Cameron: [00:00:00] Tony, do you wan­na do the intro­duc­tions to John and the, in the, the inter­view?

Tony Kynas­ton: Yeah, sure. So, uh, I men­tioned on our show a lit­tle while ago that I’ve become a direc­tor of Clime Invest­ment Wealth, and we have, uh, my boss on today for the inter­view, John Aber­nathy, who has. Been around in invest­ment cir­cles pub­licly in Aus­tralia for how long, John? 30 years. like

John Aber­nethy: 40 over

Tony Kynas­ton: 40. There you go.

I’m under under­selling you. so, uh, I thought we’d get you on to, to talk to our lis­ten­ers and, and pull back the cur­tain a lit­tle bit on Clime and, uh, and on the funds man­age­ment indus­try in gen­er­al from the oth­er side, talk about

John Aber­nethy: Yeah.

Tony Kynas­ton: lot and valu­ing com­pa­nies, et cetera. But, uh, it’s, uh, I think it’s great to find out what goes on from the busi­ness side of the funds man­age­ment indus­try.

So maybe you could start off and tell us a lit­tle bit about your­self and your back­ground and how you got involved and where you come from.

John Aber­nethy: Well, it’s sto­ry is chaos. I think when you [00:01:00] start, and I qual­i­fied in law and eco­nom­ics came out in a reces­sion in 83 in Aus­tralia when there was not many jobs around. Found myself in West­pac Bank as a trainee. I went through the, the branch­es and in the head office and then, um, was more inter­est­ed in prob­a­bly macro eco­nom­ics and, you know, invest­ing.

I guess I was look­ing at invest­ing but did­n’t real­ly know what I was talk­ing about. Uh, there was an oppor­tu­ni­ty inside West­pac at the time for some­one like me and I applied for a job as a trainee ana­lyst at NRMA, got the job, um, and then stayed there for 10, 11 years and, um. as the equi­ty man­ag­er and invest­ment man­ag­er for the group, group.

And, um, we achieved var­i­ous awards. I think one year we were the fund man­ag­er of the year, I think 92. Um, from there I left when NRMA Demu­tu­al­ized and, uh, went into cor­po­rate advice and ear­ly stage invest­ing Ven­ture [00:02:00] cap­i­tal, uh, cre­at­ed a com­pa­ny which is called Lof­tus. Uh, float­ed on the stock mar­ket at the, just about a, a month before the inter­net bub­ble crashed, we had a few ear­ly stage invest­ments in inter­net busi­ness­es, which, uh, were dif­fi­cult work­outs. in about 2004, we rid of our PDF, where we were a ven­ture cap­i­tal­ist under a PDF act. We, we dereg­is­tered that, went to an open invest­ment com­pa­ny and we bought a busi­ness called Clime. Became Cli­mate Invest­ment Man­age­ment in 2005, and today we’re a, um, that’s 20 years lat­er. We’re about $1.6 bil­lion under man­age­ment and advice.

So we’ve, we’ve gone from being a, a pure equi­ty man­ag­er to a mul­ti-asset man­ag­er high net worth advi­sor. Essen­tial­ly what we are today.

Tony Kynas­ton: To talk to peo­ple from the insur­ance indus­try who are involved on the invest­ment side The con­cept of float [00:03:00] that, uh, we hear so

John Aber­nethy: Yeah.

Tony Kynas­ton: when we read about Berk­shire Hath­away and lis­ten to War­ren Buf­fett. So

John Aber­nethy: Mm,

Tony Kynas­ton: that an impor­tant issue for you at NRMA? Was it, was it try­ing to man­age the float, or, or is there a

John Aber­nethy: absolute­ly.

Tony Kynas­ton: frame­work in Aus­tralia com­pared to the US

John Aber­nethy: Well, it’s a good ques­tion because the NRMA invest­ments was direct­ed to run as a buf­fet type invest­ment group and the NRMA invest­ment. Uh, port­fo­lio the time essen­tial­ly was man­ag­ing 80% of the reserves of the NRMA insur­ance group. Um, as it was a mutu­al, it did­n’t pay div­i­dends. So there’s your com­par­i­son to Berk­shire Hath­away.

Berk­shire Hath­away does­n’t pay div­i­dends. NRMA as a mutu­al pay div­i­dends. It grew its reserves. Um, and the direc­tion was 80% of the reserves into the equi­ty mar­ket of Aus­tralia. Uh, and that was a very open. Man­date, uh, could be unlist­ed and list­ed at the time. [00:04:00] So NRMA was one of the first direct investors in the coun­try, uh, and we brought up a pret­ty siz­able unlist­ed book, direct book.

