1 00:00:04,080 --> 00:00:06,240 Speaker 1: Welcome to the Fear and Greed Summer series, brought to 2 00:00:06,280 --> 00:00:09,920 Speaker 1: you by Montgomery Investment Management. I'm Sean Almer. Small caps 3 00:00:09,920 --> 00:00:12,160 Speaker 1: had a much better time of it in twenty twenty five, 4 00:00:12,200 --> 00:00:14,520 Speaker 1: at least compared to the previous couple of years. Can 5 00:00:14,560 --> 00:00:17,160 Speaker 1: that keep going? What type of small caps should investors 6 00:00:17,200 --> 00:00:19,560 Speaker 1: be looking for? Roger Montgomery is the founder and chief 7 00:00:19,600 --> 00:00:23,239 Speaker 1: investment officer of Montgomery Investment Management. Roger, welcome back to 8 00:00:23,239 --> 00:00:23,720 Speaker 1: Fear and Greed. 9 00:00:23,760 --> 00:00:24,319 Speaker 2: Great to be with you. 10 00:00:24,320 --> 00:00:28,120 Speaker 1: Sean, small caps A couple of questions. Yeah, can they 11 00:00:28,120 --> 00:00:30,920 Speaker 1: stick keep running? So they had a much better last 12 00:00:30,920 --> 00:00:33,920 Speaker 1: twelve months, much better twenty twenty five broadly. But the 13 00:00:33,960 --> 00:00:36,280 Speaker 1: second part of that is what type of small caps? 14 00:00:36,440 --> 00:00:40,239 Speaker 2: Yeah, so it's a great question because you know, we 15 00:00:40,280 --> 00:00:41,879 Speaker 2: need to look at our crystal ball to know what's 16 00:00:41,880 --> 00:00:44,919 Speaker 2: going to happen next, and we don't have one. What 17 00:00:45,000 --> 00:00:47,800 Speaker 2: we do know is over the long run, there are 18 00:00:47,840 --> 00:00:51,879 Speaker 2: inevitably periods where small caps underperform the large companies and 19 00:00:51,920 --> 00:00:55,840 Speaker 2: then periods where that reverses. We've had an extended period 20 00:00:56,080 --> 00:00:59,200 Speaker 2: where they've underperformed, and towards the end of twenty twenty 21 00:00:59,240 --> 00:01:03,480 Speaker 2: five they started to outperform again, which is terrific. It's 22 00:01:03,520 --> 00:01:05,959 Speaker 2: something that we were hoping happened would happen a year 23 00:01:06,000 --> 00:01:08,480 Speaker 2: before or year before that, but it's taken a while. 24 00:01:09,040 --> 00:01:12,039 Speaker 2: And the reason for it, I think is that, or 25 00:01:12,040 --> 00:01:16,319 Speaker 2: the reason for the underperformance is that as international investors 26 00:01:16,760 --> 00:01:21,200 Speaker 2: took money off the AI theme, they looked for liquid 27 00:01:21,280 --> 00:01:24,160 Speaker 2: companies everywhere else in the world to invest in, and 28 00:01:24,200 --> 00:01:27,319 Speaker 2: they found the Comwealth Bank and the banks in Australia 29 00:01:27,319 --> 00:01:31,160 Speaker 2: for example. So it was really really hard to outperform 30 00:01:31,280 --> 00:01:34,160 Speaker 2: big caps when you've got the banks being driven to 31 00:01:34,280 --> 00:01:38,440 Speaker 2: unrealistic valuations or market valuations, and so small caps found 32 00:01:38,480 --> 00:01:42,399 Speaker 2: it really really tough. But as that reversed, as people realize, okay, 33 00:01:42,480 --> 00:01:44,399 Speaker 2: CBA has gone as far as it's probably going to 34 00:01:44,400 --> 00:01:48,800 Speaker 2: go for the time being, the rewaiting or the rebalancing 35 00:01:48,800 --> 00:01:51,800 Speaker 2: of portfolios by fund managers saw them look to opportunities 36 00:01:52,000 --> 00:01:54,400 Speaker 2: that had been left behind. And that's another theme that 37 00:01:54,440 --> 00:01:56,440 Speaker 2: you see in the stock market over and over again. 