Where to invest in 2025?

And now, I'm thrilled to introduce a familiar face for many of you, our guest speaker, Roger Montgomery.

Roger is the founder and chairman of Montgomery Investment Management, which he established in 2010 and has over 30 years of experience in funds management.

He's also the author of the bestselling investment book, Valuable.

You've likely seen him on TV, radio, or in the press.

Today, Roger will be sharing his insights on where to invest in 2025.

After his presentation, I'll have a few questions for him.

Please join me in welcoming Roger.

Well, thank you, Angelina.

Great to be with everyone today.

I will be spending quite a bit of time looking at the markets and investor sentiment and things that might

ultimately influence your returns over the next 12 to 18 months.

Bear in mind that as we travel through this particular presentation, I don't know your investor, your particular circumstances.

I don't know your financial needs.

I don't know your financial situation.

And so everything that I'm sharing with you today is general in nature and not specific advice.

You'll also note that I'll be mentioning individual stocks today.

And it's really important to understand that in many cases, we own those stocks either in our funds or personally.

And so if you rush out and buy those stocks, you're really helping us.

So it's important that you seek and take personal professional advice.

Okay.

What are some of the observations that we can make about the current circumstances, current situation, the current temperature of the market at the moment?

Well, there are lots of concerns, but can I just make this one point?

There are always concerns.

In fact, a bull market is known for climbing a wall of worry.

What is everyone worried about at the moment?

Well, there's some fretting in Australia about when rates will be cut, not so overseas.

Canada, the UK, New Zealand have already cut rates.

So have some countries in Europe, but Australia really is the outlier.

And the US is going to be cutting in September, or that's certainly been the message from the Federal Reserve Bank of the United States.

But the US, sorry, the Australia is the outlier.

Australia may not be cutting rates until next year.

And that's really having an effect on the cost of living in Australia.

So we've just come through reporting season recently.

And one of the things that we found was even though some of the very, very successful retailers produced quite resilient results early in the reporting season, as reporting season wore on,

what we discovered is that cost of living issue has really become a crisis for many people because many of the latter companies that reported during reporting season, they reported tough times, reduced rates of growth, if any growth at all, and reduced margins because of promotional activity that they had to engage in, in order to promote sales.

There's also lingering concerns about a recession.

They've been in place by the way, since COVID.

And I've regularly been writing in the Australian and also on our blog and telling anyone who would listen that we're unlikely to have a recession here in Australia.

The recession risk, I think is dependent entirely on unemployment.

If unemployment rises and rises meaningfully, not just marginally,

then we could tip into a recession.

But at the moment, employment remains robust.

And so while that's the case, I don't think we'll end up with a recession.

In fact, I'm not predicting a recession for the next 12 or 18 months, for what that's worth.

There's some concerns about what is in store geopolitically.

If Trump wins another term, whether or not you want him to win, that's by the by.

Markets are nervous about what might happen geopolitically.

if he wins.

And in particular, one of the geopolitical concerns that everyone seems to be worried about is China and Taiwan.

Now, a full scale military invasion of Taiwan seems to be, according to military leaders, a low probability event.

What's more likely is an annexing of the island.

That would be Chinese ships surrounding the island.

and then flying their military aircraft over the top and completely annexing the island.

That is a possibility for 2026 or 2027.

And we've already seen US bombers being delivered to Australia and now residing here as a, I guess, a signal to China that we're not going to be taking any annexing of Taiwan lightly.

Then there's the whole AI issue.

What we're seeing there is quite interesting.

Like all technology, all new technology that transforms the world, investors get excited.

Investors were excited about commercial air travel.

Investors were excited about the advent of the motor vehicle.

Investors were excited about television and radio when they were first invented.

We're excited about the internet when it was first released to the masses.

But just because new technology is great for consumers and great for the world, and it transforms the direction of human history, it's not always good for investors.

And at the moment, what we're seeing is AI is helping us do our job.

I use AI quite a lot, so do lawyer friends of mine, so do people in construction and in accounting

And so it is helping us in our jobs, but we're not paying much for it.

It's not transforming the revenue streams of the big internet companies like Google, the big technology companies like Google, Microsoft and Apple.

It's not a transformative revenue opportunity just yet.

So that's one issue.

Great for consumers like all previous technology, but not necessarily great for investors.

So then the implications of the current very, very high share prices for those technology stocks is something that investors are concerned about.

