1 00:00:03,960 --> 00:00:07,260 Sean Aylmer: Welcome to the Fear & Greed Business interview. I'm Sean Aylmer. Generally 2 00:00:07,260 --> 00:00:11,099 Sean Aylmer: speaking, small cap stocks haven't had a brilliant couple of 3 00:00:11,099 --> 00:00:13,679 Sean Aylmer: years. To be fair, it's quite a broad category. A 4 00:00:13,679 --> 00:00:16,020 Sean Aylmer: small cap is generally considered a listed company with a 5 00:00:16,020 --> 00:00:20,370 Sean Aylmer: market capitalization of a few billion dollars or less. That 6 00:00:20,370 --> 00:00:23,340 Sean Aylmer: certainly covers lots of companies from retailers and miners to 7 00:00:23,340 --> 00:00:26,488 Sean Aylmer: travel and tech companies. So after an ordinary year or 8 00:00:26,489 --> 00:00:30,300 Sean Aylmer: two, is 2024 finally going to be the year for 9 00:00:30,300 --> 00:00:33,299 Sean Aylmer: small caps. Remember, this is general information only and you 10 00:00:33,299 --> 00:00:37,440 Sean Aylmer: should always seek professional advice before making investment decisions. Tobias 11 00:00:37,440 --> 00:00:40,710 Sean Aylmer: Yao is portfolio manager across four of Wilson Asset Management's 12 00:00:40,710 --> 00:00:45,059 Sean Aylmer: listed investment companies; WAM Capital, WAM Microcap, WAM Research and 13 00:00:45,059 --> 00:00:47,639 Sean Aylmer: WAM Active. Tobias, welcome back to Fear & Greed. 14 00:00:48,210 --> 00:00:49,080 Tobias Yao: Good day, how's it going? 15 00:00:49,710 --> 00:00:55,170 Sean Aylmer: Great. Tell me, is 2024 finally the year for small caps? 16 00:00:55,950 --> 00:00:58,530 Tobias Yao: Look, we do believe 2024 will be a good year 17 00:00:58,530 --> 00:01:02,040 Tobias Yao: for small cap companies given the change in the interest 18 00:01:02,040 --> 00:01:04,920 Tobias Yao: rate narrative towards the end of last year, and the 19 00:01:04,920 --> 00:01:07,349 Tobias Yao: fact that I think small cap companies in general have 20 00:01:07,349 --> 00:01:11,010 Tobias Yao: underperformed the broader market by more than 20% over the 21 00:01:11,010 --> 00:01:15,030 Tobias Yao: last two years. In fact, many small cap companies are 22 00:01:15,030 --> 00:01:18,990 Tobias Yao: trading at significant discounts to their long run averages, which 23 00:01:18,990 --> 00:01:22,440 Tobias Yao: is why we continue to see M& A activities in 24 00:01:22,440 --> 00:01:25,289 Tobias Yao: the space. Last year, we've had the likes of Estia 25 00:01:25,289 --> 00:01:29,848 Tobias Yao: Health, Silk Lasers, and then Healthier. However, I would caution 26 00:01:29,940 --> 00:01:32,100 Tobias Yao: that the recovery, it's not going to be a straight 27 00:01:32,100 --> 00:01:35,220 Tobias Yao: line given the plethora of risks that's still in the 28 00:01:35,220 --> 00:01:40,619 Tobias Yao: system, inflation, economic risks, geopolitical risks. And this year it's 29 00:01:40,620 --> 00:01:42,509 Tobias Yao: going to be a huge year in terms of elections 30 00:01:42,509 --> 00:01:46,259 Tobias Yao: around the world, particularly in the US and there's going 31 00:01:46,260 --> 00:01:47,850 Tobias Yao: to be rhetoric that's going to come out of both 32 00:01:47,850 --> 00:01:51,300 Tobias Yao: parties leading up to the election that could impact equity markets. 