremely high. And I argue with the company
like that too. It's the wrong time to acquire them in the ROE
is a high you should be acquiring them in the ROE is
really low. But they did a couple of recaps over the years.
And I got this phone call, which is rare for me to get a
phone call from a broker offering me something good. It
means he's been around town. He's tried everybody and
everybody said no, no way. So I'm not going to that graveyard.
So I got this call. And what intrigued me on it is it was a
big one and you need to do a big one. And the banks were
taking a haircut as well. And I thought if you're gonna try
to revive these companies, you got to assume that the cycle is
going to take and it could take much longer than you think.
You got to set it out. And who does that with these days?
There's not many. So again, our stylist, we prepared to we
prepared to sit for a while if we think it's great value. And
so we took a big piece of that recap. And significant
discount to Triton down assets. And we do have a few which
sounds like it's not similar to yours is that we think that
carbon fuels still have a way to go. You can't just turn them
off just like that. And so we felt that and we saw the capex
going down year after year after year. We saw everybody's
wants everybody went down ESG fund and hopefully as decent as
the next guy but I can't pretend. I mean, I'll turn on my
lights and I catch airplanes and so we took a view bought into
that company and although we made, you know, as it currently
speaks, six times our money but we've been selling out. It
wasn't the ride that you may think is that for the first two
years we were losing money. The pandemic came and I remember
finding David, there's two David's there, the CEO and the
CSO. I remember them saying, guys, geez, doesn't look good.
How are things? He said, James, we can't man our ships.
Couldn't get the crews to cross a border, get on the ship. They
couldn't even manage ships to get out there. It's just
unbelievably brutal. I was like, damn, you know, like to your
point, like this is bad news on a small cap. Yeah, you sit it
out. And I think was the position financially. How much
money did you have in a couple of million dollars? Yeah. And
so it was sitting around six mil, something like that. So,
you know, he's not substantial. You took you recapitalize the
third of the business. We were just under substantial, just
under four point, whatever it was. And so that was it was an
interesting time. And of course, but when it flips, and this is
my point and some of these other companies, when it flips
and you go through a death zone like that, it can pick up
quite quickly. And then if you're not capital intensive,
this is like that. We need to spend significant amounts of
capex to expand, build new ships, very expensive. And of
course, everything's gone up. Labor resource prices,
everything to replace to put new ships on exceptionally
difficult. So when the market turns, you you have this
constrained supply and then and then the prices just rock it
up. And that's what's happened. So their day rates are
exceptionally high, very clear the guys, I have to say,
obviously, we've got big offshore wind in our region too.
And then they're changing also their business model to be more
service orientated. So I think they've got a couple of years to
go. And it's a miss me selling out is not saying they're not
going to go up from here. Well, they can't do very well
building their service business is just saying, you know, I
went in for a certain story and. But these other guys, I could
probably get some more upside. But but I said that that was that
was a good story. But but the margins are fine. As I pointed
out, it wasn't it's not always just a one way street. And so
that's them. And another one I've got in there is this fleet
word, it's something not what it's it. What I was looking for
is also markets that have been had their time gone through a
really bad time. And it's coming back again. And if you get that
timing more or less right, and the timing more or less right
could be a year or two. You're never going to get it that you're
never going to build your position the day before it all
changes. And if you do you, you're wrong, because you won't
get enough of the stock at the price you want. But they've got
a flying fly to tell this is Fleetwood up in Caratha and
Caratha boomed in 2012 leading up to 2012 to remember, when
even I worked at Investec, they were they were wheeling in
their marketers, and that would fill 1000s of people's in
auditorium. And they'll talk about China forever. This and
that process were going crazy. It was that kind of market, you
just pay anything. And
I would I'm like, you remember the name, you said 2012. So I
was at Shore and partners back then. And I'm the analyst,
they're really good analysts, loved Fleetwood, and we make
good money out of it on that run up something could be
familiar with it. And then it just turned on a dime real
quick.
100% It was a well over a billion dollar market cap 1.3 was
a bit of a darling. I watched Fleetwood to during that time
I was at Alan Gray at the time. And again, I'm saying when a
company is generating a very high return on equity. I
generally don't buy I don't sometimes I don't buy
especially a very cyclical industry, it's the wrong time.
And that fly and fly to tell sitting at 100% occupancy
rates. And then it went through a death zone where to set at
30%. So the question is, if it's going to, you know, is it
going up from here? And you know, hotel you have very high
fixed costs. And so you're operating leverages. If you
think your occupancy rates are going up again, you can earn
four or five times your EBIT from 30, you know, it just
delivers is enormous. And the disclosure was pretty terrible
back back in 2012 days. But really, if you dig through the
accounts, it's the fly and fly to tell that was driving that.
And you look at it now, the last couple of years, they've
been sitting at 30% occupancy making about 10 million bucks.
And that $10 million is probably going to next year, next
fiscal year, go to 25. Because they've signed a take or pay
with Rio, which really goes into full throttle next financial
year, takes them to about 50 odd percent occupancy rates. And
the option is if anything else comes on top, then a lot of
their profitability just falls. So that's a nice, it's a nice
little play on activity up in that region. And I think it's
a good way to look at it. And as it currently stands, there may
well be a shortage of rooms. So it will be interesting to see
how it plays out. But in either way, there's a step change in
its earnings trajectory from next year onwards. Again,
running it pretty lean, looks like a good operator there. And
I say looks like is because that modern building, he changed
the whole way that modern building is done, which could be
a good thing. But the other thing that's interesting about
the modern building division is he's geared it towards smaller
ticket items doing social housing, rural housing, nursery
schools, schools, that kind of repeatable manufacturing type
work rather than trying to be a builder, if you know what I mean.
