Expert: Vince Pezzullo – Boring Companies, Exciting Returns | Perpetual

Speaker 1: [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 you going? 

Alec: [00:00:31] I'm very good. Bryce very excited for this episode. We are speaking to an expert investor from one of the biggest investment firms in Australia. I was going to say one of the oldest, but I think it's just they. 

Bryce: [00:00:44] Yeah, I think so. 

Alec: [00:00:45] Yeah. Yeah. So we spoke to the CEO of Perpetual, you know, summer series and we've got one of perpetual superstar fund managers joining us today. 

Bryce: [00:00:54] It is our absolute pleasure to welcome Vince Pezzullo to the studio. Vince, welcome. 

Vince Pezzulo: [00:00:58] All right. How is everyone? 

Bryce: [00:01:00] We're doing well. We're doing well. How are you?

Vince Pezzulo: [00:01:02] Thank you.

Alec: [00:01:03] That's good. Vince, you might be the first guest to ask us how we're doing. That's true. We appreciate that. 

Bryce: [00:01:08] Nice way to start. 

Vince Pezzulo: [00:01:09] Others told me. Well. 

Bryce: [00:01:11] So Vince is the portfolio manager of Perpetual Equity Investment Company. The ASX ticker is PIC Pay. I see. And he's also the deputy head of equities at Perpetual. Vince joins us today with over 25 years experience in financial services, 13 of those at Perpetual. At Perpetual. Vince is also the portfolio manager of the Australian share geared Australian share and direct equity alpha funds. So plenty on Vince's plate. But today we're going to be focussing on the equity investment company PIC and doing a bit of a deep dive on a couple of industries towards the end of this episode. Just a thank you to Perpetual for sponsoring this episode. If you'd like more information on perpetual equity investment company, head to perpetual equity dotcom dot AEW. So let's kick it off again. 

Alec: [00:01:58] So Vince, before we do all that, we'd love to start with you and we love to start with people's first investment. We generally find a good story or a good lesson comes out of it. So to kick us off today, can you tell us the story of your first investment? 

Vince Pezzulo: [00:02:12] Well, I had some small little investments when I was just 16, but nothing that I didn't know a lot at the time. And that amounted to pretty much what the outcome was for the investment. But the one that I got most of my valuable lessons out of was in about 1996. I'd been working for a year or two, thought I knew everything and I bought some apple. Actually, in 1996. Chase I used some of my savings. I also put money on my credit card. Oh, well, I probably was going to bought it. This is before Steve Jobs joined in 97. The stock like promptly fell 40% within about 12 months. 

Alec: [00:02:45] Oh no. 

Vince Pezzulo: [00:02:46] I'll tell you one thing, it quickly teaches you about the power of financial leverage. It also started to solidify because a lot of noise around was going on in Apple at the time. They were trying to transition from a it looks like it's a device company more than a software business, you know, make cool things to a software business. And they're trying to convert themselves into to look like a microsoft, which was a highly successful time. But that's like going away from its DNA. So you sort of learn how to always write down why you buy something. Just write a couple of rules as to why you're buying this. And they just keep to keep an eye on it because you're going to need to know those reasons because gets quite noisy when things go wrong. Fortunately, that knew the experience of me getting chased by MasterCard, you know, I hung on to them for a while and then I sold them a couple of years ago. So what it does take is about you make money over the long run rather than the short run. You got to keep those two things in mind. There's no quick money. 

Bryce: [00:03:42] There is no quick money. And yes, certainly leverage early in an investing journey can be quite dangerous, but must have been nice to get in Apple at 96. So well done over that time though Vince. Since 96 to now, have you developed a personal investment philosophy? 

Vince Pezzulo: [00:03:59] Yeah, I have always start with do your own research. When you invest down from third parties, you can get information from third parties, but you've got to do your own grunt work. Try to make the investment case as simple as possible. Don't try and overcomplicate it. It usually comes down to 2 to 3 things whenever you invest in a company that will typically drive the performance of the company over time. So always keep it very simple. Don't get distracted. I mentioned earlier about, you know, write down the reasons why you own something and in that, write down the risk to that view also through the whole period. Always test your thinking on the on your investment. Look for the you should actively look for your opposing views on your on the on the stock or the company because a lot of people follow the trap of confirmation bias or falling in love with something. You should always test your ability to initial base case as to why you made that investment. So always read the opposite opinion because you'll be found out pretty quickly whether you're sort of ignoring the let's put in a cognitive dissonance basically where there's a lot of facts changing your views, refusing to change with those facts. The last one, as I mentioned prior on the Apple store or Apple investor was just be very patient. The multi-bagger is that you can earn over. Decade. They take a decade for a reason, and it just takes a while for the markets to find the undiscovered gem. It can take a while. 

