1 00:00:03,990 --> 00:00:06,480 Sean Aylmer: Welcome to the Fear and Greed business interview. I'm Sean 2 00:00:06,480 --> 00:00:09,328 Sean Aylmer: Aylmer. A good one for investors today, we often talk 3 00:00:09,330 --> 00:00:13,049 Sean Aylmer: to Wilson Asset Management about their listed investment companies. Today 4 00:00:13,049 --> 00:00:15,330 Sean Aylmer: I want to focus on small caps and where the 5 00:00:15,330 --> 00:00:18,358 Sean Aylmer: team at WAM see the opportunities. Remember, this is general 6 00:00:18,359 --> 00:00:21,570 Sean Aylmer: information only. You should seek professional advice before making investment 7 00:00:21,570 --> 00:00:25,950 Sean Aylmer: decisions. Tobias Yao is portfolio manager across four of Wilson 8 00:00:25,950 --> 00:00:30,210 Sean Aylmer: Asset Management, WAM's LICs, that's WAM Capital, WAM Microcap, WAM 9 00:00:30,210 --> 00:00:33,180 Sean Aylmer: Research, and WAM Active. Tobias, welcome to Fear and Greed. 10 00:00:33,690 --> 00:00:35,040 Tobias Yao: Good day, Sean. Thanks for having me. 11 00:00:35,549 --> 00:00:38,790 Sean Aylmer: So WAM, Wilson Asset Management, is known as a small 12 00:00:38,790 --> 00:00:41,190 Sean Aylmer: cap investor and always has been, but it's been a 13 00:00:41,190 --> 00:00:45,659 Sean Aylmer: pretty tough time for small cap investors, hasn't it? Why 14 00:00:45,659 --> 00:00:46,500 Sean Aylmer: is that the case? 15 00:00:47,280 --> 00:00:50,069 Tobias Yao: Yeah. Look, it's been a rollercoaster ride for sure for 16 00:00:50,070 --> 00:00:52,979 Tobias Yao: equities and particularly small caps over the last few years. 17 00:00:53,940 --> 00:00:58,020 Tobias Yao: If you cast your mind back to 2018 and '19, if I 18 00:00:58,020 --> 00:01:02,220 Tobias Yao: remember correctly, that was the trade war period between China 19 00:01:02,220 --> 00:01:07,740 Tobias Yao: and the US. Then we've had COVID in 2020 and 2021, which caused 20 00:01:08,009 --> 00:01:11,549 Tobias Yao: significant disruptions, but also for tech companies and growth companies 21 00:01:11,549 --> 00:01:16,260 Tobias Yao: was an extremely strong period, given rates and the liquidity 22 00:01:16,260 --> 00:01:19,709 Tobias Yao: in the system. But to your question, the reason why 23 00:01:19,709 --> 00:01:22,709 Tobias Yao: it's been challenging over the last 18 months is due 24 00:01:22,709 --> 00:01:25,559 Tobias Yao: to the market impacts of the war in the Ukraine, 25 00:01:25,590 --> 00:01:28,619 Tobias Yao: and at the same time the largest interest rate hiking 26 00:01:28,619 --> 00:01:33,000 Tobias Yao: cycle in over 30 years. When there is great uncertainty 27 00:01:33,000 --> 00:01:36,540 Tobias Yao: and particularly risk of a recession, the market gravitates towards 28 00:01:36,720 --> 00:01:40,230 Tobias Yao: larger cap companies because they're more diversified, more liquid and 29 00:01:40,230 --> 00:01:46,020 Tobias Yao: safer in an environment that's highly uncertain. And in Australia, particularly, banks, 30 00:01:46,020 --> 00:01:48,179 Tobias Yao: on the back of higher rates and lower levels of bad 31 00:01:48,180 --> 00:01:52,290 Tobias Yao: debt and resources, on the back of the China reopening story, 32 00:01:52,650 --> 00:01:56,490 Tobias Yao: also did well. So you're right over this period of uncertainty, 33 00:01:56,490 --> 00:01:58,320 Tobias Yao: small caps definitely fell out of favour. 