SIMON SHIELDS | Monash Investors

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Reporting Season - finding the right price for a stock. Simon Shields from Monash Investors

What is reporting season and how do analysts and fund managers find the numbers to run the tape measure over a company?

Australian listed companies share their financial reports twice a year, generally in February (half yearly), and the full year in August. They come out and they talk about the results for the half or the full year with a presentation, and generally an outlook statement and that's reporting season. We have it in a six monthly period in Australia.

Simon Shields is the Portfolio Manager and co-founder of Monash Investors. We spoke about his approach to reporting season, his style of investing and the ETM that his company runs, MAAT. You can find out more about Monash Investors at this link.

"It can be confusing for somebody looking at a, at a company coming out with some cracking numbers. The sales are up 25% and the profits 30% and the share price falls. And the reason why the share price falls is because the market was already expecting those cracking numbers. And they came in less than what was expected. The stock price was priced for news that was better than what came out. And then the price had to adjust downwards to reflect the news."

Before co-founding Monash, Simon spent 25 years as an analyst, portfolio manager and head of equities for large fund management businesses. Unusually for a professional fund manager, he was fortunate to move between firms that had widely differing investment styles of growth, value and DCF approaches. Monash has taken advantage of this experience to create an agnostic approach to investing that focusses on absolute instead of relative returns.

"Often we hear, oh, it's too late. The shares have already moved. It's too late. Well, the whole basis of professional investing is that it's never too late. You know, it's like you make a call. It's not that all stocks are mispriced all the time. Most of the time most stocks are okay, but there's always some stocks that are mispriced. "


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Chloe (0s):

Shares for Beginners


Simon (4s):

You may need to be making an investment decision. It might be something that you own that has come out with this piece of news, and it might not be obvious what the implications are for it immediately. And the share price is reacting and you can't work out immediately if it's overreacting or under-reacting. Do you actually want to X your position on the back of this, or would that be an overreaction? So it can be, you know, it's very intense and very stressful. If you're trying to actively manage your portfolio and, and, and protect what you're investing, but not make stupid mistakes.


Phil (35s):

G'day and welcome back to Shares for Beginners. I'm Phil Muscatello. What is reporting season? How do analysts find the numbers that they use to judge the quality of a company? Today I'm joined by Simon Shields portfolio manager and co-founder of Monash Investors. Hi Simon. Hi Phil. Thanks very much for coming on. Great to be here. Let's start with a discussion about your background in finance. How did he get to this point?


Simon (59s):

Oh, well, it's a pretty long story. I'm in my mid fifties. So I did courses at university that was relevant. I did accounting finance law did an MBA following university, joined the charted for financial analyst course, which is quite a hard course to do. And I got that qualification. And as a professional association, my first job was as an equity analyst with Westpac investment management, five years there, three years at Rothschild's same sort of job, almost 10 years at colonial first state, same sort of job. And as a portfolio manager and eventually head of Aussie equities, they were growth investors. So a focus in the looking for growth shares and a bias like that in the portfolio moved across to UBS where I was head of Aussie equities there for six years.


Simon (1m 44s):

And it was a value investor and a value bias in the way that we look for, for shares. But at the end of that, I'd done growth. I'd done value, and I really wanted to do something a bit different. I didn't want to be tied into the way other people manage money and just come on in effect as a hired gun to, to follow their system. And so with a colleague, we set up our own business, which is not tied to any particular style, but is looking for payoff when we invest in stocks, based on what we think the stock is worth, that price can vary our view about what a stock is worth. Obviously changes as the outlook changes and as the market conditions change and the economy changes, but that's what we do. And so now we're just focused on delivering good returns over time for our investors, regardless of the state of the market.


Phil (2m 30s):

So having been in the industry for a while, how do you see the industry changing?


Simon (2m 34s):

Oh, it has changed quite a lot from when I started in the early days, Australia head thousands of company level superannuation funds, and they are all managed by professional fund management firms over time. That's really consolidated to mostly to industry funds. Those funds management firms consolidated as well as a result, but then because of technology and outsourcing, there was a real fragmentation. As individual fund managers were able to set up their new firms. So that led to an expansion in the number of fund managers followed again by more consolidation by the industry. So where does that leave us now? Well, essentially there's been so much consolidation at the industry super fund level that there isn't the same sort of market for professional fund managers, that there was where the market's more focused is more at a retail level.


