Expert Investor: Tom Millner – Contact Asset Management – 5 steps to find a quality company

Bryce Leske: [00:01:27] Welcome to another episode of Equity Mates, our aim is to help you on your investing journey, break down the barriers from beginning to dividend. Whether you're an absolute beginner or Warren Buffett, we guarantee Equity Mates. We'll have something for you. My name is Bryce and as always, I'm joined by my Equity Mates friend. How are you going? [00:01:43][16.6]

Alec Renehan: [00:01:44] I'm very good, Bryce. Excited for this episode. This is a bit of a walk down memory lane for you this week. We talk about long-term investing a lot on the podcast. And we're talking to someone who's been involved with your very first investor. [00:01:59][15.8]

Bryce Leske: [00:02:00] Yes he doesn't know it, but he's been on my journey for the last. Well, we'll talk about it in a second. It is our pleasure to welcome Tom Milner from Contact Asset Management. How are you, Tom? [00:02:09][8.9]

Tom Millner: [00:02:10] Yeah, well, thanks, gents. Thanks for having me. [00:02:11][1.1]

Bryce Leske: [00:02:11] So for those who are unaware, Tom is a director and portfolio manager at Contact Asset Management. He has 17 years experience in markets, was the chief executive officer of Brickworks Investment Company. And for those who have been on the journey. No, that was my very first investment back in 2003. [00:02:27][16.3]

Bryce Leske: [00:02:32] Tom was it was that 2008 or 2016? In that time, he grew assets under management from 440 million to a billion as well as his work at contact. Tom is also a director of Washington H. Soul, Patterson and New Hope Corporation. So, Tom, vast experience in the markets, very much looking forward to unpacking what has been my first investment. [00:02:51][19.1]

Alec Renehan: [00:02:54] So before you get into that, we do like to start with a bit of a game, just to throw a few themes and indexes out there that you may not otherwise touch on. Yeah, we call it overrated or underrated. You got to play. Yeah, let's go. I always start at home with our benchmark index ASX 200 overrated or underrated. [00:03:10][15.9]

Tom Millner: [00:03:12] Given the recent reporting season, we've had probably underrated, [00:03:14][1.9]

Alec Renehan: [00:03:15] OK, was that [00:03:17][1.8]

Tom Millner: [00:03:18] I think share prices ran pretty hard over the last 12 months. As we all know, valuations same stretch. But the reporting season we've just seen this February, the earnings gap has narrowed. Now, pretty good results and the outlook for good quality companies is still pretty good. [00:03:35][17.2]

Bryce Leske: [00:03:35] Um, overrated or underrated. The Nasdaq 100. [00:03:38][2.7]

Tom Millner: [00:03:38] Oh, so overrated. [00:03:39][0.8]

Tom Millner: [00:03:41] That's complete. Just start talking revenue multiples, you know, future revenue multiples, buying revenue. We don't really understand that in our process. So Nasdaq overrated [00:03:58][17.0]

Alec Renehan: [00:04:00] and asset class that is close to every Australian's hot, overrated or underrated Australian property. [00:04:05][5.0]

Tom Millner: [00:04:06] Depends on what you're doing. If you're a holder of a house, that's probably okay. Yeah. If you're looking, it's definitely overrated. [00:04:14][7.8]

Bryce Leske: [00:04:17] And to close it out, another asset class that is hotly spoken about at the moment, overrated, underrated bitcoin. [00:04:23][6.1]

Speaker 4: [00:04:24] Oh, my gosh. So overrated. OK, right. No comment. No comment. [00:04:29][5.0]

Tom Millner: [00:04:30] I'll be honest. I don't understand that as well as I probably should. And I think if you asked most people in the street if they actually understood it as well, they probably give you the same answer. [00:04:38][7.7]

Alec Renehan: [00:04:38] So if you ask most Bitcoin investors that [00:04:40][2.3]

Bryce Leske: [00:04:43] I was listening to, I don't know if you've heard of clubhouse. There's app in the States. Yeah. And I just jumped onto that last night to listen to a few people chat about crypto and whatnot. And I just felt so behind the eight ball that I was just like, it's almost not worth trying to get up to speed on because stuff that they were talking about was anyway, we're not here to talk about [00:05:04][21.4]

Alec Renehan: [00:05:05] that whole episode in and of themselves. [00:05:07][1.5]

Alec Renehan: [00:05:07] And so, Tom, we do want to get to what you're doing at Becci and contact and all of that. But before we do, we want to get to know you a little bit. And we like to start with hearing about your first investment. Should we find that sometimes a good story or some good lessons that come out of it? So to kick us off today, can you tell us the story of your first investment? [00:05:27][19.0]

Tom Millner: [00:05:27] Yeah, sure. It's a bit like Bryce's story. I think it's probably a little bit boring. [00:05:30][2.6]

Tom Millner: [00:05:33] it was bought for me, which I was fortunate enough, but it was it was obviously a in nature patterns and share. So obviously a very long dated family history there. So that was my my first year. Still own it. Obviously I probably will never sell it. I decided we probably passed to my kids and grandkids. So it's a very long term stable investment. But that was my first investment [00:05:57][23.4]

Alec Renehan: [00:05:58] for people who aren't familiar with Washington H Soul Patterson and your family's connection to it, do you want to just explain that? [00:06:04][5.9]

Tom Millner: [00:06:04] Yeah, sure. So 140 years ago, my great great grandfather, Louis Paterson, started a chemist chain, Patents and CO, and then he teamed up with a mate of his and started the company Washington H. Soul Pattinson, and they listed that in 1993. And since then, they've obviously had chemistry. But then as the, I suppose, business developed and things started to get probably a little bit difficult in retail and chemists, they diversified like my great Uncle Jim Milner, he he he brought in the business quite substantially. They did a cross shareholding ownership with Brickworks Ltd, which is the owner of Austral Bricks in the mid 60s. And then from there, that was literally they probably first investment outside of the chemist chain. And from there they went into mining and resources, telecommunications through TPG, which is now merged with Vodafone and various other things within, you know, agriculture, financials, etc.. So I think the market cap of sales today is about seven billion dollars. It's never missing paying a dividend since listing in 1983, some of the returns of the portfolio are probably best in the world on a per annum basis. It's an amazing story and something I'm really proud to be a part of, obviously. [00:07:23][79.3]

