Hi, I'm Murdoch Gaddi and welcome back to The Rated Change.
The Rated Change is a podcast which explores the ever-shifting momentum of financial markets
through the eyes of the leading managers in wealth management.
In today's broadcast, I'm speaking with Michael Frazes, the founder and portfolio manager at Frazes Capital Partners.
Frazes Capital Partners is an Australian-based fund manager that specializes in growth investments
in technology and the life sciences space.
Today we are talking to him about their two strategies.
Firstly, the main Frazes Fund, which invests in listed, fast-growing companies.
And secondly, the Frazes Venture Fund, which also invests in the same technology and life sciences space,
but they're targeting early emerging, unlisted or even pre-IPO opportunities.
In this broadcast, we explore the dramatic volatility that we've seen in recent months or even years in the growth assets space.
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.
I also found it very interesting and I hope you do as well, because Michael really delves in and discusses a few companies
which have had substantial drawdowns over this period from about November last year.
And he believes that this move or drawdown doesn't really reflect the true futures of these companies,
especially just after earnings season.
So, if you like what you hear, please reach out to me with your thoughts and questions at mgatty at ywm.com.au.
Before considering any investments, we encourage you to both listen to the disclaimer at the end of the broadcast
and to seek professional advice.
We would like to reiterate that this broadcast isn't designed nor is it intended to be specific advice.
I really hope you enjoy the conversation as much as I did, so sit back and relax.
Michael Frazes, welcome to the Rate of Change with York Off Management.
Hi, Matt, thanks for having me on.
Why don't we start things off by telling us a little bit about who Michael Frazes is,
your background and how you got into financial markets.
Sure. So, my background was I studied chemistry at university,
did a master of research and then worked in private equity in London for about five years.
It was kind of private equity, but like with a focus on discreet credit, very different to what I'm doing now.
And I set up this fund four years ago and had a fund running for two years before that as well.
We obviously focus on companies with like very fast growing companies across technology
and the life sciences, healthcare, focusing on companies with like, you know,
explosive growth and true customer love.
That's our little catchphrase to describe what we do.
True customer loves a really interesting one.
And there's a number of questions I want to ask, but I really want to touch on this.
It's more regarding the conversation of growth at any price compared to, you know, growth at a reasonable price.
Why do you think after COVID as an example, there was such a move in that space?
And what's happening if you're a CEO of a company right now?
Do you continue that strategy or people tightening the belt?
What do you think is currently happening?
Well, I think things changed a lot, you know, over the last year.
So, COVID caused a huge uplift, a huge change in the way people are spending money.
That's clear. We all kind of noticed it with our own spending.
Then a lot of companies kind of assumed that that would, or invested such that that would continue.
In some cases it did, in some cases it didn't.
So, I think it's kind of been a very sharp shift away from certain sectors.
But really those moves were obviously magnified several times in the equity market.
You know, whereas companies had their best years, equity valuations exploded based on that growth.
And now they're having a lot of these companies are still growing, still having solid years.
You know, the equity market has gone all the way to the other side.
And these companies are now trading cheaper than they ever had.
You know, to give a classic example, something like Shopify, which posted, you know,
triple digit growth, you know, one of its best years and was trading extremely expensively.
And has now gone the other way and is trading cheaper than it's ever traded in its trading history.
Even while still posting, you know, low growth,
but it's not like it's shrinking or going bankrupt or anything like that.
But the valuation, the fundamentals have moved, but the valuations have moved vastly more.
Does that answer your question?
Yeah, no, it does. It just actually brings more questions to mind.
But it's just, it's interesting, such a large movement.
And then we just see such a polarizing shift from when the central bank,
specifically the Fed, made a decision, what, over the Christmas break, right?
And then how much did it come off in January, the Nasdaq?
And I think we're down, what, about 30% plus a bit more?
I think the drawdown was more, but we'll be down a bit less because there's been a bit of a rally.
There's been a big rally just recently.
Why do you think that rally's been?
Do you think it's earnings season related?
Or do you think it's, you know, the low's in for this current period of time?
Or what do you think?
I think the reality is, is companies are still reporting pretty well.
You know, I think the last that I saw was two thirds of companies were beating, you know, estimates.
So everyone's saying, and we're clearly, we might be in a, probably we're in a technical recession
if you define it as two quarters of negative GDP growth in the US, which I think most people would.
But the reality is most companies are still doing really well.
So the real question should be like, why did they drop 90% or 80% in cases of companies like Shopify?
You know, that was not reflected by the move in the fundamentals whatsoever.
