(Ep.17) The Acquirers Podcast: Peter Simpson-Morgan – Aussie Lynch, Peter Lynch-Style Investing In Australia

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Summary

In this episode of The Acquirer’s Podcast Tobias chats with Peter Simpson-Morgan, a legendary Australian fund manager who ran Perpetual managing $13 billion dollars until he started his own firm 452 Capital. Peter provided some great insights into:

– The Differences In The Australian Market vs The US

– What It Was Like Surviving The 1987 Crash

– The Australian Entrepreneurial Index

– Activism, Done Correctly, Protects Shareholders From Stupid Management Decisions

– How He Came Up With The Number ‘452’ For His Firm 452 Capital

– Why He Never Shorts Stocks

– How To Deal With Being Diagnosed With Brain Cancer

– The Small Investor Advantage – Being Able To Make One’s Own Investing Decisions

– Investors Don’t Need Benchmark Comparisons, The Starting Point Is Not To Lose Money

– Why It Is So Difficult To Get Innovative Tech Businesses Started In Australia

The Acquirers Podcast

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Full Transcript

Tobias Carlisle: Hi I’m Tobias Carlisle, this is the Acquirers podcast. My special guest today is Peter Simpson-Morgan, he’s a legendary value fund manager from Australia. Peter ran Perpetual, where he managed $13 billion dollars, averaging 14.3% over his reign from 1994 to 2002, when he kicked out his own firm 452 Capital, which grew to $4 billion dollars under management at its peak. In 2009, he was diagnosed with terminal brain cancer, and given only a few months to live, at which point he wound up 452. We’re going to talk to Peter, right after this.

Speaker 2: Tobias Carlisle is the principal and founder of Acquirers Funds. For regulatory reasons, he will not discuss any of the Acquirers funds on this podcast. All opinions expressed by podcast participants are solely their own, and do not reflect the opinions of Acquirers Funds or affiliates. For more information, visit AcquirersFunds.com.

Tobias Carlisle: G’day Peter, how are you?

Peter Simpson-Morgan: Good Toby, good to speak to you.

Tobias Carlisle: Tell us a little bit about your investment strategy. For folks who don’t know, you’re a value manager, but I always say ‘value’ is a very broad church, so how do you describe yourself as a value manager?

Peter Simpson-Morgan: I think the closest prox imitation is somewhat similar to Peter Lynch, but in the context of the Australian market, it’s very cyclical based. The index itself is based around banks, and mining stocks, depending on what point in the cycle you are with those two companies. There are some fast growing companies down here, to use the Peter Lynch phase, but nowhere near the context that they are in the U.S.

Tobias Carlisle: I think one of the interesting things about the Aussie market that I’ve noticed over the years is that half of it’s financials, which is banks and insurers, and about 15 to 30% is basic materials, and so it leaves only a very small slither that’s sort of what traditional Peter Lynch or Buffet-style investors might go after, so how did you handle that when you were investing those big sums of money?

Peter Simpson-Morgan: Well it’s also … there’s a couple other dynamics playing a part as well, when I started at Perpetual in 1991, superannuation or the retirement saving system of Australia had basically just come into force. In rough terms, it was about $100 billion dollars in superannuation.

Peter Simpson-Morgan: Today, that figure’s approaching $2.5 trillion dollars, and there’s been extraordinary growth. When I started at Perpetual, everyone wanted to be a stockbroker. And then obviously, they gave us a…break at Perpetual to getting into funds management. But, the funds management industry was just starting, and when we came together at Perpetual, the flagship product, the industrial share fund was around $80 million dollars.

Peter Simpson-Morgan: And as you said in the introduction, you know, when I left and even today, equities at Perpetual are $10+ billion dollars. So you go from being a smaller fund manager to being a bigger one and also, in the context of back then, the Australian market was somewhat diverse in terms of the quality of companies.

Peter Simpson-Morgan: One of the things that I’ve noticed, over the last 25 years, is the number of companies listed has also fallen. The quality of those companies have also fallen. At the same time, the number of fund managers today, we’ve probably got around 500 domestic equity fund managers in Australia. As I said, there was probably 20 when I started.

Tobias Carlisle: What do you think that the number of companies has fallen and the quality of the companies have fallen? What’s the cause of that?

Peter Simpson-Morgan: Well, there’s been a lot of takeover activity. I mean, its…as we all know, one of the great dynamics is that…again, when I started, interest rates in Australia were double digit. 15 per cent. You know, it got up to 18, 20 per cent…at the recession we had to have basicially, in those times.

Peter Simpson-Morgan: Today, now the cashflow here is around 1.5 per cent. And also with the growth in superannuation, the growth in superannuation, or money going into the market, it’s lived a more and more concentration in the market takeover activity, as I said.

Peter Simpson-Morgan: The biggest dynamic for the Australian market down here today is where the money ends up…It’s got to go overseas. Infrastructure has played it’s part, but so has low interest rates in that growth of that sector.

Tobias Carlisle: So, let’s go back to when you first started investing. You were trained as an accountant?

Peter Simpson-Morgan: I was an accountant. Yeah, I was trained as an accountant. If you go back one step from that, I probably wasn’t the smartest kid in school. You finish school. You don’t really know what to do and I just had in my mind that if I kept that option opened, in terms of accounting, I’d see where it led.

Peter Simpson-Morgan: I did accounting at university. Didn’t really learn much about accounting at university. It was only when I did the professional year, as a chartered accountant, that I really learnt accounting. From that, I worked for a chartered accountant for 3 and a half years, and then I saw a job and took a job at a company that you might remember down here called BT Australia, as an internal audit.