And there's also, of course, the risk that AI could destroy humanity.

And that might seem like a far fetched or far flung proposal.

But there are some very, very smart people who are very, very concerned.

and are pushing for an off switch for AI if it does start making its own decisions.

Despite all of those concerns, the market has been going up.

In fact, the S&P 500 is close to all time highs.

And what's interesting is there have been lots of calls that the market or the lots of predictions that the market is overvalued and bound to crash.

But one of the things that we know is that volatility tends to rise and rise materially around turning points in markets.

And if we look at the most volatile 25 or 50 days, the 25 worst days and the 25 best days going all the way back to 1988, what we discover is that

Right now, we're not looking at historically significant levels of volatility.

And so my view, which you'll see in a moment, remains optimistic.

That view is supported at least in the short term by the fact that the recent volatility that we've seen, there has been a pickup in volatility, hasn't been as meaningful as some of the headlines might have you believe.

This chart here, by the way, just showing the 25 best days and the 25 worst days in terms of volatility, in terms of range, daily range, you can see they tend to cluster and they tend to occur around turning points.

We haven't seen the top 25 worst or best days in terms of volatility in recent times.

Having said that though, volatility, and this is zooming in to the more recent period of the S&P 500, and there has been, as you can see over on the right hand side in that lower part of the chart,

You can see that there's been a jump in volatility, a small jump, but it hasn't even reached the level of October 22 or April 20 when we had COVID.

So those volatility levels are increasing slightly, but they're not super meaningful, suggesting to me that on the surface, there's not enough uncertainty, there's not enough conviction around

the valuations of the stock market to prompt very, very substantial swings in the market that might signal that the uncertainty is great and therefore the market is going to sell off.

So the current volatility that we're seeing may just be that the investors need a breather before they, you know, they need to generate more income before they buy more shares.

It could be that the market is predicting

a slight slowdown in the economy rather than a recession.

And it could be that the market just needs to fall sometimes and it doesn't actually mean anything at all.

The markets don't go up in a straight line historically.

And so it could be that there was just a little bit of nervousness around that prompted a sell off in markets recently, but I still remain optimistic.

And the reason for that optimism, I'll talk about in just a moment,

Some things to remember in terms of volatility so that you don't become too excited about the bearish headlines is that

If we include 2024 so far, the US market has been up in eight of the past 10 years.

So it pays to be an optimist rather than a pessimist.

And if we take out 2020 because of COVID, then in seven of those eight positive years, the market has declined by 1% or more in a day.

23 times on average.

Now that's about 10% of the 252 trading days each year, or one out of every 10 days is going to be a meaningful or a notable negative day.

And of those 23 days in the same years of four days,

were greater than 2% negative.

So what you can see here is that negative days and negative days that might make you sit up and take notice, so more than 1% and perhaps even more than 2% are reasonably recurrent.

They're frequent, they happen, get used to them.

It doesn't necessarily mean anything because despite the fact that we've had all of those quite high volatile negative days,

The market has been up in the last eight times out of the last 10 years.

So just some facts to give you comfort.

Now, why am I optimistic?

Well, it's because of this chart that was presented by Gavical Research in 1978.

And the lower right hand, I guess, segment is what I want to talk or quadrant is what I want to talk to you about.

We'll come to that in just a moment.

The horizontal line represents economic activity with everything to the right of the vertical line being positive economic activity.

So positive GDP for a country.

And the vertical line is the pace of inflation with the vertical line above the horizontal line, meaning accelerating inflation.

and below the line disinflation.

So in other words, slowing rates of inflation.

And if you get disinflation, if we have a combination or a concurrence of disinflation and positive economic growth, then what we've found since the 1970s, and it's without exception, whenever you've had disinflation and positive economic growth, which Gavicle described as a disinflationary boom,

You get positive performance for innovative companies with pricing power.

Now, where are those innovative companies?

Well, at the moment, they're in technology.

Now, we've had a disinflationary boom since Covid.

We've had or after inflation peaked and it started to come off post Covid.

We've had disinflation.

That's been a constant.

And so remember, inflation was at nine percent or over nine percent.

It's pulled back now quite considerably.

We'll talk about that in more detail in just a moment.

So we've had disinflation and despite all of the forecasts of a recession, we haven't had one.

We've had positive economic growth.

So we've had what Gavical describes a disinflationary boom for at least the last two years since 2022.

