The investment opportunities in small and micro-cap companies | Marcus Burns + Brittany Isakka – Spheria

Candice: [00:00:10] Hello and welcome to Talk Money To Me. Thanks so much for tuning in. I'm Candace Bourke.

Felicity: [00:00:15] And I'm Felicity Thomas. Now, today, we're actually joined by Marcus Brand, a portfolio manager, and Brittany Osaka, an analyst at Saphira. 

Candice: [00:00:23] That's right. So Saphira is known in the markets as being a fundamental based investment manager with a bottom up focus specialising in the small and micro-cap. So naturally, Felicity was like, We got to get these guys on the pod because she loves the small cap space. 

Felicity: [00:00:39] Let's set even the micro caps. 

Candice: [00:00:42] And as you hear throughout the conversation, they really define the definition of a small cap and a micro cap in their perspective. So Brittany, one of our guests today, joined the fund back in July 2021 as an analyst after working at QIC for over four years. She's obviously very involved in the research day to day speaking with the companies asset allocation and portfolio management. 

Felicity: [00:01:06] She also has a CFA which we know is very hard to get and a lot of study would have gone into that. Then we've got Marcus Burns, who's one of the portfolio managers, is also the co-founder and has been a portfolio manager since the inception of the company in April 2016. Now he's actually managed Australian, European and global equity portfolios out of Australia in London through very volatile market cycles for over 20 years. So he does have a really established track record generating strong investment portfolio returns for investors. 

Candice: [00:01:38] Ian, another interesting point when we sat down with Marcus is that also he used to work alongside his co portfolio manager, Matthew Booker at Schroders back in the day and together they co-manage the small Australian micro-cap portfolios. So that's really nice. Reminds you of how we work wives together. 

Felicity: [00:01:56] Felicity Yes, they stayed together so they basically moved from Schroders and then started their own fund. How cool. [00:02:01][4.5]

Candice: [00:02:01] That's right. And they've got a few different funds that we're going to focus on today. So you'll hear about the Opportunities Fund quite a lot in today's conversation, which is an actively managed portfolio investing in the Australian and New Zealand companies with a small cap bias. Since inception, the performance of the Opportunity Fund has been 8.6% per annum. 

Felicity: [00:02:22] So that's great, that's always good. And then you'll also be going to hear about their Global Opportunities Fund, which has actually just been rebranded essentially in March 2019. They launched the Global Opportunities Fund because they were very confident that this largely unexplored segment of the market presented the greatest opportunities for client wealth creation. Now the fund's exceptional relative returns in a period of extreme volatility were delivered by a carefully constructed portfolio of solid businesses with strong cash flow generation and good balance sheets, which you're going to hear a lot of in this episode and inception since performance has been 8.7% per annum now since 2019. That's pretty good. That's pretty impressive. Same as the market we've just had. 

Candice: [00:03:06] Not only does this process see great businesses with strong fundamentals added to the portfolio, it ensures businesses that don't generate cash, lack suitability or are being priced in a nonsensical way by the market are avoided, which is crucial in the microcap space, definitely. 

Felicity: [00:03:25] So they're looking at companies that are essentially sustainable and aren't going to go belly up.

Candice: [00:03:31] 100%, which is what every investor wants to do. At the end of the day. Impressively, inception performance has been 12.9% per annum double digits. 

Felicity: [00:03:39] We love that. 

Candice: [00:03:40] Who does an. All right, so let's get into today's conversation. But just quickly, as a reminder, guys, obviously our discussion today does not constitute personal financial advice, nor is it a financial product. Felicity and I are advisers at Shaw and Partners. But just a quick reminder that this podcast is general in nature and you should seek appropriate financial advice before you make your investment decisions. That's out of the way. Alrighty, let's bring you today's conversation. 

Felicity: [00:04:07] So welcome, Brittany and Marcus to Talk Money To Me. We're so excited to have you on the show. 

Marcus: [00:04:12] Thanks, guys. We would like to. 

Brittany: [00:04:13] Thank you. 

Felicity: [00:04:14] We'd love to start the conversation by addressing the elephant in the room. So with everything that's going on, the markets, the macroeconomic backdrop, interest rate rises, the battle with inflation as well as geopolitical risks. Have you found it tough in 2022 like we have? And from your perspective, do you think all of the bad news is out or is it still yet to come?

