1 00:00:00,000 --> 00:00:04,480 Hi, I'm Murdoch Gaddi and welcome back to The Rated Change. 2 00:00:04,480 --> 00:00:08,840 The Rated Change is a podcast which explores the ever-shifting momentum of financial markets 3 00:00:08,840 --> 00:00:33,800 through the eyes of the leading managers in wealth management. 4 00:00:33,800 --> 00:00:40,200 In today's broadcast, I'm speaking with Michael Frazes, the founder and portfolio manager at Frazes Capital Partners. 5 00:00:40,200 --> 00:00:45,400 Frazes Capital Partners is an Australian-based fund manager that specializes in growth investments 6 00:00:45,400 --> 00:00:48,640 in technology and the life sciences space. 7 00:00:48,640 --> 00:00:52,080 Today we are talking to him about their two strategies. 8 00:00:52,080 --> 00:00:58,680 Firstly, the main Frazes Fund, which invests in listed, fast-growing companies. 9 00:00:58,680 --> 00:01:06,080 And secondly, the Frazes Venture Fund, which also invests in the same technology and life sciences space, 10 00:01:06,080 --> 00:01:16,280 but they're targeting early emerging, unlisted or even pre-IPO opportunities. 11 00:01:16,280 --> 00:01:26,160 In this broadcast, we explore the dramatic volatility that we've seen in recent months or even years in the growth assets space. 12 00:01:26,160 --> 00:01:37,760 The impact this has had on the fund, both short-term, past and present, and where he thinks it will all go to from here. 13 00:01:37,760 --> 00:01:45,560 I also found it very interesting and I hope you do as well, because Michael really delves in and discusses a few companies 14 00:01:45,560 --> 00:01:53,960 which have had substantial drawdowns over this period from about November last year. 15 00:01:53,960 --> 00:02:02,160 And he believes that this move or drawdown doesn't really reflect the true futures of these companies, 16 00:02:02,160 --> 00:02:06,280 especially just after earnings season. 17 00:02:06,280 --> 00:02:16,360 So, if you like what you hear, please reach out to me with your thoughts and questions at mgatty at ywm.com.au. 18 00:02:16,360 --> 00:02:21,560 Before considering any investments, we encourage you to both listen to the disclaimer at the end of the broadcast 19 00:02:21,560 --> 00:02:24,160 and to seek professional advice. 20 00:02:24,160 --> 00:02:31,160 We would like to reiterate that this broadcast isn't designed nor is it intended to be specific advice. 21 00:02:31,160 --> 00:02:40,160 I really hope you enjoy the conversation as much as I did, so sit back and relax. 22 00:02:40,160 --> 00:02:43,360 Michael Frazes, welcome to the Rate of Change with York Off Management. 23 00:02:43,360 --> 00:02:45,960 Hi, Matt, thanks for having me on. 24 00:02:45,960 --> 00:02:50,760 Why don't we start things off by telling us a little bit about who Michael Frazes is, 25 00:02:50,760 --> 00:02:55,360 your background and how you got into financial markets. 26 00:02:55,360 --> 00:02:58,960 Sure. So, my background was I studied chemistry at university, 27 00:02:58,960 --> 00:03:04,160 did a master of research and then worked in private equity in London for about five years. 28 00:03:04,160 --> 00:03:08,960 It was kind of private equity, but like with a focus on discreet credit, very different to what I'm doing now. 29 00:03:08,960 --> 00:03:14,560 And I set up this fund four years ago and had a fund running for two years before that as well. 30 00:03:14,560 --> 00:03:19,560 We obviously focus on companies with like very fast growing companies across technology 31 00:03:19,560 --> 00:03:23,160 and the life sciences, healthcare, focusing on companies with like, you know, 32 00:03:23,160 --> 00:03:24,760 explosive growth and true customer love. 33 00:03:24,760 --> 00:03:27,760 That's our little catchphrase to describe what we do. 34 00:03:27,760 --> 00:03:30,360 True customer loves a really interesting one. 35 00:03:30,360 --> 00:03:33,960 And there's a number of questions I want to ask, but I really want to touch on this. 36 00:03:33,960 --> 00:03:41,760 It's more regarding the conversation of growth at any price compared to, you know, growth at a reasonable price. 37 00:03:41,760 --> 00:03:48,160 Why do you think after COVID as an example, there was such a move in that space? 38 00:03:48,160 --> 00:03:53,760 And what's happening if you're a CEO of a company right now? 39 00:03:53,760 --> 00:03:56,360 Do you continue that strategy or people tightening the belt? 40 00:03:56,360 --> 00:03:58,160 What do you think is currently happening? 41 00:03:58,160 --> 00:04:01,160 Well, I think things changed a lot, you know, over the last year. 42 00:04:01,160 --> 00:04:06,160 So, COVID caused a huge uplift, a huge change in the way people are spending money. 43 00:04:06,160 --> 00:04:09,160 That's clear. We all kind of noticed it with our own spending. 44 00:04:09,160 --> 00:04:13,960 Then a lot of companies kind of assumed that that would, or invested such that that would continue. 45 00:04:13,960 --> 00:04:15,960 In some cases it did, in some cases it didn't. 46 00:04:15,960 --> 00:04:21,560 So, I think it's kind of been a very sharp shift away from certain sectors. 47 00:04:21,560 --> 00:04:25,560 But really those moves were obviously magnified several times in the equity market. 48 00:04:25,560 --> 00:04:31,360 You know, whereas companies had their best years, equity valuations exploded based on that growth. 49 00:04:31,360 --> 00:04:35,360 And now they're having a lot of these companies are still growing, still having solid years. 50 00:04:35,360 --> 00:04:37,760 You know, the equity market has gone all the way to the other side. 51 00:04:37,760 --> 00:04:40,160 And these companies are now trading cheaper than they ever had. 52 00:04:40,160 --> 00:04:44,760 You know, to give a classic example, something like Shopify, which posted, you know, 53 00:04:44,760 --> 00:04:49,960 triple digit growth, you know, one of its best years and was trading extremely expensively. 54 00:04:49,960 --> 00:04:53,960 And has now gone the other way and is trading cheaper than it's ever traded in its trading history. 55 00:04:53,960 --> 00:04:56,360 Even while still posting, you know, low growth, 56 00:04:56,360 --> 00:04:59,960 but it's not like it's shrinking or going bankrupt or anything like that. 57 00:04:59,960 --> 00:05:06,360 But the valuation, the fundamentals have moved, but the valuations have moved vastly more. 58 00:05:06,360 --> 00:05:07,560 Does that answer your question? 59 00:05:07,560 --> 00:05:11,360 Yeah, no, it does. It just actually brings more questions to mind. 60 00:05:11,360 --> 00:05:13,760 But it's just, it's interesting, such a large movement. 61 00:05:13,760 --> 00:05:18,360 And then we just see such a polarizing shift from when the central bank, 62 00:05:18,360 --> 00:05:21,560 specifically the Fed, made a decision, what, over the Christmas break, right? 63 00:05:21,560 --> 00:05:24,760 And then how much did it come off in January, the Nasdaq? 64 00:05:24,760 --> 00:05:28,560 And I think we're down, what, about 30% plus a bit more? 65 00:05:28,560 --> 00:05:32,960 I think the drawdown was more, but we'll be down a bit less because there's been a bit of a rally. 66 00:05:32,960 --> 00:05:34,760 There's been a big rally just recently. 67 00:05:34,760 --> 00:05:37,360 Why do you think that rally's been? 68 00:05:37,360 --> 00:05:39,360 Do you think it's earnings season related? 69 00:05:39,360 --> 00:05:43,560 Or do you think it's, you know, the low's in for this current period of time? 70 00:05:43,560 --> 00:05:44,360 Or what do you think? 71 00:05:44,360 --> 00:05:46,960 I think the reality is, is companies are still reporting pretty well. 72 00:05:46,960 --> 00:05:51,160 You know, I think the last that I saw was two thirds of companies were beating, you know, estimates. 73 00:05:51,160 --> 00:05:54,760 So everyone's saying, and we're clearly, we might be in a, probably we're in a technical recession 74 00:05:54,760 --> 00:06:00,360 if you define it as two quarters of negative GDP growth in the US, which I think most people would. 75 00:06:00,360 --> 00:06:02,360 But the reality is most companies are still doing really well. 76 00:06:02,360 --> 00:06:07,560 So the real question should be like, why did they drop 90% or 80% in cases of companies like Shopify? 77 00:06:07,560 --> 00:06:12,360 You know, that was not reflected by the move in the fundamentals whatsoever. 78 00:06:12,360 --> 00:06:16,960 I mean, in terms of why there's a rally, I mean, think about like, I think what happened was, 79 00:06:16,960 --> 00:06:23,760 it was kind of the end of, 2022 was kind of the end of 20 years of increasing investment in tech and growth. 80 00:06:23,760 --> 00:06:28,160 You know, obviously from the lows of 2000, 2002, that must have, you know, 81 00:06:28,160 --> 00:06:34,760 there are very few tech focused, tech forward, innovation focused managers that made it through that period. 82 00:06:34,760 --> 00:06:36,760 You know, if any, you know, almost nobody did. 83 00:06:36,760 --> 00:06:41,360 Now, if you have to think about who did make it through, people like Masayoshi Son, you know, 84 00:06:41,360 --> 00:06:44,360 there's a really small pool of people, of funds that made it through. 