Alec: [00:05:20] Some great points there. And yeah, they bear repeating patience, writing down your thesis and really testing that thesis. I don't think we can hear that enough. But look, Vince Bryce mentioned at the beginning that it sounds like you've really got your work cut out for you. Perpetual You are the portfolio manager of four funds, the perpetual equity investment company ASX. Take a pic which we're really here to talk about today, but also the Australian Shares Fund geared Australian Shares Fund and the Direct Equity Alpha Fund. How does it work? Panning for strategies and apologies if this is a dumb question, but we're not in the industry. How does it work? 

Vince Pezzulo: [00:05:59] It's not a dumb question. It's a very good question. Look, we've got a pretty large and well-resourced team at Perpetual. We've got our own internal research function. As a portfolio manager, I was once an analyst doing pure equity research. So that's a step to go through to eventually become a portfolio manager. But having a team of internal team of analysts internally allows me to select a space up a little bit from thinking about the valuations of the companies like you tested. I test that I spend my internal time. That gives me a lot of bandwidth to manage the risks of the portfolios. Obviously, with all of our management and this for sort of like 44 strategies, you mentioned they all have sort of like investors looking for four different outcomes. That can be challenging, but we've got plenty of systems in place. Each one of them has their own set of rules and their outcomes are different. They have different number of stocks, some include international stocks, some include just purely domestic or the like. As I mentioned earlier, it's in a listed strategy like the pit or they're in a traditional fund. But as you know, with experience, this is like an old timers game investing. So with experience you can sort of ignored a lot of the noise and you prioritise information that sort of you highlighted that confirms or detracts from your investment thesis. And it's might, as I mentioned, might be only three things, maybe four things. So you tend to edit quite well. You have to be a good at editing information. You know, the set up a perpetual is have been around for, you know, 50 or 60 years investing and with our processes about the same amount of amount of time, there is a cookie cutter element to that in that it's a very fixed process. In philosophy it can be done, but you need quite a bit of people around. So quite a good team around you. We've got an excellent time. Well, let's.

Bryce: [00:07:37] Have a chat about the perpetual equity investment company. Can you talk us through the strategy that you have for it, the philosophy behind it, and your approach to that fund? 

Vince Pezzulo: [00:07:48] So the peak was, if you think about it, Perpetual's been in managed funds or the industrial share funds like at least 55 years old. I think that's one of our primes. All this fund's incredible track record over decades. The PIC is actually a first Listen strategy. They've been around for a while, but it's taken us at least that long to get it right. I suspect it was specifically designed for direct investors and has this massive investor at its core and it's thinking the strategies are based on Perpetual's quality and value philosophy. So we've been utilising for several decades and we wanted to bring this into a listed format, makes a bit easier for people to get access to perpetual style and the way we do things. And with the pic being a first, let's say, look, we always like the idea of because of as a quality and value manager, we tend to favour managers citing valuations, we favour dividends and in particular frank dividends. We always that's what we're looking for in an ally. So you guys know that we can pay fully franked dividends to the investors, the shareholders and traditional fund structure. As you know, they any gains you might make in a year, you have to pay 100% of those gains out, which means it can lead to capital gains tax issues. And. Whereas, with the service investment structure, we can build a buffer and retain some of those those profits, which is what we do in the pic. We've, we're trying to build a buffer which was effectively done now the five years of dividends as a buffer, which we can fully frank. So there's some benefits to the underlying investment picks. It's quite a concentrated strategy between 20 and 30 stocks typically, and we can get up to 35% in offshore companies as well. So it's quite a broad mandate to invest. It's very benchmark on to where we don't really care what's listed on the ASX 300 just because it's big, it doesn't mean I'm going to own it, but that's not excluding that either. So it was a very flexible strategy. It is designed for the massive and direct investor at heart. 