So also very interesting space, obviously, there's going to be
no shortage of demand over the next few years in that sort of
way. So very interesting, significantly net cash balance
sheet for a small market cap, roughly 20% of the market cap
in franking credits. So bit of a conglomerate, there's a breakup
story there too. Would there be private equity or others in
time interested in the part? Sure, you could break it up. So
it's that kind of thing. Very interesting. So it's in terms of
the MRM, the parallel, I guess the fly and fly hotels
interesting because, you know, you've got to go build
potentially new houses up there that takes time. So there's a
bit of a constrained supply story potentially up there as
you move your occupancy rates up. So there's a time and a
place and these cycles, they lost quite long.
You also have a 12 point or based on the Morningstar numbers,
2.4% of the portfolio technology, where do you find
value in the tech market now? That blows my mind. Just
because what's happening with Nvidia and all these companies,
somebody else's. Is that correct? It says, it says you
got technology 12 and a bit percent on Morningstar. No, no,
that's that's wrong. Getting the numbers from of course, that
did not be Morningstar's getting them out. 12.4% technology.
So I'm just gonna I should just look at your fun fact sheet,
not Morningstar. I mean, there's some people that can do
these technology companies and they've able to get in and get
out on time and value it and with no assets and value.
That's why I was curious. I'm like, where in the world do you
find value in tech right now? Anyway, no, so no, so no, that's
not me. So we've got a big position in Fleetwood. We do own
SIG Global. So we find some of these mining services companies
are doing quite well. We chose them out of the others is
because they've got a roughly 75% to their businesses, annuity
asset services, they're growing quite quickly in that asset
services space. So I like the predictability. I'm not a fan of
the mining services where they do these big, large fixed price
contracts because they can, they can kill you. You know, the
management team and the board and about 10% of the business,
they heavily invested back towards a net cash balance sheet
growing at a very healthy tick sub 10 times free cash flow. So
paying a good dividend, you know, ABC. That's what it is.
And I guess I also I also like ALF's SurfCorp.
SurfCorp. Yeah,
I'll freeze it. Alpha is a good guy. I've used surf called for
years. You should interview him. It'd be very colorful podcast.
Yeah, no, he's I've met him a couple times. It's a very
colorful character. And he's one of these guys that literally
can control a room and he could march an army into battle
without even flinching and everyone will follow him. He's
just how he runs surf called is a really in business. And why
I always found the surf corpse so fascinating, I love to hear
you about it is the rise of what was that other company we
work and how the guy just completely blew it up. And, you
know, alpha the ability to kind of go down that trajectory and
then just refused. And he just ran a very clean product, a
good product that delivers everyone's happy. And the
client state, it was less churn. Anyway, I'd love to hear
your opinion. Yeah, in the industry. That's me that that's
me that used surf called I physically use surf for I
probably still have a membership during COVID when you
were working from home. Like it was it was a fantastic service.
100% does a good job. I mean, I wouldn't ordinarily go to
that industry is a tough industry. I mean, your turn
rates are just exceptionally high. But I've gone there
because you've got to tap into this guy. And whatever you
might think about, he knows how to run that business. He does.
I mean, he made really good cash profits during the middle
of the pandemic. I mean, it was just the guy's exceptional. He
runs a very lean business. And he's also differentiated
himself from the pack. And but before that, I'll explain the
math and why I'm there, which is a business that typically
doesn't own assets because all leases but this is the
exception is this is a 300 odd million market cap company. And
it's got about 120 130 million dollars unencumbered cash
sitting on the balance sheet. It's very cash. It's just got
exceptional amount of cash. And if you strip out the cash is
trading five times, five times cash flow, roughly, if you strip
out that cash, just under 10 times if you include it. So I
mean, and why is that business that's got that kind of track
or record trading at that? Once again, today was just
marginalized. It's relatively small. Three floats relatively
small and the big some of the big fund is the same is just
too hard, or I can't get a big enough position, which is fair.
You're running a 700 million dollar fund or billion dollar
fund, you're going to go click away on surf core, probably not.
But is it an amazing company to own? Yeah, you're going to get
a very healthy dividend partially franked while you wait
it's growing. It's actually growing quite quickly. And the
trick with him just operationally look, he runs the
business lean. He owns, I love these managers, they know how to
run their business. Absolutely love it. He runs it very lean,
but his model is on the floor. There's about five or six
ladies, and they just clicking services. Can I do your
printing? Can I do this? Can I do that? Can I do this? And if
you look at his annual report, he doesn't make money on his
long short on the leases, he makes money in the services. So
they do a really good job. They do it really well. But you're
going to pay for the services. If you want the services, you'll
pay for it. But that's how they make their money. They are
they are service business. And like you pointed out, they've
got the office, they've got an excellent away from office
where you can pretend if you're a smaller guy, you've got an
office, but you don't really. You work from home, but you've
got an office. And there's a lady they go Hello, this is x y z
company. Can I help you take a message? So it gives a
perception you've got a much bigger business and they do it
exceptionally well.