85 00:06:44,360 --> 00:06:50,960 So basically what you're left with people who are generally very cynical on technology and cynical on growth, very value focused. 86 00:06:50,960 --> 00:06:54,960 And then what happened after that is from those crazy lows, where, you know, 87 00:06:54,960 --> 00:07:00,160 companies like Amazon were trading for next to nothing and a lot of companies that were still delivering and growing, 88 00:07:00,160 --> 00:07:04,960 that weren't like kind of the companies with no revenues, they're actually delivering on fundamentals. 89 00:07:04,960 --> 00:07:08,760 You know, they then rallied more or less for 20 years with like a hiccup in the GFC. 90 00:07:08,760 --> 00:07:14,360 You know, even in 2008, 2009, they're often the best performers amongst large caps. 91 00:07:14,360 --> 00:07:18,960 And so over that period, you know, people started investing more and more in the space. 92 00:07:18,960 --> 00:07:21,160 And over the last few years, that was just magnified. 93 00:07:21,160 --> 00:07:26,960 And then you reached a point in November where all the best performing managers were generally the ones that were more weighted towards that. 94 00:07:26,960 --> 00:07:32,960 So if you think about a large cap US fund manager, the odds are their 10 year performance depends almost entirely on 95 00:07:32,960 --> 00:07:38,560 whether they were invested in Google, Microsoft, Amazon, Facebook, not necessarily some random niche tech companies, 96 00:07:38,560 --> 00:07:42,160 like what was the allocation to the big tech companies throughout that decade? 97 00:07:42,160 --> 00:07:49,160 And you could basically rank managers on their performance based on how much of those companies they owned. 98 00:07:49,160 --> 00:07:53,160 And so that level of performance obviously attracted a huge amount of investment. 99 00:07:53,160 --> 00:07:56,160 And it's kind of like a boat, you know, everyone ran to one side. 100 00:07:56,160 --> 00:07:57,360 It was kind of like a 20 year run. 101 00:07:57,360 --> 00:08:04,760 And then I guess over the kind of like seven, eight months after that, from November to say June, the boat swung all the other way. 102 00:08:04,760 --> 00:08:07,360 It was a huge unwind of that. 103 00:08:07,360 --> 00:08:10,160 And certainly some of that was very, very justified. 104 00:08:10,160 --> 00:08:12,760 But the lows in June, it was pretty wild. 105 00:08:12,760 --> 00:08:19,760 Like you had companies trading for half cash, you know, more companies were trading for less than cash than at any time in history. 106 00:08:19,760 --> 00:08:22,360 So not like... 107 00:08:22,360 --> 00:08:23,960 Do you have an example? 108 00:08:23,960 --> 00:08:25,360 We've got several examples. 109 00:08:25,360 --> 00:08:28,160 I mean, the biotech sector, basically everything we looked at in that. 110 00:08:28,160 --> 00:08:36,360 We had a company that got a conditional FDA approval and traded from $4 to $1, you know, and it had $2 over $2 of cash. 111 00:08:36,360 --> 00:08:39,960 So typically when something... 112 00:08:39,960 --> 00:08:45,760 Typically when a biotech gets, sorry, fails one of its trials, it'll trade down to cash. 113 00:08:45,760 --> 00:08:51,960 In this case, you had companies succeeding in trials, targeting huge markets and then trading right below cash. 114 00:08:51,960 --> 00:08:54,560 Like there was no floor there, it just went straight through. 115 00:08:54,560 --> 00:08:58,960 Now, obviously what happened since then is that companies up like six times in the last few weeks. 116 00:08:58,960 --> 00:09:00,760 So there was a bit of... 117 00:09:00,760 --> 00:09:03,960 I mean, like it did get pretty extreme in terms of the movements. 118 00:09:03,960 --> 00:09:10,360 And I think what we've seen in the last eight weeks is some of that, you know, things starting to normalize a little bit. 119 00:09:10,360 --> 00:09:15,160 And, you know, it's the same way that money kind of chased growth managers on the way up. 120 00:09:15,160 --> 00:09:16,760 Short sellers did extremely well. 121 00:09:16,760 --> 00:09:21,360 And then as prices went lower, short interest rose across the board. 122 00:09:21,360 --> 00:09:28,960 To get to point in June where everything's trading, you know, in most cases, in some cases, certainly in growth, you know, cheaper on a multiples basis than it ever had. 123 00:09:28,960 --> 00:09:34,360 And then you had maximum short interest. So it seems like that's unwinding now as well. 124 00:09:34,360 --> 00:09:37,360 We discussed the short component affair. 125 00:09:37,360 --> 00:09:38,560 It's a very interesting topic. 126 00:09:38,560 --> 00:09:39,360 Like what do you do? 127 00:09:39,360 --> 00:09:44,760 You build a strategy for such a long period of time that's long only. 128 00:09:44,760 --> 00:09:47,160 And then you have these particular events. 129 00:09:47,160 --> 00:09:56,160 As a fund manager, I suppose what our clients and listeners want to hear is when you're looking at the total macroeconomic cycle of, you know, 130 00:09:56,160 --> 00:10:02,960 the relationship between growth, inflation, stagflation and deflation, they want to understand, you know, how do you use your strategy? 131 00:10:02,960 --> 00:10:06,160 Like where does it best fit? 132 00:10:06,160 --> 00:10:06,560 What do you think? 133 00:10:06,560 --> 00:10:11,960 Look, we'll always be focused on, you know, forward companies that are growing really fast, hitting their numbers. 134 00:10:11,960 --> 00:10:19,760 I think it's this was one of those periods where central bank got aggressive, inflation was high and it caused an enormous sell off. 135 00:10:19,760 --> 00:10:22,360 But it's not always that easy. 136 00:10:22,360 --> 00:10:27,960 For example, there have been multiple periods where investment back central banks have raised rates and equities have done relatively well. 137 00:10:27,960 --> 00:10:31,960 In the 90s, there were multiple periods of raising rates and equities performed well. 138 00:10:31,960 --> 00:10:41,360 Think about 1980 and 1982, that had much higher rates, much higher inflation and much like a much more severely tightening central bank. 139 00:10:41,360 --> 00:10:45,960 But, you know, equities dropped over, I think it was two years, 27, 30 percent. 140 00:10:45,960 --> 00:10:48,960 I imagine small caps would have done much worse. 141 00:10:48,960 --> 00:10:52,360 But large caps anyway, they recovered that loss in four months. 142 00:10:52,360 --> 00:10:58,960 And so you only had four months to kind of, if you sold on the way down, assuming you would get back in, you had four months to kind of make that call. 143 00:10:58,960 --> 00:11:01,560 It's very difficult to do it if it's possible. 144 00:11:01,560 --> 00:11:05,260 So there's this and that was kind of one of the part of thinking that guided us. 145 00:11:05,260 --> 00:11:07,060 You know, we're like this. 146 00:11:07,060 --> 00:11:09,160 We know our companies are performing extremely well. 147 00:11:09,160 --> 00:11:10,760 We can see that in the data. 148 00:11:10,760 --> 00:11:15,560 You know, we had companies that, you know, were triple the size they were at the highs that dropped 70 percent. 149 00:11:15,560 --> 00:11:22,160 You know, there were huge moves and huge disparities and huge dislocations, you know, like that biotech that was trading for less than cash with an approval. 150 00:11:22,160 --> 00:11:27,160 You know, there was immense dislocations, but we didn't know when that would stop. 151 00:11:27,160 --> 00:11:33,960 As it turns out, it got a lot longer and a lot deeper than we anticipated. 152 00:11:33,960 --> 00:11:37,360 But the good news, if you kind of stay consistent, is it does matter. 153 00:11:37,360 --> 00:11:41,060 But in a way, you can still it doesn't matter because eventually things will recover. 154 00:11:41,060 --> 00:11:42,360 Things will normalize. 155 00:11:42,360 --> 00:11:44,160 You know, value still does matter. 156 00:11:44,160 --> 00:11:51,560 So in the fund, you know, growth, what is for a lot of people that aren't familiar with the fund, what does that exactly mean? 157 00:11:51,560 --> 00:11:53,260 What asset classes are in there? 158 00:11:53,260 --> 00:11:58,860 What sub like as an example, you say biotech e-commerce. 159 00:11:58,860 --> 00:12:04,660 What specifically exposure do you have and whereabouts is it globally? 160 00:12:04,660 --> 00:12:09,660 Most of it's in the US with about 10 to 15 percent, usually in Australia. 161 00:12:09,660 --> 00:12:15,860 In terms of sectors, you know, we focus on e-commerce, life sciences, health care, 162 00:12:15,860 --> 00:12:21,760 fintech, things like that, you know, companies that sectors that are growing extremely fast, 163 00:12:21,760 --> 00:12:23,160 but did attract a lot of hot money. 164 00:12:23,160 --> 00:12:25,160 And, you know, now they're trading. 165 00:12:25,160 --> 00:12:28,560 They've had a pretty obviously had a pretty tough time in markets lately. 