We had exter­nal man­agers at one time, but then we brought it in house. But the invest­ment focus was on just buy­ing good com­pa­nies, look­ing at the index. Uh, tar­get­ing a com­pound return of around 8%. The man­age­ment of NRMA insur­ance said, if you can com­pound 8% over 10 years, that’ll, that, that alone will increase our reserves by about 150% over that peri­od. and that’s before we get flows, which is the insur­ance mar­gin. And, and NRMA was run by very risk man­agers, and I think we’re, we’re, we were renowned for that in the 1980s. And I’d, I’d point out some­one like John Lam­ble who ran the NRMA group. He was the exec­u­tive, CEO and, um, I think he was regard­ed as the best in Aus­tralia at the time. our chair­man of the [00:05:00] NRMA group was Jim Mil­ner of Brick­works fame. So we had blue blood in our com­pa­ny.

Tony Kynas­ton: Hmm. Yeah, very much so. Was there a, was there a slant towards val­ue invest­ing then? Uh, or was it, or was it more gen­er­al?

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John Aber­nethy: No, that was val­ue. I mean, I used to get, uh, well, John Lam­ble used to send me and the whole and RMA invest­ment.

invest­ment depart­ment, the year­ly address from War­ren Buf­fet. He’d actu­al­ly walk it into our office and say, please read, please, please read by the best in the world. Um. And he said, just fol­low that. And it, and he was adamant and it was drilled into me com­mon sense invest­ing. Um, and, um, you know, and not be afraid, you know, pick out good stocks, small, medi­um, large. He was a great believ­er in, uh, in com­pa­nies which could self-fund growth. And he said, you’ll get the best growth in the mid­dle of the mar­ket if you pick the right stocks. You got­ta remem­ber in the [00:06:00] eight­ies that the Aus­tralian share mar­ket was much broad­er than it is today across indus­tries and sec­tors.

I mean, it’s a very dif­fer­ent mar­ket today than it was in the eight­ies. And because it was so broad and we just opened up the econ­o­my, for­eign invest­ment, for­eign banks, there was a pletho­ra of cor­po­rate activ­i­ty. Uh, and obvi­ous­ly the biggest cor­po­rate activ­i­ty in the eight­ies was the bid for BHP by homes of court, which. NRMA, like oth­er insti­tu­tions were big hold­ers BHP. And so we were right in the mid­dle of that. And then we had counter plays with a lot of indus­tri­al com­pa­nies, uh, invest­ment groups like uh, Steam, IEL, um, elders, you know, all play­ing in that space. It was a great time for invest­ing and, um, we. We are quite an active investor.

Uh, uh, uh, we had a core port­fo­lio which was cap­i­tal gains restrict­ed because we did­n’t wan­na upset [00:07:00] our cap­i­tal gains posi­tion. But out­side that, we did have some books where we could move port­fo­lios around, um, and be liable for tax. So we, it was a big busi­ness. I mean, I, my rec­ol­lec­tion is when I left the, the assets of NRMA group was about 7 bil­lion, and we had about 2 bil­lion in equi­ties. And the reserves were about two and a half bil­lion at the time. So, you know, and that’s 1990 prices. So that’s a long time ago. So you can maybe mag­ni­fy that by 20 or 30 to get an equiv­a­lent of today.

Tony Kynas­ton: And I, I think, um, from dis­cussing this with you in the past, there was, uh, some con­vert­ible notes involved. Would you, you out­line that for our lis­ten­ers? What, uh, what, they are and what role they play in help­ing the port­fo­lio?

John Aber­nethy: Well, again, um, John Lam­ble, he and Sam Kaplan was my direct equi­ty man­ag­er. We, Sam taught me that very much as an investor. You know, [00:08:00] we’re look­ing for. Cash­flow to us as an own­er. Now, hav­ing said that, we did make some longer term invest­ments expect­ing cash­flow to appear or com­mit­ting to com­pa­nies like we’re very ear­ly investor in Mac­quar­ie Bank when it was unlist­ed. Um, and we’re one of the major shel­ters when it, when it list­ed, but for, I think for at least a decade, uh, all div­i­dends declared by Mac­quar­ie Bank were rein­vest­ed. So that was a com­pound going inside Mac­quar­ie Bank, which. It a won­der­ful invest­ment, we found oth­er com­pa­nies, and I guess it’s some­thing I drove, you know, very often there was a dis­cus­sion with com­pa­nies, mid­dle size or small­er com­pa­nies, and we were open book who want­ed to raise cap­i­tal, um, and they were com­ing to us direct­ly. Bro­kers were there some when, when it was a decent size there was a bro­ker, but when it was­n’t, it was direct to us. And very often it was a dis­cus­sion about val­ue. as you know, when you’re rais­ing cap­i­tal, you want the best pos­si­ble price. When you’re invest­ing cap­i­tal. You want a low­er price with a, a return, you [00:09:00] can see com­ing from that entry point. very often we closed the gap through what we said was a, was a con­vert­ible note. Um, and well, we did this to great effect in the late eight­ies, ear­ly nineties, and I took that into my cap­i­tal days or devel­op­ment cap­i­tal days by, you know, bridg­ing the gap between what I. A want­ed to issue cap­i­tal at and what I want­ed to invest at, and I often said, well, look, just think of an exam­ple.