Yeah, but it's not just small businesses. It's big businesses
like I still I generally still use it. And the main reason I
use it the best way I can explain it is everyone knows
fitness first, right? Fitness versus fantastic for one
reason you can have a membership for Lane Cove, but I
could go to any fitness first wherever it is any point in
time. And if I just need to use the shower for the day or need
a stamp or something equivalent, or just need to you know,
place to whack out a laptop, it's just available. So of
course, offices, they've got pretty much the number one bit
of real estate in nearly every single state of Australia and
over in Dubai, you know, and other countries. So you can
just fly in, have a meeting to your point, right? So there's
different memberships available. And the other way I
look at it as well, everyone understands Airbnb. And one
bringing that up is you might go pay rent, I don't know, for a
townhouse, and I don't know, an apartment overlooking the
water, and that's costing you $1,000 a week. If you take that,
and proceeded to a short term stay on that, the multiples just
go up extraordinarily. So if you take what ServCorp is a very
small office in there, the numbers which you're paying are
potentially double or sometimes triple what you ideally could
get down the street, but you have to lock physically lock
into a three or five year contract to get those numbers.
ServCorp is month to month. Yeah. And then yes, as you said,
you essentially have the ability to get all the the ladies in
that office to, you know, do services for you. When
ordinarily you have to go hire a staff member for anywhere from
I don't know 70,000 up to like $120,000 just to physically do
that and it's you're paying per. And the other thing as well,
which people don't realize is it's a phenomenal place to meet
people. And I would actually say it's very tied into the
startup community. The startup community is huge there, lawyer,
and the other thing is people a lot of people use it as their
plan B, I had a friend that had their office flight, a lawyer,
very prominent lawyer. That's how I met her. It flooded all
the generators went out, kind of like Fukushima, you know, you
know, they put the diesel generators down in the basement
just made no sense. But she was there for six months. And then
and then another gentleman you mentioned, you know, a shipping
container company, there's another gentleman, which I know
that's one of the most prominent shipping companies.
Running on the sorry on the container side, he runs this
entire office out of surf called why it doesn't need an office,
but he's always going into every single state for meetings
and meetings and meetings. So yeah, no, it's a very interesting
business. It's a huge cash flow business. But the last point I'll
finish, I'd love to hear your thoughts is the virtual
assistant I think has so that the virtual office choice, and
the ability is this culture now where you can work from
anywhere as long as you have a laptop and then but you have a
essentially a business face, I think it's really driving that
business.
Absolutely. And you're right. I mean, I've just had a meeting
with him and that's going quickly. It's almost like
surf corp is a good example of what's happened in the market.
So you can go IWG or whatever, I have a Steve massively
leveraged balance sheet, plus 20 times earnings. And, and yeah,
you got a business which is far better run. And this business,
if you look through its history, they're only going to be
a few years. If you look through its history, the overseas
some of the overseas peers, they go through periods where
they make big losses, and they're making money and losses
and leverage and scary. He's got none of that. It's it. He's,
in my mind, from what I've seen running the best service office
business in the world, and he's been doing so for a long time.
And so the I guess the question is now what now? What now for
him? So the other thing is, it's quite interesting what he wants
to do the Saudis Saudi Arabia, you know, he's got a big Middle
East business. A lot of peers aren't going into the Middle
East, and he has been going in there for quite some time, and
he's killing it. And he's talking about maybe listing
this partially listing the Saudi and European business
there. And the multiple there will be significantly higher
than his multiple. So it's interesting that whether he does
it or doesn't do it, it's interesting that he's thinking
of options. That's what I take as in something interesting,
because ultimately, I'm happy to hold it, but love elf, but
forever. And I got to think about, you know, he's in his in
his 80s. And he seems very engaged. It's almost like, you
know, Buffett spoke about that lady in his 90s. And eventually
had a buyer out because she just went back and open business
again, I think was a furniture store or something the other
and she just knew her business. And when he left it to the
children, they couldn't run it and had to just buy out get it
back just to stop. And also, but like that, he's just so
passionate. He's constantly flying around doing deals. But
I'm I'm quite interested about what what happens next. He's got
the energy of a 40 year old. Unbelievable. He's probably a
20 year old. He's so fit. Yeah, it's just his bicycle in and
constantly exercising. You know, he's amazing, amazing guy.
And he's built an amazing business and the market's not
giving him credits. But you can sit there and you can pick
your dividends and it is growing. And quickly. Interesting.
What other opportunities seeing out there in other sectors?
So we've done a range of things. I mean, we do do resources.
We did uranium before became wildly popular. We made some
good money there. We're not in it now. Because when it's an
exceptionally popular trade, you can you can bet that we've
already out. We are in Illumina, which is going to become
Alcoa. And you look at the margins of that business and
they are it's it's a struggle. The margins have shrunk. And so
this is what we typically do. We go in when the when the
margins are low. Knowing that these things go in cycles. So
yeah, the resources where the margins are exceptionally high
where things are going well, we won't be there. But when it
goes through its its dips, then we tap in and typically these
resource ones we do trade. We in and out of Woodside. We do
play that we're in Woodside now, which is a bigger market cap.
On the resource side, other than the uranium plays, we
typically go for the bigger companies because we play in
the resource themselves mostly. And we don't want some sort of
and we want to take a bigger position don't want a company
specific accident. The uranium is a different we bought a
smattering of of them because let's let's be honest, the
uranium is listed on the ASX are juniors. And there's still
much to do. So we just diversified ourselves there.
Yeah, why why why have you exited completely out of
uranium like from my understanding the conversations
that I've had, there's still a disparity on demand and supply
of what demands probably what 180 190 million tons and there's
only what about 140 150 million supply. So there's still like
40 to 50 million missing from the market. And then a
gentleman which I was speaking with saying some of these
mines and they were they're building out all those reactors
as well, which might add another 25 million with the demand.