And what's done well since 2022 or the end of 2022, it's been innovative companies with pricing power, names like that are in the Magnificent Seven.

So Apple, Google, Microsoft, those sorts of companies have done incredibly, Amazon's another one, done incredibly well because one, they've got pricing power.

two, they're innovative.

And perhaps because there's been a fear of recession, perhaps because of that, investors have concentrated their investing in the biggest names because they're perceived to be safer.

And so what's happened is Gabbacle has been right again.

But the investment or the performance of investment in and therefore the performance of

those innovative companies with pricing power has really been concentrated amongst the magnificent seven.

And so this remains, by the way, disinflation remains and economic growth is positive.

And so I still believe that innovative companies with pricing power are going to do well, but maybe the leadership changes, and we'll talk about that in just a moment, what I mean by that.

So here's a quick table just showing you whether or not we're in a disinflationary boom in Australia, the US, the UK, Canada and Europe.

And what you can see there is that we are.

We've got positive GDP for Australia.

These are annual rates, by the way, and the US, the UK, Canada and Europe all showing positive annual GDP.

And you can see compared to the inflation, when you compare inflation this year to inflation the previous year, and I've taken the most recent quarterly or monthly results annualised and then compared them to the previous corresponding period, you can see that we've still got disinflation in place.

Inflation is declining in all of those countries.

So it is the case that currently we remain in a gavical research-defined disinflationary boom in Australia, the US, the UK, Canada, and Europe.

In all the markets that probably matter for most investors, we're looking at a setup or a baseline that is supportive for innovative companies with pricing power.

And if we look at the performance of the companies that have done well and the companies that have done poorly this year so far, you can see that companies that don't have pricing power, for example, metals and mining companies, they've not done well.

Over on the right, the energy and utilities companies, energy is a price taker, doesn't have pricing power.

The oil price has been in decline, which is good for disinflation, but not great for their revenues, not great for energy company revenues and profits.

So you can see that those companies have been in free fall this year.

Utilities don't have pricing power either, or they've got some pricing power, but they certainly don't control their input costs, which have been going up.

And as a consequence of their margins contracting, they've not done well.

And so we said earlier, Gabacool pointed out that, you know, in an environment of the disinflationary boom, companies that will go back to that slide now just briefly, have a look at it there,

companies with pricing power do well in looking at the lower right quadrant and companies with little pricing power don't do well, they are sold off.

And remember Gavical presented this idea in 1978 and here we are again in 2024 and it's proving true.

So it's a great framework for you guys to keep forever.

Put that quadrant next to your computer where you do your investing and keep it in mind.

for the next 20 or 30 years, and I'm sure it's going to stand you in good stead.

If we look at the companies or the sectors that have done well.

You can see that where we've got financials, the banks have got pricing power, they get to choose the interest rate that you earn on your deposit and the earning interest rate that they charge you on your mortgages.

So banks have done particularly well.

Over on the top right hand side, consumer discretionary stocks have done well, those that have been able to pass on price increases in particular.

But during reporting season, we've seen a little bit of a sell off in that sector because at the tail end of reporting season,

the poorer companies, the weaker performing retailers who weren't able to pass on price increases reported tougher margins, reduced margins, reduced revenue growth and so forth.

And so you've seen the early part of 24 did well and reporting season didn't go so well.

Down on the left hand side, bottom left hand side, technology stocks have done

quite well this year.

Technology stocks again, pricing power.

And gold has done well and that's been an interesting one.

Arguably not gold mining companies don't have pricing power

but the price has gone up.

And so the price of gold has gone up and that in the early part of this year helped gold stocks, but really since about the end of the first quarter, gold stocks haven't followed the gold price higher.

And that's probably because many gold companies are seeing rising production costs and depleting reserves.

Okay, so

That's the background.

But where do we see the opportunities?

Okay, first one, I talked about leadership earlier, and the leadership of innovative companies with pricing power has really been those mega cap technology companies.

But you know what?

It's a growing, there's a growing chorus, and I guess I talked about this at the end of 2022, and you know, it still hasn't happened, but I'm expecting it'll, we'll have a year where this happens.

We expect the leadership to change because innovative companies with pricing power also reside in small cap stocks.

This is the S&P 600 small cap index, and it's the PE ratio or the price to earnings multiple of that index going back

to the turn of the century.

So it's 25 years now.