Peter Simpson-Morgan: The only reason I took that job was to perhaps get to New York. At the time, BT had about 300 people working at it. This was around 1985. Financial markets, under Labor and Paul Keating, were deregulating, foreign exchange was floating. The currency was floated. Stockbroking fixed charges were changing, and it was an exciting time, but as an internal audit, I’d walk into this organization that was entrepreneurial, a lot of young people. It was growing very fast. It was effectively taking on the big incumbent trading banks and the AMP, national natural mutual societies. And it was so exciting and I…To be honest with you, I was walking around in an environment where I was learnings what went on, but I could see that this place was successful, it was going somewhere.

Peter Simpson-Morgan: For the first time, I’d seen an Australian company actually reward to be broke up, in terms of profits centers. So, the ethics department had to stand up for it’s…had to stand up and be profitable. Every department. The previous companies that I had audited in Australia, hadn’t had anything like that. As time went on, in those next 2 years ago, I had got into my mind that I wanted to try and find the next BT Australia. But I wanted to get into financial markets.

Peter Simpson-Morgan: I saw an ad in 87 for a…a small ad in the newspaper, for a stockbroking firm. I applied for that job and then started as a stockbroker in June, 87.

Tobias Carlisle: That must of been quite an introduction to-

Peter Simpson-Morgan: It was. I can still remember going to that job, Toby, in the sense that to his credit, the chief financial officer said, I pointed to a chart on the wall, he said to me…I can still remember him saying it, ‘I don’t know where this market ends, but we’re pretty high’, and you have to keep in mind that stockbrokers are pretty, for lack of a better word, a variable business, and you may not have your job tomorrow.

Peter Simpson-Morgan: Well, 3 months later, as we all know, or 4 months later, as we all know, the markets in October 87 lost 20 per cent in one day. And I think…looking back on it, and remembering it…I then ran into a period where you had to survive. And even in the early years of Perpetual, we never really knew that we had a job the next day for 2 or 3 years, because they were pretty sour times.

Peter Simpson-Morgan: Just talking about 87 for a moment, sorry, October 87, I can still remember walking in on that day when the Dow has fallen 500 points. It was a Tuesday morning here. Whereas a telex coming from overseas, a meter long in terms of bite, so those were 2 or 3 meters long, in terms of buyer and seller was. The telex that day was 50 meters long and [inaudible 00:09:18]

Peter Simpson-Morgan: And it went from there. Now, added to that, I probably wasn’t the greatest stockbroker in the world in the sense that I was never really comfortable selling something that I wasn’t comfortable with. But luckily, as people were retrenched, and the industry contracted somewhat, I was given an account called Perpetual to look after as a stockbroker. And that led to an introduction to a guy called Anton Tagliaferro, who had just gone to Perpetual at the time.

Peter Simpson-Morgan: From about 88 onwards, we just sort of grew together. Eventually I went up and joined Anton and another guy called John Murray, that had gone onto bigger and better things at funds management as well. Like, I didn’t and others have. We all came together, based around that. As I said at the start, when we all joined Perpetual…the funds management and the industrial share fund were around $80 million. But the importance, also, with regards to that is that the team that had left had left a portfolio of under researched, somewhat illiquid, very good quality companies, such as Brickworks, Sol Patterson, Gibson Chemicals, Australian Chemical Holdings, Plumbrose, Rick and Coleman, amalgamated holdings, basically a lot of them were asset plays. As I said, a lot of them were under researched.

Peter Simpson-Morgan: We basically, in those days, had to go out and do our own research. The reason why they were under researched is that they were great companies, but there wasn’t a lot of liquidity in them, and brokers weren’t the one who carried the file. And that’s, basically, in a round about fashion how it all sort of, came together.

Tobias Carlisle: So, how did you develop your style? So, you inherited the portfolio, and it’s pretty impressive that you can remember all the names in it, these many years later.

Peter Simpson-Morgan: It was a lot, Toby. That’s why I kept thinking about it today. I know that this is a cliché, people used to ring me…I still remember a broker ringing me up and saying ‘you do this job for nothing’. And I would of done it. So would we have all.

Peter Simpson-Morgan: It was like walking into something…You know when you find something that you love, we loved it. In the same context, we were going through the recession that we had to have. On the other side of that, I can remember quite vividly, ANZ and Westpac, the 2 major banks, in a lot of trouble. They were gone for all money in 91, 92. There’s ups and downs and that, but the beauty of that, the beauty of what we walked into, is that we gone through the 87 crash all the companies had, and they survived.

Peter Simpson-Morgan: We would have started in early 87 as fund managers, we may well have got caught up in the boom of the entrepreneurs like Alan Bond and Christopher Skase, and that sort of stuff. There was a lot of things that came together and then, you kind of put it altogether, and again, if you wanted to talk about books at the same sort of time, I think Anton, myself and maybe John all read Peter Lynch’s ‘One Up on Wall Street’. It all sorta came together. It all sorta came together in a funny sort of way.

Tobias Carlisle: So that’s what made you Lynch-style investors, you read that book early on in your career and tried to implement that?

Peter Simpson-Morgan: It explained to us actually what we were doing, or trying to do. The other important thing, I should also stress with regards to the [inaudible 00:12:57]. It just wasn’t the fund managers. There was a very good team that came together in terms of…the sales team came together, and even the guy that was on the phones to staff as it was building, he was a great guy…if the client had troubles, you could take him somewhere else with his thought process and calm him down. And the sales team, when they were selling the Perpetual product, and we were only starting, they didn’t sell the fund itself, they sold equity. Equity, the importance of investing in equities. In the sense that they’d go out with a story like the dividend growth story, where a company’s earnings would grow, and then subtly sell the Perpetual funds on the other end.

Peter Simpson-Morgan: It wasn’t an aggressive sell and they were terrific. And we’re all learning at the same time. I’ve also got to say that there was no guarantee that Perpetual was going to be what it became. It could have been shut down the next day.