33 00:01:51,750 --> 00:01:53,700 Sean Aylmer: Okay. So just a couple of things I just want 34 00:01:53,700 --> 00:01:56,160 Sean Aylmer: to unpack on what you said there. It's starting from 35 00:01:56,160 --> 00:01:59,249 Sean Aylmer: a lower base basic. So 2024 small caps are starting 36 00:01:59,250 --> 00:02:02,490 Sean Aylmer: from a lower base, so there's a discount to their 37 00:02:02,580 --> 00:02:05,639 Sean Aylmer: average valuation in many cases, but as you say, it's 38 00:02:05,879 --> 00:02:08,520 Sean Aylmer: apples and oranges. There's plenty of different stocks in there. 39 00:02:08,520 --> 00:02:11,459 Sean Aylmer: So there's that to think about. What about the interest 40 00:02:11,460 --> 00:02:13,680 Sean Aylmer: rate profile? So we've had 12 months ago, we knew 41 00:02:13,680 --> 00:02:16,620 Sean Aylmer: interest rates were going to keep rising. As we stand 42 00:02:16,620 --> 00:02:19,830 Sean Aylmer: here today, market consensus is there won't be any more 43 00:02:19,830 --> 00:02:22,829 Sean Aylmer: rate rises. Certainly in the US there'll be cuts and 44 00:02:23,038 --> 00:02:26,550 Sean Aylmer: possibly in Australia later this year there'll be cuts. What 45 00:02:26,550 --> 00:02:27,780 Sean Aylmer: does that mean for the sector? 46 00:02:28,230 --> 00:02:31,380 Tobias Yao: Yeah, so the key for us is, directionally, it's positive 47 00:02:31,380 --> 00:02:34,080 Tobias Yao: for small caps or risk assets, and we're going to 48 00:02:34,080 --> 00:02:38,040 Tobias Yao: have a lot of macro data on inflation or commentary 49 00:02:38,040 --> 00:02:41,309 Tobias Yao: from the various central banks around the world over the 50 00:02:41,309 --> 00:02:44,100 Tobias Yao: next 12 months. And that's going to create volatility in 51 00:02:44,100 --> 00:02:48,240 Tobias Yao: the equity markets in terms of beating or missing expectations 52 00:02:48,660 --> 00:02:50,550 Tobias Yao: and like it did when the race was going up 53 00:02:50,550 --> 00:02:53,130 Tobias Yao: on the back of the high inflation rates. So it's 54 00:02:53,130 --> 00:02:55,349 Tobias Yao: not going to be smooth sailing. But in terms of 55 00:02:55,349 --> 00:02:59,100 Tobias Yao: our view, directionally, it is positive that we are going 56 00:02:59,100 --> 00:03:03,450 Tobias Yao: to rate easing environment. And in terms of how we 57 00:03:03,450 --> 00:03:07,410 Tobias Yao: approach the macro backdrop, we are bottom up stock pickers. 58 00:03:07,470 --> 00:03:09,870 Tobias Yao: So the key for us is to stick to our 59 00:03:09,870 --> 00:03:14,399 Tobias Yao: investment process, which is to just find undervalued growth companies 60 00:03:14,400 --> 00:03:17,070 Tobias Yao: with catalyst and to stick to what we're good at. 61 00:03:17,369 --> 00:03:19,770 Sean Aylmer: Okay. I'm going to ask you about those in a 62 00:03:19,770 --> 00:03:24,120 Sean Aylmer: moment, but mid last year, you were on the show 63 00:03:24,360 --> 00:03:26,639 Sean Aylmer: and you gave us a couple of tips. How'd they 64 00:03:26,639 --> 00:03:29,700 Sean Aylmer: go? How was 2023 in some of your stocks? And 65 00:03:29,700 --> 00:03:31,529 Sean Aylmer: this is a bit of a Dorothy Dixer here because 66 00:03:31,530 --> 00:03:32,670 Sean Aylmer: I do know you did pretty well. 67 00:03:33,059 --> 00:03:35,879 Tobias Yao: Well, thank you. Look, fortunately a couple of the companies 68 00:03:36,209 --> 00:03:38,940 Tobias Yao: which I mentioned on the podcast last time actually were 69 00:03:39,000 --> 00:03:43,020 Tobias Yao: probably our best performers. The