Alec Renehan: [00:07:24] Yeah, it's one of its it's an underrated company in Australia because, you know, we often talk about, you know, reinvesting profits, finding ways to grow the business. And like, that's the story of Washington. So it's like started with a chemist and now it's just a diversified financials company that just keeps reinvesting. [00:07:41][17.0]

Tom Millner: [00:07:42] And it's hard to explain because even though it's soul patch chemists, Chinese is dwindling somewhat. But people are being aware of the Priceline China pharmacies so that that is part of the API group and sold still only 20 odd percent stake in IPO. [00:07:55][13.4]

Bryce Leske: [00:07:58] Tom, are you able to give us a bit of insight into your own sort of personal investing philosophy? [00:08:02][4.8]

Tom Millner: [00:08:04] Yeah, it's pretty sensible. I only own. [00:08:08][4.0]

Alec Renehan: [00:08:08] everyone says that [00:08:09][0.6]

Tom Millner: [00:08:10] I probably made it because I've only got sort of, I think seven or eight holdings. Well, OK, I don't have all this big, huge, elaborate portfolio of 100 shares. And if they don't work, I put them in the bottom drawer and I do that for a living. I manage other people's money with my business partner. We'll call but contact. And I'm with my father at Sarles, but. It's backing myself, so I own B.K. shares, I own sole shares, I am Brickworks shares, I New Hope shares, I own money in the funds that we manage. And that's literally it. You know, I don't want to go out and then buy BHP or Transurban or an IRB, which would they say we'll talk about later, but. You know, I own them through IBK II or through a sales portfolio, or through the managed funds that we run. So I don't need to then go and duplicate that, the hassle of doing that twice a year, of getting your dividend statements and all that sort of thing. And it's just I get six slips. Yeah, a half. And it's quite easy. [00:09:10][60.4]

Alec Renehan: [00:09:11] Well, we say look for managers and look for like executives that have skin in the game. It sounds like you definitely have skin in your own game. [00:09:18][7.5]

Tom Millner: [00:09:19] Yeah, I think yeah. I think that's something that the dads instilled in us as well. And Jim did with him. And, you know, Louis Pattinson way back in the day, you know, his name was on the front door and you know, you're back yourself. If you're not prepared to back yourself, you're not going to go out and raise money and manage other people's money. So, you know, it's a thing that we take quite seriously. And through alignment, when we look at companies, that's one of the big things we look at. [00:09:45][26.1]

Bryce Leske: [00:09:46] Hmm. So let's move to Brickworks and Contact Asset Management. It was my first investment back in 2003. So the story of contact starts with Brickworks. [00:09:57][11.2]

Tom Millner: [00:09:58] Yeah. So that the BKB Brickworks story is a very similar one to sales. So Brick works as well. When they merged with rissole, Patz started to invest in equities themselves. So when they had a really good year and they saw a lot of building product, they'd buy bank shares, they'd get the dividends, they get the franking credits. So when Brickworks acquired Bristol Roof Company in 2003, they needed to raise some money and they had this portfolio and they thought rather than liquidate it, why don't we create a I? So I was called Brickworks Investment Company in 2003 and we raised 172 million dollars, I think, from memory. And then over the years I've got a bit sick of taking calls for fabric orders and lots of things have changed. [00:10:37][39.3]

Tom Millner: [00:10:38] We changed the name to be Kaixi, which was the teka code of the stock. So so that's how it sort of developed. [00:10:44][5.4]

Bryce Leske: [00:10:45] And what's the for those that are unaware, what's the sort of mandate for BKOY? [00:10:49][4.2]

Tom Millner: [00:10:50] There's not true mandate in the sense that we can own any stock in the in the market. And we're pretty, you know, broad about the, I suppose, the investment holdings in the portfolio from a market cap point of view. But what we've found is we've got 19000 shareholders. Most of them are in pension mode. Most of them are self managed super funds or a bit like Ebright. Most of them are in accumulation phase. So we've got to try and have a portfolio that's a high yielding portfolio, but then does also add a little bit of growth so that the mandate is first and foremost, let's try and give our shareholders a better five per cent yield, if we can, through that through the cycle. And we might hold stocks that yield seven, eight, nine per cent and we might own stocks that only yield one two to three per cent, but they've got a growing dividend. So that's that that's the mandate. The mandate is JFC, covid, whatever. We might have to adjust the dividend, but at least we're going to pay one and in the good times will accumulate franking credits and we'll pay out specials to sort of flatten the curve in which we have done I think we paid eight or nine special dividend since listing. [00:11:54][64.3]

Alec Renehan: [00:11:55] So between 2008 and 2016, you were the CEO at Bakayoko, you more than doubled assets under management and I guess you started at a pretty inauspicious time with the GFC. What was the journey like? It became and what were some of the lessons you learned during that time? [00:12:12][16.9]

Tom Millner: [00:12:13] Yeah, it's a good question. And it's important to go back into those sort of periods sometimes, especially in the, you know, the environment that we're at now. But when we listed B.K., ISO's Funds Management, which was a small mid-cap fund that souls had an interest in, they were the managers of B.K. for five years. And through that experience, I learned a lot from guys like Frank Volante and Paul Bidle in particular. And then after the five years when that mandate finished, I was invited by the board to come in and become CEO of Beaky, which I thought was great. I was only thirty as CEO of a 400 million dollar market. [00:12:48][35.0]

Alec Renehan: [00:12:48] KCR Certainly what we do, [00:12:50][1.7]

Bryce Leske: [00:12:51] the more we do these podcasts and the older we get, the more I'm just like, yeah, [00:12:55][3.4]

Tom Millner: [00:12:58] but you haven't sold your B.K. shares, but I'm sure you're winning. [00:13:01][3.1]

Bryce Leske: [00:13:01] I don't know. Yeah, well we'll say so. [00:13:04][3.1]

Tom Millner: [00:13:05] I don't you know, that was all great. But the GFC was happening and it was pretty ordinary. You know, it was you know, the Dow Jones was down six, 700 points a night for four weeks on end. Our market followed capital raisings left, right and center. One of the biggest things I did learn during that period, Alec, was. Dad always says, make sure you have some cash, you know, make sure I have some cash on the sidelines, because if you find a moment like the GFC, you don't want to be selling NAB to buy CBA. It ought to be selling Woolies to buy Wesfarmers back then. You want to have some cash so you can own both of them and buy them when everyone else is selling. And you know, all those raisings that they did, they were huge discounts, massive, and we still owned most of those stocks today. [00:13:53][48.5]

