ASX week: Alison Savas – Two winners from decarbonisation

Bryce: [00:00:15] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce, and as always, I'm joined by my equity buddy Ren. How are you going? 

Alec: [00:00:30] I'm very good. Bryce very excited for this episode. I've been very excited this whole week as we deliver an ASX week across the Equity Mates podcast and then get started in Investing podcast. Yes, and there's so much to be excited about because we've had the chance to speak to some of the best investors from the best investing companies in Australia, and we're covering some really exciting topics as well. 

Bryce: [00:00:52] We are, and today is no different. Before we get into it, just a reminder that if you would like to listen to our expert from today, plus all of the others that presented at the ASX Investor Day, head to the ASX website Investor Day website at this link will be in the show notes, and you can watch it all for free. But it is our absolute pleasure to welcome to Equity Mates Alison Savas. Alison, welcome. 

Alison Savas: [00:01:16] Hi, guys. Thank you for having me today. 

Bryce: [00:01:18] So Alison is Antipodes client portfolio manager. She has almost two decades of experience in the investment management industry, working for leading managers in Australia and Singapore. Activities have an active ETF listed on the ASX, and the ticker code is a G X one, and we're going to be chatting today about decarbonisation, what's happening overseas and doing a bit of a look at a couple of stocks that are in super interesting in this space. 

Alec: [00:01:44] Yeah. Now, Alison, before we get into the thematic of decarbonisation and to particular companies that you're interested in around that theme, we wanted to start with the idea of pragmatic value because that's how Antipodes, Invest, Invest and you know, a lot of people have probably heard about value investing. You actually started your career at platinum under one of Australia's most famous value investors incur Neilson, but I don't expect too many people listening have heard of this pragmatic value approach. So can you take us through it? 

Alison Savas: [00:02:18] Pragmatic value, as the name suggests. We do have a value bias, so valuations do matter to us. But you know, we don't just buy stocks just because they're cheap. You know, we do look for good quality businesses that are cheap relative to their growth profile. Now, a traditional value approach is going to change the way to owning cheap or low multiple stocks with that expectation of mean reversion. Now what that can risk is structural change in an industry, and that's why companies are being permanently impaired by their competition. And so these stocks are cheap for a reason, and they can often be those classic value traps. And we don't want to own those sorts of businesses, you know, no matter how low that multiple might be. So it's really about finding just great businesses that are cheap relative to their their growth profile. 

Bryce: [00:03:09] Are you able to share some examples of this pragmatic value of, you know, your traditional value investing in what you're kind of saying today 

Alison Savas: [00:03:17] in that sort of being prepared to pay the right price for growth? So our portfolio contains a collection of stocks across that growth spectrum. So at the low end, you know, we do have exposure to GDP plus light growers that are on low multiples, but importantly, their market leaders, and they're not under a threat of disruption. So a good example there would be IAG Bank, you know, really well, capitalised retail bank. It's going to benefit from ongoing economic recovery in Europe, and it's valued on a nine per cent payout yield. So really attractive valuation. Now at the other end of the spectrum, we do have exposure to companies that are valued on what many would think of as being optically high pace, but they're growing at a really fast rate. So a good example of that bucket would be Tencent. You know, it's valued at 10 to 18 times core earnings, but those earnings are growing at 20 per cent per annum, so pay 19 times. It's not an expensive multiple to pay, you know. In fact, we think that's cheap. So IAG and Tencent both have a place in a pragmatic value portfolio. 

Alec: [00:04:22] Alison, I love the fact that you're interested in Tencent. I came in hot at the start of the year talking about how great a company Tencent was and have really suffered this year as it's fallen. But great to hear you guys are interested in it as well. 

Alison Savas: [00:04:36] Well, well, you'll be pleased to know we have actually been buying it recently. It's one of the we've we've used sort of that changing regulatory backdrop to add to our position. So we are we're like minded.

Alec: [00:04:47] that makes me feel better. 

Bryce: [00:04:50] Unfortunately, you need to give more context. Ren it was for us stock of the year. It doesn't matter what's going on now. 

Alec: [00:04:56] Yeah, every every year I have a kiss of death with the stock of the year. I can cut any company in half. So taking suggestions next year for companies that you want to say 

Bryce: [00:05:08] should outsource it.