Marcus: [00:04:37] Well, that is a great question. And it's something that we debate internally as a team over the whole time. So it ends the first part of that question. We have had a look at how funds are down this year in terms of actual nominal performance, but we've materially outperformed the market across all the funds. And I think the major reason for that really is the style of investment we employ. We are very focussed on bottom up companies, very focussed on real businesses that make cash flow in earnings and have good balance sheets. Many of these trades sounded boring to investors a couple of years ago when they were chasing the next greatest thing, the fastest revenue growth story, the newest disruptive business model, all of which we, you know, we think are fantastic in small companies. But at the same time, it's only great if it translates eventually into something like cash flow and earnings. So avoiding that has been really helpful for our funds. And then we've had on the flip side, some stocks that have been recognised as being good quality businesses that have had earnings performance during a fairly tough macro environment and they've actually performed really well and actually gone up in a down market. So yeah, I mean it's been challenging. It's sort of the wheat from the chaff, but we think it's actually creating some really good opportunities now as well. And then perspective on looking forward, this is obviously the multi-trillion dollar question and I wish I had had a crystal ball myself, but I think we would say that a lot of the sell off in the markets has been largely driven by rates rising. And obviously there has been a downgrade in earnings as well, driven by rates and material costs and energy prices that are rising. But we would argue that a fair chunk of that inflation news now is now in the price for the market. There are probably some signs that inflation is abating. We start to see commodity prices coming off. For example, oil prices went down from that well, I'll say as all the other commodity prices in iron ore, aluminium, copper, for example, would be down so between 30, 50% from the peaks earlier this year. And then lastly, all of the stuff about the backlog of chips and transport costs, etc., that were writ large in the last 12, 24 months. The chip shortage is pretty much over, I believe, according to the Wall Street Journal and other sources. I've checked that recently. I'm trying to get my ten year cards personally, but I do understand the chips are now much more widely available and then transport cost bottlenecks, etc. are also well down. So freight rates are off all over the world well, well down from their highs. And you actually have CEOs like CEO, for example, going out today saying that the costs are going in the right direction. And he clarifies, saying you're actually going down. So, you know, mostly inflation's over is still an issue with wages, but it's definitely some signs that the pressure on inflation is coming off, which I think is positive and positive right to.

Felicity: [00:07:19] The markets are looking a little bit better, essentially. So a bit more growth on you would say? 

Marcus: [00:07:26] Well, I think less negatives. And we would say that there's definite opportunities that come from the sell off. And if there are good growth stocks, that good price is definitely that should be attractive because that could be attractive mid-cycle demand that could be attractive. Yes. 

Candice: [00:07:40] Okay, So that's really good news from our perspective. So I guess, you know, to quote yourself, no one has a crystal ball, but let's just pretend that you guys do have a version of one because you're well informed in the markets, right? So what I'm interpreting is, you know, maybe all the negativity is at its peak and we could be seeing a shift as we look into 2023. So I want to pose this question to both of you. I'd love to hear your thoughts in your smaller cap fund, you know, in the market of the ASX, what's your outlook for the next 12 months? 

Brittany: [00:08:14] Yeah, so we've obviously seen the small cap universe underperform over the last 12 months relative to large caps which have held up surprisingly well, especially in Australia. And we know during negative markets and recessions that small caps really underperform. They're a bit more volatile and illiquid and we've seen that. And I think what we know is that coming out of a downturn and a recession, small caps actually perform very well. And you never can time the bottom, but the best performance comes out from the bottom coming out. And we think over the next four months, the outlook for small caps looks really positive. We're seeing, as Marcus mentioned, some great opportunities in the small cap space. Lots of companies have sold off recently and we think there's great opportunity for high quality names. And yeah, so the outlook for us is that small caps we think will do really well relative to large caps. 

Felicity: [00:09:06] I love to hear that because I absolutely love small caps. Everyone who listens to Talk Money To Me knows that as well, because I think that's where you can get the most upside and find that next Multibagger So that's what you guys are clearly doing. 

Candice: [00:09:18] On the small cap space. Can we clarify what's your definition of a small cap here in Australia? 

Marcus: [00:09:23] X 100 so approximately $3 billion and down would be considered small companies. And then our definition of micro-cap would be probably sub $500 million. 

Candice: [00:09:33] So turning our attention to the global market, in particular the US, I want to ask, although you're not focussed on the large cap side of things, obviously you would be, you know, keeping note on the mega caps, what's going on in the Nasdaq, for example. So any comments there given that you have a fund in the small cap global space? 

Marcus: [00:09:53] Well, I'm not going to give you that, to be honest, because we only have a global opportunities fund as a single fund, which. It's really a small kept focus. So we don't really look at Google and we look at Google and Apple from the point of view of curiosity and Amazon, etc., from a sense of what they are doing with the labour force and their valuations like, etc. But we don't really try to forecast evaluation or direction of the share prices. So we would probably have a better view on small caps and I guess it would look a bit similar to our view on small caps domestically and the sensitivity also from large caps. The global markets have a more volatile, in some cases even less efficient, would you believe, in Australia. And that's what really talks about small cap investing globally long term is the fact that the market is so biased. It is so in a research relative to the domestic small caps we feel and some the universe gives us a lot of opportunity. So as long as we stick to a very disciplined process and don't try anything too clever, we think we can start to get through that enormous universe and buy some really, really amazing businesses, which we are defining. So like I said, for Global it would be the same as domestically. We think if there is a recovery in markets, small and micro are both domestically and globally. We'll do that. The large caps, because I sold off less than a hot visa. And, you know, we do think inflation probably has peaked. That's a big call. 