166 00:12:28,560 --> 00:12:31,760 But in many cases, the growth the growth is still coming through at the moment. 167 00:12:31,760 --> 00:12:37,760 So we define it. We kind of look at organic top line growth and we want to see good economics. 168 00:12:37,760 --> 00:12:42,360 And if companies are investing, investing well and getting good return on those dollars, 169 00:12:42,360 --> 00:12:45,660 we're very comfortable with them if they're not getting cash flows today. 170 00:12:45,660 --> 00:12:50,260 And so another way of looking at what happened over the last kind of year or so is the top 171 00:12:50,260 --> 00:12:54,560 of the market people willing to underwrite, you know, 10 year business plans. 172 00:12:54,560 --> 00:12:58,260 So an example that would be Rivian that came out at a hundred billion dollar market cap, 173 00:12:58,260 --> 00:13:01,960 no prospect of, you know, serious cash flows for maybe 10 years 174 00:13:01,960 --> 00:13:05,360 and people willing to value it based on that. 175 00:13:05,360 --> 00:13:10,660 And so people willing to look a really long time out and then at the lows was the opposite. 176 00:13:10,660 --> 00:13:14,360 It was people were willing to value the future at nothing. 177 00:13:14,360 --> 00:13:16,160 You know, it's what cash flows you making today. 178 00:13:16,160 --> 00:13:17,660 Those companies were far more resilient. 179 00:13:17,660 --> 00:13:21,460 A lot of them still sold off significantly, you know, a lot of small cap profitable companies 180 00:13:21,460 --> 00:13:25,460 had similar moves to kind of the growthier ones. 181 00:13:25,460 --> 00:13:27,060 And then something like a biotech. 182 00:13:27,060 --> 00:13:30,160 It's like, okay, you might have a successful trial result in two years. 183 00:13:30,160 --> 00:13:34,660 That stuff got traded that like that was just that had no value ascribed to it whatsoever. 184 00:13:34,660 --> 00:13:36,760 In fact, negative value. 185 00:13:36,760 --> 00:13:41,460 And that's kind of how you saw those things trading for less than cash. 186 00:13:41,460 --> 00:13:46,660 So it swung all the way back in terms of way people looking at those things. 187 00:13:46,660 --> 00:13:52,260 And I think now what happens next is the companies that deliver will end up showing outstanding returns. 188 00:13:52,260 --> 00:13:56,560 The biotechs that end up, you know, getting drugs approved and delivering revenues 189 00:13:56,560 --> 00:14:00,760 or get bought it out will have spectacular returns from here far more than usual. 190 00:14:00,760 --> 00:14:05,060 But obviously the ones that won't deliver will stay on the floor. 191 00:14:05,060 --> 00:14:06,160 It's quite interesting. 192 00:14:06,160 --> 00:14:09,660 And just to give our listeners a bit of idea how the portfolio is structured, 193 00:14:09,660 --> 00:14:12,860 like your top 10 holdings, what percentage is that? 194 00:14:12,860 --> 00:14:17,960 Top 20 holdings percentage is that and how many holdings are in the portfolio? 195 00:14:17,960 --> 00:14:23,660 Oh, we typically have about 40 positions, equity positions at the moment. 196 00:14:23,660 --> 00:14:26,760 The top 20 would be about 50 percent. 197 00:14:26,760 --> 00:14:28,060 I can get the exact numbers. 198 00:14:28,060 --> 00:14:29,960 What's in the top 10? 199 00:14:29,960 --> 00:14:32,760 The top 10, so our largest position is MercadoLibre, 200 00:14:32,760 --> 00:14:36,860 which is the number one e-commerce and fintech platform in South America. 201 00:14:36,860 --> 00:14:43,260 It's actually worth kind of talking to you because it kind of describes kind of the troubles that we've had over the last year. 202 00:14:43,260 --> 00:14:48,860 So we bought it, went up, I guess, four or five times from our initial purchase. 203 00:14:48,860 --> 00:14:51,260 It peaked in 2021. 204 00:14:51,260 --> 00:14:52,560 It just reported then. 205 00:14:52,560 --> 00:14:55,760 So it just reported the quarter that was March to June, 206 00:14:55,760 --> 00:14:59,760 which was a quarter in which it had lost half its value, basically, high to low. 207 00:14:59,760 --> 00:15:05,460 You know, it went from say 1200 to 600s, peaked at 2000, just under 2000. 208 00:15:05,460 --> 00:15:07,860 So it was a 70 percent draw from high to low. 209 00:15:07,860 --> 00:15:12,660 You know, they just reported over that quarter, you know, 58 percent organic profit growth, 210 00:15:12,660 --> 00:15:17,860 you know, a massively expanding fintech business, basically everything you could possibly want to see. 211 00:15:17,860 --> 00:15:22,260 And they've been reporting like that for the last year and a half as they've sold off. 212 00:15:22,260 --> 00:15:25,660 So you've got a company and if you add that kind of growth up, 213 00:15:25,660 --> 00:15:31,060 it's about two and a half times the size it was at the end of 2020 in terms of revenues. 214 00:15:31,060 --> 00:15:36,260 You've got a company that's say two and a half times the size and it's down 70 percent at the lows 215 00:15:36,260 --> 00:15:41,760 and it's still reporting blowout returns, no risk of bankruptcy, you know, huge cash balance, 216 00:15:41,760 --> 00:15:46,660 absolutely dominant at large scale, posting amazing numbers. 217 00:15:46,660 --> 00:15:49,460 And we're ultimately guided by those numbers. 218 00:15:49,460 --> 00:15:52,160 And again, you know, obviously companies like that that are growing really fast, 219 00:15:52,160 --> 00:15:57,760 they're going to drop 20, 30, 40, 50 percent often or semi-regularly at least. 220 00:15:57,760 --> 00:16:02,360 But it was really that kind of that last, that second minus 50 percent that kind of happened 221 00:16:02,360 --> 00:16:07,560 across the growth space that caused so much trouble for us. 222 00:16:07,560 --> 00:16:09,360 But ultimately, you know, the fundamentals are important. 223 00:16:09,360 --> 00:16:13,060 They do matter, you know, and since then it's rallied, you know, quite substantially. 224 00:16:13,060 --> 00:16:18,660 It's gone from the 600s up to, you know, over a thousand in the last few weeks. 225 00:16:18,660 --> 00:16:20,360 It's quite a big move, isn't it? 226 00:16:20,360 --> 00:16:26,960 And just thinking about that now, how correlated is the portfolio from a beta standpoint? 227 00:16:26,960 --> 00:16:30,160 So Alis, Nuzi, Moller, welcome to explain what beta is. 228 00:16:30,160 --> 00:16:32,860 How correlated is that to the NASDAQ? 229 00:16:32,860 --> 00:16:36,460 Is it predominantly the NASDAQ or would you use a different index? 230 00:16:36,460 --> 00:16:38,060 I think there's two correlations. 231 00:16:38,060 --> 00:16:43,060 So it's all very correlated with kind of long duration assets. 232 00:16:43,060 --> 00:16:48,560 You know, at the moment it's kind of like these companies investing today for the future. 233 00:16:48,560 --> 00:16:52,560 So they're in that bucket of they can't show you cash flows today, but they can show you, 234 00:16:52,560 --> 00:16:56,960 you know, growing revenues, growing gross profits, return on investment. 235 00:16:56,960 --> 00:17:00,260 They can show all those kinds of metrics. 236 00:17:00,260 --> 00:17:05,760 And so they do kind of trade as one with companies like that. 237 00:17:05,760 --> 00:17:09,660 There is a correlation to tech, but there's also periods where the NASDAQ has performed 238 00:17:09,660 --> 00:17:10,260 much better than us. 239 00:17:10,260 --> 00:17:12,160 For example, on the way down, the NASDAQ was more resilient. 240 00:17:12,160 --> 00:17:17,360 They're much more kind of the largest companies in that, you know, buying back shares and 241 00:17:17,360 --> 00:17:19,260 big cash balances. 242 00:17:19,260 --> 00:17:22,160 But, you know, there's been periods where the NASDAQ's been down 20% plus and we've been 243 00:17:22,160 --> 00:17:23,560 up quite a bit. 244 00:17:23,560 --> 00:17:28,260 So there is a correlation there, but it's not, doesn't always work. 245 00:17:28,260 --> 00:17:29,960 It's not super correlated. 246 00:17:29,960 --> 00:17:31,360 At the moment, we're kind of bounce. 247 00:17:31,360 --> 00:17:34,860 It seems like from the lows, gross stocks are rallying harder than the NASDAQ and the 248 00:17:34,860 --> 00:17:37,560 NASDAQ is moving, moving up more than the S&P. 249 00:17:37,560 --> 00:17:39,260 Well, let's use, let's use numbers. 250 00:17:39,260 --> 00:17:46,860 So when it based out the NASDAQ has rallied, what's the NASDAQ rallied in comparison to 251 00:17:46,860 --> 00:17:50,960 your portfolio in the past, what, only two months, right? 252 00:17:50,960 --> 00:17:51,560 It's a tough one. 253 00:17:51,560 --> 00:17:54,160 I guess from the lows, we bounced about 40%. 254 00:17:54,160 --> 00:17:57,760 So I reckon I'd have to check, but I'd say the NASDAQ's probably done about half that, 255 00:17:57,760 --> 00:17:59,460 less than half that. 256 00:17:59,460 --> 00:18:03,460 And I'd say in general, you know, we do have, it is very high beta portfolio. 