Ask an Advisor: Luke Laretive – Choosing a fund manager & making money in Aussie large caps

Bryce: [00:00:16] Welcome back to another episode of Equity Mates or should I say good day Legends? It's the Spin King here, and that's all I'm going to say.

Alec: [00:00:24] Well, the gusto and momentum of this ChatGPT translated intro is.

Bryce: [00:00:29] Yeah, I think ChatGPT is listening a bit.

Alec: [00:00:32] So, Bryce, we're back for another episode of Equity Mates. You are Shane Warne. And let's get into the episode and not dwell on that. 

Bryce: [00:00:41] That's it.

Alec: [00:00:42] Because we're here for What's Fast become one of our favourite types of episodes here at Equity Mate. And that is an Ask an advisor.

Bryce: [00:00:49] That's right. And today we have Luke Laretive from Seneca Financial. It is the second last episode for the series asking advisors a series for the year. As you said, it's been a it's been a series that has really resonated the community. And that's because a lot of the questions in the episode today come from the community.

Alec: [00:01:07] Yeah. So in this episode we're going to talk about building good financial habits, the things that Luke advises all of his clients to do, regardless of who they are and where they are in their financial journey. We're going to talk about selecting the manager. There's a lot spoken about, lot written about finding the right stock. There's a lot less spoken about finding the right fund manager and super fund and ETF provider. So we're going to talk about that. And then finally, Bryce and Luke are going to go head to head about the merits of investing in Aussie large caps. I don't actually know if you will go head to head, but it'll be a good conversation. 

Bryce: [00:01:44] Abit of a teaser there, Ren. Now a reminder that while we are licensed, we're not aware of your personal circumstances. So any information on this show is for education and entertainment purposes only. Any advice is general?

Alec: [00:01:56] Now, Bryce, before we get into it, two very exciting pieces of news as we close out the year. The first is that the third Annual Equity Mates Awards alive. This is your chance to celebrate the people, the products and the platforms that have delivered for the retail investor in 2023. The link is in the show notes or head to any of our channels and you will see. But we will be announcing the winners of the Equity Mates Award on the very last episode of this year. So get your votes in and make your voice heard. And secondly, Bryce, just an important reminder as we get towards Christmas that we have both of our books get started investing and don't stress, just invest. Ready and waiting. They form the perfect Christmas present for anyone in your life who wants to start 2024 off on the right financial foot so you can buy them wherever books are sold. If you buy them through, our website will sign them. That's a little Christmas bonus. You look a little bit surprised that yes, maybe I haven't told you that yet, but you will sign them. Or you can buy them, you know, wherever books are sold. But anyway, with that said, let's get ready for Luke.

Bryce: [00:03:09] Luke, welcome to Equity Mates.

Luke: [00:03:12] Bryce, Ren, how are you?.

Bryce: [00:03:13] Well, we're excited to have you here. We're going to cover a lot of ground. And this is part of our Ask an Advisor series. So we've got some questions from the community. But we're going to as I said, we've got a lot to get through. Let's start with a quick fire. And these are some of the questions that we get over and over and over again, and we'd love your thoughts on them. So to start with investing in shares or paying off your mortgage.

Luke: [00:03:35] Mortgage rate 7%, man, So I pay off your mortgage. It's not tax deductible that get rid of it all. It's pretty simple, really. 

Bryce: [00:03:41] Nice.

Luke: [00:03:42] You're not going to get a better risk adjusted return in the market.

Alec: [00:03:45] Didn't didn't you're funded more than.

Luke: [00:03:53] We're getting the promotional material item.

Alec: [00:03:57] All right. Second quick follow on the one that we get all the time. Investing inside or outside of super.

Luke: [00:04:03] They have to choose. I bought this easy answer. 

Alec: [00:04:05] Well, I mean, with every dollar, you have a choice. 

Luke: [00:04:07] Yeah. Okay. Well, you can only get, say, 25, 30 grand into super every year if you're working age. So yeah, definitely do that first. And then because it's like, you know, tax deferred and if you can to say by that being said, if you're saving for a goal like buying a house or, you know, doing something, starting a business or whatever it might be, then maybe, you know, saving in the markets outside of sleep is appropriate. Certainly like Claire and I say that I saw outside the market as outside of super as well as inside super.

Bryce: [00:04:38] And then to close out, what is the best way to invest for kids?

