TOBIAS BUCKS | from Ausbil
TOBIAS BUCKS | from Ausbil
This is a fun conversation with Tobias Bucks, Portfolio Manager of Global Small Caps at Ausbil. It turned out to be one of the most fascinating conversations I’ve ever had. Tobias has a unique background in social anthropology, bringing a perspective to investing that was as refreshing as it was profound. What started as a discussion about global small cap companies evolved into a deep dive into human behaviour, cultural constructs, and the art of asking the right questions.
Tobias kicked things off by explaining his unconventional journey from studying social anthropology at the University of Edinburgh to managing a global small cap fund. I was intrigued by how he pivoted from the humanities to finance. He admitted that, yes, finance might offer more financial reward than anthropology, but the real value of his degree lies in how it shaped his thinking. “Social anthropology teaches you how to ask the right questions,” he said, emphasising that understanding human behavior is key to navigating the markets. It’s not just about crunching numbers—it’s about decoding the narratives and power dynamics that drive countries, companies and investors.
Books Mentioned:
We then shifted gears to explore global small cap companies—businesses with market caps roughly between $500 million and $20 billion, akin to Australia’s REA Group. Unlike Australian small caps, which are heavily tilted toward mining, global small caps span a vast range of industries, from industrials to healthcare to IT. Tobias was particularly excited about the power grid sector, which he sees as a massive opportunity over the next five years.
He highlighted three companies in the power grid sector, emphasizing their growth potential due to increasing global demand for electrical infrastructure:
Hammond Power Solutions HPS.A (Toronto Stock Exchange) : The only listed transformer company globally, trading at 8x EV/EBITDA with net cash. It’s poised to expand manufacturing and margins over five years, benefiting from high demand and barriers to entry in the custom transformer market, especially in the U.S.
Powell Industries POWL (NASDAQ): A Texas-based producer of switchgear, including spark-resistant models critical for energy and manufacturing facilities. It serves OEMs and is well-positioned for grid rebuilds, with strong demand and high safety requirements driving growth.
NKT (Denmark) NKT (Nasdaq Copenhagen): Specializes in high-voltage transmission cables (525,000 kV), with a supply-demand imbalance favoring its near-100% focus on high-margin products. Trading at 13.5x forward earnings, NKT is investing in new facilities to meet the projected doubling of global transmission lines by 2040.
These companies are set to thrive regardless of economic or geopolitical challenges, driven by the urgent need to upgrade power grids for EVs, renewables, and peak demand. “The market’s got the power grid wrong,” he said, noting that analysts often overlook the sector’s long-term potential.
What struck me most was Tobias’s emphasis on humility in investing. He admitted that even the best fund managers are wrong much of the time. Drawing on his anthropology roots, he stressed the importance of engaging with “the other”—whether it’s a competing analyst’s view or a company’s narrative—to challenge your own biases. “You learn more by asking questions and listening than by trying to prove yourself right,” he said. This approach informs his investment strategy, which focuses on “unrecognized growth”—finding quality companies with strong growth potential at reasonable valuations, like the next Amazon or Netflix.
We also touched on risks, from liquidity to business performance to market timing. Tobias explained that global small caps are more liquid than many assume, trading $5–50 million daily, and his team carefully manages liquidity risk by weighting positions based on trading volume. On business risk, he described a rigorous process of weighing a company’s narrative against market expectations, ensuring they’re not overpaying for hype. And on market timing? He’s a fan of dollar-cost averaging to smooth out volatility, a practical tip for any investor.
For more information check out Ausbil’s website (ausbil.com.au) or speak with a financial advisor to learn more about their global small cap fund. It’s available through platforms like BT Panorama, making it accessible for everyday investors.
TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE
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EPISODE TRANSCRIPT
Tobias Bucks: I firmly believe that the markets are efficient, but they have no imagination. And that's how we operate. Yet markets are very good. Better calculator than you, me or most market participants at, uh, working out the next three to six months. The market's incredibly efficient at pricing in what it thinks is going to happen quicker than you or any other market participants. But 6 to 12 months out market'got no clue. And 12, not that we have much of a clue. And 12 to 24 months out market'got no idea. Markets are efficient, but they have no imagination. So I think with small cap investing, you've got to focus on companies that can do things themselves, regardless of a GFC or a Trump trade war.
Phil: G'day and welcome back to Shares for Beginners. I'm Phil Muscatello. Which companies are the biggest little companies on the world stage? How does a background in anthropology help you to understand the behaviorural side of investing? I'm joined today by Tobias Bucks from Ausbil. Hi Toby.
Tobias Bucks: Hi Phil. G day, how are you?
Phil: Good, good. G Day. And may I call you Toby?
Tobias Bucks: Yeah, please, please.
Phil: Tobias is portfolio manager, global small CAPS at Ausbil. He's focused on global small cap companies and his responsibilities at Ausbil include strategy and portfolio construction, research analysis and portfolio management. Tobias has a Master of Arts with honors in social anthropology from the University of Edinburgh. So that's quite a turn from the humanities to funds management. Most probably. More money in finance than the humanities, Toby, I'm assuming.