34 00:01:58,710 --> 00:02:02,159 Sean Aylmer: Okay. That is across the board, all fund managers has 35 00:02:02,160 --> 00:02:05,639 Sean Aylmer: experienced that. Now, where we stand today and we're getting 36 00:02:05,639 --> 00:02:09,060 Sean Aylmer: towards the end of the interest rate hiking cycle, if 37 00:02:09,060 --> 00:02:11,520 Sean Aylmer: that's such a phrase as that, what's the outlook for 38 00:02:11,520 --> 00:02:12,600 Sean Aylmer: small caps now then? 39 00:02:13,110 --> 00:02:16,858 Tobias Yao: Yeah. So as a team we're very bullish, the small 40 00:02:16,860 --> 00:02:19,500 Tobias Yao: cap companies. In the market, we think a lot of 41 00:02:19,500 --> 00:02:23,459 Tobias Yao: them have come off quite substantially and we've spent a 42 00:02:23,459 --> 00:02:26,608 Tobias Yao: lot of time finding ideas in the small cap space 43 00:02:26,669 --> 00:02:29,460 Tobias Yao: that we believe could be strong outperformers in the next two 44 00:02:29,460 --> 00:02:32,820 Tobias Yao: to three years. So particularly in some of the tech 45 00:02:32,820 --> 00:02:35,669 Tobias Yao: names that has been sold off aggressively over the last 46 00:02:36,150 --> 00:02:39,780 Tobias Yao: two years. And then, more recently, we've started to look 47 00:02:39,780 --> 00:02:44,310 Tobias Yao: at some of the consumer discretionary names, knowing the demand is 48 00:02:44,310 --> 00:02:47,370 Tobias Yao: falling off, but you typically have to be 9 to 12 49 00:02:47,370 --> 00:02:50,910 Tobias Yao: months ahead of that. So those are just two areas 50 00:02:50,910 --> 00:02:51,900 Tobias Yao: that we're looking at right now. 51 00:02:52,950 --> 00:02:54,780 Sean Aylmer: We'll get into some specifics in a moment, but I 52 00:02:54,780 --> 00:02:58,170 Sean Aylmer: just want to... so consumer discretionary is an interesting one. 53 00:02:58,379 --> 00:03:03,120 Sean Aylmer: You would think as an economy slows then their earnings, 54 00:03:03,389 --> 00:03:05,760 Sean Aylmer: at least in the short term, won't be as good 55 00:03:05,760 --> 00:03:07,410 Sean Aylmer: as you might think. But then you just said 9 56 00:03:07,410 --> 00:03:09,510 Sean Aylmer: to 12 months. So I presume you're kind of looking 57 00:03:09,510 --> 00:03:12,150 Sean Aylmer: beyond earnings in the next 6 to 12 months. You're 58 00:03:12,150 --> 00:03:14,340 Sean Aylmer: actually looking beyond that. Is that why you're interested in 59 00:03:14,340 --> 00:03:15,328 Sean Aylmer: consumer discretionary? 60 00:03:16,079 --> 00:03:18,388 Tobias Yao: Yeah, sure. And so if we look at the consumer 61 00:03:18,389 --> 00:03:22,470 Tobias Yao: discretionary space, in the small cap space, it could probably 62 00:03:22,470 --> 00:03:27,900 Tobias Yao: separate it into travel, automotive and just general retailing. And 63 00:03:27,900 --> 00:03:33,899 Tobias Yao: so the travel guys have done exceptionally well. There's revenge 64 00:03:33,900 --> 00:03:36,930 Tobias Yao: spending in terms of holidays, everyone's gone to Europe. And 65 00:03:37,080 --> 00:03:40,650 Tobias Yao: auto's done really well due to this pent-up demand and 66 00:03:40,860 --> 00:03:43,110 Tobias Yao: the supply not being able to meet up to demand. 