1 00:00:03,790 --> 00:00:06,390 Sean Aylmer: Welcome to the Fear and Greed daily interview. I'm Sean 2 00:00:06,390 --> 00:00:10,040 Sean Aylmer: Aylmer. Investors might have heard of growth at a reasonable 3 00:00:10,150 --> 00:00:14,370 Sean Aylmer: price gap. Essentially, it's a strategy that combines both value 4 00:00:14,370 --> 00:00:18,299 Sean Aylmer: and growth investing when making decisions, but there's a view 5 00:00:18,300 --> 00:00:21,130 Sean Aylmer: that with rates at record lows, a different principle has 6 00:00:21,130 --> 00:00:24,919 Sean Aylmer: pervaded the market. Quality at any price. I wanted to 7 00:00:24,920 --> 00:00:27,220 Sean Aylmer: find out what this means and whether it's opened investors 8 00:00:27,630 --> 00:00:30,310 Sean Aylmer: to greater risk. Remember of course we're not an investment 9 00:00:30,310 --> 00:00:33,050 Sean Aylmer: podcast and this information is general only. You should get 10 00:00:33,050 --> 00:00:37,130 Sean Aylmer: professional advice. You certainly should before making any investment decisions. 11 00:00:37,510 --> 00:00:41,229 Sean Aylmer: Nicolas Bryon is portfolio manager of the Atlantic Pacific Australian 12 00:00:41,229 --> 00:00:43,269 Sean Aylmer: Equity Fund. Nicolas, welcome to Fear and Greed. 13 00:00:43,729 --> 00:00:44,380 Nicolas Bryon: Good day. Thank you. 14 00:00:45,050 --> 00:00:47,620 Sean Aylmer: Now we're going to do a 101 here, if that's 15 00:00:47,659 --> 00:00:49,459 Sean Aylmer: okay. So we're going to go through all these different 16 00:00:49,460 --> 00:00:54,160 Sean Aylmer: terms. We talk about growth and value investing. Kind of 17 00:00:54,830 --> 00:00:57,360 Sean Aylmer: a five second version of what growth investing is and 18 00:00:57,360 --> 00:00:59,230 Sean Aylmer: what value investing and then we're going to go into 19 00:00:59,230 --> 00:01:01,130 Sean Aylmer: the growth at a reasonable price definition. 20 00:01:01,610 --> 00:01:06,899 Nicolas Bryon: Sure. So growth would be considered looking at companies who 21 00:01:07,140 --> 00:01:13,080 Nicolas Bryon: due to industry dynamics or a particular product can sustain 22 00:01:13,270 --> 00:01:16,840 Nicolas Bryon: growth over a long period of time. In terms of 23 00:01:17,069 --> 00:01:23,200 Nicolas Bryon: value, that determines whether or not a company can be 24 00:01:23,200 --> 00:01:28,029 Nicolas Bryon: seen as relative to market multiples or from a discounted 25 00:01:28,170 --> 00:01:32,880 Nicolas Bryon: cash flow perspective, whether it's cheap relative to those metrics. 26 00:01:32,950 --> 00:01:36,730 Sean Aylmer: Okay. So traditionally tech stocks have always been thought of 27 00:01:36,730 --> 00:01:39,650 Sean Aylmer: as growth stocks, for example, whereas some of the more 28 00:01:39,650 --> 00:01:43,330 Sean Aylmer: cyclicals, maybe a media company, or maybe a consumer discretionary 29 00:01:43,330 --> 00:01:46,740 Sean Aylmer: company, depending on where it is in the cycle are 30 00:01:46,740 --> 00:01:48,170 Sean Aylmer: more value. That's right, isn't it? 31 00:01:49,530 --> 00:01:49,700 Nicolas Bryon: Yeah. 32 00:01:49,780 --> 00:01:53,440 Sean Aylmer: Typically, yeah. Okay. So then growth at a reasonable price, 33 00:01:53,600 --> 00:01:54,250 Sean Aylmer: explain that. 34 00:01:54,560 --> 00:01:57,700 Nicolas Bryon: So I guess the underlying concept is that when you're 35 00:01:57,700 --> 00:02:01,600 Nicolas Bryon: looking at the future growth of a company you want 36 00:02:01,600 --> 00:02:04,510 Nicolas Bryon: to be able to price that whether two years, three years 37 00:02:05,250 --> 00:02:08,950 Nicolas Bryon: or further into the future at a reasonable price such 38 00:02:08,950 --> 00:02:12,830 Nicolas Bryon: that the room for error when you are buying that 39 00:02:12,830 --> 00:02:18,610 Nicolas Bryon: security is sufficient. So, there's a concept called a PEG 40 00:02:18,900 --> 00:02:22,240 Nicolas Bryon: ratio. Essentially what you're trying to do with a ratio 41 00:02:22,240 --> 00:02:27,100 Nicolas Bryon: like that is to price the short term future growth. 