Welcome back to The Rate of Change with York Wealth Management.
As advised, it's the summer wealthiest families in the country.
The Rate of Change is a podcast designed to help you in the pursuit of building long-term
wealth through the insights of some of the brightest minds in asset management.
I'm your host Murdoch Gaddi and in today's broadcast, we're speaking with Vince Bezullo,
Head of Australian Equities at Perpetual about his outlook for Aussie equities, gearing and
activist ownership investing.
Was founded in 1886 and is one of Australia's oldest financial services and asset managers.
The Aussie equities part of the business manages roughly $12 billion and today we are discussing
the Australian share fund, the geared Australian share fund, which mimics the previously mentioned
Aussie shares fund and is leveraged at two to one and their strategic capital fund, which
was launched back end of last year.
For me, I really enjoyed hearing Vince discuss the activist investment fund, the new fund
which they have and in particular, how they go in, speak with these businesses, purchase
up, purchase a percentage of the company and then go to improve the business inside out
to improve shareholder value.
And one thing I found very interesting was how he mentions that aligning the right remuneration
packages in the business is probably one of the easiest ways to create this long lasting
positive change and shareholder return.
So if you're wondering how the new weight loss drug like ozempic, Novonautist, Eli Lilly
may impact Australia's healthcare sector or you just keep hearing about it being discussed
at the barbecue, then I think you're going to enjoy Vince's insights on what has happened
in this space and the impact on various Australian companies in the healthcare sector such as
Red, Smed, Sears Cell and more.
Today we discussed many companies, Vincent Pax, Blue Scope Steel, Aluka, Woolworths,
Flutter Entertainment, Goodman Group, a French company which I can't pronounce but it's brilliant,
IAG, Sears Cell, ResMed, Novonautist, Eli Lilly and more.
Before we get into the 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 this claim at the end of this broadcast and to keep your
feedback coming.
You can reach me at mganney 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.
Vince Bezullo, welcome to the rate of change with York Wealth Management.
Is that okay going?
Good.
Really, really well thanks.
So Vince, you've been in the market a long time.
How did you get into the market?
It's not really getting into the market.
You sort of almost buy osmosis.
When I was about 13, 14, you know the newspaper section where they had all the stock prices,
I was just saying seeing all these letters and numbers after them, what the hell were
they?
So I started reading those every day, having a look, trying to understand what that all
meant, then started trying to pick up as much information as I can, go to the library, get
some annual reports out of the library, have a look at those.
I don't know what that meant either.
So you start to develop a bit of an information, the information starts to build, your interest
starts to peak and it's just a constant sloth of trying to work out where you're going to
go.
When you're that young, you're trying to work out what career you want to have.
Maybe it's at 15, 16, most people don't have that yet, but I was pretty clear I wanted
to go work in investing somehow or in the markets and investing.
I don't know which part though.
I didn't know where I was going.
So it's still an untrodden path I was going to go down for me personally.
And I come from a different background.
My family are not in the financial markets or any of that.
They're all in building trade as you would expect.
So I was going down all on my own and trying to have it a crack that way.
And then you just meet a few people, they help you out sometimes.
They give you, you should probably do this first and then that, etc.
And you get a lot of help if you really show a bit of interest in something and you put
the effort in.
And people will always recognise that and they'll give you a helping hand occasionally.
So then I got into economics and finance at uni and I was on my way then.
But I was working at the same time.
So I was working at night and I was doing some currency trading at night.
And that was very different.
And then in the mid 90s I answered an ad about this big in the city morning herald.
There was no such thing as Seek back then.
Seek does a job to go to work for State Superannuation Board of New South Wales.
State Super, that's cool.
Because they had an internalised, I'll tell you how this is full circle, an internalised
management team, portfolio management team.
So they had a full team internally and I worked in the global team first.
I was covering UK and continental Europe sectors.
I knew absolutely nothing.
So I was 100% vertical learning curve.
And I had a good boss there at the time, his name was Rob Prugay and there was a good team
of international investors.
Tom Codden was the chief investment officer at the time.
And he modernised the team there, brought it up to the 20th century, no 21st century.
But that was an interesting period to go through that where they changed the philosophy that
actually was developed at State Super.
And they had an Aussie equity team as well at the time.
But I was in the global team at the time.
So it took that period, that was like six or seven years.
State Super eventually corporatised their investment management business and sold it
to Deutsche Bank actually.
It was Morgan Grenfell at the time, but Deutsche Morgan Grenfell, which is an offshore fund
manager.
And they took that money overseas to their teams overseas.
And I moved over to the Australian equity team in small caps.
And then I was there for about 11 years at that time.
And then basically in 2007, the Australian equity business was sold to Aberdeen Asset
Management in Australia.
Deutsche sold it.
And I took the opportunity to take a redundancy at the time, particularly because the tax
rates were really good.
So I left not knowing where I was going to go, but within a fortnight, I got contacted
from someone at Perpetual that I'd met 12 months earlier.
Emilio Gonzalez was there at the time, was chief investment officer.
And wanted to buy me some of the analysts and the PMs at Perpetual at the time.
Because you see them in the markets, you go to meetings, et cetera.
And they offered me a role in the Australian equity team.
And I started in basically May, June 2007, just before the GFC.
And I was covering the banks.
And I was managing money at State Super.
But you've got to go back two steps sometimes to go forward.
And I didn't consider to go backwards because Perpetual is a recognised business.
And they've got a great track record in asset management.
So to get into the Perpetual business, I took it as this is a great opportunity.
And you're going to have to prove yourself again.
And that's what life's about, continually trying to prove yourself.
And I covered the banks.
Banks, some industrials, REITs, et cetera.
And I was looking at some of those non-banks, some of the high and mighty type stocks like
Babcock and Brown and Alco and all these things that basically went to God after the GFC.
That was an exciting period going through that.
But I learned a lot.
Again, you get these moments, you know, tech rec, you get these moments in markets where
their signposts tell you, be ready to learn something because things are about to change.
And these are the errors that everyone's making.
This group think that you've seen is actually you've got to be very wary of it.
And just try and recognise the symbols if you can.
It's hard when you're in it to spot those signals.
But yeah, so then I started managing money at Perpetual in about 2014, Industrial Share
Fund.
Started running that.
Then moved through the business, launched the PIC as well, Perpetual Equity Investment
Company, it's an LIC.
And today I run a few funds.
Now I'm the head of equities at Perpetual and the philosophy, more importantly, the
philosophy and the process from when I started, the people I knew before Perpetual, it's very
consistent.
The reason you joined Perpetual is that the culture is well defined, the philosophy is
well defined and it doesn't flex.
The philosophy is what it is.
The way we invest is very strict.
What is the philosophy?
So we're like, we focus on quality envy.
So there'll be times in the cycle where you'll probably be a little bit more exposed to quality
businesses where you know typically the cycle is very extended.