best performer in 2023 has 70 00:03:43,020 --> 00:03:47,100 Tobias Yao: been a company called Tuas Limited, ASX ticker is TUA, 71 00:03:47,550 --> 00:03:51,449 Tobias Yao: which is the fastest growing Singaporean telco. Now the board 72 00:03:51,450 --> 00:03:54,539 Tobias Yao: and the management team has done an exceptional job growing 73 00:03:54,570 --> 00:03:57,930 Tobias Yao: their business in Singapore. I mean, the share price rose 74 00:03:57,930 --> 00:04:01,320 Tobias Yao: from around, I think, about $1. 20 at the beginning of the year and 75 00:04:01,320 --> 00:04:02,850 Tobias Yao: finished at around $ 3. 76 00:04:03,660 --> 00:04:03,840 Sean Aylmer: Wow. 77 00:04:03,870 --> 00:04:08,070 Tobias Yao: And the company's founder and largest shareholder is David Teoh, 78 00:04:08,070 --> 00:04:11,039 Tobias Yao: who we believe has had the most amazing track record 79 00:04:11,369 --> 00:04:14,910 Tobias Yao: in the telco industry globally, and he also founded TPG 80 00:04:14,910 --> 00:04:18,870 Tobias Yao: Telecom here in Australia, and he's supported by the CEO, 81 00:04:18,870 --> 00:04:22,709 Tobias Yao: Richard, who's in another industry veteran in Singapore, and they've 82 00:04:22,710 --> 00:04:27,029 Tobias Yao: grown their market share in mobile from 0% to now 83 00:04:27,029 --> 00:04:31,200 Tobias Yao: over 10% over the last four years. So as investors, we're 84 00:04:31,200 --> 00:04:34,800 Tobias Yao: really backing this team to continue this growth trajectory, and 85 00:04:35,010 --> 00:04:37,650 Tobias Yao: it continues to be one of our largest positions as 86 00:04:37,650 --> 00:04:40,200 Tobias Yao: we believe over the next three to five years, TUA 87 00:04:40,500 --> 00:04:43,740 Tobias Yao: or Tuas Limited would be able to continue its trajectory 88 00:04:43,740 --> 00:04:47,579 Tobias Yao: of growth. Another stock I think I mentioned last time 89 00:04:47,580 --> 00:04:51,210 Tobias Yao: was a company called MMA Offshore. The ASX ticker is 90 00:04:51,240 --> 00:04:55,740 Tobias Yao: MRM, which provides marine and sub- sea services to the 91 00:04:55,740 --> 00:05:00,450 Tobias Yao: offshore energy, and I guess, the wider maritime industries. Another 92 00:05:00,450 --> 00:05:04,170 Tobias Yao: company with an amazing management team who came in, initially, 93 00:05:04,170 --> 00:05:07,440 Tobias Yao: fixed the balance sheet, optimized the business, and then given 94 00:05:07,440 --> 00:05:10,950 Tobias Yao: the favorable demand backdrop that we are seeing now is 95 00:05:10,950 --> 00:05:14,639 Tobias Yao: growing their business significantly. The share price, I think, is 96 00:05:14,639 --> 00:05:19,049 Tobias Yao: up around 60% over the last 12 months. While we have 97 00:05:19,049 --> 00:05:23,129 Tobias Yao: reduced our position size along the way, MRM continues to 98 00:05:23,129 --> 00:05:25,500 Tobias Yao: be a pretty important position in the portfolio. 99 00:05:26,279 --> 00:05:28,140 Sean Aylmer: Stay with me, Tobias. We'll be back in a minute. 