I mean, in terms of why there's a rally, I mean, think about like, I think what happened was,
it was kind of the end of, 2022 was kind of the end of 20 years of increasing investment in tech and growth.
You know, obviously from the lows of 2000, 2002, that must have, you know,
there are very few tech focused, tech forward, innovation focused managers that made it through that period.
You know, if any, you know, almost nobody did.
Now, if you have to think about who did make it through, people like Masayoshi Son, you know,
there's a really small pool of people, of funds that made it through.
So basically what you're left with people who are generally very cynical on technology and cynical on growth, very value focused.
And then what happened after that is from those crazy lows, where, you know,
companies like Amazon were trading for next to nothing and a lot of companies that were still delivering and growing,
that weren't like kind of the companies with no revenues, they're actually delivering on fundamentals.
You know, they then rallied more or less for 20 years with like a hiccup in the GFC.
You know, even in 2008, 2009, they're often the best performers amongst large caps.
And so over that period, you know, people started investing more and more in the space.
And over the last few years, that was just magnified.
And then you reached a point in November where all the best performing managers were generally the ones that were more weighted towards that.
So if you think about a large cap US fund manager, the odds are their 10 year performance depends almost entirely on
whether they were invested in Google, Microsoft, Amazon, Facebook, not necessarily some random niche tech companies,
like what was the allocation to the big tech companies throughout that decade?
And you could basically rank managers on their performance based on how much of those companies they owned.
And so that level of performance obviously attracted a huge amount of investment.
And it's kind of like a boat, you know, everyone ran to one side.
It was kind of like a 20 year run.
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.
It was a huge unwind of that.
And certainly some of that was very, very justified.
But the lows in June, it was pretty wild.
Like you had companies trading for half cash, you know, more companies were trading for less than cash than at any time in history.
So not like...
Do you have an example?
We've got several examples.
I mean, the biotech sector, basically everything we looked at in that.
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.
So typically when something...
Typically when a biotech gets, sorry, fails one of its trials, it'll trade down to cash.
In this case, you had companies succeeding in trials, targeting huge markets and then trading right below cash.
Like there was no floor there, it just went straight through.
Now, obviously what happened since then is that companies up like six times in the last few weeks.
So there was a bit of...
I mean, like it did get pretty extreme in terms of the movements.
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.
And, you know, it's the same way that money kind of chased growth managers on the way up.
Short sellers did extremely well.
And then as prices went lower, short interest rose across the board.
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.
And then you had maximum short interest. So it seems like that's unwinding now as well.
We discussed the short component affair.
It's a very interesting topic.
Like what do you do?
You build a strategy for such a long period of time that's long only.
And then you have these particular events.
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,
the relationship between growth, inflation, stagflation and deflation, they want to understand, you know, how do you use your strategy?
Like where does it best fit?
What do you think?
Look, we'll always be focused on, you know, forward companies that are growing really fast, hitting their numbers.
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.
But it's not always that easy.
For example, there have been multiple periods where investment back central banks have raised rates and equities have done relatively well.
In the 90s, there were multiple periods of raising rates and equities performed well.
Think about 1980 and 1982, that had much higher rates, much higher inflation and much like a much more severely tightening central bank.
But, you know, equities dropped over, I think it was two years, 27, 30 percent.
I imagine small caps would have done much worse.
But large caps anyway, they recovered that loss in four months.
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.
It's very difficult to do it if it's possible.
So there's this and that was kind of one of the part of thinking that guided us.
You know, we're like this.
We know our companies are performing extremely well.
We can see that in the data.
You know, we had companies that, you know, were triple the size they were at the highs that dropped 70 percent.
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.
You know, there was immense dislocations, but we didn't know when that would stop.
As it turns out, it got a lot longer and a lot deeper than we anticipated.
But the good news, if you kind of stay consistent, is it does matter.
But in a way, you can still it doesn't matter because eventually things will recover.
Things will normalize.
You know, value still does matter.
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?
What asset classes are in there?
What sub like as an example, you say biotech e-commerce.
What specifically exposure do you have and whereabouts is it globally?
Most of it's in the US with about 10 to 15 percent, usually in Australia.
In terms of sectors, you know, we focus on e-commerce, life sciences, health care,
fintech, things like that, you know, companies that sectors that are growing extremely fast,
but did attract a lot of hot money.
And, you know, now they're trading.
They've had a pretty obviously had a pretty tough time in markets lately.
But in many cases, the growth the growth is still coming through at the moment.