Felicity: [00:11:09] It is a big call. 

Marcus: [00:11:10] It was a print last week, obviously in the US. It's just that inflation still growing but it could come off the highs just all is a little bit it's a about picking up the suggests that it's coming back a little bit and obviously the rise rates are pretty aggressively in the states, more so than in here. And that is definitely seeing an impact on consumer demand, house prices, all those things and you're seeing layoffs, etc.. So unemployment is rising and in the US in particular probably will rise in Australia as well. 

Felicity: [00:11:37] So essentially you would have been invested in Apple and Google maybe 20 or 30 years ago and now you're really trying to find the next global name in the small cap arena. So let's quickly just turn our attention to Australian small caps and then we'll come to Global a little bit later focussing on Australia, right. Can you give us the latest look into your fund? What have you added recently and why and potentially what have you removed and why? 

Marcus: [00:12:06] This is the question ever lost here we say, what are you buying? What are you selling? And can we jump on the back of those of the stock stories? I think, look, we give you a flavour of the kind of things we're buying. And it's important that I think investors understand that we don't change what we do. So the market dynamic as it does change creates opportunities. We're very opportunistic, very bottom up investors. And by that I mean we look at fundamentals when making investing decisions. We love free cash flow businesses, so businesses that generate a history of free cash flow. We look at this which is backed up by earnings and free cash and typically balance sheets that are in a low or not geared. That's been a very trendy thing for a couple of years because obviously the more gearing that hoardings grow, all the more etc. has been going to be a fairly good place to be whilst rates are going down. But as rates go up, obviously the cost of that debt goes up materially. So to answer your question, we have picked up a couple of names recently we think are interesting. And both our small microcap fund, one we can talk about is Bravura PVS, which had a major profit downgrade late last week and the stock is very heavily sold off. We were pretty small shelled into those profit downgrades like a small shareholder. And given the reaction of the market, the stock fell over 50% on the day. We thought it had become an incredible opportunity. So we've been buying a fairly large chunk of that company, both the microcap and small cap funds. What do we like about it? And a couple of quick points. It's a high quality business that is going through a tough time and in my opinion it has had a history of good earnings and reasonable cash flow. The current balance sheet is net cash to about 30 million and the market cap and got sold down to something like 40 or 50 million. So it is about 120. If you take off the net cash, this could reduce the balance sheet revenues around about 270 million. And if you look at the average margin of the business over the last ten years, it's probably in that range of 13, 14, 15%. So just a simple maths on that to 70 times 15% gives you 35, $40 million of it anybody in business only about one or 20 million. So it's three times what we consider to be possibly recoverable at that level. You know, clients who use a product are incredibly sticky and almost like they have made some missteps and there's still some things that can be done to improve the business. But just in terms of the share metrics, business looks really attractive to us. And the fact that the balance sheet is pristine and it has been a good cash flow generator just leads us to be very excited by the opportunity. So the risk reward to us next off this right variable. 

Felicity: [00:14:24] Right, so it's buying some more of a bit of a microcap, which is really interesting and we absolutely love investable ideas here. So do you have any other ideas that you're looking to add into the fund recently and why? I know we obviously spoke about you've got Nitro in the latest update, which is quite exciting that that takeover, although you did mention and I agree it'd be nice if it stayed listed on the ASX because obviously there's a lot more upside in Nitro I believe as well. But what else can you give us? Marcus and Brittany? 

Brittany: [00:14:54] Yeah. So another name we've added to the MicroCap Fund is Premium and the tickers. So premium for those who don't know is one of the leading specialist wealth platforms. And so they do tax and administration for financial advisors. The company's share price actually fell from over a dollar 50 in November last year when rival Met Wealth lobbied a bid for the company to a low of below $0.50 in June and the sun added to the position slightly before this. So whilst we're aware that the sell off reflects that net wealth has pulled their bid and the company did have a disappointing earnings result in February, we felt the recent performance through June was more of a macro kind of fall as opposed to company fundamentals. So we entered the position for several reasons. So the business currently has about 2% of the market share of us with the platform space, but they're actually winning 5% of the flows. So we know that flows tend to lead so well and so that's a really positive for the business if they're winning double the amount of flows to their market share. In addition, the business actually recently sold a part of their business, the international platform business, and it was loss making. And so a real detractor not only in terms of earnings but even destruction from the core Australian business. So they've sold that off now and returned a nice dividend of $0.05 per share back to shareholders. And at the last update, which was August, the company informed us that they were now charging a fee on cash. So I'm not sure if you know much about platform space, but there's obviously you've got your equities and your other listed investments and also your cash portion. They weren't charging any fee on the cash portion just because cash rates were so low. But as cash rates have moved up higher, they now are able to charge clients a small fee and that'll drop straight to the bottom line because there's no additional cost for the business. And then probably final point is that their leader in the high net wealth space, so they've got a really good asset in non custody which is kind of off platform assets and it's part of the reason we believe that net wealth actually lost the bid back in November and we think could provide real strategic value to the likes of net wealth or even hub and probably worse provide the two biggest players with scale in terms of focus and also what they have on the platform. The grade of margins I can own just purely from scale. So it's kind of why we like premium, it's why we've added it to the portfolio. 