100 00:05:34,230 --> 00:05:38,910 Sean Aylmer: I'm speaking to Tobias Yao from Wilson Asset Management. When 101 00:05:38,910 --> 00:05:41,490 Sean Aylmer: we talk about large caps, many mom and dad investors 102 00:05:41,490 --> 00:05:44,790 Sean Aylmer: particularly invest in Commonwealth Bank or Telstra or something like 103 00:05:44,790 --> 00:05:48,479 Sean Aylmer: that for dividends. When we think about small caps, the 104 00:05:48,480 --> 00:05:50,309 Sean Aylmer: companies you've just mentioned there, I don't know what their 105 00:05:50,309 --> 00:05:53,550 Sean Aylmer: dividend policy is, but I'm presuming their growth stocks, you 106 00:05:53,550 --> 00:05:55,620 Sean Aylmer: are looking for growth in share price more so than 107 00:05:55,620 --> 00:05:58,440 Sean Aylmer: dividends. How do we think about dividends with small caps? 108 00:05:58,830 --> 00:06:02,070 Tobias Yao: Yeah, you're absolutely right. Look, we look at dividends as 109 00:06:02,070 --> 00:06:05,159 Tobias Yao: part of the overall capital management strategy by the board 110 00:06:05,250 --> 00:06:07,830 Tobias Yao: and the management team. In the small cap space, I 111 00:06:07,830 --> 00:06:11,368 Tobias Yao: guess most investors, we want to find the next ASX 100 112 00:06:11,370 --> 00:06:15,779 Tobias Yao: company, companies that start small and over time grows to 113 00:06:15,779 --> 00:06:18,419 Tobias Yao: be a much larger business, and you're getting that capital 114 00:06:18,450 --> 00:06:22,380 Tobias Yao: growth along the way. And when companies pay out dividends, 115 00:06:22,470 --> 00:06:26,010 Tobias Yao: it typically means they can't find areas where they can 116 00:06:26,010 --> 00:06:31,619 Tobias Yao: reinvest the earnings that they've achieved. So we don't typically 117 00:06:31,620 --> 00:06:35,969 Tobias Yao: look at dividends just by itself mainly in the context 118 00:06:36,299 --> 00:06:38,969 Tobias Yao: of the overall capital management strategy. But I did have 119 00:06:38,970 --> 00:06:41,760 Tobias Yao: a look at some of the companies we hold in 120 00:06:41,760 --> 00:06:45,870 Tobias Yao: the fund and one company, it's called SG Fleet. Now 121 00:06:45,870 --> 00:06:49,110 Tobias Yao: it's a sort of fleet management and novated leasing business, 122 00:06:49,320 --> 00:06:52,890 Tobias Yao: has a very attractive dividend yield of around 7. 5% 123 00:06:53,459 --> 00:06:56,370 Tobias Yao: this year, and we believe they can probably grow that 124 00:06:56,370 --> 00:06:59,670 Tobias Yao: dividend yield to around 9% in 2026. So it's a 125 00:06:59,670 --> 00:07:04,050 Tobias Yao: business with good gains and with a pretty large dividend yield. 126 00:07:04,529 --> 00:07:06,900 Sean Aylmer: Any other small caps that you just want to mention? 127 00:07:06,900 --> 00:07:09,359 Sean Aylmer: I mean, you've given us three there and all three 128 00:07:09,360 --> 00:07:13,920 Sean Aylmer: notwithstanding, you may have reduced your positions in at least 129 00:07:13,920 --> 00:07:18,000 Sean Aylmer: one of those anyway, but anything else that you're also 130 00:07:18,060 --> 00:07:19,950 Sean Aylmer: holding that you're pretty confident about? 131 00:07:20,490 --> 00:07:24,330 Tobias Yao: Yeah, so we quite like founder- led businesses where the 132 00:07:24,330 --> 00:07:27,660 Tobias Yao: founder has significant skin in the game and he's focused 133 00:07:27,660 --> 00:07:30,929 Tobias Yao: on the next three to five years rather than the 134 00:07:30,930 --> 00:07:34,710 Tobias Yao: next six months. So one company in the portfolio that 135 00:07:34,710 --> 00:07:37,860 Tobias Yao: we have is a company that you're probably familiar with, 136 00:07:37,860 --> 00:07:42,780 Tobias Yao: Temple & Webster, now it's the leading online furniture and homeware- 137 00:07:43,349 --> 00:07:45,510 Sean Aylmer: Oh, Tobias, Tobias, Tobias. 