And what you can see in that quarter century, there's only been four occasions, four or five occasions prior to now, four occasions prior to now, where the PE has been lower than where it is today.

The price earnings multiple or the multiple of earnings people wanna pay for small cap companies.

That means that they're relatively cheap on a historical basis.

They're certainly much cheaper than mega cap technology companies.

At some point, those mega cap technology companies are going to be perceived as relatively expensive and funds will flow out of those stocks and perhaps they might, well, they could flow into small caps.

We've seen some small caps and you'll see this in a moment do really, really well

when they've demonstrated pricing power and innovation and growth in their revenue.

And I'm going to show you some examples of those companies in a moment.

But if we look at the S&P 600 small cap index, the thing to take away from this particular chart is that going back 25 years,

There's only been a few occasions where the market was cheaper than it is today, and more often than not, investors are willing to pay higher price to earnings multiples than they're paying for them today, suggesting that small caps could be very cheap.

And here are some of the companies that we like in the small cap space.

Now, remember, we might own these companies, so please don't rush out and buy them.

And some of them have done very, very well for us and this year.

So let me tell you, let me give you, I guess, a few data points about each of these companies.

Breville is at the vanguard of a really important trend.

Now what we like about Breville or what's pretty exciting about this particular business is it doesn't manufacture and it doesn't own stores.

So it doesn't have any of those costs, none of the capital intensity or labour intensity associated with any of those activities.

It is a brand, it designs products, it has them

manufactured by third parties and then it uses third parties to sell those products, so chains of stores for example.

We in Australia, and you're gonna be quite bored about this, we in Australia know our coffee pretty well.

And Breville coffee machines are very big sellers.

But we know coffee, we make our coffee at home, we know who the best barista is.

You know, I took my, well my team went downstairs for a coffee yesterday into the CBD of Sydney.

And once we got downstairs to Martin Place, we all went three different ways

to go to our favourite baristas.

I didn't.

I don't drink coffee.

I drink hot chocolates, so I don't care who the barista is.

But the point is that in Australia, we know our coffee.

In the US, barista-made coffee is really only just at the start of where we were maybe 20 or 25 years ago.

They still go to Starbucks where, I don't know if you've been to Starbucks and not casting aspersions, but that's not really a coffee.

It's a large, hot milkshake with a bit of coffee in it.

with lots of artificial flavouring and so on.

And that's been an enormous trend in the US.

But barista-made coffee is just taking off.

And what's even further behind that is the idea of making barista-quality coffee at home.

and that's what Breville is selling into now.

Selling coffee machines in the United States just as the coffee trend really starts to take off and people start bringing that barista quality coffee home.

Okay, so that's the Breville story.

Nick Scali, amazing.

Do you know

When you want to buy a sofa in Australia, you walk into a furniture store, you point to the sofa that you sit on and you like, and you say, I'd like one of those, please.

And what happens?

You place a deposit and in 12 weeks time, you get your sofa.

Anthony Scali, Nick Scali's son, brought that concept to Australia.

The idea that just in time inventory system or what we used to call the JIT inventory system.

He invented that in Australia or brought that idea here.

And it's been hugely profitable because it means Nick Scali doesn't need to store sofas.

They don't need big warehouses and inventory management systems and all of that kind of stuff that is very, very costly.

And consequently,

they've been able to generate high double digit returns on equity with little or no debt, which is exactly what you want to generate wealth from a business.

So they've been able to do that.

Now, they've also been able to improve scale by buying plush stores in Australia, so a lower price point furniture store.

And the consequence of that purchase has been the delivering of

very, very high margins or improving margins, lower overall costs across greater revenue because they bought plush and then all of the duplication of back office systems, marketing, head office costs, they remove those costs very quickly.

Now you might say, well, why is that relevant?

How are they going to grow their revenue in the future?

Well, they've just bought

the second or third player furniture sofa distributor in the UK.

That is a massive market, much bigger than the Australian market.

Many analysts believe that they're going to be able to replicate what they did with Nick Scali and Plush over in the UK.

and that sets them up for enormous growth there.

ARB, another overseas expansion story.

This business provides or manufactures and distributes four wheel drive parts and accessories, aftermarket parts and accessories.

They're expanding that business into the United States, which is obviously a 10 times bigger market than in Australia.

But more importantly, they've signed OEM agreements or original equipment manufacturer agreements

with Ford and with Toyota in the United States.