Simon (3m 26s):

Now either direct investing or financially advised investing. And so the, the, the clients either investing in shares themselves or they're investing in funds themselves, or these, or their individually managed super funds are investing in funds. And that's where our client base is across all those, all those three sort of areas.


Phil (3m 45s):

So we're recording today on the 19th of July. So what is reporting season?


Simon (3m 49s):

As you know, financial year in Australia is 30 June and typically companies will do half yearly accounts. So as at the end of December, and as at a full year, at the end of 30 June, and they take about a month to do those numbers and to pull a presentation together on the back of those numbers. And then they come out and they talk about the results for the half or the full year with the presentation, and generally with an outlook statement and that's reporting season, it generally starts about back end of the first week of either February or August and goes to the end of that, that month. And so we have it in a six monthly period in Australia, in America, they report quarterly.


Simon (4m 30s):

So they have reporting seasons every quarter. It doesn't take a month generally to get all the information out. So in the United States for the June quarter, as of today, we we're already starting to see lots of companies start to come out with their results. They don't have presentations that are generally as detailed as the Australian presentations. And the other difference between us and the United States is that we have continuous disclosure and they don't have continuous disclosure. So if anything changes in Australia between the six months, the company has to come out and talk about it, if it's significant enough, whereas in the United States, they don't, they just come out every three months.


Phil (5m 8s):

I've heard the term confession season, is that different to reporting season?


Simon (5m 13s):

Absolutely. So if you think of, and confession season is actually something that's more specific to Australia than the United States, and to some extent as a function of our continuous disclosure. So you can imagine a company it's in it's it's in the six months at the back end of its financial year, knows the analysts have all their forecasts out there and they get to May I finished their main numbers and they show the board what the main numbers look like. Like it doesn't look like we're going to make our full year numbers that everybody's expecting, well in Australia because of continuous disclosure, the company is bound to come out until people are sorry, we're not going to be making their guidance, or we're not going to be making what the market's expecting of us or conversely, they might go, gee, these numbers are so much better than what the market expects.


Simon (5m 58s):

We just have to tell people because otherwise the market's being misled about our true prospects. So that's what confession season is. Of course it tends to be bad news rather than good news. Yeah.


Phil (6m 10s):

So expectations, that's something we hear about all the time analysts expectations, and you hear a company report comes out and they are the beat expectations, or they don't come up to expectations and that can have a significant impact on the share price can't it?


Simon (6m 29s):

Very, so it can be confusing for somebody looking at a, at a company coming out with some cracking numbers. Yeah. The sales are up 25% and the profits 30% and the share price falls. And the reason why the share price falls is because the market was already expecting those cracking numbers. And they came in less than what was expected. And therefore, you know, the, the, the stock price was priced for news that was better than what came out. And then the price had to adjust downwards to reflect the news. That's so that's, that's what that is. Yeah.


Phil (7m 5s):

So when we were organizing this interview, we mentioned that it's a good time to talk now because in a couple of weeks time, you're going to be really busy.


Simon (7m 12s):

That's right.


Phil (7m 12s):

What, what are you actually doing? I mean, presumably you can't go through every company's accounts, but are you just looking at the, the companies that you're particularly interested in or,


Simon (7m 23s):

Yeah, so there's, there's obviously there's the companies, there's the companies we own, or, or a short we're very interested in those companies. And there's also companies that we're thinking about owning or thinking about shorting. And then there are companies that come out with something that just grabs our attention. And that's one of the great things about being a professional investor, you know, if you're somebody that likes news and, and, and, and let's say you're somebody that likes betting as well. Not that I bet, but, you know, it's sort of a, it's a fun, interesting sort of thing to do if you get into it, as far as I'm concerned, you know, being an, a professional investment manager is, is a great career because you're always looking at the news and you're always trying to work out what something's worth. And you're trying to work out where you, you know, putting your money where your mouth is,