So we define it. We kind of look at organic top line growth and we want to see good economics.
And if companies are investing, investing well and getting good return on those dollars,
we're very comfortable with them if they're not getting cash flows today.
And so another way of looking at what happened over the last kind of year or so is the top
of the market people willing to underwrite, you know, 10 year business plans.
So an example that would be Rivian that came out at a hundred billion dollar market cap,
no prospect of, you know, serious cash flows for maybe 10 years
and people willing to value it based on that.
And so people willing to look a really long time out and then at the lows was the opposite.
It was people were willing to value the future at nothing.
You know, it's what cash flows you making today.
Those companies were far more resilient.
A lot of them still sold off significantly, you know, a lot of small cap profitable companies
had similar moves to kind of the growthier ones.
And then something like a biotech.
It's like, okay, you might have a successful trial result in two years.
That stuff got traded that like that was just that had no value ascribed to it whatsoever.
In fact, negative value.
And that's kind of how you saw those things trading for less than cash.
So it swung all the way back in terms of way people looking at those things.
And I think now what happens next is the companies that deliver will end up showing outstanding returns.
The biotechs that end up, you know, getting drugs approved and delivering revenues
or get bought it out will have spectacular returns from here far more than usual.
But obviously the ones that won't deliver will stay on the floor.
It's quite interesting.
And just to give our listeners a bit of idea how the portfolio is structured,
like your top 10 holdings, what percentage is that?
Top 20 holdings percentage is that and how many holdings are in the portfolio?
Oh, we typically have about 40 positions, equity positions at the moment.
The top 20 would be about 50 percent.
I can get the exact numbers.
What's in the top 10?
The top 10, so our largest position is MercadoLibre,
which is the number one e-commerce and fintech platform in South America.
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.
So we bought it, went up, I guess, four or five times from our initial purchase.
It peaked in 2021.
It just reported then.
So it just reported the quarter that was March to June,
which was a quarter in which it had lost half its value, basically, high to low.
You know, it went from say 1200 to 600s, peaked at 2000, just under 2000.
So it was a 70 percent draw from high to low.
You know, they just reported over that quarter, you know, 58 percent organic profit growth,
you know, a massively expanding fintech business, basically everything you could possibly want to see.
And they've been reporting like that for the last year and a half as they've sold off.
So you've got a company and if you add that kind of growth up,
it's about two and a half times the size it was at the end of 2020 in terms of revenues.
You've got a company that's say two and a half times the size and it's down 70 percent at the lows
and it's still reporting blowout returns, no risk of bankruptcy, you know, huge cash balance,
absolutely dominant at large scale, posting amazing numbers.
And we're ultimately guided by those numbers.
And again, you know, obviously companies like that that are growing really fast,
they're going to drop 20, 30, 40, 50 percent often or semi-regularly at least.
But it was really that kind of that last, that second minus 50 percent that kind of happened
across the growth space that caused so much trouble for us.
But ultimately, you know, the fundamentals are important.
They do matter, you know, and since then it's rallied, you know, quite substantially.
It's gone from the 600s up to, you know, over a thousand in the last few weeks.
It's quite a big move, isn't it?
And just thinking about that now, how correlated is the portfolio from a beta standpoint?
So Alis, Nuzi, Moller, welcome to explain what beta is.
How correlated is that to the NASDAQ?
Is it predominantly the NASDAQ or would you use a different index?
I think there's two correlations.
So it's all very correlated with kind of long duration assets.
You know, at the moment it's kind of like these companies investing today for the future.
So they're in that bucket of they can't show you cash flows today, but they can show you,
you know, growing revenues, growing gross profits, return on investment.
They can show all those kinds of metrics.
And so they do kind of trade as one with companies like that.
There is a correlation to tech, but there's also periods where the NASDAQ has performed
much better than us.
For example, on the way down, the NASDAQ was more resilient.
They're much more kind of the largest companies in that, you know, buying back shares and
big cash balances.
But, you know, there's been periods where the NASDAQ's been down 20% plus and we've been
up quite a bit.
So there is a correlation there, but it's not, doesn't always work.
It's not super correlated.
At the moment, we're kind of bounce.
It seems like from the lows, gross stocks are rallying harder than the NASDAQ and the
NASDAQ is moving, moving up more than the S&P.
Well, let's use, let's use numbers.
So when it based out the NASDAQ has rallied, what's the NASDAQ rallied in comparison to
your portfolio in the past, what, only two months, right?
It's a tough one.
I guess from the lows, we bounced about 40%.