Luke: [00:04:41] Look, I don't know the best way to invest for kids. Like it probably depends on the kids and how much you're talking about investing. And there's lots of weird and wonderful ways you can structure things. What I do for my nephews, which is really simple using my own name, I just have a nephews account, just designate. It's just my just individual and I'm very boring. I put a thousand boxing there every birthday for both the nephews and then I just invest 50% in my Aussie shares product and 50% in our global equity product. Family group that account with all of my other accounts. So if I pay one set of admin fees. Yeah, it's shaped around. I get all tax reporting done for me. Yes, I pay a little bit more tax every year for the grandkids, but it means that if one of them is a crackhead down the road and I want to give him the money on that day. Yeah. So that's of thought. That's, you know, I've got control, you know, and I still also not have to put it in his parents name or, you know, like it's just simple. I think the extra cost is worth the simplicity. Like, the simplicity is worth the extra cost.

Alec: [00:05:34] So there's a couple of things we want to cover in this interview. First of all, building good financial habits, the stuff that you work with your clients on. Then we want to talk about selecting the manager. There's a lot of conversations around selecting stocks, but far less on choosing the right manager. Then we want to close out with some conversations around Australian shares. But let's start at the very beginning. Building good financial habits. When you meet a new client or maybe the kids of a client gets ushered into a meeting to start building some good habits. What are one of the first things that you work with a client on those early habits? 

Luke: [00:06:09] I think with a new client just want to build the appreciation for the markets being a sort of zero sum, adversarial kind of place. I kind of use the boxing and boxing kind of analogy like the other side of the ring. Mike Tyson standing there gritting his teeth and with his gloves on. Do you really want to get in that boxing ring? And whether that's employing someone to help you to box on your behalf? I was trained and serious about boxing or that's just not trying to box at all and do something that's more passive and simple. Like you guys kind of recommend all the time. I think they're both fine strategies and pretty, you know, both pretty easy to employ. It's just a question of your preferences and how you like to go about things. Obviously I'm an advisor, you know, I want people to employ me and hopefully we can do a good job for people and make it worthwhile to employ someone like me. But that being said, you know, I think a passive strategy works really well as well. So yeah, just trying to bring that appreciation and for them not to take their share portfolio, well, their investments like gambling, you know, I think there's a real habit and a lot of companies try and kind of gamify things and make it really attractive and interesting and make you feel like you're important, especially blokes like they get really get after that kind of gambling I'm smart type mentality. And I think, you know, having done this for a little while now, definitely just appreciating how dumb you are all the time is kind of a, you know, a cage.

Alec: [00:07:29] We are. We won't say the sponsor, so we have to say, yeah, we have a hard road. No gambling sponsors. But they always are reaching out. And one of the gambling sponsors reached out recently and they wanted to do a campaign like gambling is like investing away. So then let's move on from, I guess, the habits. And that was really mindset. Like, you know, zero sum. You know, every time you're buying something, someone's selling. But yeah, I think they're right. And the market will decide who is right in the long term. So once you've got the mindset and the habits conversation out of the way, what are some of the basic structures, building blocks, accounts, whatever it is, what are some of the things that you start with with new advice? 

Luke: [00:08:20] Client Yeah, I think so. You know, I advise high net worth families who are generally business owners, business operators or ex business owners and business operators. So, you know, I'm not working for every segment of the market. So as I said, it's sort of a little bit different, differentiated depending on how you talking to. I think a lot of the clients that come to me these days are actually coming from other advice businesses. I actually get it. Most of my business, my new inbound business firm. You know, accountants who have no business making investment recommendations, churn and being stockbrokers or, you know, just other people paying too much in an investment bank somewhere. So I think at the end of the day, that's sort of my they're often set up with structures. They're often set up with a reasonable plan. And it's not that they've been given necessarily bad advice, but maybe just the execution of the advice has been pretty average or they're not happy with the service. So just figuring out, you know, if they've got the right structures in place, you know, trusts and self-managed super, if that's the things they need or, you know, investing in the most tax efficient way. It's kind of the first port of call. And then once we figure that out, it's like making sure those investments mapped to the goals that they've stated. I think a lot of the time people have got, you know, a disparate mix of goals, but a lot of the time people just want to either maximise return for an a grade level of risk or, you know, minimise risk to achieve a specific level of return. So there's sort of two kind of optimisations that you can do for a client. And once we've sort of figured out what bucket the client sits in and I sort of risk minimise or max return or are they up in the other. It becomes pretty simple to sort of design a portfolio that's going to meet those objectives or hopefully maybe exceed them even. So yeah, that's sort of how we do it in terms of sort of a framework for it for each client. And then from there, you know, because we run managed accounts, because we do all the investing for clients, everything else pretty much takes care of itself. We've just got to make sure your client doesn't get, you know, too far away from their sort of strategic asset allocation and and subsequently too far away from their sort of goals and trying to target.