Tobias Bucks: Yeah, that was a consideration, yeah.
Tell us about your journey from social anthropology to managing a fund
Phil: So tell us about your journey from social anthropology to managing a fund. What was that like? How did that path take you?
Tobias Bucks: I did always have a strong interest in, in capital markets and businesses. I'm not sure it really formed as a young man really what it was. Um, and at school I'd studied sciences through to the equivalent of HSC with a heavy focus on science and not much on arts. And one thing that really struck me about the syllabuses on offer at university was it was just more of the same and I didn't really have any, much, much interest in trying to learn more detail on a cell or more detail on more equations. I really wanted to learn how to think. And through a process of discovery I started talking to people and it seemed to me that, you know, I needed a subject that was really going to expand my horizons and help me grow. And uh, social anthropology was clearly the one for me and I still think it's a really underappreciated discipline that has a lot to offer everyone in their day to day lives.
Phil: So what did you study in your master specifically? What was the particular subject?
Tobias Bucks: So in social anthropology we focus on culture and people as opposed to sort of medical or more forensic or historical anthropology. When you look at culture and people there's various themes that are going on and they're all interlinked. I have a particular interest in narrative and power and the theory of practice which is key to being an anthropologist, if one does want to be one. And that is what I've focused on and that for me is still what I go back to and um, try and re engage with the texts and the ideas to help me make sure I'm doing as well as I can at my day to day job.
What in particular about social anthropology bears weight in the world of investing
Phil: So what in particular about social anthropology bears weight in the world of investing?
Tobias Bucks: So I love that question Phil, I'm super happy you've asked that because I wish people would ask that every day. What is anthropology? At the end of the day, social anthropology is an attempt to understand humans and understand ourselves and that to understand oneself or humans you need to understand the other and you need to engage with the other as much as possible. So that's really what anthropology is about. It's about learning how to ask the right questions. Because it's the questions that you ask that are some, in some ways more important than the answer that you get. Uh, and I know that sounds sort of silly and maybe a little bit like uh, Douglas Adams, but that is the truth. If you learn to ask the right questions, you're going to get much more out of life. And that's what social anthropology teaches you. I got really lucky out of university. I did a degree in social anthropology and then got a job with Newton Investment Management in London, working for a guy called Paul Butler on their global desk. He's retired now, but a famous fund manager who, very big in global equities, institutional fund management in the 80s and the 90s and the NTs and well known and he taught me a lot. I was very lucky to get that job. You know, obviously In London in 2005 there were a lot of CAPAB graduates and I think I just fortunately stood out. Right day, right time, right manager and I
00:05:00
Tobias Bucks: asked the right questions instead of just parroting back what people think. And if you want to be good at investing, you've got to ask questions. Otherwise you're just going to be a CFA analyst following the market around like an index tracker. You might have a few good years, but overall you're losing money like gambling.
Phil: So when you were say, asking the questions, is the'asking questions of management or asking questions for an answer that you're looking for in the market and the numbers themselves?
Tobias Bucks: Well, both, Phil. I think just going back, what can anthropology add to the markets? I think there's sort of two things or three things that are going on really. The first one is anthropology is touched on what are the markets, what are capital markets and why do they exist in culture and what do they do for culture and what does culture want from capital markets? I think that's a really good grounding if you want to start investing in markets because these are all humans at the end of the day. And markets are purely a social construct. They're the most social construct. They're not real like the sun or like Mars. They're just a made up cultural construct that we invented, you know, around commodities and then around debt in companies and then around owning equity in companies. And to do that, I think there's a lot of anthropology that really helps, like Max Weber and the Protestant work ethic, the spirit of capitalism in the iron cage and, and Dasital by Marx and Engels. I think those are really important texts to understand what's important for humans. And then the bit probably people want to get into most of all, which is how can you improve yourself as a market operator? So, and social anthropology has some direct things for you. So for example, you know, focusing on power and self bias, which I really focused on when I was there, and something I've really tried to drag out. Now there's a lot of work by French sociologists on the phenomenology of perception. Um, there's a guy called Merle Ponty that I think people should read and then there's a guy called Pierre Bouru who wrote an outline of the Theory of practice which was aimed at um, anthropologists. But it's just so important to equity markets or debt markets because anyone who's worked in an investment market knows you have bias and you're concerned about your own bias. And these are, uh, this is an academic subject that's been going on for over a hundred years. It will help remove your bias and then it'll help you understand power and soft power. And that's really what it comes down to as an equity investor. I'm looking at earnings, the EPS results from companies, the earnings that companies deliver and the expectations that investors have on the future earnings of those companies. And that is at its essence, soft power. That's narrative. Nvidia trades on a huge multiple because it does well. It's got good financial results that's real in the future. We don't know what they're going to deliver. It's the soft power of Jensen. It's the way that they describe and um, explain a narrative of a future that makes people want to put a multiple on it. And it's the way companies say my product'better than that company's product. They're creating a narrative around their product, a narrative around their company, their components, their services. And that's what they then go and try get other humans to value. So this, this is just a game of humans thinking with their imaginations and so understanding that hard and soft power how people create a narrative to be a niche leader or other things. It's hugely important. There's other books obviously lots of books written on it that I think people should go and read. But I definitely start with pair book. Pierre Boria and Maurice Merle Ponty.