So now if a car buyer or a four wheel drive buyer walks into a Ford dealership in the US and they specify they want a bull bar, they want sidesteps, they want a snorkel, they want a canopy on the back of the ute.

Well, Ford ticks all of those boxes and delivers the car to that customer with those items, those items were manufactured by ARB.

So that is going to be a huge market and a huge opportunity for growth.

And we also think we're going to see the PE expand for this company.

People will be willing to pay a higher multiple of earnings for this company because it will have changed from being a pro-cyclical domestic retailer to a global growth story.

And finally, Macquarie Technology Group.

We think this is a brilliant business that's worth probably more than $100 a share, even though it's trading at about $76 a share at the moment.

And why do we like it?

Because it sits at the junction of cloud computing and AI.

It's also a very, very high quality supplier centres to the Australian government and government departments, including Defence, the Tax Office, the Stock Exchange and so forth.

So there's four companies.

that are all small caps that we think have great prospects ahead of them and may be reasonably priced.

If you're finding it too hard, by the way, to invest in small cap stocks yourself, and by the way, I understand if that's the case, it isn't easy rather

to keep track of all of the small cap companies that exist to know the trends that are going on in the background of each sector or subsector that they're in.

Well, you may want to invest instead in a small cap fund.

And that's one that we run.

We run the Montgomery Small Companies Fund.

It's run by Gary Rollo and Dominic Rose.

And what's important about small caps is highlighted in this slide here, which was put together by Gary and Dom.

And what you can see is when you look at the ASX 100,

over on the left-hand side, you can see that the PE ratio, the two-year PE ratio, so that's looking at the price today compared to the earnings per share in two years' time, is currently at about 16.6 times, but the earnings per share growth over the next two years is only gonna be 3.4%.

Compare that to the small ordinaries, and you can see that the PE ratio is a little bit higher, 17.7 times earnings in two years' time,

17.5% growth, annual growth for the next two years in earnings out of small caps.

So you're getting a lot more growth, five times more growth without paying five times more than you're paying for ASX 100 stocks that are offering a fifth of the growth.

And over on the right hand side, the Montgomery Small Companies Fund or MSCF, and you can see you're not paying any more than the small ordinaries really,

17.9 times earnings for the portfolio of stocks that are in the fund, but you're getting 25.2% earnings growth over the next two years.

So as a consequence of that, if you look down on the very bottom line of the table, you can see over on the right hand side, the PEG ratio, that's the PE to growth ratio.

So that compares the PE in the middle column to the growth in the first column, and you can see the lowest

peg ratio, which is one way some investors talk about value.

And so you can see there that it's got the cheapest ratio, cheapest peg ratio.

And so if ultimately small caps take off, then investors should start to bet or start to buy those companies with the best growth prospects that are relatively cheapest that should benefit

the Montgomery Small Companies Fund.

Okay, so why small caps?

Well, they offer a lot of growth potential.

Remember big caps were once smaller.

They were once small companies.

And so investing in small caps today, particularly the high quality ones that are going to grow, you're getting them before they become big.

Often the share prices are unaffected by major index buying.

So we don't get the manipulation of prices that occurs

on those quarterly rebalancings of the index.

When companies enter the big cap indexes, they're bought up in advance of that.

So often you miss out on buying them cheap.

When they drop out of an index, they can plunge.

If you're buying stocks that aren't swinging in and out of that particular index, then you miss out on that volatility, which could be a good thing for those of you who are looking for less volatility.

There's also exposure to a much wider variety of sectors

than you can get in the large cap space.

It's also the case that many of these stocks have less analysts covering them.

In fact, some small caps that we follow only have one, two or three analysts.

And I've given some examples there.

Adares, Autosports, Data3, Rees and Kodan, they only have three analysts covering those stocks in Australia.

The other point to make about big caps is that they're covered more frequently.

The analysts are looking over their valuations,

They're looking over their outlooks for earnings and revenue and balance sheet robustness.

They're doing that every single week, if not every single day.

So the market is more efficient for large cap stocks than it is for small cap stocks.

The other thing to think about analysis of small cap stocks is that analysts will often cease coverage without notification.

And so the consensus data can be wrong or stale.

and that presents a fantastic opportunity for investors who focus on those companies.

What I mean by investors, I mean sell side, buy side analysts.