Bryce Leske: [00:13:54] So just on that, you know, Ali and I also try and maintain a bit of a cash position because I was in year 12 or 11 when the GFC hit and remember thinking, God damn, I wish I had 10 grand to throw into anything right now. And so since then, I've said to myself, you know, I always have a bit of cash. What's your strategy in terms of knowing how much cash to kind of sit aside and, you know, is it grow that continuously or is it just allocate 10 percent, you know, for our audience who are also trying to do this? Right. [00:14:26][32.1]

Tom Millner: [00:14:26] That's a great question and I think very topical at the moment. If you can get right back to back then, we were getting five, six, seven per cent interest. So holding cash actually wasn't such a bad option anyway. So that was probably a bit easier in today's environment, when you're not getting much interest, if any interest at all post-tax, it's really hard to have 10, 15, 20 per cent of your wealth in cash. So at the moment, for B.K., for example, for our funds at contact, we're at about between probably five and seven percent cash. It's enough to deploy if we have to win probably one or two positions. But it's not enough if the market fell 30 per cent to really have had a crack and buy most of the stocks in the portfolio and really, really take advantage of it. But by holding 10 or 15 percent cash in this environment last year, you know, you've missed 20 plus per cent growth. You're getting nothing in interest. So it's a bit of a game of what's a better opportunity. [00:15:28][61.6]

Alec Renehan: [00:15:29] Yeah, it's tough. I mean, however much cash you had on the sidelines, you would wish you had more during, like the GFC or in March 2010. [00:15:34][5.6]

Tom Millner: [00:15:35] Yeah, I mean, we're sitting here 12 months ago from where it just about turned. Yeah. And you're right. You know, you could have had 30, 40 percent cash, but you probably wouldn't have pulled the trigger until a month's time, right? Yeah, yeah. [00:15:47][12.2]

Alec Renehan: [00:15:47] The thing that we were lamenting was just how quickly. We thought we had more time and it was just. Yeah. And it's up again. [00:15:53][5.9]

Tom Millner: [00:15:53] Yeah. We took the same view. Yeah. [00:15:55][1.6]

Alec Renehan: [00:15:56] So let's go back to your story. So you were CEO of Bakaly until 2016 and then you started contact with your partner, we'll call it. What was the why the decision to transition from Becci to managing B.K. under contract? [00:16:15][18.9]

Tom Millner: [00:16:16] Yeah, sure. So Will will join BKB three years prior to to the decision to start contact. And just for your listeners, it's a pretty cool story as well. We talk about our family a lot, but, you know, Will and our family have got a very similar story and hence the name Contact. Will's great grandfather was a really famous horse trainer. Jenny Lewis, my great grandfather on the other side of the family, Max Klavern was an accountant who loved race horses. They became good mates. Danny Lewis as Will's great grandfather, as I said, and Max is mine. And they had this horse called Contact and as a long distance runner. So it wasn't a sprinter. So it typified sort of what we're doing. It won the 1936 Sydney Cup and ran second in the 35 Melbourne Cup. You know, it's a pretty cool story. Yeah, that is. So that's the name. If people are wondering why we call it contact, it's a pretty random name. You can't Google search it because every single website comes up contact. It's a marketing nightmare in that sense. But we're working together and we thought, this is great. We've built this thing now to about one billion dollars. It's a really good Alisi. MMR is minuscule, it's about 16 bips, but we were pretty ambitious. [00:17:32][76.3]

Alec Renehan: [00:17:33] We're just going to interrupt you to get some jargon. Explain that. I'm sorry and sorry, sorry, sorry. [00:17:37][4.6]

Tom Millner: [00:17:38] So managed management expense ratio, what it costs a shareholder or an investor to run the portfolio. Most funds are anywhere between zero point five per cent, up to two percent. So we run Beaky at point one per cent. So 10 basis points only. That's very, very low. We haven't actually seen another managed fund run as cheaply as that. [00:18:01][23.6]

Alec Renehan: [00:18:02] And that's a zero point one percent management fee. And from memory, no performance fees and high performance. Yeah, yeah, yeah. [00:18:07][5.7]

Tom Millner: [00:18:08] So what we had to do when we when we started. [00:18:10][1.8]

Alec Renehan: [00:18:10] Yeah. Yes. [00:18:11][0.8]

Tom Millner: [00:18:14] So when we started the business contact, we felt compelled to. Take our salary equivalent as a I suppose, a management fee and take that across, you know, there's no good charging 40 basis points if you're only, you know, equivalently charging 10 through your salary. So so that was that was important to us. So we went to the board and pitched this idea of we'd like to start a funds management business. You know, obviously very happy to continue to run BKB as it is. And it's important to also break that down. Is Walsworth, our portfolio manager? All the investment decisions are done by the investment committee at B.K. So, you know, there is a secondary filter before it. Actually, investment is made and implemented at the B.K. level. So we went to them and they agreed. And, you know, we started started contact. We only had one client for a long time, which was fine. But what we thought is as we build contact and put more analysts on and more resources, the BKB shareholder should benefit from that because it was very hard if we went from an MLR of 16 to 20. And all the bigger guys, Affleck, Argo, Milton, you know, the grandfathers of the airline industry who have been around for, you know, 90 years, some of them, they're all charging between sort of 15 and 18, 15 and 16 even. You know, we couldn't then just go outside the circle and do that. So that's why we went that way. But and then from there, we ended up managing the Souls large cap portfolio. Do you remember the Brickworks portfolio I was talking about before? Sals obviously had their own in-house portfolio. It's about a 350 million dollar Australian equity portfolio. We manage that same sort of mandate as being High-Yield Capital Preservation. Those dividends go back to the main Washington sell patents in business to help them pay their dividends to shareholders each half as well. [00:20:07][113.3]

Bryce Leske: [00:20:07] Hmm. We will just take a quick break to hear from our sponsor. When you are all about getting fit, you've bought the and you bought the golf membership. You bought the gym membership and you're on the mind MasterChef. And even in lockdown last year, you bought those resistance bands of Instagram that from memory didn't even come. [00:20:25][17.8]

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Bryce Leske: [00:21:16] back to your own Bayt Virgin money terms and conditions and monthly criteria apply. Now let's get back to the show. There's. So, Tom, you just mentioned there the large-cap fund at SOLs, so let's kind of move to that. And you've explained the relationship. So it's a large cap, what, three, 350? What's your investment process for that or the filter that you kind of take for that sort of process? [00:21:41][25.3]