Phil: What are the names of those books? Just say we make a note and we'll put them in the episode notes post.
Tobias Bucks: Well yeah, Maurice Merle Ponty wrote a book called the Phenomenology of Perception. I think I was around 1945 and Pierre Bourdieu wrote An Outline of a Theory of Practice. I think it was late 70s. And those are the two books I suppose are most relevant for Power and the Phenomenology of Perception. Like who are you to perceive and what is uh, that as a phenomenon and how do you deal with that? So it all sounds quite airy fairy but I'd say well look, company_nings future earnings results and the multiple investors want to put on them. That's super airy fairy as well. So ye we can build models and use calculators but at the end of the day, you know, our job is to guess who other people are going to think other people think is the coolest company that's got the best upside in two years time. There's a few steps of imagination and cultural interaction that go on in that.
When you understand hard and soft power, you can ask the right questions
Phil: Yeah, you mentioned Nvidia and I have heard that about. Is it Jensen Hung, name of the.
Tobias Bucks: CEO Jensen K. Yeah, yeah.
Phil: And how he is setting up. He's talking about the future. It's not just about the company, it's about imagining the future. And is that how it relates in what you're saying in terms of the soft power that you're describing?
Tobias Bucks: Yeah, hugely so. And I think it's really interesting the way he does it. You know, clearly they trade on a multiple because of him. And the same way you saw that with Musk and Tesla potentially. I think also soft power is important in just day to day stuff. Like right, this podcast is going to go out in 2025. Everything's changing a lot. Trump came in, things have changed. There's a war in the Ukraine and people are trying to do different things. When you understand hard and soft power, you can ask the right sort of questions. So for example,
00:10:00
Tobias Bucks: Stalmer took a letter from the King to Trump and Trump got all happy about it. Was that worth $20 billion in arms? Was it worth $40 billion in arms? Little known fact, but in 1963 the French lent the Mona Lisa to the Americans to improve French U.S. relations during the early Cold War. What's to stop the French, you know, offering the Mona Lisa to the Americans to go around all the major art galleries in the US for another three month tour to improve relations and potentially uh, a three day stint in the Oval Office to start it off with, just, just to get some soft power on board. So that there are a lot of things that are going on that I think asking the right questions helps you understand, doesn't mean that you know the answers just hopefully expands and widens your sort of field of understanding and helps you focus on what's really important. I think we will get to the.
Phil: Fund in specific investing questions.
You talked about, uh, I think it was social construct that markets are
But this is so uh, fascinating. You talked about, uh, I think it was social construct that markets are ah, a construction of humans. But money is as well really, isn't it? I mean we ascribe a value to something just because we believe it has value, nothing else. I mean I know nothing about Bitcoin for example, but I think, well, humans are ascribing a value to it. So it uh, must have a value same as gold, same as money.
Tobias Bucks: Yeah, it's a really interesting subject that fiat currency and its store of wealth. Humans have been trading rights and future responsibilities, all kinds of rights, you know, rights to eat, rights to reproduce, rights to stay in a location, rights to engage in a ritual. That s humans have been trading rights and bartering rights and bartering food for well, for as long as, you know, probably when we got fire. And it's only in the last sort of 3,000 years that we've started using money. But there was other things in form of money. Obviously the Romans used salt and there were a few other things. But that trading of things hasn't really changed. What's changed with money I think is really interesting in, you know, as Marcel Mouse calls out in the gift, which is. And Engels and Markx are calling out which, that we used to exchange things to improve social relationships but now we buy things for consumption. We don't care about the relationships and that's a reason why society'breaking down. Even worse than that, people point to the fact that now on social media now there is not even a real life social relationship that's being built with this activity. It's just poof, into thin air. There's no actual real trustworthy relationship that you can sort of rely on if you get into trouble or you need help. So it's an interesting area, that money thing. But it's the greed and the rights that humans are after. And humans are trying to, mostly trying to improve the position for their offspring and their own happiness day to day. I mean that's their number one aim. And money is just enabled. People do that in a way that's not great. You know, um, a thousand years ago you couldn't have a rich person just living on their own with their money. They'd have to support villages of people, look after the sick, they'd have to educate. There was a responsibility that came with those rights. Now it's a lot of rights without the responsibility. And that's what the money invention as a social construct's done. But it also gives an opportunity for people to improve the lives for their offspring by investing. So, you know, I don't ever take a medical, um, an ethical stance on it. I think investing is really good. You know, we need to build companies, we need to make new drugs to solve and fix horrible diseases, we need to improve the lives of the 8 billion people in the world and we need to end war, et cetera. So we do need stock markets to help facilitate that.
Chloe: Super. Is one of the most important investments you'll ever make. But how do you know if you're in the best fund for your situation? Head to lifeshherra.com.au to find out more. Life Sherpa, uh, Australia's most affordable online financial advice.
Phil: We've got to do another episode just simply talking about this. But let. Yeah, no, I would really love to do that uh, as well.