38 00:01:56,480 --> 00:01:58,960 Speaker 2: It's a little bit irrational sometimes, but what you see 39 00:01:59,000 --> 00:02:03,279 Speaker 2: is you see the Ferrari wins against the vw Combe 40 00:02:03,560 --> 00:02:07,000 Speaker 2: every race. Every time they race together, the Ferrari wins. 41 00:02:07,560 --> 00:02:10,679 Speaker 2: Eventually in investment circles. People say, you know what, I 42 00:02:10,720 --> 00:02:12,600 Speaker 2: think we're going to bet on the Kombe. The Kombi 43 00:02:12,720 --> 00:02:14,959 Speaker 2: is going to win now because you know it hasn't 44 00:02:14,960 --> 00:02:17,120 Speaker 2: won for a while. So there's a bit of that 45 00:02:17,200 --> 00:02:20,079 Speaker 2: going on. But really, and that's why your second part 46 00:02:20,080 --> 00:02:23,440 Speaker 2: of the question is so important. Which small caps you 47 00:02:23,440 --> 00:02:26,000 Speaker 2: want to look for quality businesses that are growing. And 48 00:02:26,040 --> 00:02:29,200 Speaker 2: that's the other thing. I'll say small caps for the 49 00:02:29,240 --> 00:02:31,959 Speaker 2: pe that you're paying for the price earnings multiple that 50 00:02:32,000 --> 00:02:34,280 Speaker 2: you're paying, which is very similar to the pe on 51 00:02:34,360 --> 00:02:37,200 Speaker 2: large caps, you're getting three or four times the growth. 52 00:02:37,800 --> 00:02:40,880 Speaker 2: So large caps are growing at low single digits in Australia. 53 00:02:41,200 --> 00:02:46,080 Speaker 2: Australian small caps are growing mid double digits, even high teams, 54 00:02:46,800 --> 00:02:50,120 Speaker 2: and so you're getting more growth, you're getting more bang 55 00:02:50,200 --> 00:02:54,040 Speaker 2: for buck. And that's why our small cap team believe 56 00:02:54,160 --> 00:02:57,200 Speaker 2: that this outperformance that we've seen in small caps will continue. 57 00:02:57,280 --> 00:02:59,680 Speaker 1: Okay, but not all small caps are the same. If 58 00:02:59,680 --> 00:03:01,840 Speaker 1: you're goal small cap, over the last twelve months you 59 00:03:01,919 --> 00:03:06,440 Speaker 1: had a cracking time, yes, right, and commodities aside. What 60 00:03:06,560 --> 00:03:09,079 Speaker 1: should you be looking for in a small cap though? 61 00:03:09,400 --> 00:03:12,160 Speaker 1: Is it all about balance sheet management those types of things, 62 00:03:12,280 --> 00:03:14,280 Speaker 1: or are there sectors you should be thinking about. How 63 00:03:14,320 --> 00:03:15,120 Speaker 1: do you think about it? 64 00:03:15,240 --> 00:03:18,840 Speaker 2: Well, the challenge for small caps is that it really 65 00:03:19,160 --> 00:03:21,320 Speaker 2: a lot more of the success is down to the 66 00:03:21,360 --> 00:03:25,280 Speaker 2: people involved. You know, you want to have great governance, 67 00:03:25,400 --> 00:03:28,280 Speaker 2: you want to make sure you've got experienced capital managers, 68 00:03:28,320 --> 00:03:31,520 Speaker 2: you want to make sure you've got experienced operators. And 69 00:03:31,600 --> 00:03:36,680 Speaker 