Now is the time to be a contrarian.

Our next presenter is Daryl Wilson, CEO and Portfolio Manager at Affluence Funds Management.

Daryl founded Affluence in 2015 and is co-manager of all investment portfolios.

He has experience across all aspects of funds management, including investment, operations, and capital raising.

His presentation topic today is, now is the time to be a contrarian.

Welcome to the presentation, Daryl.

Thanks, Angelina.

So today I'm going to take you through some reasons we think it's a good time to be contrarian.

I'm going to talk about how we do that in one of our funds, how we're currently positioned and a few examples of current investments in that fund.

Just to give you all out there an idea of how we're handling this.

What I would say is a fairly unique investment environment at the moment.

By way of a very quick introduction at Affluence, we've been going for just over 10 years.

We offer four funds.

The one I'm going to refer to a little bit today is the Affluence Investment Fund.

And it's really a combination of all of our best ideas.

And it also includes an allocation to our other three funds.

Our other three funds are specialist strategies where we believe we can add value.

So we don't set up a specific fund unless we believe we can add a lot of value over time.

We have an income focused fund, which at the moment is heavily invested in various private credit investments.

We have an NIC fund, which I've spoken about with investment markets before, and it deals in discounted listed investment companies.

And we have a small companies fund, which is for wholesale investors only, and as the name suggests, invest in small companies, which are very interesting at the moment.

When we're looking to invest by way of a philosophy, we have a value focus and we're looking with all of our funds to give our investors three things.

Firstly, better than average returns over three years and longer.

Secondly, regular income, which we consider to be at least quarterly and at least 5% per annum is the target for all of our funds.

And finally, smoother returns, which helps to limit drawdowns and helps you get through negative market events with less drama.

So on with the show, why is now a good time to be contouring?

Well, let's look at some perceptions and our view on the reality out there at the moment.

There's a general view everything's expensive.

Our view is different.

We look across all asset classes, all areas, and I can tell you there are plenty of bargains out there, but not necessarily in the obvious places.

So while there are certainly a lot of places that are expensive, there are also a lot of very cheap opportunities at the moment.

It's a very unusual situation.

It's very rare to see that in a single market to see so many opportunities at either end of the spectrum.

There's a general view that US exceptionalism is worth a premium.

Our view is that time is over and the US market is overvalued and it will continue to be overvalued, although at the moment it's probably showing signs of moving back to normal and we think that might be a trend that kicks in.

There's a view that you must have an allocation to artificial intelligence, to AI in your portfolio.

It's the thing to have, it's where all the alpha is going to come from.

Our view is that we are probably at or near the very top of what Gartner terms the hype cycle.

And this happens in every new trend.

And at the moment, it feels to us a bit like the internet in 2000.

where the internet changed the world over 20 years, but in March 2000, it was probably three to four times overvalued in terms of getting access to that.

We feel that AI-driven companies similarly might well change the world over 10 years, but right now, they're tremendously expensive and investing in those is most likely going to lead to disappointment.

There's a view that interest rates are going to fall quite a bit from here.

Our view is not so much.

And we are seeing perhaps inflation sticking around in one way or another.

We think we're going to see a resurgence of inflation over the next year or two.

And what that probably means is that interest rates are going to stick about where they are or maybe a little bit lower is going to be the new normal for the foreseeable future.

If interest rates fall a lot, it means something very bad has probably happened in markets and that's not what we want to see.

There's a perception that quality stocks are worth a premium and not just US, but around the world.

Our view is quality is about as expensive as it's ever been at the moment.

And the standard we can roll out as a Commonwealth Bank at the moment, it's come back a little bit, but you're paying 24, 25 times earnings for a bank that probably won't even grow earnings this year.

And that as an investment proposition to us is not exciting at all.

We prefer to look elsewhere.

And finally, there's a perception that Trump is completely unpredictable and that literally anything could happen.

That one's actually true, in our view.

And so, you know, we are going to see all sorts of weird and wonderful thought bubbles, ideas and attempts by the Trump administration to do different things over the next few years.

And that's going to keep markets really, really interesting.

So how are we playing this?

Well, this is the asset allocation currently for our Affluence Investment Fund.

We invest directly and indirectly.

A lot of the money we put to work is through other fund managers.

We pick managers that are doing something differentiated that have very much a niche speciality in what they're doing.

And so you're not getting anything average with us.

