Jodi Pettersen: Hello, everybody. It’s 11:00 now, so let’s do this. I’m joined here with, of course, Steven Bruce, the portfolio manager of the Invest Income Generator Fund under the code Eiger. Steven Managers, how much money do you manage now in total? Lots. Many billions on behalf of Australian investors, institutional and retail investors, of course, and we’re really happy to have him today here to discuss. What’s been there’s a lot been happening right now and so we’re very keen to understand what’s been happening, how you view it and how you think it will impact the EIGA portfolio, the income generator portfolio. Before I dive in with Steve, I want to make a couple of quick housekeeping’s. Of course, we have the Q&A function down below. So you see in the little bar, you can type in your questions there and we will get to them probably closer to the end. But we will get to them. So as they as they as they come up, just please just type them in. We also are making a donation for every attendee. Today, we will be donating $5 to the Save the Children Ukraine appeal. So thank you, everyone, for attending. And of course, before recording this, so people who can’t attend today can watch it in the future. So be aware of that. And then, of course, we have this important disclaimer. So basically what this disclaimer describes is that we are obviously not financial advisors, we are investors. So this none of this presentation is financial advice. So always seek your own advice and always read the PDF and TMD at einvest.com.au. So with that out of the way, let’s slide in to the main deal, which is Steven and Steve. Let’s jump into it. What’s what’s been happening? What should we care about?
Stephen Bruce: Oh, thanks, Jody. Good morning, ladies and gentlemen, and welcome to our webinar and thanks very much for for your interest. So today I’m just going to take a step back and give a quick overview of the fund for anyone who’s on the line who may not be that familiar with it. I’m going to and I’ll just touch on how the fund has performed since we got quoted or listed nearly four years ago. Then I’ll talk about the backdrop, the macro backdrop that we’re that we’re experiencing the minor moment, I think. Oh, my goodness. That is certainly interesting times in the Chinese proverbial sense of sense of the word. You know, I don’t think any of us really expected that we’d be talking about some of the things that we’re going to. But I guess that’s the world we’re in at the moment. And then given that, I’ll talk about how we’ve got the portfolio position to to try and navigate that, I’ll touch on, I guess, some of the highlights of the reporting season just gone. And then finally I’ll just make some comments around around ESG. Okay. So if we just move on. All right. So just just to recap on on how we run this fund. So the way we manage your money in this fund is it’s a value style investment process with a focus on generating dividend income. When we’re picking stocks, we really we really look at the underlying fundamentals of the stock.
Stephen Bruce: And what we’re trying to find are basically quality businesses which are going to grow their earnings and their dividends over time. And so the sort of businesses that have have a track record of profitability, so reliable companies that have been around for a period of time. And we tend to stay away from what I call the hopes and dreams part of the market, such as loss making, tech stocks and things like that. And amongst other reasons, those sort of stocks don’t pay dividends at all, which is critically important to this fund. As a value style investor, we’re very focused on the prices we’re paying for stocks, and so we want the stocks that we invest in to be on attractive valuations and offer good value. We have got a very big focus on balance sheet strength because, you know, at the lowest level when you’re buying a company, you’re actually buying a balance sheet. And so it’s always the first thing we look at. And so we’re looking for that financial strength, which reduces your downside risk in in many ways. And one of the metrics that you look at there is what’s called interest cover. So the number of times that profit covers your interest, your interest bill, and the higher that is, the less chance you have got broken in an unexpected situation. So essentially, they’re the sort of stocks that we’re picking out of the market and then we further enhance the yield that the fund can develop by the portfolio generates buy.