257 00:18:03,460 --> 00:18:06,760 In general, we expect to make more when the market's going up. 258 00:18:06,760 --> 00:18:11,260 And this time we certainly lost more when the market was going down as well. 259 00:18:11,260 --> 00:18:11,960 Absolutely. 260 00:18:11,960 --> 00:18:14,360 We can always learn from history, but we have to plan for the future, right? 261 00:18:14,360 --> 00:18:18,960 So there's a lot of conversation and everyone's really starting to sit and feel it, you know, 262 00:18:18,960 --> 00:18:24,460 with property as an example, rising interest rates, high inflation, go to the groceries. 263 00:18:24,460 --> 00:18:27,660 I think I paid like, what was it, nearly $15 for tomatoes the other week. 264 00:18:27,660 --> 00:18:30,860 It's getting a bit on the high side. 265 00:18:30,860 --> 00:18:36,060 How has the rising rate environment impacted the portfolio and what do you think the impacts 266 00:18:36,060 --> 00:18:38,560 will be for the next six to nine months? 267 00:18:38,560 --> 00:18:39,860 Look, I think there's two parts. 268 00:18:39,860 --> 00:18:43,360 It's like, how does it affect the fundamentals and how does it affect the stock prices? 269 00:18:43,360 --> 00:18:47,060 So there's no doubt that rising inflation triggered, you know, the sharpest rising rates 270 00:18:47,060 --> 00:18:53,060 in 40 years and that caused a huge sell-off from very high valuations and very overweight 271 00:18:53,060 --> 00:18:57,360 positionings in these kinds of growth companies. 272 00:18:57,360 --> 00:19:01,360 So inflation had a huge impact on us in the way that people invested and looked at these 273 00:19:01,360 --> 00:19:04,260 and certainly priced these companies. 274 00:19:04,260 --> 00:19:10,060 In terms of fundamentals, broadly, these companies generally have been able to capture 275 00:19:10,060 --> 00:19:11,360 that inflation. 276 00:19:11,360 --> 00:19:16,260 To give you one example, Disney is a company that dropped about 55%. 277 00:19:16,260 --> 00:19:17,660 It's a consumer business. 278 00:19:17,660 --> 00:19:22,460 You know, the last year, and again, it's another example of like the challenges facing people 279 00:19:22,460 --> 00:19:24,260 investing in growth today. 280 00:19:24,260 --> 00:19:28,160 So in two and a half years, it accumulated something like more subscribers than Netflix 281 00:19:28,160 --> 00:19:30,060 did in 12 and a half. 282 00:19:30,060 --> 00:19:35,060 It's now generated this entire business line where Disney fans, over 100 million, I think 283 00:19:35,060 --> 00:19:39,660 127 million Disney fans are now being billed every single month from their credit card, 284 00:19:39,660 --> 00:19:43,860 cash is being transferred straight from their accounts into Disney's corporate account. 285 00:19:43,860 --> 00:19:48,660 You know, over the next 5, 10, 20 years, that's going to be immensely valuable business and 286 00:19:48,660 --> 00:19:52,660 it's certainly attracted far more people far quicker than anyone really expected. 287 00:19:52,660 --> 00:19:54,860 It's really kind of the upper end of those expectations. 288 00:19:54,860 --> 00:19:59,260 Over that period, the stock was more than cut in half. 289 00:19:59,260 --> 00:20:00,660 And then how does that affect inflation? 290 00:20:00,660 --> 00:20:04,760 To come back to your question, well, they raised their prices for ESPN, the smallest 291 00:20:04,760 --> 00:20:06,660 channel by something like 38%. 292 00:20:06,660 --> 00:20:13,060 They announced similar increases across the Disney Plus range and in the lowest cost Disney 293 00:20:13,060 --> 00:20:15,860 Plus tier, they're going to put ads on as well. 294 00:20:15,860 --> 00:20:19,760 So it's not going to be free with ads, it's going to be lowest cost plus ads. 295 00:20:19,760 --> 00:20:23,160 And so you've got this funny environment where you've got companies that are building 296 00:20:23,160 --> 00:20:24,460 immense new business lines. 297 00:20:24,460 --> 00:20:25,860 Sure, they're definitely spending to do it. 298 00:20:25,860 --> 00:20:29,360 You can't get 100 million people paying you money every month for free. 299 00:20:29,360 --> 00:20:31,260 You know, they're spending. 300 00:20:31,260 --> 00:20:34,260 The stocks are down 50% plus or more. 301 00:20:34,260 --> 00:20:37,260 But you can see the value being created. 302 00:20:37,260 --> 00:20:41,660 It's kind of like that old experiment, like you want a cookie now or two later. 303 00:20:41,660 --> 00:20:44,260 The market's saying, I want a cookie now, I don't care how many cookies I get later. 304 00:20:44,260 --> 00:20:45,860 If it's not here now, I don't... 305 00:20:45,860 --> 00:20:49,860 It's quite funny they've done that with kids and the kids sit there for about 30 seconds 306 00:20:49,860 --> 00:20:50,860 and then eat the cookie. 307 00:20:50,860 --> 00:20:54,260 Yeah, parents correlated with long-term success as individuals. 308 00:20:54,260 --> 00:20:56,860 I don't know if that's a serious study. 309 00:20:56,860 --> 00:21:00,460 You know how people do these studies with like 20 people and draw like wide ranging 310 00:21:00,460 --> 00:21:01,460 conclusions? 311 00:21:01,460 --> 00:21:04,260 I don't know if anybody's kind of gone back and redid it and see if they got the same 312 00:21:04,260 --> 00:21:05,260 results. 313 00:21:05,260 --> 00:21:07,860 But yeah, I mean, it shows the opportunities. 314 00:21:07,860 --> 00:21:12,860 So the companies that do well in invest right correctly, they've been marked down severely. 315 00:21:12,860 --> 00:21:14,460 I think they'll do extremely well in the future. 316 00:21:14,460 --> 00:21:19,260 And actually going back to that inflation question, in the 80s, I'm sure that's basically 317 00:21:19,260 --> 00:21:20,260 what happened. 318 00:21:20,260 --> 00:21:23,260 Like on the back end of these inflationary environments, equities have done extremely 319 00:21:23,260 --> 00:21:24,260 well. 320 00:21:24,260 --> 00:21:28,760 You know, the index went up several times after that in the 80s. 321 00:21:28,760 --> 00:21:33,980 So if you could see thinking about something like Disney, over this period, it's been cut 322 00:21:33,980 --> 00:21:35,140 in half. 323 00:21:35,140 --> 00:21:38,660 It's brought in new business lines, new revenue streams. 324 00:21:38,660 --> 00:21:40,180 It's raising prices dramatically. 325 00:21:40,180 --> 00:21:44,100 Obviously, parks as well are coming back hard. 326 00:21:44,100 --> 00:21:48,660 There's no reason not to think that that could eventually, you know, take, go back to where 327 00:21:48,660 --> 00:21:51,700 it was at the highs and actually push on to new highs. 328 00:21:51,700 --> 00:21:56,940 But if it does, that was over well over 100% return from the lows. 329 00:21:56,940 --> 00:21:59,940 In fact, it has actually, it's one of those companies that has rallied quite strongly 330 00:21:59,940 --> 00:22:03,700 in the last few weeks. 331 00:22:03,700 --> 00:22:05,500 Which brings me on to my next question. 332 00:22:05,500 --> 00:22:09,740 I keep hearing in many different areas and some people are saying that some of the best 333 00:22:09,740 --> 00:22:12,900 businesses out there are staying private for longer. 334 00:22:12,900 --> 00:22:16,940 And a lot of very large private equity firms are trying to get these companies into their 335 00:22:16,940 --> 00:22:18,980 portfolios early on. 336 00:22:18,980 --> 00:22:24,760 Some even saying, and a lot of very, very affluent, very ultra high net wealth investors 337 00:22:24,760 --> 00:22:29,900 are even arguing that is it even worth some of these companies are listing. 338 00:22:29,900 --> 00:22:33,340 And the reason I'm asking this question is you run two strategies, correct? 339 00:22:33,340 --> 00:22:34,340 Correct. 340 00:22:34,340 --> 00:22:36,140 Did you want to speak to the second strategy? 341 00:22:36,140 --> 00:22:38,860 Yes, we have a private investment fund. 342 00:22:38,860 --> 00:22:42,820 The idea was basically to make venture capital investments and back pre IPO investments, 343 00:22:42,820 --> 00:22:46,300 you know, on the way to being listed in the market. 344 00:22:46,300 --> 00:22:50,540 Obviously, the pre IPO market has, you know, stalled lately. 345 00:22:50,540 --> 00:22:51,860 There've been very few IPOs. 346 00:22:51,860 --> 00:22:53,620 There's been a few cap raisings in Australia. 347 00:22:53,620 --> 00:22:59,220 It'd be very interesting to see how those trade in the next few weeks. 348 00:22:59,220 --> 00:23:00,220 Staying private for longer. 349 00:23:00,220 --> 00:23:03,660 So there was a whole like vintage of tech companies that did that. 350 00:23:03,660 --> 00:23:06,500 It's like Airbnb, arguably Spotify, Uber. 351 00:23:06,500 --> 00:23:11,700 You know, they listed at extremely high valuations and broadly, they haven't done particularly 352 00:23:11,700 --> 00:23:12,820 well since then. 353 00:23:12,820 --> 00:23:19,100 So all the returns were kind of captured by the early investors. 