So analysts in funds management firms who are covering these stocks, the market might think that the company is going to generate 10% earnings growth this year, but that's a consensus number that is stale because analysts have stopped covering that particular stock

and our analysts might have discovered that the company is going to grow its earnings at 20% or 25%.

So value could still be presented.

The market might not have picked up on that very, very significant change.

Okay, so we've talked about small caps.

I think small caps are a terrific opportunity over the next 12 to 18 months.

I don't know beyond late 25 what's going to happen.

And remember, we do have that ever present geopolitical risk the further we travel through 2025.

But I think for the next 12 months, we're going to be in a place where small caps do relatively well and better than their large cap brethren.

OK, where's the next opportunity?

The next opportunity, I think, is in this boom.

This is the population boom.

If you look over on the far left hand side, we've got the Australian population back in 1955.

Males on the left.

and females on the right.

And what you can see is on the horizontal axis, you can see the size of the population for each age cohort, which is on the Y axis, on the vertical axis.

So you can see age on the left-hand axis and number of people that age on the horizontal axis.

Over on the bottom left-hand side, you can see a little bump at the five-year or six-year age group at about 100,000 for males and a similar number, a little bit less than 100,000 for females in 1955.

They are the baby boomers.

They're literally the babies that boomed just after World War II.

And then if we fast forward another 15 years,

what you can see is those five-year-olds are now in their 20s.

And you can see that those red arrows that I've got there are getting shorter.

So they've moved up and you can see that bulge starting to move up.

And it'd be nice if this was on a video and it was dynamic, but it isn't.

That's using technology I'm not capable of employing at the moment.

And over on the right hand side, fast forward another 30 years, and you can see that massive bulge now that exists in the population.

And it's moving ever forward towards retirement.

And then if we move to last year, you can see that chart on the left hand side, that bulge is now sitting in that 60 to 65 age group.

and behind them is a massive, massive increase in people who are going to be requiring something that they didn't require before they retired, and that is income.

So we've got a massive boom in the requirement

for income.

That boom is now underway.

Now what's interesting is if we look over on the right-hand side, that boom in the requirement for income is happening at precisely the same time banks are pulling back from lending to small and medium-sized businesses.

So the chart on the right hand side looks at financial institutions with more than $2 billion or more than $2 billion of business credit.

So that's the major banks, the smaller banks and some private credit funds of which there are a couple that have more than $2 billion.

In fact, there are private credit fund managers with $20 billion now.

What's happened since the global financial crisis is the big banks have pulled back from lending to small and medium sized businesses.

It's no longer profitable for them or it's less profitable for them and it is more labour intensive for them because of changes to regulation and their capital adequacy requirements.

The amount of capital they need to put up for small and medium business loans is so much now because of the changes to regulation

that it's just not worth their while.

That gap, the gap as a consequence of banks pulling back is about 400 to $600 billion in Australia.

And private credit is now delivering those loans to small and medium businesses that the banks were once lending to.

20 years ago, if you'd asked me to lend to a small or medium sized business, I would have said, you've got rocks in your head.

Why?

because they would have been the businesses that the big banks didn't want to lend to.

The big banks were still lending to those businesses back then.

But today the proposition is very different.

The banks have pulled back.

There are lots of very high quality medium businesses and small businesses, so medium sized corporates and small corporates in Australia.

There's lots of them that are high quality.

with Equifax credit scores of more than 600 which makes them investment grade and yet the banks won't lend to them.

So private credit is now lending to those businesses and you can now generate terrific rates of income, when I say terrific I mean attractive rates of income,

by lending to small and medium sized corporates without the volatility associated with the stock market, but producing in some cases, certainly in the past, producing returns as high as the stock market, but without any of the volatility.

This is the Aura Private Credit Income Fund, which is a fund for wholesale investors and sophisticated investors only.

But what you can see there is it's been running now for over seven years, starting in 2017 in August of that year.

These are the monthly income returns every month going back seven years, including through COVID.

Now, two things stand out.

The first thing that stood out for me when I first saw this table was that there have been no negative months in that period.

Now, of course, historical returns aren't a reliable indicator for future performance, and that's really important to understand.

It's also important to understand that neither the returns nor the distributions are guaranteed.

Even during COVID and with all of the disruption that that caused, this particular fund generated attractive monthly cash returns, paid out cash returns every month and has never so far had a negative month.

Over on the very right hand column, you can see the totals for each year.