You feel like you're getting close to the peaks, the economy is probably running a little
hot and you're going to start to see some weakness or policy response to slow things
down etc.
Those are the sort of things, those markers you look for.
And at that point the quality part of the market will typically hold up better, typically.
But then there'll be a point where you know you'll get your curves start to steepen etc.
You want to be exposed to value.
Right.
And you want to be a little bit concerned in that point because you need to move into
value well before the market recognises that you need to be in value.
So we have this element of trying to pay the right price for quality when it's available.
When you get a really great company, occasionally and I think the COVID sort of fleshed that
out a bit, you had really good companies like trade down 50% and on a look through basis
start trading on very low multiples.
And that was an opportunity to really high grade your portfolio and take some risk in
really good companies that you couldn't buy before because they're just trading to expenses.
The valuations were way up there.
But at that time, if I was to focus on COVID a bit, you did see these hugely contrarian
opportunities in the market.
You saw access to trade below replacement value, businesses to trade below replacement
value during COVID, which was as long as their balance sheets are okay.
And going through that period, you sort of sat there and went, there's probably going
to be a capital raising for some of these companies.
You want to be around to participate because it'll be done in a very, very cheap multiple.
And it's hard to do because you don't want, things are looking ugly at the time.
But that these are, as I said, through that period, I've been through a few cycles in
that period.
You try and recognise, you try and keep your alerts to some of the signals, but every cycle
is completely different.
The main year is exactly the same though.
What do you start to say?
Well it's good that we started off straight into it.
I love it.
Yeah.
Well, normally there's a process about how we do these conversations, but I just love
the fact of what you were saying.
And Manzler will just jump right into it.
And what I mean by this is I've had a number of conversations with very high end asset
managers like yourself, Vince.
And what I'm starting to see is a pattern forming where, as you mentioned, funny money
were pushed everything up, valuations did make sense, huge amount of money went in,
everyone felt rich at the wrong time at the wrong prices, just makes no sense.
We've seen that shake out.
And what's really interesting, when you agree, is now assets potentially look better than
they've ever looked, but people are feeling poor and are finding it very, very difficult
to justify going and supporting company, which they've done a fundraise around previously.
Even when the asset prices are potentially half or even lower than what they went into
before, people should be greedy when others are fearful to an extent.
And the other thing which I'm hearing a lot is a number of these excellent small or value
businesses can barely catch a bit.
And why this is quite topical, I believe last night in the US, this is recorded on the 28th
of March, we just hit all time highs.
It broke out what?
40,000.
And then today, then the market set to open in 12 minutes, that's potentially going to
set another all time high.
So the question, which is, I suppose, is on everyone's mind is we're literally at all
time highs.
And whenever you're looking at a technical chart, you know, is it a situation where we
should be considering taking profit here, like you're talking about before?
Or is this just some companies that have driven this up, like the magnificent seven, meanwhile,
the underbelly, all these companies are looking potentially healthier than ever, and barely
even moved.
So I'd love to hear your thoughts on this, because it looks like a two spared economy,
but I'd love to hear what you're saying.
Well, if you look at the US, the actual Magnuson seven hasn't done too much in the last few
months.
They've actually been pretty stagnant, if not down a little bit.
So you have seen a bit of rotation, as into a broader part of the market.
I guess there is this expectation of going from a soft hard landing, soft landing to
now the market sort of probably trying to deal with a no landing situation.
So the things just muddled through in the economy and you don't see much slowdown.
But then people have to sort of the market has baked in two to three toughs this year.
You could be look, you've also got to throw in the fact that we're going to be in an election
cycle in the US as well.
And that sort of throw things around as well.
You'll get quite a few policy statements.
You know, we're in an age of fiscal dominance at the moment.
So running significant deficit financing.
You know, when governments run deficits, they're basically dis-saving and they're giving the
money to the private sector to go spend and use as they see fit.
That tends to get things going.
I think the US government and Biden administration is now after a pretty significant fiscal expansion
again.
So, you know, they've got central banks sitting there trying to keep a lid on inflation.
And the problem we've got by the time we get to the end of this, let's say the end of this
year, the inflation will start comping weaker numbers.
So you could actually see inflation start stabilising and go back up.
If you don't see more prevalent softness in the broader economy.
There's pockets of weakness in the economy.
Like Australia's obvious, right?
You've got housing constructions weakening, but rents are going up at twice inflation.
So that's the simple thing of supply versus stock.
There is no stock being built because rates are high and developers can't get lending
and banks are tightening lending standards for developers.
And you get this cycle spinning through the economy.
And it's incongruous to think that things are strong, but housing's weak.
Housing activity is weak.
And then you've got the reserve banks sitting there going, we're not ruling anything in
or out.
So they could raise and they make up.
It's a fascinating period, right?
It's hard to think about it.
So what the markets do is they will go the path of least resistance.
And you've seen financial conditions.
So effectively, ease to access to money has improved since November last year.
You can basically track that to the movement in the market.
It's had a pretty significant easing of financial conditions and that's filtered its way through
to assets, financial assets.
But it does feel like because none of us has experienced a blow off in inflation, that
everyone's assuming we're going to go back to pre-19, pre-cub, sorry.
Maybe that's the case.
But I think there's significant amounts of price power still in the corporate sector.
And commodities have rolled us a little bit.
That helps.
Labor's had a pretty strong year last year.
Labor rates going up, wage rates.
And they need to start rolling off.
That will provide, I think they'll provide a bit of benefit in the next 12 to 18 months.
But you still have this issue of marrying that up again to what you're paying for the
day of the company.
And I still think you've got to be a little bit more conservative now because there is
a sense of somo right now.
And you want to be a bit more, have a bit of patience.
And just wait.
You will get an opportunity.
So there are pockets in the market now where there's smaller companies, no one's interested
in them.
The earnings have gone probably backwards for good reason.
And they're trading pretty cheaply.
Some have had already one or two capital raisings.
That's a bit of the catching the falling knife sort of attitude.
But if you're buying those things today, they're the ones that are going to probably deliver
you alpha in the next 12 to 18 months rather than buy the high flies today, I think.
Yeah, I'm seeing that quite a bit.
Well, why don't we just unpack the three funds which you operate in?
So you've got the Australian fund, which isn't geared.
And then you've got the perpetual Australian geared funds.
So why don't we begin there?
Do you mind giving a bit of colour around what's in the portfolios, how they operate
and how the gearing works with one of the funds?
That'd be great.
So the geared fund basically mimics the Australian shares.
So the Australian shares has been around for 21 plus years.
And that's basically a portfolio between 40 to 55 stocks.
Also though, that fund can go up to 20% offshore, that product.
And we started that, I think that was done in 06, 07, I think, to give a bit more flexibility
to the portfolio managers.
And we do use that occasionally.
As you know, what's in the fund, what's in the positions and to the biggest positions
are offshore.
People unfortunately don't have a PDF in front of them.