Alec: [00:09:43] So Vince, you say though, that you don't worry about the benchmark, but you have outperformed the benchmark over two, three, five and seven years. But when Bryce and I were preparing for this interview, we joked and we may no offence by this, but we joked that you could call it boring portfolio exciting returns because some of the biggest holdings in the portfolio are pretty well-known Australian companies BHP, Santos, Westpac. ANZ, the not exactly the exciting end of town, but obviously the returns speak for themselves. When you're looking for companies to put in the portfolio, what are you looking for? 

Vince Pezzulo: [00:10:26] You're right, they they seem very boring. But any any company can get exciting based on what price you pay for. Yeah. So I'm always looking for the lowest risk fucking type. So the maximum return I can generate off that risk. So if I can get boring and it's trading 60% below its what we believe is fundamental value, I'll take that risk every day. So you're right, these sort of companies like you talk like we do on BHP and Santos and some of the banks. We were buying those during the initial phase of Corona in 2020 and the financials and resources being the most economically sensitive really got punished. Basically they got halved in value, a lot of them, which basically implying that we're going to go on to quite a to be extended recession if not close to a depression. As an investor, when you start seeing markets get that extreme in the way they price risk into a company and, you know, sort of like permanently impair the future returns of that company, that's when you should be thinking about investing in those companies, particularly as you mentioned, they are boring, but they quite steady in the way they they operate. And it's at times of market stress where you do get an ability to buy, you know, top 20 stocks even that can give you a 50% return and you should always be thinking about that. You don't need to go to the speculative end of the market to generate those returns. Investors, you should always think about what's the maximum upside for a given level of risk. What am I willing to lose it, so to speak? But that happens once in every market cycle where you'll be able to buy really high quality businesses at half the valuation. You should always be thinking about that that you don't need to go super speculative. Having said that, you know, in the pit we've got companies which are less than $1,000,000,000 in market cap and we've got companies that are offshore listed in the UK and France and the US. So as a nation early, the strategy's quite flexible that we can pretty much go anywhere in a sense that we're not restricted by market cap or size or even geography. So we just let the market tell us what it thinks. You know, let the market say we don't like these stocks. That should pique your interest all the time. Do a bit of work. Think about why the market saying that and is there an opportunity in that if there is no, you get it back yourself. 

Bryce: [00:12:36] So Vince, you mentioned quality there a couple of times. And, you know, preparing for this episode, it came about that Perpetual has four quality tests for a stock to actually make it into your investable universe. So for those that are wondering what quality means to you, can you talk us through what these sort of quality tests are? 

Vince Pezzulo: [00:12:55] Yeah. So we've got four quality filters which we apply to every company to become investable. They have to take these poor quality filters off second filters. We start off with typically quality business, like a quality what is a quality business? And we typically look at there's no magic bullet here. You look a few things. We look at the industry structure, you look at how many competitors are in that industry. You look at the position of that company in the industry, you look at the returns of that industry. You try and understand directionally where the returns may be going. On a whole, you look at, again, the returns the company is generating is above industry, standard above industry. These are reason for that. Is there a strategic reason is a technical, technical reason for that? And then you look at the risks of a natural monopolies. Can a capital enter and exit an industry really quickly and thus in quite simple, but it is like the good old SWOT analysis, you know, strengths, weaknesses, opportunities and threats. It's good to write those things down. That's what we do. We test for a quality business. Then we look at conservative debt. We always are pretty hard and fast measure on balance sheets. The type of metrics we look at is we start with a debt to equity ratio of no greater than 60%. Some industries like to think about the more utility style industries monopolistic on issues that can typically run with higher than 50% debt to equity. In those cases we will look at interest cover, which is what it's like to think about like a loan sustainability ratio. It's got to be a interest cover. So we'll look at how many times a but do you have to cover your interest delivery? And at a minimum it has to be three times at the low point of the cycle. So for businesses like building materials or mining companies, etc., we want to invest in companies where it goes below three. Occasionally companies will can get into trouble for whatever reason and dip below three. And what we typically look at is we'll contact the company, will assess the ability of that company to basically sort that situation out and we'll assess whether it's a permanent feature and we actually kick a company out of our universe. That's what Universal will sell these. We have a position. We'll sell that position down. The third filter we typically use is we look at sound management. Now, management's going to makes a lot of money because they can definitely destroy your business if you've got the wrong people in management. So how do we typically assess where you look at? Always start with the remuneration package. CEOs are quite smart. They always try to maximise their wealth. As great as long as the longest shareholders. So look at the RAM package states align with the interests of these shareholders doesn't match the type of company it is. We look at how the CEO management behaves. Look at their history, in particular, where they've been seen, how much they're going through successful track record, particularly their work, the different types of companies you understand, have they applied the right strategy to right company? And that's when we look at strategy and what management puts forward doesn't match the company's prospects. You know, if you're thinking about sort of growth companies, typically they're growing quickly. They need a lot of cash as a growing. Paying a dividend doesn't sort of make a lot of sense initially. You know, you want them to reinvest in the business and not issue equity the whole time. So you can weigh all those things up. You're looking for red flags, really management. Well, lost money is when management's alignment was not with its shareholders and they had lessons to learn. And the last thing, one of the fourth quality CEOs we look at is recurring earnings. We don't sort of invest in concept stocks. All the companies we invest in and it sounds boring, needs to make money. Making money is really hard. It's quite a discipline to produce a profit where demand is cyclical, that's fine. But as long as the company can finance itself, generates free cash flow to invest in its business, but is typically profitable through the through the business cycle. When you look at the balance sheet and the profitability measures, I think it's prophetic to say it's times like these at the moment is that that gets you out of trouble. Because when a company can't finance itself or has got a really bad balance sheet, they typically may not survive the business cycle. And you know, a lot of companies now are struggling, will probably not exist within the next 2 to 3 years because they don't have either of that. Typically, during tough times, funding markets dry up. So if you're an equity investor in a business which has a really bad balance sheet, you're either getting a tap on the shoulder for very solid advising, capital raising or the company will just go broke. 