Phil (8m 5s):

You're running your tape measure on a whole bunch of,


Simon (8m 7s):

Yeah, that's right. So reporting season gets really, really busy because, you know, there are some days when there are 20 or 30 companies coming out and in any one of these companies, if you want it to, you could spend an hour and a half or two hours between looking at the, the actual financial information that came out, understanding what, what in there, looking at the presentation, listening to the presentation, asking questions to the management. And so you have to really work out where you want to spend your time. And sometimes you only spend five minutes on something, and sometimes you spend half an hour on something, and sometimes you spend two or three hours on something, and you've really got to, you got to work out where you're best spending your time. And, and, and the more of a surprise the news is, of course, the more the share price is going to be reacting as well.


Simon (8m 51s):

And, and you may need to be making an investment decision. It might be something that you own that has come out with this piece of news, and it might not be obvious what the implications are for it immediately. And the share price is reacting, and you can't work out immediately if it's overreacting or under-reacting. Do you actually want to exit your position on the back of this, or would that be an overreaction? So it can be, you know, it's very intense and very stressful. If you're trying to actively manage your portfolio and, and, and protect what you're investing and, but not make stupid mistakes.


Phil (9m 23s):

So there is actually a period of uncertainty there that you might be going through when these reports come out and you really do have to spend a bit of time. Working through it


Simon (9m 31s):

Well, this is, this is something that's really interesting, right? So, so you can imagine what happens. A company comes out with its numbers and everybody finds out at the same time. The, you know, the man in the street finds out the professional buy-side analyst and fund manager finds out the sell side, analyst finds out, and the dealer at the broking house finds out. Now, they all have different levels of understanding of the business. And, you know, things that look obvious on the surface, there might be details below that are really important. What's in the abnormals, you know, other notes to the accounts that you need to, to know about. Is there a mixed change involved in the way that the prices have changed overall for the company, or is it a volume effect that's occurred?


Simon (10m 17s):

What's happened to costs and is it something that's relevant to just that company or to other companies as well right now? So quite often we see a company come out and the share price moves one way. And then over the course of it could be as little as 15 minutes or a P be two or three hours. It moves another way. And sometimes it doesn't actually move that other way until the brokers put their notes out overnight, because they've had to have that much time to really go through things and talk to the company and have a considered response, and maybe they've come out and gone. No, this is an overreaction by the market. You can add value as an investor or a fund manager by being really on top of things. But it's also the speed at which you can assimilate that information and be confident of what you're seeing and take your position based on what the market's doing, which might be counter to what you think is right.


Simon (11m 11s):

Or it might be the market reacts positively, but you go, gee, it's not even reacting positively enough. I'm going to buy it. Even though the share price has just jumped 10%,


Phil (11m 21s):

Is gut feeling a major part of it?


Simon (11m 25s):

I I'd say informed decision-making


Phil (11m 29s):

Having seen, maybe having seen similar situations in the past,


Simon (11m 33s):



Phil (11m 33s):

Some rhyming. Yes.


Simon (11m 34s):

So one of the things I'm very big on is recurring business situations and recurring patterns of behavior. I've got absolutely no doubt that it's very, very important to look at how different industries or companies or products have worked in the past, how the customers have responded in the past the cost of drive them, how the businesses have responded in the past, because you know, quite often what you're looking for is what comes next. Okay, this is what's happening now, but what does that mean next? And, you know, rather than just sticking your finger in the air and guessing if you can look back and seeing how it worked out previously, that's really important.


Phil (12m 15s):

Another term I've heard in terms of company reporting is 4C, and I believe this is something for very small cap companies. What is it?


Simon (12m 22s):

A 4C is a quarterly cash flow statement. So that's just the number that the stock exchange uses to describe that report. But


Phil (12m 29s):

This is, this is not every company.


Simon (12m 31s):

No it's for companies that aren't profitable. When a company in the early phases happens a lot with mining companies are sort of still in the project phase, or it might be a, a company that's come to market with revenue, but doesn't have a, you know, profit. The stock exchange is basically saying on a quarterly basis, you've got to show the market, your cash flow and their old certain line items. You've got to show us, you've got to talk about your balance sheet. You've got to show what your expenses are in the next quarter, because you're not a profitable company yet. And people need to be able to keep a closer eye on how you're going. Hmm.