Alec: [00:05:09] Yeah, yeah. But Alison, look, we want to. Speak about decarbonisation today, that was the key theme in your ASX Investor Day presentation. It's one that's really interesting to the Equity Mates community. Obviously, climate change is front of mind and when there's such a big disruption or such a big change across the world, there's big winners and losers as a result. So let's get stuck in and let's start at the very top. When we talk about decarbonisation, what are we talking about and what does that actually look like in the economy? 

Alison Savas: [00:05:45] Well, decarbonisation is the premature closing of fossil fuel based energy and replacing it with electricity from carbon neutral sources. So if we want to keep global warming to that one and a half to two degrees above pre-industrial levels, we need to halve greenhouse gases by 2050 and we need to eliminate them by 2100. Now, the bulk of these greenhouse gases are in the form of carbon dioxide, and that's hence the term decarbonisation. Now, another way to think about global warming is that 75 per cent of greenhouse gases are related to the combustion of fossil fuels, and most of that is is carbon dioxide and methane fuel is combusted in a really for two purposes. The first is is kinetic energy. So the notion to drive our cars or in an industrial process, it will be to spin a turbine and then fuels also combusted to create it heat. And that could be to heat or cool our homes or again and, you know, heat in an industrial process. In most of these cases, not all, but most of them. We can replace fossil fuels with electricity from non-fossil sources like hydro or variable renewables, like solar, wind or even nuclear, which you know, is a less popular choice. But it is a low carbon alternative. So, you know, from the perspective of the economy, you know, these technologies already exist, but we need to scale them up. And you know, that gets us three quarters of the way to achieving our climate objectives. 

Bryce: [00:07:21] Know there's no doubt that as citizens, there's, you know, we understand why decarbonisation is so important to fight climate change as investors, though why does decarbonisation represent a good investing somatic?

Alison Savas: [00:07:36] Look, the world, you know, as you say, the world is going to go greener. And you know, decarbonisation is a central pillar of policy in Europe, China and the US. So to meet the goals that policymakers have set, it requires an enormous amount of investment. And this isn't an investment cycle or a thematic that's going to play out over a few quarters. It's going to play out over decades. And you know, for us, that's what makes it such a great investment thematic. 

Alec: [00:08:03] There's a number of drivers of this theme, you know, obviously from the bottom up, costs have come down a lot in a whole bunch of renewables. The cost curve in solar is something to behold, but also from the top down was saying a lot of government policy come into the space and really and drive this change. We're recording right before Glasgow kicks off. This will be released after Glasgow, so hopefully we've seen some really strong commitments come out of that. But this feels like the right time to really be talking about decarbonisation and thinking about it as investors with Glasgow on our minds, what are we seeing from governments around the world, both in terms of commitments and then how that's really translating into policy?