Tobias Bucks: We'll.
Let's compare Aussie small caps and international small caps
Phil: So let's compare Aussie small caps and international small caps. What's a, what's the difference in size and scale and also scope of operations because as we all know there's so much mining in the small cap space in Australia. Just don try and give us a feel for the major differences when you're moving up into international small caps.
Tobias Bucks: So the jargon and the lexicons deliberately misleading unfortunately because of the way it's all been set up. But very, very briefly, small caps, as I think it generally understood in Australia of businesses that are listed outside, that are outside the ASX 200, they're the not 200 companies, biggest companies in Australia. It's a similar way of working things out in the west of the world. Put simply, global small caps, their companies that are listed outside of Australia on developed market exchanges
00:15:00
Tobias Bucks: with the size somewhere between the ASX50 down to the bottom of the ASX200. So we, we call them small caps because they're smaller than Nvidia and Bank of America in America, but they'they're still serious companies. So uh, just for AIE investors, when we say global small caps we're usually investing around the size of REA. So just outside that 50 ASX 50. That's what a global small caps are. So 500 million market cap, uh, up to about $20 billion market cap.
Phil: And also what about the scope of operations? I noticed the largest sector weighting is in industrials. What kind of industrials for example, are included in your funds?
Tobias Bucks: It's a huge scope and we're core investors and we invest in everything from people who mine, people who provide technology to software and financial services. Global small caps as compared to domestic Australian small caps is far less mining. Australian as you pointed out, is a lot of mining and mining services and materials globally. There's a m broad range, much more broader range and it includes every industry in the world. Obviously we don't have a lot of manufacturing here, so in Australia, but outside of the world there's huge amount of manufacturing and it very broadly around 22% of the world indexes in industrials as you mentioned. And that's a really miscellaneous sector. It's everything from heavy transport to construction to business services. It's pretty much every business that doesn't fit easily in the other sectors of, you know, what we traditionally called telecoms. We got discretionary. So both consumer discretionary, sorry and consumer staples like grocers, financials, healthcare, industrials, IT and materials and real estate. The biggest differences would be in IT for our fund. Investing in global small caps gives investors exposure to many more different types of businesses in hardware and software. Far more superior than you can get in Australia. Industrials as a manufacturing offering isn't huge in Australia. So investing in manufacturing we can take part in businesses that are exposed to components in the power grid, components that are needed for the defense industry, components that are needed for other things that we're trying to do in the world. That's a great offering. We have a lot more opportunity to invest in healthcare and financials than we do in Australia. So uh, I'd say key points are it's broader and you get the opportunity to add to everything. There's four and a half thousand stocks in our universe, so that compares to around sort of 400 if you're an Australian small cap investor. So a far superior opportunity set. And what's great about that is it means it's always a bull market somewhere in global small caps and you don't have that investing in other areas. Because we can invest in all developed markets in the world, whether it's Japan, Singapore, Sweden, Switzerland, the US or Australia. And we can invest in every single sector, whether it's hardware, software, healthcare, staples, whatever sector or business. There's always a bull market for us somewhere to invest. And that's what really sets apart the asset class and why I think people should be allocating more dollars to it on an ongoing basis.
Phil: In the Australian small cap space, it's often said that you can have an advantage because there's far less research and far fewer brokerage houses that are researching these companies. Is it similar on the global stage as well? Are there less eyes on um, this sector?
Tobias Bucks: Very much, Phil. In fact it's better overseas than it is in Australia. Australia does have a slightly inefficient market. As you've pointed out overseas we've had changes in regulation in financial services industry in Europe and the U.S. it's called Metiffid in Europe and there's another one in the US and essentially that changes the way people pay for services. What it's done is meant far less sell side broker research on global small cap companies. So for uh, a company like REA, where you've prob got between 8 and 10 analysts covering it, maybe more. The equivalent size company in the US you've got one to two analysts covering it. So it's got more inefficient.
The investment style of the fund is uh, described as unrecognized growth
Phil: So the investment style of the fund is uh, described as unrecognized growth. Does this give you a bit of help in terms of recognizing what other people aren't recognizing in a company and what they might, their potential might be?