Stephen Bruce: When we’re putting the portfolio together, we have bigger weightings towards those stocks which have higher dividend yields. Sometimes we’ll increase our weightings in stocks ahead of their dividend paying period and we’ll also participate in in off market buybacks and we participated in the Westpac buyback during the period and that’s a way of generating not only a higher level of distributable income, but also it creates a positive return because the on and after tax basis and we’ve been running this strategy well this listed version of the funds only been running since 2018. We’ve actually been running a similar strategy since 2005. So it has a 16 year track record and there’s $30 million or so in this fund. But across the other strategies, that’s around $100 million. So in terms of how the fund the fund has performed since. It was listed. If we if we go back to to May 2018, what we can see over that period of time on the right hand column there, we’ve delivered a cash distribution yield of 7% per annum. On top of that, there’s been a 3.1% in franking credits that you claim back at the at the end of the year and your tax return. So a total distribution income yield of a bit over 10% per annum for the period. So you know, generating good income is the number one goal of the fund over that period we can see the capital growth has been slightly negative, down 1% per annum.
Stephen Bruce: So that leaves the unit price just below the $4 that it listed at and so, so relatively stable unit price over that period, albeit with the COVID sell off and bounce. It’s been volatile, but we’re kind of back where we started. So delivering on that high, high level of of income yield next. So moving on to moving on to the outlook and we’re not putting this presentation together. I was looking at some presentations that I’ve done in previous years and I came across one from 2019. And and this kind of speaks to just how uncertain and unusual the world is at the moment. So back at the end of 2019, there were a lot of things that we were worried about in the world, and I’ve sort of put some of them here. You know, we were worried about what Trump was going to do next. We were worried about what the implications of Briggs were going to be. We were worried about sort of increasing economic tensions between the US and China. And back at that point, if you can believe it, house prices were looking a bit soft and we’re all worried about deflation. Now we roll forward just to sort of two short years, really. I mean, what are we worried about now? Well, none of those things turned out to really matter all that much because, of course, COVID came along and COVID still with us.
Stephen Bruce: Trump didn’t do as much damage as we’d perhaps worried about, but his Vlad’s replaced him as the lunatic du jour who’s threatening to to wreck the world for everyone. We were worried about China flexing their economic muscles. Now we’re actually more worried about the Chinese economy slowing too much and problems in their in their property market. And you’re right about what’s what what’s been going on with Evergrande, one of the essentially their largest private property developer. And then concerns about house prices falling and deflation have been replaced with concerns around the sort of social impacts of house prices being too high and what inflation is now going to mean. So I think this just kind of speaks to a couple of things. One is that the backdrop is very volatile and unpredictable. And two, you know, there’s actually always a lot to worry about in the world at any given time. But, you know, I guess the good news is that the global economy tends to roll on, roll on through it in spite of these things. But you know, when we look at what’s going on, though, we do see a number of quite significant shifts that are occurring in, I guess, what you’d call the macro and geopolitical backdrop. And these have been caused by increasing tensions between countries and also some of the effects of COVID.
Stephen Bruce: And one of the first ones of these was this sort of shift from monetary to fiscal policy. Now, after the GFC, most policy was implemented just by cutting or raising or generally cutting interest rates, but COVID meant that governments actually had to start doing some targeted fiscal spending. And this has been quite significant in that it’s really not just made asset prices go up like cutting interest rates does, but it’s also increased the underlying level of economic growth and broaden that growth out across across most of the economy. Supply chain disruptions and conflict have made us all more focused on the resilience of supply chains and a way of saying it is. People have moved from running their business businesses or their countries from having things available on the just in time basis to a just in case basis. And this is going to lead to, I think, some significant investment in new capabilities. And that kind of ties into the next point where we’ve had for decades is increasing globalization. Now, globalization will continue, but certain aspects of globalisation are going to start to be wound back around critical and strategic goods and services, for example, there’s going to be more offshoring, etc.. So some of this sort of job loss to over shore of job loss to offshore, etc. could well start to reverse which which has some positive implications. Decarbonisation has been talked about for a long time, but it’s finally thankfully starting to gather pace and that’s going to require massive investment by governments and the private sector and that’s going to be it’s going to be positive for growth.