Felicity: [00:17:18] It's really interesting you say that because we actually use premium for our clients and we also use their reporting service. So we know that Hub 24 is in the reporting service as well, similar to premium. But that is very interesting. Hopefully it's due to a lot of our inflows, right? Candace. 

Candice: [00:17:35] Yeah, we're the ones who are contributing totally. So we'll keep at it.

Felicity: [00:17:38] Putting inflows, right, if it's suitable for the client, obviously.

Candice: [00:17:42] Now on the flip side, in the Australian Small Cap space, are there any names that you guys are really worried about and cautious about that are screaming big red flags?

Marcus: [00:17:51] There's always something we're cautious about. I think the one, although there's many attributes of small and micro that make a difference, are large caps. But one of the particular things we flagged to clients is that it is actually quite prone to two bubbles and of criticism, equally prone to under enthusiasm and depression as well. So you get incredible movements in shares, share prices well, well above and below their equilibrium levels. One area we think is probably failure because right now is lithium. So everyone is aware of the massive transition to these and the huge amount of batteries. And that's led to a massive boom in lithium price, which led to massive, massive boom and lithium stock prices as well. So there's a lot of listed lithium players in Australia now, many of which are explorers, some of which have got a deposit. There are very few which are actually producing lithium. And so we just argue that the multiples these things are trading on versus what we think is a realistic long term outcome for lithium price doesn't reflect any value in our opinion. That is our view. We could be wrong. Maybe, maybe there's no alternative to lithium long term and it's the only solution. But it does seem to us like there's a lot of euphoria around that space, probably not justified by long term fundamentals. It is our discussion. It is actually hard because there is a long history of lithium. It's a pretty small material versus copper. And we've got 20, 31, hundreds of years of history. The other material has been around for a long time, but has been in big demand for a long time. So it looks to us like a potential bottle. 

Candice: [00:19:16] Okay. That's interesting to hear. And what about, you know, other future facing commodities, like you mentioned, copper, uranium. What are your thoughts there you like in that space? 

Marcus: [00:19:24] Look, we don't have much exposure there. Apart from those names. And the main reason for that in our case is we really struggle to find small companies and to produce those materials with decent lives, consistent cash flow and a valuation we think is logical or attractive. So we tend to apply that exposure to mining through mining, mining service names. We will find names, occasions that we don't we join not to terror royalties which is a mining royalty on, on all projects produced by BHP money area. See that's a very long asset. Great cash flows and incredible. In our opinion, they are so provocative from time to time, but are generally pretty challenging to stick to that model.

Brittany: [00:20:05] And I think just to comment on the lithium space, especially in the small and micro-cap end of the market, there really aren't too many players that actually are producing. A lot of them are explorers, but yet have, you know, almost $1,000,000, billion dollar market caps in them. And we just can't justify investing in a company that doesn't have cash flow earnings just purely being driven by the commodity price war. You know, we've seen a ten X in the lithium price spodumene going from $400 to over $6,000. And we know how commodity cycles work eventually. Supply has to meet demand and those things will balance out. And we just think that the share price for some of the small ones is just unrealistic.

Marcus: [00:20:46] I also would flag that, you know, that lithium is prone to technology shocks. As you guys would be aware, this has probably been three or four battery technologies in our lifetime, and it was the lead acid, there was nickel cadmium, there was nickel metal hydride. Now the lithium ion is probably ten others that are out there and there's never been more research being done on batteries. And there is today because of that huge demand for these. So if there is a material change in the chemistry of batteries, that gives them longer life, lower cost or some of the benefits. Lithium may or may not be part of the chemistry set. So we know that it is a lithium event. It could dramatically change that there as well. And then the other thing we would flag is that, you know, any stocks that built up in October without any fundamentals backing them up and symbols and markers we'd be very cautious on as well, especially with rates going up. And that's what's hurt people in the last 12 months, in particular lack of cash flow. It is earnings stories that have materialised so that we weren't the only names in particular with that. Those of stocks would still remain a concern to us. 

Candice: [00:21:41] Oh, we know the ones you're talking about. You know, just look at their share price, right? Like it's you guys identified, I think, the first signs of stress. They're the first to be sold off. So that makes sense. And it makes sense that that's part of your rhetoric as you look for, you know, profitable businesses. You know, that makes sense. So that the small kind of mining cap names, you know, that you're not investing in makes sense to us. In a moment, we're going to be hearing more from Marcus and Brittany about the Australian market and opportunities they're seeing and also chat about the global market. But before we do that, we're just going to take a quick break to hear from our sponsors.