So do you want to give it a bit of colour around what's in the portfolio and specifically
what comprises that 20% international?
Yeah, so we don't use, I've traditionally not gone above about 10% in this strategy.
Because it gives you just enough extra, you're taking more risk, obviously.
It is a benchmark quasi-aware product, but not really.
We don't run looking at the benchmark and saying, oh, I want to own that because I have
to because VHB's 10% of the index, I have to own it.
We try not to do that.
Try to get people to get, have a lot of idiosyncratic risk, have a lot of stock risk in the portfolio
rather than, so have our ideas in the portfolio rather than, oh, the benchmark's got 25% in
banks, so we're going to make sure we have enough banks so we don't take any risk, real
risk.
But in this one, we've got Flutter, we've done that for a while.
We've done quite well for us.
That's the global online sports maker.
They own Sportsbet in Australia, Patty Power in the UK, et cetera, and they own Sanduil
in the US and they're in India.
They're a bit everywhere, right?
Do you mind fleshing that out a bit?
Because a lot of people I'm finding are starting to start hearing about Flutter and a lot of
people just aren't aware of it.
But my understanding, Flutter just don't own some of it.
They practically nearly dominate half the entire global market.
Is that right?
Yeah, they're pretty dominant in Australia.
I think they're close to 50% share here.
They bought one or two businesses and they're very good at what they do.
That's all they do.
They haven't moved across from any other businesses in their DNA.
When you speak to management, it's in their DNA.
They think that way.
So they're a point I feel that because it's a global business, pricing risk, they're
basically pricing risk and putting odds out there and trying to understand how the market's
reacting to every minute that time passes and again, odds are changing, they're pricing
that, et cetera.
And they've got a global business to be able to do that.
If you're just one business in Australia trying to do that, good luck.
They've got multiple markets in multiple countries to be able to develop that intelligence.
So they have invested quite a bit in their tech stack.
It's not about tech though.
It's about how you run the business and their attitude towards their customers.
They don't try to go after the big VIP customer.
That's not their game.
They leave that to others.
But every time they go into a market, they invest a lot into that market.
They have a basic way they approach their market development and product development
and they are the same game parlays.
It's then they come up with that product actually in Australia, I think.
So they've got great product development as well.
So they've moved into the US.
They bought a business of basically a private equity group several years ago called FanDuel,
which is a fantasy football business.
No gambling, obviously.
It's just me versus you.
And a bit of ego.
So they lucked out there because online you could only really put a bet on in Vegas on
sports.
The rest is technically illegal.
But they changed the law so you could have online bookmaking in the US.
And that changed everything.
And then it's basically a state by state proposition in the US.
Every state has their own sports betting laws.
And they're slowly opening up.
They've been opening up for the last two years, two and a half years.
And they're there with a great brand, FanDuel, with some customers already in it.
Once they turn 18, they can gamble.
And they've just executed flawlessly on that.
And they're the base number one sports book in the US now.
The base is between 40% and 50% share, I believe.
So in some, mostly markers.
And it's very effective at developing their business.
And they play the long game.
Too many companies.
It's a good business model.
I play fantasy.
You're premier league.
We're about to finish the season.
That thing is addictive.
But I've read the articles because we've seen a lot of this space with a number of other
companies because there's a consolidation play happening in the gambling space.
I've read a couple of the articles that the probability that if a kid or someone under
age starts playing fantasy, there's a high probability they're going to potentially gamble
on the football games in later stage of life at least once or twice.
So it's just essentially vertical integration.
Look, I think you've got to also pull apart that Aussies tend to gamble anyway.
Two flies walking up a wall, that's just Aussies, right?
That's the way we are.
We enjoy doing that.
As long as it's done responsibly.
And look, Flutter spent quite a bit on the RG on responsible gambling.
They don't want the top player that could get in trouble because that's not going to
help anyone.
And they don't want to help the player.
So you don't want them in the book, really, and you want to understand.
And they do spend quite a bit of money trying to make sure that is not occurring.
Like the UK last year, they handed down a white paper on trying to change gambling in
general to make it a little bit more responsible.
And Flutter implemented it before anyone else, even before the white paper was handed down.
They basically got a sense, we're going to move to here in responsible gambling.
Let's do it now.
Why are we waiting?
Because they moved well ahead of everyone else and they were ready to when the white
paper was handed, their competitors are now trying to implement it, but they've already
got the business model ready to go in that market.
So they're actually taking quite a bit of share in the UK because of it.
That's that sort of, as I said, playing the long game, like looking at longer term investing
for years out to where the market's going, where the business will be, rather than what
you get in certain companies is a very two to three years, that's what we're managing
it for, I'd say I'd get his EPS so that he can get paid his long term incentives, rather
setting the business up for years ahead.
That's rare to get management that can do that.
Yeah, I'm finding that that's very much a European or Southeast Asian way of thinking
about looking at a business in reverse over 30 years instead of the quarter by quarter
or three years, rip your business apart, I get my paycheck, but then you leave it, the
company worse than when you arrived.
I'm all for that.
So the top 10 holdings in the portfolio, I've just got it here, please come if I'm wrong,
it's BHP, CBA, Flutter, NAB, Goodman Group, Origin, CSL, IAG, I can't pronounce it, La
Francaise, some French person is going to shoot me for my pronunciation, I apologize,
and Westpac, right?
Is that roughly it?
Yeah, the biggest sized weights in the fund.
Is there anything else interesting in there that's not in the top 10 that I can see?
Not really.
The active weights, we've got IAG in there as well.
That's a pretty big position as well.
That's done quite well for us.
We'll talk about, I think we'll discuss it maybe later, but active ownership.
We'll definitely get into that, where I was kind of going with this question is, if I'm
understanding correctly, you said it's a benchmark product to an extent, but you can pick and
choose when you're getting in if something runs up, it's looking a bit expensive, you
take some off the table and you look for value, right?
I do understand that.
And where I wanted to go back to is back to the two funds and how they're structured,
because you've got one where you can participate, just one for one, and then try to beat the
index and then you've got the fun one, which is, speak to your advisor.
Speak to your advisor.
You've got the fun one, the geared one, which I should disclose personally used and had
a very fun couple of months recently.
So do you mind giving a bit of color around how the gearing works?
What is the gearing?
Because that'd be great.
So at the corporate level, we basically borrow money from an external bank.
So we can get some pretty competitive rates on the borrowing rates on that capital.
And we basically gross up every position two to one.
So if you had a million dollars in BHP, then also you got two million and half that's been
funded by the debt.
So as you said, you're leveraging up the portfolio.
So if the market goes up 20% and hopefully we're outperforming, we're doing our job
and we're beating the market anyway, you're going to get a great, at least 2X that number
all the time.
But it works in reverse as well.
When the market goes down, you'll get the same impact.
It'll be a 2X sort of downward.