Tobias Bucks: I hope so. Simon W. And myself have worked together for coming up. We first started working together 18 years ago. We have our process that we've been running in the UK and we've run it here in Australia seven years now. Focusing on unrecognized growth. I think it does give us an advantage. We're a quality manager. We're trying to buy the companies that become the next Amazon, that become the next Netflix. In this fund at Ausbil, we've bought and held successfully the trade desk,
00:20:00
Tobias Bucks: Capcom and Vertiv and a few other names that have gone from small caps to being mid caps. We want to own the growing companies. You've got to do it with a focus on valuation. Valuation is really important for investing. It's, uh, an incredibly important discipline. You make all your money the day you buy something because you never know when you're going to have to sell it. But having too much for focus on valuation in small caps can be dangerous because you just focus on companies that are cheap and cheap companies are usually the ones that aren't growing. So just having a valuation focus, you know, you can see over the last 25 years all the value managers and global small caps have produced bad returns, they've underperformed the index consistently and it's not a place that people have wanted to put money. And I would suggest that that would be right, because if you focus, you're in a growth asset class and you focus on the cheap stuff, you're going to miss out on Amazon, you're going to miss out on the trade desk, you're going to miss out on M M core, you're going to miss out on Vertiv, you're going to miss out on all the good stuff. Having said that, if you just focus on buying the companies that uh, are growing the most, which other funds do, it looks great for a few years and then you run into sort of a period we've had in 2025 or 2022 and the funds blow themselves up, right? They're down 40, 50% and their clients are upset, right? So both those extremes, ah, don't make a lot of sense to us. And we've seen people blow up left, right in the center and clients going to happen. What's delivered our strong returns in Europe when we're at beariingss and our strong returns here is having a real focus on the growth and buying the growthy companies, but just overlaying a very, very strong price discipline. And that's basically what unrerecognized growth is. You know, a lot of investors look for Companies to have positive surprises on their forward guidance. I mean that's well known. It drives earnings estimates but making sure that you're always cheaper than the indexes is lost. So with focus on unrecognized growth is our way of saying yeah it's cheap growth and it's a surprise and its's quality therefore you need to buy it. Uh, and that's what we've always focused on.
There's always a bull market somewhere in global small caps can be volatile
Phil: Can you give us an example of a company that in your portfolio that you're very excited about and know listeners do love to hear about individual company stories.
Tobias Bucks: There's 76 stocks in the portfolio and I'm super excited about all of them. I'm also excited about stocks that we don't hold in the portfolio that are on our buy list that I think have got a lot of good upsides. So there's a lot of opportunity out there and there's always a bull market somewhere in global small caps can be volatile. This is a podcast so we don't know exactly when it's going to go out but you know Trump's come in and he's with a lot of volatility and that's.
Phil: We're not talking about volatility because it's just changing day to day as we know overnight in markets but we're not going to go there.
Tobias Bucks: So things can change in the short term. The markets are uh, this is my tagline and I sort of came it up as well as there's a bull market somewhere in global small caps. I firmly believe that the markets are efficient but they have no imagination and that's how we operate. Yet markets are very good better calculator than you, me or most market participants at uh, working out the next three to six months. The market's incredibly efficient ah at pricing in what it thinks going to happen m quicker than you or any other market participant. But six to 12 months out, market's got no clue. And 12 not that we have much of a clue and 12 to 24 months out and market's got no idea. Markets are efficient but they have no imagination. So I think with small cap investing you've got to focus on companies that can do things themselves regardless of a GFC or a Trump trade war. They need the balance sheet to go through the sticky times and they need the products or the services that are leading that they can take to more places geographically and they need to put the balance sheet to work improving their vertically integration and other parts of the capital structure. So we've got lots of different companies that do that. And that's what we. I really want to see if that's a great management team at a cheap price. And I think the end industry demands misunderstood by the market, then that makes me super excited. So that's what forms the basis of all our picks, the investments that we make and we trim and add to those as the prices move around. You know, right now we got a lot. I think there's a lot of opportunity in the market because Market'Down sort of 20% since the start of the year. See, depends on what day you are that score. But less, less than the nasdaq. So global small caps have outperformed the NASDAQ considerably. So your s and P MAG7 Nasdaq Investments will have underperformed significantly this calendar year. That sets up a lot of opportunities for investors across the NASDAQ, the S& P and global small caps, particularly in global small caps as businesses that have been really underappreciated for many, many years because people have just put money into passive and very little money's gone into active and that active money has all gone ono the US pretty much on a relative basis.
00:25:00
Tobias Bucks: And it's all gone on to these rubbish software stocks, which I just do not believe in. I mean the bull case for software stocks has to be the worst investment case I've ever heard right now. And no one's been putting money into Europe, no one's bought European companies for 20 years. The valuations are stupid. So in the end of last year, the end of 2024, Simon and I, after two very strong years, Simon and I sold a lot of our US holdings and started buying Europe on the basis that we didn't think Europe could get any worse. It was. And it was cheap and the US was just stupid expensive, like ridiculously expensive. At the end of 22 in some asset, in some areas of the market, we weren't in them. But large caps mag 7 to be a standout right now. I think there's a lot of opportunity in the power grid. I think before we get down onto the actual company specifics, just taking a bigger step back, you know, if there is a recession or if there is an improvement in growth, what's still going to be there? And um, but the investment in the power grid is huge. So we all know we need to change our generation, we need less coal and we need more wind and solar. Up for debate how we do it, but that's roughly it. And we need to change our uh, distribution because everyone wants to get home on a Friday night and be able to plug in an EV and fully charge it and turn on all the home electronics and the air conditioning. So we got to rebuild the entire grid really, um, undercooked. The