2: so that's why in Australia, small cap fund managers outperform, 70 00:03:36,960 --> 00:03:41,440 Speaker 2: including our team, outperform the small cap index. So you 71 00:03:41,440 --> 00:03:44,720 Speaker 2: know you've heard you often hear oh, active management doesn't work. 72 00:03:45,240 --> 00:03:47,800 Speaker 2: Fund managers don't beat the index. Well, that's actually not 73 00:03:47,800 --> 00:03:50,760 Speaker 2: true in Australia in small caps, and it comes down 74 00:03:50,760 --> 00:03:53,040 Speaker 2: to the fact that the small cap fund managers are 75 00:03:53,040 --> 00:03:56,200 Speaker 2: able to meet with these with these operators and get 76 00:03:56,280 --> 00:03:59,240 Speaker 2: to know them and follow the business closely. And that's 77 00:03:59,280 --> 00:04:01,360 Speaker 2: a little bit harder to do when you're trying to 78 00:04:01,360 --> 00:04:03,560 Speaker 2: do it yourself. And that's why if you want some 79 00:04:03,640 --> 00:04:06,960 Speaker 2: exposure to small caps, it does make sense to think 80 00:04:06,960 --> 00:04:10,160 Speaker 2: about going through a fund and actively managed fund rather 81 00:04:10,160 --> 00:04:11,360 Speaker 2: than trying to do it yourself. 82 00:04:12,240 --> 00:04:14,240 Speaker 1: Having said that, are there any little small caps you 83 00:04:14,320 --> 00:04:14,760 Speaker 1: like at the moment? 84 00:04:15,000 --> 00:04:16,440 Speaker 2: Look, I'm not going to give you one. I'll give 85 00:04:16,480 --> 00:04:21,040 Speaker 2: you five, all right, we'll do it. Real Zip, which 86 00:04:21,080 --> 00:04:23,000 Speaker 2: is the buy now pay lad company growing in the 87 00:04:23,080 --> 00:04:26,160 Speaker 2: United States at a great rate of knots. There's Megaport. 88 00:04:26,560 --> 00:04:33,520 Speaker 2: Megaport's off. Megaport is the is the Switzerland of data centers, right, 89 00:04:33,640 --> 00:04:37,200 Speaker 2: So it's a provides the It provides the cables if 90 00:04:37,240 --> 00:04:40,800 Speaker 2: you like, and the hardware to connect data centers to 91 00:04:40,839 --> 00:04:43,880 Speaker 2: each other. Google doesn't want to talk to Apple or 92 00:04:43,920 --> 00:04:47,320 Speaker 2: Microsoft or Amazon, you know, so they talk to each 93 00:04:47,320 --> 00:04:51,839 Speaker 2: other through Megaport. Now what's happened is that Megaport have 94 00:04:51,960 --> 00:04:55,839 Speaker 2: made an acquisition and that acquisition hasn't been factored into 95 00:04:55,880 --> 00:04:58,960 Speaker 2: the market's numbers, and so it looks relatively cheap. It's 96 00:04:58,960 --> 00:05:03,159 Speaker 2: off about thirty two from its highs, and that's why 97 00:05:03,160 --> 00:05:06,119 Speaker 2: we like that one. Then there's Codean. Now Codan makes 98 00:05:06,160 --> 00:05:10,640 Speaker 2: the world's best gold detectors and gold detextas. 99 00:05:10,240 --> 00:05:11,440 Speaker 1: Everyone wants a gold detector. 100 00:05:11,520 --> 00:05:13,800 Speaker 2: It's a gold detector for Christmas. I don't know if 101 00:05:13,800 --> 00:05:17,719 Speaker 2: you've got one or not, but so that business is amazing. 