Bryce: [00:10:16] For a couple. What's the what would you say the amount needed is to justify self-managed super.

Luke: [00:10:24] Paul I'm actually not a big advocate for self-managed super okay. At all. I think if you're really into investing in property and you want to buy in self-managed super and there's other things you want to do with your super, then self-managed becomes sort of, you know, much more viable or needed. I think with investment platforms these days, you know, if you just want to control your the way that you sleep is invested. I mean, you can just roll your money into premium and you can have all of the control that you want, you know? So I don't really understand unless you're going to punt super on, you know, macro caps and taking placements, which, you know, I probably wouldn't recommend to the average couple. You know, I would be very surprised if the approved product list of any platform, you know, we use premium bought, whether it's net wealth or horrible, you know, probably any of the others that are out there from the major banks. I think yeah, it's a, you know, pretty surprise if you didn't have everything you kind of needed to to make and run a pretty successful investment portfolio. 

Bryce: [00:11:23] Well, we have as in superhero, which has that functionality. Obviously it's not as diverse. It's not as diverse as premium. They have a list of list games. 

Luke: [00:11:34] The structures are all much the same, whether it's a sort of an order structure or a managed investment scheme, which is what superhero is. You know, these things are essentially a regulated trust where you get your little slave and you can buy anything that the trust says is okay. It's pretty simple. 

Bryce: [00:11:49] Is there anything you disagree with the majority of your advisor? Piers.

Luke: [00:11:53] You know the answer to this question.

Alec: [00:11:56] We have to include this question because we know you've got strong Views like say.

Luke: [00:12:00] Say like, where do you want me to stop the look, I have lots of gripes with this industry. You know, whether it's financial advisors advising business owners on how to buy businesses. And yet I've never actually worked or run a business, you know, is sort of I find it was quite baffling that successful business owners want to take advice from people like that. I always find it interesting that, you know, fund managers run around espousing the the benefits and the outperformance potential of a founder led business, yet don't own a single share in the funds management business that they work for. Yeah. You know, it's like it to me, you know, there's just so many little paradoxes in the industry that don't make sense. I think from a client's perspective and the things that I sort of have seen recently and I'm a bit worried about, it's a lot of these alternatives product that's out there, particularly unlisted alternatives. I think liquidity is going to become a real concern over the next, you know, 12 and 24 months with rates of staying higher for longer. And I think a lot of this product isn't fairly mark to market. And what I mean by that is the price that you get on your report at the end of the month isn't a fair representation of the price if you actually to go to market and sell that asset. So, you know, I think whether it's the private credit stuff, the unlisted VC and stuff, you know, there's a range of product out there that's, you know, that's pretty various and spreading quality. But I am concerned that there's been a lot of money going into this stuff over the last few years as we've had this sort of zero rates environment in the hunt for yield and ageing populations and blah blah, blah. And you know, it's going to want to come out or it's going to be trapped. And, you know, I don't really see a reason why it goes in there in the first place. You can achieve the same sort of low or no volatility, low correlation. Product returns from liquid investments. There are out there strategies that deliver those sort of similar numbers. So yeah, I think it's a bit of a advise, a sleight of hand. You know, you get a client, you put him in a 5 or 7 year lock up fund, that client's going to be tied into your ongoing phase. They're going to be tied into that product that on the access that product through you. And it's an easy way to sort of keep the client engaged with you and not leave. So, you know, from office effective, we really like the liquid alternative space I have a strong preference for liquid investments over illiquid investments. I know there's a premium there. I know the story. Like I can, you know. Yes, I'm aware. But I just think that you can achieve almost, if not as good returns without tying you up. 

Alec: [00:14:27] What we're talking about the industry. When we were prepping for this interview, you mentioned you could talk about the dark secrets of financial advisors and funds management industry and how could we not take you up on that opportunity? So what are some of those dark secrets. 