So what I understand is that that space is just starting to
get going. We've had a massive pullback in the price from
profit taking, which makes sense. But I don't think that's
over. Anyway, I'm just curious as to why you're not even like
holding half or 25% of that position for why we cut out so
early. You know, you could be right. We were we were in there
we built our position in 2019. Again, before the pandemic, we
moved in some of these positions. And that had been a
death zone. And we we looked at that very carefully because you
if you sit there for five years, you are horribly wrong or even
four years, possibly three years, you're going to get
carved out by your clients really. And so you got to go
quite carefully and modestly. And I think if you look at the
timing of when we did it, we're probably a trailblazer. There
were no buts. And so we did it. And we went in with our
reports. So the price is really, really low. You could
understand why. By the way, this demand and supply thing you
could you could also build that same case back then. And there
was no sure thing. And we had a pretty clear idea about what
price when it goes north of that is that we're going to
start getting out and that just comes down to there's a risk
as a fundamental analyst is that when times get good, you
start moving the goalposts. There's also a risk to do that.
And so you might you may well be right, but I think our
fundamental approach is saying we're coming in here. This is
what we think is normal. It bypass the normal. We then
going to be selling. And as I said, even on the MRM, I think
it's very likely MRM is going to continue to do very well. But
it's probably here's a question. Here's a question. I'd
love to talk about, you know, how to how to manage a position,
right? I've always found this topic fascinating as in
percentage sizes. There's one simple philosophy, which I
personally like to use, because it just makes sense in my head
when discussing with clients is if the trading is you have your
risk capital, which you don't want to lose, right? And then
once if you put in money in an investment, then you get your
risk capital back, and then you're making profit over the
top. Well, a very easy, yes, a very nice behavioral psychology
means of managing that is just get your risk capital out, and
then leave your profits in there to run. So if you lose
anything, you actually haven't lost anything. You're right. I'm
wondering how does that, you know, as a value manager, does
that logic make sense in your mind? Or do you say that as
you still risky money?
I understand where you're going as an individual. And I said,
when I start open this fund, like, think of it like my own
money. Yeah. And, you know, I'm heavily invested in this fund
as well. So that does, I do hear what you're saying. But I
do look at it and I say, it's more about I've made my I've
made my money. It's working out exceptionally well. I'm
trading it out. We don't do it in five seconds. We trade it
out. I can see the demand. And I slowly slowly on and I
drop it back out the same way when I'm entering. It's really
awful. Nobody wants to buy it. I don't go by my normally don't
go by my home position very, very quickly. I drop it in. And
I go because I'm not really sure where the bottom is. Could
you know, when people in that negative zone, they can drive
that share price lower than what you ever thought possible. And
the same is on the reverse. I mean, when everybody's think
is the best thing since last prayer, they can take that price
to exceptional highs. And that's that's just the human
nature. So we we tend to trip in, trip out. And there's a
part of in there with the gray zone, we I just don't know.
That's not us. And I do hear you on the on the uranium side. But
you know, when you when everything's buoyant, you don't
start thinking about all there could be another Fukushima or
what if it's happening happens in Russia when they're shooting
bombs near that reactor in Ukraine, well, like what impact
will have? There's all sorts of things that can come and hit
you that you're not expecting. And you think of that more when
you're losing money, or everybody's against you, you've
just entered the stock, like you think like that you think, you
know, you wake up in the morning, you know, you got that
edge. You're making money and your models are high and it
means great. You don't wake up in the morning and think, I'm
really worried. Really worried about my position. You're not
you think I'm making money doing well. I'm not thinking about
what I see. I see your logic. So the the force of which I'm
discussing is you're taking a view on, you know, where it
could potentially get to. So you know, there is the Australian,
you know, have a punt type logic with money that technically
isn't yours, because you're not risking your capital. Yeah, I
suppose that's one way to look at it. But I suppose from a
purely business mind and value side, as in you go into it, you
have the return you want to make. And if you make that
return, then happy days, happy to leave some on the table.
What's next? Is that kind of what you're saying? Yes. That is
what I'm saying. And that way you can sleep at night and
everyone's comfortable. Yeah, when everybody's feeling
comfortable, we averaging out, we just don't just do it in one
day, we just take our time, we average it out, we see that we
see what's coming. I know who the growth managers are. I see
them coming. I see the substantial. I see two or three
of them running run together. And I see the one off the other.
Of course, I can see what's happening. And yeah, try use it
to advantage.
With copper, I suppose copper is very similar copper and natural
gas, I'd argue very much in that similar stages. Have you got
positions in them or out of those positions?
No, I guess I do the natural gas for the bigger one. Yeah, I
hear you. I hear you on the natural gas. I got to find a
clean exposure that through like, actually, because after
the pandemic, and one I actually took a piece of paper and I say
what are my mistakes? Like I just need to come clear clear air
because obviously I was got wrapped by a pandemic but like
there's you always make mistakes, you must think, okay,
where can I improve? There's always something. So let me
write this down. So the thing is on the natural gas or some of
the juniors, it's it's a thing on timing. And you mentioned
what position how much capital. And so it's on the smaller ones
is you're going to come really to risk small, I'm a 1% to
2% whatever. Okay, that's how I'm going to manage my risk. And
goes goes goes goes to see the capital. Cap exists another cap
raise. Okay, I think this is the last one. Okay, I might go a
little bit harder with this one. And you wait, wait, wait. Oh,
shucks. It's taking so long. And this state government's doing
this and that and everything else. The next one, next minute
you look, you put shit load of capital in there. And so yeah,
it's that was very cautious on that. So just exceptionally
cautious. And on copper, finding clean copper exposures
quite hard, you can keep partial of it some of these gold
entities, which may not be a bad idea to have another look at
gold, actually, but partially get a bit of it. It's not
obviously much smaller quantities. But having clean
coppers, quite difficult. Yeah, on is x, having a nice clean
copper, clean, clean. It's not that easy.