Alec: [00:17:01] Vince It's it's a very 20, 22 thing to hear you say. It may sound boring, but the company has to actually make money. I think, you know, you're not the only one that is saying that profits going to matter a lot more than valuations in the coming years. Marc Andreessen, one of the biggest venture capitalists in the world, came out and said something very similar recently. Thinks a lot of these big unicorns that have big valuations but don't make profits are in for a rude awakening in the coming years. So earnings, they might they might seem boring, but they are incredibly important. We're going to take a quick break. And then when we come back, we've got a few big picture questions to ask you. And then we want to take a deep dive into two industries that feature heavily in your portfolio. But before then, we'll just take a quick break. So Vince, before the break, we spoke a little bit about the perpetual equity investment company ASX ticker PIC that you are the portfolio manager of the philosophy that you invest there. We want to take a step back and just ask a few questions about the big picture and how you and the team at Perpetual say it. Now Perpetual are known as bottom up investors, but I guess generally, how are you saying the world and how are you saying markets right now?

Vince Pezzulo: [00:18:21] That's a really important question because things have sort of changed. But it's pretty self-evident where I can say today the market's always looking forward and trying to price in any sort of deltas or changes in economic prospects. So when you look at it, it's probably hastened now that fragmentation of everything is sort of like the buzz word. Thinking about the old rules of engagement in business have sort of been abandoned. Now people on the line understand what to do. Conroy's The Return on equity, and that's generated by your profit margins, your acetone, so your asset efficiency and finally, your financial leverage or leverage over the last 30 to 40 years, particularly since China entered the World Trade Organisation. Every company was told to maximise their profits by offshoring stocks or getting rid of the labour in their business. That sort of tried to maximise your profit margins. You were told to don't actually own any physical assets, so you just get rid of your business from offshore it again, build the plant in China or Vietnam, etc. Mostly China originally you could do that for a quarter of the cost and you can build significantly more capacity out of it. So that lowered your capital so you improve the efficiency your tan. And then lastly, because we've had record low rates for quite a while, you know, companies and particular CEOs were encouraged to buy back stock because the cost of debt was very low. So you see the tax return on on debt. Cost of debt was quite low. So you encouraged to see you're trading off 30, 25 times pay or 30 times higher than your earnings yield, which is impossible to pay if you're not 3 to 4% tax cost, it might be 3%. So there's a big arbitrage there. So you saw it for the last ten or 15 years. You see equities, Asian companies buying back stock. Well, the fact that what we've seen over the last 18 months suggests that that's probably going to reverse. Are you going to see companies going to probably because you saw supply chain shortages. You saw materials shortages. Companies are now caught where their manufacturing base is. Are you going to see the sort of reversal of all that? You're going to see more staff or higher cost staff. You're going to have to carry more of your onshore, your manufacturing, or you carry way more inventory onshore. And when you carry inventory or work in progress or etc., that goes up in cash. It's taking up more of your cash flow. Just sitting in inventory. You can't run just in time. You can outrun just in case. It's a war on time that allows you profit margins and it allows your ability to generate outside time. And lastly, with interest rates going up and even credit spreads blowing out a little bit, the ability to buy back stock now is going to be a lot more expensive unless you're trading quite cheaply. I suspect the quantisation sort of overbid at this point and all that does is puts pressure on your return on equity, which is why US investors get that spread over your cost of capital. So the reversal, that means you need to we done sort of investing in concept stocks, stocks, as I said earlier, in an inflationary type of environment. You want to be looking at sectors which have structural shorts in them where there's an undersupply of goods or materials and you want to go as far upstream as you can, you'll get the source of the materials. So that's why we're going to get on some of the second. But the energy and materials sectors are really important now is experiencing sort of deflation that's been in the markets the last 20 years to quite a benign environment. So it's a new experience for a lot of people. And also, don't forget, if you think about the GFC and the dirty word, there was fiscal policy, austerity was the word of the day where they ran very trying to get balanced budgets or run surpluses. Well, now that's the reverse. Now, with governments sort of spending a lot more money that's within itself is very inflationary as well. And but the markets are okay with that at the moment. We'll see what happens when bond yields really back up a bit, though. So that's a very different environment to the last 15, 20 years. So if you use the last two, 15, 20 years as environment to determine what you should be buying, you could get itself in a bit of trouble. So you really need to have quite a bit of balance in your portfolio. So that's how we sort of see the big picture. You know, you've got globalisation and again these are all buzzwords which your height but decarbonisation as well, you know, you can't just decarbonise without being a cost, there will be a cost. I think the Ukraine war sort of tipped everyone off as to what the reality of the situation is. So there's quite a few themes there, as you mentioned earlier, rightly. A sort of bottom up. But we do think about those things, those bigger themes as to where the opportunities in the market are. 

