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Speaker 1: Welcome to the Fearing Greed Business Interview. I'm Sean Almer.

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Speaker 1: Is the ASEX in trouble. James Hardy is set to

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Speaker 1: merge with US giant AAAC A z e K, in

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Speaker 1: a move that will see the new company's primary listing

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Speaker 1: on Wall Street a secondary listing here on the AX.

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Speaker 1: It was a similar story when Australian gold miner new

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Speaker 1: Crest was brought out by Newmont last year. The new

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Speaker 1: company is still listed here, but as a secondary listing.

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Speaker 1: More and more investors are buying US shares think Magnificent

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Speaker 1: seven and with a couple of exceptions, we're unlikely to

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Speaker 1: see any major new listings here on the AX anytime soon.

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Speaker 1: Think can for Air Wallix, they're likely to list overseas,

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Speaker 1: So what's that mean for the AX. As always, this

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Speaker 1: podcast contains general information only and you should seek professional

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Speaker 1: advice before making investment decisions. We speak regularly to Roger Montgomery,

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Speaker 1: founder and Chief investment officer at Montgomery Investment Management. Roger,

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Speaker 1: Welcome back to Fear and Greed.

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Speaker 2: Always good to be with you, Shaw.

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Speaker 1: Just up when these companies are being taken over. In fact,

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Speaker 1: just go through the whole building materials group ad bre

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Speaker 1: CSR borrel this one yesterday James Hardy, James Hardy, what's

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Speaker 1: it mean for the AX should be the AX be worried?

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Speaker 2: Well, you said in your introduction they're in trouble, and

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Speaker 2: I think there's let me say this, I have some

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Speaker 2: sympathy for that view. There's certainly a shifting landscape. And

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Speaker 2: in answering the question, I guess you have to sort

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Speaker 2: of think of a framework to come up with all

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Speaker 2: of the reasons first why it's happening, and maybe some

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Speaker 2: suggestions about what could be done to fix the problem.

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Speaker 2: And the way to think about it maybe is in

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Speaker 2: terms of supply and demand. So if we think from

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Speaker 2: the supply side, there aren't as many companies listing on

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Speaker 2: the AX. Now you've highlighted one reason. One reason is

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Speaker 2: that in the US there is an unparalleled pool of

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Speaker 2: capital that just wants to invest in tech giants and

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Speaker 2: innovation driven companies. For a very long time, private equity

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Speaker 2: and public equity markets have been more willing than Australian investors,

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Speaker 2: perhaps to support profitless companies and to value those in

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Speaker 2: a way that appears appropriate to the founders of those businesses.

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Speaker 2: So that's true and that's one reason why we're not

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Speaker 2: seeing as many IPOs in the Australian market. Another reason

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Speaker 2: I think is that the listing process has convoluted in Australia,

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Speaker 2: so when a company prepares its IPO documents, it has

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Speaker 2: to lodge those with ASEK as it takes some time

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Speaker 2: to approve those and in fact quite a number of

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Speaker 2: weeks past. Now, if you've nominated the price that you're

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Speaker 2: going to list at, but it could be six weeks

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Speaker 2: before you list or issue that prospectives document, then the

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Speaker 2: markets could change. It's not a short enough time for

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Speaker 2: the pricing to respond to market conditions. So that's a

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Speaker 2: hurdle for listing in Australia and that's something that many

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Speaker 2: others in investment banking, and particularly the people at Baron

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Speaker 2: Joey last year suggested needed to be changed. And then

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Speaker 2: another issue is that for many business founders there's a

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Speaker 2: huge onus of responsibility when you're a listed company. You've

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Speaker 2: got continuous disclosure compliance requirements and all of these ongoing

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Speaker 2: regulatory requirements that you've got to meet as a listed company,

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Speaker 2: which used to be attractive when private equity wasn't willing

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Speaker 2: to pay a high price for your business. But nowadays

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Speaker 2: the private equity markets, the private equity pool of capital

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Speaker 2: is very very deep. Lots of people have put money

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Speaker 2: into private equity because it doesn't have that public market

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Speaker 2: volatility exposure to it, and consequently private equity have very

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Speaker 2: deep pockets, so they've been able to pay higher prices

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Speaker 2: for business founders to exit or for growth capital, for example.

