Welcome to the Fearing Greed Business Interview. I'm Sean Almer. Is the ASEX in trouble. James Hardy is set to merge with US giant AAAC A z e K, in a move that will see the new company's primary listing on Wall Street a secondary listing here on the AX. It was a similar story when Australian gold miner new Crest was brought out by Newmont last year. The new company is still listed here, but as a secondary listing. More and more investors are buying US shares think Magnificent seven and with a couple of exceptions, we're unlikely to see any major new listings here on the AX anytime soon. Think can for Air Wallix, they're likely to list overseas, So what's that mean for the AX. As always, this podcast contains general information only and you should seek professional advice before making investment decisions. We speak regularly to Roger Montgomery, founder and Chief investment officer at Montgomery Investment Management. Roger, Welcome back to Fear and Greed.

Welcome to the Fearing Greed Business Interview. I'm Sean Almer. Is the ASEX in trouble. James Hardy is set to merge with US giant AAAC A z e K, in a move that will see the new company's primary listing on Wall Street a secondary listing here on the AX. It was a similar story when Australian gold miner new Crest was brought out by Newmont last year. The new company is still listed here, but as a secondary listing. More and more investors are buying US shares think Magnificent seven and with a couple of exceptions, we're unlikely to see any major new listings here on the AX anytime soon. Think can for Air Wallix, they're likely to list overseas, So what's that mean for the AX. As always, this podcast contains general information only and you should seek professional advice before making investment decisions. We speak regularly to Roger Montgomery, founder and Chief investment officer at Montgomery Investment Management. Roger, Welcome back to Fear and Greed.

Always good to be with you, Shaw.

Always good to be with you, Shaw.

Just up when these companies are being taken over. In fact, just go through the whole building materials group ad bre CSR borrel this one yesterday James Hardy, James Hardy, what's it mean for the AX should be the AX be worried?

Just up when these companies are being taken over. In fact, just go through the whole building materials group ad bre CSR borrel this one yesterday James Hardy, James Hardy, what's it mean for the AX should be the AX be worried?

Well, you said in your introduction they're in trouble, and I think there's let me say this, I have some sympathy for that view. There's certainly a shifting landscape. And in answering the question, I guess you have to sort of think of a framework to come up with all of the reasons first why it's happening, and maybe some suggestions about what could be done to fix the problem. And the way to think about it maybe is in terms of supply and demand. So if we think from the supply side, there aren't as many companies listing on the AX. Now you've highlighted one reason. One reason is that in the US there is an unparalleled pool of capital that just wants to invest in tech giants and innovation driven companies. For a very long time, private equity and public equity markets have been more willing than Australian investors, perhaps to support profitless companies and to value those in a way that appears appropriate to the founders of those businesses. So that's true and that's one reason why we're not seeing as many IPOs in the Australian market. Another reason I think is that the listing process has convoluted in Australia, so when a company prepares its IPO documents, it has to lodge those with ASEK as it takes some time to approve those and in fact quite a number of weeks past. Now, if you've nominated the price that you're going to list at, but it could be six weeks before you list or issue that prospectives document, then the markets could change. It's not a short enough time for the pricing to respond to market conditions. So that's a hurdle for listing in Australia and that's something that many others in investment banking, and particularly the people at Baron Joey last year suggested needed to be changed. And then another issue is that for many business founders there's a huge onus of responsibility when you're a listed company. You've got continuous disclosure compliance requirements and all of these ongoing regulatory requirements that you've got to meet as a listed company, which used to be attractive when private equity wasn't willing to pay a high price for your business. But nowadays the private equity markets, the private equity pool of capital is very very deep. Lots of people have put money into private equity because it doesn't have that public market volatility exposure to it, and consequently private equity have very deep pockets, so they've been able to pay higher prices for business founders to exit or for growth capital, for example. And that has meant that the outcomes that founders might have looked for exiting their business and selling it on the IPO market or the listed market isn't the only avenue to pursue. You've now got you might get just the same price without the regulatory burdens by selling to private equity, And so now private equity competes with the public market for businesses.