Stephen Bruce: It’s going to be very intensive in resources. So it’ll be good for the for the mining sector, but it will likely result in higher costs again. And then that ties to the next point where we’ve gone from a period of very low inflation with periodic deflation concerns to a period of, well, currently very strong inflation, which will likely moderate back to a reasonable level of inflation. Again, that’s been a big change from the last ten years. And all of this has really driven this turn in the interest rate cycle that we’ve seen from from ever lower interest rates to rates which are starting to rise. And this is a very significant change in markets because it has not only affect the economy, but more it really impacts the valuations of different stocks in the economy. And and most most significantly, the valuations of the really expensive tech growth parts of the market are far more sensitive to interest rates. So as rates go up, the valuation of an expensive or a loss making growth stock are going to be impacted a lot more than the valuation of a reasonably priced, safe value stocks. So all of these factors, by and large tend to favour our value base style of investing.
Stephen Bruce: And if we just summarise some of these factors in in charts, if there are really three big things that move the markets, it’s the level of GDP, the level of inflation and the level of interest rates. And these are charts that I’ve grabbed off the RBA’s chart. If you’re interested, the RBA produce a great chart pack every month. It’s on their website with charts on everything imaginable about domestic and global economic matters. And so on the left we can see that GDP going back to 20 plus years, it had been kind of trending down, got hit hard with COVID, bounced hard, and now seems to be kind of settling at a slightly higher, higher rate. Similarly, inflation had been trending down for quite a number of years, hit with COVID, but now it’s bounced back with a vengeance to sort of a level we’ve not seen for probably for ten years. And then the ten year bond yield as a as a proxy for interest rates, we can see it’s been declining as far back as the chart goes, but now it’s started to rise again. And it actually the Aussie bond yield is now higher than it was. It was pre-COVID. And again, all of these factors tend to favor a value style of of investing. So obviously there’s a very high level of uncertainty out there. But when we look at the overall economic backdrop, on balance, we think the outlook is reasonably positive.
Stephen Bruce: Covid is still with us, but by and large, it tends to be in retreat. The reopening is continuing. There’s still a ways to go, but in many ways we’re getting back to almost normal in large parts of the world and markets. Employment is really strong in almost every every market that you look at. The unemployment rate in Australia starts with a three and you see that everywhere and obviously very strong employment markets are. Very good, thoughtful people and spending, etc. and stimulus yesterday was big COVID stimulus and that’s being wound back. But I think fiscal stimulus will become a bigger part of economic management going forward. And Australia, again, we’re looking like the lucky, lucky country. We’re pretty much open again. We’re really benefiting from the commodity price boom that’s going on. And agriculture, even though it’s not a big part of the economy, it’s really flying at the moment. Of course, on the negative, we’ve got the situation in Ukraine, which I don’t think any of us would have even dreamed of as recently as Christmas time. Covid is still causing disruptions to supply chains, etc., pushing up inflation and so on. This turn in the rate cycle, it will have a moderating effect on growth. The question is how far how far it goes. Energy costs are definitely going up and that kind of feeds into everything else. And then China, which is obviously a massive driver of Australia, is slowing down.
Stephen Bruce: However, I think on the positive the there have been a number of announcements by the Chinese government in recent times about various stimulus measures that they’re putting through to maintain growth in that sort of 5 to 6% range in in the coming year, which should continue to benefit Australia in the and the resources sector. So you know, overall we have the portfolio leveraged to an ongoing positive economic environment, but a degree of caution is warranted given the highly elevated level of risk and uncertainty out there. And so if we just move to the next slide, when we look at how we have the portfolio set up in a I guess, some broad categories, what we’re trying to do is balance the cyclical leverage that we have in the portfolio with some good quality defensive kind of stocks and some uncorrelated holdings. So if we just look at these sort of categories, the first would be consumer discretionary. And consumer spending has held up significantly more strongly than people than people would have thought. And so in that space, we have stocks such as Kathmandu, as a retailer of outdoor wear, as we all know. And in a way, it’s also leverage to travel because the whole of Kathmandu stuff, you buy it when you go travelling. And we know travel hasn’t fully come, international travel hasn’t come back yet, but it’s only a matter of time.