So I reckon I'd have to check, but I'd say the NASDAQ's probably done about half that,
less than half that.
And I'd say in general, you know, we do have, it is very high beta portfolio.
In general, we expect to make more when the market's going up.
And this time we certainly lost more when the market was going down as well.
Absolutely.
We can always learn from history, but we have to plan for the future, right?
So there's a lot of conversation and everyone's really starting to sit and feel it, you know,
with property as an example, rising interest rates, high inflation, go to the groceries.
I think I paid like, what was it, nearly $15 for tomatoes the other week.
It's getting a bit on the high side.
How has the rising rate environment impacted the portfolio and what do you think the impacts
will be for the next six to nine months?
Look, I think there's two parts.
It's like, how does it affect the fundamentals and how does it affect the stock prices?
So there's no doubt that rising inflation triggered, you know, the sharpest rising rates
in 40 years and that caused a huge sell-off from very high valuations and very overweight
positionings in these kinds of growth companies.
So inflation had a huge impact on us in the way that people invested and looked at these
and certainly priced these companies.
In terms of fundamentals, broadly, these companies generally have been able to capture
that inflation.
To give you one example, Disney is a company that dropped about 55%.
It's a consumer business.
You know, the last year, and again, it's another example of like the challenges facing people
investing in growth today.
So in two and a half years, it accumulated something like more subscribers than Netflix
did in 12 and a half.
It's now generated this entire business line where Disney fans, over 100 million, I think
127 million Disney fans are now being billed every single month from their credit card,
cash is being transferred straight from their accounts into Disney's corporate account.
You know, over the next 5, 10, 20 years, that's going to be immensely valuable business and
it's certainly attracted far more people far quicker than anyone really expected.
It's really kind of the upper end of those expectations.
Over that period, the stock was more than cut in half.
And then how does that affect inflation?
To come back to your question, well, they raised their prices for ESPN, the smallest
channel by something like 38%.
They announced similar increases across the Disney Plus range and in the lowest cost Disney
Plus tier, they're going to put ads on as well.
So it's not going to be free with ads, it's going to be lowest cost plus ads.
And so you've got this funny environment where you've got companies that are building
immense new business lines.
Sure, they're definitely spending to do it.
You can't get 100 million people paying you money every month for free.
You know, they're spending.
The stocks are down 50% plus or more.
But you can see the value being created.
It's kind of like that old experiment, like you want a cookie now or two later.
The market's saying, I want a cookie now, I don't care how many cookies I get later.
If it's not here now, I don't...
It's quite funny they've done that with kids and the kids sit there for about 30 seconds
and then eat the cookie.
Yeah, parents correlated with long-term success as individuals.
I don't know if that's a serious study.
You know how people do these studies with like 20 people and draw like wide ranging
conclusions?
I don't know if anybody's kind of gone back and redid it and see if they got the same
results.
But yeah, I mean, it shows the opportunities.
So the companies that do well in invest right correctly, they've been marked down severely.
I think they'll do extremely well in the future.
And actually going back to that inflation question, in the 80s, I'm sure that's basically
what happened.
Like on the back end of these inflationary environments, equities have done extremely
well.
You know, the index went up several times after that in the 80s.
So if you could see thinking about something like Disney, over this period, it's been cut
in half.
It's brought in new business lines, new revenue streams.
It's raising prices dramatically.
Obviously, parks as well are coming back hard.
There's no reason not to think that that could eventually, you know, take, go back to where
it was at the highs and actually push on to new highs.
But if it does, that was over well over 100% return from the lows.
In fact, it has actually, it's one of those companies that has rallied quite strongly
in the last few weeks.
Which brings me on to my next question.
I keep hearing in many different areas and some people are saying that some of the best
businesses out there are staying private for longer.
And a lot of very large private equity firms are trying to get these companies into their
portfolios early on.
Some even saying, and a lot of very, very affluent, very ultra high net wealth investors
are even arguing that is it even worth some of these companies are listing.
And the reason I'm asking this question is you run two strategies, correct?
Correct.
Did you want to speak to the second strategy?
Yes, we have a private investment fund.
The idea was basically to make venture capital investments and back pre IPO investments,
you know, on the way to being listed in the market.
Obviously, the pre IPO market has, you know, stalled lately.
There've been very few IPOs.
There's been a few cap raisings in Australia.
It'd be very interesting to see how those trade in the next few weeks.
Staying private for longer.
So there was a whole like vintage of tech companies that did that.
It's like Airbnb, arguably Spotify, Uber.