Felicity: [00:22:15] And we are back. So I hope you stay listening, because at the end of this podcast, Brittany and Marcus are going to give us their three top Australian names and potentially three top international names. However, right now I just want to go back to the Opportunities Fund. So has got a focus on Australia and New Zealand companies with a mid to small cap bias. And we actually noticed you owned the once ASX Dairying A2 milk. Now I thought what was interesting is the recent announcement about their infant milk formula in the US actually being FDA approved and the market clearly liked that news popping up 5% on the day of announcement. So obviously you guys are long managers. So I assume you also like this announcement and do you have any further comments on A2 Milk? 

Marcus: [00:23:03] Obviously. Thanks for the question. Look, we've got an interesting history of A2. Actually, we had quite a long time before we set up Syria on the ground, that it would be a strong proposition. It was attractively priced, incredibly profitable, and it turned out to be an incredibly good investment for us at the time. And then it got very expensive and very well. We bought the momentum kinetic. As you know, we had a couple of sort of more challenging years and it's sort of it's based out now and we think it's going to get back into growth. So our thesis really is buying a really good brand. It's not so much about the patents, it's more about A2 and what it stands for. And they really have got ownership of that A2 protein. And we think in consumers' minds both here and China and obviously looking to establish that brand equity in other countries like the US in particular, the announcement made to allow, you know, importation in May to influence the US is obviously a huge positive. It's the second largest infant formula market globally, something like $5 billion of value. And it's very, very, very concentrated in the hands of those three players currently. So two US players and one foreign company can play to dominate the US. I think it's something like 80 to 85% market share amongst those three, those three players. So there's a lot of scope for potential for that to fragment and for marketing to be taken by some attractive, differentiated foreign companies coming to the states with that kind of market size and with the kudos to has in Asia, we think there's a good coverage that takes some reasonable luxury over time. So look it's positive. Can I turn that loss in the states and sell profitable in the medium term. Obviously we like this and there's a good chance now. And in fact the analogy between what the US is going through now and what China went through sort of ten, 15 years ago when foreign players made this entry into China is quite interesting. There was a scandal in China where melamine powder was mixed within formula, which unfortunately made some children sick in China. And that created a lot of paranoia amongst consumers' minds in China, as you can imagine. And that enables high quality foreign brands to come into China. And I think that hasn't been melamine, has been up, has been another bacteria that entered the food chain in the States. But that definitely creates paranoia amongst people. And the regulators stepped in and asked for a massive recall in the US and said that similar parallels create an opportunity for foreign players so they can establish themselves with the quality brands and a niche around what it does. Then there's every chance it could become a very profitable income stream for it to some to. 

Felicity: [00:25:24] So back to being one of those ASX darlings, again, it's currently trading just under $6 at the moment, so I know consensus is around 8.50. So do you think there's a lot more upside essentially from where A2 Milk is trading at the moment? Or do you think they're going to have to recoup investor confidence in the market? 

Marcus: [00:25:43] Again, that's a good question. I think I think both really I think there is more upside beyond potentially beyond consensus and certainly beyond the current share price. And it does take time for investors to kind of fall back in love with stock. They feel if they've been in love with it and sort of been hurt by it and there is a sort of pain that people have to forgive, forgive the stock for it doesn't make much sense. But it's just psychological. Well, I think people go through we have high confidence in the current management team, Bortolussi, who was a producer of Pacific Brands. We have experience with him running back brands where we were shells with him as well. He's a really good job turning that business around and eventually getting it sold to Hanesbrands out of the US. So we know he's a good executive in the consumer space, also quite good at getting this, getting businesses taken over. So if A2 doesn't sort of recover to levels that are reflective of intrinsic value, then there's always an opportunity to be taken over by a large multinational looking to bolt on an attractive brand. 

Felicity: [00:26:37] That's a really good point because Candice and I are always on Talk Money To Me when we're talking about various companies that actually say that you do really need to look at the management and if they've got strong management and that's always a very good sign. So that's actually really nice to hear. I think now that, you know, it has been sold off. So it's obviously been sort of way too much in your opinion. And, you know, we think the same because it is a good product. Everyone's heard of A2 Milk, so it's just about them continuing to hit those various goals and catalysts. 

Marcus: [00:27:04] Yeah, look, I would agree with a lot. And in the meantime, you've got a cracking balance sheet that's around $50 million of net cash. Again, what about these is that, you know, it's good to have back up on a balance sheet it doesn't need. And if your pen is cash everyday, even if there's things we cover internationally which we think they will, then stocks on the stocks are not looking too expensive. 

Candice: [00:27:23] Oh, I love a good balance sheet. I get excited when we talk about that sort of stuff, but let's turn our attention to the global side of things now. Any names that are exciting give us an update on the fund. You know what's been in and out recently within the portfolio. 