Stephen Bruce: It’s starting to now with the borders, the borders open. So we think that’s the sort of retailer that’s well positioned. Ampol is, you know, roads are clogging up again, but they’re not back to where they were. The planes haven’t started flying. So there’s still a good reopening story there. And then Aristocrat with its gaming machines and video gaming, etc., that’s all actually performing quite strongly. So, you know, these sort of stocks which are leveraged to the economic reopening, then resources now commodity prices have been really strong. They were really strong before Ukraine. They’ve spiked even higher on the back of that. Now, hopefully that will go away and they’ll come back down. But we’re what’s characteristic of pretty much every commodity at the moment is that demand is robust, yet the supply side has not kept up. There’s been underinvestment and the reality is new deposits of commodities just get harder to find because the easy ones to find have been found. The easy ones to mine have been mined. So it’s incrementally it’s getting harder to keep up. And as our mining analyst says, there are three certainties in life. The first two death is death, the second is taxes, and the third is Vale, which is the biggest iron ore producer in the world in Brazil, will miss its production targets. And so things like that, it’s just keeping the demand side of the supply side of the equation quite tight in the face of pretty good demand.
Stephen Bruce: And that’s why we see the iron ore price up well over 100, $100 again. So those stocks are generating really good cash flows and trading on low multiples of the cash flows. Now, the banks again are in an interesting position. The last five years has been really quite tough for the banks coming out of the royal commission. It distracted them. They had to sell off the non-core parts of the business. They had to put in a whole heap of extra cost into the business to remediate for things that they’ve done wrong and also to improve their systems and processes, things around the anti-money laundering and all that sort of stuff that’s cost them. But they’re through that now and the economic backdrop being good is good for them. And with interest rates starting to go up, that generally has the effect of expanding the margins they make in their business. So we think the outlook for the for the banks is pretty good. There are some other financials that are really interesting. Macquarie for example, it’s a stock which tends to do really well regardless of the environment it’s in because they. They’re very adaptable and they’ve managed to maintain that adaptability, even though the business is very large these days in particular, they’ll do really well from the transition to renewable energy because they’re the biggest financier and developer of renewable energy projects in the world. Little Australian.
Jodi Pettersen: Macquarie Yeah, I didn’t know that that’s actually no they amazing.
Stephen Bruce: Yeah. As part of their asset management management business, they’re sort of moving, they’re moving down the curve from just buying projects, putting them in funds for investors to actually doing greenfield developments where they do everything from finding the right bit of land to designing and building the projects. So, you know, there’s opportunity there. The insurance sector is another one where there’s significant leverage to the increase in interest rates because insurance companies all have big investment portfolios. And so the higher interest rates are and because a lot of it’s invested in cash deposits and things like that, they can invest these at higher prices. And then as we think about the defensives, we want companies in the portfolio which on a rainy day will do or do well for us. Things like Wesfarmers that owns it owns Bunnings, which is probably one of the absolute best businesses in Australia, Telstra which is a pretty defensive business. And again it’s, it’s had a not been a great investment since it since it listed. But I think it’s at a point now where most of its headwinds are kind of behind it and the next few years are starting to really look quite good. And then Helios in the healthcare space, you know, they, they are the number two pathology provider in Australia. And the thing about them is if we do get more covered coming back, they make an absolute fortune doing, doing COVID tests. So it’s a kind of a hedge against variant number seven or whatever of COVID coming along. And so and then finally that leaves leaves agriculture. Now I call that an uncorrelated sector because the agricultural sector really marches to its own beat. You know, a wheat plant doesn’t care what interest rates are or what what the currency is, but.