Do you want to explain why it is because like, I don't know a
copper mine that doesn't have a gold next to it a potential
cobalt. Yeah. It was just, you know, you find the resource,
then that's just essentially what's in the ground, you find
copper, and there's going to be things around it. It's going to
be kind of, you can't, you can't get out around that.
Absolutely. So look, we we've been hearing, you know, you,
me, everybody's been hearing that copper has been a good
trade for a number of years now. I don't disagree. It's hard
to do it. How to do it clean. Yeah. I there's other things I
can do. As I said, aluminium is a pretty good conductor of
electricity to so you want to talk power lines. You can do it
in aluminium, and you can do it with something that's pretty
liquid, liquid in shock to bits, get in and out. You can do
that you can do that trade. So how much of the portfolio you
trading like looking around these commodity prices compared
to the stable buy and hold the commodities, the commodity
stocks, we generally trade more. We'd go in when the
commodity, or even when the margins are low. So these are
globally traded commodities, but when the margins are low, we
would look to go in. And sometimes the margins can last
low for three years, but it does reprice relatively quickly, you
know, within that time zone, there's generally a repricing
that takes place. You know, it's with most of them, unless you
want to get to small commodities like 10, where it's
quite difficult to ascertain exactly what the cost curve is.
A lot of these other ones, you have a fairly good idea what
the cost curve looks like and where you positioned on that.
And if you're in the first quartile early in the second
quartile, you can last. This is why I generally prefer those
that have been around because I know where I'm at. And I know
if it takes longer, I can survive a little bit longer
than you think. But man, you don't want to be sitting in
third quartile, fourth quartile. And the other thing is with
commodities, I find that the cycles can sometimes be quite
long. It can just carry on for that little bit longer. And I
wouldn't like to be sitting there with a structurally weak
position. You just can just get carved out.
Cycles are brutal. It's kind of like when you're putting in a
kitchen and then the builder comes to you and you tell your
missus, oh yeah, it's going to take six months to build. And
then before you know it, the kitchen's still a dust
dominance. It's been 18 months. And you're nearly getting
divorced every second day. If I can take that commodity thing,
which I mean, we're not in, so we've both done it. Yeah. And
we're talking about small cap value or small cap, large cap.
This is a cycle. It's like the end of the uranium cycle or
whatever it might be where nobody wants to touch it.
The models are low. There's no eyes on it. There's just dead
zone. When should you buy it? Why weren't they buying it back
then when it was so cheap? You know what I mean? The supply
and the demand dynamic, it was showing already. It was showing
that there was value there. And then later when it's gone up a
lot, then it's really good value. It's the same thing.
There's going to be some trailblazers. They'll come. But I
think we need to know that in a lot of these things, the cycles
are really long and can be really brutal. But it does
change. It does happen. It happens a little bit faster than
you think because eventually there's a bit of momentum and
then all of a sudden everybody thinks it's a great thing.
It just happens slowly than all at once. Well, let's discuss
this because I find this quite interesting because you look at
the numbers, how my brain works is I've always been patterns. I
don't know why it's just how my brain operates. I can always see
the macro patterns. Predominantly where it comes to
is headlines. What I mean by headlines for signaling a bottom
of a market is when I start seeing mergers and acquisitions
space start to heat up or talks off or it just takes one. I
suppose how my brain works is behavior, behavioral psychology,
the ability to read, as you said correctly, the moods and the
emotions of the market. I find that quite interesting. One
thing I would like to discuss is as I brought up before, there
hasn't been much M&A activity in small caps at the moment, but
we've just started to see the beginning of the year, three
IPOs get off the ground and then a couple of others. Do you
think that the beginning of a mergers and acquisitions market
is an indication that the cycle in a particular sector or asset
class is going to change?
Or is it about to change?
It tells me that we've reached the bottom.
Yeah, okay.
So out of 14 entities, there's three where there's active M&A
potential now and I haven't had this. So half of our exits,
which are about 20 odd companies, take us before the
pandemic and then there's been nothing for now what four years?
Nothing. And now within the last three months, I'm hearing of
it again with what I'm seeing in our portfolio. So it tells me
that I don't know whether this is going to be the big turn and
all the odds, there's going to have incremental odds with this
is it. But I'm very confident we've reached the bottom is
because that M&A activity people love it. I mean, it just
got into the newspaper and people think that can make a
quick buck and it just brings us starts to bring some ours back
to an area that's been completely neglected and
rightfully so. Investors have been looking at areas and saying
I can't make money. I just can't make money the last few years
and they were right. Very hard. And now you're saying, okay,
you got this layered on. Come and have a look at it now. And
then also when you say bring, bring new companies to market.
That feels the next step. I don't feel we there. I think
you got to have some M&A of what's there already, just to
get the market going. And that might take a bit of time. And
then maybe that window will open up a little bit more. But
these are all very important things to watch out for. I
don't disagree, but it takes you know, step by step.