Tom Millner: [00:21:42] So it's the same as B.K.. So we've got that five step process that we talk about. It bakayoko principle activity, balance sheet management and then valuation. We can talk to her that if you like. [00:21:53][10.8]

Alec Renehan: [00:21:53] Yeah, I think so. I think people love hearing how it's analyzed. So let's get into that. Yeah. So number one, principal activity if we start there. Yeah. I mean it's pretty self-explanatory, but like what are you looking for with that one. [00:22:05][12.4]

Tom Millner: [00:22:06] Yeah. So principal activity is is basically understanding the business. So we had a bit of a joke about Bitcoin before, but if there was a business attached to Bitcoin and we didn't understand it, there's no way we should be investing in that. Whereas if it's an IRB or a race or a CBA or BHP, we understand their principal activity and their business model. And that sort of goes then to the next step that we're happy to invest in that company. [00:22:30][24.9]

Alec Renehan: [00:22:31] Yeah. So then you understand the business. Next one is income income. [00:22:35][3.8]

Tom Millner: [00:22:35] So what are you looking for there? So I think we get a bit mistaken about it. Must be five per cent yield, must be seven per cent yield. That's not necessarily the case. Income for us is if a company has the ability to pay out a dividend, it might only be a yield of one percent. But if they've got the ability to pay out a dividend, a lot of things have worked for them. You know, they've been successful. We're not talking about revenue multiples anymore. So they get revenue, but it's growing. Obviously, they've got a lot of expenses that they've they've they've paid they've paid staff. They've acquired a business or they've grown or they've spent money on R&D. It's generating cash. Still, they might have to have some debt, but they're paying interest. And then all of a sudden they've got profits and excess capital that they can return to shareholders. So it just sorts of proves up the business model for us as opposed to say, let's run a filter. Anything under four per cent we won't invest in. [00:23:27][51.6]

Alec Renehan: [00:23:27] Yeah, right. So it's not it's not a threshold. It's more just binary. Are they paying anything or [00:23:32][5.1]

Tom Millner: [00:23:32] do they have the prospect of paying more in the near future? Yeah. And further to that, if a company cuts a dividend, that's a bit of a red flag to us. Yeah. Something's actually really gone wrong in the business that says, okay, we we're not generating enough profits from our core business to pay a dividend. [00:23:49][17.1]

Alec Renehan: [00:23:50] I got to ask, SOL Parts has been listed for, what, 117 years? Have they ever cut their dividend? [00:23:55][5.3]

Speaker 4: [00:23:56] Have they ever cut that's in [00:23:58][1.2]

Tom Millner: [00:23:58] the last 20 odd years. And they're the only stock in the whole market that hasn't. Wow. Ramsay Health Care was the other one, but they obviously have cut the dividend recently. But the only stock in the whole market that haven't cut the dividend of last 20 years. Wow. But they have paid dividends every year. Credible, credible, stat. [00:24:16][17.8]

Alec Renehan: [00:24:19] So your principal activity, you understand the company income, it does pay a dividend or it has the capacity to pay a dividend. A third one is financial strength. [00:24:27][8.2]

Tom Millner: [00:24:27] Yes. So we talked about the JSE before. We're talking about covid. If a balance sheet is stretched in a cycle in a cyclical environment, the first thing to go is the dividend. And then once the dividend gets cut, all sorts of stuff happens. You know, they raise money, they dilute shareholders. Management might leave because it's, you know, it's not the business they thought it was. They're not going to hit their EPS targets, et cetera, et cetera. So it does start a bit of a tsunami. If you get the balance sheet wrong. We don't mind debt as long as it's serviceable and easily, easily addressed if it needs to be. [00:25:02][34.6]

Alec Renehan: [00:25:03] I know at the start of 2020, Bruce and I were talking about, you know, like, oh, sorry, not it's not like when Clive was really kicking off, it was sort of like, look, you know, look for companies that have the ability to survive this time, like with a strong balance sheet and then thrive afterwards. And, you know, that's all good and well for us to say. But it's I guess it's a lot harder to actually, like, understand what you should be looking for when you're looking at a balance sheet. So, like, what are some of the key metrics you're looking at or what are some of the key, I guess, indicators you're looking at that indicate financial strength? [00:25:32][28.7]

Tom Millner: [00:25:33] Yeah, there's a lot of ratios. And we can go we could go into that. But, you know, it's probably not not worth going to the mall, to be honest. [00:25:39][6.5]

Tom Millner: [00:25:39] But but, you know, debt coverage, whatever ratio you look at, it must be sustainable. And it depends what industry industry you're in. Yeah. You know, the gearing the gearing ratios may be, you know, 90 per cent for one industry, but they might only be sort of 30 per cent. You know, you might feel comfortable at 30 per cent at another industry, because if you look at a resource company, you know, the profits of a resource company, a sort of driven by two things, the commodity price and the currency. And if those if those to go against you and your gearing 30 per cent, do you think it's comfortable, but your revenue falls to pieces. You're gearing, gearing jumps up, your balance sheet is a bit stretched. Your market cap falls. Yeah. And you run into all sorts of sorts of trouble. So it's a bit hard to put a blanket rule on that. And that's sort of another reason that, you know, people should give money to the professionals to manage them. [00:26:29][49.2]

Speaker 4: [00:26:29] Yes. [00:26:29][0.0]

Alec Renehan: [00:26:30] Yeah, yeah. Yeah, it is. It is more and more that we do this. You do say that, that like everyone's looking for the short cut like indicator, like valuation price to earnings. But like you say, that's not good enough, you know, and then like in saying we'd like balance sheet stuff, there are indicator like ratios and stuff. But more and more, it's like you just have to do the hard work of doing it. [00:26:49][18.9]

Tom Millner: [00:26:49] And another another stock in that example is, is Transurban or even a Sydney airport or, you know, an infrastructure stock has, you know, on the surface a terrible looking balance sheet. But it's so long dated, it's all fixed. And their business model usually is is so consistent that they can service that debt. Yeah, yeah. If you went to a retailer and looked at their balance sheet, it was 90 per cent gearing. [00:27:11][22.3]

Tom Millner: [00:27:13] So, yeah, literally, yeah, yeah, [00:27:16][3.1]

