The Rules of Investing

Is this the least crowded opportunity in the market today?

In the world of investing, listed markets dominate the airwaves due to their ease of access, broker coverage and liquidity. For that reason, unlisted shares can often take a back seat.
But companies aren’t born on the listed markets. Many of the best opportunities exist in the unlisted, pre-IPO space.
Today’s guest is Dane Roberts – a portfolio manager at Fifth Estate Asset Management. Fifth Estate invest in pre-IPO, IPO, unlisted and listed microcap and small cap companies. Its first fund was launched in 2021, delivering 13.29% since then – impressive considering the extreme volatility of that period. That fund’s closed to new investment, but they’re about launch their second fund with much the same strategy.
In today’s episode, we discuss what it takes to invest in unlisted companies, how they compare to their listed peers, the outlook for unlisted stocks, and why now could be the perfect time to invest at the pre-IPO stage. 
Note: This interview was recorded on Friday May 5, 2023. 
Timestamps
1:49 - Birds-eye view of pre-IPO and IPO
4:00 - Liquidity in unlisted markets
6:00 - Debt vs equity
10:30 - The perfect time to put money to work
12:45 - Finding and filtering unlisted companies
15:30 - How unlisted assets are priced
18:40 - When should a company list?
22:20 - A company storming towards IPO
27:20 - Fund 2
30:24 - In it for the long haul
33:00 - Monetary policy on the street
35:40 - The comeback kid (ASX: NXT)
38:45 - An infrastructure company surrounded by moats

No lithium, no worries for this outperforming small cap manager

When volatility rattles markets, micro caps and small caps typically suffer the biggest drawdowns. But markets have a reliable habit of reverting to the mean sooner or later. That’s very good news if you’re investing in small caps, arguably, now!
This week’s guest is Matthew Booker, portfolio manager and co-founder at Spheria Asset Management. Matt’s managed small company portfolios for over 15 years, consistently outperforming the index.
The Spheria Australian Microcap Fund has outperformed the S&P/ASX Small Ordinaries Accumulation Index by over 7% per annum since inception, while the Smaller Companies fund has outperformed that same index by over 3% per annum. Just as importantly, they’ve managed to preserve capital and outperform the benchmark through the volatility of the past year. And he's done it without lithium stocks!
We discuss:
where we are in the small cap cycle;
the opportunities Spheria are targeting;
capital preservation; and
the former market darling that’s back in business. 
Timestamps
1:50 - Where we are in the small cap cycle
3:30 - Lessons from the past year
5:30 - Preserving capital
6:50 - Outperforming without lithium
10:00 - The best is ahead for small caps and microcaps
11:00 - Filtering down an enormous universe of stocks
12:40 - "Inverse broker" indicator
14:00 - Investing in "legitimate growth"
16:55 - Red flags
21:20 - Takeovers
23:00 - Outlook for M&A
28:00 - Return of an unloved market darling?
35:30 - A bottom-drawer stock (from New Zealand)
Note: This interview was recorded on Wednesday April 19, 2023. 

James Gerrish: Low risk equity returns are back (and these stocks provide them)

Some fund managers don't freely disclose how they go about business, for fear of losing a competitive edge (or maybe letting on that they don't have any edge at all). 
Then there's the other school of thought - tell investors how you operate, what you're thinking, and forge ahead as a thought leader. Then, if you're worth your salt, investors pick up what you're putting down and entrust you to manage their capital. 
Today's guest on The Rules of Investing occupies the extreme latter end of that spectrum.
James Gerrish  is the 9th most followed contributor on Livewire. Subscribers might know him best as author of the daily match out report, but that’s certainly not the only hat he wears.
He’s also on the tools – running money at Market Matters across portfolios specialising in growth, income, international equities, emerging companies, and global macro.
We discuss:
the benefit of holding short-term views when long-term investing;
the market signals that matter most
the sectors with the best risk adjusted return
and the one thing investors should fear
Note: This episode was recorded on Wednesday December 12, 2023. 
Timestamps1:20 - Managing short-term views with long-term investing4:30 - Short-term noise8:50 - Banking crisis and deposit flight10:40 - The most important signals across sectors and asset classes15:30 - Are bond yields too high?19:40 - Investing is a game of inches, not yards23:50 - How important is the index?25:00 - Risk across today's sectors28:00 - The best risk-adjusted return33:00 - Know your risk, and invest accordingly35:40 - Discounting macro is a cop out42:00 - The thing that should frighten all investors45:50 - Look for companies with warts48:00 - The market's getting ahead of itself49:00 - Biggest career win and loss52:00 - A company for all seasons