Bryce: [00:22:56] So we want to have a bit of a deeper dive on a couple of the industries that you're invested in. You mentioned energy and resources, but we'll start with insurance and with everything that you've just sort of spoken about from a bigger picture perspective. Interested to hear why insurance is an industry that is in the portfolio and the role that it plays in the portfolio. You've got investments in Insurance Australia Group, the Ticker, IAG and Suncorp Group. The ticker is Sue. And so yeah, why insurance and what role is it playing in in the portfolio? 

Vince Pezzulo: [00:23:30] So insurance is quite a cyclical sector for the last couple of years. Indeed, the timing. Right. And insurance because it has typically two things you're always going to consider in insurance is the pricing cycle, you know, where, you know, you get to insurance premiums every year and it is quite a bit of new capital we took. Remember I told you earlier about well, we assess the industry, the quality of the business. You always look at how easy is it for capital come in to compete away excess returns. Now in insurance that can be the case with very low interest rates. Capital is effectively nearly close to free, which means I can compete away in financial type products and services like insurance, which has been the case for a while the last couple of years. But now with the cost of capital and it starts going up, it makes it very hard for people to come into an industry where a financial services or good like insurance, you need a lot more to survive rather than just cheap capital. And with insurance we're exposed. You mentioned Insurance Australia Group, IAG and Suncorp. That's not a short tail insurance. So they do home and motor insurance and they do some insurance they consider to be short tail because you you renew your policy every year and you know the risks within the insurance book every year you see the catastrophes that occur every year, etc., and you know what's going to pay out so you can reprice your book effectively annually. And that's really important because when you get inflation and in insurance, you know, if you think about repair costs anyone tries to repay, anyone's ever tried to get a something around your house repaired. You know what the inflation what that is like when the from the minute the tradie walks in the front door by the time he gets to the actual back door, it's gone up about 10%. That's a real that's a real cost. So in inability to reprice with insurance, there's also another significant leverage. It has significant leverage interest rates because the technical reserves, which are reserves they have to hold because of regulatory rules like FSA, its rules regarding capital adequacy, that's that has typically be invested in very high quality securities, which is typically government bonds. And when they're earning, when they come with bonds trading with a zero rate, they are earning zero money on that those funds now as interest rates rise. So those funds which are earning zero are going to earn something all of a sudden. So that that's a free kick. It's a bit of a kicker and that's law. Insurance is quite leveraged to rising rates, interest rates. So in Australia at the moment you have a positive pricing. Soccer insurance premiums are going up because the number of events we're having and you have rising rates. So these two things are headwinds 3 to 4 years ago, they're now sort of tailwinds and with the insurance sector is actually not trading that expensive either. It's quite a trade sector in particular IAG, it's trying to price it as and try to do so six or seven or eight years. So there's a lot of this. It has some issues, but we think that's priced into the into the price of the equity today. And there's not much upside being priced into where we are in the cycle.