42 00:02:27,480 --> 00:02:31,619 Nicolas Bryon: What we've seen over the past, probably three or four 43 00:02:31,620 --> 00:02:36,390 Nicolas Bryon: years, is that PEG ratios might well have been one 44 00:02:36,570 --> 00:02:41,680 Nicolas Bryon: or lower. They've expanded dramatically in some cases five times. 45 00:02:41,770 --> 00:02:45,650 Sean Aylmer: Okay. So PEGs page, it's price over earnings to growth. 46 00:02:45,760 --> 00:02:49,820 Nicolas Bryon: Yeah. That's sort of a variable that you can use to assess whether 47 00:02:49,820 --> 00:02:51,419 Nicolas Bryon: it's growth at a reasonable price. 48 00:02:51,810 --> 00:02:54,070 Sean Aylmer: Okay and so then more recently, as you're saying it's 49 00:02:54,070 --> 00:02:57,200 Sean Aylmer: above one in some cases, is that where you're starting 50 00:02:57,200 --> 00:02:59,410 Sean Aylmer: to talk about growth at any price, because people are 51 00:02:59,410 --> 00:03:02,850 Sean Aylmer: just kind of buying without thinking about the fundamentals. 52 00:03:03,190 --> 00:03:06,169 Nicolas Bryon: It's probably not just overwhelmed. I mean, there's many examples 53 00:03:06,169 --> 00:03:10,079 Nicolas Bryon: of companies that grow really fast and so maybe a 54 00:03:10,080 --> 00:03:14,070 Nicolas Bryon: high PEG is justified, but I guess when you have 55 00:03:14,660 --> 00:03:19,110 Nicolas Bryon: very, very low interest rates it's quite possible that the 56 00:03:19,110 --> 00:03:23,010 Nicolas Bryon: actual price that you are paying could be anything. So in the 57 00:03:23,010 --> 00:03:27,540 Nicolas Bryon: case of a traditional growth stock it may have traded 58 00:03:28,139 --> 00:03:33,090 Nicolas Bryon: on 15 times EV EBITDA, but there are many examples 59 00:03:33,090 --> 00:03:36,120 Nicolas Bryon: in the market where they're trading on 40 times and 60 00:03:36,120 --> 00:03:40,790 Nicolas Bryon: that's only appeared since we've had near zero rates. 61 00:03:40,790 --> 00:03:42,810 Sean Aylmer: Stay with me, Nicolas, we'll be back in a minute. 62 00:03:49,320 --> 00:03:52,070 Sean Aylmer: My guest today is Nicolas Bryon, portfolio manager of the 63 00:03:52,070 --> 00:03:58,240 Sean Aylmer: Atlantic Pacific Australian Equity Fund. Okay. Are there some examples 64 00:03:58,400 --> 00:04:02,040 Sean Aylmer: you can provide us that may need to derate effectively? 65 00:04:02,690 --> 00:04:05,920 Nicolas Bryon: Yeah, sure. The one company that always comes to mind 66 00:04:05,920 --> 00:04:10,900 Nicolas Bryon: is Cochlear. Obviously it's a great product. It's very well 67 00:04:10,900 --> 00:04:15,230 Nicolas Bryon: developed company in many investors' eyes. It would be seen 68 00:04:15,230 --> 00:04:19,580 Nicolas Bryon: as high quality company over a range of metrics. 69 00:04:19,779 --> 00:04:19,839 Sean Aylmer: Yep. 70 00:04:19,960 --> 00:04:22,790 Nicolas Bryon: Where I'm sort of coming from is the perspective that 71 00:04:23,210 --> 00:04:26,900 Nicolas Bryon: the pricing multiple for a stock like that has grown 72 00:04:26,900 --> 00:04:32,099 Nicolas Bryon: to a level which I don't think justifies the future growth. 73 00:04:33,000 --> 00:04:35,860 Sean Aylmer: Okay. So, I'm sorry. I'm interrupting you here for a moment Nicolas. We are 74 00:04:35,900 --> 00:04:38,409 Sean Aylmer: putting all these pieces together as we go. So, Cochlear 75 00:04:38,410 --> 00:04:42,299 Sean Aylmer: the healthcare company, which the cochlear implants, very successful over 76 00:04:42,300 --> 00:04:45,520 Sean Aylmer: many years. It's considered a growth stock being within the 77 00:04:45,520 --> 00:04:50,349 Sean Aylmer: healthcare environment, which of course is priced somewhat of, future earnings 78 00:04:50,350 --> 00:04:53,050 Sean Aylmer: are priced somewhat of interest rates, which are rising. 