You know, they listed at extremely high valuations and broadly, they haven't done particularly
well since then.
So all the returns were kind of captured by the early investors.
I don't think it's that whole industry is kind of in flux at the moment, because a lot
of those private rounds over the last two or three years were done exceptionally high
valuations, 20, 30 times sales, often for software businesses, 100 times plus.
It's now apparent that those companies are not going to be able to list anywhere near
that because you have extremely high quality software businesses, you know, trading under
10 times sales.
But that hasn't necessarily resolved yet, because those companies haven't had to list,
they haven't had to kind of necessarily raise more money at those lower valves.
So it'd be interesting to see how that affects the equation of whether to stay private or
not.
My guess is actually, yeah, I guess it depends what the capital markets are willing to do.
So I think the people that listed have probably had a very tough time of it, probably wish
they were private.
Funds that have had to mark, like listed growth funds have generally done worse than private
growth funds, because the private growth funds can just don't need to mark in the same way.
But then, you know, the best performing companies have generally all been public.
You know, you think about Apple, Facebook, Google, you know, Tesla, they performed, they
had their biggest achievements all while listed companies, Amazon, they were able to tap the
markets very quickly when they needed to, they had their own currency to pay people.
When companies stay private for longer, often it's the employees that do worse.
You know, it's fine for management, they'll always be looked after.
Investors don't need to mark their books, they get the benefit of growth without seeing
the volatility day to day.
If anything goes wrong, employees often lose their entire stake.
It's very hard for them to sell.
It's very hard to know what it's actually worth, particularly at times like this when
prices are moving very fast.
So generally going listing is good for employees and staying private makes things much riskier
for employees.
So that's another consideration, but they don't really make the call.
Which is right.
You know, it's quite an interesting topic.
So how much in that have you deployed or how much is sitting in cash to deploy?
Is there anything interesting you're seeing coming up or you're just holding your powder?
I think there's a couple of interesting things that we're going to write about.
I mean, the final stages of two investments, I'll write about them and post them.
But we decided to go slow as many people did.
Like we're still investing.
We also wanted to see where things settled.
I think now there does seem to be a bit of life back in markets.
For growth investors, a lot of our companies peaked in January 2021.
So it's been over a year and a half now, this kind of sell off.
And that's like on the long end of these things.
Like it's pretty rare that you have two year bear markets.
In fact, it was really kind of 2008, 2009, obviously 2000, 2002.
Then you have to go all the way back to the early 80s.
These things don't happen very often, but we definitely kind of, it does feel like we're
at the back end of one in the sense that prices have massively reset.
They've stabilized.
Things kind of bounced on the bottom for a few months, you know, from May, June, July.
And now August has been strong and you're seeing companies start to go back to the market.
And, you know, there's still a lot of cash, you know, fund managers sitting on a bunch
of cash.
A lot of people have raised VC funds.
The world's not going to stop.
And I think that's also another reason why things have kind of stayed, things are kind
of positive at the moment.
People are realizing the world hasn't stopped.
You know, business is continuing.
These companies are continuing to grow.
There's no reason for them necessarily to keep going down in a straight line to zero.
Well talking about potentially market stopping, you know, we do have some polarizing activities
happening on the global stage.
So with semiconductors as an example, you know, if hopefully it doesn't happen, the
situation with China develops.
What impact will that have?
Is it isolated or doesn't TSM have something like 50 something percent of the supply?
Like have you seen a shift, a company starting to create their own chips now or?
We've seen the US obviously wants to kind of foster a domestic industry.
The China flashpoint is pretty serious.
I mean, look at what the Ukraine war did, right?
That really was probably one of the reasons why we got that second leg down.
It was when energy just, it just had this uncontrollable feel to it.
We didn't know how high energy was going to go.
You didn't know how high prices were going to have to rise.
What that did to like demands from labor, from higher wages.
And that was nothing on the scale of what a Taiwan conflict would be.
On the flip side, I don't think anyone looks at Russia, Ukraine, specifically like the
Chinese leadership and thinks that's something you want to emulate.
You know, they just rolled tanks over the border.
They would have to do an amphibious assault.
It's very hard to kind of see how that will play out.
It wouldn't affect most of our companies, you know, we used to have a decent China exposure.
We don't have that anymore.
It would be indirect.
Even that's kind of unpredictable.
You know, defense companies would probably do pretty well.
Would there be a flight to the US dollar and US government bonds?
Probably.
Rates probably come down.
There's no doubt be a huge shock if there was a full scale war there.
But I'm probably not the best person to comment on that.