Luke: [00:14:41] I don't have that dark secrets I like I said, I just think there's some things that don't quite make a lot of sense. If you can kind of step back and think about them. I think there's a lot of active managers out there that don't really take any active risk. You know, they don't actually the tracking errors, you know, minimal. I think, like I said, there's some pretty high fee, you know, alternative product that people are ripping really good livings out of and clients aren't making a lot of dough. I think there's a lot of funds that espouse their short selling ability, yet they only short sell to or up to, you know, 10% of their book at any given time. And and when they do do it it's actually a negative to like draws away from their outperformance doesn't add to it. So I think you know they're just really using it's always short so we can charge my face. You know it's they don't ever they're not actually using it, if that makes sense. So you know, there's a lot of sleight of hand, maybe not dark secrets, but sleight of hand that we say. And I think when it comes down to, you know, selecting managers and and trying to build multi-asset portfolios and and manage people's money, you know, understanding how to assess a product against a comparable product and not compare it to something that you shouldn't be comparing it to and also not expect returns or results that that that kind of products are not realistically going to deliver. I think he's kind of half the battle and that's what I think a lot of people go wrong and why they're sort of flipping between products all the time and and changing strategies is so they chase these, you know, return trailing returns or, you know, periods of return when in reality they should just be, you know, finding something that kind of works for them and then just sort of changing around the edges.

Bryce: [00:16:13] Well, that's a good segway into our next section, which is all about actually selecting fund managers. We speak a lot on the show about selecting individual stocks. We're really good at that. And but we think far less about selecting fund managers, right? And Red and I both are invested in funds, as are a lot of the community. But let's start with the top. Why is it an important conversation to have around the, you know, actually the process of selecting fund managers? 

Luke: [00:16:42] Yeah. I think it's it's kind of naive to think that, you know, you're going to be an outperforming manager or any firm's going to be an outperforming, you know, in every asset class. And like, you know, we know that the only free lunch in finance is diversification. So if you're going to be diversified, you're going to have exposure to equities, Australian equities, global equities, you know, investment grade debt, sub investment grade that, you know, some alternative strategies. I think if you think you're going to do all of that well at the same time, you're kidding yourself. So you need to be able to say, I might be able to do slave, I may well, but I can't do say day and f well. So I think, you know, having that framework and thinking about you're going to have this broad suite can't do it all well you need to be able to find other people who can do it well for you. And I think when you're trying to select a manager, you just want to be have a really clear understanding of what you're looking for. I think that's how it like I said, half the battle is just figuring out, okay, what role do am I trying to fill in this team of people who are trying to solve a problem? You know, you shouldn't be comparing, you know, an emerging markets manager to a to a developed markets manager or a large cap manager to a small cap manager or a fixed income manager to someone, you know, like it's not just about chasing the highest returns and trying to build this, you know, Goldilocks portfolio of assets that just do well all the time. Regardless, I think it's about finding balance, making sure that you're not taking away by adding something else and certainly trying to find something that fits your sort of risk profile and stage of life and is going to give you the type of return profile that, you know you're looking for.

Bryce: [00:18:22] I think in our situation, well, in mine anyway, and we've spoken about this over the last few weeks, having interviewed fund managers in emerging markets and small caps like that's where I see the benefit. The role to play for me personally is in that space. I don't need a large cap. Australian funds. You do plenty of other good things for them. You know what I mean? A large cap. U.S. equities, for example. It's the small cap space that I think it becomes interesting to me or the emerging markets where you can really take advantage of the expertise in that space. 

Luke: [00:19:05] So I think you've also got to appreciate that some markets offer more alpha opportunity. So, you know, if you're a top quartile ASX 2 or 300 benchmarked, you know, fund manager and you're looking at the best over 10 or 15 years, you're looking at like two, 3% alpha after fees per annum. So you look at Aussie Small over the last five years. We did some analysis when we launched our small cap fund. And I would like the 97 managers in our peer group that we looked at the top quartile beat the market over five years by 8% per annum. That's just top Quartile. So there's like 20, 20 odd managers there that are paying an average among that top quartile. So I think having a clear understanding, like I said, of what it's going to feel in your portfolio, I think emerging market is a really good example. The benchmark is has got a lot of exposure to China and maybe if you want to buy a manager, I mean, who's got more exposure to say, you know, the Middle East or to India or to South America, like these are sort of, you know, opportunities, I suppose, to outperform. And even if they don't necessarily generate higher returns, they can generate similar returns. So a lot less risk or they can generate similar returns and you sleep a lot better at night knowing that the financials that you're writing about, the companies that you're invested in aren't actually kosher. You know what I mean? So just a black box and so on. Just sort of throw it out at the board and hope that no one notices. So, yeah, I agree with you that there's certainly opportunities for Alpha in different markets and there are varying scale. But look, from my perspective, you know, I think there's times where passive works better than active and we're certainly agnostic, you know, in the way that we do things at Seneca. But yeah, as a general, as a general comment, we probably invested a lot more with active managers somehow with passive income. 