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Speaker 2: And that has meant that the outcomes that founders might

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Speaker 2: have looked for exiting their business and selling it on

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Speaker 2: the IPO market or the listed market isn't the only

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Speaker 2: avenue to pursue. You've now got you might get just

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Speaker 2: the same price without the regulatory burdens by selling to

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Speaker 2: private equity, And so now private equity competes with the

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Speaker 2: public market for businesses.

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Speaker 1: How As superannuation funds feed into this, we know that

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Speaker 1: when I put my money into my super fund and

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Speaker 1: I nominate X amount chairs and I say local chairs,

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Speaker 1: international chairs, it's going to be difficult sometimes to actually

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Speaker 1: find if it keeps going this way, Is it going

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Speaker 1: to be difficult to find fairly valued companies on the

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Speaker 1: AX when you've got so much money going to super.

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Speaker 2: Yeah, well you've got a lot of money going in.

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Speaker 2: That's the weight of money argument, and you know, it's

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Speaker 2: one I've heard many many times. You do have a

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Speaker 2: lot of money going to super every week, every day,

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Speaker 2: and that now has a shrinking pool of companies on

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Speaker 2: the ASX, but that money can invest in, and so

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Speaker 2: you know, from that perspective, you would think that that

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Speaker 2: means mispricing is going to occur, you know, and some

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Speaker 2: people would argue that markets or prices of stocks will

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Speaker 2: always be elevated as a consequence of that weight of

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Speaker 2: money in a concentrated a shrinking and more concentrated pool

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Speaker 2: of companies. But the reality is markets correct, Markets do

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Speaker 2: have crashes, and so you know, if it was the

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Speaker 2: case that superannuation was always going to keep stocks elevated,

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Speaker 2: then you wouldn't ever have crashes. But we know crashes

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Speaker 2: do happen. In fact, the market's full and ten percent

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Speaker 2: or so in February, so you know, so that's probably

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Speaker 2: not always going to be the case that mispricing is

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Speaker 2: going to be on the expensive side, because we do

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Speaker 2: know markets crash.

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Speaker 1: Stay with me and Roger, we'll be back in a minute.

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Speaker 1: I'm speaking to Roger Montgomery from Montgomery Investment management. So

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Speaker 1: let's look at how investors should play this, and as

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Speaker 1: an investor broadly in the local market, but in equities

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Speaker 1: more generally, much easier to buy international chairs now than

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Speaker 1: it ever has been. How should investors play these trends?

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Speaker 2: Well, it's interesting, you know, I wrote a actually wrote

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Speaker 2: this morning, not knowing that we were going to chat.

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Speaker 2: I wrote this morning a blog post comparing the ASEX

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Speaker 2: two hundred to the S and P five hundred over

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Speaker 2: five years, ten years, and fifteen years. And not only

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Speaker 2: did I include the dividends being reinvested in the ASEX

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Speaker 2: two hundred, but I also gave one and a half

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Speaker 2: percent to two percent for the franking credits, assuming that

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Speaker 2: an investor was a retiree in pension phase and got

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Speaker 2: the benefit of reinvesting those franking credits as well, And

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Speaker 2: so because they're in a zero tax environment. And what

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Speaker 2: I found was that over the short term, there is

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Speaker 2: and if you're an income investor and you like that

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Speaker 2: stable income from the banks and to a lesser extent,

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Speaker 2: the resource companies, there's some merit investing in the ASEX

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Speaker 2: two hundred. But over all of those timeframes that I mentioned,

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Speaker 2: the S and P five hundred when you take into

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Speaker 2: account with holdings tax and when you take into account

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Speaker 2: the currency, the Aussie dollar depreciation, so you know that's

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Speaker 2: the becaviate there. The S and P five hundred for

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Speaker 2: an Australian investor beat the ASEX two hundred, which is