79 00:04:53,360 --> 00:04:54,330 Nicolas Bryon: Well, it should be. 80 00:04:54,500 --> 00:04:54,950 Sean Aylmer: Well, yes. 81 00:04:55,490 --> 00:04:58,909 Nicolas Bryon: In the sense that like with any long duration asset, whether 82 00:04:58,910 --> 00:05:02,670 Nicolas Bryon: it's those highly priced growth stocks, you could even argue 83 00:05:02,670 --> 00:05:06,219 Nicolas Bryon: in property as well, when interest rates start to rise, 84 00:05:06,580 --> 00:05:11,640 Nicolas Bryon: those types of stocks should see some derating. We have 85 00:05:11,640 --> 00:05:15,180 Nicolas Bryon: seen that to some extent in a range of healthcare 86 00:05:15,180 --> 00:05:20,050 Nicolas Bryon: stocks, whether it's Cochlear, ResMed's probably another example of a 87 00:05:20,050 --> 00:05:22,690 Nicolas Bryon: highly priced, high quality name. 88 00:05:22,690 --> 00:05:22,719 Sean Aylmer: Yep. 89 00:05:23,710 --> 00:05:27,240 Nicolas Bryon: And you know from our point of view, that is 90 00:05:27,550 --> 00:05:28,510 Nicolas Bryon: quality at any price. 91 00:05:29,210 --> 00:05:32,150 Sean Aylmer: Is there ever an argument that quality at any price 92 00:05:32,220 --> 00:05:33,140 Sean Aylmer: is okay. 93 00:05:33,510 --> 00:05:35,671 Nicolas Bryon: Well, clearly when interest rates are zero, because that's when it improves. 94 00:05:35,671 --> 00:05:36,240 Sean Aylmer: Yeah. Right. Yeah. Yeah. 95 00:05:37,800 --> 00:05:39,960 Nicolas Bryon: Otherwise, you wouldn't see it in my view. 96 00:05:40,360 --> 00:05:43,850 Sean Aylmer: So some of the healthcare names need a derating. 97 00:05:44,180 --> 00:05:48,920 Nicolas Bryon: Yeah. I believe so. If you look at other markets, 98 00:05:48,960 --> 00:05:52,810 Nicolas Bryon: whether you are looking at the tech or high growth consumer names, 99 00:05:53,110 --> 00:05:57,970 Nicolas Bryon: those too have derated, but certainly more materially than obviously 100 00:05:58,860 --> 00:05:59,500 Nicolas Bryon: in Australia. 101 00:05:59,760 --> 00:06:00,120 Sean Aylmer: Okay. 102 00:06:00,200 --> 00:06:04,599 Nicolas Bryon: There's sort of natural correlation between what stocks are going 103 00:06:04,770 --> 00:06:09,620 Nicolas Bryon: to perform in a rising bond yield environment versus those 104 00:06:09,620 --> 00:06:13,870 Nicolas Bryon: that should underperform on a relative basis. In our world 105 00:06:13,870 --> 00:06:18,159 Nicolas Bryon: where we're long and short equities, we necessarily will bet 106 00:06:18,260 --> 00:06:22,130 Nicolas Bryon: against those relatively high valuations. 107 00:06:22,520 --> 00:06:25,029 Sean Aylmer: What about, are there stocks out there that need re- 108 00:06:25,029 --> 00:06:26,810 Sean Aylmer: rating that you are happy to go along in? 109 00:06:27,490 --> 00:06:31,130 Nicolas Bryon: Yes, for sure. In an environment where you've gone from 110 00:06:31,560 --> 00:06:39,150 Nicolas Bryon: a reflationary rebound, plus COVID, to then moving through a 111 00:06:39,250 --> 00:06:45,560 Nicolas Bryon: energy crisis more recently via the Ukraine invasion, clearly energy 112 00:06:45,560 --> 00:06:49,130 Nicolas Bryon: space is an important space to be exposed to. The 113 00:06:49,130 --> 00:06:54,020 Nicolas Bryon: way that we've looked to get exposure in energy has 114 00:06:54,020 --> 00:06:58,900 Nicolas Bryon: been through both oil and gas, but also importantly thermal 115 00:06:58,900 --> 00:07:03,270 Nicolas Bryon: coal. So, the dynamic going on in thermal coal is 116 00:07:03,270 --> 00:07:08,900 Nicolas Bryon: quite an unusual historical precedent. Certainly my experience over the 117 00:07:08,900 --> 00:07:13,510 Nicolas Bryon: last 20 years or so, I've never seen anything that 118 00:07:13,510 --> 00:07:17,060 Nicolas Bryon: comes close to this. So, if we refer back to 119 00:07:17,140 --> 00:07:21,240 Nicolas Bryon: what happened to iron ore prices, post COVID, the iron 120 00:07:21,240 --> 00:07:24,350 Nicolas Bryon: ore producers were printing lots of cash. 121 00:07:24,870 --> 00:07:24,900 Sean Aylmer: Yep. 122 00:07:25,200 --> 00:07:28,980 Nicolas Bryon: And what that meant is that whether it was buybacks 123 00:07:29,100 --> 00:07:33,160 Nicolas Bryon: or special dividends, those cash flows were coming out of 124 00:07:33,270 --> 00:07:37,380 Nicolas Bryon: those companies to the order of 10 to 20%. In 125 00:07:37,380 --> 00:07:41,410 Nicolas Bryon: the case of thermal coal companies, it's quite possible that 126 00:07:41,410 --> 00:07:43,990 Nicolas Bryon: in a quarter, those sorts of cash flows are going 127 00:07:43,990 --> 00:07:50,030 Nicolas Bryon: to be seen. So it's highly peculiar that these companies 128 00:07:50,340 --> 00:07:54,930 Nicolas Bryon: are moving into these super non cash flows. So, yeah, 129 00:07:54,990 --> 00:07:58,239 Nicolas Bryon: that space we're positively disposed to. 130 00:07:58,510 --> 00:08:01,870 Sean Aylmer: How long can it last I suppose is the $ 64,000 question? 131 00:08:02,120 --> 00:08:05,490 Nicolas Bryon: Yeah, that's true. In some way you have to consider 132 00:08:05,740 --> 00:08:10,970 Nicolas Bryon: how long it takes for that Russian thermal coal supply 133 00:08:10,970 --> 00:08:14,630 Nicolas Bryon: to be displaced. Could it be over the next six 134 00:08:14,630 --> 00:08:18,570 Nicolas Bryon: months, the replacement cycle starts to accelerate. I find it 135 00:08:18,570 --> 00:08:23,740 Nicolas Bryon: difficult to take that view and so we probably more of 136 00:08:23,740 --> 00:08:27,650 Nicolas Bryon: a medium term view on thermal coal prices being elevated. 137 00:08:27,920 --> 00:08:31,580 Nicolas Bryon: And it's simply because it's related to base load electricity 138 00:08:31,710 --> 00:08:35,880 Nicolas Bryon: production. As the world reflates the world needs base load electricity. 139 00:08:36,020 --> 00:08:36,090 Sean Aylmer: Yep. 140 00:08:36,290 --> 00:08:41,479 Nicolas Bryon: And so together with the lack of investment in that 141 00:08:41,480 --> 00:08:45,849 Nicolas Bryon: space, merely being if you look at say a Whitehaven 142 00:08:45,850 --> 00:08:49,429 Nicolas Bryon: Coal, all that they're talking about is replacement capital. They're 143 00:08:49,429 --> 00:08:53,660 Nicolas Bryon: not looking at new mines, obviously there's a political issue surrounding 144 00:08:53,660 --> 00:08:58,270 Nicolas Bryon: that, but similarly, if you're looking across the globe, there's 145 00:08:58,270 --> 00:08:59,420 Nicolas Bryon: limited supply coming on. 146 00:08:59,490 --> 00:08:59,700 Sean Aylmer: Yeah. 147 00:09:00,120 --> 00:09:03,640 Nicolas Bryon: So it could well be the case that because of 148 00:09:03,640 --> 00:09:07,620 Nicolas Bryon: that lack of investment, the long term dynamics of that 149 00:09:07,620 --> 00:09:11,209 Nicolas Bryon: market are here to stay for a lot longer. Now 150 00:09:11,210 --> 00:09:14,220 Nicolas Bryon: not saying that prices will stay at 400 plus. 151 00:09:14,530 --> 00:09:14,559 Sean Aylmer: Yep. 152 00:09:14,630 --> 00:09:18,839 Nicolas Bryon: But long term averages, 70, 80 will shift up. 153 00:09:19,570 --> 00:09:21,310 Sean Aylmer: Nicolas, thank you for talking to Fear and Greed. 154 00:09:21,710 --> 00:09:21,850 Nicolas Bryon: Thank you. 155 00:09:22,510 --> 00:09:25,530 Sean Aylmer: That was Nicolas Bryon, portfolio manager of the Atlantic Pacific 156 00:09:25,620 --> 00:09:28,370 Sean Aylmer: Australian Equity Fund. This is the Fear and Greed daily 157 00:09:28,370 --> 00:09:31,580 Sean Aylmer: interview. Remember you should get professional advice before making any 158 00:09:31,580 --> 00:09:34,530 Sean Aylmer: investment decisions. Join us every morning for the full episode 159 00:09:34,530 --> 00:09:38,020 Sean Aylmer: of Fear and Greed, Australia's most popular business podcast. I'm Sean 160 00:09:38,070 --> 00:09:38,530 Sean Aylmer: Aylmer. Enjoy your day.