I think you’re worth a dol­lar. You say you’re worth a dol­lar 50. I’m not gonna pay a dol­lar 50, but I’ll tell you what, I’ll pay a dol­lar 30, but here’s my con­di­tions. three years. It’s a con­vert­ible debt. So I’ll give you the dol­lar 30. If you per­form and your equi­ty val­ue goes way above one 30, then I’ll con­vert it.

If you don’t per­form, I’ll get my dol­lar 30 back. in the mean­time, you are pay­ing me eight to 10%. Per annum income. Okay, so I’m get­ting my tar­get­ed cash­flow return and I’m look­ing for out­per­for­mance by the com­pa­ny achiev­ing what it [00:10:00] said it was gonna, its fore­cast val­u­a­tion. Um, and that’s how we, we used those over and over again, and we even took those struc­tures into con­vert­ing pref­er­ence shares some­times. and we. Went into the unlist­ed mar­ket where you had to pro­tect your­self. ’cause there was no liq­uid­i­ty. So we often did con­vert­ible notes too, which come to mind. We did a, a big invest­ment in Unit­ed Milk, Tas­ma­nia, which was a mutu­al, had non-vot­ing stock, but we took a con­vert­ible, pref. Um, and then we, we did oth­er invest­ments.

Uh, nev­er fail was one. Um, we, uh, Peters and Brown’s Foods, which some­one might have heard of that, that they brought con­nois­seur to Aus­tralia. We, we did a, a big con­vert­ible note and my rec­ol­lec­tion was eight or 10% yield had to roll it once because there was dif­fi­cul­ty in the com­pa­ny and we, we gave, we did­n’t want to, we did­n’t want to own the com­pa­ny.

We want­ed to con­vert or be redeemed, and we gave them two years hon­ey­moon. And that, that, that com­pa­ny began to fly [00:11:00] a west­ern Aus­tralian dairy com­pa­ny of all things, but a agri­cul­tur­al com­pa­ny could­n’t get cap­i­tal for the Aus­tralian mar­ket, had run out­ta bank. Facil­i­ties and we, we came in as vir­tu­al­ly a bridg­ing finan­cial with con­vert­ibil­i­ty.

So there, are notes which can pro­tect you. And, and my only final com­ment, Tony, is that’s exact­ly what Buffer did 2007, when there was cat­a­stro­phe in the GFC.

Tony Kynas­ton: Mm-hmm.

John Aber­nethy: Did those con­vert­ible debt or, or, or debt with attached war­rant in com­pa­nies like GE and Gold­man Sachs, for instance, I think Bank of Amer­i­ca or Wells Far­go, he did quite a few of these and. I’m not being smart, but that’s exact­ly what we did 20 years ear­li­er in NRMA group, based on the way Buf­fet wrote, how you should invest.

Tony Kynas­ton: No, I was gonna men­tion that. So thanks for remind­ing me. Um, and then after N‑N-R-M‑A, you moved into Lof­tus, which then went into Clime. And, and I know the answer to this ques­tion, but can you [00:12:00] tell us what KLE actu­al­ly stands for?

John Aber­nethy: Well, it’s clever invest­ment made easy. Um, Clime as a word does­n’t exist, so it’s an acronym, I guess. Um,

Tony Kynas­ton: Yeah.