build out of the grid is built on peak demand. So it's all built on you going to be charging your car's EVs and you're more importantly that the air conditioning, the heating or the cooling in your house. It's got nothing to do with average load demand which is sort of data centers and AI growth is sort of suggested to drive it. So this year with the concern around AI maybe getting cheaper or growth rates not being increased, this year with DeepSeq, people got concerned about power demand going forward. And in a deep seek and AI it'got everything to do with average load but nothing to do with the peak load because data centers accounter cyclical. So I think the market's got the power grid wrong. I think that's the best place to invest globally that in defense over the next two years. Defense is an expensive sector. Uh, lots of good little companies. The power grid names are extremely cheap. Ah. What's great about the electrical GID is they key components that you can't develop a new technology for. Some pieces of equipment. We perfected the technology 100 years ago. We're just changing the design and the materials now. So. And that there's very strong regulation protecting how you can provide a product to the electricity grid. Obviously not anyone can say they've made a product. It has to be tried and tested and known about for years and past regulations. So that set ups there for the electricity grid, it set ups there in Europe and it's set ups there in America. If you speak to people, you know we need transformers and switch gear. That's a long conversation. But we need a lot of transformers and we need a lot of switch gear. And we need it everywhere on all stages of the grid from you know, generation through to transmission and then distribution. And the rebuild of the US will require more. And they don't make any transformers in the US So the US is the biggest market for transformers in the world. Only 5% of transformers get made there. And the US is a custom transformer market. That is it's not standardized and I can get into why that is, but we'd need two podcasts. So it's a very high margin business. S got huge demand, very high barriers to entry and there's very few players. So there's a business called Hammond Power Solutions that's Listed in Canada, it's been a top five position in the fund for almost two and a half years now. The share price is off, it's high. But we think that over the next five years they're going to continue to expand their manufacturing base and grow margins. Uh, and if there's a recession on a relative basis, that's going to be even better. Obviously on an absolute basis, quite, quite bad. So Hammond Power Solutions is trading on eight times EV EBITDA and it's net cash and it's the only listed transformer company in the world.
Switchgear is another area that you just can't make the stuff
So I'd really look at transformers and then switchgear is another area that you just can't make the stuff. The same setup exists and we need a huge rebuild. Um, in switch gear we get different types. We get the big metal switch that you see people sort of lift up for Frankenstein to recharge Frankenstein. But modern days we have smaller versions of that that handle more power. And also we use basically spark resistant switch gear. So you build a switch gear in a box and you make it almost a vacuum with inert gas. And that's important for energy facilities or near manufacturing facilities. Electrical fires are really dangerous, they're really powerful and they can be hard to extinguish. And there's a lot of money needs to be spent on the grid. And if you muck up any small bit of planning, you could blow out all these other really expensive components. So you don't miss, you don't muck around when it comes to, to getting the right component. You overspend because the risk is just too much. So I really think there's excitement there. And there's, there's one listed company in the US that makes
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switch gear. They produce for themselves and they sell to the OEMs, which, and it's called Powell Industries, it's a Tecx and company and that's been in the fund. So those are two companies that I think are going to do well. And then the last one, uh, I'm probably worth mentioning on the grid as well. There's a Danish company called nkt. There's basically three companies in the western world that can make transmission cables. They make medium voltage and high voltage and low voltage cables. There's Nexans in France. NKT is almost 100% high voltage. So we're talking 525,000 kilovolts, the big transmission lines that are going in. It's very difficult to make new facilities to make these high voltage lines. You, you need to build a building that's sort of 200 meters uh up and 100 meters below ground called an extrusion tower. It takes about three or four years to get one of these things built. You have to wind these, these high voltage cables on the fly so they start being wound at the top. You get the copper, the nylon, the protection sheath and it all gets wound on the way down and the cable gets made on the fly. That's how you can make kilometers of it. They're been investing heavily in new facilities for the last four years and they're starting to reap the rewards from that. The market. The global installed transmission line base is around 40 million km at the moment and the world thinks they're going to go to 80 million kilometers by 2040. I think they're going to go to 60 million kilometers by 2030. There's no way the industry can produce that me cable so then it's not going to get installed. And the net result is that countries that want their electricity grid upgraded this decade, not next decade are uh, overpaying or the're paying upfront for this stuff to be installed. So there's a massive supply demand. Im balance in high voltage cables as well and it's skewed very much in favor of nkt. Business is cheap, it's trading on right now. I think it's on 13 and a half times forward this December. So I think there you've got a business that I think over the next 10 years is going to do extremely well. By then I think it'll be a decent mid cap and I think everyone be very happy. I certainly am expecting very high returns over the next five years for their manufacturing assets. So those are sort of three businesses, different parts of the world, slightly different products, all industrials but 40% of the funds in industrials at the moment. But I think their businesses that they're going to go well over the next SoR of three to five years regardless of whether this tariff war turns into a massive recession or whether there's a cold war between China or America. And if anything the worse the tariff war gets the better it is for the electrical grid because whilst the tariffs might be bad for global trade, you know they are good for net growth in square foot manufacturing base in the US it's been growing rapidly over the last five years and is expected to grow even m more so. So I think you know all those things mean that I'm pretty happy with calling out those names, doing well.
Phil: That sounds like quite a tailwind for the power sector and you know, and you're also pointing out that there are many other analysts who you seem to think that are getting this wrong.
You mentioned having some humility about your own investment decisions
I think you wanted to mention something about having some humility about your own investment decisions. Is that right?