You're getting a ball end of strategies and assets that are very, very different.

So at the moment we've got a good blend between Aussie and global equities.

We've got some property, mostly listed rigs, a small and growing allocation to resources and about half that's in gold miners.

We've got a sizable allocation to our LIC strategy because at the moment we've got a portfolio

LICs at about a 25% discount, a small and growing allocation to small caps, and then the balance of the portfolio is mostly defensive strategies, market neutral alternatives, debt, fixed interest and some hedges.

This is a snapshot of the top 10 investments, looking at the underlying funds and the managers that we use.

As you look down that list, you might see a few names that aren't particularly known to you, perhaps a little bit under the radar.

And that's the idea.

Most of the managers we invest with are not brand names.

They're out there doing things that are a bit unusual and a bit different.

In a lot of cases, they only take money from high net worth and institutional investors.

And in a lot of cases, their funds are closed to new customers, they're not taking new capital.

So we're able to provide access to a range of different underlying managers across a whole range of asset classes.

What do we like right now?

There's four areas I'd highlight where we see good opportunities.

Firstly, private credit.

It's definitely flavour of the month, but there genuinely is an advantage in that space.

We're seeing reasonably low risk opportunities where you're getting perhaps four to 5% above the RBA cash rate.

And so we are able to deliver in that area comfortably somewhere between 7% and 8% per annum on what we believe are pretty low risk opportunities out of private credit.

LIC, as I mentioned previously through our fund there, we are currently sitting on a portfolio of listed investment companies that's trading at around a 25% discount to its asset value.

And that's basically as high as it's been since we've been investing in that sector.

And we think over a two to three year window, the discount will close.

There's a lot of opportunity in that space.

REITs in the small to mid cap space, there's a lot of REITs that are similarly trading at 20, 30, in some cases 40% discount to the value of their assets.

That to us represents a compelling opportunity if you're prepared to be patient.

And finally, small caps, micro caps, mid caps, that whole space is interesting, particularly the value stocks in that space.

They've been completely ignored.

They've got no friends.

There's very little capital going in.

And as a result, you can pick up a portfolio of small caps these days, generally a range of businesses and a range of discount driven opportunities at

you know sort of prices we haven't seen since the financial crisis.

So there's absolutely great value to be had there as well.

Just looking now at three or four examples of where we've invested and why we like these different areas.

So this is a fixed income example.

This is Merrick's Capital.

They've delivered for us, for our Affluence Investment Fund, around nine to 10% per annum returns in the period we've been investing with them.

They invest across real estate, a little bit of development, construction, and also importantly, a lot of agricultural loans.

So there's a good opportunity to do something different in that space.

got quite a long track record and a good history of doing that very very well and it's incredibly diversified portfolio.

As an example of some LICs we like CD1, CD2 and CD3 all listed on the ASX core holdings in our LIC fund currently

They each own a portfolio of private equity investments in the US, which are gradually being sold and the proceeds being returned to investors.

And that's probably got between two and four years to run on each of these three vehicles.

At the moment, you can pick these up.

We've been picking them up for between 30 and, in some cases, 40% discount on the value of the investments that they own.

For us, that's a compelling opportunity.

And there are a range of other LICs with similar types of discounts and similar sorts of situations where we've been buying over the last year or so.

It's counter-capture opportunity for us at the moment.

Another ASX-listed stock, URF, which is a portfolio of US apartments, which are being, again, gradually sold over time, trading currently at about $30.

plus percent discount to the value of those properties, and we would expect over the next two to three years, the majority of those assets will be sold and the capital returned to investors.

So you're able to profit as that discount closes as the capital returns.

You're also able to profit if those properties themselves actually go up in value.

There's another one here, property related as well.

We bought into this vehicle in mid 2024.

This is Centre Group or Westfield as they're better known in Australia, the first ever time they offered an unlisted property fund.

And what they did was they acquired an existing asset that they managed, of which half was owned by another manager.

They acquired that 50% share, they continue to hold the other 50% of this asset,

They've ordered in an incredibly attractive valuation, such that they've already written it up by about 25% since we bought in last year.

But even now, it's a very attractive asset on an attractive 8% to 9% yield.

And I think there's more to go in this one.

So another opportunity that we picked up late last year that is currently showing exceptional value.

And finally, a private equity type play.