Alec: [00:26:22] Yeah. So Vince, on that, you mentioned the increase in events and I guess for the layperson like myself, when I think about insurance, that's where my mind first goes. You know, the increase in bushfires and flooding and and everything else that Australia is living through at the moment. I would think that insurance is a difficult industry because of the increases in extreme weather. I guess first of all, how do you think about that at the moment? But then second of all, when you're making a case for, you know, sort of 5 to 7 years in the future, when you thinking about these stocks long term, how do you even factor in something like the increase in extreme weather due to climate change? 

Vince Pezzulo: [00:26:59] So as I said earlier, it is a cyclical sector. It's no different to resource companies or building materials companies, etc.. You've got to get your timing right when you buy and sell insurance companies. The most important thing to consider when you look at insurance company, is it well capitalised, right? Do they have enough regulatory capital and a buffer on top of that to take advantage to basically buffer you against extreme events? Fortunately, we've got a domestic regulator and APRA, which runs pretty precise measures on how much capital needed to run and their provisioning levels as well, how much provision they're running. And the two Aussie to Australian ones, Suncorp and IAG, they are relatively conservatively geared and they have both inadequate capital and they do run pretty significant reinsurance programmes where they they reinsure the risk whilst the balance sheet the. So that sort of gives you a that's a starting point is to make sure that you're buying something which has some excess capital for that rainy day and a well provisioned and have a reasonably well thought out reinsurance programme to allow some of their risk. So typically for an insurance cycle, it does price stock go from between one to 3 to 5 years. I think we're still in the middle of the repricing of in Australia. So when it comes to the catastrophes you mentioned or more extreme weather, remember, because it's an annual renewal, they reprice the new risk next year and could tell you can be sometimes 18 months to recover the margin from an event or in effectively La Nina now. So whether there'll be a point where that reverses will be El Nino and then it's dry weather and there's way less events all of a sudden. So I said, it's cyclical, it's not easy. It's not for the faint hearted. Sometimes insurance companies up, it's got a lot of many years. So to start with, that well capitalised right at the start and then they got good provisioning and it is insurance expect accidents. 

Bryce: [00:28:46] Yeah, yeah. Nice. So let's turn to energy and resources. Vince, in in the portfolio, you've got pretty heavy exposure to the resource sector. You've got Santos, BHP and JR Voice Global. So you know, we've seen over the past year or so that there's been some pretty significant and strong movement in commodity prices. So what's Perpetual's view on commodity prices going forward? 

Vince Pezzulo: [00:29:12] We try not to forecast commodity prices. The history of forecasting results. Prices by the market is not great. There always is such an effect as the geopolitics in itself can knock you for a bit and it can be come out of the blue. So we don't try to focus on that. We try to look at, again for the industry structure, look for the metal resource or energy that is short, that is structurally short supply, or there's upside to demand in the future, which is likely to exceed the supply and always bring it back to what you're paying for. Look at the valuation, look at the price, and look at the valuations on balance sheets in resources. It's really important you consider the balance sheet because they can go pop in the night. Those ones we said it's got a great balance sheet resource companies, which a lot of us, single asset companies, something goes wrong, they will have trouble surviving. 

Alec: [00:29:58] Mm hmm. So BHP obviously is you know, it's Australia's biggest company now that it's returned from its dual listing in London, it it seems to just go from strength to strength. It's obviously recalibrated its portfolio, I guess, a little bit over the past few years getting out of, you know, oil recently and coal a little bit before that. Also Rio retaining its balance sheet and I guess its portfolio, a little bit of the majors. Why do you like BHP over Rio.

Vince Pezzulo: [00:30:30] BHP, its valuations, all that dissimilar to Rio? We like the spread of commodities. There's a lot more balance in their exposures. Is reais a lot more of an iron ore company purely? And we get our iron ore exposure through a company called the Terra, which is just spun out of Iluka a year or two ago. It's an iron ore royalty company. That's how we get our on our exposure through to Terra. It's simply because of just the structure of the resource base that BHP has. 