Tobias Bucks: I would love to. I firmly believe that the universe, you know, hates hypocrisy, loves irony, and I think that's probably a decent way one should try and improve oneself a little bit. Getting 60% of your stuff right is good enough to have a very good track record as a fund manager. As long as you do the right things at the right time. Having a higher hit rate, then that's even better. Trying to understand where you're wrong is hard. It's a lot easier if you've got lots of other people pointing out different ideas and different views. So like coming back to anthropology, I think, yeah, it's good to be able to analyze your own views, but at the same time you're so biased and conflicted that, uh, can you really look in front of a mirror and deliver any good in a five minute conversation with yourself? Because you're just internalizing personal views, checking the other view and analyzing it and maybe attacking it. I think it's a lot easier than attacking your own view. So one things I've always tried to do is, is instead of just trying to rip yourself apart, which is what you should do to be, you know, completely balanced. You know what your balance of scales are, you know what you think's on the lift and what's on the drag side. So you can balance that, but you can't rely on it. You'got to go to the other and see what they're doing. It's very much easier to try and put yourself in the other's shoes, try and be positive, find out why you agree with them and then try and rip them to shreds. Because if you do that enough, what's going to happen is you're going to rip your own argument to shreds. And you're also going to give more support to the things in your argument that are actually right.
On humility, clearly we're all wrong most of the time
So
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the first point, I think on humility, clearly we're all wrong, all most of the time. And finding out how you're wrong is actually pretty difficult. Like you've got to have the humility. I think one should try and have the humility for one to admit that one can't solve it on one's own. So this whole I'm going to try and be humble or I'm going to try and be balanced and Lose my bias. I think anthropology would tell you you're on a losing game. What it would say is, look, you're bias. Sorry. The best thing you can do is shut up, get out a notepad, sit down, wear what the other person's wearing to do what the other person's doing, eat the food the other person's eating, and just ask questions and write down the response. Because you're going to learn a lot more doing that than you are trying to investigate yourself and your own history. And so I think on the power grid, when you read what's going on, you know there's a need to change. So they're very clearly telling you culturally, Europe's telling you they believe that wind farms and solar panels are just as important as tanks and missile factories. They're telling you that, I mean, uh, Europe's been through a hell of a lot. They relied on the Chinese market for trade, the Russians for energy, and the US for security, and they've lost it all in a year and a half. They've got to have a complete reefn. So, so culturally, you know that that's super important. So therefore it's going to take precedence over migration, it's going to take precedence over tax, it's going to take precedence over all these things. Therefore, when you read through the government bodies that are set up to deal with it, so there's legislation been put through in Europe now that all the states have to correspond to. It's all written there and it's all planned by the regulatory bodies. So then you can map out on a global basis. And we did this, you know, at osboill, what we try to get the macro right, then we deep dive into sectors or regions, and then we deep dive into stocks and then we try and not optimize the portfolio for our best ideas. I done a big deep dive into the energy grid and I read a lot of the plans from the transmission operators and I put it all together, what we did as a team and we have an idea. We think there's going to be 80 million kilometer lines needed. We know 60 by 2030, we think they're going to deliver barely 55. So we've got an idea of where we think the opportunities are. Then when you go and read somebody else's piece of work most people are reading or basing the ideas on, and it doesn't contain a single reference to those papers anywhere. It's hard to assume they've read them. And then when they talk about the business in such a recent basis, so they just talk about the last six months to a year and then you see that they've only been in covering industrials for five years and that they've only been in the market nine years and they were never around in the gfc. They weren't managing money in the gfc. They don't understand what a GFC trough valuation looks like. You can start to see where their sand is wet and soft and their foundations are just moving all over the place. They've got no, there's no build for it. So they can't have the humility to admit they're wrong because they don't have the humility to admit they haven't read the papers. So. And then when I know the businesses, I know they're wrong. I could be getting some of my things wrong. But I know that the theory of what they're putting together is not right, therefore it's going to fall apart. Mine could fall apart just as easily. I think on the grid people are really missing this sort of five years of big transmission and then the distribution comes. I don't think I, uh, haven't seen many people speaking to grid engineers or actually taking the time to go and visit the component manufacturers. And if you go and visit these guys that are making these components, they'll tell you where to look. So, you know, you can visit the guys in the small cap world and then you can see the large cap, Siemens Energy, who has to buy this stuff off the OEMs, have to buy this stuff off the small guys. They don't produce themselves and they can put their margins up by 400 points. You can go back to your model and put your margins up by 600 points. So there's a lot of opportunity in the grid that's not being respected. I think people are too easy to focus on defense or the end of US exceptionalism, which, you know, everyone coming on your show four months ago have been talking about US exceptionalism and how Europe's totally screwed forever. Right. So. But I think power grid'the most exciting area you can be in right now. Up to that. I think the rebuild of Europe's really underappreciated. They don't have to do much.
There is more liquidity risk in small caps than large caps
Phil: So in the sectors that you're looking at, what are the main risks and how do you manage them?