Tobias Carlisle: So, you started out there…were you managing the portfolio initially?

Peter Simpson-Morgan: I started out there. John and Anton was there running the portfolio. And Anton’s gone and done his own thing for MIC investors mutual, his time has passed. John Murray was there but he didn’t stay long, he then went Maple-Brown and he then went on to Perennials, and he did his own thing. And I was at [inaudible 00:14:17] with another 3 guys that fell into it.

Peter Simpson-Morgan: Took over from there in 1991, and just…you become so attached to it, and you could see it coming, the success of it coming. It was like playing a sport you didn’t want to drop the ball. And that’s what fund management is. It’s like playing a sport, except there’s no off-season. You’re constantly in it for every day of the week. Hopefully you love it, which you should. If you don’t love it, and you can’t manage your own money, well don’t do it.

Tobias Carlisle: So, in the early 1990s, that’s the last recession that Australia has had. And you were managing…you were 31 years old? Approximately then?

Peter Simpson-Morgan: At that stage, I was 26 when I went into stockbroking…Yeah, about 31, 32.

Tobias Carlisle: So, how did you manage the portfolio through that period? Do you remember what you were trying to do?

Peter Simpson-Morgan: As what I was trying to allude to you, Toby, the lucky thing, and it’s not luck. The companies were good, solid companies, that it had formed the basis of what we went to the market with. Basically, the companies were companies that made a profit, they had sound balance sheets, and a good management team. And typically being around for a number of years.

Peter Simpson-Morgan: On the other side of that, the companies that we didn’t know, and the bond corps, the [inaudible 00:15:47], and the entrepreneurial index in 87 was almost 20 per cent of the All Ordinaries index, were all highly leveraged. Basically speculative asset plays that we use in a lot of…John’s [inaudible 00:16:03]…we didn’t have any of those in the portfolio.

Peter Simpson-Morgan: So that side went [inaudible 00:16:09], on the other side, we had a number of good quality companies that survived. But probably the one mistake we did made…we became overly cautious, as Marcus corrected. Whereas Marcus picked up, obviously as you go out of a bear market, on the other side, that there’s a bull market coming. So, perhaps early on, we were positioned coming out of that bear market conservatively, and it went against us. But all the way through, that style of investing in conservative [inaudible 00:16:46] that have got an earnings track record has stuck with me, and I’m still very attached to it.

Tobias Carlisle: So, for non-Australian investors, the entrepreneurs index was a group of guys who were basically takeover, leverage buy out guys who pyramided up, and eventually they all almost to the man, all went bust. And a few of them ended up in jail. So, it became a bit of a…it wasn’t a word that you liked have applied to you in Australia for a while after that. Right? The entrepreneur?

Peter Simpson-Morgan: That’s right, but on the other side of that, you had a banking sector that was blinking lead than money. It rose to 13 to 20 per cent and they’d happily do it and then Paul Keating, in the background, took us into the famous cliché, ‘the recession we had to have’. In 87, it happened. So, the asset prices were falling as well. On the other side of that, interest rates were up and becoming…we’re a long way away from 13 to 20 per cent interest rates today and it’s perhaps interesting to think back on that in the sense that…a marginal rise with a lot of leverage in terms of volume, may have the same dramatic effect.

Tobias Carlisle: So, you start out running there and… you start putting up a pretty good track record, and you get some flows into…do you remember what sort of flows you were getting through that period?

Peter Simpson-Morgan: Well, again, when you into a [inaudible 00:18:10], you don’t want to over get flows, but you also get markets falling at outflows…They don’t sound like big figures today, but when the markets were falling, 3 or 4 per cent a month, or something, as they were. We were getting 20 to 30 million dollars in a month, which was good, and gradually the funds started growing. We were getting the net inflow. So, I should also say at the time, it was in an environment where I had a lot of respect, and we had a lot of respect for some of our competitors.

Peter Simpson-Morgan: It was a time when guys like Greg Perry at Colonial First State, probably the best fund manager I’ve ever seen, was starting out. David Paradice was starting out. And another guy that’s no longer with us, Robert Maple-Brown was also there. So, out of those 20 fund managers that were around at the time…5 to maybe 7 of them were ones that you really respected.

Peter Simpson-Morgan: On the other side of that, another 5 or 7 were ones that were copying all the outliers that weren’t going to survive. I think that the surprising thing as well is that it took a long time for people to realize that superannuation was coming, funds under management was…they could only grow and there was legislative growth in it, and it probably gave us time to all fine-tine ourselves and run with it.

Peter Simpson-Morgan: In a time where interest rates were falling, and the attraction to equity was growing, it helped…That’s basically how an industry is built.

Tobias Carlisle: So, you ran Perpetual, and it topped out, according to some of the articles that I read, it topped at about $13 billion dollars AUD, under your management?

Peter Simpson-Morgan: Yeah, in domestic equities it did. But with me…with that growth, we had to do a few things. And a lot of the things were…I don’t want to sound arrogant saying this word, were actually quite smart at the time, in the sense that a couple of the fund managers that I was working with, they took money on and managed it, and we split the industrial share fund with John Sevior, and it became, basically a competition between myself…which was good, it was a good internal competition in terms of…he got half the portfolio and I got half the portfolio.

Peter Simpson-Morgan: And underneath that, we had maybe 5 or 6 analysts coming to us with recommendations. But we also developed over time, a method of measuring those analyst recommendations, and rewarding them, based upon those recommendations. It’s all what the industries are doing today, but to some extent, some don’t.