Alison Savas: [00:08:46] I'll talk to the three major economic blocs because that's where we're really seeing quite a lot of a lot of a lot of change. China, the US and Europe. And I'll start with China. You know, China's got a goal to reach peak carbon emissions by 2030 and to be carbon neutral by 2060, which, you know, will be no easy feat for China given the starting position and and a pretty big dependence on coal. But the policy change that we are seeing in China is prioritising reducing emissions over adding more and more capacity to these very high emitting sectors like coal and steel and aluminium and chemicals. And China has some pretty, you know, has some of the most aggressive targets globally, with EVs to account for 20 per cent of new car sales by 2025. And you know, China's moving towards more renewables and you mentioned the cost of solar. You know, in China, the all in cost of greenfield solar is the same as coal without subsidies. So we're seeing China move in that direction. And then even in the US, the south west of the US is one of the richest solar resources globally, with more than I think it's around 10000 gigawatts of utility scale solar plants. And then in the Midwest, it's got wings throughout the entire year. Now, with investment in the grades connecting the North to the south, this wind could produce electricity every day, but the US needs to make invest and in this high voltage. In high voltage grid, so even though even with the US, there's a lot of gas. Given the extent of wind and solar that the US has, it increasingly makes sense for the US to invest in renewables, and we think this will accelerate under the Biden administration. I think where all the action is or where it's sort of most exciting is it's certainly in Europe. Europe's very serious about reducing carbon emissions, you know, with some of the most aggressive targets with a legally binding goal to reduce emissions by 55 per cent from 1990 levels and to be carbon neutral by 2050. Europe's got its new Green Deal, which is a four trillion euro investment plan over the next decade to help achieve these goals. So this is probably the context around that. Four trillion euros is equivalent to incremental investment of two per cent of GDP every year for the next 10 years, which is pretty significant when you compare it to Europe's economic growth rate. And it could create 20 million jobs, so it's also creating employment. Now at the core of this, this new Green Deal is Europe's emissions trading scheme, which has put a price on the cost of carbon abatement, such as the cost of reducing carbon emissions. Now this scheme is not new. It's been around since 2005, and it really targets the power sector and the very other large industrial emitters. So power producers have got to purchase certificates to offset their carbon emissions. But where it gets really interesting is that the number of certificates available every year, they they decline. So, you know, it's actually going to force the power sector to just switch to renewables and look at some really neat system because the funds that are generated from the sale of these certificates and it's not insignificant. We're talking around 40 to 60 billion euros per annum. Those funds are being used to subsidise a reduction in fossil fuels in other parts of the economy. So to subsidise the take up of these or to replace gas with green electricity. So Europe's Europe's got a real a real plan in place. But also what you can see here is that as electrification occurs in other sectors, it's going to lead for an increase in demand for electricity, which puts even more pressure on the power producers to switch to renewables. So, you know, on on the numbers that we have internally, we think wind and solar can grow from. It's around 20 per cent of power generation today to 60 per cent by 2030, which has a whole host of implications. You know, we're going to have to see investment in the grid. And in fact, we're seeing that play out in Europe's power market today. There's been an underinvestment in the great, and as renewable generation has increased, the grid's become unstable and it would need to see a lot more investment in transmission and distribution. We're going to need to see investment in storage because, you know, as you know, the Sun doesn't necessarily shine and the wind doesn't necessarily blow at the same time as peak demand. So we need to be able to store this excess generation in times of low demand so we don't lose the energy. So, you know, a lot needs to happen. You know, it's not just about to be the solar here, and it's made easier. It really is an investment supercycle which is going to play out over a very long period of time. 

Alec: [00:13:34] Alison, we're going to cover two stocks that you're particularly interested in in terms of how we play this thematic well in terms of how Antipodes is playing this thematic. Before we do, I want to pick up on something you mentioned there. You said Europe has had a trading scheme since 2005, and when I hear that, all I think is that Australia could have followed them in 2008. But instead we had a bit of a lost decade in terms of climate policy in Australia. So when you look at Europe and you see how far ahead they are, then Australia and the rest of the world, what can we learn from them? What should Australian policymakers be learning and perhaps copying from Europe? 

Alison Savas: [00:14:15] I think what's important is also the context and also what drives the motivation. I think the context is what shows you what's driving that motivation in Europe. Europe's a net importer of fossil fuels, so reducing dependence on these imports is positive for Europe's GDP. Europe spends it's around 120 billion a billion euros per annum on importing energy. And of course, Europe's a wealthy country that can afford the investment. So in Europe's case, decarbonisation, it's a bit of a no brainer, right? You know, because it's adding to GDP and it's creating jobs internally. When you look compare to Australia, you know, politically, it's it's it's a different decision. We're dealing with a different framework here. The challenge in Australia is that we have large amounts of coal and gas. And so the transition is is is more challenging. Where we are lucky in Australia is that we do have tremendous solar and wind resources and Australia in. It's a wealthy nation, and as you mentioned, there is a will, you know, there's a real push from the community to shift in this direction so we can afford the cost of the transition. The problem is that politics are unpredictable. But, you know, if there's any doubt about decarbonisation, as you know, the Australian nationals are on board with a net zero target in 2050, and that's positive. So hopefully we will start to see much more concrete policies.

Alec: [00:15:42] The most hopeful thing that we saw out of that whole Nationals liberal squabble, shall we say, was that business was getting on and even some of the most unexpected businesses were making big commitments. The day that the national parties came out and said, We're not, we're not sure if we're going to commit. Rio Tinto tripled their investment and tripled the ambition, their ambitions when it came to carbon reduction. And you know, that's one of the most school mining companies out there. So. Exactly. People often look at the market and think that the market moves faster than politics, and hopefully that's a good indication. 

Alison Savas: [00:16:17] Yes. 

Alec: [00:16:18] But look, Alison, we want to talk about two companies that you're interested in that you spoke about at the ASX Investor Day to play this decarbonisation trend. Before we do, we're just going to take a quick break to hear from our sponsors. 