Tobias Bucks: There's risks everywhere. I think some of the main risks are, uh, inequities are going to be your first one'your drawdown risk. So do you own a good business, but over a bad period, so own A great business like Mueller Indust Industry is one of our top holding. But you hold it during the gfc. That's a risk. So there's timing risk to these assets and then there's a business performance and then there's a liquidity risk. Liquidity risk is the easiest one to deal with. There is more liquidity risk in small caps than large caps. You get paid a premium for that and
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Tobias Bucks: the market's liquid. I mean you are going to get your money back. It's not like all the money everyone's been putting in private equity, which, you know, the flags should be massively being waived. People should already be asking for their money back. It's liquid. But you know, you could have some price pressure on the way in, on the way out. How do we manage it? We liquidity weight all our positions. So we think liquidity risk is lopsided. Uh, we don't want to gain from it that much. We don't want to suffer from it. So our big stocks are liquid. They've been in the fund a long time. New ideas that are smaller in size as a company are smaller positions in the portfolio.
Phil: When you're referring. Just if I can interrupt for a moment. When you're referring to liquidity, does that mean the amount of money that's moving around in the markets in and out of that particular company? Is that um. Description.
Tobias Bucks: Exactly. So in terms of US dollars, most of our companies trade between 5 to 50 million US dollars a day. That's incredibly liquid. That's much more liquid than domestic small cap funds. It puts us about the same liquidity. Our stocks are as liquid as Australian large cap funds, but we traditionally get sort of 3 to 4% annual premium return over domestic equities historically. And so you know, with there are liquid, it's easy to get your money in and out. And I think that's really important for investors. There hasn't been a liquidity issue in markets really a bit of the yen carry trade last year, but there hasn't been a liquidity issue since the gfc. I think people have forgotten to price and liquidity as a risk. When a fire sale commences and the door, the exit is small, there is a lot of trampling at the exit.
Phil: So, so that's when liquidity is leaving the market. It's just like basically everyone wants to sell, get it out, put their money in gold bars and put them underneath.
Tobias Bucks: The bid and it is dangerous. So we are a listed fund in the sense that all our assets are daily traded in huge Volume some way towards that probably will happen over the next, you know, one to 10 years. Because you tend to get big events. Liquidity is really important to make sure you're on top of and we focus on it strongly. Then business risk in terms of the actual businesses that we analyze, we're focused very much on trying to weigh the scales. You there is a story out there put out there by management. There's an understanding of that story by the market and evaluation been given to the paper. We really think about the scales on each division. We look at their margins, what's more likely to go up or down and what's been priced in over time. I think we've developed a good process to benefit from that risk. And our returns have showed that we do benefit from that risk. That's good. And then the main risk for investing in markets is do you hold it during a period where s something really bad happens? You know, it's not the timing of the market, it's timing in the market that gives you returns. That'mantra there's not a lot anyone can do about that. Uh, our way is to say and what I do is I dollar cost average, you know, I want to put a certain amount of my dollars into global small caps and a certain amount into into gold will basically cash. Global small caps has historically provided the best risk return in the asset class inequities and also the best absolute return. I'm fully about it, but I put in a set amount of money. Everything else goes on my children. If there's a time in the market where you think the market's really expensive, you know, you could not put in as much as you normally put in every month. And likewise if there's a time where you think the market's very cheap, you should put in slightly more hopefully at the extremes of the GFC or the TOPs of last year in the US market, people we're doing that correctly. No one can do it perfectly. But that just means that you got a bit of powder dry. You're not always picking stuff up at the top and you definitely are picking up some stuff at the bottom. And that's, that's the best approach to manage that risk. Our jobs to be fully invested in global small caps. Uh, people who put money in our fund expect it to be fully invested in the asset class. They don't expect us to have a sort of waiting in cash. You know, they can put money in cash and gold themselves. So my advice to people on that is to get some good financial advice on what's right for you.
Phil: So if people want to and viewers and listeners want to find out more and this fund is available, you can like if you've got a WRP account, like a BT Panorama, this is available for ordinary investors. That way you don't have to go and buy units in this fund directly from Emmafunder.
Tobias Bucks: No, it's right there. And later, O Bill, in the future we will be producing active ETFs, so hopefully that's the journey we're going on, which will also provide another avenue for people to invest in it.
Phil: And how can listeners and viewers find out more?
Tobias Bucks: Well, the best thing to do is to speak to your financial advisor about oil investment management or go to osbil.comdoiu and have a look.
00:45:00
Phil: Tobias Bucks. What a conversation. We're definitely going to get you back on to talk about anthropology and it seems to be even going into economics and philosophy there as well. So thank you so much for joining me today. It's been a great pleasure chatting with you, Phil.
Tobias Bucks: That was a great pleasure. I wish we had more time. Yeah, I'd love to talk more about anthropology and stock markets. Uh, I don't know any other fund managers that I've ever met in the industry with a social anthropology degree. I think it is far more useful than going and getting an accountant or an economics degree. If you want to go into funde management, you are going to have to get your CFA later. The maths is super easy, but no one's going to teach you how to ask the right questions or get you to ask yourself. What questions do you want to ask yourself?
Phil: Thank you very much.
Tobias Bucks: Thanks Phil.
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