354 00:23:19,100 --> 00:23:24,660 I don't think it's that whole industry is kind of in flux at the moment, because a lot 355 00:23:24,660 --> 00:23:27,740 of those private rounds over the last two or three years were done exceptionally high 356 00:23:27,740 --> 00:23:33,900 valuations, 20, 30 times sales, often for software businesses, 100 times plus. 357 00:23:33,900 --> 00:23:36,540 It's now apparent that those companies are not going to be able to list anywhere near 358 00:23:36,540 --> 00:23:40,300 that because you have extremely high quality software businesses, you know, trading under 359 00:23:40,300 --> 00:23:42,140 10 times sales. 360 00:23:42,140 --> 00:23:46,540 But that hasn't necessarily resolved yet, because those companies haven't had to list, 361 00:23:46,540 --> 00:23:51,260 they haven't had to kind of necessarily raise more money at those lower valves. 362 00:23:51,260 --> 00:23:54,380 So it'd be interesting to see how that affects the equation of whether to stay private or 363 00:23:54,380 --> 00:23:55,380 not. 364 00:23:55,380 --> 00:24:04,340 My guess is actually, yeah, I guess it depends what the capital markets are willing to do. 365 00:24:04,340 --> 00:24:07,860 So I think the people that listed have probably had a very tough time of it, probably wish 366 00:24:07,860 --> 00:24:09,660 they were private. 367 00:24:09,660 --> 00:24:13,080 Funds that have had to mark, like listed growth funds have generally done worse than private 368 00:24:13,080 --> 00:24:18,980 growth funds, because the private growth funds can just don't need to mark in the same way. 369 00:24:18,980 --> 00:24:22,660 But then, you know, the best performing companies have generally all been public. 370 00:24:22,660 --> 00:24:28,460 You know, you think about Apple, Facebook, Google, you know, Tesla, they performed, they 371 00:24:28,460 --> 00:24:33,620 had their biggest achievements all while listed companies, Amazon, they were able to tap the 372 00:24:33,620 --> 00:24:38,060 markets very quickly when they needed to, they had their own currency to pay people. 373 00:24:38,060 --> 00:24:40,580 When companies stay private for longer, often it's the employees that do worse. 374 00:24:40,580 --> 00:24:46,220 You know, it's fine for management, they'll always be looked after. 375 00:24:46,220 --> 00:24:49,100 Investors don't need to mark their books, they get the benefit of growth without seeing 376 00:24:49,100 --> 00:24:50,580 the volatility day to day. 377 00:24:50,580 --> 00:24:55,100 If anything goes wrong, employees often lose their entire stake. 378 00:24:55,100 --> 00:24:56,620 It's very hard for them to sell. 379 00:24:56,620 --> 00:24:59,980 It's very hard to know what it's actually worth, particularly at times like this when 380 00:24:59,980 --> 00:25:02,020 prices are moving very fast. 381 00:25:02,020 --> 00:25:07,780 So generally going listing is good for employees and staying private makes things much riskier 382 00:25:07,780 --> 00:25:08,780 for employees. 383 00:25:08,780 --> 00:25:13,620 So that's another consideration, but they don't really make the call. 384 00:25:13,620 --> 00:25:14,620 Which is right. 385 00:25:14,620 --> 00:25:18,260 You know, it's quite an interesting topic. 386 00:25:18,260 --> 00:25:22,740 So how much in that have you deployed or how much is sitting in cash to deploy? 387 00:25:22,740 --> 00:25:26,340 Is there anything interesting you're seeing coming up or you're just holding your powder? 388 00:25:26,340 --> 00:25:29,820 I think there's a couple of interesting things that we're going to write about. 389 00:25:29,820 --> 00:25:35,860 I mean, the final stages of two investments, I'll write about them and post them. 390 00:25:35,860 --> 00:25:40,140 But we decided to go slow as many people did. 391 00:25:40,140 --> 00:25:42,380 Like we're still investing. 392 00:25:42,380 --> 00:25:45,180 We also wanted to see where things settled. 393 00:25:45,180 --> 00:25:48,900 I think now there does seem to be a bit of life back in markets. 394 00:25:48,900 --> 00:25:54,700 For growth investors, a lot of our companies peaked in January 2021. 395 00:25:54,700 --> 00:25:58,620 So it's been over a year and a half now, this kind of sell off. 396 00:25:58,620 --> 00:26:01,100 And that's like on the long end of these things. 397 00:26:01,100 --> 00:26:03,580 Like it's pretty rare that you have two year bear markets. 398 00:26:03,580 --> 00:26:07,900 In fact, it was really kind of 2008, 2009, obviously 2000, 2002. 399 00:26:07,900 --> 00:26:12,420 Then you have to go all the way back to the early 80s. 400 00:26:12,420 --> 00:26:15,780 These things don't happen very often, but we definitely kind of, it does feel like we're 401 00:26:15,780 --> 00:26:21,780 at the back end of one in the sense that prices have massively reset. 402 00:26:21,780 --> 00:26:22,940 They've stabilized. 403 00:26:22,940 --> 00:26:28,020 Things kind of bounced on the bottom for a few months, you know, from May, June, July. 404 00:26:28,020 --> 00:26:32,740 And now August has been strong and you're seeing companies start to go back to the market. 405 00:26:32,740 --> 00:26:36,180 And, you know, there's still a lot of cash, you know, fund managers sitting on a bunch 406 00:26:36,180 --> 00:26:37,180 of cash. 407 00:26:37,180 --> 00:26:40,900 A lot of people have raised VC funds. 408 00:26:40,900 --> 00:26:41,900 The world's not going to stop. 409 00:26:41,900 --> 00:26:45,860 And I think that's also another reason why things have kind of stayed, things are kind 410 00:26:45,860 --> 00:26:46,860 of positive at the moment. 411 00:26:46,860 --> 00:26:48,740 People are realizing the world hasn't stopped. 412 00:26:48,740 --> 00:26:49,900 You know, business is continuing. 413 00:26:49,900 --> 00:26:52,140 These companies are continuing to grow. 414 00:26:52,140 --> 00:26:55,580 There's no reason for them necessarily to keep going down in a straight line to zero. 415 00:26:55,580 --> 00:26:59,780 Well talking about potentially market stopping, you know, we do have some polarizing activities 416 00:26:59,780 --> 00:27:01,620 happening on the global stage. 417 00:27:01,620 --> 00:27:07,220 So with semiconductors as an example, you know, if hopefully it doesn't happen, the 418 00:27:07,220 --> 00:27:09,540 situation with China develops. 419 00:27:09,540 --> 00:27:11,740 What impact will that have? 420 00:27:11,740 --> 00:27:18,980 Is it isolated or doesn't TSM have something like 50 something percent of the supply? 421 00:27:18,980 --> 00:27:24,980 Like have you seen a shift, a company starting to create their own chips now or? 422 00:27:24,980 --> 00:27:32,420 We've seen the US obviously wants to kind of foster a domestic industry. 423 00:27:32,420 --> 00:27:33,980 The China flashpoint is pretty serious. 424 00:27:33,980 --> 00:27:38,180 I mean, look at what the Ukraine war did, right? 425 00:27:38,180 --> 00:27:41,180 That really was probably one of the reasons why we got that second leg down. 426 00:27:41,180 --> 00:27:45,140 It was when energy just, it just had this uncontrollable feel to it. 427 00:27:45,140 --> 00:27:47,260 We didn't know how high energy was going to go. 428 00:27:47,260 --> 00:27:50,540 You didn't know how high prices were going to have to rise. 429 00:27:50,540 --> 00:27:55,500 What that did to like demands from labor, from higher wages. 430 00:27:55,500 --> 00:27:59,660 And that was nothing on the scale of what a Taiwan conflict would be. 431 00:27:59,660 --> 00:28:03,820 On the flip side, I don't think anyone looks at Russia, Ukraine, specifically like the 432 00:28:03,820 --> 00:28:06,540 Chinese leadership and thinks that's something you want to emulate. 433 00:28:06,540 --> 00:28:08,380 You know, they just rolled tanks over the border. 434 00:28:08,380 --> 00:28:11,420 They would have to do an amphibious assault. 435 00:28:11,420 --> 00:28:14,820 It's very hard to kind of see how that will play out. 436 00:28:14,820 --> 00:28:21,780 It wouldn't affect most of our companies, you know, we used to have a decent China exposure. 437 00:28:21,780 --> 00:28:22,780 We don't have that anymore. 438 00:28:22,780 --> 00:28:25,340 It would be indirect. 439 00:28:25,340 --> 00:28:26,340 Even that's kind of unpredictable. 440 00:28:26,340 --> 00:28:29,020 You know, defense companies would probably do pretty well. 441 00:28:29,020 --> 00:28:32,260 Would there be a flight to the US dollar and US government bonds? 442 00:28:32,260 --> 00:28:33,260 Probably. 443 00:28:33,260 --> 00:28:35,620 Rates probably come down. 444 00:28:35,620 --> 00:28:39,740 There's no doubt be a huge shock if there was a full scale war there. 445 00:28:39,740 --> 00:28:43,060 But I'm probably not the best person to comment on that. 446 00:28:43,060 --> 00:28:48,860 Well, let's talk about what you are best to talk about, which is specific companies in 447 00:28:48,860 --> 00:28:49,980 your portfolio. 448 00:28:49,980 --> 00:28:51,940 And we've just come through earnings season. 449 00:28:51,940 --> 00:28:54,060 So what have you seen? 450 00:28:54,060 --> 00:28:55,140 Anything exciting? 