Marcus: [00:27:38] Okay. Well, thanks. Thanks. The opportunity that global it's we've we've done a bit of rebranding there actually it was previously this very global microcap fund. So as you know, we have a microcap fund domestically. We love micros, we love smalls, we love needs. But we think my business models are particularly exciting because just the sheer alpha opportunity, those in those less recession areas gives us massive scope. We think so potentially our value is fund managers, obviously, because we do our job properly and do the research. But if we do, we think we can uncover interesting and exciting angles and we thought micros globally would be the same, the same thing. But we've pivoted to global small and changed names of scary opportunities and really raised my cap to include the small cap index. So that's quite dramatically changed. The universe in which we invest and really met the largest cap we can invest in is something like 20 billion, which is the largest stock in the global small cap index, whereas previously the US and make up around about a billion going down on that. So we've got a much bigger scope to plan, much bigger brand names. People have also added some stocks in the portfolio like Burberry, for example, we'll see groups in the US. The names that people have held are not just obscure little names that people would not have never heard of in the market space. So that excites us. The fact that the universe is bigger also excites us. One negative, I suppose, for investors point of view is that we are playing in a slightly bigger spectrum, which some people would argue means it's more efficient, there is less opportunity for us to invest after all the fund's mispriced securities. I'd agree with that. But I just kind of said that we do see a much, much bigger universe, which should give us still good Scott an opportunity. So that's the kind of update there. With that change in the index, we've changed our composition, so we were very heavily skewed to Europe and Asia and less so in the States and that the index change meant we've got to move back more U.S. focus. It is now something like 40 to 45% of the fund is now back in U.S. stocks. Now that's materially into the US. So the US component of the index which is about 60%, but we've picked up some really fancy names for Flag Zilla, which, which we own, which is like a ray of the US. And you might have come across that and some of your viewers would have been experience some understanding what is the does the model in the US is quite different Australia so we've got a cracking good model with ARIA in Australia where I think essentially they tend to pay us for their upgrades for advertising power and where the vendor drives an incredible opportunity for real estate agents to get people to upgrade their ad and possibly through the aria is they probably have the best business model in the world. Zillow's effectively less mature in many ways, but obviously the market size is vastly bigger. So, you know, we see that businesses that grow long term have a balance sheet, if you like. Balance sheets are something like $2 billion in net cash because it's got out of a flipping programme or is buying flipping properties. It might have a bit of an arrow. We think moving into that space and as its backing that it liquefy those properties and turn that into cash that's now got a huge amount of cash on the balance sheet, something around about $2 billion of net cash which is used to buy back stock. And Australians are in multi-year lows because the rate rising story is definitely ahead of house prices. People worried about transaction volumes and obviously as they come up splitting business, people thought, well, let's do earnings. So we think strategically the right, strategically the right move, but definitely as if the share price negative associated and bullish is an asset of multi, multi yellows, which we think is super attractive to fly. We bought Burberry, which is, you know, global luxury brand trading on sort of sub10 times, even which we think is very, very attractive for brands of that category. Again, massive, massive net cash of £800 million of net cash. So it can buy back stock, pay dividends and continue to grow earnings, although I presume that is going to slow. Earnings have slowed down a bit this year with Europe going through its declining crisis, etc.. And yeah, we're looking at feel for all the names that super excite us and we've we've added plumbing supply business recently called Ferguson in the US which is on 1 to 3 plumbing supply business is think a bit like race in Australia really long history of growing earnings, very good margins, incredible cash flow and that business has again been sold off heavily on the housing cycle fears in the states. So we finally sort of these opportunities where, you know, thematically people are right, rates are rising, house prices get hurt. But the reaction of the market in many cases is super exaggerated, we find. And so, you know, names like Zillow and Ferguson to us have really that right. Our screen is being really well-run businesses that are going through temporarily tough times that create the opportunity for us to invest in. So every couple nines with added risk makes it to that portfolio and that we are really excited about that's great. 

Candice: [00:32:07] We always love hearing under the hood what's going on the portfolio, but it sounds like you're quite keen on the US housing and. In the material market. You're not, I guess the outlook, they're very worried, particularly with the index change that you've just explained. You can go more into that space. 

Marcus: [00:32:23] Exactly. Look, I guess we're not thematic investors. We think thematic investing is quite dangerous and it's kind of dangerous that we think just to follow thematic timeline, like lithium, for example, or these and just buying everything's related to that that you know, that the technology around those areas because if we don't do the work on the actual the stock and what's imputed the share price already you run the risk of just falling a bit over a cliff. So yeah, we do think where there's been rate increases and people selling off shares aggressively probably in relation to thematic, thematic has for the following may we should do salary related to housing that actually creates opportunity. If it's more than the share price which in those times are flying for, we think we think it is. But yeah, we would be pretty, you know, we wouldn't just walk into without doing a lot of work and both those guys as balance sheets are really good. This is a concern many times before and hasn't gone into losses, etc.. So we know they can withstand a shock, a macroeconomic shock like that. And that does typically affect more at the share price than both the share prospects and a lot more on the downside than we think is warranted. So we'll take the other side of the trade, feel like we're in Australia. You know, we think when people panic about some news flow, it sometimes is justified. In other cases, it's ugly reflected in the share price. 