This is Kieland, which owns a bunch of forestry on Kangaroo Island, 14,000 hectares, in fact, which is being converted to farmland, agricultural land.

And ultimately, it will be one of the largest sheep stations in the Southern Hemisphere if it was sold all in one line.

It's likely that it'll split into three or four different blocks and sold.

As a kicker along the way, the project itself is eligible for substantial carbon credits potentially.

and that's because of the process they're going through to capture the carbon from the timber.

It's called pyrolysis and it produces a byproduct called biochar, which is useful in various different ways.

And because they're doing that in a very ESG friendly way, they're able to generate significant carbon credits from that project.

So that is on the surface of property play, but it's also an ESG.

carbon credit play as well with the potential for that vehicle to undertake other similar projects over the years.

So that's just a very quick snapshot there of what we've been doing, how we've been investing, why we think now is a very interesting time in markets and why we think now is probably, you know, one of those weird times where a lot of strange stuff is going to happen.

and we're seeing some changes in trends.

So the things that have worked over the last perhaps eight to ten years, the high growth stocks, the high quality stocks that are trading at huge premiums, they're probably not going to do as well for the next five or ten years.

We're probably going to see a bit of a return to some of the cyclical stocks, some of the value investing opportunities, some of the property opportunities and some of the discounted opportunities and small caps having a much better run

That's our view on life.

And if you agree, you might want to have a look at our website and have a look at the funds that we manage.

That's really all I wanted to talk to today.

I think there's a quick snapshot there of the distribution profile from our Affluence Investment Fund.

And also there's a lot of information on our website about how we manage the downside and how we outperform or tend to outperform, for example, the ASX200

in down markets.

So that's just one example of how we manage downside risk.

That's really the presentation for today and happy to take any questions you've got.

You've said that a lot of large stocks are expensive and small caps are cheap at the moment.

So how has that happened?

Good question.

I've never seen it to this extent before.

And a lot of theories have been put forward as to how it's happened.

And I don't really fully believe any of them.

We've had just this weird situation.

I think it's partly passive investing.

It's partly the fact we've had a few ructions in the economy.

It's partly a fact of a return to more normal interest rates and partly a fact that some of the more traditional buyers of small cap stocks are not in the market at the moment.

So they just had no friends at all, basically.

Whatever's caused it, it's happened.

It's happened to a degree that usually only happens sort of in the depths of some sort of bear market or financial crisis.

So we've seen, for example, small caps having to perform large caps by somewhere around 25 per cent over the last two and a half years, depending on how you measure that.

And we think over time that rubber band will snap back and we'll see a period at some point in the next two or three years

of significant outperformance by some of those smaller cap stocks and we've already started to see it weirdly enough over the last month or so.

Certainly our small companies fund you know the market was down about for example three nearly four percent in February our small companies fund fell about one and a half percent so it's already outperforming the large cap market and we expect you know some of these trends that

they'll continue and they'll become a parent over the next year or two.

When you're looking to place funds with another fund manager, what are the big things you are looking for?

There's a bit of a laundry list that I could probably talk all day on that one as well.

I think if we were to highlight three or four things, firstly, we've got to be confident that they

are going to deliver a decent performance and that generally means that they have shown that in the past.

So they've got a performance track record that is attractive to us.

Secondly, we evaluate the investment team.

So if the investment team changes, we think that's not necessarily able to be looked at.

So we want an investment team that's been together for a long time.

We want to review their service providers, their processes and the way they operate their funds to make sure we're happy with who they're using to help them and that they've got top quality service providers there.

We want to understand how they're making money, how they can deliver alpha or outperformance.

So generally that means they're doing something that is quite specialised.

that where they have a natural advantage over perhaps other participants in the market.

And so that could be that they're a small-cap specialist or they specialise in providing a certain type of loan or they have a specific long-short strategy that's done particularly well.

So there's various different factors there.

They're probably some of the key things.

And then finally, we also look at how they handle

the bad times, you know, whether it's a negative market or a period of dislocation.

So what's the funds done there?

And generally, we're looking for someone who's outperformed when things have gotten tough, because, you know, that's generally how we want to work.

We want ourselves and all of our managers to be able to do better than average.

In the down times, in the good times, you know, things take care of themselves, everything tends to go up.

But in the down times, you really want someone who's got your back.

So that's probably the last key thing I would say.

Thank you for your time, Daryl.

Thanks very much, good to be here.