Phil (13m 7s):

So how are you viewing this upcoming reporting season? Are you going into it with any thoughts?


Simon (13m 12s):

Yes. I, I think this is going to be one of the most disappointing reporting seasons we've had in Australia for a long time. And so that's a relative to expectation thing, but interestingly, I'm not thinking that it's going to be disappointing in terms of the results that companies have for the current financial year ended 30 June, but rather for the outlook for the following financial year ended 30 June, 2023.


Phil (13m 38s):

So companies will give you some sort of projection.


Simon (13m 42s):

Yes, generally they do. Because of COVID they were given an excuse not to do that. And some companies are still sort of leaning on that as a reason why they can't give guidance, but generally, yes, companies will look at the rate of sales, post 30 June. They'll look at their order books, post 30 June, they'll look at what their customers are saying to them. If they've got business customers about their expectations for ordering from them, they'll think about what the pricing that the market can support is and what their costs are going out. And they'll come out with a guidance that might be a range, or it might be a figure, or it might be relative to last year, we expect to do 5% better, whatever it is. There's been some very interesting changes globally and in Australia over the last 12 months.


Phil (14m 25s):

So some, some would say unprecedented for a very long time.


Simon (14m 29s):

Yeah. So, you know, obviously interest rates are going up and that's impacting on mortgages and we're still seeing rents climbing as well. So the cost of shelter, as I saying, the United States or housing in Australia is going up, likewise energy prices are going up, whether it's electricity or gas and petrol as well. And these are generally non-discretionary costs in the same way that the mortgage and rent and non-discretionary food prices have gone up as well non discretionary. So we've got inflation going costs have gone up for consumers in nondiscretionary, so less money to spend on discretionary things. And it's really the discretionary things that mostly drive the share market.


Phil (15m 8s):

That's a bit of jargon. What is the discretionary? Because there's a whole sector. Well,


Simon (15m 12s):

Okay. So discretionary, as opposed to say staples. So a staple is food. A staple is I'm going to the chemist and buying your medicine. Things that you're going to not be very price sensitive about. You're going to prioritize those things, school, healthcare, food, housing, but entertainment, a new chair for the lounge, upgrading your computer. These are discretionary spends. And so if the other costs are going up and you can't do much about that, you've got less to spend on your discretionary items now because of COVID, a lot of those durables were bought while people were sitting around the house and they don't need to be upgraded again. And so if anything, there's going to be a lower spend on those sort of durables and maybe a higher spend on some things like I'm going out for entertainment, which is again, a discretionary, but something that people haven't been doing a lot of all that recently.


Simon (16m 3s):

And so for those stocks, like the Harvey Norman's of the world and so forth, we think there's going to be quite a disappointing outlook as they start to see people pulling back from purchases that are relevant to their area. Now that's just that area, but there are other things that are interesting from a results point of view that are more applicable to the whole of the, all the businesses, because all the businesses have to pay for electricity. All the businesses that run manufacturing facilities have to pay for energy, whether it's gas or electricity one way or the other petrol. So, so even, even, even a retailer, who's seeing inflation in the cost of lighting and heating for their store, who is having to pay their employees more because the CPI has gone up and wages have to go up as well.


Simon (16m 48s):

They're then going to be having to put their prices up. And so this whole inflationary spiral begins and get some momentum. And from that, there are winners and losers who can put their prices up ahead of their costs or whose prices go up lagging. That costs leads to a change in margins. Now there's been other interesting things happening because of COVID to do with the inventory cycle, because there's been a lot of disruption globally about transport. And so that means, you know, obviously we had a period where there was a lot of stock-outs on the shelves and so retailers don't want to be in that situation again. So they have to order catch-up and then they over-order. And then they find everybody is released to go back and work, you know, outside of the home.