Peter Simpson-Morgan: It was entrepreneurial sort of stuff. And as we grew, I…again, not trying to be arrogant with it, one of the things that we learnt when we were managing large and larger amounts of money, you can’t always move, particularly in somewhat illiquid stocks, the money around. We have this time when I’m more and more aggressive in trying to direct companies, in terms of their thought process, and took companies on an OGMs, where we thought they were doing stupid things, and became quite public about it, but only for the reason it was being used as a tool to try and protect our position and… I can still remember it, we took AMP on an AGM, after they had listed, they, you know…a lot of Australian companies have done, like overspending the free cashflow and making stupid acquisitions overseas.

Peter Simpson-Morgan: We were one of the first companies that went to a AGM, and voted against a remuneration plan. We’re quite vocal as to why, and lead to change in terms of that executive team. And I was one of the ones that lead that process, but it then encouraged others within Perpetual to do the same sort of thing. And I remember Matt and John both, and we all came together and went down that path to try and protect ourselves, in terms of our position, as we grew.

Peter Simpson-Morgan: From that, as I said, for no other reason, we always viewed that we were managing other people’s money. And we were trying to perform for those [inaudible 00:22:40]. It wasn’t our money that we were managing, it was other people’s, and we had to protect it.

Tobias Carlisle: So, that’s maybe an early form of activism in Australia. Was anybody else doing anything like that? Are you guys introduced that?

Peter Simpson-Morgan: Well, we didn’t introduce it for the sake of introducing it…I hope it doesn’t sound reckless, but we were trying to learn…we were learning as we went along, Toby. I mean…I should also say, I think one of the things that gets me [inaudible 00:23:09] is you’re not going to get every call right. And if you’re getting 7 out of 10 calls right, you’re doing a fantastic job.

Peter Simpson-Morgan: And to the 3 that you’re not getting right, you’ve got to try…imagine more and more money, you’ve got to try and work out a way of trying to save that position, or making it up elsewhere. And a lot of times, these companies weren’t bad. They weren’t bad companies, they were solid companies, but they were being badly led.

Peter Simpson-Morgan: And as I said, this is in the 1990s, yes, we were probably at the forefront of that. But it wasn’t for the sake of trying to be an activist, it was what we were trying to do to do the job that we were doing for other people.

Tobias Carlisle: So, in 2002, you launch your own firm called 452 Capital. Where does the name ‘452’ come from?

Peter Simpson-Morgan: Well, it’s like…when you go out…Let’s just go back a step. At the same time that superannuation has been introduced, union-based industry funds have also been created and today, they control, effectively a third, I don’t know the exact figures, but let’s say a third to 50 per cent of the pool of money of domestic equities in the Australian marketplace.

Peter Simpson-Morgan: So if there’s 30 per cent of that $2.5 trillion going to domestic equities, the industry funds have got control of that. And they all grew, basically when superannuation was introduced, one thing that’s underplayed a lot in the Australian market, particularly, with regards to the industry fund success, is that one of the things they got right is that they bat all our consultants, perhaps the best fund managers in Australia; I’m not talking about myself in saying this, but other guys like David Paradice and the like, they were very successful and they drove their performance.

Peter Simpson-Morgan: So, that was in the context of…and I was managing money, a lot of retail money, and I was also involved in managing money for some of the industry funds, and Perpetual got to $13 billion dollars in domestic equities, let’s say that’s the figure. At the same time, John and Matt were becoming successful in their own right. There was something to fall back on. It wasn’t just me. And at the same time, boutiques in Australia were available and starting to be an area of perhaps…having a go of setting up your own boutique.

Peter Simpson-Morgan: So, I went out with a guy called Warwick Negu, and we founded 452. The name 452 comes from Australia’s best cricketer, Sir Donald Bradman’s highest cricket score. And like anything, Toby, you try and find a name for a company, something that you can attach to. And as I said to you at the start, one of the reasons we chose 452 as the name, is because it’s a sporting score, it’s a very high score, Bradman had been very successful, and as I said, he scored…I believe, [inaudible 00:26:41] is a lot like a sport.

Peter Simpson-Morgan: So, we chose 452 as the name and the other side of that, the actual…Bradman was someone with a lot of integrity and it’s what we wanted to base ourselves on.

Tobias Carlisle: Bradman for non-Australian listeners, for my U.S. listeners, is the Babe Ruth of, probably global cricket. So, he averaged 99.94, which is because he got out for a duck on his last time.

Peter Simpson-Morgan: Zero on his last hit. They won’t know what a duck is either.

Peter Simpson-Morgan: Zero on his last bat.

Tobias Carlisle: If he averaged a hundred, that’s like averaging 400 in baseball. And there’s only a handful of guys who’ve done that. So nobody’s actually ever done it. Nobody’s ever got a better average than Bradman before or since. So, that’s 99.94, it’s an incredibly high score, and 452 has been bested, but it’s taken a long time for that to happen.

Peter Simpson-Morgan: The 452 is not out too, Toby. So.

Tobias Carlisle: That’s right.

Peter Simpson-Morgan: So, anyway, that’s how it came together. You know, it’s something we’re comfortable with and it was good. If we explore that a little bit more, I mean, so we set up 452…I think another thing that should be noted is, obviously if you’re a fund manager, you’re successful at what you do, otherwise you wouldn’t be doing it, you wouldn’t be surviving.

Peter Simpson-Morgan: You know, one of the things you learn when you set up your own company is, not only that you’ve also got a company to run and to be profitable, but you also have to manage people. And I think one of the hardest things for a boutique fund manager, it’s so easy to go and set one up, but it’s harder to manage people and deal with that in terms of aiding to the stress, or whatever it’s called, in terms of trying to manage a portfolio as well.

Peter Simpson-Morgan: I think one of the things that we got right early at 452 is I left a lot of that to Warwick…I was managing the money, and Warwick effectively handled the business, and the managing of the people.