Why Morgan Stanley is overweight passive in this volatile environment

We all know the stats. Over the long term, the majority of active investment managers will underperform their benchmarks. 
According to SPIVA data, more than 78% of funds underperformed the S&P/ASX 200 over the past decade, while more than 91% of funds underperformed the S&P 500 over the same time period. These rates improve significantly over shorter time horizons, with 42% of Aussie managers outperforming their benchmark over a one-year period, and 49% of US-based managers doing the same. 
Given the volatility of today's market, and his own findings from more than 15 years specialising in asset allocation in global and Australian markets, Morgan Stanley Wealth Management's Head of Research and Investment Strategy Alexandre Ventelon believes investors should remain conservatively positioned. 
This means a greater emphasis on (and portfolio allocation to) fixed income markets, but also, a greater reliance on passive products - like index-tracking exchange-traded funds (ETFs) - as we continue to navigate this short-term volatility. And right now, Morgan Stanley's model portfolios are heavily skewed towards passive products. 
"With a short timeline, the best way to get there is with a passive instrument," Ventelon explains. 
"The managers that have outperformed their markets on a one-year basis are often very different from one year to the other, and that's the issue. If you want to go with a tactical trade and you just choose one manager, based on how they performed last year, the odds will be against you." 
In this special Listed Series special of The Rules of Investing podcast, Livewire's Ally Selby learns which asset exposures are best played with passive products in today's market, the circumstances in which passive and active products should not be used, as well as Morgan Stanley's outlook on the ETF market over the next decade.  
Ventelon also shares why Morgan Stanley still remains bullish on the outlook for bonds. Plus, for a little bit of fun, we asked him to build a portfolio of listed products for the market today, while only picking one ETF from each asset class. 
Timestamps
2:12 - How efficient the market is today 
5:37 - How passive funds have changed the world of investing 
8:12 - Are passive or active products better suited to today's market 
13:22 - The instances where passive products should not be used in portfolios 
18:17 - The instances where active products should not be used in portfolios 
24:42 - Criticisms of passive products - do they hold any weight? 
28:20 - What the market will look like in 10 years’ time
33:53 - Why Morgan Stanley is bullish on bonds (and why he is using VGB, VIF and VACF to play it) 
38:45 - Ventelon's top ETFs for today's market (A200, WVOL, QUAL, VGB and VIF) 

John Ayoub reveals WAMs playbook for volatile markets

Events of the past few weeks have cast doubt over the stability of the financial system. First Silicon Valley Bank and its troubled regional banking peers, then Credit Suisse.
In typical fashion, the US Federal Reserve has stepped in to backstop the sector. In the case of Credit Suisse, UBS scooped it up for cents on the dollar. 
These events have changed the way corporations perceive risk, according to this week's guest on the The Rules of Investing John Ayoub, Portfolio Manager for the Wilson Asset Management's Leaders Fund (ASX: WLE). 
How does this play out for investors? Equity markets remain investable, according to Ayoub, but to do it right takes an approach that factors in the macro and micro. 
Which is good, because that's exactly the approach taken by the WAM Leaders Fund, which was launched by Ayoub and colleague Matthew Haupt. 
In today’s episode, we discuss: 
the global banking crisis, and how this risk affects the Australian market;
the political risk investors are underestimating;
the way WAM use macro, micro and catalysts to find their winners;
and we also touch on what defensive quality means, and why it’s the play in the current market.
Ayoub colours the conversation with a tonne of stocks, so there's sure to be something in here for everyone. 
Note: This episode was recorded on March 21, 2023.   
Timestamps
1:30 - Global banking crisis3:20 - Moral hazard in equity markets6:50 - Where do bank deposits go?10:15 - The hole left by Credit Suisse11:20 - Political risk is exploding15:00 - Doubling down after big hits17:00 - The companies that make it into WAM Leaders 22:45 - Finding opportunities in beaten-down sectors25:30 - Spotting inflexion points in markets30:00 - Hunting for defensive quality34:00 - A big win and a big loss36:30 - The death of the office is overblown