Simon (17m 31s):

And all of a sudden they've ordered too much because they've overstocked on things that people aren't buying anymore. And so we've gone into this whole inventory cycle, and that's another layer for professional investors to think about when they're looking at balance sheets. And they're looking at margins because if they over-ordered, when goods were cheap, then the margins will expand. If they can put the prices up. Now that there's inflation, but by the same token, if they've had to order in a high inflationary environment and they can't pass it on, the margins are going to be contracting


Phil (18m 9s):

How do you think a beginner should approach a company report


Simon (18m 12s):

Is so tough? That it's so tough?


Phil (18m 15s):

Well, I mean, there's many, but, but you can begin by a company that, you know, well, it might be say, Levisa, you know, your shop at Levisa and you can


Simon (18m 22s):

Do that. Yeah. Yeah. I'd rather answer that question in a different way and talk about my own journey. When I was at university, I was very keen on investing, but I was concerned because I could say, well, I know about this company, but do I really know how this company should be priced? And then I go, well, and how should it be priced relative to other companies? I don't know about those companies. And so it's a real dilemma for somebody who's not across the market as a whole, you could be, have wonderful knowledge about a particular company, but does that translate into the right price for that company?


Phil (18m 57s):

I think because that's, that's, that's really it to the bottom line, isn't it? What the price is, what the market is going to be paying for. It. That's all we want to end up with.


Simon (19m 4s):

What are the expectations? So I think in fact, a better way for somebody who's really a beginner investor who is not across all the investment mathematics, that's, that's basically the result of somebody going to university and then doing a professional course and then practicing the area. FOr years as an analyst for somebody like, like, like a beginner investor, invest in things that you know about. And if you think the company isn't just going to be doing well now, but it's going to be doing well for the next 2, 3, 4, 5 years. And that's going to be a bit beyond the time horizon of other investors, right?


Simon (19m 44s):

In general, unless you're looking at a really high growth tech stock where the market's just sort of pricing it on ridiculous multiples of revenue, but, but in general, for most companies, if you can look at a company, you think you really like their product and they're expanding and they're doing well, and you can see that they're able to put their prices up and, and, and, and, you know, people are in the stores. That's great. That's a company that should do well and, you know, stick with it for a while. But you know, you're in that company. And then all of a sudden, you see, oh, gee, it's putting out a lot of sales at the moment. And, and yes, companies put on sales, but this is more than usual. Or you speak to the staff and there's a lot of turnover with the staff and, and they say, oh, you're not happy with the management or whatever it is, you know, then you go trust your judgment and go, okay. Time to get out.


Simon (20m 25s):

And I think if you, if you take that approach, you don't have to be all that financial literate. You can sort of assume that the market sorta knows what it's doing. You add your value on top of that, by your knowledge of the business.


Phil (20m 37s):

So how should individual investors be approaching the current reporting season? Is there anything that they can do or is it something we'll need to let, to live through


Simon (20m 48s):

Reporting season can be a very volatile time for stocks. We find that retailers in particular at some of the most followed hot companies during reporting season, because there's a lot of moving parts in a retailer. And so there's a lot of scope for surprise to the market. I think in a general sense, you can look back at what's going on in the economy, look at this inflation that we're having for the first time in ages. And look at this mix change between staples and discretionaries and go, if you're, if you're a risk averse person, you might want to be in the safer companies, those companies that are basically able to put their prices up, like the supermarkets, for example, as they need to, because people are going to keep coming in the door and buying their food.


Simon (21m 31s):

On the other hand, you know, you might know a business particularly well, and you can see that the share price has fallen a lot, but the balance sheet's okay. And, you know, you know, from your own experience as a customer, that the product's great and that it's, you know, all your friends want to buy it and, and, or, or professional associates are interested in buying it. You should be taking advantage of it. If that's the case, the market does tend to overreact. So often we hear, oh, it's too late. The shares have already moved. It's too late. Well, the whole basis of professional investing is that it's never too late. You know, it's like you make a call. It's not that all stocks are mispriced all the time. Most of the time most stocks are okay, but there's always some stocks that are mispriced.


Simon (22m 14s):

And sometimes there are more stocks mispriced than others. So what I'd say to people is if you've got a strong view, back your view, if you don't have a strong view, don't invest for the sake of it.