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Speaker 2: one of the reasons why more investors are looking to

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Speaker 2: small caps for their growth. And by the way, I

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Speaker 2: think the reason for that, Sean is simple and relatively

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Speaker 2: easy to understand. And if you look at the ASEX

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Speaker 2: two hundred, the bulk of the profits of the ASEX

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Speaker 2: two hundred companies is paid out as a dividend, it's

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Speaker 2: about eighty percent or you know thereabouts. And what does

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Speaker 2: that mean, Well, that means there's only twenty percent of

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Speaker 2: profit it's left to be reinvested for compounding. Now, sure

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Speaker 2: shareholders are going to say, well, I'd rather have the money.

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Speaker 2: I don't trust CEOs and they always overpay for acquisitions

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Speaker 2: and do stupid things with the money, so I'd rather

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Speaker 2: have it. But maybe what's happening is in the US

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Speaker 2: it's kind of reversed. You know, you've got only about

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Speaker 2: a third to forty percent of the earnings paid out

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Speaker 2: as a dividend and the rest are retained and compounded

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Speaker 2: for growth. And you know, the best example I can

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Speaker 2: give you of that is Berkshire Hathaway where you know,

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Speaker 2: back in nineteen I think it was nineteen sixty five

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Speaker 2: or thereabouts, Warren Buffett took over Berkshire hath the way,

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Speaker 2: the share price at the time was about eighteen dollars.

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Speaker 2: Believe it or not, he did pay one divid end

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Speaker 2: and then he said, I quote thought better of it

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Speaker 2: and didn't pay a divit end again. Now, if you'd

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Speaker 2: bought a thousand dollars worth of shares at eighteen dollars

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Speaker 2: back then, and that was a lot of money in

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Speaker 2: nineteen sixty five today it's worth about about fifty million

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Speaker 2: US dollars, and so you know, you would have done

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Speaker 2: incredibly well with no dividends being paid. And people would say, well,

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Speaker 2: what do I do for income? And my response would be,

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Speaker 2: will sell a share to seven hundred and fifty thousand

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Speaker 2: US dollars and if you want to have a good year,

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Speaker 2: sell too. So that retention of profit and the cave

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Speaker 2: it is the reinvestment of that profit at a high

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Speaker 2: rate of return that leads to compounding growth. At a

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Speaker 2: higher rate than if you pay most of the earnings

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Speaker 2: out as a dividend and then you go and spend

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Speaker 2: that money. And so that's a big difference. And that's

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Speaker 2: one of the reasons why I think more investors are

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Speaker 2: focusing on small companies because many of those big caps

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Speaker 2: in Australia are mature businesses and the small caps are

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Speaker 2: able to grow.

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Speaker 1: So that blog post, where is it just for listeners

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Speaker 1: to go and chase it up.

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Speaker 2: It'll be up in the next week or so and

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Speaker 2: it'll be at Roger Montgomery dot com.

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Speaker 1: That's worth it because I've often wondered, when you take

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Speaker 1: in depreciation with holding tax frankin credits, how we perform?

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Speaker 1: And I get that in the short term five years

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Speaker 1: unless the Magnificent seven probably gives us any chance. But

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Speaker 1: in the longer term, the fact that the AX has

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Speaker 1: underperformed is quite incredible.

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Speaker 2: I think, yeah, over fifteen years, that's the conclusion I've reached.

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Speaker 1: Well, Roger, thank you for talking to Fear and Greed.

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Speaker 2: Always a pleasure, Seawan, talk to you again, sir.

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Speaker 1: That was Roger Montgomery, founder and chief investment officer at

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Speaker 1: Montgomery Investment Management. This is the Fear and Greed Business Interview.

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Speaker 1: Remember this is general information only, and you should seek

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Speaker 1: professional advice before making investment decisions. Join us every morning

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Speaker 1: for the full episode of Fear and Greed, daily business

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Speaker 1: news for people who make their own decisions. I'm Sean Elmer.

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Speaker 1: Enjoy your day.