Bryce: [00:16:33] So, Alison, as Ren mentioned, we have two stocks from your presentation that you're very interested in to do with decarbonisation and here at Equity Mates, we love nothing more than talking about stocks. So the two that you spoke about were Siemens and Norsk Hydro. So let's start with Siemens for each of these will go through what the company does, the role it's playing in decarbonisation and chat about valuations. So for those who haven't heard of Siemens before, what does this company do? 

Alison Savas: [00:17:07] Siemens historically was this big conglomerate, so it's very big industrial company that did a whole host of industrial businesses now. But what's happened in more recent history is that it's actually slimmed down its portfolio substantially. And today, where it's focussed really is today, which which is what makes it such an exciting investment is it's the global leader in factory automation. So it's the only company globally that can do both the hardware to make a manufacturing line run as efficiently as possible, but also the software which controls and optimises those processes. Now, as we move into a low carbon world, manufacturing lines have to be redesigned and retooled and look, just look at the auto industry, you know, huge investment required to pivot from manufacturing lines that focussed on internal combustion engine vehicles to a base. Now, Siemens on the hardware side, look, they do the robots and products to make manufacturing lines energy efficient. But on the software side, they have digital industries, which, amongst other things, allows the company to make a digital twin of the product that it's trying to produce. So rather than manufacturers having to produce, you know, these endless prototypes of products in the real world, they can now design, build and even stress test their product in the virtual world. So in cars, this includes a virtual wind tunnel. So it's it's it's incredibly efficient. And look a little a little known fact about Siemens is that it's the will. The eighth largest software business globally is housed inside Siemens, a massive industrial company, which is pretty remarkable. And they also they're also a top three player in rail so that they provide the signalling equipment, which is really key to rail infrastructure. Rail is the most environmentally friendly form of all transport, and it's critical to reducing carbon emissions in the transport sector. Again, looking at Europe, you know Europe's in discussion to remove short haul flights where rail can be a viable alternative. So you know what you can see here with Siemens? What role does it play? It's a facilitator. You know, it's it's an enabler of reducing carbon emissions, and we think it's going to be a key winner in a low carbon world in terms of valuations or, you know, how we think about the value of this company. It's, you know, despite its position, you know, it's valued at only 14 times earnings, with those earnings growing more than 10 per cent per annum. And in fact, if you if you exclude all the other bits and pieces and you just look at digital industries, which I hope you know, you can sort of heat from that commentary, you know, that's really the jewel in Satan's crown. You know, it's valued at ten times a day. So 10 times earnings before interest, tax and amortisation, where it's pure play peers are valued at twenty five times a day. So. So we do say that there's still quite a bit of upside left in Siemens, and in fact, it is one of the largest positions in our portfolio. 

Alec: [00:20:02] I love that there's, well, number one, I love the fact the relative valuation on European stocks compared to American stocks. There's just yes, it's very different. Yeah, but I love the the the way that you're approaching that same, you know, a lot of people think the grid is going to change, you know, we're going to decarbonise. So let's go to renewable energy stocks. But the thought process of all these manufacturing lines are going to have to change and how and who's going to change I and how are they going to change? Not the way that I thought of buying that trend. So, you know, this is why we love having these conversations. It's a fascinating company. If people want to do more research. Siemens, its German is what? What's the stock ticker? 

Alison Savas: [00:20:46] Oh, look, it's silly. OK, yeah. With with a European bid at the end. Yeah. 

Alec: [00:20:54] So the the second stock that you're looking at to play this trend similarly in Europe, Norsk Hydro, I think the name suggests you know what the company is involved in, but can you give us the one on one? What does the company do and what role is it playing in decarbonisation?