Because the other thing which we're seeing is, as you
mentioned, you know, small caps, there's well, there's two
types that we're currently seeing you got businesses that
have been spun out. There's an IPO done business has spun out
mining asset, and that mine assets got cash flows, then you
go take that asset in order to grow it, you do bold and
acquisitions, which is what we're starting to see. But then
the other way everyone's a little concerned with is, yes,
there's the IPO activity where someone finds a fresh plot of
land, let's raise some money and off we go. But as you
pointed out, then you find into ABCD of raising and when does
it stop? Nobody knows. But the one I find the most
interesting is that there's the first one of spinning out
assets, there's cash flow there, or you have a top tier firm,
a company. And the only way to grow is to go to the bottom
acquisitions that now that's interesting, because that
means people got balance sheet, they've got runway and the only
way to grow is to gobble up the small players. When I see
that's starting to happen at the bottom, you know, spider
sink sensors start tingling. Yeah, you're right. And if you
take the larger industrial companies as an example, they
had their own issues the last three, four years as well. You
know, they've got to clean up, get a bit tighter. So they
weren't ready. But are they ready now? There's time to take
up and take a breath and have a little look around for sure. So
the whole cycle will start, you're right, they're going to
look to gobble up smaller companies again. And that just
creates market activity and creates opportunities that were
just not there. Just went there the last three, four years.
What three sectors were so what those three companies you
mentioned, what sectors are they in that you've started to see
this activity?
So mining services, we've seen it. And further down in our
portfolio, we we own a beverage company that's very deep
discount to their net assets. They actually make money and
pretty decent money. They'll make pretty decent money to as
you look forward. And they've got an issue got to be able to
niche yourself. But of course, we've got this giant called
accolade, which has been taken over by the debt owners. And so
there's definitely huge cost synergies around it was going to
be rational, hopefully egos are in sufficiently crushed. But
there's something to be done there. That's one. And you know,
I mentioned surf corp listing a portion of their business off
short to get a better better multiple as an example. And also
further down, there's a another service company, I won't
mention it for now, but also got the house in order. I'm
retaking five times earnings, very consolidated shareholders.
It's private equity, it's gonna go. So is that kind of thing.
So yeah, it's it's I'm starting to feel the buzz again. And, and
also those who have been there and have gone through the
journey, fix it up, tighten it up, time to go. Okay, let's
speak to the board, let's have a strategic review. Let's have a
look around what we can do. And so we have in that again,
thank goodness. Very interesting, rational. It's
rational. It's rational. That's very interesting. Well, let's
let's discuss let's leave equities alone for a second. I
think I've answered a lot of my questions. That's very, very
interesting. With the the lending part of the business. Do
you want to explain how that works? And the number one
question everyone asks is, okay, cool, you're lending money, you
know, what who are these companies or people which are
lending to? And what what percentage are you lending the
money? Yeah. So I'll just unwind a little bit. I mean, when we
had the GFC, obviously, the regulators got a lot tighter on
what the banks can and cannot do and does force them to hold a
lot more capital on on lanes to be riskier if you go through
long histories. And so the best thing for a residential bank,
which they did do is to lend on residential mortgages and your
amount of capital you hold against that is exceptionally
low, actually. And so it's great from an ROE perspective. And
the way the interest rates moved, what these CEOs were
doing is they let's go residential mortgages and put
their foot down and all the other stuff where we've got to
hold higher levels of capital and arguably more risky, it's
going to penalize our ROE. Let's just focus on this area. And
so they were kind of neglecting other areas. And so it opened
the door for the private credit market, which in Australia is
probably still very much into infancy compared to what we see
overseas. And a couple of years ago, I mean, I just saw it as
an interesting product just to deliver income to my clients
and stability. So it was probably one of the earlier ones
in that zone. I think every man and his dog is opening a
private credit fund the last year or so. But we are focusing
on warehouses to the non-bank lenders. And we feel that for
some of the warehouses, we like the protections of what a
warehouse offers, and we only do secured. So we're not going
for unsecured consumer lends, not trying to pitch ourselves in
those stacks for warehouses, has to be secured. Steady eddy.
We've got a tremendous amount of money that wants to enter into
our fund, and we've just put it on hold. And what we do is when
we find the land that we like, and fits our metrics, then we
find them say, you're on our list. We just back it up. And
that's a very old fashioned way to do it. But that's what we
do. It's open ended, but we kind of close doors to new clients.
And because, especially in this market, most of the time we say
no. People are coming up for lends that aren't secured. We
don't feel comfortable with the management team. The capital in
the business doesn't seem to be sufficient. We're just
exceptionally cautious. But there's lots of deals running
around there. We don't do development property. We're not
trying to play that whole property game. So we play in a
specific niche in the market. We're getting away with what
we're doing because we've been patient. And also because we've
been around for a while. So our margins are 550 over, roughly,
which is still a very good yield, which in today's terms
means nine and a half ish yield to clients per annum, which we
pay monthly. And in that sort of space, we play a role for
society, I guess. We're not trying to shoot the lights out
in the teens. We don't have performance fees. We're not
scraping for fees. We have just a modest one percent management
fee. And we're just trying to iron. When I opened it, I said
what I want to do with this fund is I must just deliver a
regular return to my clients and I would like to sleep
comfortably at night. I don't want to be worried that there's
going to be a blow up here and there. That said, we watch our
investments like hawks. We have detailed meetings fortnightly
with them and go through the book. And the reason why we do
that, first of all, we want to choose our management teams
well. And the reason why I say that is because there's always
something that's going to happen you don't expect. That's
life. And we're with our management team saying if there
is a problem or emerging problem, let's find out early.
Let's fix it. Let's work with you. What can we do? And so
I don't. There's very few things we had set and forget.
It's and for us also in the market, we want to be known as
you. You want to go out there and just get the lowest rate
or you just want to pick and choose and fight over 20 basis
points. Go for it. Try your luck if something goes wrong.
It's good and bad. And there's, you know, some people don't
want to walk the journey with you. Some people just want to
fly the coop if something goes wrong. There's all sorts of
things out there. And for us, it is we like you. We choose you.