Stephen Bruce: What matters is seasonal conditions here and around the world. And and what’s been happening after the terrible drought of three years. We’ve had two amazingly good seasons and it looks like we’re setting up for a third bumper season. So companies like GrainCorp have been doing very well. Incitec Pivot, which is a fertiliser producer. Fertiliser prices are at the highest levels they’ve been since 2008 and so that’s really well positioned. And then United Malt is an interesting one. It’s the number four bulk producer in the world. So more obviously goes into beer and it goes into into whisky as well. And it’s really it should be a really quite a stable business, but it got knocked around a bit by COVID because its highest margin sales tend to go into hipster beers that people drink on premise. And when people are in lockdowns, less of that happens and you drink more, whatever. Vb At home and they make so they make less money for that. But as as everything reopens there, that one will do well. But there’s a really interesting angle in that the global malt industry is undergoing significant, significant consolidation and united more potentially fits very, very nicely with some of the other malting, bigger malting companies in the world. And if you think about the price that these transactions usually get done on this, on our reckoning, there’s potentially 50% upside. It should it should it be taken over. So at a high level, I think that gives a flavour of how where we’re seeing opportunities and how we’re trying to balance the portfolio. Now, I can talk about some of these stocks in more detail, but I’ve sort of kind of been told that I have to keep keep to time.
Jodi Pettersen: But this would be short. Wait.
Stephen Bruce: Yeah, I just just, you know, just if I can just point out a couple of things here. Here, are we talking about the iron ore miners? And with iron ore, if you look at the table on the bottom right at like $140, you can see we’re only trading on like six times cash flow. And theoretically Rio could pay about a 15% dividend and keep its gearing within its target levels. And on the left here we see the global cost curve, so that’s how much it costs per tonne to produce iron ore. And you can see the big miners here Vale, BHP, Rio and Fortescue, how low they are on that cost curve. So these are all higher, higher cost producers in the grey. So these guys are making huge margins. The banks are just very, very quickly. If we just look at the chart in the middle, credit growth here in housing, these are new housing approvals or commitments. It’s going up very strongly. So the outlook for the banks is pretty good. Virgin money. It’s a number one challenger bank in the UK used to be owned by NAB who didn’t run it very well. But they span, they spun it out a couple of years ago and so it’s it then it was used to be called Yorkshire and Clydesdale Bank, which sounds about as boring as you can get, but it sort of took over virgin money and took the name. So it’s now it’s a far more sort of appealing consumer proposition and we think there’s potentially it could actually double.
Stephen Bruce: And the big driver there is, as the Bank of England starts lifting interest rates in the UK, that will have a big positive benefit to its tweets, earnings and telcos. I was talking about how Telstra had been a pretty miserable investment for a long time. You can see this sort of earnings decline on the left over many years. First you had it just exposed to general competition from being a monopoly and then in more recent years as the NBN’s rolled out, that’s just chewed up the margin in its fixed line broadband business. But now as we get to FY 22, we’re at the end of that because the NBN is done, earnings have been rebased lower and that just leaves it to be driven by mobile, which is the biggest part of the business now and it is growing and in the mobile market you’ve just had the merger of TPG and Vodafone, so that’s locked in. A nice three player industry structure is with TPG, Vodafone plus Telstra plus Optus, all trying to get a return on their network. So we think we think the dynamics for Telstra have got better in recent times and I was talking about United Malt as well. You can see it’s got a big position in Asia down here which is serviced out of Australia, our barley growing regions and making. It’s a really strong position in Scotland where where they make scotch whisky and then in the US it’s sort of got a big position in the US and Canada and that’s obviously a big market.
Stephen Bruce: So an interesting one there. And then finally on agriculture, you know, chart on the left shows just how how much it’s been raining in Australia, which is obviously a key determinant of how much gets grown. Graincorp, for example, hold the portfolio. They make their money by storing and exporting it, so they run silos and export ports and they trade grain internationally. And then if you look at the. Price in the middle. A couple of years ago, it was $4. It had just been progressing nicely, up to sort of seven or $8. And then this spike here is what’s happened in Ukraine, because Ukraine and Russia export around 30% of the world’s traded wheat. So not too many ships are going into the Black Sea just at the minute. Now hopefully this spike will come back down very quickly because if it doesn’t, there’s a billion people in the world who live on less than $2 a day. And when your food prices are doing that, it’s gets pretty ugly pretty quickly. So hopefully that’ll come down to a far more sensible level. But you know, that’s not a big driver of GrainCorp earnings really. So yeah, so that just gives a flavour of some of the, the stocks we’re in and then we just yeah. I’d say in terms of we emphasize how we have a focus on valuation in the portfolio and this table has got a lot of numbers in it.