Alec Renehan: [00:27:17] you're out of business, yeah, so let's get back to those five steps. Are you on principal activity, income, financial strength? Fourth one is management. [00:27:25][7.7]

Tom Millner: [00:27:25] And this is this is key. This is this is one thing that we have really learned over the last nearly 20 years is. A good manager will make a good business, great, a bad manager will make a great business quite ordinary, either his or her tenure. Right. How do you pick a good manager? Well, obviously, you've got to meet them. And the last 12 months has been really difficult to do that. But we always meet management. We always go and see their facilities or the distribution center or or their factory or wherever they are. But the big thing is how much equity in the company that they are running. If they had if they had if they got true alignment, they own five, six, 10, 15, 30 percent of the business. The really good managers are usually the founders, yeah, founder led businesses is something that we really, really like looking for. Again, the names on the door that all their wealth tied up in the business, you know, that they're going to get out of bed every morning and work for you as a shareholder. [00:28:24][58.3]

Bryce Leske: [00:28:24] What about for the big Australian companies? They like the Woolworths, the CBA. It's like they're obviously not going to have their entire wealth tied up in this. How do you treat that sort of dynamic? [00:28:32][8.0]

Tom Millner: [00:28:33] No, but if you you know, if you say a CEO, the big, big bank, and he's got 10 or 15 million dollars worth of stock, I could probably get you out a bit, probably enough. What are their incentives? What's that structure look like? How long is that, you know, going to go for? It's a bit different at the top end. I understand that. But, you know, again, they're still aligned. [00:28:55][22.3]

Alec Renehan: [00:28:56] Yeah. Although Bradbourn Daichi apparently is trying to put his name on every Woolworths stores. [00:29:00][4.1]

Bryce Leske: [00:29:00] Is it? [00:29:01][0.1]

Alec Renehan: [00:29:03] so of management for us is an interesting one because you know, the majority of the Equity Mates audience are retail investors and a lot of fund managers we spoke to talk about going and meeting management. And for retail investors, that's just something that we can't do. So outside of that, what are some of the key things that you're looking at that you help, you know, assess management? [00:29:23][20.3]

Tom Millner: [00:29:25] Well, I think culture of a business stems from management or good management. So even if you go to Coles and Woolies and you're there doing the groceries, just take a step back. Just observe someone who's packing the shelves and have a chat to them and, you know, see if they're engaged in the business. If you go if you're, you know, fortunate to have to go to a town which is a mining community, just have a look at, you know, what's what's written on their shirt, which mind they come from, how their behavior is. And it's not just the management at the top tier. It's management at differing levels of a business which obviously flows through to the to the entire workforce. So any any retailer, you can go in and you get a good sense of if. That person on the on the front register is up to the task of, yes, this is I'm working for a corporation, but I actually enjoy it and I'm passionate about it. [00:30:15][50.2]

Alec Renehan: [00:30:15] Yeah, that just always makes me think of Bunnings like, um. Well, I think that's a great example of Australia. But you go into every store and it's like people are helpful and like you enjoy going, yeah. [00:30:25][10.4]

Tom Millner: [00:30:26] Harvey Norman's no different JB Hi-Fi. They're you know, they're very similar of being very acceptable to the customer. They understand that the customer is king. And, you know, without customers, you don't have a business. [00:30:36][10.6]

Alec Renehan: [00:30:37] Yeah, yeah. So we've covered principal activity, income, financial strength management. Now we get to the fifth one where I guess you really make the money, which is valuation. So how do you think about valuation, [00:30:50][12.7]

Tom Millner: [00:30:52] which can be very patient? I think that's the thing that we have within the sales group. We can be very patient. So for years we looked at eBay and the GFC finally hit and the stock was to forty five two-point fifty. And we bought we were buying it. We thought this this has fallen. Way below our valuation, it was probably four or five dollars before that it came down and we were buying it when when no one else wanted it. And that was a really good example for me to say, OK, we like a business, but if it is stretched, if the valuations are stretched, you don't have to pay for it. You can wait. But if you do all the work first and then you do get a bit of a blip in the market, happy, happy to own it. [00:31:32][39.8]

Bryce Leske: [00:31:33] So this is where the tricky part comes in. If you don't want to have too much cash on the sidelines because there's no point having cash given the cash environment, but valuations become so stretched and you want to remain patient and not go into the market. Where do you where what do you do? [00:31:50][16.9]

Tom Millner: [00:31:51] You look a bit further out than F.I. 21, right? So you look at 22, 23, 24 and all our models, we do a five year assumption. So, Eyob, not long ago, we're picking on Eyob a little bit here. I'm sorry, but it's just it's a it's a stock that's done very, very well. I choose anything but but IIIB, it was on 40 times per moldable not long ago. Share price went through 40 dollars and it was probably difficult to own if you hadn't already owned it. But if you'd fast-tracked two or three years and assumed that their US acquisitions and revenues that were going to get out of the US business with their JV, with Ford was going to work. You know, the valuations came down quite significant. You're talking sort of 24, 25 times again. So, again, if you're if you are a genuine long-term investor, you can look out and have a view that I think this will be worth significantly more in three or four, four, or five years time. [00:32:43][52.1]

Alec Renehan: [00:32:43] Yeah, yeah. I mean, what's the like the truism that Amazon's always tried it at a 60, correct? It's always been expensive. [00:32:50][7.1]

Tom Millner: [00:32:51] Ramsay Health Care we bought when the market cap was lower than 400 million dollars. [00:32:54][3.1]

Bryce Leske: [00:32:56] So, Tom, just before we move on to the X 50 fund, for those who are looking to get access to the work that you're doing, it solves, is that just through the sole ASX and so. Well, how retail investors or that's. [00:33:13][17.0]

Tom Millner: [00:33:13] Yeah, it's a tricky one. So that's an internal mandate. So that that portfolio would be part of or is part of the broader group. So that's a that's an investment similar to but very much smaller than New Hope, Brickworks, TPG, et cetera, et cetera. So, you know, if you're buying a sales share. Yeah. You're buying all that. Yeah. Um, I think if you if you're buying a B.K. share, you're just buying the portfolio. [00:33:38][24.9]

Bryce Leske: [00:33:39] Yeah. Yeah. So the ticker for souls sold for those who are unaware is ISIL. Now, Tom, you have just launched the ASX 50 fund, which is investing in Australian companies outside the largest 50 companies in Australia. Why pursue that sort of strategy? [00:33:58][19.5]