67 00:03:43,380 --> 00:03:47,849 Tobias Yao: So we've invested in those two sort of buckets quite 68 00:03:47,910 --> 00:03:51,299 Tobias Yao: extensively over the last two years. I guess my point is, 69 00:03:51,299 --> 00:03:55,290 Tobias Yao: at some point money should flow back into retail, which 70 00:03:55,740 --> 00:03:57,630 Tobias Yao: to your point, it should be a pretty tough period over 71 00:03:57,720 --> 00:04:00,450 Tobias Yao: the next six months. But then you almost have to 72 00:04:00,450 --> 00:04:03,719 Tobias Yao: be a little bit ahead of the market, investing in 73 00:04:03,719 --> 00:04:07,980 Tobias Yao: those names. And then probably have to allow the share 74 00:04:07,980 --> 00:04:10,799 Tobias Yao: price to go down before it goes up. 'Cause if 75 00:04:10,799 --> 00:04:14,040 Tobias Yao: things turn, then everyone would be wanting to invest in 76 00:04:14,040 --> 00:04:16,740 Tobias Yao: retail and it would be very difficult to then therefore 77 00:04:16,740 --> 00:04:20,010 Tobias Yao: buy those names at a significant discounts to their intrinsic value. 78 00:04:20,428 --> 00:04:22,560 Sean Aylmer: Stay with me, Tobias, we'll be back in a minute. 79 00:04:28,740 --> 00:04:32,339 Sean Aylmer: I'm speaking Tobias Yao, portfolio manager for WAM Capital, WAM 80 00:04:32,339 --> 00:04:36,870 Sean Aylmer: Microcap, WAM Research and WAM Active. Okay. So can you 81 00:04:36,870 --> 00:04:39,719 Sean Aylmer: give us a name that you like in that discretionary 82 00:04:39,779 --> 00:04:43,049 Sean Aylmer: retail area? And we just hasten to add to listeners, 83 00:04:43,049 --> 00:04:45,959 Sean Aylmer: this isn't professional advice, get your own advice before making 84 00:04:45,960 --> 00:04:48,659 Sean Aylmer: any investment decisions. But who do you like, Tobias Yao 85 00:04:48,660 --> 00:04:50,070 Sean Aylmer: from Wilson Asset Management? 86 00:04:51,029 --> 00:04:53,130 Tobias Yao: Yeah. Look, this one is in retail, but I would 87 00:04:53,130 --> 00:04:57,300 Tobias Yao: say it's a little bit different. The company's called Temple & Webster, 88 00:04:57,630 --> 00:05:01,259 Tobias Yao: so they are a dominant e-commerce platform. They sell furniture 89 00:05:01,259 --> 00:05:05,129 Tobias Yao: and homewares. Now we love management. They've done an exceptional 90 00:05:05,129 --> 00:05:08,820 Tobias Yao: job growing the business, since I think around 2016 is 91 00:05:08,820 --> 00:05:12,180 Tobias Yao: when they entered the business. Our view is that online 92 00:05:12,180 --> 00:05:15,509 Tobias Yao: penetration in their space will continue to go up in 93 00:05:15,510 --> 00:05:17,700 Tobias Yao: the long term. And these guys are pure online players, 94 00:05:17,700 --> 00:05:21,630 Tobias Yao: as I was saying before. And large players with scale 95 00:05:21,719 --> 00:05:24,779 Tobias Yao: should do really well as a result. In the short term, 96 00:05:25,230 --> 00:05:29,520 Tobias Yao: the flexibility of their model, to pivot towards value customers 97 00:05:29,520 --> 00:05:32,519 Tobias Yao: and continue to drive growth when their peers are struggling, 98 00:05:32,520 --> 00:05:35,308 Tobias Yao: means they will be even stronger coming out of this 99 00:05:35,309 --> 00:05:39,178 Tobias Yao: period of uncertainty. And finally, on the cost side, they've 100 00:05:39,178 --> 00:05:41,879 Tobias Yao: been talking about this a little bit recently, but they're 101 00:05:41,879 --> 00:05:44,460 Tobias Yao: trying to implement a few AI initiatives within the business 102 00:05:44,460 --> 00:05:49,050 Tobias Yao: and we believe that the incremental cost savings going into 103 00:05:49,050 --> 00:05:52,529 Tobias Yao: the marketing budget to drive growth will be funded by 104 00:05:52,529 --> 00:05:56,430 Tobias Yao: some of the efficiency gains from these AI initiatives. And 105 00:05:57,270 --> 00:05:59,520 Tobias Yao: the best thing is they have, I think, around a 106 00:05:59,520 --> 00:06:02,310 Tobias Yao: hundred million dollars of net cash in the bank, which 107 00:06:02,310 --> 00:06:05,550 Tobias Yao: gives them that extra optionality and the safety net. 108 00:06:06,480 --> 00:06:08,880 Sean Aylmer: Okay. So let's moving on to the tech space because 109 00:06:08,880 --> 00:06:12,089 Sean Aylmer: you mentioned the tech space a moment ago. What is 110 00:06:12,089 --> 00:06:15,119 Sean Aylmer: your view on the small cap tech stocks at the 111 00:06:15,120 --> 00:06:18,539 Sean Aylmer: moment? And particularly, again, you talked about AI and I 112 00:06:18,539 --> 00:06:19,980 Sean Aylmer: don't know if there's a bubble, but there's certainly lots 113 00:06:19,980 --> 00:06:22,770 Sean Aylmer: of enthusiasm for AI stocks. Think of Nvidia in the 114 00:06:22,770 --> 00:06:27,180 Sean Aylmer: US, but what's your take particularly on small cap tech stocks? 115 00:06:27,990 --> 00:06:31,379 Tobias Yao: Yeah, so we do like tech because we believe if 116 00:06:31,380 --> 00:06:34,350 Tobias Yao: you get the core right you can generate a lot 117 00:06:34,350 --> 00:06:37,260 Tobias Yao: of performance. One of the things I think over the 118 00:06:37,260 --> 00:06:40,710 Tobias Yao: last 18 months that we're very mindful of as a 119 00:06:40,710 --> 00:06:43,979 Tobias Yao: team is not to be too bearish because this gave 120 00:06:43,980 --> 00:06:47,639 Tobias Yao: us the headspace to look for investment ideas. And I 121 00:06:47,639 --> 00:06:50,670 Tobias Yao: think you can always generate performance in every market, you 122 00:06:50,670 --> 00:06:53,339 Tobias Yao: just have to look a little bit harder. Over the last, 123 00:06:53,400 --> 00:06:56,010 Tobias Yao: I'll say 18 months until recently or until probably the 124 00:06:56,010 --> 00:06:58,799 Tobias Yao: last three months, we've generally stayed away from the loss 125 00:06:58,800 --> 00:07:02,339 Tobias Yao: making tech names, but we've invested in the really high 126 00:07:02,339 --> 00:07:07,169 Tobias Yao: quality tech names like ProMedica, Carsales, which is a platform as well, 127 00:07:07,410 --> 00:07:10,740 Tobias Yao: which has done really well for us. However, more recently 128 00:07:10,740 --> 00:07:12,989 Tobias Yao: we've started to look at, I guess, some of the 129 00:07:12,990 --> 00:07:15,990 Tobias Yao: high beta names that's on the verge of breaking even. 130 00:07:15,990 --> 00:07:19,500 Tobias Yao: And we're therefore eliminating the capital raising risk, which usually 131 00:07:19,500 --> 00:07:22,410 Tobias Yao: sees a re-rating in the share price and gives you 132 00:07:22,410 --> 00:07:25,679 Tobias Yao: that initial margin of safety. So someone like Megaport, to 133 00:07:25,679 --> 00:07:30,479 Tobias Yao: your point, exposed to AI, new CEO, great initiatives by 134 00:07:30,480 --> 00:07:33,780 Tobias Yao: the board and the management team, is a great example. 