Stephen Bruce: But if you just look at some of the multiples, for example, on the left, the price to earnings multiple, our portfolios are about 20% cheaper than the overall market. On a cash flow basis it’s about 30% cheaper and the dividend yield in our portfolio is nearly 50% higher than that of the overall market. In terms of the reporting season, a busy chart here, but what we saw so what this chart tells you is each reporting season, the number of companies where the analysts consensus forecasts for next year’s earnings, how it changes after they result. So they come out and say this was our result for the period. And then based on that, people’s view of the coming year changes either more positively or more negatively. And you can see that generally most years, because analysts we tend to be a bit over overly optimistic. We generally have to temper our expectations a bit. So you have more stocks where the earnings for the next year get revised downwards than than upwards. But if we look at the most recent period on the right, February 22, that was actually one of the strongest periods ever for positive revisions. So that’s telling you that results were better than what the market was expecting. And that’s largely a function of post COVID rebounds being better than people thought.
Stephen Bruce: And generally, I think the economic backdrop, particularly in Australia, being stronger than people thought. The other thing that to come out of reporting season was that it pretty much continued the trend of corporate Australia having very strong balance sheets. And as we sort of started out at the beginning of the presentation saying balance sheet strength is something that’s very important at a stock level and then at a macro sort of index level. This just tells you the overall corporate Australia is is in sort of rude good health from, from a financial position and that means they have money to invest for growth. If demand picks up strongly, they’re in a good position to weather any unexpected headwinds that come along. And importantly, they’re also in a good position to pay out an attractive level of dividends as we’ve seen in recent times. And the last the last thing I’ll just leave you with is is ESG. Now, obviously, ESG has become a very big area of focus for investors and investment managers in recent years. Now, this fund now we run, obviously, dedicated ESG strategies within perennial. Now this fund isn’t a dedicated ESG strategy, but what we do in our fund is we make sure that overall our fund has better ESG characteristics than the overall market. So funds with good ESG characteristics, not only do they have lower risk, but they also, in our view, have better opportunities as well. Because, you know, a lot of the discussion tends to around ESG, tends to focus on risk.
Stephen Bruce: Do you have assets that will be stranded or is regulation going to change and damage your business? Now, those are very, very valid. Things to focus on. But I don’t think you want to sort of overlook some of the opportunities that ESG creates as well. And our previously I’d talked about Macquarie. There’s a tidal wave of money coming into renewable investment and Macquarie will do really well, really well out of that. And another one, which is maybe a little bit less, less obvious is something like Incitec, which produces fertiliser. Now unfortunately fertiliser production does produce greenhouse gases. It’s just an inescapable part of chemistry doing it. And so if you could snap your fingers and come up with a way of not producing fertiliser which doesn’t produce greenhouse gases, we would, but it’s in early stages yet. But it is quite possible that they’ll be able to make fertiliser using what’s called green ammonia. So instead of using natural gas as a feedstock, you can use hydrogen produce with renewable energy. And Incitec have an ammonia plant at Gibson Island in southern Queensland where they’re looking into a project with Fortescue Future Industries to do just that. So that would be one of the first if that goes ahead, one of the first sort of green fertiliser producing facilities in the world. So that’s really quite exciting and it’s just an example of the sort of opportunities that companies will have.
Jodi Pettersen: And I have notes, I write always write notes. We go through these things because I always have lots of questions to ask you. Steve I like the fertiliser industry. I understand Russia is a big producer of fertilisers. Does that also impact the way Incitec the future prospects for Incitec Pivot Well.
Stephen Bruce: The key input, as I was saying to fertilisers is natural gas. And so Russia being one of the biggest gas producers in the world, also produces a lot of fertiliser, again around the Black Sea, the Black Sea region. So the higher European gas prices are and the less the higher gas prices are, pushes up the cost of fertiliser globally, which is good for Incitec because they have cheap gas locked in so they make more money. But also it’s a supply issue. If fertiliser simply can’t get out of these places because no one will, no one wants to send a ship into a Russian port or a Ukrainian port for fuel. It’ll never be seen again. Or you’ll get sanctioned for doing it potentially, which is obviously a very big risk for companies that that is that is positive. But at the end at the end of the day, we the world needs fertiliser because if you don’t have yields plummet, food prices go up and it’s not good.