Well, let's talk about what you are best to talk about, which is specific companies in
your portfolio.
And we've just come through earnings season.
So what have you seen?
Anything exciting?
Anything you like?
Didn't expect that.
Yeah, look, I think broadly, I think positioning has had a huge impact on doesn't always but
the last year, maybe in the last two years, positioning has had a huge impact on on on
monthly movements.
So at the end of last year, companies reporting really well and getting absolutely smashed.
And we found it difficult because we're like, these are great results.
And they're on track.
And we're confident they'll continue to perform really well.
And that has happened.
You know, in our reporting in this reporting season, companies continue to report with
a couple of exceptions, you know, generally very good numbers.
But unlike the last two earnings season, where even good results were resulting in big sell
offs, this time you're seeing some absolutely atrocious results, or certainly some very
weak results, and companies are rallying really hard.
So as an example, you know, Shopify announced one of its slowest growth rates ever.
So they're going to Toby, the CEO came out and said, you look, he's miscalculated.
So many of us did, and kind of thought that thought that there'd be more demand than there
was.
And he's also going to, you know, sack half the work, half 10% of the workforce, and the
stock rally rallied on that news.
And so that is interesting.
And that's happened across the reporting season, I'd say, is even weak results now are generally
resulting in rallies.
And that's, we can't read too much into it.
But it's a very noticeable difference of where things were, you know, six months ago.
And one thing I'll certainly be always be much more aware of is just really paying very
close attention to price action.
Because there is information in that in terms of how things are, how people are positioned.
There's information that people were massively overextended when companies were reporting
brilliant results and selling off.
Similarly now you're seeing companies report poor results, they're rallying very, very
hard.
And the same way kind of growth year long only investors were kind of thinking, scratching
heads thinking, why is this happening?
Now I can see the similar thing happening from short sellers.
You know, these companies are down 80% and they're confused as to why they're up 50%,
you know, from those lows.
So that's been one feature.
So we talked about MaccadaLibra that reported well.
Another top three position for us is CloudFlare.
So CloudFlare, we always thought was one of the best companies on the planet.
They do basically internet infrastructure.
So everything Cisco used to do, they do on a network cloud basis.
So they've got 200, I guess you'd call them, they basically replicate the internet at multiple
points around the world.
So if you're accessing a US website from Sydney, say, you're probably, it's blazingly fast
because they're probably using CloudRez network.
The site's probably mirrored very close to where you are.
It makes it really fast.
It's really helpful for security.
You know, they're bringing out what they call workers, which is a way to do Amazon style
web apps.
But most of the computing will be done at the edge, which is what they call these kind
of nodes of the network.
So it'll be blazingly fast.
So if you put your app on CloudFlare and build it using CloudFlare workers, it will be much
faster than if you use Amazon, for example, because they built this network.
And it's both physical hardware and also software, you know, the way they balance the traffic.
All that's great.
And it was widely acknowledged by everyone to be amazing.
And you know, the workers, the ability to build apps is an example of how they're able
to use that amazing network that they've got to kind of develop completely new business
lines.
You know, they're still very much at the beginning, not the end of their journey.
But this is one of those companies that trade at like 100 times sales.
Like it's the most one of them, I think at times the most expensive company in the market.
And it dropped from 220 to 120 in March, and then went from 120 to 40 to the low 40s.
And that was the like, that was that was the move that caught us by surprise.
We didn't own it through that period.
We had plenty of companies that, you know, had severe falls over that period as well.
So we picked some of that up, not quite at the lows, but close enough.
Yeah, they then answered over 50% revenue growth.
Everything's on track.
Nothing's changed in the company.
It's just gone from $220 to $40.
And then now up to I think 75 at the last point.
It's a big rally again off of a report that everybody was expecting.
You know, it's maintained just about 50% revenue growth for quite some time now.
But the market reaction now is completely different to the market reaction six months
ago.
Let's keep on the cybersecurity space.
Like me personally, fascinated by this space.
And what's kind of interesting as well, some may argue that the cybersecurity space, if
you look at the NASDAQ, some of the holdings are actually outpacing the recovery of the
broader exposure.
So I'd love to hear your thoughts on that.
And are there any other companies in the portfolio that are in cybersecurity?
And are you considering any others?
Look, we look at CrowdStrike.
Cloudflare is the only one that we have at the moment.
The worry with CrowdStrike is that firstly, there might be better opportunities at the
moment.
There's companies growing equivalent rates that have sold off significantly.