Alison Savas: [00:21:12] Well, I might surprise you here. So North Korea is a global aluminium producer, which I know you did surprise me. The most interesting stock to talk about. So. So bear with me. Look, aluminium smelting is an old world industry, but usage of aluminium is increasingly new. Well, it's because aluminium is as light, it's recyclable and it's as strong as strong as steel. Now aluminium smelting is it's incredibly energy intensive, which has traditionally major reliance on cheap coal. So the opposite of being green. Now we know. So what we really love about North is that it actually does produces aluminium, predominantly using hydro power, so it is sustainable. And in fact, its carbon footprint is 80 per cent lower than its coal based peers. I guess, you know, how do we think about where it fits in? If we maybe if we talk on demand one of the some of the key uses of aluminium as it is in autos now, autos today, though, they are predominantly made out of steel because steels a lot cheaper than than aluminium. But as we move into a world where we have more and more electric vehicles, the weight of that battery pack demands a much lighter vehicle. So, so to put it into context, today, cars use around 100 and 80 kilos of aluminium per vehicle, but an electric vehicle uses 700 to 800 kilos of aluminium. So that's a four times uplift. So, you know, we can see increasing demand for aluminium coming from electric vehicles lightweighting, traditionally surveys from energy efficient buildings and also packaging. And in fact, our conversations with key aluminium consumers, including Coca-Cola and Volkswagen, showed a very positive response towards using green aluminium because they want to reduce the emissions through their supply chain. So using green indium really works, works for them. And also they showed a potential to potential to. We can pay a higher price for that green aluminium. And unless there's going to be a natural beneficiary of lower aluminium capacity and also production coming out of China now in terms of valuations, it's still valued at a substantial discount to the replacement cost of its very unique assets. So the way we think about this company will look. We see more than 30 per cent upside left in the stock as the market continues to appreciate just how well positioned it is. 

Bryce: [00:23:48] Yeah, I love I love hearing about this stuff. It's just it's just so interesting for for those who are listening at home, Alison and thinking, you know, this is a massive opportunity, a decades long opportunity, it feels like, but also one where, you know, there's probably many different parts of the thematic that you can be. Look looking to invest. What sort of areas are really just broadly exciting you? Or where should we think about keeping an eye on when it, you know, when we're thinking about investing in companies like automatics like this? 

Alison Savas: [00:24:19] Yeah, sure. And I think you touched on earlier on one of those questions where, you know, decarbonisation, everyone knows that the world's going greener. And so you are going to get these sort of periods where you're going to get bubbles, right? It's going to be hot stocks. And so we want to avoid those hot stocks and still play there, still play the thematic and the way we think about it. And Antipodes is we do. We break it down. Well, certainly now the way we're thinking about is we've broken it down into sort of three categories. So the first is is to look to look at those very well priced utilities that will get paid a return for greening the great. And so that's sort of one one category. The next category would be commodities or materials and Norsk. Great example there. And it's just it's those commodities that are going to be disproportionately benefit from decarbonisation. And today we like aluminium and we also like copper for for similar reasons on that demand side. And then the third bucket where you've got the Siemens type business is your enablers. So it's those companies facilitating decarbonisation. And so we talk through Siemens. But look at the stocks in our portfolio on that sort of enabler side is, you know, we do have exposure to electric vehicles now. We take that exposure in companies where we see attractive valuation. 

Bryce: [00:25:34] I was going to say any pragmatic value in Tesla, right? 

Alison Savas: [00:25:41] But look, you know, we own Toyota and we own Volkswagen. You know, these are traditional automakers who sort of pushed aside in the rush to own in restaurant Tesla. These are companies that are on really attractive multiples, but they're also being really front footed on their move towards an electric fleet. 

Bryce: [00:26:00] Well, I mean, I feel like if they don't, they die. That's kind of where it's at, right? 

Alison Savas: [00:26:03] Yeah, one percent. And look, with that in that traditional auto space, just some of them have been more front footed than others. And that's what we're looking for. 

Alec: [00:26:12] You Bryce was a big fan of VW. They may well, they've got some commitment about going fully electric by something very soon. 

Alison Savas: [00:26:20] And actually, we do think they will be they'll be as in terms of volumes produced of electric vehicles, they really will be up there with. Tesla have really gone full throttle on electrification on electric vehicles because of the diesel. Well, the diesel emissions scandal and a number of years ago really forced them to make that change. So I guess it's making lemonade out of lemons. 

Alec: [00:26:44] And I just did some quick googling. The commitment is in all electric in Europe by twenty thirty five point thirty five. Yeah, which is just a remarkable turnaround when you think about these companies having one business model, all of the production lines, as you were talking about earlier Alison and in the space of less than two decades being like, we're going to be completely new business. 