Jodi Pettersen: No, we don’t want that. I think I’ve got a number of questions that have come in, so let’s have a look at them. I’m going to stop sharing the screen so I can read them. Here we go. Here we go. Do you expect higher dividends for some of the commodity producers in the portfolio for the next financial year?
Stephen Bruce: Possibly. And again, it just 100% comes down to what the iron ore price does over over the next 12 months. Our view on the iron ore price is positive in the sense that we expect Chinese in fixed asset investment to be quite strong as they need to do more stimulus to a to what they need to take steps to support the property market. And so the property market is a big consumer of steel. They’ll also likely pick up their fixed asset and infrastructure investment and also investment into renewables. And obviously a big focus of China and everywhere, as with everywhere else, is the decarbonisation, which is all materials intensive. So the iron ore outlook we think is positive. Some of some of the other things like copper again should also be quite, quite positive as well. So whether the dividends go up or down, I’m not sure. But they will be, I think, very attractive at a very attractive level, basically.
Jodi Pettersen: I know that some people on this call might have joined Justin Tyler’s presentation yesterday. He talked a lot about nickel prices going through the roof. Is do we have any exposure to nickel in this portfolio?
Stephen Bruce: Bhp has a nickel operation called Nickel West, but it’s not a material part of nickel but of its overall operations. It’s really about iron ore and copper is what you’re buying with BHP. The thing with nickel and the other sort of base metals is. So again, supply of all these things is, is quite tight. The the I think the nickel price was up 70% in one day. But you don’t want to pay too much attention to these sort of headlines because they’re generally driven by traders who’ve got caught short something and have to cover positions and strange things going on in the financial side of the metals market rather than the actual fundamental underlying demand for a physical, physical metal. But what’s indisputable is the demand for the physical metal is strong, and supply of most of these metals is actually is actually weak for the reasons I’ve mentioned before. Also in certain in South America, where a lot of copper comes from, there’s more political pressure and which is causing issues for the miners. Yeah. So yeah. And, and then you get to the battery metals, things like lithium, copper, cobalt and nickel. So nickel falls into the it’s used in stainless steel, but it’s also a big component of batteries as well. And you can only see demand for that increasing over time. Sorry. And Russia is the world’s biggest producer of nickel, for example.
Jodi Pettersen: So what about this one question here? How evaluation is looking for the universal value stocks compared to 12 months ago?
Stephen Bruce: Yeah, so it’s sort of interestingly, if you look at a chart of value stocks and growth stocks, value stocks never really went up anywhere near as much as growth stocks did. So if you sort of look over the last number of years, you know, value stocks have gone up a bit, growth stocks went up like that. And now they started to it started they’ve both rolled over a bit. But growth stocks have been coming down more. But there’s still this really big, really big gap. So so in absolute terms, value stocks kind of look in line with their long term average, whereas growth stocks are well, well above their long term average.
Jodi Pettersen: Yes. And that’s also something we discussed yesterday with Justin. You know, his increase risks of interest rate rises and how that will impact growth stocks. From what I’m gathering from this presentation, that risk is a lot lower with this portfolio just because of the types of businesses that you’re investing in.
Stephen Bruce: Yeah, the types of business, but also the the starting point of your valuation is the critical thing.
Jodi Pettersen: You know, they’re not buying them in a super expensive.