135 00:07:33,990 --> 00:07:37,080 Tobias Yao: But we're still trying to stay very selective and effectively 136 00:07:37,110 --> 00:07:40,619 Tobias Yao: continue to stick to our process, which is identifying catalysts 137 00:07:41,130 --> 00:07:44,009 Tobias Yao: that could re-rate the share price of these businesses. In 138 00:07:44,009 --> 00:07:45,990 Tobias Yao: this case, the catalyst could be getting to the break-even 139 00:07:46,500 --> 00:07:47,819 Tobias Yao: point sooner than expected. 140 00:07:48,300 --> 00:07:51,750 Sean Aylmer: We haven't really spoken about the WAM process, but you're 141 00:07:51,750 --> 00:07:55,290 Sean Aylmer: famed for it. And the idea is that, just explain 142 00:07:55,290 --> 00:07:58,649 Sean Aylmer: it to us, you're looking for not just valuation. There's 143 00:07:58,650 --> 00:07:59,640 Sean Aylmer: more to it than that. 144 00:08:00,450 --> 00:08:04,949 Tobias Yao: Yes. So our process is pretty straightforward and we've been 145 00:08:04,949 --> 00:08:09,750 Tobias Yao: consistent with sticking to this process since the inception of 146 00:08:09,750 --> 00:08:15,300 Tobias Yao: the fund. We're looking for undervalued growth companies, catalysts to re- 147 00:08:15,300 --> 00:08:19,710 Tobias Yao: rate the share price of these businesses over the next 3, 6, 9, 12, 148 00:08:19,710 --> 00:08:25,050 Tobias Yao: 18 months. And these catalysts could be earnings upgrades, typically, 149 00:08:25,050 --> 00:08:29,580 Tobias Yao: or an EPS accretive acquisition. More recently, a cost out 150 00:08:29,580 --> 00:08:33,000 Tobias Yao: program or a capital management initiative, such as a buyback 151 00:08:33,270 --> 00:08:36,870 Tobias Yao: or special dividend, worked really well over the last two years. 152 00:08:37,110 --> 00:08:40,259 Tobias Yao: So we spend all of our time as bottom- up 153 00:08:40,260 --> 00:08:45,929 Tobias Yao: stock pickers meeting with management, suppliers, customers and traveling both 154 00:08:45,929 --> 00:08:50,400 Tobias Yao: domestically and overseas to try to find these great ideas. 155 00:08:50,400 --> 00:08:53,880 Tobias Yao: And then we need to identify the catalysts before we 156 00:08:53,880 --> 00:08:55,530 Tobias Yao: would invest in a business. 157 00:08:55,828 --> 00:08:58,889 Sean Aylmer: Okay. And the catalyst could be balance sheet related, it 158 00:08:58,889 --> 00:09:01,289 Sean Aylmer: could be legislation, it could be... I'm just trying to 159 00:09:01,290 --> 00:09:02,790 Sean Aylmer: get my head around what a catalyst is. 160 00:09:03,330 --> 00:09:06,150 Tobias Yao: It could be anything that we believe is upside to 161 00:09:06,150 --> 00:09:10,440 Tobias Yao: the market expectation for the business that is not currently 162 00:09:10,440 --> 00:09:13,050 Tobias Yao: captured in the share price, in our view. 163 00:09:13,620 --> 00:09:15,779 Sean Aylmer: Okay. Tobias, you've given us a couple of ideas. How 164 00:09:15,780 --> 00:09:16,470 Sean Aylmer: about a third one? 165 00:09:17,160 --> 00:09:19,738 Tobias Yao: Yeah. So I mean another company we like is a 166 00:09:19,740 --> 00:09:23,700 Tobias Yao: company called MMA