Alison Savas: [00:27:06] Exactly, exactly. I mean, I guess that's one thing about giving another plug for pragmatic value is that disruption is very real. I guess, you know, what we're trying to do in activities is, you know, we're acknowledging that disruption is Israel. So we don't want to win those those cheap value traps. But it's it's about finding an attractive way of accessing that disruption on, you know, paying the right price for rather than paying any price for the disruption. So I think that's really what we're trying to do on 

Alec: [00:27:33] that point of pragmatic value and avoiding value traps. I feel like a lot of it's a common sort of initiation into investing is people start by reading the Warren Buffett letters, writing security analysis or the intelligent investor. Those kind of books getting 

Bryce: [00:27:49] bored and leaving 

Alec: [00:27:51] and then like really resonating with value investing. And then a lot of people get caught in a value trap at some point. I remember earlier this year I was speaking to someone who was talking about how AGL look so cheap. And you know, it's, you know, all of the metrics seem to point that it was cheap, but it's just a business that is seriously struggling. And you know, that was a classic example of a value trap for beginner investors listening. What are some tips or some rules of thumb that you use to separate those value opportunities that are pragmatic from those that may be traps? 

Alison Savas: [00:28:26] This is a tricky one. And actually, look, it's a lesson I really learnt as as an analyst back in in my analyst days. You know, as investors, we adjust. We were always looking for a deal. I think is is what the problem is or is looking for that that cheap stock and we can invariably get sucked into owning that. You know, that fourth or fifth largest player in a market, which it's on, the more attractive valuation and the multiple will mean referral. It'll catch up to its peers. What you've always got to do is you've just really got to understand the business, really understanding that competitive environment. And there will be instances where the tide lifts all boats, but there will be instances where it just simply wipes. You've got to think more than just the quarters in front of you and take that that longer term approach and try and think quite holistically about the industry. There is a value on quality, and I think as investors, we've got to remember that, you know, what we're doing is we're buying a company that is going to generate returns through the cycle or returns on the capital that they've invested. And sometimes those better quality businesses are worth a little bit more. And and I think that's what we need to sort of keep in mind was certainly a pragmatic value. That's what we're trying to do. Is this that we don't want to just find the cheap stuff. We are prepared to pay that little bit more for a better quality business because over the longer term, you know, your portfolio is going to be in a much better position. 

Bryce: [00:29:52] Well, Alison, before we move to our final three questions that we love to finish with. Is there anywhere that our audience can go to find more information on what you're doing, what activities are doing, fund or yeah, your tik-tok Sandler.

Alison Savas: [00:30:08] My Tik-tok would be the first place to start, so you get the most you get the most relevant information bearing in mind. I do have 20 years investment experience, so seriously I tik-tok. But seriously, our website Antipodes Partners dot com and we're also on LinkedIn and and we are on Twitter, so we're not on Tik-tok. 

Bryce: [00:30:29] Awesome yet. 

Alec: [00:30:30] Yet Bryce Bryce makes that tik-tok joke. Most interviews and most of the time there's a laugh and, you know, obviously no tik-tok account. It'll be a real indicator that Tik-tok has gone mainstream when people start answering no. Here's my handle. 

Bryce: [00:30:47] That's sure. One day it's going to happen. 

Alec: [00:30:49] That is when you go. Hopefully, ByteDance is public. You go long ByteDance's short Facebook. 

Alison Savas: [00:30:54] That exactly this could be that sort of leading indicator.

Alec: [00:31:01] So Alison would get us stuck into the final three questions. And the first one is, do you have any books that you consider? Must read?

Alison Savas: [00:31:10] Yeah, look, there is a book called Capital Returns, and it's by Marathon Asset Management, so it's another investment firm and also Edward Chancellor. And what it is, what the book is, is, look, it's basically a reprint of Marathon's own investigators and their own internal research notes, along with commentary over their decade of investing. That's roughly a decade. I think it goes from 2002 to 2015. And you know what's interesting? Well, Marathon Day long term investors and these strategies that they look at the capital cycle. So their philosophy is, is there is no point in trying to forecast demand because demand is is actually unpredictable. It's too difficult to forecast. What you need to understand in your investments is supply. And the point is is that bubbles attract a lot of capital and a lot of investment, and a lot of capital means a lot of supply, which makes it really hard to make decent returns on on capital. So that's the part of the market you want to avoid. And and instead, what you want to look for is those parts of the market where capital capex or investment is depressed or it's been taken out of the industry and so and so supply is shrinking, and it's just a much more attractive competitive environment. And that's where you get high returns on capital. So that's that's an interesting one because it's it's the, you know, it's it's hearing about what's going on or the discussions that are going on inside the firm, which is taking that approach, which I think is an incredibly interesting approach. 