You do the right thing. We'll walk the road and walking the
road means say we come in and we are the senior funder and you
walk the road and you become a bigger guy. We'll help you get
that other senior funder. Then we comfortable to go down to
miss. So it really does the pins. But we are playing a very
specific role. But we also quite specific about the type of
land. If we call it multiple layers of security. So we want
the oblique or the the underlying oblique or to be
strong. There must be security behind that. And also the non
bank finance that the company that we are supporting, they
want them to be well run. Obviously, they've got a layers
of protection below us. So if something goes wrong, it hits
them first and rightfully so. So it's, it's a specific niche in
the market. We are playing. And so we just got to take one foot
off to the other and just do that and do that well.
No, I think it's really good. There's a lot of competitors in
this space. So I think having good operators that understand
how to value businesses, you know, doing lens is incredibly
important. And I think it's really great. It would agree.
It's good for the companies as well. And I like quite like as
well. I don't think it's common that people make fortnightly
maybe monthly. Yeah, I think that's very important. Because
if you think about it, you're getting a business is focusing
on growing the business sometimes you don't check your
back end. That's the way of other people. But, you know, if
you've got the finance, it's genuinely concerned about, you
know, ensuring that you're going to get to where you're
going to be. That's a very good partnership to have and with
your value, the how you run your equity side of the
portfolio, you understand patients, things go wrong. And
it's not necessarily a straight line. That's quite
interesting. Yeah, I think the equity side helps credit side,
but the credit side also help my equity side. Yeah, I can see
that. And I had a question for you as well, James. I met another
firm came in from Singapore, I won't bring up the names or
anything, but they brought a very interesting product. And I
didn't even have heard of it. And on the panel, it's three
players in Australia. They've managed to marry the relationship
between lending, private lending to companies with an equity
uplift, fly warrants. Yes, yes, yes, they are around. Yeah. Yeah.
And I was just wondering, I don't know anything about this,
though. So I'm not going to dig into that topic today. That's
something for else. But I was just wondering, say someone with
your skill set that you understand both avenues. I'm not
asking you would you set up another fund. That's not the
point of this. I'm just wondering, I can see how that
works in very, very large companies. But I'm just
wondering, would find that you can both do the equity piece and
the lend piece on the small to mid sized companies in
Australia? Does that make sense? Or is just way too much
risk for that product? And so there's two things that the one
is on where we lending money to a company, we want investing
equity. We just want to realize because I think you must be very
clear about where your hat is. For example, you shouldn't be
supporting them more on the debt side because you're trying
to protect equity. That's very dangerous ground. That's the
first thing. The other thing is, is it all the warrants around,
say somebody comes into office, it's got a great, we know them,
actually, we know them as an operator, they've got a great
model, secured lend. So if the business doesn't make it, we can
still collect our money. The term is very short, say it's six
months, we're going to get our money back. I don't have to
worry that it's going to take years and years and years for
this book to roll off. But they're starting, they need
somebody to support them. And they come in here and help us
to get a warrant. That does exist. I mean, we haven't done
it. But they exist in the market just because we haven't
found the right one. And in fact, when there was an earlier
business that was around, we didn't even play the game because
we actually wanted the book. We wanted the book to grow because
there's a competitive market out there. And we were just very
focused on our clients. We like the lend. And we think we can
help them be successful and we can grow our book. I mean,
because we're in a very strange situation, we could probably
put away a 40, $50 million deal now. We could and just
define the right deal that suits us. That's difficult. That's
the trick is just finding that niche which suits us. It
ticks all those boxes, the right one, and also the right
yield. I mean, we can't deliver very low rates to our clients
and still think we're going to be a popular fund. There's an
area in our niche and we know where it is. And typically it
will sit above the bank hybrids plus the franking credits,
somewhere around there. And you can argue whether hybrids are
more risky or less risky or whatever you want to do. But
that's just the reality in terms of where you've got to
pitch yourself, at least if you've been around for a few
years. And if you haven't been around for a few years, you've
got to go higher than that. And that's all logic. That's just
life. Yeah, there's not many funds out there. I know one
that are paying monthly cash flows. That's quite beneficial.
You know what I'm saying? That's what brought it up. That's
not necessarily common and that's quite good on that,
especially to a lot of high net wealth families that are trying
to generate monthly cash flows out of assets. That's quite
interesting. What's the lock in though? So typically, so what
will be first of all, we will tell all clients, I don't care
what anybody says in the offer document. This is unlisted
credit. If we have a moment in time, there's a credit squeeze
around the world. Your money's not coming out. Yeah, everyone's
cash, but you're not going to get it because otherwise then
everything goes pot and you just kind of just hurting yourself.
And we very clear about that. We've got quarterly, not IM, but
we've anybody wants to redeem, we've paid them monthly. We're
not short of cash. We're not short of clients. And because
it's the cycle we're in. And that we're saying, it could be
another time. And then it's more difficult. So we're very clear
about what type of product it is. This is not something that's
typically liquid. We can go sell it tomorrow. So you just
have to be, you got to educate your clients as best you can
what it is. And for all of this stuff, whether it's private
credit fund or small cap equity, or whatever you do, it's about
having an element of diversification, but other things
in your portfolio and eyes wide open, because you know, you
know, even more than me, you make most of your offer on
allocation. It's beginning using where you want to put your
money depending on the environment. And then you pick
and choose that, like even the stock selection stuff in my
small cap fund. That's all great. But you know yourself, you
get your timing right on that space, or that bit of
diversification there that's going to do you because a world
of wonders, a lot of boats are going to float when that all
switches. Yeah. And that gets the same thing that happens.