But I use the geared fund personally, myself, because over the long run, if you can actually,
I don't say you don't want to do market timing, but if you think the market's going up on
average 8% to 10% a year, that's what it typically does.
You're doubling that exposure over time.
So for superannuation, it's fantastic for them because you can jump years ahead in your
savings goals in superannuation.
But as I said, go your advisor and get personal advice on that because it can be a rocky ride.
I'm speaking from experience here because just disclosing, it was March 2020 when everything
collapsed and I think the platform which I had was Generation Life.
There's a number of good options there, but I was looking for something that can give
me more oomph.
It wasn't that much of a menu and we bought it.
I knew through a bit at it for a couple of clients and I blinked and that thing was up
like 90% or whatever it was.
It was outrageous.
And then recently before Christmas, they're looking at the lows coming to the election
time coming into the announcement.
Hold on a second.
I just mean if this is seven is dragging everything up.
So look, again, speak to your advisor.
Some people asset allocate to diversify, et cetera, but this is a conversation for people
that live a bit more active that like to have a look at timing.
I found it quite a useful fund to be able to get something that doesn't have much of
a delay on it and then to not just participate in the small upside based on the benchmark,
but potentially to go over if you're right.
Yeah.
Look, I noticed that period during COVID, March, April, that's when the market was on
its lows.
A lot of the advisors, we had influence into that product.
It's an old product, right?
So it's been around a while.
There's one or two other competitors in the market, but it's been around a while.
And given our style, because we're, look, Perpetual is known for having lower beta than
the market, but still being able to outperform the market.
So we are a lot more conservative in the way we invest, but it doesn't mean that we can't
beat the market, even though we're more conservative.
As I said, we run a lower beta than the market most of the time.
So I'm drawn.
They're just implied volatility of the market.
I know, so apologies.
I know what the beta is.
I'm just saying, what is the beta of the fund?
It runs at 0.8 to most sometimes can drop even lower than that during past year, so up
to 0.9.
So we're going to be a lot lower typically.
So every unit of risk you're taking, you're getting an outsized return typically to that
unit.
And that's just our style, because we pay attention to what you pay for something, like
the valuations, sort of struggle paying stupid multiples of things.
But sometimes, full disclosure, from 18 to 19, it was tough for value managers, because
you were at the right at the end of the basic 10-year bond yield going down where money
was free.
When money is free, you can justify pretty much any investment, and most people did.
So when COVID hit and you had, we went from, as I said to you before, an age of austerity,
really, to 10 years, into an age of fiscal dominance, where because of COVID, governments
just opened the checkbooks.
People were getting money sitting at home, remember.
So that was spent.
It was partly saved, but it was spent.
And it got the asset markets flying, and money started moving.
And then we had to add to that a bit of a trade war, and supply chain disruptions, and
that was brought about this really fast inventory cycle up and down really quickly.
So from being very short product to being market venture caught up.
But prices adjusted up materially.
And I don't have to tell you on the podcast, inflation was pretty severe.
And we are definitely in a cost of living problem.
There's a cost of living problem, because we're sort of rewiring the global economy
at the moment.
And we're reversing.
So that's going to have outsized impacts on the way things work going forward.
But with this one, you're sitting here, right?
I put money into the counter round about the same time.
Because that's what you're trying to do.
You're trying to find those periods where things are so extreme that people say you
shouldn't be buying equities.
Well, that's probably the best time to buy them.
You said to be greedy when everyone's here for.
I use my favorite theoretical thing to lean on is the elastic band.
I find when I find when work politics or your people's agendas, say you can't invest in
coal or whatever it is, and it pushes asset classes to the end down a particular way.
Life's a cycle.
It's all going to come back.
But the other thing as well is you have to being again, speech advisor, because the geared
fund can be incredibly volatile.
But it's also the exact same thing on the other side.
When people are way too optimistic, FOMO kicks in, this is never going to stop.
It can be volatile, which is why I was very interested to begin the conversation at the
beginning of this on the basis it feels like it's a two-stage economy.
You have one side where FOMO is ripping at the other stage.
It's just starting to get started or it looks healthier than ever, but can't catch a bid.
It's very interesting.
What do you say?
Yeah, I don't know.
I find it all quite fascinating.
So with the third fund, the strategic capital fund, how does that work?
So if you take a step back, Gimper Petrel's been around a while.
It's 130-odd plus new company.
The oldest fund in Australia is a fund called the Industrial Share Fund.
It's over 60 years old, the oldest equity fund.
That was originally called the Widows and Orphans Fund.
So as a trust business, they decided there's money sitting here that we should do something
about it and try to invest it for the benefit of the widows and orphans of these trusts,
et cetera.
And they've used a very, you can imagine because it's inheritance or money passed down to someone,
et cetera, they tended to take quite a conservative view on things.
And that's ingrained into place.
But what we've been through is we tend to get involved when we don't like what we're
seeing.
So we were doing the G part of ESG.
Well before ESG, it was considered a thing.
We always didn't like, companies with CEOs, if you can determine what the rent package,
if the rent package is in favour of all shareholders, you'll get a behavioural response from the
management team.
Basically, if they're incentivised correctly, that will benefit the shareholders.
That's the first thing you can do and it's the easiest thing to do.
But perpetual has always been getting their hands a little bit dirty, what we call like
it's active ownership.
We don't want to get in there and run the companies like private equity, et cetera.
That's not our deal.
But we know when we try to recognise and sometimes it does slip by when the wrong behaviour is
starting to creep in, whether it's at the board level or in the executive team.
So we will try to nip it in the bud early.
So we've been doing that for a long time.
And it's ingrained in everyone in the team.
So what we've done is we thought, okay, we've been practising for 40 years.
So now we're ready to launch a product which focuses more on that.
So our portfolios used to get a little bit of that.
You'd get a couple, 5 to 10% of the portfolio would be more of an activist style leaning
in to corporates and trying to change the direction of them a little bit because you
can get significantly outsized returns when you do that.
We always start with it's got to be a quality business, right?
It has to be a decent enough business.
You don't want to buy something that's in a bad industry and it's a bad operator.
Can you give an example of a business that you've done it with?
Well look, I've got to be very careful what I say.
Oh, fair point.
It ranges from the top 20 all the way down to small caps.
You'd think that the large caps would be run extremely well.
They are mostly.
But occasionally you get the aligning of the planets there where you'll get sometimes a
chairman that's probably not as acting in the best interests of shareholders or a board
which is very complicit or a CEO who's an imagine team that sort of don't know what
they are as a business and think they're trying to change into something they're not.
That's very dangerous typically.
So the strategic capital fund is basically, I talked about the Australian share fund geared
funds like 40 odd stocks.
This is basically 10 to 20 stocks.
So it's very punchy.
But pardon me, sorry mate.
But they have, these are activist style positions where each position can go up to 15 odd percent
plus in the fund.
So the top three positions would be something we're probably working on actively right now.