Well, you said in your introduction they're in trouble, and I think there's let me say this, I have some sympathy for that view. There's certainly a shifting landscape. And in answering the question, I guess you have to sort of think of a framework to come up with all of the reasons first why it's happening, and maybe some suggestions about what could be done to fix the problem. And the way to think about it maybe is in terms of supply and demand. So if we think from the supply side, there aren't as many companies listing on the AX. Now you've highlighted one reason. One reason is that in the US there is an unparalleled pool of capital that just wants to invest in tech giants and innovation driven companies. For a very long time, private equity and public equity markets have been more willing than Australian investors, perhaps to support profitless companies and to value those in a way that appears appropriate to the founders of those businesses. So that's true and that's one reason why we're not seeing as many IPOs in the Australian market. Another reason I think is that the listing process has convoluted in Australia, so when a company prepares its IPO documents, it has to lodge those with ASEK as it takes some time to approve those and in fact quite a number of weeks past. Now, if you've nominated the price that you're going to list at, but it could be six weeks before you list or issue that prospectives document, then the markets could change. It's not a short enough time for the pricing to respond to market conditions. So that's a hurdle for listing in Australia and that's something that many others in investment banking, and particularly the people at Baron Joey last year suggested needed to be changed. And then another issue is that for many business founders there's a huge onus of responsibility when you're a listed company. You've got continuous disclosure compliance requirements and all of these ongoing regulatory requirements that you've got to meet as a listed company, which used to be attractive when private equity wasn't willing to pay a high price for your business. But nowadays the private equity markets, the private equity pool of capital is very very deep. Lots of people have put money into private equity because it doesn't have that public market volatility exposure to it, and consequently private equity have very deep pockets, so they've been able to pay higher prices for business founders to exit or for growth capital, for example. And that has meant that the outcomes that founders might have looked for exiting their business and selling it on the IPO market or the listed market isn't the only avenue to pursue. You've now got you might get just the same price without the regulatory burdens by selling to private equity, And so now private equity competes with the public market for businesses.

How As superannuation funds feed into this, we know that when I put my money into my super fund and I nominate X amount chairs and I say local chairs, international chairs, it's going to be difficult sometimes to actually find if it keeps going this way, Is it going to be difficult to find fairly valued companies on the AX when you've got so much money going to super.

How As superannuation funds feed into this, we know that when I put my money into my super fund and I nominate X amount chairs and I say local chairs, international chairs, it's going to be difficult sometimes to actually find if it keeps going this way, Is it going to be difficult to find fairly valued companies on the AX when you've got so much money going to super.

Yeah, well you've got a lot of money going in. That's the weight of money argument, and you know, it's one I've heard many many times. You do have a lot of money going to super every week, every day, and that now has a shrinking pool of companies on the ASX, but that money can invest in, and so you know, from that perspective, you would think that that means mispricing is going to occur, you know, and some people would argue that markets or prices of stocks will always be elevated as a consequence of that weight of money in a concentrated a shrinking and more concentrated pool of companies. But the reality is markets correct, Markets do have crashes, and so you know, if it was the case that superannuation was always going to keep stocks elevated, then you wouldn't ever have crashes. But we know crashes do happen. In fact, the market's full and ten percent or so in February, so you know, so that's probably not always going to be the case that mispricing is going to be on the expensive side, because we do know markets crash.

Yeah, well you've got a lot of money going in. That's the weight of money argument, and you know, it's one I've heard many many times. You do have a lot of money going to super every week, every day, and that now has a shrinking pool of companies on the ASX, but that money can invest in, and so you know, from that perspective, you would think that that means mispricing is going to occur, you know, and some people would argue that markets or prices of stocks will always be elevated as a consequence of that weight of money in a concentrated a shrinking and more concentrated pool of companies. But the reality is markets correct, Markets do have crashes, and so you know, if it was the case that superannuation was always going to keep stocks elevated, then you wouldn't ever have crashes. But we know crashes do happen. In fact, the market's full and ten percent or so in February, so you know, so that's probably not always going to be the case that mispricing is going to be on the expensive side, because we do know markets crash.