138 00:07:45,570 --> 00:07:45,839 Tobias Yao: Yes. 139 00:07:45,839 --> 00:07:50,040 Sean Aylmer: My partner, Jackie, she's going to love this. I reckon 140 00:07:50,040 --> 00:07:52,290 Sean Aylmer: that we are Temple & Webster's number one customers. Well, we're 141 00:07:52,290 --> 00:07:54,660 Sean Aylmer: not, but I'll tell you what, over Christmas, we bought 142 00:07:54,660 --> 00:07:56,520 Sean Aylmer: a lot of stuff from Temple & Webster. 143 00:07:56,639 --> 00:08:00,060 Tobias Yao: That's great to hear. So Temple & Webster, in our view, is 144 00:08:01,950 --> 00:08:05,399 Tobias Yao: a long- term idea for us. We've been there for 145 00:08:06,150 --> 00:08:09,390 Tobias Yao: quite a while. They continue to take market share away 146 00:08:09,390 --> 00:08:13,080 Tobias Yao: from the brick and mortar businesses, but they're the leader 147 00:08:13,080 --> 00:08:16,349 Tobias Yao: in online, but they're at a stage where they're large 148 00:08:16,349 --> 00:08:20,849 Tobias Yao: enough now to reap some of the scale benefits. And 149 00:08:21,120 --> 00:08:24,960 Tobias Yao: the platform is very modern. They are going into artificial 150 00:08:24,960 --> 00:08:29,460 Tobias Yao: intelligence, they're spending money on TV advertisements, and they're really 151 00:08:29,460 --> 00:08:33,660 Tobias Yao: trying to create, I guess, the JB Hi- Fi equivalent 152 00:08:33,660 --> 00:08:37,770 Tobias Yao: in the homeware and in the furniture space. So we believe 153 00:08:37,770 --> 00:08:40,679 Tobias Yao: that Australia's about five years behind the US, but there's 154 00:08:40,859 --> 00:08:44,520 Tobias Yao: a company in the US called Wayfair that experienced extraordinary 155 00:08:44,520 --> 00:08:48,480 Tobias Yao: amount of growth, given the online penetration rate kept going 156 00:08:48,480 --> 00:08:50,999 Tobias Yao: up. And so we believe Temple & Webster could follow a 157 00:08:51,000 --> 00:08:53,550 Tobias Yao: very similar path over the next five years. 158 00:08:53,880 --> 00:08:55,980 Sean Aylmer: Well, I mean, I'll remind listeners that you should always 159 00:08:55,980 --> 00:08:59,129 Sean Aylmer: get professional advice to suit your circumstances when investing, but 160 00:08:59,129 --> 00:09:00,600 Sean Aylmer: I'm now going to give another shout out to Temple & 161 00:09:00,600 --> 00:09:03,630 Sean Aylmer: Webster because I reckon their delivery is really, really good 162 00:09:03,630 --> 00:09:05,670 Sean Aylmer: comes when it says it does it is what it 163 00:09:05,670 --> 00:09:10,170 Sean Aylmer: is well- packed. Anyway, I digress. Before we finish, maybe 164 00:09:10,170 --> 00:09:12,599 Sean Aylmer: you can just remind us if I'm a mum and 165 00:09:12,599 --> 00:09:15,389 Sean Aylmer: dad investor, I'm a bit different to you, Tobias, because 166 00:09:15,389 --> 00:09:17,639 Sean Aylmer: Wilson Asset Management obviously has a lot more money and 167 00:09:17,639 --> 00:09:20,820 Sean Aylmer: invests in a broader spectrum, but there'd be rules that 168 00:09:20,820 --> 00:09:24,390 Sean Aylmer: you follow that a mum and dad investor might be 169 00:09:24,390 --> 00:09:26,820 Sean Aylmer: able to follow too. Now, you sort of alluded to 170 00:09:26,820 --> 00:09:29,939 Sean Aylmer: some of them already about longer term investing and stuff 171 00:09:29,940 --> 00:09:32,520 Sean Aylmer: like that, but what are the two or three things 172 00:09:32,520 --> 00:09:35,969 Sean Aylmer: that maybe retail investors can take from this podcast about 173 00:09:35,969 --> 00:09:36,839 Sean Aylmer: how to invest? 