Felicity: [00:33:29] That's a really interesting point and also a very good segue actually to our next question. So I guess the question is what excites you about global opportunities rather than Australia? Because at the moment we've got more of a bit of an Australian focus rather than the US. And why do you think that you guys can actually do it better than your peers overseas? And I've got another question, but I'll let you answer that 1/1. 

Marcus: [00:33:54] Okay. Let's look at the two really good questions. I think look, I think what excites us is as bottom up investors, we love scope two to be a wander around and find opportunity, I guess. So if you look at the landscape in Australia as a parallel to something like 2300 years listed in Australia, the top 100 shares, the small cap index is the next 200. So the top three inches of the small cap and large cap index and then you've got micros effectively. So roughly 2000 shares now in that space a ton lose money, but some make money and some are really well run that are just completely uncovered and undiscovered. And so by analogy, you take the same logic and look at globally, and those numbers would be really much bigger. Maybe 2000 shares, a large cap in the next couple of thousand small caps, etc., and 20,000 microcap. But you have just an incredible scope to find businesses that are either regional appraisal champions, entrepreneurially led, but also really poorly covered. So you have multi-billion dollar businesses in the US that come by three regional analysts, for example. It's just such a different scope to Australia. I mean a multi-billion dollar business, they would have ten analysts covering it in the US because it's such a vastly big market, so liquid, you just get this incredible scope for inefficiency to occur. There's, there's ETFs trading up there, there's these retail investors, hedge funds doing all kinds of weird things with stocks from time to time, which creates just huge scope for opportunity if you can if you can be patient and do the work. So I think the one thing that we really see is better for us sitting in Australia as opposed to being necessarily in these markets. Is the distance now to go well? Is that a negative? And we flip around and say, well, why is it a positive? I mean, we get the data or the information flow at the same time as a hedge fund. Maybe if in New York and you got a direct line to do this, the same seaboard or whatever it is, you got a point to a second hand information. FLOOD We're not we're not HFT is not trying to drive that some point to a second intellectual advantage. We are looking at the information with the benefit of distance and and time and we just transport the anomalies and I think with with a disciplined approach the focus on cash in earnings and valuations which which we have a sphere out that does line sell pretty well I think with the access of this stuff looking at Bloomberg models, putting in the assumptions as to stocks B buying and actually focus on valuation and cash flows leads to tremendous outperformance of those global indices over time. So that's why we're excited because the US is enormous and we know we're really passionate about investing. And those two things I think will probably give us a real long term advantage there. So today the purpose in their performance has been pretty strong and I think. 

Felicity: [00:36:19] Those are really good points. And you've actually just got my next question essentially and already answered it. That cash flow, looking at cash flow globally does lead to outperformance. So I guess that's a really good point for everyone listening. 

Marcus: [00:36:30] So I'll be going there. But yes. 

Candice: [00:36:32] That's fine. All right. Well, let's finish off with our favourite topic here at Talk Money To Me. I want to hear from both of you, from your perspectives on your top three Australian names that you're liking and why really briefly. And then three, if you have global names that you're loving and why. 

Brittany: [00:36:47] Yeah, so my start on the Aussie side. So one name we hold in the market and small cap is J or Michael who jewel quick summation. Daniel Bracken, who's the MD, came a couple of years ago and transformed the business. So he's rolled out digital, omnichannel, built out the new ERP system and now they've got a million loyalty members. So he's really come in and transformed the business. They've had 12 cores. Revenue growth despite COVID and despite reduced store count, the business is trading on 4 to 5 times, even a bit. It's got 100 million net cash because we love great balance sheets and we just think this business has got so much upside opportunity. And even if we're heading to a downturn and consumers start spending, earnings have still traded on 8 to 9 times with great management, great balance sheets and a really good runway for growth. So that's one I really like. 

Felicity: [00:37:47] And just on that, the inventory, one thing we always talk about with retailers is we're not worried about the inventory and I guess heading into the Christmas season. Right. So it's looking positive from your side.

Brittany: [00:37:56] Yeah. I mean, the inventory is quite different to a normal retailer and that diamonds kind of never date. You know, it's not like a dress and fashion. So, you know, the inventory turn is actually quite low, but it's not an issue for the business. And Christmas and New Year is the best time of greatest sale, the most earnings I make. So we're definitely not worried about inventory for Michael Hill. 

Felicity: [00:38:17] Oh, we should be getting diamonds this Christmas then. That'd be nice. 

Brittany: [00:38:22] They've just released a five carat one as well. I was up in Brisbane a couple of weeks ago saying that, so it was quite impressive. Quite. Yeah, because your job is hard. Wow. All right, that's one. Give us another. 