Stay with me and Roger, we'll be back in a minute. I'm speaking to Roger Montgomery from Montgomery Investment management. So let's look at how investors should play this, and as an investor broadly in the local market, but in equities more generally, much easier to buy international chairs now than it ever has been. How should investors play these trends?

Stay with me and Roger, we'll be back in a minute. I'm speaking to Roger Montgomery from Montgomery Investment management. So let's look at how investors should play this, and as an investor broadly in the local market, but in equities more generally, much easier to buy international chairs now than it ever has been. How should investors play these trends?

Well, it's interesting, you know, I wrote a actually wrote this morning, not knowing that we were going to chat. I wrote this morning a blog post comparing the ASEX two hundred to the S and P five hundred over five years, ten years, and fifteen years. And not only did I include the dividends being reinvested in the ASEX two hundred, but I also gave one and a half percent to two percent for the franking credits, assuming that an investor was a retiree in pension phase and got the benefit of reinvesting those franking credits as well, And so because they're in a zero tax environment. And what I found was that over the short term, there is and if you're an income investor and you like that stable income from the banks and to a lesser extent, the resource companies, there's some merit investing in the ASEX two hundred. But over all of those timeframes that I mentioned, the S and P five hundred when you take into account with holdings tax and when you take into account the currency, the Aussie dollar depreciation, so you know that's the becaviate there. The S and P five hundred for an Australian investor beat the ASEX two hundred, which is one of the reasons why more investors are looking to small caps for their growth. And by the way, I think the reason for that, Sean is simple and relatively easy to understand. And if you look at the ASEX two hundred, the bulk of the profits of the ASEX two hundred companies is paid out as a dividend, it's about eighty percent or you know thereabouts. And what does that mean, Well, that means there's only twenty percent of profit it's left to be reinvested for compounding. Now, sure shareholders are going to say, well, I'd rather have the money. I don't trust CEOs and they always overpay for acquisitions and do stupid things with the money, so I'd rather have it. But maybe what's happening is in the US it's kind of reversed. You know, you've got only about a third to forty percent of the earnings paid out as a dividend and the rest are retained and compounded for growth. And you know, the best example I can give you of that is Berkshire Hathaway where you know, back in nineteen I think it was nineteen sixty five or thereabouts, Warren Buffett took over Berkshire hath the way, the share price at the time was about eighteen dollars. Believe it or not, he did pay one divid end and then he said, I quote thought better of it and didn't pay a divit end again. Now, if you'd bought a thousand dollars worth of shares at eighteen dollars back then, and that was a lot of money in nineteen sixty five today it's worth about about fifty million US dollars, and so you know, you would have done incredibly well with no dividends being paid. And people would say, well, what do I do for income? And my response would be, will sell a share to seven hundred and fifty thousand US dollars and if you want to have a good year, sell too. So that retention of profit and the cave it is the reinvestment of that profit at a high rate of return that leads to compounding growth. At a higher rate than if you pay most of the earnings out as a dividend and then you go and spend that money. And so that's a big difference. And that's one of the reasons why I think more investors are focusing on small companies because many of those big caps in Australia are mature businesses and the small caps are able to grow.