Offshore. It's the old Mermaid Marine. Now 167 00:09:23,700 --> 00:09:27,389 Tobias Yao: it provides support vessels to offshore oil and gas and 168 00:09:27,389 --> 00:09:32,370 Tobias Yao: wind power projects. Again, the management team is exceptional. Having 169 00:09:32,370 --> 00:09:35,999 Tobias Yao: inherited a business in a very bad shape all those 170 00:09:36,000 --> 00:09:39,420 Tobias Yao: years ago with a lot of debt. And slowly turning 171 00:09:39,420 --> 00:09:42,360 Tobias Yao: the business around to now be in the best position 172 00:09:42,360 --> 00:09:45,030 Tobias Yao: to benefit from this, the activities in the oil and 173 00:09:45,030 --> 00:09:47,759 Tobias Yao: gas and the wind power space. The biggest debate in 174 00:09:47,759 --> 00:09:51,598 Tobias Yao: the market right now is whether the supply of vessels 175 00:09:52,049 --> 00:09:54,720 Tobias Yao: will come online to meet the demand and hence reduce 176 00:09:54,750 --> 00:09:58,559 Tobias Yao: the overall profit of the industry. And our view is 177 00:09:58,559 --> 00:10:01,978 Tobias Yao: that if you're ordering a new vessel now, it'll take 178 00:10:01,980 --> 00:10:05,730 Tobias Yao: you over 30 months to get it delivered. And a 179 00:10:05,730 --> 00:10:09,960 Tobias Yao: lot of issues around financing and shipyard availability. So it's 180 00:10:09,960 --> 00:10:12,240 Tobias Yao: going to take a long time for new vessels to 181 00:10:12,240 --> 00:10:15,929 Tobias Yao: come online. And idle vessels, it costs a lot of 182 00:10:15,929 --> 00:10:19,559 Tobias Yao: money to reactivate those vessels in the current environment. So 183 00:10:19,559 --> 00:10:24,269 Tobias Yao: vessel operators like Mermaid should benefit from increasing rates as 184 00:10:24,270 --> 00:10:27,059 Tobias Yao: the demand is really coming through now. And so that 185 00:10:27,059 --> 00:10:29,489 Tobias Yao: will continue to stay elevated. So over the next few 186 00:10:29,490 --> 00:10:33,360 Tobias Yao: years, I think, ideally what the company can do is to 187 00:10:33,660 --> 00:10:36,780 Tobias Yao: transition the business, which they've done a great job already, 188 00:10:37,500 --> 00:10:40,290 Tobias Yao: and rebalance their revenue to be more exposed to win 189 00:10:40,290 --> 00:10:43,710 Tobias Yao: power projects. These are less cyclical in our view, demands 190 00:10:43,710 --> 00:10:44,700 Tobias Yao: a high valuation. 191 00:10:45,150 --> 00:10:47,010 Sean Aylmer: Tobias, thank you for talking to Fear and Greed. 192 00:10:47,609 --> 00:10:48,839 Tobias Yao: Thank you very much for having me. 193 00:10:49,290 --> 00:10:52,440 Sean Aylmer: That was Tobias Yao, portfolio manager for WAM Capital, WAM 194 00:10:52,440 --> 00:10:55,860 Sean Aylmer: Microcap, WAM Research, and WAM Active. This is the Fear 195 00:10:55,860 --> 00:10:58,860 Sean Aylmer: and Greed business interview. Remember, this is general information only 196 00:10:58,860 --> 00:11:01,588 Sean Aylmer: and you should seek professional advice before making any investment 197 00:11:01,590 --> 00:11:04,108 Sean Aylmer: decisions. Join us every morning for the full episode of 198 00:11:04,109 --> 00:11:07,379 Sean Aylmer: Fear and Greed, Australia's best business podcast. I'm Sean Aylmer. 199 00:11:07,710 --> 00:11:08,429 Sean Aylmer: Enjoy your day.