Phil (22m 25s):

You mentioned earlier in the interview about being a hired gun and that you were sick of, well, you want it to work in your own investing framework rather than someone else's. So what is your investing framework now? What is the funnel for making decisions about what to buy and well sell? Because you do short.


Simon (22m 41s):

Okay. So it hangs on this taking advantage of recurring business situations and patterns of behavior. The analysts that look at stocks are all very clever young people for the most part. And they do really good work. And one person's guess about what the next year or two is for any particular business. Who's, who's done good work, and it's in a smart person and has gone to talk to the company, its competitors, and the suppliers. And it's going to be more or less as good as anybody else's. They might differ a little bit, but that's, that's what happens. You know, people can have a different, slight different view where I tend to make more money is looking out a little bit further and waiting for these people to change their view, to what I think is going to happen.


Simon (23m 23s):

And of course, that's not applicable to all companies all the time. So I'm looking for these situations where I can look back on something that's playing out and say in the past the situation like this has led to an outcome like that. And if that outcome like that is different from what the market's expecting on a 2, 3, 4 year view, that's where I can make money either by going along, or if it's a bad thing by going short. So that's not where it begins and ends because that's just the framework of, is there an opportunity where it really begins and ends is doing all the hard work as an analyst and actually taking that view, turning it into forecasts for the balance sheet, the profit and loss, the cashflow take, taking those numbers and turning them into, well, what price should this stock be trading at in that situation?


Simon (24m 12s):

And then finding a situation where my view about where the stock should be priced today, based on my expectations is very different from where the stock is trading based on the market's expectations. And so that can be a positive or a negative. So it's a long or a short, and that's what we're looking for. And so it's, we're not tied to any particular style, but we're looking for value. We're looking for that payoff to get that payoff. We're typically looking for a step change up or down in earnings. So that's growth, right? And tying those two together as is that insight. Why is this opportunity there? And how's it going to be resolved?


Phil (24m 49s):

And you also have a process for deciding when to sell a stock as well. Don't you


Simon (24m 55s):

Indeed. It's really the same as the buy process, really. I mean, it's all about the price and the payoff. So we don't invest in a stock long, unless we think there's a 60% upside to the price that we think the share price should be trading at today.


Phil (25m 7s):

What sort of time period? Well, this is


Simon (25m 9s):

The point it's over the period at which we think the share price should be trading today. So we look out into the future. So we look out two years, three years, four years, five years, do a discounted cashflow on those numbers to bring it back to the price. We think the share should be trading it today and compare that to the current price. Now, if things work out for us, the market might realize that we're right very quickly about the outlook for the stock and the price could go very quickly to the price we think it should trade at today. If it does, we'll just sell and go. We're not going to wait around for two years, three years, four years, five years to find out if we're right, if the market's paying us for what we believe is the future.


Simon (25m 52s):

That's good enough. Move on onto the next thing. So it is, it's not a, it's not a, it's not a time period about how long do I expect to own the stock for it's an uncertain time period. It's a time period about, well, I don't know how long I own this stock for, but as long as there's that gap between what I think it's worth and what it's trading at, I'm going to take advantage of that. And when that gap closes up, it's over


Phil (26m 16s):

And you also, if a thesis is not playing out, you've got triggers to look out for


Simon (26m 21s):

Are very much so. So at two levels in the first instinct,


Phil (26m 24s):

It's a three-step thing for me.


Simon (26m 25s):

Well, in the first instance, we talk about thesis violations. And so if it's just clear that we're wrong about our, that for a company, like it's not doing the store rollout, or there's a new product, that's coming to compete with it and it's losing market share. And we didn't think that was going to happen. That's an investment thesis violation, and we just get our completely, but that's a late trigger. Typically it's often the case that an investor will die the death of a thousand cuts as they come to the realization that there's actually something wrong with their investment thesis. So what we've developed is what we call early warning triggers. And these early warning triggers are whenever a stock misses a, a guidance or has an unexpected downgrade, it could be because there's a spike in short selling, or could be that one of our own signposts things that we're looking for in the short term, don't come to pass.