But also on the business side, most of what CrowdStrike does, Microsoft can do, for example.
And that Microsoft question is just huge because they have, it's amazing how dominant that
platform is now.
And there's one thing that I wish we had done is I wish we did, we kind of said, look, we're
not going to invest in Microsoft, Google, Apple, even though we know these are some
of the best companies in the world, but we're going to be focused on being different and
we don't want the much smaller, faster growing companies.
We'll still always do that.
We could have easily had 10, 15, 20%.
It wasn't all or nothing.
And then seeing how even the best companies in these subsectors perform against this juggernaut
that everybody already has a relationship with.
Have you seen that chart of Teams versus Slack?
Where Slack was really cool, Microsoft nearly bought them, apparently didn't, Salesforce
did, and then Microsoft just created their own version.
And then now Teams is vastly ahead of where it is.
And now obviously everybody's already, almost every business on the planet already has a
relationship with Microsoft.
So that bundling aspect just makes it really hard for people to compete.
And so that was a hesitation of us with CrowdStrike.
But then again, they're still posting great numbers.
They're still winning contracts.
They're still performing really well.
That's kind of where we landed on that one.
Well, it's behavioral psychology, right?
So a number of my friends, colleagues, even myself with our company loved the idea that
unfortunately a lot of people were seeking COVID.
So I went to go there and respects, but the one benefit that did come out of it, it wasn't
that like 10 years worth of innovation got condensed into a year.
And it was great until we had to log into 15 different things to do our jobs.
So like Microsoft is just such an interesting idea.
One portal, you log in and you can do everything in one particular place.
Do you think that's more of a behavioral pattern with just workers and families in general
that they just want one station to go to and thus that is the case?
Or do you think people will still gravitate to whoever is the best product in the market
or is ease of use the main reason why this is occurring?
I think there's two points there.
I think for Microsoft, it's often business decisions.
So it's businesses making that decision and the ability to go with Microsoft and everything
under one billing system, you know, it's going to be good.
You know, it's going to be, if not best in class close to that is pretty compelling.
It's very hard to beat that logic.
But the other point is, you know, you're right.
You know, we all picked up so many subscriptions over the last two years, didn't we?
You know, whether it was like Evernote or like Calendly or something.
You're just getting billed both on a business perspective and like on a personal basis by
so many different things.
And one of the kind of bear cases that kind of manifested was that people would start
to cancel those subscriptions.
And that does, I mean, all those companies are still, a lot of those companies still
performing really well.
So an example would be Monday.
So Monday does kind of project management on a web-based project management.
There's plenty of, there's multiple competitors.
Asana is another one.
You can definitely use products from Google, from Microsoft to do the same thing.
But you know, those companies are still pouring pretty strong growth.
They came out with blurt results recently and then rallied really fast.
So it's hard to tell.
Like there is that fatigue, that subscription fatigue.
That's definitely a thing.
But how much of that, it hasn't really seen it in the numbers yet.
But it's an interesting point.
Every now and then you have to like cancel your credit card and get a new one just so
you can get all the things that you signed up for.
But we always advocate, you know, looking after the customers, which we have and things
that we've subscribed to, of course.
Just looking again, back in what's the portfolio and looking forward for the next six to nine
months, where do you think, I suppose as a subcategory, the most prominent growth is
going to come from?
It's a good question.
I mean, there's companies like, for example, in the network security that you're just going
to power on.
You know, there's those.
I think the big question for us is what happens to e-commerce and does that return to trend
and do other business?
There's a lot of companies that posted triple digit growth, sometimes two years in a row
over the COVID period.
But before that, they're growing at 40, 50, 60 percent.
This year, for example, Shopify, you know, kind of 16 percent.
Does that re-accelerate?
Or has it slowed down?
That's like a really tough question.
Is there pent up demand that's building?
You know, did everybody buy all their stuff over the last one, two years, not buying it
this year, but might return to buying online again over the next year?
That's I think that's an open question.
If that growth does resume, then they'll probably be some of the best performing stocks in the
market because right now they're priced as though that growth will never come back.
And there's another thing like, you know, we've been pretty life sciences focused, but
we should have been more healthcare focused.
We should have gone broader.
Like really, we had a huge drawdown.
We could have avoided that by having a big allocation to, you know, mid tier pharmaceutical
companies that were doing extremely well.
Couple of examples.
Well, obviously you've got, it's just a general bias that we've had, you know, I was big in
Moderna and we did pretty well out of that, eventually sold out, but we didn't buy Pfizer.
But obviously on a risk reward basis, Pfizer has probably done better.