Tom Millner: [00:33:59] Yeah, we took the view that at both B.K. and sales, we had a lot of large caps. So we've got a 15 per cent portfolio weighting CBA. It sells at the sales portfolio, for example, we own about eight per cent of CBA in BKB in both portfolios. We also own big, big licks of BHP, NAB, Rio, Wesfarmers, Woolworths, you know, the typical stocks that the mums and dads would probably own. But we do have a bit of a tail in those both portfolios of all the races, your abs, your Ramsay health care's, your Goodman groups, those sort of companies that have done really, really well for us. And we thought it would complement that quite nicely. It ties into our process a lot better. You a lot of those are founded led businesses, which we which we really enjoy obviously investing in. And the equity index itself has outperformed most indexes over the last 10, 15 years by a considerable way. The trouble we have with that index, though, is there's a lot of stuff like a zip or enough to pay a lot of the IT stuff that we don't understand doesn't sort of like make our filter. [00:35:07][67.6]

Alec Renehan: [00:35:07] Unfortunately, I think the valuation [00:35:09][2.0]

Tom Millner: [00:35:10] and you can say I'm a bit better because I didn't mind body parts, but but I've done a fantastic job, but unfortunately in our process that that doesn't stack up. So we've got we've got a great pool to fish in. But again, we've just got to be true to word and stick to our process. And the equity funds done very well. I think in 10 or up to 12 months we've we've returned, I think 27 or 28 per cent. I think well, it just in just good quality, sensible founder led businesses. [00:35:39][28.8]

Alec Renehan: [00:35:40] So we've been kaixi we were talking about the strategy being some growth, but a lot of focus on income. And for those self-funded retirees and stuff like that, is that the same with the equity? It is. Okay, yeah, it is. [00:35:53][13.0]

Tom Millner: [00:35:53] And again, the yield headline yield is not as good. It's not the four and a half, five per cent. It's more like three point two three point three per cent, which is a lot lower, but the growth is a lot higher, [00:36:05][11.3]

Alec Renehan: [00:36:05] which would be you would expect if you start excluding the big four banks and the big retailers and stuff like that. [00:36:10][4.6]

Tom Millner: [00:36:11] And it's you know, we've we've sort of covered the space for many years anyway. But it's exciting to have them in the one portfolio and have a meaningful position in a you know, in a ResMed, for example, a bit more of a holding in TPG, you know, both both flannelette businesses, Eyob races, you know, that's it's the same sort of stocks, but just good quality, sensible positions. [00:36:32][21.4]

Bryce Leske: [00:36:33] When will after to get a look in? [00:36:35][1.2]

Tom Millner: [00:36:36] Well, from an alpha point of view, it ripped through the index. Yes, it's gone into the 100. So it's not in the equity. It's gone into the fifties. I think it's in the 20s now. [00:36:46][10.4]

Alec Renehan: [00:36:47] So it was I don't know, it's fallen off a bit crazy. [00:36:50][2.9]

Tom Millner: [00:36:50] It's so it's not in the not in the crosshairs, you know. [00:36:53][2.8]

Alec Renehan: [00:36:53] Yeah. [00:36:53][0.0]

Alec Renehan: [00:36:56] I mean given we've given we've touched on off to buy a little bit. You did write a blog post talking about after pay and I guess while you are okay with missing after pay, you want to share some of the insights. [00:37:07][10.5]

Tom Millner: [00:37:07] Yeah, that's a great article. We will write that. And he did it, did a fantastic job in doing so. And I think when you break it down and just write about not just I could have been any stock, but but what we avoided by sticking to our process, we've got to be. We've got to be sensible, you know, people give us money to manage for them, you know, they might be a pensioner, they might give us a percentage of their life savings. And we are not going to invest in something that we understand that may not be here tomorrow, that may do very well one day, but may not may not make it over the next five, seven years. So, yeah, that whole being sensible is is sort of ingrained in us and we're just not going to risk chasing our for five minutes to to try and take a box of. Yeah. You perform well this year because anyone that's performed 50 per cent in the last year, I can guarantee you they'd be hard pressed to do it again next year. [00:38:03][55.9]

Alec Renehan: [00:38:04] I think like a key theme that's coming out of this conversation is like long term patient capital. And, you know, that's a real strong point. And I guess that comes from the the roots of souls being around for so long and stuff like that. But at the same time, you are a fund manager. And I guess, you know, you have to tell your clients, how are you going quarterly, yearly, all that stuff. How do you balance the, I guess, the constant need from the people you're managing, the money that you're managing to know, how you going, how they've performed this quarter with that like long term patient, disciplined approach? [00:38:38][33.6]

Tom Millner: [00:38:38] Yeah. It's something we have juggled with, but I think what's happened with us managing an I first has been really good when we go into the active fund space, so. Bakaly being listed, you've got all these ASX rules, obviously, you know, full transparency, good corporate governance, et cetera, et cetera. So we give our shareholders and the market the whole portfolio twice a year. Now, most active guys will give you the top five or 10 and put it in alphabetical order so you don't actually know what they're managing. Yeah, and that's fine. I've got a lot of IP and all the rest of it. I understand that. But but what we found at BKB and going into the next 50 product is let's be transparent. Let's show people what we do. Let's tell people what we do. And let's not be afraid of doing that. We've even done an extra step with Beaky. Traditionally, we do a monthly NTA. Now we're doing a weekly NTA to try and update the market and hopefully some of the other traditional Elyse's will follow. But that's that's that's sort of closing a gap a little bit. [00:39:39][61.0]

Alec Renehan: [00:39:40] Will you ever get to, you know, the ATF style, just like constantly reporting, you know, here [00:39:44][4.5]

Tom Millner: [00:39:46] we've got the modeling to do it, whether a shareholder who's in pension mode really cares that much about it? Probably not. That's right. But just taking that transparency into the equity fund, we you know, we show typically our top 10 or top 20 stocks percentage. We'll talk about them. We'll just be open and honest and transparent. [00:40:07][21.1]

Bryce Leske: [00:40:09] So just briefly on the X 50, before we move to sort of current times, the fees on the X fifty point six management and 15 per cent performance, whereas B.K. and sold both point one, as we've spoken about, and also zero performance y why the difference? [00:40:27][18.3]