So we're either engaging the board, sending letters, trying to change the rent package
or asking for a strategic review of the business because they've underperformed for a while
and we've noticed there's a behavioural problem in the business.
Or there's a recapitalisation that can occur.
So all that's a menu of things that can occur that you need to apply to a business and management
and it requires early engagement with the board.
You want to be collaborative if you can.
Like if you're going to the board and say, right, this is what's going on with the business,
this is the work we've done.
We feel like this is another path, course of action you should be taking or we feel
that the CEO's time is pretty much up and there's no succession planning.
We want something to be done about it.
These are all discussions that happen behind closed doors.
So 99% of the time you won't even know what we're doing because it's just quiet engagement.
And that's the way to do it.
You want to do engagement and try and get a conversation with the board.
And sometimes you can reach out to other shareholders to talk about things, about trying to put
a bit more of a united front out there.
So the Strategic Capital Fund is a bit more very stock specific.
It's purely almost idiosyncratic.
It's sort of a focus on absolute returns rather than just the benchmark.
And it's got, as I said, two reasonably concentrated positions.
But we've done a body of work where when we've done this and we've gotten the necessary changes
and response from the company, the returns are significant.
And more importantly, rather than have a fund where you get that catalyst, that type of
catalyst and then you get this 30 to 40% rerating and then you move on, what we've found is
you want to hold those businesses for two to three years after that because they actually
compound out.
They do those returns more frequently actually.
Because if you can change the culture in a place and improve it, it's the multiplier
effect through the business.
And some of the ones where we've done like ILUCA where we sort of engaged ILUCA to try
and split the business up into Deterra, which is the I know royalty business and the Middle
Sands which is ILUCA today, they'll together.
So it was like a two year campaign.
There was a good business and they'll run well and they had a good balance sheet, which
is all things we're looking for.
But we felt that the value wasn't being fully recognised in the share price in the market
cap of the company.
So we engaged them early, took a bit of time, but eventually they agreed and they split
the business into two.
That was almost like a 100% return when that happened on a combined basis.
So you can get outsized returns when you sort of take this activist approach.
So that fund is, we only launched late last year and we're going out now and raising
some money in it now.
It's very different to like you said, the Australian share fund.
How much is in the fund now and how much, what's your max?
We haven't disclosed it yet.
So we're not trying to disclose how much is in it now.
Well what I'm trying to work out by that question is for people that are unfamiliar with the
strategy that you have, you need a particular percentage of shares in order to sit on the
board and have enough of a vote to essentially have any sway.
So what percentages are you, high, middle, low, what percentages are you buying of these
companies to essentially get enough oomph to have these conversations?
And as an example, how big's that check?
I suppose that will give an understanding of what you're trying to build in this fund.
Well firstly, I have literally no interest in sitting on boards.
That's more a private equity style of doing things where they take business and not stick
a couple of people on the board, et cetera.
But we'll suggest directors to go on the board though.
We'll try and change the director mix if we can and improve the director mix with relevant
industry experience, et cetera.
So we're not going down that road because I'd rather have a bit more of an arm's length
to that point.
But if you put enough smart people in a situation, they will work it out as a group.
So don't forget we also manage $12.5 billion across the other funds.
There's another nine other strategies.
And typically some of the active strategies we have are already owned across the group,
perpetual group.
I'm sorry, perpetual asset management, our business, Perpetual Australia.
So we'll have those positions anyway.
We'll own between in large caps a couple of per cent, which doesn't sound like a lot.
But what I find is the large caps are actually quite responsive.
They don't want to have the 25 per cent no rule on the rent package.
So if the remuneration package gets two strikes against, so it gets voted against by the shareholders
once and then the second time, there's a board spill.
But no one wants to go down that path as in large companies.
And even if it's a high vote, not 25, but it gets up there to 12, they will tend to
not that's something they should recognise something's wrong if you're getting that.
But we'll own up to 15 per cent of companies typically.
So we do have a bit of weight when we need to.
And you will need to get at least 5 per cent plus, I feel, typically in companies to have
a bit of an impact.
And that's why sometimes even with the large caps, we reach out to other shareholders.
You might have a similar belief to what we believe, which is there's problems in the
business, we need to change it.
And that can be again, you're multiplying your outcome then.
And that happens.
All right.
So the fund itself will own a particular amount, then you pull together what's all in perpetual
coffers and then you seek allies to build your position.
We can go on our own a lot of times.
If you have a plus 10 per cent or 7 to 10 per cent, you're going to have five to 10
per cent.
You're going to get a hearing from the board, definitely.
Well, and for us also, with respect, it has to be done in a certain way.
You've got to approach them and suggest, look, we've done the work.
This is what we think.
Set us right if we're incorrect.
It's interesting you're discussing remuneration.
Would you say that to change the behaviour and the direction of a company besides doing
an asset split, like the other scenario, is determining how people get remunerated, in
your opinion, probably one of the best ways to make change in a company?
It's probably the only way to make change in a company.
Because let's face it, look, people get to that position, the senior management are pretty
smart operators.
Typically, they're quite good at what they do.
And if you put the right incentive package in front of them, they'll typically try and
achieve it, which is good for shareholders, right?
So all you've got to make sure is that that remuneration package correlates with shareholders
winning out of their behaviour, like making, improving the returns of the business or whatever.
If you have to ask them to do a strategic review, they get paid to do that, if it's
in the best interest of shareholders.
It is the easiest way to get return out of the business.
And look, we've looked at rem packages and we look, we rate all of them.
So we look at all the companies in our universe, quality universe, and we rate the remuneration
packages and there's some absolute hells out there.
It's just funny we're having this conversation, and I'll give you a bit of context.
Like I have this conversation practically on a weekly basis or a monthly basis with
my sister.
My sister's head of remuneration for Sydney Water.
Yeah, so it's just funny you're talking about how dictating behaviours and the other thing
which she says is quite interesting is you might make a change at a board level or at
the management level.
But then what happens when you have parts of the business that are kind of like isolated
and then you have a manager thinks that they can make a change and then dictate in their
own terms and then the backlash from that.
It's just, it's an entire little ecosystem that you can drive change from one particular
source and nudge behaviours.
And yeah, I think it's very, I hear it all the time, but I'm having, I'm asking these
questions because a lot of people might not be familiar with, you know, how remuneration
can really drive behaviours and then essentially dictate how the company is going to perform.
There is, if you can get it down to the shop floor, but you have to make it, what we've
noticed is make it really transparent to the people in the shop floor that if you do X,
you will get paid extra, right?
And people are aspirational at heart.
They want to do well for themselves and their family.
So if you can get it down to the shop floor, whether they can, you know, it's going to
be tied to productivity, right?
In the end of the day, that's what we need.
There's been, we're in a negative productivity sort of situation for years now.
So there are plenty of companies I know of that have driven that change through the shop
floor and they've got outsized benefits out of it.
The shop has done extremely well and so have the people in the shop floor that's got paid
you know, one to two X's, what they traditionally would have made.