It's like, you know, you have a conversation with a client and
you do all the things that are financial planning orientated
at a high level, you know, the service is great, everyone's
happy. But if you stuff up, yeah, I said allocation, you
know, good diversification always wins. And everyone says,
you know, diversification, etc, etc. But you know, if you get
the tailwind right, which we did during COVID times, the
number of those funds, the doors open and people were just
like, hey, I had a mate that just did really, really well
with your fund, but where the trouble with India then, and
then and then, you know, getting clients non stop, which has
been fantastic, but where the tough conversation becomes, is
the conversation where it's near the top. And I'm telling
that person and then they're telling me, oh, you know, blah,
blah, blah, x, y, z fund, you know, I want my money there
because he's done so well. I'm like, you do realize
potentially you're going to have the opposite result based on
the timing. If you copy what Joe Blow did, you know, remember
they stuck their money in 18 months ago, like having that
conversation with someone is challenging. It's kind of like,
you know, you go to a psychologist, you know, you're
young kid, you know, no, no one's going to turn someone
away. That's paying on time. Mommy and daddy's look after
you. You don't have a huge amount of problems. You sit in
the chair and talk about your feelings all the time when
potentially the best thing to do is go actually kid, there's
nothing wrong with you. You're fine. Just go do some exercise.
Yeah. Yeah. You know, I'm hearing what top, you know,
I've mentioned it for a little while now and I'm picking up
what type of guy you are. You've got a pretty thankless
job because you can see signs and you can't be too early
making your change because it's pretty thankless with your
clients. You probably are right and you're going to start
making it and you got to do that switch very slowly and
you got to massage them slowly, slowly, slowly because they
come and see you. I don't know, maybe six months or whatever
and they say, why the hell did you do this? Oh, you pulled me
out of the NASDAQ. You dropped me a little bit out of the
NASDAQ and it's just gone up another 30%. What the hell are
you doing? But this is why, no, but this is why I'm having
diversification in profile is so important and as I've mentioned
in the past, you know, having, you know, core then having
satellites around the edges and then, you know, having this,
having this, the ability to speak to managers like yourself
and other managers where you understand that there's some
asset classes which you can just leave till death do us part
and there's other ones that you have to, you know, play like a
chess board and the chess piece just know when to play those
pieces. It's a dance because you're going to constant life is
change. Speaking of which, what keeps you up at night and what
gets you out of the bed in the morning? Since we're discussing
change, you know, what's on your mind when you're hitting the
bunk and getting up in the morning?
Well, I'll say what, what gets me up more. It was interesting.
A few years ago, we once to, you know, we've got the little
mantra about what they are and we debated it. So, what's our
little buzzwords and for us, it was and I think something even
very personally to me, it was like to earn respect for or
have respect for what we do and that comes down to when you've
got an offer document, do what you said you're going to do on
that offer document and stick to it because it's going to be
husband and those and times of the model, you know, you're
going to be in the market and times of the markets in your
face and times in your back. It's like you come out with a
nice product as part of that chessboard you're saying and
you're saying this is what you do. That respect thing for me
is if you say you're going to do something, you do that
through the high and the low and everything else. Don't bud
from what you said you're going to do and then you can come
out with the high health high and for me, that's personally
very important. I think I always knew when I came into this
industry, there were going to be times where it was going to
be tough. I hadn't had them yet but I had seen others do it
and I remember saying, I want to do that. You know, like
these stupid things you say. I don't want to be like that. You
stick it out like that person. Come on. What glory. Shouldn't
have ever thought like that. It's stupid. It's freaking
stupid. It's a stupid world but to do that, there's something
personal for that for me. I think something special and
unique about that. So that's what gets me up. What worries
me,
you know, I've been so attentive to the assets and the
business. When you're a business owner, when you
founded something, a baby and you're a business owner and
you're watching the bank accounts and watching the bank
stock, you're constantly watching everything and there's
a buzz to that and it's good and bad that comes with that.
It's like you can't turn that off. That is you just and
there's a separate tone and a kick to that too but sometimes
it's like, man, I'm just going to take the day today and I'm
going to my phone's staying at home. I'm going to the beach.
I'm going to swim three kilometers or something. I'm
just going to get my or go for a run with last bunch of guys
here and ladies in the city. I'm going to get myself so
tired. I can forget about that. It's just a creating those
breaks because the reality is if you do this, if you do
strategies where you are really away from the pack and
you're willing to do it, it is challenging and you have your
moments but there's a beauty to it too. There's something
special to do in that and of course, there's a number of
other good people, some of them that you've interviewed and so
forth doing that too and hats off to them. Well done. Let's
stick to that. There's something special to that.
No, I can understand exactly what you're saying and I
couldn't agree more and again, this is the reason why I do this.
We can read as much as we can on the websites or about it but
trying to understand who you are as a person, James, for me
personally gives me a read just like playing poker. You play
the person on the hand of the table and if you understand the
behaviors and how people think and why they're making
decisions and then obviously it's up to you, the investor or
whoever's listening to then decide you've got your money,
where you're going to allocate it. I think in my personal humble
opinion, that's why I like active managers because at the
end of that, what's the expression? If you're the
smartest person in the room, leave the bloody room.
Exactly right. We're in a good industry. If you want to, your
learning curve stays steep. There's always stuff to learn
here. It's good fun. All right, James. Well, I really
appreciate the conversation. That was fascinating and if
anyone needs to learn more about your firm and your
strategy Wentworth Williamson, how can they best find you?
Best finding us on the website. It is wentworthwilliamson.com.au
and you'll find us there. We're pretty responsive.
Brilliant. All right, James. I hope you have a great day and
I think the market opened 40 minutes ago. Let's have a look.
Thank you so much. Take care. See you soon.
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