Tobias Carlisle: Was it a relief to get a blank canvas and to start again? Did you…What did you put on when you first started out?

Peter Simpson-Morgan: In terms of the investment?

Tobias Carlisle: Yeah.

Peter Simpson-Morgan: You got to remember it’s our money. It’s Warwick’s and my money. I think that figures that we out were that I had put in $150,000 and Warwick put in $100,000; and that was the capital base which had…I could remember having Christmas, I think…this going to work or we’re…it’s not going to work because there was no guarantee the money was coming to us.

Peter Simpson-Morgan: Warwick has signed for us, and I obviously signed off on it, and signed a lease on a part of Australia Square, which wasn’t cheap. And it’s also the context…I think the only thing that should be made is that when we’re at Perpetual, and when I started at Perpetual, there was no bonuses. I think I left…and again, it sounds a lot of money to, you know, we talk in billions and how do we talk in…you know, when I left Perpetual, I think was getting paid $400 thousand dollars a year, or whatever. With maybe a hundred per cent bonus over time.

Peter Simpson-Morgan: And that’s what I left on. But I had to back myself to go out and do it. I would of regretted not going out and doing what I did, but it could have all fallen over the next day. And I know those figures sound big, and I’m not trying to…I’m just telling you the story, that’s basically it.

Tobias Carlisle: That’s all I want.

Peter Simpson-Morgan: Sometimes you feel like you’re talking big numbers, and it’s…as I said at the start, it was never the money that attracted it. It never has been. It was a love of what we were doing. And a lot of it turned out very well for us.

Tobias Carlisle: No, I understand completely.

Peter Simpson-Morgan: I don’t want to apologize for that. I just want to say, a lot of the…luck plays it’s part, but at times, if you don’t back yourself, you never see where you end up.

Tobias Carlisle: So, you did eventually get some pretty good flows into 452. And I was actually a junior lawyer when that 452 listing came through and I remember the prospectus filing come across my desk and reading through it. Very interest because it was Bradman’s high score, and I knew that at the time. You got some flows and you started building that business up.

Tobias Carlisle: How was that period of time?

Peter Simpson-Morgan: Well, it’s…again, sorry to do this, but let’s go back one step before that. There was an important period just before we set up 452 and that was the dot com boom. In 1999, through to 2001, globally all the dot com stocks boomed for a period of time based upon revenue with not a lot of profit.

Peter Simpson-Morgan: In the Australian marketplace, a company called News Corporation, which has now been broken up. It was Murdoch’s thing…and again, it shows the dynamics of the Australian index. In 2000 and 2001, it became 21 per cent of the Australian market. That shows you how tight this market is. And at the time, at Perpetual, we didn’t owe a share of News Corp, and for all the right reasons, we thought it had too much doubt, it was overvalued, and again, we were sort of novel in that thinking. A sense of…even in the U.S. today, I don’t think many hold that type of stocks in it. But we holding a stock that’s 21 per cent of the market… and we’re telling people this, for all the right reasons. But the takeover of AOL Time Warner occurred and in one day, News Corporation jumped 15 per cent and now we were 3 per cent behind in one day.

Peter Simpson-Morgan: You know, all the normal things sort of happened, you think of the bull…we were menacing a lot to me, we were underperforming, but only on one day, but we got to underperform for a little while for quarterly figures and yearly figures. You go through the process of you thinking a board looking at you, asking why you’re not holding News Corp and it’s becoming a…why haven’t you held News Corp? You not holding it is effecting performance of…technically becoming a business risk.

Peter Simpson-Morgan: So, the eventual thing that happened is we get direction from the board to buy News Corporation after which jumped, the market is gone. John and myself, and Matt, I think also, fought that decision. They were called to buy News Corporation, and the inevitable happened. The dot com boom busted and luckily we only got to 3 or 4 per cent News Corporation in the portfolio, [inaudible 00:33:53].

Peter Simpson-Morgan: But, the reason I’m telling that story, it also played a part in the sense that I wanted to go back to try and manage more the money. And when we went to the market, we didn’t think we’d be a success in terms of setting up 452. We didn’t think we’d be as successful as we were in raising the money as quickly as we did.

Peter Simpson-Morgan: That that whole process lead to, it helped in making that decision to get out there and have a go on my own than going back to where I started, hopefully, at Perpetual. If that all makes sense? Which it probably doesn’t.

Peter Simpson-Morgan: But I did want to talk about the dot com boom, in the sense that it also helped Perpetual as well. Because it obviously turned the other way, and like we did in the early 1990s, we were at position went…the eventual bust came in a cyclical market, and then when we set up 452 and progressed, we then go obviously into the coalmine of 2008, being the global financial crisis, and the same sort of thing happened again. But took a lot longer this time, in terms of highly indebted companies. Particularly in the U.S. With a lot of speculation, the things we blew up.

Peter Simpson-Morgan: And all through those three times, the entrepreneurs in Australia, the dot com boom, and just preceding the Global Financial Crises, we were over the difficulty of holding…staying true to [inaudible 00:35:27], in terms of being conservatively positioned when markets go wacky in their size, of their process. If that makes sense?

Tobias Carlisle: You’re a long only investor through that period?

Peter Simpson-Morgan: Honestly, I’ve never short of stock…I’m only joking…At least I’ve made the wrong buy or sell decision which I’ve never done. I’ve never short of stock in my life, Toby.

Peter Simpson-Morgan: I know when I’m going to say this next comment, I’m going to get every [inaudible 00:35:59] attack me, but I actually don’t believe in shorting. I know…If you believe in investing, I don’t think shorting is actually investing. I know I’m going to get [inaudible 00:36:14] ‘Oh, that’s price discovery’, and all that sort. I just don’t believe in it. It’s fine, it’s legal, do it. I don’t mind that. I’ve never really wanted to run a pun that has [inaudible 00:36:26] that shorts companies.