Bryce: [00:30:57] Yeah, right. And then Vince, to close out this steep dive, you've got an investment in Jervois. So can you tell us why, why that's of interest and the role that it's playing in the portfolio? 

Vince Pezzulo: [00:31:09] It's a cobalt nickel company. It's quite hard to find cobalt exposure in Australia. Aussie really important metal for battery minerals, but also defence. It's a key ingredient to defence as well to sort of developing the nickel cobalt mine in North America, which is important because if you look at cobalt itself, Jigawa has a cobalt refinery in Finland, which is significant in size and quite important to the non-Chinese market. They also own a refinery in Brazil as well, which more importantly, is backed by a very cheap energy and hydroelectricity. So from an energy perspective, it's one of the better assets and it's quite a strategic business in that sense. I mentioned earlier about management a lot of the management of Jaguar, Xe, Glencore, which is a large mining company renowned for its ability to execute on strategic plans. We quite like the management. It's got a good balance sheet. I said earlier, it's hard to get exposure cobalt directly and this is probably the only way you can do it and we think the market recognises that in the future. 

Bryce: [00:32:08] So Vince, before we just get to the final three quick questions that we that will rip through at the end. Just want to say thank you for your time today. Been an absolute pleasure and thank you to obviously Perpetual for sponsoring this episode as well. If you'd like more information on the perpetual equity investment company, then head to the petrol equity dot com dot AEW to find out more information. But Vince, we do close each episode with three questions. So Ren, let's crack into it, let's do it. 

Alec: [00:32:37] So Vince, the first question we like to finish with, do you have any books that you consider a must read? 

Vince Pezzulo: [00:32:43] Yeah, I usually read every year one up Wall Street by penalties as well known. In Stocks. Uncommon Profit by Philip Fisher. 

Alec: [00:32:51] Two great books there. The second question, forget valuation. Forget it as an investment today or any day, just purely on what the company is and what it does. What's the best company you've ever come across. 

Vince Pezzulo: [00:33:04] From an Australian context that have to say, CSL, their ability to generate those high returns and to reinvest for 30 or 40 years, 30 years and to be able to grow the business and maintain those returns has been quite impressive. But I'll leave you with this thought though. Yeah, the top ten companies, they say today will not be the top ten companies in the next 10 to 15 years. 

Alec: [00:33:22] Yeah, yeah, yeah. 

Vince Pezzulo: [00:33:24] Awesome. In the market. Quite high. 

Bryce: [00:33:26] Yeah. Not even Macquarie. 

Alec: [00:33:27] Well, I was going to say. You say that. You say that. But Perpetual is what Australia's oldest company or something. Or you've been around for like 160 years.

Vince Pezzulo: [00:33:36] You're trying to get me to say whether it is one of the best companies.

Alec: [00:33:40] It's one of the oldest companies. I'm sorry. 

Vince Pezzulo: [00:33:43] Right. It is one of the oldest companies. And it's it's stuck to its knitting for that long. It's a, it's a quality company.

Alec: [00:33:49] Mhm. Yeah. But I do, I do love the CSL answer. It's funny, the really the only critique we ever hear about it on the show is that it's trading at too high a valuation. The quality, the quality of the business isn't really disputed by anyone. 

Vince Pezzulo: [00:34:04] Yeah, that's right.

Alec: [00:34:04] But Vince, final question. We want you to cast your mind back to when you were, you know, levering up using your credit card to invest in Apple. Yeah. If you could speak to your younger self, what advice would you give your younger self? 

Vince Pezzulo: [00:34:19] If you've done the work right, you're not going have all the answers. You can't invest with 50% of the answers. Typically, I find a lot of experience. Information is if you've done the work back yourself, you always have that nagging feeling. At the time, it feels like I'm invested enough typically, but that's only post the investment. When they've gone up three or four times. So if you've done the work but truly back backed yourself, that's the only way to really generate any wealth. 

Bryce: [00:34:43] Nice, great way to finish the episode. Vince, thank you so much for your time. It's been really enjoyable unpacking sort of the perpetual investing philosophy for pick. So a reminder, if you would like any more information, head to perpetual equity icon today. Vince, thank you. And we look forward to catching up again at some point in the future. 

Vince Pezzulo: [00:35:03] Now, that was really terrific. I really appreciate the opportunity to speak. 

Alec: [00:35:05] Thanks, Vince.