One of the other interesting things she always says is that if you can't write someone's
remuneration on the back of a napkin, then it's just way too complicated.
If they can't understand it and they can't tell it in an elevator, then why would they
potentially go for it?
It's crazy, but people just kind of get confused and lose sight of it and they just kind of
forget and then it becomes a bureaucracy and I'm just happy to turn up every single day
to get my check.
Well, the dangerous part is where they add these intangible aspects to a remuneration
package.
I think most people respond to numbers.
They just say if we can get output up by X, you will get Y.
Simple.
Not, then you must behave a certain way.
Like people that should behave correctly in the workplace, right?
But where you're trying to change, when we talk behaviour, not that behaviour, we want
them to act professionally in their job and really care about the quality of the work
they do.
If they do that and they hit the numbers that we require, they'll do okay.
And they have to stream through the...like the best companies we've ever invested in
have, from the shop floor up, they all benefit from the improved economics of the business,
right?
And they are the ones that tend to compound returns for decades.
And it's like a...it's a culture in the business where they...the man on the shop floor and
the woman on the shop floor, they know they'll get paid an extra $2,000 for the six months,
which can make a difference to someone, right?
Or more than that.
If they achieve their objectives, and more importantly, that no matter what else happens
at the corporate level, they get paid that number.
They can't just call back stuff because the senior managers have done a bad job somewhere
else, you can't allow that to affect the man on the shop floor.
You've got to pay for excellence.
I know this is quite sensitive, but you say you've done this a number of times in the
past.
Is there any companies where you can give examples that you can discuss or...?
We've talked about one or two in the past.
Back in the day, we had a pretty large position, Blue Scope Steel, and they had a decade of...the
steel industry is not an easy industry, it's quite a tough business.
You think about who you're competing with, you've got a billion tonnes of steel capacity
in China, in North Asia.
So that's being exported and depressing prices, etc.
Now we've got tariffs on everything, so it's a lot harder to do that.
But Port Kemblah, which is one of their biggest assets, Blue Scope, it's a blast furnace,
over two million tonnes of steel, etc.
They own the Colobon business, a great business in Australia.
But the workflow and the work, the productivity in that plant was quite poor.
It was based on very old work conditions, like ages old, and they're losing $200 million
a year making steel, which is not the best outcomes for shareholders, or the employees,
really.
You don't want to run a business which is losing money because your job's at risk the
whole time.
And we...look, I don't think it was our idea because we sort of thought, you've got to
change that.
And obviously you've got to either restructure the business or shut it down.
It's dangerous talk, right?
You're talking about this fourth significant amount of people working in that plant, but
you can't keep writing checks, losing money.
But the way that we had was we were fortunate that at that time, when we approached the
board, we said, look, let's change the rem structure.
The rem structure for the management team make it longer term rather than short term
incentive, make it a proper long term incentive.
If they do X and Y, the shareholders are going to benefit, the employees will definitely
benefit, right?
This is going to be a more profitable business, okay?
You'll get this enormous outsize return and we're happy to write a check to the management
team to that.
No problem.
Fortunately, we had a good board there.
They recognised that and they were well down the path of doing it.
They wanted to support his shareholders, I suspect, but...and we had a good CEO and
management team.
Paul O'Malley was the CEO at the time.
He had some good deputies in there like Tanya and Mark LaCella, who's now the CEO.
And they just modernised the work practices down the plant and they went from losing 200
to making 200 plus.
In what time frame?
A couple of years.
That's a material day of addition to the business.
That's huge.
The stock tripled on the back of it.
So as a shareholder, you should be more than happy to write a check for that behaviour,
that performance.
More importantly, though, the management team made sure that the people in the shop floor
got paid to a productivity, right?
So now it's a fantastic business.
It's a great asset down there, right?
And that's changed the very nature of that business.
So I'd say it's not all us.
I'd definitely say it's not all us, but you had a compliant, like a board that was willing
to take the risk, because you are taking a risk there, right?
You're basically saying, well, we can't operate like this, we might have to shut the plant
and just import hot roll cords, basically, HRC, and all those to make Taliban, because
you can't lose that much money for that long.
And then had a management team that was actually willing to execute on the plan and to look
longer term to make those changes.
And they had a decent balance sheet as well at the time, because it was going to be rocky
to do that.
You were going to have some mistakes.
So it was the best example, I feel, of a changing culture at the top, they're willing to make
that change, to make a structural change to the business.
And you got a, again, it proved up the case, it was a three times top outcome on the share
price because of it over a few years.
That's a steel company, right?
Not a tech company, nothing like that.
It's a steel company.
And today they're a fantastic business still.
Yeah, yeah, no, I remember the story, I remember investing in it.
I remember that entire thing play out, but I just didn't realize how effectively remuneration
from the ground floor up played a part in that.
You mentioned tech as well.
Is there an example you have of like a SaaS business or tech business or service based
business, because that's completely different to like a factory floor with?
A bit harder with that, because the capital goes up and down the elevator every day to
the people business.
But it's usually, tech's a bit harder.
It's an entangled business.
It doesn't have to be tech.
I'm just thinking like something that's not essentially like a factory, because a factory
makes a lot of sense to myself, but probably to a lot of people that have had family members
work at these places or something.
Yeah, look, IAG is one that we've been involved in for a while, in the last few years.
I see the insurance sector had a tough time with it.
You had La Nina, you had significant water.
Like insurance don't like rain, particularly in built up areas, because it tends to do
more damage than, I hate to say it, but when it's dry.
It's a lot better for clients, because they had to cope with that like significantly
heavy rain events and catastrophes to the weather.
Plus during COVID, remember we ran out of parts.
You couldn't get a car, you couldn't buy a car.
So the replacement cost went vertical.
So isolation was like 3X in home and motor.
So they had to deal with inflation and they had to, with premium pricing, it has to catch
up.
If they haven't priced for the risk initially, pricing is always catching up.
And IAG is an excellent business in a very good industry where basically Suncorp and
IAG, there's a couple of internationals there as well, short tail insurance.
So it's basically home and motor policies.
It's not life insurance and stuff like that, which is very long tail.
And that's all about, it's an intangible service.
They're selling a policy.
What is it?
You're not buying a piece of steel or whatever you're buying or a brick.
You're buying a policy that's going to cover you in a downside scenario.
So that's, and it's an older business.
It's been around a long time.
And sometimes capital allocation is quite poor in these sort of businesses.
And for us, we engaged early with the board of IAG because we're fearful they're going
to buy something.
And you typically, most of these deals aren't great, not just insurance, but in general,
any sort of deal to buy another business, you have to have flawless timing.
You have to do it at the worst, like we talked about being greedy when everyone's fearful.
Most companies don't do that.
They do the reverse.
So they get nervous at the bottom and they don't want to do anything.
So the great companies always have great balance sheets.