Tom Millner: [00:40:29] It's obviously more of an active portfolio. Last 12 months is not a great example, but we are going to have to be very active. We have to go out and visit these companies quite regularly, more so than we do it by Kaixi. But if you look at that 60 basis points, most of the industry in the next 50 product or x 20 product charge is between one and one point two per cent. So it's half the market and we are actually. Looking at restructuring that performance and actually getting rid of it. [00:40:56][27.2]

Bryce Leske: [00:40:57] All right, well, next time you go out. Bring us along. We record it. [00:41:00][3.5]

Alec Renehan: [00:41:06] So, Tom, we want to get a couple of thoughts on, you know, the market today and some companies that you're looking at. But before we do that, we're just going to take a quick break to hear from our sponsors. So, Tom, you know, we've talked about the different funds that you run contact, I'm sure, between all of the different funds, you've got great coverage of the ASX. So we want to pick your brains a little bit on that. What are some let's start here. What are some of the companies at the top of your watch list at the moment in Australia [00:41:33][26.9]

Tom Millner: [00:41:34] from a large cap point of view? We think Transurban is probably good value at the moment. Why do we say that interest rates are very low every time a line of debt for them comes up, they're striking that at a significantly cheaper rate than they were when it was struck five, seven, 10 years ago. So that's great. I think the average interest now is about four per cent. We can see that going quite a lot lower than that in the next couple of years. Assets that they've delivered are opening North Conex, part of the West Connex program, is open and doing very, very well. That North connects tunnel. There's five or six thousand trucks from day one on that. That toll road is on a truck multiplier of three three times. So three times more than the car. I think it's like twenty seven dollars a trip, for example. And their rights, the toll, [00:42:28][54.1]

Alec Renehan: [00:42:28] it's nine dollars for a car, which is just as crazy [00:42:31][2.5]

Tom Millner: [00:42:31] But if you want to sit on Pennant Hills Road and waste 45, you know, it's still there [00:42:35][4.5]

Tom Millner: [00:42:39] and you know, their tolls are CPI adjusted. So as we're seeing now, inflation comes through, these toll roads are going to go up as we see people moving around more. And we saw the traffic numbers in Sydney increase. Melbourne still got to come, but the traffic numbers are going to go very well. We think they've got a great network in Brisbane, Melbourne and Sydney in particular. They've got some other stuff overseas, which is good. But we think at current market prices, it's a really good opportunity. [00:43:05][26.5]

Alec Renehan: [00:43:06] Twenty twenty-one might be the sweet spot for Transurban, where everyone's going back to work, but no one wants to go on public transport. [00:43:12][5.7]

Tom Millner: [00:43:12] And so and they've talked about let's get in the car. They talked about that recently. It's a huge trend. [00:43:16][3.9]

Bryce Leske: [00:43:17] Where do you sit on the inflation debate at the moment? What's where you sort of calculating that into your models? [00:43:22][4.3]

Tom Millner: [00:43:23] It's a great question and one we're debating constantly. I think if you step back and start with, like general interest rates, they'll they'll bet soft and low for a while. So put that to aside. They've sort of told us that. Yeah. How much money they put into the market to buy bonds back. Probably the bigger the bigger question. And we think they'll have to do that. That's probably the only way they can keep any sort of lid on currency at the moment. So so that that may get a bit of support and a bit of, you know, QE. But any inflation from what we've seen in the last 12 months is obviously positive. Yeah. Is that having a direct impact on housing? I don't think so. I my view is on housing is we're just there's so much pent-up demand that's happened for many, many years. And a lot of people have rented and a lot of people actually now want to buy their own home REITs, although it's a really big drawcard. And I think that's probably why house prices are going up, because you're whole just basic supply demand dynamics not. Not working properly. [00:44:24][61.5]

Alec Renehan: [00:44:25] Yeah, yeah, how how do you think about, I guess, the bottom up approach of, you know, analyzing companies and their management and stuff like that and then the top down macro stuff like how much does the macro stuff fit into your investing process? [00:44:39][14.7]

Tom Millner: [00:44:40] It does. It does quite a lot. And I think especially in a new position, you have to have a bit of a top down view before you sort of meet in the middle on that last step five valuation criteria. But it's something we're spending a bit more time on the top down than we ever used to [00:44:57][16.9]

Alec Renehan: [00:44:58] because it just feels like I mean, everything is at all time highs, like an asset class. It hasn't hit all time highs in the last 12 months from baseball cards and Pokemon cards to Bitcoin to property to stocks. It's gold. Gold hit an all time high. Twenty. Twenty. Yeah, it's just it's a crazy environment. It's like there hasn't been any inflation in the real economy, but asset prices have just been invited to it. [00:45:21][23.3]

Tom Millner: [00:45:21] Yeah, it's amazing. And you know, if you talk to the older guys around the sales arena and be arena, they're comfortable now, but they are worried about what will happen or may happen in two or three years time because everything won't be at record highs forever at once. [00:45:37][16.0]

Alec Renehan: [00:45:37] Yeah. So, yeah. Make sure you give us a call. Yeah. Yeah. [00:45:39][2.0]

Speaker 4: [00:45:40] You're on the job. [00:45:40][0.4]

Bryce Leske: [00:45:44] So the time we, we are holding a I wouldn't say competition, but all of our fund managers who come on this year, whether they like it or not, put forward as a nominee for fund manager of the year fund you d you sorry. F you and apostrophe day lucky I'm not in a spelling competition and it's just something that our community will sort of vote on in towards the end of the year based on the interview and all that sort of stuff. But the question [00:46:12][28.7]

Alec Renehan: [00:46:13] that we hope we have a big gala dinner at some point. [00:46:15][2.7]

Speaker 4: [00:46:16] Yeah, yeah. [00:46:18][1.3]

Bryce Leske: [00:46:19] But to go towards the nomination, we always like to ask if you could put forward one stock trend or industry that you think we should be keeping an eye on this year. I know it's very short term. I know it's very short. I know it's short term focused. And the result of what you put forward, how it performs is not going to go towards the benefit. But it's just so glad [00:46:41][22.2]

Alec Renehan: [00:46:42] we're making this up on the floor. [00:46:43][1.0]

Tom Millner: [00:46:44] And my answer might reflect that as well. Like a [00:46:48][4.0]

Bryce Leske: [00:46:48] stock trend or in the trend industry. [00:46:50][1.4]