Stephen Bruce: And there’s I didn’t include it in this presentation, but a good example is Goodman Group. You know, they build the shares now. That’s a fabulous business. But over the last over the last five years, the total return on Goodman Group has been 250%. So it’s been a fabulous performer over five year period or five or six years. But when you break down where that returns come from. 100% of the 250 has been from earnings growing over that period. So so earnings have doubled going up 100%. Which is which is great. Which is great. But the share price is up 250%. So the other 150% has just been the PE multiple expanding. So 60% of your total return has just come from the PE expanding. Now part of that is people may have thought this is a better business than we thought it was five years ago, and that’s probably true. But then a big part of it is just that interest rates going down have expanded the multiple that people have put on it. So as interest rates go up, you’re likely to get a D rating and it could be kind of significant. And you can say that across most of the growth parts of the of the market to a greater or lesser or lesser extent. And where I think people are really at risk is in stocks that don’t actually have any earnings, but the hopes and dreams ones. And if you want to sort of see a really good proxy for have a look at Cathie Wood’s Ark Innovation ETF.
Jodi Pettersen: You just mentioned that yesterday. Yeah.
Stephen Bruce: So if you’re not familiar with it, the codes are K, K and it’s I think it’s set the record for attracting the greatest inflows in the shortest time ever into an ETF. And it’s run by this sort of flamboyant lady in the US called Cathie Wood. And it essentially it invests in highly innovative businesses, that sort of businesses that will change the world, which is great, but none of them are currently kind of doing that world changing in any form of profitability. And so, you know, this is a stock, you know, it went from $50 to 160 and now it’s now it’s back back at kind of 50. And unfortunately, most people don’t get in at the bottom. They get in kind of near the top. But that that’s just an I guess, a good one. It’s like summarizing what can happen to a lot of these stocks, which don’t have any fundamental valuation support in the form of earnings or decent, decent multiples of earnings if they do happen to have them. Similarly with Bitcoin as well. I mean, Bitcoin, you know, it has no intrinsic I’m not saying don’t buy Bitcoin or buy bitcoin, I’m just saying they have no intrinsic value and no yield. And in an environment where interest rates are zero, that’s kind of not as bad as an environment where interest rates are rising. And hence you’ve seen a lot of weakness in Bitcoin and crypto and things like that in recent times.
Jodi Pettersen: I’ve got another question here. I have excess cash in my portfolio. Should I consider adding to your fund now? Now remember that we can’t provide financial advice, so this is not financial advice, but what would your response be that to that?
Stephen Bruce: Yeah, I mean, my response is that, you know, macroeconomic things are extremely hard to forecast and therefore market timing is really hard, really hard to forecast. So I think incremental investing over time, dollar cost averaging or whatever the term is, is, is probably not a sensible way to look.
Jodi Pettersen: At things time in the market versus timing the.
Stephen Bruce: Market. Yeah, timing the market is is hard.
Jodi Pettersen: It’s very hard. Yeah. Look, I think that that’s enough for today. I have one last question. What is your if this conflict with Ukraine and Russia extends and expands dramatically, what would you expect to happen? How would how would Australia do? How would what would what would I mean, we’re just we’re predicting the future here, which no one can predict. But what is your kind of vibe?
Stephen Bruce: Well, I guess it depends. When you say expand, like there’s one way of it expanding, which would be really, really bad, obviously. But if it just drags on and the sanctions, if we get a year down the track and it’s dragging on to this horrible war of attrition and the sanctions have just ratcheted, ratcheted up, then I think you get into this environment where overall growth starts to slow, inflation continues to be high, generally not a very good environment for for anyone. Commodities probably do do well. So Australia probably as a country and as a market tends to do better, will probably tend to do better in that environment. What governments would have to do around spending and things in that, that’s too hard to predict. Let’s hope it all ends.
Jodi Pettersen: Yes, I agree. Well, look, I think that’s everything for now. We have tried to keep it to 30 minutes. I’ve gone a little bit over. But if you’ve got additional questions for me or Steve, you know where to reach me. I am. We are on the website. I am the one who answers the little chat function. So. Feel free to reach out to me there. Steve, thank you for joining us today. I know that it’s very busy at the moment, so we’re very glad to have your your time and expertise.
Stephen Bruce: Thanks, Jodi. And thanks very much, ladies and gentlemen, and I’ll speak to you later.
Jodi Pettersen: Thanks again.
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