Simon (27m 15s):

It might be the numbers of stores rolled out. It might be the marketing spend relative to sales, whatever it is in those situations, we call that a strike, a first strike, and we'll cut our position by a third. If we subsequently have a second strike, we'll exit the position completely. And that saved us a lot of money over the years.


Phil (27m 33s):

Yeah. Well, it's good to have a process in place for making a decision on when to get out if things aren't working out


Simon (27m 37s):

That's right. And that's,


Phil (27m 38s):

And that's something that's a basis of investing as well. It's the risk management side of things.


Simon (27m 43s):

It is. And it's a hard learnt decision as well. There are other ways to control risk. In addition, you control for the weight of a stock in your portfolio. For example, you might be controlling overall for the characteristics of your portfolio. You don't want a whole portfolio. That's got a massive PE ratio relative to the market. For example, maybe you do, but, but you want to, there are risks that you can control for at a, at a portfolio level risk. You can crawl at a stock level and this, these early warning triggers we've found to be very, very useful for controlling at a stock level.


Phil (28m 17s):

Well, let's talk about the, well, it's not an ETF, it's an ETMF, isn't it?


Simon (28m 21s):

Exactly exchange traded, managed,


Phil (28m 23s):

Managed fund. Yep. And was originally an LIC, we've covered this on the podcast a couple of times a listed investment company, but without getting into the, the woods on the difference, why did you go from the LIC into the ETMF structure? And


Simon (28m 37s):

A couple of reasons, the main reason was because there was a persistent discount in the price of the LIC relatives.


Phil (28m 45s):

That's common net. Yes. Isn't it.


Simon (28m 47s):

Yeah. As a perfect, and it is common, I suppose, as a fund manager, whether or not you want to put up with that for your investors. So I didn't see it as a, as a stock trading on the market in its own little universe. I saw that as a, if you like the shopfront of my investment management business, where people would come to invest with me and, and get a return, and I didn't want people putting a dollar into our stock, and then only being able to pull 90 cents


Phil (29m 14s):

Because, because LLCs are traded on the


Simon (29m 17s):

Stock exchange and it's whatever buyer and seller will pay for them. Right.


Phil (29m 22s):

Even though, even though the net asset value, the value of the assets that are being held in that LLC are actually worth a lot more than the current pric.


Simon (29m 30s):

It's a real problem for most LLCs that they try to discount, even though the performance can be quite good and it was, it was persistent and it also attracted the wrong sort of investor invest. It attracted people that want to take advantage of the arbitrage as well. So for those reasons, we wanted to change to a structure that would always try to NTA. And our ETF always chart trades NTA, because it's got a market maker. So Macquarie comes along as the market maker. And if it's trading more, more than a cent away from where it should be, the Macquarie will buy or sell units to whoever wants to buy or sell them, which means it will always trade within that scent.


Simon (30m 13s):

Right now, when Macquarie buys units, that's because an investor has sold units and Macquarie turns around and takes those units that they bought and they sell them to the trust. So we redeem those units, we're acting as the unit trust that redeems or issues units, when somebody comes on the market and buys or sell using the market maker,


Phil (30m 39s):

All ETFs are run that way anyway, which is why they're continually changing based on the value of the assets within the index. Correct within that. Yeah,


Simon (30m 48s):

Yeah. That, that, that is correct. So for all sorts of governance and regulatory reasons, it's, it's a much more suitable way of doing things. And the, you know, the LIC has had a huge advantage when there was no other way to get immediate liquidity and that, you know, cause our trading on the ASX, but once unit trusts could be listed on the ASX with a market maker,


Phil (31m 9s):

As ETFs,


Simon (31m 10s):

As ETFs or ETMFs, that changed the game. And that's why we're not seeing very many LIC actually come to market anymore, but we're continuing to see lots and lots of ETFs and ETMFs come to market.


Phil (31m 22s):

So many ETFs are based on an index. So obviously yours being managed, it's not an index. Tell us a bit more, what was the code again? M


Simon (31m 30s):

MAAT. Yep.