Alec: [00:20:58] So that's sort of a, we all say the role of active management. There's hundreds if not thousands of active fund managers in Australia all try to get our money. How do we go about separating the wheat from the chaff? How do we find those good managers? How do we assess them? And then once we're in them, how do we monitor them ongoing? So like what's the process to make sure we're getting the best of the best. 

Luke: [00:21:26] All the way, way to it. I'm a cynic is, I suppose, just not trying not to focus too much on trailing returns. I think everybody gets caught up on what managers have done. Even may, you know, first thing you mentioned all what he returns. You know, like that's kind of just nature. But I think at the end of the day, understanding what start like what the style of the manager is, what what the, you know, objectives are, what their benchmarks are, comparing managers who have got similar benchmarks, similar styles operating in similar markets, you know, it's pretty useless to compare. I saw the I think the Mercer survey came out recently and the best performing manager in the country last year was a good strategy. 

Alec: [00:22:06] Yeah, of course. 

Luke: [00:22:07] Like it's it like it's it's. Not that's not telling anyone anything. That's just saying that. Oh guess what was geared, geared and it concentrated with the top three. So it's like well duh. When the markets go up, if you got high, buy it. Are you going to win? Like that's just the nature of it. So being able to equalise for things like, you know, based on being able to equalise for things like volatility, being able to think about things, you know, not just what's happening, but okay, is this manager likely to keep outperforming based on our views of the world and how things are changing? So yeah, they're the sort of things that we're trying to focus on. It's probably a bit sort of asset class specific and even like sub asset class specific. So I think to give you some steps, like I wrote that article for Livewire, which people can go check out which talks about Australian Australian equities. 

Alec: [00:22:52] We'll include that in the show notes for each strategy. So let's take a large cap Aussie. Yeah. Is there a right number of managers for each strategy? Like do you just want one or like. 

Luke: [00:23:04] So we run 4 to 8 manages in each asset class. So in our large cap Aussie or in Aussie Australian equities at any given time we'll probably run to what we call core managers and that will be like 50 sort of 80% of the allocation depending on our views of the world. And then we'll normally throw in the other, you know, 20 to 50% will be small cap managers or special strategies or other kind of non-core strategies, and that's just Australian equities. And then you kind of going through like global equities, we have an emerging markets manager there where we have a large cap developed manager that probably have a small cap specialist. You know, we might look for an Asia specialist or Europe specialist or it might be like more small cap exposure, but value, you know. More of a value type strategy versus a growth strategy. It all just, you know, you got a lot of levers to pull in global equity. You know, you can work to add to our defensive income portfolio. We're not just going to be running, you know, diversified global bond strategies. You might have a couple of Australian specialists in there. We might have a long duration and no duration strategy. Like there's lots of different ways Gavi is versus taking risk. 

Alec: [00:24:04] So rolling it all up, how many funds or fund managers do you have at any one time?

Luke: [00:24:09] So at the moment, the it depends what the clients asset allocation is. If they've got, say, like a basic balanced portfolio, a balanced portfolio with us, they'll have five managed accounts. So at the moment that would be there's eight managers in all stays, six, six like sort of average of five, 25, 30 managers. Okay. In a multi-asset strategy, so it looks much more like a what you would say a super fund or an asset consultant recommend. And a lot less what like a stockbroker would recommend to you buy ten, 10 or 12 stock portfolio? Like it's just. But when you're dealing with tens of millions of dollars where you can't just whacking ten stocks and pretend it's diversified, like it's just absolute Fugazi bullshit. So, you know, like, it's like it's like, yeah, you know. 

Alec: [00:24:57] Step one, Get tens of millions of dollars. Then we'll have 30 managers. 

Luke: [00:25:01] Yeah. Look, even a smaller Portfolio like the beauty of platforms, the beauty of, like, not paying brokerage, the beauty of being able to, you know, you can invest three grand into some of these. She could be doing this with 150 grand. It would work perfectly fine. Yeah. You know, the reality is, is that people are so I don't have enough leverage that I have and it's not sexy enough. And that's you being bored. That's you trading it. You want a kick out of it? It's supposed to be boring. Yeah, you know what I mean? It's supposed to annoy you. Like it's supposed to not make you feel good about it. And then you look back in 20 years and you might.