Peter Simpson-Morgan: I can see that it can lead to trouble in the sense of positions being…positions for all the wrong reasons. I don’t think if you give your money…let’s take an extreme example, if I manage money for an industry fund, which is union fund, I don’t want to be shorting a company that people are working for. I just don’t…I know I’m going to get cobbed in the head for this, but I just don’t believe in it.

Tobias Carlisle: I do a little bit of shorting, Pete, but we can move on from that.

Peter Simpson-Morgan: Sorry, you asked.

Tobias Carlisle: In 2009, you were diagnosed with terminal brain cancer, given 6 months to live. They give you 2 rounds of chemo, and do a biopsy, and ultimately they found that the diagnoses is you don’t have it. So, it must of been incredibly devastating, incredibly difficult period of time. Ultimately-

Peter Simpson-Morgan: Yeah, it was a lot. It’s also important to put that in the…I’ve been told so many times to write a book my whole thing, and you know, maybe one day I will. But there’s more background with regards to that. You know, I’ve been up as a fund manager for 20 years in a competitive environment.

Peter Simpson-Morgan: In February, 2009, something was going wrong, mentally in the sense that I was very depressed, I was very…I was burnt out. And one thing lead to another, and when I was going through that whole process, one of the doctors suggested I have an MRI scan. I had an MRI scan with regards to that and the MRI scan came back with various shading on the brain. And as I’ve since learnt, with football players, or whatever, if you don’t want to play the next weekend, have an MRI scan, because they’re not that accurate.

Peter Simpson-Morgan: So, I had the MRI scan that night and I’m wrung up when we’re driving home, and we have to go back in, and have another one, have another one that night. They’re all coming up with this shading, and no one knows what the shading is. So, that leads to a biopsy where they take a part of your brain out and then go away and analyze it. And so that happens, and you’re learning stuff as you go along.

Peter Simpson-Morgan: The most important part of your brain is at the front, for anyone that wants to know, and the stuff that they want to take out is at the back of your brain. The front of the brain controls, obviously, your sight and pretty important things. So, we had that biopsy, it goes to a pathologist, who I never met, and they cut the biopsy.

Peter Simpson-Morgan: And in the background, they’re also putting the picture together with regards to…circumstantially what I’m going through. And the biology comes back, it’s cut, and basically a cut is wrong in terms of a diagnosis. So, I was diagnosed with a rare form of brain cancer, and given 6 months to live, and time to get affairs in order, going on chemo.

Peter Simpson-Morgan: Looking back on it, the things you learn, learn the hard way, is the things like drugs, they’re very powerful and if you take a powerful drug, it…can take a month to get into your system, but it can also take a month to get out of it. And there’s obviously withdrawal symptoms, with regards to that.

Peter Simpson-Morgan: I can still remember going to the oncologist the first time, and she was…the people in the system are so good. But obviously, they do make mistakes. She was so good and the first thing she said to me, she said that ‘well, we’ve got to give you rat poison to try and save you. So you’re going to chemo’…and I’m lucky I got through it. But for those who haven’t, that’s a whole process in itself in the sense that you…because the drugs are so powerful, you can no longer share toilets, you’re sick. You’re obviously sleeping a lot. It’s [inaudible 00:41:47] the whole complications of the process, and as I’ve said…I would have paid them a million dollars to be wrong, borrow 10 million dollars for them to be wrong, and they were wrong.

Peter Simpson-Morgan: And people sometimes ask me why I never sued them, I have no interest in that. As I said, I’d rather them be wrong. And that’s what’s happened. And the funny thing now is, 10 years later on, you can see how things turned out…It’s bizarre, you can see…you watch kids grow up and you can see the decisions that you made, might of made, in that process, in terms of getting your affairs into order, whether they were right, or wrong, or whatever, the whole thing is complicated, it’s interesting, and thank God you can look back on it.

Tobias Carlisle: So, you stepped back out of funds management at that time. What have you been doing for that last few years?

Peter Simpson-Morgan: For the last 10 years, I’ve effectively been managing my own, Toby. I actually love it. I’m actually…I’ve had the opportunity on a few occasions to go back into it, but the market…the dynamics of the market are not the same.

Tobias Carlisle: What do you think has changed?

Peter Simpson-Morgan: There’s a lot more fund managers, as I said, trying to articulate… chasing a smaller and smaller number of stocks, in the Australian marketplace, particularly in terms of quality. The industry funds have grown so much that we’re now basically going to have to, or are, either index in Australia, or they’re going to have to go globally.

Peter Simpson-Morgan: I’m interested in the global markets, and we’ve seen a few Australian fund managers…I think Australian fund managers can do very well globally. But that money has to go offshore. As I said, I’m managing my own money. And that’s given me the opportunity to look at things in terms of technology and the use…one of the reasons that I’m talking to you today is I’ve never done a Skype interview before.

Peter Simpson-Morgan: I’m interested in that whole tech area. It’s one area that Australia is…it’s not the end of Australia, it’s not the right word, it’s still a very backwards place in terms of technology and that sort of stuff.

Tobias Carlisle: I think the Atlassian guys have done fairly well, as one of the few that’s got out, listed on the Nasdaq.

Peter Simpson-Morgan: That’s the saddest thing about it, they had to go to the Nasdaq to do it and they were successful…I just hope Australia gets, at some stage, gets away from housing, digging stuff out of the ground and relying on population growth, because I don’t think it’s got the same future it’s had in the past [inaudible 00:44:48]. I just don’t, and maybe again, I’m wrong.