Marcus: [00:38:33] Look. It's kind of like we're obsessive about retailers, but we really like INVESTools, which is, you know, Target is a youth fashion brands that's got a decent role. I have a really good management team and I'm actually just looking to expand by some acquisition. So that's been a really well-run company. We don't think that, you know, 15 to 25 year olds are as exposed to consumer discretionary or they're not they're not that analysis yet that got consumer debt so likely to probably be less affected by rising energy bills, etc., and interest rates. And the footprint there is expanding fairly strongly and has a lot of scope to move potentially internationally, like into New Zealand or Singapore or further afield. And that's not trading too extensively and it's got a good balance sheet. So we like that one. And then I guess a microcap or a small cap now is so-called meta, which unless you come across I mentioned we do like some mining service names that give us access to resource companies without any cycle or resource risk. And Mader would be one of those is an IPO about three years ago founder led by Luke Mader and his team and business has grown something in excess of 30% a year for the last four or five years and done organically without a need to raise any capital. So it was a pure sell down during the IPO. Pretty small listing has a raise, a small team of capital, as mentioned, to grow organically. So it's got to be a very high return on capital as it rolls out and basically services capital equipment. So it has mechanics running around doing work on site for large mining companies on a fixed class and it's taken share from the OEMs and that's that that you're taking has been a very good experience for these guys. They've rolled that business model from W.A. into the rest of Australia successfully and they've now taken it internationally into the US and Canada where it's, it's fairly nascent, but we're probably 18 months into the States and that's, that's showing incredibly good signs of getting traction and the Canadian operation out probably about that 12 months ago and again is also the signs show a real traction up in Canada and imagine with as well as the US and Canada on the size of the mining market up in those markets and fleets. 

Felicity: [00:40:36] Yeah, it's huge. 

Marcus: [00:40:37] Yeah. 

Felicity: [00:40:38] Well that's one definitely to watch. That sounds interesting to see that play out.

Candice: [00:40:42] We actually did the IPO, we actually did the IPO at Shriram Partners. So yeah, we are familiar with our fans. 

Felicity: [00:40:47] We are fans. And then just quickly, any other names you want to add to the global space? 

Marcus: [00:40:51] I look at a couple things we own and we like like Zillow Group and Ferguson. I think that that's the autopilot. And then look, one, I'll give you one really long term less sales name because, you know, maybe Delta was interested in this. But if you're Epson guys, there's a stop in Sweden called by a guy that produces some probiotics for the gut. So there is an absolutely vast treasure trove of bacteria in the gut, something like I want to say hundreds of thousands, probably billions of millions, but it's got hundreds of thousands and absence of those or excess of those can obviously lead to massive shifts in your gut health. This company's probably in the top five in the world and probiotics and take a very clinical approach to it so they don't just produce the bacteria and then sell it in some form and hope that it does a good job. They clinically test and trial a bit like a biotech company would try and prove the benefits and if it proves, then they and they market the benefits of that. So it goes something like ten, ten strains of bacteria currently being produced and sold globally. And it is probably, I mean how many hundreds Australians are out that it could do out in the future. There's a lot of potential for that and as I think people know that health is becoming an incredibly big area and area that people became much more aware of. And these guys will be one of the leaders in that field, profitable business, great margins, net cash balance sheet, not a not particularly cheap multiple, but a very long runway ahead of it, I think, in terms of what it could do with growth. Just beginning on a long pathway. 

Candice: [00:42:16] And now we like to wrap with a final question for both of you. Coffee, tea or tequila? 

Brittany: [00:42:22] Coffee. 

Marcus: [00:42:22] Coffees. 

Candice: [00:42:22] Makes sense. Your portfolio managers. Well, thank you so much for chatting with us today. That was such a great episode and we've got a lot of great investable ideas and insights there. 

Brittany: [00:42:34] Thank you both. 

Marcus: [00:42:34] Thanks, guys. Thanks for your time. 

Candice: [00:42:36] Alrighty. Wow, that was a great chat and I was writing down all these codes that they were mentioning. Good to know that they're liking stocks that we are familiar with as well. Felicity, an interesting comment that they think it's a bit of a bubble in the lithium space. So we'll see if that prediction plays out or not. Like you said, you know, no one has a crystal ball. It's just their best guess at the end of the day. Now, before we sign off, we hope you enjoyed today's special guest interview episode. But please remember, although Felicity and I are financial advisors at and partners and obviously the guys are portfolio managers at Spheria today is not constituted as personal financial advice. All the information is known at the time of recording, which is the 15th November. 

Candice: [00:43:20] That's it. What a great episode. So make sure you follow us on the Talk Money To Me podcast for daily market updates. And if you enjoyed our podcast, please give us a five star review on Apple Podcasts, Spotify or ever else you would listen to your podcast and remember if you have any questions or you want to book a meeting with us, email us at tmtm@equitymates.com. We'll be back next week. Until next time. 

Felicity: [00:43:43] How do you say goodbye in Swedish? Goodbye? I don't know. That's a good point.