Tom Millner: [00:46:50] Okay, so another stock I spoke about, Transurban from the largecap folks say from a mid and small cap, we still like Harvey Norman. OK, so so stock take great alignment. Probably the best retailers in the whole market industry online is still such a small, small part of Australian retail sales. And what we're seeing through the brickworks Goodman jive, what they've built over the last ten, fifteen, twenty years and what they will continue to build over that time is amazing, amazing growth in distribution centers and, you know, supported by obviously online and retail. Harvey Norman, I've got a long way to go there, which is great, so they've hit record profits, record share prices without really. Tapping into that market yet, so that's a bit of a tick as well, but the industry is probably not retail property, OK? Their property book is enormous. It underpins most of the share price at current value. And, you know, just because it's a big box Harvey Norman site doesn't mean it's a big box Harvey Norman site forever. So, you know, look up. There's air space. There's urban renewal happening around a lot of these facilities. And it might not be a retail asset for much longer in the next sort of 10, 15 years. [00:48:10][80.6]

Alec Renehan: [00:48:11] Yeah, it's interesting. Yeah. So Harvey Norman are in most of [00:48:13][2.4]

Tom Millner: [00:48:08] a lot of them. Not most of them, but a lot of. A lot of. [00:48:08][0.0]

Alec Renehan: [00:48:16] Oh that's interesting. Yeah. Well that's good. Will, we'll make a note of that. Yeah. Harvey Norman. Not a company that I really think of a lot, but I'll, I'll have to do some research into it. OK, so Tom, we want to say a massive thank you for coming on and giving us some of your time. We do like to end these interviews. Final three questions before we do. If people want to find out more about contact or follow you on social media, is there any way you know that show? [00:48:43][27.4]

Tom Millner: [00:48:44] Yeah, sure. So the best way to follow us is contact AM Dotcom that are you from? From there you can link back to the sales website and the BKB website. But that's probably the best point of call. Yeah. [00:48:56][12.1]

Bryce Leske: [00:48:56] And a reminder that the Biketawa like ticker is Bacani and then also. So ASX is essential. So yeah, go check them out. [00:49:07][11.2]

Alec Renehan: [00:49:08] And I think so. Brize has been a shareholder for, what, 18 years? I think he's thinking about that. He deserves a shout out in some way in the next week. [00:49:15][7.5]

Speaker 4: [00:49:15] I just have to go get ready. Yeah, we've got a slide in our pack [00:49:20][4.4]

Tom Millner: [00:49:21] Bryce, that we do the do nothing slide. We call it. If you've if you've invested from day one and participated in all the diapers and placements and entitlement offers that we've done, you know that one billion worth I think now four point sixty four doing nothing. So yeah, we'll put a mug shot of you in the slide going forward and say, you know, the price slide or something. [00:49:44][22.5]

Alec Renehan: [00:49:44] But I feel like it should be the whole Leske family. I think you guys would all be [00:49:48][3.6]

Bryce Leske: [00:49:48] I don't know if dads do all mate probably thought he was going to go to something, but anyway. [00:49:52][3.6]

Tom Millner: [00:49:53] But thanks for having me, gents. It's been been a great interview. [00:49:55][2.5]

Alec Renehan: [00:49:56] Yeah. Good on chat [00:49:57][0.9]

Alec Renehan: [00:49:58] Thanks. So final three questions. You're not done yet. [00:50:01][2.7]

Tom Millner: [00:50:02] I cant get away with it. I know that [00:50:03][1.1]

Alec Renehan: [00:50:04] our first one is do you have any books that you consider must read and these can be investing or otherwise? [00:50:10][5.5]

Tom Millner: [00:50:11] Yeah, I actually, unfortunately, don't have a lot of time to read outside of work stuff, you know, obviously reading a lot of, you know, stuff in the team and research papers and then board papers and that sort of thing. But to be honest, the last thing I feel like doing some weekends is sitting down writing a book I'd rather spend time with my wife and the kids, to be honest. But one book that has always stuck with me is a book called Endurance, which is a story of Shackleton's adventure. And that's just amazing. And I think in those times where it's all pretty easy for a lot of us, you know, going back and reading those sort of stories is is quite amazing. [00:50:47][36.1]

Alec Renehan: [00:50:48] Second question. Now, this is a bit of a controversial one that we're trying this year, but I think it's working so far in 60 seconds or less. What's the best company you've ever seen? [00:50:58][10.4]

Tom Millner: [00:50:59] And we've been talking about it all day [00:51:01][1.1]

Tom Millner: [00:51:03] it's the second oldest company on the market. It's been around for forever. It's never missed paying a dividend. [00:51:08][4.6]

Speaker 4: [00:51:09] That was a softball. [00:51:09][0.4]

Alec Renehan: [00:51:10] Yeah, but you did get under 60 seconds, so well done. And then finally, you know, if you think back to your early days, you know, when you got your first share, what advice would you give your younger self? [00:51:27][16.4]

Tom Millner: [00:51:28] That's a really good question. We had the pleasure we've been to the Berkshire Hathaway meeting quite a few times, Peter Kaufman, who wrote Poor Charlie's Almanac, we were fortunate to have a quite intimate dinner with him and probably only three or four other people one year. And Dad actually asked him, you know, what advice would you give these young guys around the table? And Will was there as well. And he basically said, don't get destination anxiety. Don't wish you were somewhere before you actually get there, work hard, put in the hours, do your job and you'll get there eventually. So, you know, I think I think in business in particular, people want to become the CEO very quickly. People want to become the CEO. People want to become portfolio manager overnight. That doesn't happen. All that you got to put the hard word in. You've got to get experience. You've got to get a few battle scars. And then once you've done that, you'll become it. But don't try and get there before you times, a time before you, times like that. [00:52:26][57.4]

Alec Renehan: [00:52:26] I like that. I haven't heard that destination anxiety before, but it's good. [00:52:29][3.0]

Tom Millner: [00:52:29] And that's stuck with us as we use it a lot. [00:52:31][1.9]

Bryce Leske: [00:52:31] Yeah. Well, Tom, it's been an absolute pleasure chatting with you today. We've covered a lot of ground and, you know, we appreciate you sharing your story and you know how you've built these businesses. So appreciate it for our listeners. If you do want more info, Tom's given the contact details, but we'll put it in our show notes as well. So best of luck down at the Challenge on the weekend. [00:52:53][22.0]

Tom Millner: [00:52:55] Thanks for having me, guys. A lot of fun. Good on you. Thank you. [00:52:57][2.0]

Alec Renehan: [00:52:57] Thanks. [00:52:57][0.0]

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