174 00:09:37,679 --> 00:09:41,280 Tobias Yao: Yeah, I guess for long- term, I guess stock ideas, 175 00:09:41,580 --> 00:09:45,929 Tobias Yao: the ideal stock typically ticks three boxes. Firstly, I think 176 00:09:45,929 --> 00:09:48,088 Tobias Yao: I've touched it on earlier, it needs to be a founder- 177 00:09:48,090 --> 00:09:51,360 Tobias Yao: led business or where the management team has significant skin 178 00:09:51,360 --> 00:09:55,620 Tobias Yao: in the game. So in the case of Tuas Limited, 179 00:09:55,950 --> 00:10:00,179 Tobias Yao: the founder owns 35% of the company or 37% of the company, 180 00:10:00,179 --> 00:10:03,630 Tobias Yao: I think. So that's a huge chunk of the business. 181 00:10:04,139 --> 00:10:06,389 Tobias Yao: In the case of Temple & Webster, the founder who's a 182 00:10:06,389 --> 00:10:09,299 Tobias Yao: CEO also owns quite a large part of the business 183 00:10:09,299 --> 00:10:12,689 Tobias Yao: as well. And so their focus is on the next 184 00:10:12,690 --> 00:10:15,150 Tobias Yao: three to five years, and they have a very strong 185 00:10:15,150 --> 00:10:20,010 Tobias Yao: alignment of interest with minority shareholders like us. The second 186 00:10:20,010 --> 00:10:22,020 Tobias Yao: box you need to take is the business needs to 187 00:10:22,020 --> 00:10:26,549 Tobias Yao: be able to grow organically, and in particular growing volume 188 00:10:26,549 --> 00:10:29,699 Tobias Yao: or the number of new customers instead of just putting 189 00:10:29,699 --> 00:10:32,790 Tobias Yao: out prices. So we spend a lot of time trying 190 00:10:32,790 --> 00:10:35,670 Tobias Yao: to understand and verifying why certain companies are winning and 191 00:10:35,880 --> 00:10:39,450 Tobias Yao: how sustainable is that winning advantage. And the final box 192 00:10:39,540 --> 00:10:42,150 Tobias Yao: is that it needs to have a very healthy balance 193 00:10:42,150 --> 00:10:45,030 Tobias Yao: sheet. So ideally, with cash on the balance sheet and 194 00:10:45,030 --> 00:10:49,620 Tobias Yao: no debt, this is both downside protection during periods of 195 00:10:49,830 --> 00:10:55,140 Tobias Yao: volatile economic environment, but also provides management the flexibility to 196 00:10:55,200 --> 00:11:00,328 Tobias Yao: acquire strategically important assets or grow in adjacent areas. 197 00:11:01,230 --> 00:11:04,379 Sean Aylmer: Fantastic. Tobias, thank you very much for talking to Fear & Greed. 198 00:11:04,830 --> 00:11:05,939 Tobias Yao: Thank you very much for having me. 199 00:11:06,150 --> 00:11:10,050 Sean Aylmer: That was Tobias Yao, portfolio manager at Wilson Asset Management. 200 00:11:10,050 --> 00:11:12,210 Sean Aylmer: This is the Fear & Greed business interview. Remember, this is 201 00:11:12,210 --> 00:11:15,478 Sean Aylmer: general information only and you should seek professional advice before 202 00:11:15,480 --> 00:11:18,150 Sean Aylmer: making investment decisions. Join us every morning for the full 203 00:11:18,150 --> 00:11:21,720 Sean Aylmer: episode of Fear & Greed, Australia's best business podcast. I'm Sean 204 00:11:21,809 --> 00:11:22,949 Sean Aylmer: Aylmer. Enjoy your day.