451 00:28:55,140 --> 00:28:56,140 Anything you like? 452 00:28:56,140 --> 00:28:57,140 Didn't expect that. 453 00:28:57,140 --> 00:29:03,100 Yeah, look, I think broadly, I think positioning has had a huge impact on doesn't always but 454 00:29:03,100 --> 00:29:07,300 the last year, maybe in the last two years, positioning has had a huge impact on on on 455 00:29:07,300 --> 00:29:08,780 monthly movements. 456 00:29:08,780 --> 00:29:14,220 So at the end of last year, companies reporting really well and getting absolutely smashed. 457 00:29:14,220 --> 00:29:16,780 And we found it difficult because we're like, these are great results. 458 00:29:16,780 --> 00:29:17,820 And they're on track. 459 00:29:17,820 --> 00:29:20,120 And we're confident they'll continue to perform really well. 460 00:29:20,120 --> 00:29:21,120 And that has happened. 461 00:29:21,120 --> 00:29:24,420 You know, in our reporting in this reporting season, companies continue to report with 462 00:29:24,420 --> 00:29:27,940 a couple of exceptions, you know, generally very good numbers. 463 00:29:27,940 --> 00:29:32,460 But unlike the last two earnings season, where even good results were resulting in big sell 464 00:29:32,460 --> 00:29:36,100 offs, this time you're seeing some absolutely atrocious results, or certainly some very 465 00:29:36,100 --> 00:29:38,980 weak results, and companies are rallying really hard. 466 00:29:38,980 --> 00:29:43,060 So as an example, you know, Shopify announced one of its slowest growth rates ever. 467 00:29:43,060 --> 00:29:47,300 So they're going to Toby, the CEO came out and said, you look, he's miscalculated. 468 00:29:47,300 --> 00:29:52,940 So many of us did, and kind of thought that thought that there'd be more demand than there 469 00:29:52,940 --> 00:29:54,940 was. 470 00:29:54,940 --> 00:29:59,460 And he's also going to, you know, sack half the work, half 10% of the workforce, and the 471 00:29:59,460 --> 00:30:01,780 stock rally rallied on that news. 472 00:30:01,780 --> 00:30:02,820 And so that is interesting. 473 00:30:02,820 --> 00:30:08,900 And that's happened across the reporting season, I'd say, is even weak results now are generally 474 00:30:08,900 --> 00:30:10,340 resulting in rallies. 475 00:30:10,340 --> 00:30:12,860 And that's, we can't read too much into it. 476 00:30:12,860 --> 00:30:17,940 But it's a very noticeable difference of where things were, you know, six months ago. 477 00:30:17,940 --> 00:30:21,740 And one thing I'll certainly be always be much more aware of is just really paying very 478 00:30:21,740 --> 00:30:23,660 close attention to price action. 479 00:30:23,660 --> 00:30:28,660 Because there is information in that in terms of how things are, how people are positioned. 480 00:30:28,660 --> 00:30:32,860 There's information that people were massively overextended when companies were reporting 481 00:30:32,860 --> 00:30:35,220 brilliant results and selling off. 482 00:30:35,220 --> 00:30:38,780 Similarly now you're seeing companies report poor results, they're rallying very, very 483 00:30:38,780 --> 00:30:39,780 hard. 484 00:30:39,780 --> 00:30:43,660 And the same way kind of growth year long only investors were kind of thinking, scratching 485 00:30:43,660 --> 00:30:44,740 heads thinking, why is this happening? 486 00:30:44,740 --> 00:30:46,940 Now I can see the similar thing happening from short sellers. 487 00:30:46,940 --> 00:30:51,020 You know, these companies are down 80% and they're confused as to why they're up 50%, 488 00:30:51,020 --> 00:30:53,060 you know, from those lows. 489 00:30:53,060 --> 00:30:57,140 So that's been one feature. 490 00:30:57,140 --> 00:30:59,580 So we talked about MaccadaLibra that reported well. 491 00:30:59,580 --> 00:31:01,740 Another top three position for us is CloudFlare. 492 00:31:01,740 --> 00:31:06,300 So CloudFlare, we always thought was one of the best companies on the planet. 493 00:31:06,300 --> 00:31:08,660 They do basically internet infrastructure. 494 00:31:08,660 --> 00:31:12,940 So everything Cisco used to do, they do on a network cloud basis. 495 00:31:12,940 --> 00:31:19,020 So they've got 200, I guess you'd call them, they basically replicate the internet at multiple 496 00:31:19,020 --> 00:31:21,140 points around the world. 497 00:31:21,140 --> 00:31:25,860 So if you're accessing a US website from Sydney, say, you're probably, it's blazingly fast 498 00:31:25,860 --> 00:31:28,780 because they're probably using CloudRez network. 499 00:31:28,780 --> 00:31:31,820 The site's probably mirrored very close to where you are. 500 00:31:31,820 --> 00:31:33,900 It makes it really fast. 501 00:31:33,900 --> 00:31:35,940 It's really helpful for security. 502 00:31:35,940 --> 00:31:41,780 You know, they're bringing out what they call workers, which is a way to do Amazon style 503 00:31:41,780 --> 00:31:42,780 web apps. 504 00:31:42,780 --> 00:31:45,900 But most of the computing will be done at the edge, which is what they call these kind 505 00:31:45,900 --> 00:31:47,620 of nodes of the network. 506 00:31:47,620 --> 00:31:49,540 So it'll be blazingly fast. 507 00:31:49,540 --> 00:31:54,180 So if you put your app on CloudFlare and build it using CloudFlare workers, it will be much 508 00:31:54,180 --> 00:31:58,020 faster than if you use Amazon, for example, because they built this network. 509 00:31:58,020 --> 00:32:03,460 And it's both physical hardware and also software, you know, the way they balance the traffic. 510 00:32:03,460 --> 00:32:04,940 All that's great. 511 00:32:04,940 --> 00:32:07,820 And it was widely acknowledged by everyone to be amazing. 512 00:32:07,820 --> 00:32:11,700 And you know, the workers, the ability to build apps is an example of how they're able 513 00:32:11,700 --> 00:32:16,100 to use that amazing network that they've got to kind of develop completely new business 514 00:32:16,100 --> 00:32:17,100 lines. 515 00:32:17,100 --> 00:32:19,220 You know, they're still very much at the beginning, not the end of their journey. 516 00:32:19,220 --> 00:32:22,500 But this is one of those companies that trade at like 100 times sales. 517 00:32:22,500 --> 00:32:26,900 Like it's the most one of them, I think at times the most expensive company in the market. 518 00:32:26,900 --> 00:32:36,100 And it dropped from 220 to 120 in March, and then went from 120 to 40 to the low 40s. 519 00:32:36,100 --> 00:32:40,700 And that was the like, that was that was the move that caught us by surprise. 520 00:32:40,700 --> 00:32:41,700 We didn't own it through that period. 521 00:32:41,700 --> 00:32:46,420 We had plenty of companies that, you know, had severe falls over that period as well. 522 00:32:46,420 --> 00:32:50,940 So we picked some of that up, not quite at the lows, but close enough. 523 00:32:50,940 --> 00:32:54,860 Yeah, they then answered over 50% revenue growth. 524 00:32:54,860 --> 00:32:55,860 Everything's on track. 525 00:32:55,860 --> 00:32:56,860 Nothing's changed in the company. 526 00:32:56,860 --> 00:32:59,980 It's just gone from $220 to $40. 527 00:32:59,980 --> 00:33:02,940 And then now up to I think 75 at the last point. 528 00:33:02,940 --> 00:33:06,860 It's a big rally again off of a report that everybody was expecting. 529 00:33:06,860 --> 00:33:11,420 You know, it's maintained just about 50% revenue growth for quite some time now. 530 00:33:11,420 --> 00:33:15,620 But the market reaction now is completely different to the market reaction six months 531 00:33:15,620 --> 00:33:17,100 ago. 532 00:33:17,100 --> 00:33:19,020 Let's keep on the cybersecurity space. 533 00:33:19,020 --> 00:33:22,260 Like me personally, fascinated by this space. 534 00:33:22,260 --> 00:33:26,220 And what's kind of interesting as well, some may argue that the cybersecurity space, if 535 00:33:26,220 --> 00:33:30,700 you look at the NASDAQ, some of the holdings are actually outpacing the recovery of the 536 00:33:30,700 --> 00:33:32,380 broader exposure. 537 00:33:32,380 --> 00:33:33,820 So I'd love to hear your thoughts on that. 538 00:33:33,820 --> 00:33:38,220 And are there any other companies in the portfolio that are in cybersecurity? 539 00:33:38,220 --> 00:33:39,740 And are you considering any others? 540 00:33:39,740 --> 00:33:44,500 Look, we look at CrowdStrike. 541 00:33:44,500 --> 00:33:47,080 Cloudflare is the only one that we have at the moment. 542 00:33:47,080 --> 00:33:52,820 The worry with CrowdStrike is that firstly, there might be better opportunities at the 543 00:33:52,820 --> 00:33:53,820 moment. 544 00:33:53,820 --> 00:33:57,500 There's companies growing equivalent rates that have sold off significantly. 545 00:33:57,500 --> 00:34:03,660 But also on the business side, most of what CrowdStrike does, Microsoft can do, for example. 546 00:34:03,660 --> 00:34:10,060 And that Microsoft question is just huge because they have, it's amazing how dominant that 547 00:34:10,060 --> 00:34:11,060 platform is now. 548 00:34:11,060 --> 00:34:14,940 And there's one thing that I wish we had done is I wish we did, we kind of said, look, we're 549 00:34:14,940 --> 00:34:18,700 not going to invest in Microsoft, Google, Apple, even though we know these are some 550 00:34:18,700 --> 00:34:21,820 of the best companies in the world, but we're going to be focused on being different and 551 00:34:21,820 --> 00:34:23,980 we don't want the much smaller, faster growing companies. 