102 00:05:17,760 --> 00:05:21,120 Speaker 2: It's up seventy one percent over the last twelve months, 103 00:05:21,640 --> 00:05:24,640 Speaker 2: but it's down about a quarter from its highs. And 104 00:05:24,680 --> 00:05:27,080 Speaker 2: with the gold price staying where it is, it is 105 00:05:27,279 --> 00:05:31,200 Speaker 2: very very likely that demand for gold detectors is not 106 00:05:31,279 --> 00:05:34,559 Speaker 2: going to come off, So that's another one. And another 107 00:05:34,600 --> 00:05:37,600 Speaker 2: one is MA Financial Group. So MA Financial Group are 108 00:05:37,600 --> 00:05:40,360 Speaker 2: a private credit manager. They have a lot of private 109 00:05:40,360 --> 00:05:43,160 Speaker 2: credit funds that are listed and they're seeing huge inflows 110 00:05:43,200 --> 00:05:48,479 Speaker 2: because of that aging demographic looking for regular income instead 111 00:05:48,480 --> 00:05:50,880 Speaker 2: of the volatility of the stock market, so they're seeing 112 00:05:50,960 --> 00:05:54,080 Speaker 2: huge amount of growth. And then the last one is 113 00:05:54,320 --> 00:05:58,280 Speaker 2: Generation Development Group, which is an interesting business if you're 114 00:05:58,279 --> 00:06:02,240 Speaker 2: not in the funds management space, but they provide software 115 00:06:02,279 --> 00:06:07,320 Speaker 2: that helps fund managers and financial planners set up managed accounts. 116 00:06:07,560 --> 00:06:11,719 Speaker 2: They also own lo sec, which is the independent research 117 00:06:11,960 --> 00:06:15,440 Speaker 2: agency that provides ratings for funds, and they're growing at 118 00:06:15,440 --> 00:06:17,400 Speaker 2: a great rate of knots at the moment. In fact, 119 00:06:17,880 --> 00:06:21,320 Speaker 2: they saw record investment bond inflow of about a third 120 00:06:21,360 --> 00:06:25,200 Speaker 2: of a billion dollars just recently, so they're continuing to grow. 121 00:06:25,440 --> 00:06:27,960 Speaker 2: And that's the point with small caps, you're looking for 122 00:06:28,080 --> 00:06:30,600 Speaker 2: extra growth. You do get a little bit more volatility 123 00:06:30,880 --> 00:06:33,320 Speaker 2: going with small caps, but that's why you look for 124 00:06:33,360 --> 00:06:36,239 Speaker 2: a manager who's able to identify the right management teams 125 00:06:36,800 --> 00:06:39,120 Speaker 2: running businesses that are growing at double digit rates. 126 00:06:39,160 --> 00:06:41,240 Speaker 1: Fantastic, Roger, thank you for talking to Fear and Greed 127 00:06:41,279 --> 00:06:41,920 Speaker 1: summer series. 128 00:06:42,240 --> 00:06:43,479 Speaker 2: Great to be with you, Sewan, thank you. 129 00:06:43,760 --> 00:06:47,320 Speaker 1: That is Roger Montgomery from Montgomery Investment Management. To learn more, 130 00:06:47,440 --> 00:06:49,840 Speaker 1: visit mont invest M O N T, I n V 131 00:06:50,000 --> 00:06:52,760 Speaker 1: eest mont invest dot com and you can sign up 132 00:06:52,760 --> 00:06:56,040 Speaker 1: for Roger's insights at Roger Montgomery dot com. Fear and 133 00:06:56,080 --> 00:06:58,280 Speaker 1: Greed is not a financial advice podcast. If you want 134 00:06:58,320 --> 00:07:00,560 Speaker 1: to invest, we recommend you visit a financial advisor who 135 00:07:00,560 --> 00:07:03,320 Speaker 1: can tailor investments to your needs. Don't forget to follow 136 00:07:03,360 --> 00:07:05,080 Speaker 1: on the podcast. I'm Sean al Mat This is Fear 137 00:07:05,160 --> 00:07:08,080 Speaker 1: and Greed, brought to you by Montgomery Investment Management