So when things are terrible, they can swing to the senses on something, take out a competitor,
all that stuff, and then you know they're paying the lows.
So IAG had just had to tighten up their capital allocation policy.
So we engaged the board and fortunately the chairman of the board actually responded quite
positively to what we were telling them.
And they sort of walked away from the transaction, which is quite positive because I would have
thought it destroyed value.
And ever since that point where they're showing the market, this is a bit different, they're
showing the market some discipline around capital allocation, how they spend, how they're
going to invest the excess capital in the business.
The market slowly rerated them and it's outperformed the market for the last 18 months.
That's a bit different and a different approach because you're trying to tell them not to
do something.
Or if you're going to do something, make sure you're not paying that price.
They'd be more friendly with the way you approach transactions.
Look, 99% of most M&A doesn't really work.
In those conversations, did you point out QBE's failures?
This is exactly what QBE did and look where it is now.
They're still suffering those legacy deals.
They're suffering legacy whereas, but going forward, they're a much better business though
because they have got that corporate memory.
We don't own QBE, but they're on a journey to sort themselves out.
And that's the thing is this corporate memory.
When things are going well, what typically happens is our favourite people in the world,
some bankers will show up at the door with a hot deal and if you don't have enough experience
on the board, they've seen this before, they can say no, leave the room, type of thing,
please.
They will typically get out of path because most companies want to grow, right?
They want to get bigger.
But there's no point.
The suffering that you can inflict on your basically your shareholders from a bad deal
lasts for years.
It lasts for years.
I always tell people look at the share count of companies going through time.
Because if they're willing to issue equity all the time, they're telling you what they
think the value of the equity is because they're happy to just give it away.
So that's a good rule to look at.
Some of the best companies in the world have issued equity once and that's pretty much
it.
What they do is actually then spend the next 20 years shrinking the equity balance by shrinking
the pairs on issue, right?
And they're more focused on investing in the customer, the people in the business to get
them better and make sure they're high service levels, et cetera, et cetera, and invest their
capital internally, wisely, so that they're compounding the returns in the business over
a very long period and allows you to buy back more stock.
And then you look at some of these charts like Autozone in the US where the share counts
have gone down the whole time.
They're like seven baggers, those things.
And that's AutoParts retailing.
It doesn't have to be a tech company to get those returns.
And that's again, that starts at the top.
The management and the writing center structure.
And people that actually get skin in the game as well.
Sorry, they have to have skin in the game.
Yeah, I was just going to say, yes, skin in the game.
I was just going to say it is also the trend in the past number of years where companies
have stayed private for longer for exactly this reason to essentially make themselves
look better and not getting caught.
Whole another conversation.
But one question I do want to ask with Outlook, if this is something you're actually exploring
right now, it's okay.
We'd have to discuss it.
You mentioned insurance.
Do you have a lot of the portfolio that looks at health insurance?
And where I'm going with this is I can't go to a barbecue these days.
I even had a colleague use these weight loss drugs from Azempic.
Novin Otis, Eli Lilly, people are losing substantially.
It's just a diabetes drug.
But now it's coming commonplace.
And a comment which I heard yesterday was, sorry, don't quote him.
I can't remember the number.
But if the US or Australia allow these weight loss drugs to essentially become part of parcel
in the health insurance, like they pay for it, potentially the US can go bankrupt.
It's really something ridiculous.
If the market picks up over in the States, it becomes like a $150 billion business.
And what I'm also seeing the pattern is for the past 12 months, we've seen companies like
ResMed, CSL, which is the portfolio, a number of these companies pull back because the people
are saying that if this weight loss occurs, there might be 20% less obese people.
And then those people might not be using other products down the journey.
And since you mentioned insurance, it's just a question that's been running around in my
mind, which is, is this entire industry going to change?
And then again, with remuneration, how do you deal with the numbers on that?
Yeah, it's interesting how we ended up here.
But it was just, you said a number of things.
It just made me curious if you knew the answer or you had an opinion on it.
I don't know the answer.
But I'm going to find an opinion on that.
Yeah, look, I think with these weight loss drugs, they're used for, as I said, diabetes
first.
What happens if you're on them for a long time and you're doing this for weight loss
and you're technically sort of, what happens then?
Right, so you need some long term studies.
And don't forget also that they'll probably get better.
The drugs will get better.
So the pharmaceutical companies will spend more on R&D to try and improve, less side
effects.
But you're right, they've created a whole new industry.
And it does sort of, if people are healthier, it's not great for the drug industry itself
that sells products which are there once you get a problem.
If you sort of like, if this is a preventative sort of measure, it does change market dynamics.
So health insurance, initially it's probably pretty good actually, less claims.
So claims expenses are not high, not growing a lot, people are still paying their premiums.
I guess the problem in the long run though is if people are healthier, you need private
health insurance.
Just to put it out there.
Also the tax system forces you if you earn a certain amount.
I was just about to say, I had a friend that did that and it's like, hold on a second,
I'm still paying the 1% of my salary anyway.
And then if I had to go get my health insurance back, it's going to cost me more money.
Like the entire exercise was lost in money in the end.
So obviously there is that peace of mind when you're getting health insurance that if something
goes wrong, you can get treated pretty quickly.
But look, this epic thing swept through and it affected, you know, anything from QSR,
which is a restaurant style fast food to drug companies and...
Is it covered?
Is that covered by government rebates?
Or is it purely off the paper?
I think if you're a diabetic, it might be.
Don't quote me on that, but if you're being put on to diabetic, because you have a diabetic
condition, I think it might be covered, but I'm not too sure about weight loss.
Well, this is interesting, right?
And this is why it's so fascinating because a lot of the community these days, we're having
a lot of foods that essentially horrendous for you, you know, seed oils, all these things
that, you know, corn based.
Yeah, I don't want to get started, but there's all these things that are essentially creating
a dietary problem that are fine and allowed to happen because you're going to cover amper
by beware.
But then you have the launch of a product that genuinely knocks off 20 to 25% of people's
weight, makes them actually genuinely healthy.
And now there's an actual argument or a conversation happening on whether or not the government
should pay for a drug, which nearly so many people can use that could potentially drop
the entire obesity in Australia, but like, you know, in double percentages.
And the question is, if the government funds this, it will complete the amount of money
that they're going to spend on this is out is going to be huge.
And can they afford it?
But the thing is, if they don't do it, then what's the point of even having them existing?
Because isn't it for health?
Like they're talking about the knock ons effects, like, you know, there's less risk of heart
attacks of, you know, anyway, I just, I'm just curious, because you're closest to the
coal face on this particular, you know, in the insurance space, as you mentioned before,
I'm just curious to hear what you think.
That's what the market will give you part of the information and then they'll try and
extrapolate.
So you get part of the information looks straplight, you're trying to look the market, try and
look forward.
And I sort of did that with the equity of certain companies, right?
