The Rules of Investing

A stealthy small cap quietly building a market monopoly

Investment management can be a brutal business. When you're talking small caps, the brutality is amplified orders of magnitude. 
Between March 20 and September 3 last year, the ASX Small Ordinaries Index sky-rocketed 44.38%. That's the kind of performance that will make a fund manager euphoric, but also nervous. Mean reversion is a thing. 
Eventually, you need to pay the piper for that kind of performance. And pay the piper the small cap sector most certainly did, in the form of a 25% downward correction.  
But just as what goes up must come down, what goes down will eventually go up. And we may have passed that inflection point, with the Small Ords Index up over 11% in the last month. 
In this episode of The Rules of Investing, Livewire's David Thornton sat down with Donny Buchanan, Co-Founder, CIO and Portfolio Manager for the Lakehouse Small Companies Fund. 
Donny's fund has been swept up in the sell-off. But frankly, so has just about every fund. What's important is how they set themselves up for the recovery. You make money in the buying, after all.  
Donny discusses the problems associated with valuing tech growth, the importance of believing in and sticking to your fund's mandate, and the lessons he's taken away from this latest sell-off. 
He also offers up a small cap tech stock that is quietly forming a monopoly by creating its own ecosystem. 

Is a golden era for income investors coming?

Fixed income has had a torrid time of it the last year – in fact, by some measures it’s been the worst year on record – with US treasuries losing about a tenth of their value. 
Since the beginning of this year, global bonds have recorded their worst performance on record, with the Bloomberg Global Aggregate Total Return (USD) Index down around 10% year to date - equating to $3.76 trillion in lost value. 
This performance has also coincided with a sell-off in global equities, with the MSCI World Net Local Total Return Index down around 21% over the same period.The last time that we saw a multi-month sell-off in both global equity and bond markets was in 1994 – a time when the Federal Reserve also had to sharply reverse policy.
But if you’re thinking about selling out of fixed income – think again. Crystallising a loss by panic selling may be the worst thing you can do.
Joining us for today's episode of The Rules of Investing is Andrew Canobi, director of Australia Fixed Income at Franklin Templeton. He’s been in the role since 2014, and is responsible for steering macro strategy, credit research, and fixed income portfolio construction. Prior to that, Andrew was director and portfolio manager for Deutsche Asset & Wealth Management. He also had stints at Invesco and ABN AMRO.
What goes up must come down, and as Andrew explains, yields can only go so high, so we mightn’t be very far from a golden era in fixed income. 
He also gives us his take on the inflation cycle, why we should take our cues from the market rather than central bankers, and where the best value exists in fixed income. 
This episode was recorded on June 18, 2022. 
Timestamps
1:20 - Are markets at DEFCON 1?
2:25 - Will central banks do too much or too little?
3:30 - Should we take cues from central banks or the market?
8:00 - How is supply side inflation tamed by killing demand?
10:00 - Is Australia's housing market the joker in the pack?
14:00 Why fixed income is still a good investment
20:45 - A corner of the fixed income market investors don't know about
22:20 - Investing in overseas bonds
26:00 - 3 favourite questions

How Perpetual’s Vince Pezzullo invests when multiples retreat

Markets are a right mess today, thanks to surging inflation and the fear of what that will do to earnings.  
In this environment, you want companies that have the market position, leadership and balance sheets to survive. However, actually finding these companies is no mean feat. 
On today's episode of The Rules of Investing, Livewire's David Thornton sits down with Vince Pezzullo - Deputy Head of Equities at Perpetual. Vince joined Perpetual in 2007 and has covered a heap of sectors since then; you name it - chemicals, financials, banking, telecommunications, materials and REITS.
He now heads up the Australian Share fund, Geared Australian Share fund, Direct Equity Alpha fund and the Perpetual Equity Investment Company (ASX:PIC) with about $435 million under the hood.
There's not much we don't cover in this episode. We take a granular look at the affect inflation is having on valuations and company decision-making, the structural shifts afoot in the energy market, and the qualities every company in your portfolio should have. 
We even discuss an Irish gambling stock making waves in a wide-open US market.   
This episode was recorded on June 23, 2022. 
Timestamps
1:45 - Company margins
5:00 - Investing to get down the cost curve
6:00 - DuPont ROE
7:30 - Growth stock valuations
9:30 - Energy, the global tax on growth
10:45 - Shifting trade flows
13:10 - Santos
14:30 - Energy sector going from spot price to contracts
19:45 - Banks margins and rising rates
23:00 - Inflation: 1990s vs 1970s
25:30 - An investment checklist during high volatility
28:00 - The limit to duration risk
29:10 - The importance of real assets
32:00 - The Irish bookmaker making waves in the US
39:00 - 3 favourite questions

The best inflation protection you can get

The prophets of doom are blowing their recession horns. Accordingly, investors want to hold assets that can be bulwarks against whatever's driving recession - that being inflation in today's case. And that's what today's edition of The Rules of Investing is all about.
Livewire's James Marlay sat down with Warryn Robertson, who is a portfolio manager and analyst at Lazard Asset Management. Warryn's responsible for managing the Global Equity Franchise Strategy as well as Lazard's well-known Global Listed Infrastructure Fund - which has roughly $20 billion under the hood. 
Today's episode will focus on infrastructure - a topic we know is front of mind for our readers. In our recent survey infrastructure ranked third as the asset class they're most likely to increasing exposure to over the next 12 months. 
Warren founded the infrastructure strategy back in 2005 and it has returned 10.7% per annum since then. 
You'll hear why infrastructure is "the best inflation protection you can get".  But don't go running off to market before pressing play on this episode - as it can't be just any old infrastructure. 
He also explains how Lazard value their assets, the key thing the whole investment industry missed during COVID, the increasing trend towards privatisation of infrastructure and a near monopoly asset that he believes offers compelling value. 
This episode was recorded on June 23, 2022. 