Tobias Carlisle: So, you no longer have multi-billions of dollars that you have to get into the companies, and you don’t have a board telling you to buy News Corp at the very peak, so what does that do to your investing? How do you invest now?

Peter Simpson-Morgan: The first starting point, again, this is going to sound bad, but the first starting point is…I should say this as well, Toby, and I mean it sincerely, when we started with Perpetual, we had no process, we had a portfolio of stocks…we didn’t know what our performance was until 3 days after the end of the month.

Peter Simpson-Morgan: Our first starting point was not to lose money…it was 3 years at Perpetual before even knew what a benchmark was. And I wish we never done it, but…never been, you know-

Tobias Carlisle: Never found the benchmark?

Peter Simpson-Morgan: Well, never found it. Being a benchmark, unaware. A benchmark unaware today. Once you go into the benchmarks sort of philosophy, and they all want to do it all the researchers and consultants want you to benchmark you against something and it’s like this passive thing that’s playing around the world today.

Peter Simpson-Morgan: And I’m not just saying this because I’m active and I’m a stock picker. I can see it ending in disaster somewhere. I mean, we take the News Corp example, could you imagine if the stock in the U.S. copped a 20 per cent of the benchmark over there, or the entrepreneurs became 25 per cent of the global market around the world, and it’s going to happen, and it may well happen again here in Australia.

Peter Simpson-Morgan: I mean, once you start getting benchmarks, you’ve got find things like tracking, which I, to this day, still don’t know how you calculate. Sharpe ratios, well whatever they are. It’s not true stock picking. If I take a step further, when we were over at 452, we were getting performance figures basically on a [inaudible 00:46:54] basis, and it’s the pressure associated with just watching that performance is just so stupid and so ridiculous. It’s basically what fund managements become.

Peter Simpson-Morgan: So, I’m not…I’m investing money where I should. And as I said, given that this is my money and it should be the same when you’re managing other people’s money, my first port of call is I don’t want to lose it. But the trouble in the funds management industry, your benchmarked to a benchmark, so…it doesn’t mean your first port of call is not to lose money, your first port of call is outperform the benchmark, which means you could lose money if markets go down, but you can be rewarded because you’re down 7 per cent, and others are down 15 per cent. And the client is actually losing money, and not happy. I think it’s just…it’s become so much tied to that investors are no longer…fund managers are no longer investing perhaps they should or want.

Tobias Carlisle: It does. Do you still follow a Peter Lynch style? Are you still-

Peter Simpson-Morgan: Yeah, in the context of an Australian market. I mean, if you look at Lynch’s style, you had all those five categories, and obviously, Australia has got a lot of cyclicals in it. As we talked about, the banks and the mining stocks. I mean, the banks are interesting, but the [inaudible 00:48:25] they are cyclical. Obviously super [inaudible 00:48:28], they’ve had period where interest rates have come down, there’s been a housing boom in Australia…because accounting policies, we’re sitting in a situation where the bank bad debt charge has gone through the profit loss account, are almost zero.

Peter Simpson-Morgan: And on the other side of that, is that because of the taxation system here, with regards to the attempted eliminate taxation of profits, the distribution dividend by Australian companies is very high. So, we’re in a position where the yield of the dividend distributions coming out of the banks at a time when bank bad debt charges are very, very, very low, are very high, and in that environment we just had election pulled over, over dividends basically, which is dangerous in itself. There will come a point where something has to get rid of bad debts, the bad debts have to go, go up, and dividends have to come down.

Tobias Carlisle: You think the payout ratios are too high?

Peter Simpson-Morgan: They are too high on a medium to long-term basis. And someone has got to do something about it because it’s sucking…and you saw it yesterday, in terms with after the election, the rally in the market, the high yielding stocks all rallied quite hard. Again, it’s going to attract perhaps investors into a company, based upon a dividend that may not maintainable. We all know that earnings pay dividends, or free cashflow pays dividends over the long-term.

Tobias Carlisle: I took a look at the Australian banks a decade ago, taking what had had happened in the recession in the early 1990s, and just projecting that forward to…that was about 2009, and just seeing what that did to the big four banks in Australia.

Tobias Carlisle: And it almost wiped up all of their equity. If you assume similar sort of loan losses.

Peter Simpson-Morgan: If you go back to 91 and 92, the thing that caught the banks out is that they were reckless in lending to the entrepreneurs. It wasn’t a housing bust that caught them out. Even though interest rates were very high. And we’ve never really had a house…and I’m not saying we’re going to have one, but we’ve never had a housing bust here in Australia.

Peter Simpson-Morgan: They way in terms of capital, that the housing in Australia is actually lower than it is that very other sort of lending, so the same part playing into it as well. And as I said, if you just look at Westpac, and again, I’m not saying we’re going to have a collapse, but we’re at a point where they are at a cyclical highpoint. And it can go on for a while. In the last half, Westpac’s charge for bank bad debts was 9 basis points.

Peter Simpson-Morgan: And you’re talking about almost $800 billion dollars worth of loans. And putting that into context, banks are happily leveraged. Doesn’t matter if they’re Australian banks or global banks, or whatever. The liabilities are 13 times what the tangible backing is for banks, put that into context in terms of leverage, it doesn’t take much, if things do go bad, to wipe that capital out.

Peter Simpson-Morgan: I think the other thing that gets lost, with regards to capital, is that capital is set at 10 per cent. If it gets wiped out, you’ve got to rebuild it. And you’ve got to rebuild in the time, if that does play out, at a time when confidence is suppressed, and maybe that’s what happened with regards to Westpac and ANZ in early 91, 92. And they were very lucky to a large extent, but someone like Kerry Packer came in effectively underwrote the Westpac [inaudible 00:52:23].