Like Resmin fell quite a bit, so it didn't move because of Osempi, but a lot of drug
companies that were selling statins and stuff like that, they moved because of it.
That's what the market does, it looks forwards and discounts.
And every time there's a piece of information that comes in, they'll make an assessment
of it, right?
Markets are reasonably efficient at doing that, most of the time.
Other times they lose their minds.
So it's hard to be very definitive about it.
I just tend to react to, look, I'll look at what the equity is pricing in.
I always bring it back to what the stock's worth.
What's the market paying for it?
Is it overly discounted, which can happen?
Like Markets are always overly, too much of a premium on things, always, and they'll
overly discount bad news, they're a string of bad news.
So I always work it back to, I don't have to worry about that sort of stuff.
I always back to what's the company worth?
Does it fundamentally change the value of this business?
If it's trading at a big enough discount, I should be buying it.
And sticking with that and trying not to worry about government policy and those things.
It's always in the mix.
That's all information that goes into the hopper, right?
So the market to work on.
And so all I have to do is work out, okay, what's the symmetry of that risk?
The probability of it having a significant impact on the business.
And what's my upside downside from here?
What am I paying for today?
Is there 30 to 50% upside versus 15% downside?
I should probably have a bit of this in the portfolio.
Yes, it's so interesting.
Yeah, and like you do have a point, right?
You know, pie in the sky, it's nice to chew the fat over this thing over a barbecue, but
in reality, you know, what are we dealing with today?
I believe, I think I put up a quote recently, I can't remember his name, but the comment
was investors sell to optimists and buy from pessimists.
So it's good to see a market where, you know, it's pessimistic because...
Well, that was March to April, it was just complete pessimism.
Like nothing was good.
The world was over.
And you could, everything, almost 95% of the market was on sale.
You had a couple of stocks that did well, like the Woolies and drug companies held up
quite well during that period, that initial period of COVID, for obvious reasons, but
everything else was on sale.
Like even REITs, which were, you know, had a tough time, post-GFC, were trading at such
material discounts and they still are, some are still today.
You mentioned Woolworths, I wouldn't mind just touching on this quickly.
The pricing situation with COVID, the so-called inflation, I saw a huge amount of price gouging.
Just from a valuation standpoint, do you think the Australians have a reason to be upset?
Was there actually price gouging or was that genuine, you know, inflation?
I'm just asking, you know, what happened there?
I don't want to bring him to the end.
I don't want to be called down to Canberra to be a witness or something.
Right, I understand.
No, I'm just joking.
Well, I look at what margins they get, the supermarkets.
They get between 5% and 6% either margins, not 50%.
Right.
So they are a pass-through business.
And it's a fine line, right, because they want to make sure the prices are good for
consumers.
Yeah.
But then they have to sort of negotiate hardness on the supply so that they can get that price.
Okay.
So they're in the middle.
They're a distributor effectively.
And it's a hard thing to balance.
But they're not making 30% even margins.
Right.
They're doing 5% to 6% on average.
And it's been like that for a long time.
And if it goes lower than that, these businesses will struggle to survive.
It's a tough business then.
Outside of the significant reinvestment they make in logistics to get, you know, through
from point A to point B, coal chain logistics, there's a lot of capital invested in these
businesses.
Right.
So whether they're price gouging, that's a very hard...
I think it'll be very hard to prove.
Maybe remove the word gouging from a political sense.
I was just more curious as in, do you think, as you said, the business, they have the cost,
they're just operating generally as a business or just wondering, do you think Australians
have a leg to stand on with how they feel when something used to cost 50 bucks now it's
120 for the same items?
I think you're going to step back and look at the picture in totality.
Things have changed globally.
Supply chains are very different.
The way things are moving from point A to point B is very different.
We're doing a lot more, you know, China was the base for everything.
Now it's not so.
A lot more Europeans are doing more on... they're trying to ensure so they're doing
more in Eastern Europe, which means if you were in Eastern Europe before COVID, because
it was cheaper, you're probably being forced out.
Excuse me.
So supply chains are changing.
When it becomes less efficient, it's more expensive.
That's going to get in the price somehow.
All other things, fuel, energy, you know, electricity prices are up to an half X compared
to pre-COVID.
So you think about that, you know, businesses need electricity as well.
That factors into their cost of business, doing business.
So all these things go in and then they charge... there's a margin on top of that.
If the government, you know, if people want to come out and say they can't make that margin,
well you'd be prepared for the consequences of that.
Is the capital withdrawn from the industry?
Right?
Well, speaking of...
Even less efficient.
So you're dealing with a proper Pandora's box.
It's hard to prove.
I don't know, I think it'll be difficult to prove gouging.
That's why I think probably best thing is to discuss the gouging.
So I was just curious, you know, people are feeling pressure at the checkout compared
to, you know, how well the companies are doing.
That is definitely the case though.
That is definitely the case.
So that's crossed a lot of things.
Right.
Well, that's what concerns Australians.
So what I'd like to finish on is what keeps you up at night and what gets you out of bed
in the morning?
Everything keeps me up at night.
You're an investor.
Equity investors worry about everything at all times.
So you're always thinking about your portfolio, right?
The risks inherent in your portfolio, you know, the 1% risks in the portfolio, which
are only 1%, but can they become worse?
And you're always constantly weighing up the perspective return versus the risk you're
taking today for that return.
You've got to take significant risks to make significant returns.
Sometimes you can lower the negative outcomes by doing some decent work, research, to really
understand the risks and actually lower the probability.
You'll have a better understanding of the probability to actually be a lot lower than
you think of that risk occurring, which means we're getting a very cheap, cheap company
with significant upside.
That's the whole game is to constantly just, the ones you're long, just make sure you're
sure you understand it.
And don't fall into the old traps of, you know, confirmation bias and, you know, recency
bias, all that sort of stuff where it can happen.
Everyone's a human being.
So you can always slip down that road occasionally.
You've got to put yourself out of occasion, step back and go, hang on a sec.
What's the antithesis to this thesis that we have?
Yeah, this conversation has been very fascinating.
If anyone wants to learn more about yourself or Perpetual or these particular funds, how
can they find you?
Go to the Perpetual website, so perpetual.com.au.
All our products are up there.
All the PDFs and PDFs are there.
Or speak to your advisor, actually.
We've been around long enough.
Most advisors know who we are.
That they do, that they do indeed.
Well, Vince, it's been brilliant having you on and I really appreciate your insights and,
you know, how you think about markets.
So I hope you have a great day.
Thanks, man.
I appreciate the opportunity to speak to you.
Take it easy.
Cheers, mate.
Any views expressed in this recording do not represent a view of any other third party
and other sole personal opinions of the speaker.
Any reference to financial product does not constitute advice or recommendation.
And before any action, you should seek proper advice from your financial professional.
Australian listeners should head to www.moneysmart.gov.au to find more information on obtaining financial
advice.
To get in touch with York, head to our website www.yorkwealth.com.au.