Bryce: [00:25:31] So two coins out before we move on to specific stocks. Luke, you mentioned that, you know, some people fall into the trap of flip flopping between managers and getting frustrated and just chasing short term returns. So how regularly are you reviewing your managers and I guess trying to avoid that short term you haven't played in the market this year?

Alec: [00:25:49] I guess like what is flip flopping and then what is actually subbing out another performing manager. And I reckon there would be some managers that have thrived on the you got to be long term even though they just continue to underperform.

Bryce: [00:26:01] And I've been in funds too long that have underperformed but 

Luke: [00:26:05] Not my fund, Bryce. 

Bryce: [00:26:07] I think everyone should know which fund it is. 

Alec: [00:26:08] But yeah, you've spoken about it before. 

Bryce: [00:26:10] Yeah. Yeah. Underperform, underperform, underperform, underperform. And you kind of in there being like, oh, long term market, seven years whatever, longer a longer term turnaround and then eventually and eventually you just, you just like.

Luke: [00:26:22] Yeah. Look, I think our process is we make monthly. Most funds have got weekly or daily liquidity on a platform so we could do it more. But we think monthly is a good thing. Do we make changes every month? No. I would say we make changes to one of the portfolios, bearing in mind we've got five multi manager portfolios that we're looking at, as well as the two direct share portfolios that we run in-house. But those five, you know, we might change something every 1 or 2 months across five. But you know, most recently we've just like dialled up the yield on our aggressive income portfolio by adding more duration. So that's like, you know, over a 10% yield on that product now. And, you know, we've sort of taken a more of a view that like bonds aren't going to get much worse. So, you know, we think they're at 30 year lows. And so we're adding duration to our portfolios and, you know, different credit risk in our aggressive and our diverse defensive income and different profile. But nonetheless. Yeah, more duration. So they're the kind of things that happen. And I say on a month to month basis in terms of like when we get rid of someone or what's flip flopping. I think if you don't have a process, you're flip flopping, right? Like if you don't have a if you're not if it's not there solving a need for you and you're not comparing that to alternatives that you have available to you that are comparable and not just saying, oh, I could have done better in. Well, that's not really a thing. You know, if you've got a an Australian equities manager and they're, you know, got relatively low tracking error and they're an index plus two types sort of manager, not some stock portfolio or some kid thing where you're trying to really shoot the lights out or some, you know, micro-cap manager. You know, if you look at all the other managers in that peer group and they're consistently in the top quartile or, you know, in the top half over any sort of medium term period, you know, that's going to be a pretty good manager like and it doesn't mean they're not going to outperform. Outperformance from active tends to come in big spurts. So what happens is you have periods the best managers well, like I can talk about small because I've just done a lot of work on it. So you know, drawdown average Australian small cap manager, top quartile goes down like 35%. Bottom quartile 35% tackle the same. Same. Same. Volatility numbers. Same. Pretty much on every metric. The only differences is a max gain on the fund so that when the markets are good, who makes more money? A bad manager makes 30%. Good management 55. So the reality is it's more about like making hay while the sun shining and then dying less. Yeah. Do you know what I mean? Like, you're going to get beat up, markets are going to beat you. You're going to have periods, you know, three, six months, 12 months of underperformance is not unusual in active. But the key thing is to say, okay, has this manager been able to make money and more money when stuff is going well? Yeah. And that's where everyone is. So like right now go out the market, you see these outflows out of every manager. Everyone's like, Oh, the market's going down, I'm going to get back in when it goes. And then they miss the rent and then they're on the back and then they get then they back on the cycle again. So it's just a Yeah, it is. It is really frustrating for me because you see people sort of getting their own way. 

Alec: [00:29:22] Yeah. I think the key thing that I'm hearing in a lot of these answers about selecting the manager is doing the work to have a really clear understanding of the different types of managers. And even if they're investing in similar markets or similar products, like knowing like what their strategy is. So and then comparing them against each other rather than comparing them to like the overall market.

Luke: [00:29:44] And when they say founder led, you're going to ask them how many shares like owning the company they work for. That's the question. You found a lot. 

Alec: [00:29:56] So it's definitely one of the big buzzwords of, oh, yeah, yeah, yeah. Now, Luke Bryce had some things to say about active management in Australian large caps. Yes. So we want to get to that. I want to moderate the debate between the two of you. 

Luke: [00:30:11] I'm kicking him out of the title. 