Oscar Oberg’s bear market guide to oversold small caps

Let's face it, it has been hard going in the small caps space - which is down almost 18% this calendar year. 
As soon as you get headwinds such as inflation and rate hikes, babies will invariably get thrown out with the bathwater. Good companies with strong balance sheets get sold off in the stampede as investors run for the door.
Today's guest on The Rules of Investing is Oscar Oberg, a lead portfolio manager at Wilson Asset Management. Oscar and his team run the firms flagship listed investment company WAM Capital (ASX: WAM), which has a market cap over $2 billion, as well as WAM Microcap (ASX:WMI), WAM Research (ASX:WAX) and WAM Active (ASX:WAA).
Oscar is firmly of the view that small cap sentiment has become overly pessimistic, and the longer term view is better than the prevailing headlines suggest. 
"On a medium to long term view, I'm positive. We want to be ready for when it changes, and it will flick really quickly."
Oscar recently joined Livewire's David Thornton on the Rules of Investing podcast where he outlined his playbook for investing through the bear market currently gripping small cap industrial stocks.
Oscar says he is seeing craziness in the market and it is creating great opportunities that are categorised under three broad baskets.
beaten down stocks where values are massively depressed;
companies with strong asset backing; and
retailers where sentiment has massively overshot to the downside.  
As you'll hear, those baskets are full to the brim and Oscar shares a number of stocks that he believes look compelling right now.
Timestamps
0:52 - How Oscar and the team run the portfolio and uncover new ideas
4:25 - The outlook for small and mid-cap Australian shares
6:56 - Why earnings downgrades are on the way for small caps
8:18 - Stocks that have taken a beating and now look interesting
10:50 - Some of the sectors Oscar is avoiding and a few that look interesting
14:48 - Inside WAM’s research and active investment processes
19:58 - Never a put a redline through a potential opportunity
22:20 - The one-way market in ASX listed stocks
23:55 - Opportunities in unloved microcaps
29:00 - What it will take for sentiment to turn for small caps
32:15 - The 3 favourite questions 

Why Allan Gray is still bullish energy and cautious on darlings like CSL

Imagine for a moment that you had a clean sheet of paper from which to build your investment portfolio from the ground up. Would that rebuilt portfolio look the same as what you own today? One could guess that for many people the answer is no, and that if given the chance to start from scratch their portfolios would look quite different. 
Livewire's James Marlay puts this question to Simon Mawhinney, the Managing Director and Chief Investment Officer of Allan Gray, a contrarian investor responsible for oversight of the firm's Australian equity strategies. They also touch on what it means to be a contrarian investor and where contrarian opportunities exist right now.

Simon Shields: These stocks are turning market headwinds into competitive advantage

We're all well aware of the headwinds battering markets today - inflation, supply chain pressures, and rate hikes. Yet it's easy, and misguided, to broad brush the market and expect all stocks to respond in the same way. As you'll learn in this edition of The Rules of Investing, what is a headwind for one stock can be relative value for another. 
Today’s guest is Simon Shields. Simon co-founded Monash Investors in 2012 following stints as head of equities at UBS and Colonial First State. 
Monash Investors are a long/short Australian equity manager with an absolute return focus, which it adopts in its two funds – one listed and one unlisted. Today won’t focus on Simon’s investment style – for that, I urge you to listen to the episode published back on Oct 09, 2020. 
Simon discusses:
The outlook for oil prices, and what this means for Aussie producers
Back to the future for supply chains
What earnings downgrades will mean for stock pricing 
Timestamps:
1:30 - What gave birth to today's headwinds
3:30 - Oil supply in trouble, and the stocks that will benefit
9:00 - Inventories and cost pressures
17:00 - Cost pressures on consumer discretionary
20:30 - Growth discount rates
24:00 - Companies with moats
26:00 - Time for shorts
30:00 - The problem with benchmarks
37:00 - 3 favourite questions

Ben Griffiths: A bull waiting for these three signs to charge at small caps

Global markets are in a world of hurt. This week the Dow Jones Industrial Average nose-dived 1,100 points - its biggest loss since 2020. For all but those with the greatest of risk appetites, it's time to hunker down and weather the volatility storm. 
But the rout won't last forever. As the saying goes, the night is darkest just before the dawn. So being ready for the turn will be key to capturing the growth to come.   
For today's episode of Rules of Investing, we're joined by small cap notary Ben Griffiths, Managing Director and Senior Portfolio Manager at Eley Griffiths Group. Ben is a notary of sorts in the Australian small cap space, having co-founded Eley Griffiths Group back in 2002 with Brian Eley following a successful career as joint head of small companies at both BT Financial Group and ING Investment Management.
Ben discusses the mess markets are in today, and the three signs he's waiting for to know when it's time to start buying. We also take a deep dive into small cap resources - a sector that can't, and shouldn't, be ignored when investing in small caps.