Alan Kohler: We’re in for a recession we didn’t need to have

On this week's episode of The Rules of Investing, Livewire's David Thornton sits down with Alan Kohler AM, one of the country's preeminent business journalists. 
Alan first cut his teeth in 1969 as a cadet at The Australian. From 1985 and 1988 he served as editor of the Australian Financial Review, and was editor of The Age from 1992-1995.
In 2007, together with Robert Gottliebsen and Stephen Bartholomeusz, Alan founded Australian Independent Business Media, publisher of Business Spectator and Eureka Report.
In 2016, after selling the business to News Corp, Alan founded The Constant Investor, which was sold on to Investsmart. 
In a case of full circle, Alan now once again writes for the Eureka report. He also pens a regular column for The New Daily, hosts The Money Café (with Alan Kohler), and you’ll still find him in your living room reading the finance on the ABC. 
In today’s episode, Alan why the RBA has become too hawkish (and the consequences of it being so), the overhaul needed at the Reserve Bank of Australia (RBA), and his views on funds management.
Note: This episode was recorded on March 7, 2023.   
Timestamps
2:34 - It's all in the hands of the RBA
5:00 - Elevated inflation isn't ideal, but it's ok
5:30 - All roads lead to the inflation target
8:30 - Renovating the central bank
12:20 - What is guidance, anyway?
15:30 - Should Parliament carry its weight?
19:30 - What is priced into equity markets?
21:35 - What to look for in an actively managed fund
23:35 - What is a reasonable net return from a balanced fund?
24:50 - The role of ETFs in the portfolio

From a kosher butcher shop to one of the country’s largest family offices

The Smorgon family is one of Australia’s great wealth building stories.
The family emigrated from Ukraine in 1927, opening a Kosher Butcher shop in Carlton soon after. Through the 1930s, the family expanded into wholesale meat and canning industries and, by the time the decade was up, were exporting meat and canned fruit goods to the United Kingdom.
Victor Smorgon AC and the family established Smorgon Consolidated Industries in 1942, and this is when things really started to take off. In the 50s, the family added paper and packaging businesses to their repertoire, while the 80s saw the addition of a glass and plastic packaging company.But it was the Steel industry where the Smorgon family displayed its appetite and aptitude for disruption, with Smorgon Steel going on to become the country’s largest vertically integrated producer of steel and steel products.
In 1995, with a heavy heart, Victor and the family divested Smorgon Consolidated Industries. In its place came Victor Smorgon Group, which is today one of Australia's premier family offices. 
In today's episode of The Rules of Investing, Livewire's David Thornton sits down with Peter Edwards – the late Victor’s grandson and CEO of Victor Smorgon Group.  
We discuss:
The Smorgon family’s flair for disruption
The way a family office invests, and
The multi strat fund that has recently opened its doors to outside money.   

Christopher Joye: the RBA got it wrong, now it will crush housing, growth and the consumer

Today’s guest on The Rules of Investing will be very familiar to subscribers of Livewire. 
Christopher Joye co-founded Coolabah Capital in 2011, and it's since grown to house about $7 billion in funds under management. Coolabah is a leading active credit alpha manager, with 28 portfolios across institutional and retail mandates. 
Chris has storied history analysing Australia’s property market. In 2008, when the world was in the throes of the GFC, the Australian Government ploughed $15 billion into a policy proposal developed by Chris to provide liquidity to the Australian residential mortgage backed securities market.
He also founded research and investment group Rismark International. While there, he designed Australia’s first “quality-controlled” house price indices, the IP for which is used to this day by Corelogic.
In today’s episode, we dive into the RBA’s latest rate decision, the dire outlook for Australia’s housing market, and how Coolabah generate returns by exploiting mispricing in the bond and cash markets.
Along the way, you'll get a front row seat into the inner workings of an active bond fund. 
Chris also spins a yarn about the time he challenged GMO's Jeremy Grantham to put his money where his mouth is. 
Timestamps
2:30 - The RBA hikes rates to a 10 year high
6:00 - Pain on the way for the Aussie household
10:00 - A problem in the RBA's models
12:50 - Housing to fall by 30%
18:55 - Maintaining central bank credibility
22:00 - Zombie haunt the ASX
26:00 - Wait for the risk-free rate to do its work
27:26 - Challenging GMOs Jeremy Grantham
38:30 - How to short the housing market
31:30 - Hunting for mispriced bonds
38:00 - The inefficiency of the over-the-counter bond market
41:20 - How Coolabah builds its portfolios
46:00 - Navigating 2022
48:00 - Choose your hedges wisely
57:00 - How the NSW Government becomes a hedge fund
59:30 - The best value in bond and cash markets
Note: this episode was recorded on February 8, 2023.