Phil (31m 32s):

So tell us about,


Simon (31m 33s):

Okay. So there it's called an ETMF for a reason as opposed to an ETF. So an ETF is based on an index or, or based on, even if it's not a standard index, it's a replicable index of some sort. And it allows not just the market maker, who's the official paid market maker to manage it. But anybody who knows what the index is, could hedge. And so any other stock broken from, or, or primary investor could come along and try and work out if there's an arbitrage and have a crack and, and keep that spread very, very tight around the NTA. You can't do that for a profit, with a fund that's managed by a professional fund manager because we don't want to let everybody know what's in our portfolio every day.


Simon (32m 20s):

And so the way it's done for us is that we send that information to a specialist business that tracks the value of our portfolio during the day, and sends that INAV that interactive net asset value to the maker who then moves the price up and down, keeping that 1 cent spread all through the day. And so the market maker doesn't know what's in the portfolio, but the INAV provider does, or the market maker knows is when they buy or sell shares, they can come back to us as the fund manager and we will redeem or issue shares.


Phil (33m 2s):

And what would people consider investing in this? I mean, people are used to ASX 200 ETFs, very, for example, what's, what's the performance been like?


Simon (33m 11s):

Well, performance has been very good. Our aim has been to deliver more than 10% per annum after fees, since inception. When I think of inception, we've been going now for over almost 10 years, and we've done over 10% per annum after fees, over 10 years, the ETMTF hasn't been going for that long about a year. And before that, we had an LIC, which was going for several years, obviously it's been a tough year. So the, the MAAT is underwater compared to where it started a year ago, but it has done a lot better than the small boards has done a little bit worse than the ASX 200. In general, though, we tend to beat both of those indices and we are quite nimble and we react to what's going on in the market.


Simon (33m 52s):

And of course we can go short as well as long. So from an investor's point of view, they can invest with a professional fund manager who has a track record of beating the market after fees over quite a long period. The other thing that they've got going for them is that we pay a quarterly distribution. So every quarter we pay one and a half percent distribution. So if you're an investor and you need that yield to live on, you know, that you've always got to get that every quarter. And of course, if you want to sell your shares units at any time, you know, that you're going to get NTA.


Phil (34m 22s):

So is that set at one and a half percent distribution payment? Yeah.


Simon (34m 26s):

So there's a change in the tax law a few years ago called AMIT. And that allows unit trusts to have a more regular distribution, not having to worry about only distributing from realized gains or losses or income allows it to be smoothed out a little bit more over the last 10 years ago. So we've been able to pay out a six or 7% year per annum, but it's been very lumpy from year to year. That's changed because of it now. And we were able to basically smooth that out and pay out one and a half percent per quarter. And then at the end of the financial year, if we've got more money to pay out, we'll put on an extra dividend on top of that.


Phil (35m 1s):

Is it franked?


Simon (35m 2s):

It's franked to the extent that there is franking to back it


Phil (35m 5s):

To be available,


Simon (35m 6s):

Correct? Correct holdings. Yeah. Yeah. Now we make a lot of our returns from capital gains, whether that's gains from shorting or gains from going, going long. So we do have franking some franking, but a lot of it is unframed.


Phil (35m 21s):

So if listeners want to find out more, where can they go?


Simon (35m 23s):

They can go to our website, and all the information's there both for our listed MAAT and for our unlisted, MAIF


Phil (35m 35s):

Simon Shields. Thank you very much for joining today. Thanks Phil. If you found this podcast helpful, please tell a friend, especially if it's someone who needs to start thinking about investing for their future, you'll be helping them and helping me to keep this show on the road


Chloe (35m 49s):

Shares for beginners is for information and educational purposes, only it isn't financial advice and you shouldn't buy or sell any investments based on what you've heard here. Any opinion or commentary is the view of the speaker only not shares for beginners. This podcast doesn't replace professional advice regarding your personal financial needs circumstances or current situation.


Phil (36m 8s):

And thank you for listening to my podcast.

Shares for Beginners is for information and educational purposes only. It isn’t financial advice, and you shouldn’t buy or sell any investments based on what you’ve heard here. Any opinion or commentary is the view of the speaker only not Shares for Beginners. This podcast doesn’t replace professional advice regarding your personal financial needs, circumstances or current situation