Well, it's interesting, you know, I wrote a actually wrote this morning, not knowing that we were going to chat. I wrote this morning a blog post comparing the ASEX two hundred to the S and P five hundred over five years, ten years, and fifteen years. And not only did I include the dividends being reinvested in the ASEX two hundred, but I also gave one and a half percent to two percent for the franking credits, assuming that an investor was a retiree in pension phase and got the benefit of reinvesting those franking credits as well, And so because they're in a zero tax environment. And what I found was that over the short term, there is and if you're an income investor and you like that stable income from the banks and to a lesser extent, the resource companies, there's some merit investing in the ASEX two hundred. But over all of those timeframes that I mentioned, the S and P five hundred when you take into account with holdings tax and when you take into account the currency, the Aussie dollar depreciation, so you know that's the becaviate there. The S and P five hundred for an Australian investor beat the ASEX two hundred, which is one of the reasons why more investors are looking to small caps for their growth. And by the way, I think the reason for that, Sean is simple and relatively easy to understand. And if you look at the ASEX two hundred, the bulk of the profits of the ASEX two hundred companies is paid out as a dividend, it's about eighty percent or you know thereabouts. And what does that mean, Well, that means there's only twenty percent of profit it's left to be reinvested for compounding. Now, sure shareholders are going to say, well, I'd rather have the money. I don't trust CEOs and they always overpay for acquisitions and do stupid things with the money, so I'd rather have it. But maybe what's happening is in the US it's kind of reversed. You know, you've got only about a third to forty percent of the earnings paid out as a dividend and the rest are retained and compounded for growth. And you know, the best example I can give you of that is Berkshire Hathaway where you know, back in nineteen I think it was nineteen sixty five or thereabouts, Warren Buffett took over Berkshire hath the way, the share price at the time was about eighteen dollars. Believe it or not, he did pay one divid end and then he said, I quote thought better of it and didn't pay a divit end again. Now, if you'd bought a thousand dollars worth of shares at eighteen dollars back then, and that was a lot of money in nineteen sixty five today it's worth about about fifty million US dollars, and so you know, you would have done incredibly well with no dividends being paid. And people would say, well, what do I do for income? And my response would be, will sell a share to seven hundred and fifty thousand US dollars and if you want to have a good year, sell too. So that retention of profit and the cave it is the reinvestment of that profit at a high rate of return that leads to compounding growth. At a higher rate than if you pay most of the earnings out as a dividend and then you go and spend that money. And so that's a big difference. And that's one of the reasons why I think more investors are focusing on small companies because many of those big caps in Australia are mature businesses and the small caps are able to grow.

So that blog post, where is it just for listeners to go and chase it up.

So that blog post, where is it just for listeners to go and chase it up.

It'll be up in the next week or so and it'll be at Roger Montgomery dot com.

It'll be up in the next week or so and it'll be at Roger Montgomery dot com.

That's worth it because I've often wondered, when you take in depreciation with holding tax frankin credits, how we perform? And I get that in the short term five years unless the Magnificent seven probably gives us any chance. But in the longer term, the fact that the AX has underperformed is quite incredible.

That's worth it because I've often wondered, when you take in depreciation with holding tax frankin credits, how we perform? And I get that in the short term five years unless the Magnificent seven probably gives us any chance. But in the longer term, the fact that the AX has underperformed is quite incredible.

I think, yeah, over fifteen years, that's the conclusion I've reached.

I think, yeah, over fifteen years, that's the conclusion I've reached.

Well, Roger, thank you for talking to Fear and Greed.

Well, Roger, thank you for talking to Fear and Greed.

Always a pleasure, Seawan, talk to you again, sir.

Always a pleasure, Seawan, talk to you again, sir.

That was Roger Montgomery, founder and chief investment officer at Montgomery Investment Management. This is the Fear and Greed Business Interview. Remember this is general information only, and you should seek professional advice before making investment decisions. Join us every morning for the full episode of Fear and Greed, daily business news for people who make their own decisions. I'm Sean Elmer. Enjoy your day.

That was Roger Montgomery, founder and chief investment officer at Montgomery Investment Management. This is the Fear and Greed Business Interview. Remember this is general information only, and you should seek professional advice before making investment decisions. Join us every morning for the full episode of Fear and Greed, daily business news for people who make their own decisions. I'm Sean Elmer. Enjoy your day.