Tobias Carlisle: So, you don’t look outside the Australian market for any investment opportunities?

Peter Simpson-Morgan: I do. I try to learn about it. I do, I do a little bit. But not greatly.

Peter Simpson-Morgan: I’ve always believed I knew the Australian market. I knew the Australian companies, and I was restricted to that, obviously, running money. I’m trying to learn more and more. Not so much learn, but get a feel for overseas markets more and more.

Tobias Carlisle: Anything interesting that you’ve bought recently or that you’re looking at that you’re prepared to share?

Peter Simpson-Morgan: This is again, it’s only…it’s a little bit thematic. I mean, trying to go back to Peter Lynch’s…I’m actually a pessimist, Toby. I know that’s stupid thing to say, but I’m not eternal optimist, so I’m always pretty cautious.

Peter Simpson-Morgan: I think one of the interesting things in the market, at the moment in the Australian market, is we went through a period say 2 years ago, where a lot of listed investment companies came to the marketplace and listed. And like a lot of things, when there’s a lot of them listed at the same time, opportunities get thrown 2 or 3 years later.

Peter Simpson-Morgan: I’m not articulating it properly, but there was a number of listed investment companies there that are trading at…particularly global ones that are trading at a 15 per cent discounts, the hard underlying portfolios, and that’s why the areas in the last couple of weeks that I’ve sort of been [inaudible 00:54:11] some money. I know that sounds very basic, but…yeah, at the moment, I am actually quite cautious on markets, given that Wall Street and the like, trade more to one side, are at pretty high levels, valuations are pretty high. You’ve got a lot of unicorns coming to the market that don’t make a lot of money, and probably won’t. So, it feels like it’s very left plate cycle.

Peter Simpson-Morgan: And we’re in an environment where interest rates around the world, in a lot of places, have never been lower. We’ve got negative interest rates of…that are accounting for a lot of global capital allocation. And on the other side of that, globally is very, very high.

Peter Simpson-Morgan: In a funny sort of way, Australia is…despite us geared towards banking, and to a less extent, towards mining, I don’t think is as badly placed as some of the places around the world, in terms of [inaudible 00:55:22], and in terms of debt. [inaudible 00:55:26]

Tobias Carlisle: The Australian markets only just got back…or just over it’s 2007 peak, do you have any thoughts on the valuations market?

Peter Simpson-Morgan: There’s another dynamic that we touched on before the one big thing, the one big differential between the Australian market and the U.S. market, is that dividends is a percentage of profits. They pay us in Australia a lot higher. So, and the dynamic of the Australian market, not only geared towards banking and mining, but there are a lot of listed companies that are operating in all [inaudible 00:56:06], slash duopoly positions, as Peter Lynch would say, the maturing companies or [inaudible 00:56:15], but they’re paying a lot of their profits in dividends.

Peter Simpson-Morgan: So, the accumulation effect on the market, in Australia, compared to the U.S. is a lot greater. Whereas the capital growth in the U.S. market is a lot greater. Now, I think that we’re in at a very important inflection point in Australia, in the sense of…If Australia was to have a future and not be based around banking and mining, companies have to retain things and start to grow, and it has to be marketplace for entrepreneurial, or take for example, technology companies in Australia…it explains waste in the context of, as I’ve said, there [inaudible 00:57:00] at the moment surrounding $2.5 trillion dollars. Expect to grow, perhaps by the end of this decade to $4 or $5 trillion. And there’s a big pool of money there. It’s not so much getting wasted. The allocation is still to Australian companies from that money, being between 25 and 30 per cent.

Peter Simpson-Morgan: Unless things change, that can’t be sustainable. It would be a shame to waste that opportunity. And [inaudible 00:57:28] domestically with regards to-

Tobias Carlisle: What should they do with it?

Peter Simpson-Morgan: I don’t think you never direct or invest in where you want it to go. You have to put the framework in place that…say for example a technology hub, or whatever, can flourish, and entrepreneurs…I’ve always had my doubts whether an Airbnb or an Uber could ever have got off the ground here in Australia. I think the Atlassian guys have proven that in the sense that they had to go to the Nasdaq to list.

Peter Simpson-Morgan: Australia is a very hard place to get companies up and going. It’s wages are very high in terms of competition, but there’s no reason that it can’t tap technology, whether it’s extending that AOI, or extending that to whatever. I think Australians are actually quite smart and entrepreneurial, so maybe give them the encouragement to do that. And as I’ve said, in the background, there’s this big pool of money that is there to be perhaps accessed. Particularly while there’s still this crazy allocation at 25 to 30 per cent going to Australian equity. Which is [inaudible 00:58:50].

Tobias Carlisle: Well, Peter, thanks very much. We’re coming up to the end of the time. If folks want to follow you, you’re on twitter. What’s your twitter handle? Just to remind me again.

Peter Simpson-Morgan: Sure, it’s PeterMorgan@psimpsonmorgan.com

Peter Simpson-Morgan: And look, I’ve got to stress, the only reason I’m doing that is I’m trying to learn about technology, Toby. So…I do think there’s a lot of good stuff on…there’s obviously a lot of bad stuff on twitter as well. But there’s a lot of good information there [inaudible 00:59:23]. I’m just trying to learn from it.

Tobias Carlisle: Well, hopefully-

Peter Simpson-Morgan: One day I may well disappear from it. Who knows?

Peter Simpson-Morgan: Toby, this is a bit of a learning experience as well.

Tobias Carlisle: We’ll pick you up some more followers. Peter Simpson Morgan.

Peter Simpson-Morgan: I’m not here for that reason, as I said.

Tobias Carlisle: Peter Simpson Morgan, thank you very much.

Peter Simpson-Morgan: All right Toby. All the best to everyone.

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