You know, it's held onto those gains much better.
And it's rallied when the market sold off.
So again, even a small, a little bit less growth, a little bit more biotech, a little
bit more Pfizer might have done, would have really helped us out.
One thing that is really exciting is a company called Alnylam, which is our number one, our
largest holding in the space.
So they've got six, it's kind of like a mid tier pharmaceutical company.
So losing money, but they've got six company, sorry, six products being marketed today.
They basically do RNAi, so they're interference RNA.
At the moment that accesses the liver, so they're basically treating liver diseases.
But unlike say Moderna, which has one mRNA vaccine, like I said, they've had six approvals
and they just had a very important one, which will probably triple their revenues.
It's basically for a liver condition that creates proteins.
And this treatment is for one that when the proteins accumulate in your heart.
So it's estimated a lot of heart attacks, a lot of heart disease, perhaps 150, 200,000
people in the US have this, can actually be attributed to this, but we didn't know until
recently.
And this is an effective, this is likely to be an effective cure.
And if so, that single approval will probably triple their revenues and Alnylam is trading
basically where it was six months ago before that.
So it didn't fall as much as some of the other life science things.
But again, you've got a company that's massively delivered over the last few months that has
barely moved from where it was in November.
So there's a ton of opportunities like that.
And they also have the benefit of trading, they have nothing to do with the cycle.
We don't need to worry what people are going to spend on.
We don't worry if e-commerce is going to return to growth, all those big questions.
That part of the market is extremely defensive.
It's completely acyclical or largely acyclical.
That's not to say the stock prices aren't cyclical, they were ultra cyclical, but the
actual fundamental results that are delivered, it's healthcare.
So last question, is there any final thoughts that you want to discuss or anything you want
to leave the listeners with?
Yeah, look, I think we obviously need to do, the drawdown we took was much bigger than
what we expected.
It really was that second leg down in the second quarter of this year.
We were seeing some huge gains over 2020 and 2021.
So we should have locked more of those in and we will structure that into the portfolio
in the future.
I think in general, we need to take more...
We really want to be focused on companies that are trending up, they're really delivering.
And so I think our focus now is...
But those lessons are lessons that are most relevant at the top of the next cycle.
They're not really relevant today.
Now it's crystal clear that, especially a month ago, I didn't know a single professional
investor amongst anyone that I spoke to, the thought markets would do anything other than
continue to trend down.
After the biggest sell off in 12 years, when the liquidation got so extreme that you had
so many more companies trading for less than cash than ever.
At that moment, that was when every professional I knew, almost with no exception, a couple
of exceptions, was extremely bearish on the market.
At the same time, valuations have come all the way down.
And you're seeing the Fed still quite hawkish, but the latest inflation print was basically
flat month on month.
So obviously there are big price increases over the last 12 months, but month on month,
like over the last four weeks, the four weeks that this data was measured over, there was
no inflation whatsoever.
So the market is completely positioned the opposite way.
If you think about where the opportunity is, there's no doubt in my mind that the opportunity
and the best returns will come from people that are buying now, that are taking these
opportunities.
Now obviously we'll kind of bullish on these growth companies over the last two, three,
four, five years.
And we've largely held them through these kind of hair raising drawdowns, including
like market leaders like Michael Delibre that have continued to deliver throughout.
But in my mind, it's crystal clear that the opportunity now is to the upside, given the
extent of the sell off, the huge positioning shift from max bullish to max bearish and
kind of where we are in valuations.
So that's kind of how I see things at the moment.
Obviously plenty of things to improve on from us.
And ultimately we need to execute now as well.
And we're going to continue to focus on these companies that are posting these results.
So what are the best things to own on the back end of this?
There's probably going to be small mid cap growth companies that are growing 50 to 100%
that are down 70, 80% trading cheaper than they ever have before, but are still posting
brilliant numbers.
That's probably our thesis over the next six, 12 months is that they will be the best performers.
And usually under most market environments, companies that deliver numbers like that are
the best performers.
And coming off this kind of valuation low at the back end of this sell off, we think
that will be the case, you know, that short, medium and hopefully longterm as well.
Michael, if anyone's listening to this and wants to find out more or get in contact,
what do you recommend?
Just go to our website, www.frazyscapalpartners.com or contact me directly at michael at frazyscapalpartners.com
as well.
Perfect.
Michael, thank you very much for speaking with us on the rate of change and I hope you
have a great day.
Thanks Murdoch.
Hope that was interesting and thanks for having me on.
Fantastic.
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