552 00:34:23,980 --> 00:34:25,580 We'll still always do that. 553 00:34:25,580 --> 00:34:27,500 We could have easily had 10, 15, 20%. 554 00:34:27,500 --> 00:34:29,700 It wasn't all or nothing. 555 00:34:29,700 --> 00:34:36,300 And then seeing how even the best companies in these subsectors perform against this juggernaut 556 00:34:36,300 --> 00:34:38,420 that everybody already has a relationship with. 557 00:34:38,420 --> 00:34:41,660 Have you seen that chart of Teams versus Slack? 558 00:34:41,660 --> 00:34:46,380 Where Slack was really cool, Microsoft nearly bought them, apparently didn't, Salesforce 559 00:34:46,380 --> 00:34:49,740 did, and then Microsoft just created their own version. 560 00:34:49,740 --> 00:34:52,940 And then now Teams is vastly ahead of where it is. 561 00:34:52,940 --> 00:34:56,940 And now obviously everybody's already, almost every business on the planet already has a 562 00:34:56,940 --> 00:34:57,940 relationship with Microsoft. 563 00:34:57,940 --> 00:35:03,980 So that bundling aspect just makes it really hard for people to compete. 564 00:35:03,980 --> 00:35:07,140 And so that was a hesitation of us with CrowdStrike. 565 00:35:07,140 --> 00:35:09,380 But then again, they're still posting great numbers. 566 00:35:09,380 --> 00:35:10,380 They're still winning contracts. 567 00:35:10,380 --> 00:35:13,300 They're still performing really well. 568 00:35:13,300 --> 00:35:14,660 That's kind of where we landed on that one. 569 00:35:14,660 --> 00:35:16,580 Well, it's behavioral psychology, right? 570 00:35:16,580 --> 00:35:22,580 So a number of my friends, colleagues, even myself with our company loved the idea that 571 00:35:22,580 --> 00:35:24,860 unfortunately a lot of people were seeking COVID. 572 00:35:24,860 --> 00:35:30,380 So I went to go there and respects, but the one benefit that did come out of it, it wasn't 573 00:35:30,380 --> 00:35:37,060 that like 10 years worth of innovation got condensed into a year. 574 00:35:37,060 --> 00:35:40,860 And it was great until we had to log into 15 different things to do our jobs. 575 00:35:40,860 --> 00:35:46,300 So like Microsoft is just such an interesting idea. 576 00:35:46,300 --> 00:35:50,540 One portal, you log in and you can do everything in one particular place. 577 00:35:50,540 --> 00:35:56,460 Do you think that's more of a behavioral pattern with just workers and families in general 578 00:35:56,460 --> 00:36:00,980 that they just want one station to go to and thus that is the case? 579 00:36:00,980 --> 00:36:07,040 Or do you think people will still gravitate to whoever is the best product in the market 580 00:36:07,040 --> 00:36:09,900 or is ease of use the main reason why this is occurring? 581 00:36:09,900 --> 00:36:11,220 I think there's two points there. 582 00:36:11,220 --> 00:36:14,420 I think for Microsoft, it's often business decisions. 583 00:36:14,420 --> 00:36:17,500 So it's businesses making that decision and the ability to go with Microsoft and everything 584 00:36:17,500 --> 00:36:20,160 under one billing system, you know, it's going to be good. 585 00:36:20,160 --> 00:36:26,060 You know, it's going to be, if not best in class close to that is pretty compelling. 586 00:36:26,060 --> 00:36:28,180 It's very hard to beat that logic. 587 00:36:28,180 --> 00:36:30,860 But the other point is, you know, you're right. 588 00:36:30,860 --> 00:36:33,980 You know, we all picked up so many subscriptions over the last two years, didn't we? 589 00:36:33,980 --> 00:36:36,500 You know, whether it was like Evernote or like Calendly or something. 590 00:36:36,500 --> 00:36:39,940 You're just getting billed both on a business perspective and like on a personal basis by 591 00:36:39,940 --> 00:36:41,900 so many different things. 592 00:36:41,900 --> 00:36:46,540 And one of the kind of bear cases that kind of manifested was that people would start 593 00:36:46,540 --> 00:36:48,260 to cancel those subscriptions. 594 00:36:48,260 --> 00:36:52,740 And that does, I mean, all those companies are still, a lot of those companies still 595 00:36:52,740 --> 00:36:53,740 performing really well. 596 00:36:53,740 --> 00:36:55,300 So an example would be Monday. 597 00:36:55,300 --> 00:37:01,500 So Monday does kind of project management on a web-based project management. 598 00:37:01,500 --> 00:37:03,340 There's plenty of, there's multiple competitors. 599 00:37:03,340 --> 00:37:05,300 Asana is another one. 600 00:37:05,300 --> 00:37:08,940 You can definitely use products from Google, from Microsoft to do the same thing. 601 00:37:08,940 --> 00:37:12,980 But you know, those companies are still pouring pretty strong growth. 602 00:37:12,980 --> 00:37:16,540 They came out with blurt results recently and then rallied really fast. 603 00:37:16,540 --> 00:37:18,340 So it's hard to tell. 604 00:37:18,340 --> 00:37:20,140 Like there is that fatigue, that subscription fatigue. 605 00:37:20,140 --> 00:37:21,500 That's definitely a thing. 606 00:37:21,500 --> 00:37:25,860 But how much of that, it hasn't really seen it in the numbers yet. 607 00:37:25,860 --> 00:37:30,900 But it's an interesting point. 608 00:37:30,900 --> 00:37:34,580 Every now and then you have to like cancel your credit card and get a new one just so 609 00:37:34,580 --> 00:37:39,660 you can get all the things that you signed up for. 610 00:37:39,660 --> 00:37:42,860 But we always advocate, you know, looking after the customers, which we have and things 611 00:37:42,860 --> 00:37:47,300 that we've subscribed to, of course. 612 00:37:47,300 --> 00:37:54,700 Just looking again, back in what's the portfolio and looking forward for the next six to nine 613 00:37:54,700 --> 00:38:00,340 months, where do you think, I suppose as a subcategory, the most prominent growth is 614 00:38:00,340 --> 00:38:01,340 going to come from? 615 00:38:01,340 --> 00:38:04,460 It's a good question. 616 00:38:04,460 --> 00:38:08,580 I mean, there's companies like, for example, in the network security that you're just going 617 00:38:08,580 --> 00:38:09,580 to power on. 618 00:38:09,580 --> 00:38:10,580 You know, there's those. 619 00:38:10,580 --> 00:38:17,580 I think the big question for us is what happens to e-commerce and does that return to trend 620 00:38:17,580 --> 00:38:18,580 and do other business? 621 00:38:18,580 --> 00:38:24,620 There's a lot of companies that posted triple digit growth, sometimes two years in a row 622 00:38:24,620 --> 00:38:26,460 over the COVID period. 623 00:38:26,460 --> 00:38:29,280 But before that, they're growing at 40, 50, 60 percent. 624 00:38:29,280 --> 00:38:33,100 This year, for example, Shopify, you know, kind of 16 percent. 625 00:38:33,100 --> 00:38:34,100 Does that re-accelerate? 626 00:38:34,100 --> 00:38:36,220 Or has it slowed down? 627 00:38:36,220 --> 00:38:37,940 That's like a really tough question. 628 00:38:37,940 --> 00:38:39,420 Is there pent up demand that's building? 629 00:38:39,420 --> 00:38:43,060 You know, did everybody buy all their stuff over the last one, two years, not buying it 630 00:38:43,060 --> 00:38:47,260 this year, but might return to buying online again over the next year? 631 00:38:47,260 --> 00:38:50,740 That's I think that's an open question. 632 00:38:50,740 --> 00:38:53,860 If that growth does resume, then they'll probably be some of the best performing stocks in the 633 00:38:53,860 --> 00:38:58,740 market because right now they're priced as though that growth will never come back. 634 00:38:58,740 --> 00:39:01,820 And there's another thing like, you know, we've been pretty life sciences focused, but 635 00:39:01,820 --> 00:39:03,260 we should have been more healthcare focused. 636 00:39:03,260 --> 00:39:04,260 We should have gone broader. 637 00:39:04,260 --> 00:39:06,120 Like really, we had a huge drawdown. 638 00:39:06,120 --> 00:39:11,340 We could have avoided that by having a big allocation to, you know, mid tier pharmaceutical 639 00:39:11,340 --> 00:39:13,740 companies that were doing extremely well. 640 00:39:13,740 --> 00:39:14,740 Couple of examples. 641 00:39:14,740 --> 00:39:19,900 Well, obviously you've got, it's just a general bias that we've had, you know, I was big in 642 00:39:19,900 --> 00:39:23,500 Moderna and we did pretty well out of that, eventually sold out, but we didn't buy Pfizer. 643 00:39:23,500 --> 00:39:26,620 But obviously on a risk reward basis, Pfizer has probably done better. 644 00:39:26,620 --> 00:39:29,500 You know, it's held onto those gains much better. 645 00:39:29,500 --> 00:39:32,180 And it's rallied when the market sold off. 646 00:39:32,180 --> 00:39:38,380 So again, even a small, a little bit less growth, a little bit more biotech, a little 647 00:39:38,380 --> 00:39:42,700 bit more Pfizer might have done, would have really helped us out. 648 00:39:42,700 --> 00:39:46,460 One thing that is really exciting is a company called Alnylam, which is our number one, our 649 00:39:46,460 --> 00:39:48,740 largest holding in the space. 