Alec: [00:30:13] But before then, we're going to take a quick break to hear from our sponsors. Welcome back to Equity Mates. We're talking with Luke Laretive from Seneca Financial Solutions. We've spoken about building good financial habits. We've spoken about selecting fund managers and the process that Luke goes through to build, I guess, portfolios of fund managers. Now we want to turn to Australian shares because as well as being an adviser, you also run two funds, the cynical Australian shares, SMA and then the Seneca Small Australian Small Cap Fund. You've done well. Have I got that name right? Yeah. 

Luke: [00:30:52] Brainwashed. 

Alec: [00:30:55] And Aussie large caps like, you know the ASX 200 index 300. Often seen as boring, often overlooked cynical Australian shares. SMA invests in 20 to 40 companies from the ASX 200. Bryce doesn't think that's worth it. So make the case for us for Aussie large caps. 

Luke: [00:31:13] Yeah, sure. I think, you know, first and foremost, you know, there is less opportunity for alpha in large caps globally because the number of people who look at it. So I think when choosing a manager and in large, you kind of want to go with the style of manager that you like. And then if you if they're generating if they're at least covering their paying their way in terms of, you know, not being too far under benchmark, not being too far over benchmark after fees, I think it's well worth it because like I said, there are periods of time when you're going to pick up some extra returns in my experience, to be with a top quartile manager. So our product, like you said, we're focussed on on kind of quality growth businesses at reasonable prices. It's a very common trope that people run. So it's kind of more the way that we like to do it, you know, being a kind of business owner and coming from industry, not sort of just, you know, working my way up inside financial services, I think, you know, we look at things through a sort of an ownership sort of approach. We think about things in a in a sort of like we own these businesses a little bit more, maybe a little bit more of a long term focus, but a bit more patient. And because I have a boss and I own the business, I don't have to worry about my quarter to quarter performance or my bonus next year. So, you know, it's a little bit of a different sort of approach in the way that we invest. Certainly, you know, we've done okay, you know, sort of since we started this three and a half years ago, I think to June 30th. And I'm as with, you know, sort of 14% per annum, beating the index by to almost 3% after four before fees. So but I don't pay fees. It's a zero fee product for our clients. Well, you know how you want to compare it. Like, do you want to count your advice fees? Because wherever you go, are you going to pay for advice? Yes. You know, can you just get two for one kind of thing? Yeah. But look, it's a you know, I think that Aussie equities, the Australian market's really bifurcated between kind of resources and banks. And I think you'll find that, you know, most managers are kind of their alpha is tied to either the sort of XDR, the resources index or the G, the industrials index. So it's more about their style than it is anything else. And I think, look, we tend to avoid investing in resources a lot. We do it. Don't get me wrong. So I'm not saying that, but it's not our it's generally not a huge source of alpha for us unless it's something like lithium, where we see a structural trend and we're kind of we're making money out of that. So yeah, they're the kind of I suppose that's the kind of the cases if you don't want to invest in just banks and just resources and just a really kind of concentrated name of sort of 18 companies, which are the majority of the index buying an ETF at the ASX 200 level to me doesn't actually give me a representative sample of the Australian economy. So even if you were playing sort of like long term profits and the kind of ETF argument, you're not actually getting it from the index and so you can combine equal weight. But then I think you're buying too much junk at the bottom. Like we've done heaps of work on the inclusions exclusions of the ASX 200. And there's just so much unprofitable zero revenue stuff that comes into the index and you end up putting if you're in the equal weight, you know, to an opportunity portfolio. A Look, I'm, I'm a real proponent for active in the ASX 200 because of the construction of the index. And I think that's the key driver of alpha both in large and small in this country, to be honest. 

Bryce: [00:34:20] So look, we've got two companies that we want to get your thoughts on. The first is Allkem. The ticker is AKE, the second is Pexa ticker is PXA. So let's start with Allkem. What is the company and what's the investment thesis. 

Luke: [00:34:35] I'm going to super quick for you. So they do lithium, they do hard rock, they do brine. The company valued for the hard rock assets only no one values the brines. They're wrong. It's too cheap. Yeah, that's why. 

Alec: [00:34:49] This is a new format that we should introduce. Stock pitching. 25 words or less.

Luke: [00:34:53] Yeah. 

Bryce: [00:34:53] So undervalued assets there. 

Luke: [00:34:56] Mispriced because everyone, like, doesn't really understand brines are done. Can I say shitloads of work? I'm just going to go and read, you know, my stuff on brines. I've written lots and I know it backwards and get the market dismissed. I don't understand it. I went to Perth just last week and like, they're just obsessed with hard rock over there. And then I really understand brines at all. So the market doesn't price them. They've got some of the best restaurant assets in the world. 