Alec: [00:32:39] Yeah, incredibly fascinating. I haven't heard of that book, and I feel there's a whole other podcast episode in that approach. So that's a that's a great one to add to the reading list. So the next question we like to end with Alison. Forget valuation. Forget the opportunity right now, just purely on company fundamentals. What's the best company you've ever come across? 

Alison Savas: [00:33:01] I don't think I've got a pretty unique answer, which is disappointing because I do want to have a unique answer, but I actually think Microsoft is a remarkable company. You know, we can sort of see the transition that's happened under See CEO Nadella, the company's just transition from this closed ecosystem where Windows was was used to sell everything, and now it's got this much more open approach. You know, it's moved away from being centred around and around windows, and it's it's much more about the cloud. You know, all its segments being in the cloud, whether that's Office 365 or cloud infrastructure or gaming. But for me, I guess, you know, what's the most impressive thing about Microsoft and I think it's a great business is this is this enormous platform with a massive installed base, which just allows them to move into all sorts of adjacencies. You know, it's got this unrivalled ability to to bundle and cross-sell and and because of its size, it can be competitive from the outset. It can offer its products for free or for for very low price, which is a pretty difficult operating environment for you. Few competitors who actually do need to monetise and I remember discussing it internally at work, one of the guys was putting putting it into context and the the average Office 365 subscriber only pays $15 a month. Now, if you were to replicate what you get in Office 365, using other software providers like Zoom and Slack and you would need a whole host of others, you'd have to pay more than $100 a month. So, you know, it just shows you it's so hard to displace. It's got this unrivalled lock, I think, over customers. And so I think that's why it's a great business.

Alec: [00:34:49] Yeah, it is an unbelievable business. The true definition of a network effect when we talk about the whole world of business running on of the office suite and then Bryce, and we're actually talking in the office this morning about A.I. and Microsoft have all these exclusive partnerships with OpenAI, who's like on the forefront of A.I.. And it's just this is another business area that they're going to come in and dominate. 

Alison Savas: [00:35:13] And look, that's the thing with the size of that company, it's just got such an enormous R&D budget to spend on moving into new great areas. And again, that's what increases its competitive position.

Alec: [00:35:27] And now, Alison, final question because otherwise we could talk about Microsoft all day. If you think back to, you know, your younger self starting out in the new world of finance, what advice would you give your younger self? 

Alison Savas: [00:35:43] Look, I mean, I touched on this earlier, but it really is the advice I would give to myself as as a as a more junior analyst would be to maybe pay up for that better quality company. You know, don't don't fit around really at the bottom end. Sometimes it is a bit better to pay a little bit more, particularly if if that you know, when you're talking about the fourth fourth competitor versus the largest, the largest player in a particular. In a particular segment, you know, if that that like that market leader, the valuation of that company is attractive in an absolute sense, or it's attractive in a relative sense compared to how it's normally traded. You're going to be better off buying that business because it's the company that's going to be the market share taker. It's going to be in a better position to protect its profitability, and it's probably going to earn superior returns through the cycle. So it's a giant way to lower multiples. Don't hope for this, that the value. Don't assume that valuation gap is going to close that door. Unassuming reversion. So that would be my advice to my younger self. Love it, 

Bryce: [00:36:47] Alison. It's been an absolute pleasure and joy speaking with you today. We've taken a lot from that conversation. We love chatting stocks and you've brought two to the Equity Mates community that you know are certainly playing that Dave carbonised Asian theme and one that I know is a semantics that's very important and of interest to our community. So thank you for your time. Thank you for your presentation at the ASX day as well. A reminder to our community that if you'd like to check out Alison's Presyo, as well as all of the other experts that have presented head to the ASX website, or there's going to be a link in the show notes. But thank you very much, Alison. We appreciate your time. 

Alison Savas: [00:37:24] Oh, thanks, guys, was an absolute pleasure. Thanks for having me today. 

Bryce: [00:37:28] Hey, thanks for listening to this episode of Equity Mates. We love hearing from you, so drop us a line at contact@equitymates.com or even better, go to your podcast player and leave a five star review. Also, a reminder that the Equity Mates content train doesn't stop when you've run out of episodes to binge. We've got a brand new website, a Facebook discussion group where on Instagram, YouTube and slowly making our way as an influencer on Tik-tok. That's Ren. So come and say hello and join the community. We'd love to welcome you. Until next time.