650 00:39:48,740 --> 00:39:52,480 So they've got six, it's kind of like a mid tier pharmaceutical company. 651 00:39:52,480 --> 00:39:57,980 So losing money, but they've got six company, sorry, six products being marketed today. 652 00:39:57,980 --> 00:40:01,060 They basically do RNAi, so they're interference RNA. 653 00:40:01,060 --> 00:40:06,100 At the moment that accesses the liver, so they're basically treating liver diseases. 654 00:40:06,100 --> 00:40:12,980 But unlike say Moderna, which has one mRNA vaccine, like I said, they've had six approvals 655 00:40:12,980 --> 00:40:17,460 and they just had a very important one, which will probably triple their revenues. 656 00:40:17,460 --> 00:40:20,900 It's basically for a liver condition that creates proteins. 657 00:40:20,900 --> 00:40:24,980 And this treatment is for one that when the proteins accumulate in your heart. 658 00:40:24,980 --> 00:40:29,220 So it's estimated a lot of heart attacks, a lot of heart disease, perhaps 150, 200,000 659 00:40:29,220 --> 00:40:33,420 people in the US have this, can actually be attributed to this, but we didn't know until 660 00:40:33,420 --> 00:40:34,420 recently. 661 00:40:34,420 --> 00:40:41,740 And this is an effective, this is likely to be an effective cure. 662 00:40:41,740 --> 00:40:46,460 And if so, that single approval will probably triple their revenues and Alnylam is trading 663 00:40:46,460 --> 00:40:49,880 basically where it was six months ago before that. 664 00:40:49,880 --> 00:40:53,060 So it didn't fall as much as some of the other life science things. 665 00:40:53,060 --> 00:40:59,900 But again, you've got a company that's massively delivered over the last few months that has 666 00:40:59,900 --> 00:41:02,660 barely moved from where it was in November. 667 00:41:02,660 --> 00:41:06,740 So there's a ton of opportunities like that. 668 00:41:06,740 --> 00:41:09,540 And they also have the benefit of trading, they have nothing to do with the cycle. 669 00:41:09,540 --> 00:41:12,020 We don't need to worry what people are going to spend on. 670 00:41:12,020 --> 00:41:16,460 We don't worry if e-commerce is going to return to growth, all those big questions. 671 00:41:16,460 --> 00:41:18,140 That part of the market is extremely defensive. 672 00:41:18,140 --> 00:41:20,700 It's completely acyclical or largely acyclical. 673 00:41:20,700 --> 00:41:25,940 That's not to say the stock prices aren't cyclical, they were ultra cyclical, but the 674 00:41:25,940 --> 00:41:31,860 actual fundamental results that are delivered, it's healthcare. 675 00:41:31,860 --> 00:41:38,020 So last question, is there any final thoughts that you want to discuss or anything you want 676 00:41:38,020 --> 00:41:39,500 to leave the listeners with? 677 00:41:39,500 --> 00:41:44,220 Yeah, look, I think we obviously need to do, the drawdown we took was much bigger than 678 00:41:44,220 --> 00:41:45,220 what we expected. 679 00:41:45,220 --> 00:41:51,100 It really was that second leg down in the second quarter of this year. 680 00:41:51,100 --> 00:41:55,860 We were seeing some huge gains over 2020 and 2021. 681 00:41:55,860 --> 00:42:00,660 So we should have locked more of those in and we will structure that into the portfolio 682 00:42:00,660 --> 00:42:02,660 in the future. 683 00:42:02,660 --> 00:42:07,540 I think in general, we need to take more... 684 00:42:07,540 --> 00:42:13,860 We really want to be focused on companies that are trending up, they're really delivering. 685 00:42:13,860 --> 00:42:15,300 And so I think our focus now is... 686 00:42:15,300 --> 00:42:19,660 But those lessons are lessons that are most relevant at the top of the next cycle. 687 00:42:19,660 --> 00:42:21,580 They're not really relevant today. 688 00:42:21,580 --> 00:42:26,700 Now it's crystal clear that, especially a month ago, I didn't know a single professional 689 00:42:26,700 --> 00:42:30,740 investor amongst anyone that I spoke to, the thought markets would do anything other than 690 00:42:30,740 --> 00:42:32,500 continue to trend down. 691 00:42:32,500 --> 00:42:37,540 After the biggest sell off in 12 years, when the liquidation got so extreme that you had 692 00:42:37,540 --> 00:42:40,540 so many more companies trading for less than cash than ever. 693 00:42:40,540 --> 00:42:46,340 At that moment, that was when every professional I knew, almost with no exception, a couple 694 00:42:46,340 --> 00:42:49,060 of exceptions, was extremely bearish on the market. 695 00:42:49,060 --> 00:42:52,540 At the same time, valuations have come all the way down. 696 00:42:52,540 --> 00:42:57,420 And you're seeing the Fed still quite hawkish, but the latest inflation print was basically 697 00:42:57,420 --> 00:42:59,080 flat month on month. 698 00:42:59,080 --> 00:43:02,540 So obviously there are big price increases over the last 12 months, but month on month, 699 00:43:02,540 --> 00:43:06,780 like over the last four weeks, the four weeks that this data was measured over, there was 700 00:43:06,780 --> 00:43:08,620 no inflation whatsoever. 701 00:43:08,620 --> 00:43:11,660 So the market is completely positioned the opposite way. 702 00:43:11,660 --> 00:43:18,220 If you think about where the opportunity is, there's no doubt in my mind that the opportunity 703 00:43:18,220 --> 00:43:21,940 and the best returns will come from people that are buying now, that are taking these 704 00:43:21,940 --> 00:43:22,940 opportunities. 705 00:43:22,940 --> 00:43:26,140 Now obviously we'll kind of bullish on these growth companies over the last two, three, 706 00:43:26,140 --> 00:43:27,140 four, five years. 707 00:43:27,140 --> 00:43:32,140 And we've largely held them through these kind of hair raising drawdowns, including 708 00:43:32,140 --> 00:43:36,260 like market leaders like Michael Delibre that have continued to deliver throughout. 709 00:43:36,260 --> 00:43:41,980 But in my mind, it's crystal clear that the opportunity now is to the upside, given the 710 00:43:41,980 --> 00:43:48,580 extent of the sell off, the huge positioning shift from max bullish to max bearish and 711 00:43:48,580 --> 00:43:49,900 kind of where we are in valuations. 712 00:43:49,900 --> 00:43:52,180 So that's kind of how I see things at the moment. 713 00:43:52,180 --> 00:43:55,660 Obviously plenty of things to improve on from us. 714 00:43:55,660 --> 00:43:58,660 And ultimately we need to execute now as well. 715 00:43:58,660 --> 00:44:03,060 And we're going to continue to focus on these companies that are posting these results. 716 00:44:03,060 --> 00:44:05,620 So what are the best things to own on the back end of this? 717 00:44:05,620 --> 00:44:10,660 There's probably going to be small mid cap growth companies that are growing 50 to 100% 718 00:44:10,660 --> 00:44:14,700 that are down 70, 80% trading cheaper than they ever have before, but are still posting 719 00:44:14,700 --> 00:44:16,340 brilliant numbers. 720 00:44:16,340 --> 00:44:20,980 That's probably our thesis over the next six, 12 months is that they will be the best performers. 721 00:44:20,980 --> 00:44:24,380 And usually under most market environments, companies that deliver numbers like that are 722 00:44:24,380 --> 00:44:26,060 the best performers. 723 00:44:26,060 --> 00:44:31,220 And coming off this kind of valuation low at the back end of this sell off, we think 724 00:44:31,220 --> 00:44:35,860 that will be the case, you know, that short, medium and hopefully longterm as well. 725 00:44:35,860 --> 00:44:40,700 Michael, if anyone's listening to this and wants to find out more or get in contact, 726 00:44:40,700 --> 00:44:41,700 what do you recommend? 727 00:44:41,700 --> 00:44:49,340 Just go to our website, www.frazyscapalpartners.com or contact me directly at michael at frazyscapalpartners.com 728 00:44:49,340 --> 00:44:50,340 as well. 729 00:44:50,340 --> 00:44:51,340 Perfect. 730 00:44:51,340 --> 00:44:55,500 Michael, thank you very much for speaking with us on the rate of change and I hope you 731 00:44:55,500 --> 00:44:56,500 have a great day. 732 00:44:56,500 --> 00:44:57,500 Thanks Murdoch. 733 00:44:57,500 --> 00:44:58,500 Hope that was interesting and thanks for having me on. 734 00:44:58,500 --> 00:45:01,820 Fantastic. 735 00:45:01,820 --> 00:45:05,780 Any views expressed in this recording do not represent the view of any other third party 736 00:45:05,780 --> 00:45:08,460 and other sole personal opinions of the speaker. 737 00:45:08,460 --> 00:45:12,460 Any reference to financial product does not constitute advice or recommendation and before 738 00:45:12,460 --> 00:45:16,420 any action, you should seek proper advice from your financial professional. 739 00:45:16,420 --> 00:45:23,260 Australian listeners should head to www.moneysmart.gov.au to find more information on obtaining financial 740 00:45:23,260 --> 00:45:24,260 advice. 741 00:45:24,260 --> 00:45:29,940 To get in touch with York, head to our website www.yorkwelf.com.au.