And they're attractive rates of return, similar to the stock market's returns or the returns the stock market has generated in that timeframe, but without

a negative month, and we all know the stock markets can deliver negative months.

If we look at the returns another way, you can see the S&P ASX 200 there, labeled on the right hand side, and you can see that jagged and volatile line which represents the stock market index.

The AURA private credit income fund with distributions taken out or withdrawn is the green line

that says private credit fund monthly income withdrawn.

And what you can see there, it's very smooth because there've been no negative months.

The blue line at the top of this particular chart is the private credit, the Aura private credit income fund with the income reinvested.

And you can see again, it's been very smooth because there've been no negative months.

Remember that there are no guarantees.

about that.

There could be negative months in the future.

But given that this fund has operated through COVID, through all of that disruption and it's only lending to high quality borrowers with Equifax scores, credit scores of over 600, then the manager is clearly focusing on trying to preserve

that capital and ensure that there's no negative months, no guarantees, but that's what they're entirely focused on.

And so those of you who are interested in this particular fund, you can see videos on our website where I interview the manager, Brett Craig from Aura, and he's the manager of that particular fund.

Now, there's a black line that sits just under the green line, and that's the private credit funds benchmark.

That benchmark is the RBA official cash rate plus 5%.

So there's no performance fee paid on this particular fund unless Brett and his team beats the cash rate plus an additional 5%.

And that's what that black line represents there.

So I think that they're the two opportunities for the next 12 to 18 months.

And I say 12 to 18 because I am a little bit nervous about 2026.

I'm data driven, I'm data dependent.

And I think by 2025, middle to end of 2025, there'll be a whole raft of new data on which we can base our calls beyond that timeframe.

But in the absence of that data, we can only go that far.

So small caps and private credit are two opportunities that I really think are worth investigating carefully.

And remember, seek and take personal professional advice.

And thanks for your time today.

I'm looking forward to answering your questions.

Well, thank you for your presentation, Roger.

Now, many of us would like to bring that Gavaco's quadrant like you mentioned.

Since we last spoke, private credit has indeed gained the attention you predicted as an asset class.

We've seen increasing media coverage and more investors incorporating it into their portfolio.

So what do you think is next for private credit?

Well, I think it's going to become an asset class in its own right, Angelina.

I wrote about this particular subject in The Australian about a year and a half ago, and I've written about it again since, and it's exactly as I predicted.

Private credit is becoming a much more meaningful part of professionally managed portfolios and advised portfolios because it's delivering those two things that retirees desperately need, and that is attractive income,

along with lower volatility or without the volatility associated with public markets.

So my prediction is that private credit is going to be a much more meaningful part of people's portfolios.

And as that happens, it'll become an asset class in its own right.

That makes sense.

And your prediction that 2024 will be a good year for small caps is coming true.

So what did the recent reporting season tell us?

And what are your thoughts on the outlook for small caps for 2024 and 2025?

Well, I think this is really important.

It's why I mentioned investing in a small cap fund rather than doing it yourself.

It's simply because what we saw in reporting season was it started off really, really strong.

And in fact, when we got to about the middle of August, 40% of companies were beating expectations, which was fantastic.

But what we also know is that in the early part of reporting season, it tends to be the better performing companies that get their act together and report earlier.

And the companies that are having difficulties or challenges in their businesses, they take longer to report and get all their numbers together.

Pardon me.

And so consequently, as reporting season progressed, what we found is that the percentage of companies that were beating expectations was declining.

And the percentage of companies that were missing expectations was increasing, such that by the end of the reporting season, we had about 26% of companies beating expectations and 27% of companies missing expectations, which with the remainder,

about in line with expectations.

And so what we saw is a deterioration of performance as reporting season progressed.

More importantly, one of the things that I think really mattered and was observable at a reporting season was that the companies that are doing well are doing well because they're taking market share.

and the winning market share from the other retailers as an example.

So Nick Scali, winning share from other furniture retailers.

JB Hifi, winning share from Harvey Norman.

And so there's just a couple of examples of businesses that are taking share and that's what generated their performance.

Not because the market was growing, the consumer sector is doing it tough, but the better performing businesses

are taking share from the poorer performing businesses.

And that's what you need to find if you're gonna investigate which businesses to invest in.

Thank you, Roger.

It's great to see you.

You too, Angelina.

Thanks for your time today.