Alec: [00:35:19] Is it brine in Australia or not?

Luke: [00:35:20] It's in South America.

Alec: [00:35:21] Okay. Yeah. 

Luke: [00:35:21] So. So, yeah, I just think it's a geographic kink of the ASX.

Alec: [00:35:27] Fascinating. All right, well, do we want to follow up? We could do that. 

Luke: [00:35:32] Why is it, like 11 bucks a share? It's like 18 dollar stock. 

Alec: [00:35:37] Okay. Love it. And then the second. The second company that we mentioned was PEXA. P-E-X-A, people may not be familiar with it so quickly what it is and then why you like it.

Luke: [00:35:50] Like I said, Bryce bought a house. Like when you buy a house, you have to do like conveyancing and like you change the title and like, Pexa do the settlement and the title. 

Bryce: [00:35:57] Yeah, that's where I recognise it from. Yeah. So listen. 

Alec: [00:36:02] Hey, because the house is older than the 1980s, it's been an absolute nightmare. Because you still got paper based conveyancing for title. 

Luke: [00:36:10] And probably the bank were trying to figure out find enough money for him to actually to transfer the money for him to a house. He's bought that. So I think, look, that's what they do. They do digitised property settlements essentially in Australia. They've got like 90 plus percent market share. Like it's the, it's it, right? 

Alec: [00:36:26] That it was, it was created by all the banks wasn't it. So the definition of a monopoly. 

Luke: [00:36:33] It is a monopoly. Yeah. Right. Monopoly business in Australia I describe it as going fine, but obviously like property settlements in Australia have kind of like declined to be. The people aren't buying as many properties, volumes are low. We hear about all this stuff all the time, you know, mortgage cliff, blah blah, blah. So the price went down quite a bit. And so Ben Knight had a look at it and it looked very cheap. Essentially it's just price for the Australian monopoly now. So I'd be like, okay, we think that the chance of the UK not digitising their settlement system the same way we have here in Australia, given similar legal framework, similar kind of, you know, legal history. And the way they do things over there is quite pretty much the same way we think Pexa can win in that market, at least some market share. Good, good. Like green shoots already that kind of doing pretty well. And yeah, we reckon if they can win there too much bigger market than what they've got here. If they win the UK and become the same as here, that it's multiples of the current share price. But even if they don't just like if you modest assumptions and you can see a pretty nice change a step change in the earnings. So yeah, that's kind of where we're at with that. 

Alec: [00:37:35] And it feels like a real winner takes all market. 

Luke: [00:37:39] Okay, I don't necessarily agree, but I think that it's I think if you can be the winner, like winner take all, take, take all but they might be to the UK is pretty big. 

Alec: [00:37:48] Yeah, and they just bought a company in the UK. 

Luke: [00:37:51] Yeah they're buying a few things and you know market always starts on when people buy stuff internationally, especially for first time of, you know, stepping out over there. And you know, there's other companies that you can look at that have been a bit of a graveyard. 

Alec: [00:38:02] I've been. Burt So Slater and Gordon, they made their UK acquisition and I lost all my money. 

Luke: [00:38:07] That's called being a criminal. That's a different a different story. 

Alec: [00:38:14] And then when I was. Working at Coles, which was owned by Wesfarmers, I saw their experience of trying to do the Bunnings UK for an extended over there, which didn't really work. So I'm always a bit sceptical. On Aussie businesses going to the UK. 

Luke: [00:38:27] I think it's fine. I think you're right, there's a lot of risk with some of these physical things. I think software is a little bit easier, a little bit more malleable as a business unit. You know, you can change a software business a little bit quicker and easier. And certainly once you do have those relationships with the solicitors and the people who are working in the property sector, they're unlikely to change. Yeah. So, you know, whether it's we've seen that, you know, across a range of other kind of, you know, SAS type businesses and I wouldn't say that Pex is necessarily a SAS business, but certainly it's got really nice, steady recurring revenues. And yeah, so we like Pexa. 

Alec: [00:39:04] Nice, love it. Well, we didn't have a heap of time, but I feel like you gave a pretty good accounting of quite company.

Luke: [00:39:10] Yes, like a short, quick and dirty. Okay. 

Bryce: [00:39:17] Well Luke, thank you so much. That brings us to the end. We do really appreciate it. If you want more information on Seneca Financial, we've included links in the show notes for the websites senecafs.com.au, Luke is always available to have a chat but we do really appreciate it. Thank you so much.

Luke: [00:39:32] It's a pleasure gentlemen as always.