John Aber­nethy: what it stands for. Um, and the clev­er­ness, I think is, is in the val­ue invest­ing method­ol­o­gy, which, um, that com­pa­ny, when it was man­aged by pre­vi­ous own­ers was dri­ving into, uh, val­ue based invest­ing based on return equi­ty. And iden­ti­fy­ing com­pa­nies intrin­sic val­ue on the size of the equi­ty and the return equi­ty and the capac­i­ty to grow the equi­ty through retained cash flows. So self-fund­ing growth and find­ing those com­pa­nies and tak­ing stakes in them. Um, much bet­ter to buy a busi­ness which can sell fund growth. Draws on cap­i­tal to grow from the exter­nal world. And it does­n’t mean that com­pa­nies which raise cap­i­tal are bad invest­ments, it just means that com­pa­nies which can self gen­er­ate cap­i­tal are the best invest­ments. [00:13:00] Um, and uh, we have an invest­ment, Tony, um, inside the cli­mate invest­ment group, share­hold­ers who own cli­mate invest­ment. When we con­vert­ed from a PDF to an unre­strict­ed com­pa­ny, we had one. A major invest­ment from our ven­ture cap­i­tal devel­op­ment cap­i­tal today. It’s a com­pa­ny called Jaco, and that was an invest­ment which Lof­tus made 1995, so it’s a 30 year invest­ment Today. invest­ment sits in a, a group, a com­pa­ny called Clime Pri­vate, which Clime share­hold­ers received in 2016. The his­to­ry of that com­pa­ny is we put $750,000 Jaco as a 10% pref. Three year pref, con­vert­ing pref. Um, it, uh, paid us the 10% and we con­vert­ed into about 20% of JCO when we con­vert­ed that $750,000 today is worth cir­ca 12 $13 mil­lion at book val­ue. [00:14:00] and it’s paid us a div­i­dend every quar­ter for the last 30 years.

We’ve nev­er put our hand in our pock­et to put more mon­ey in. Um, and it’s returned us at var­i­ous stages, cap­i­tal returns of about five to $6 mil­lion. So they’re the sort of great invest­ments you’re look­ing for. Very hard to find. there’s a few on the stock mar­ket. The stock mar­ket’s open for busi­ness every day.

And, you know, there are com­pa­nies which you can iden­ti­fy, which are self-fund­ing grow­ers. Uh, and one I’ve always looked at was Nick Scar­ley. You know, it, it, its first cap­i­tal rac­ing, as we know was last year when it went into Eng­land. But up until that stage. The com­pa­ny just grew by self-fund­ing its growth. It was a, one of the bet­ter exam­ples of self-fund­ing growth. So they’re few and far between, but when you find them, they’re extra­or­di­nary gen­er­a­tors of val­ue for for own­ers.

Tony Kynas­ton: And, uh, you’ve spo­ken about Jaco, but peo­ple might know that Jaco owns the Eck­er­s­ley stores, uh, busi­ness. So that’s [00:15:00] the sort of pub­lic face of Jaco. Yeah. Yeah. One of the things we, we focus on in our, sor­ry, you go.

John Aber­nethy: no, I was just gonna say, it’s, it’s a great lit­tle busi­ness, but obvi­ous­ly, uh, it’s some­thing we can’t talk about. ’cause it’s, it’s, it’s trad­ing on a gray mar­ket at, at present any­way.

Tony Kynas­ton: Yeah. some­thing we talk about a lot in, in our, our check­list is con­sis­tent­ly increas­ing equi­ty. So that sounds sim­i­lar to what you are talk­ing about in terms of a com­pa­ny being able to, to fund its growth. Very impor­tant things.

John Aber­nethy: Yeah,

Tony Kynas­ton: Um.

John Aber­nethy: where we, where I’m a lit­tle bit dif­fer­ent from Buffer, just to cov­er it. I, I’d like div­i­dends as an own­er. Um, there’s a great debate, you know, buffer would say, well, if I can do bet­ter, if the mon­ey, why would I give it back to you? And that’s fine. Yeah. so long as he and his great ben­e­fit is he has enough of a mar­ket, a deep enough mar­ket where the own­ers of Berk­shire Heay can get val­ue for their stock in the stock mar­ket. Now, if you’re a small com­pa­ny in [00:16:00] Aus­tralia and you take that view, well, I’m gonna keep the cap­i­tal and grow, and you run the risk that the val­ue of your stock, if it’s trad­ing on the stock mar­ket, does not reflect its true val­ue because there, there’s always peo­ple that wan­na buy, sor­ry, wan­na sell. And they don’t, know, when, when some­one wants to sell, they lose sight of val­ue we find a a, some of these com­pa­nies get sold down and, and, and trade very cheap­ly, and it, it’s not fair a share­hold­er who is going the jour­ney to have his shares trad­ing well below val­ue.

Now, oth­er peo­ple say, well, that’s an oppor­tu­ni­ty for some­one to buy more. But you know, you’re try­ing to look after your own­ers. Um, and par­tic­u­lar­ly a long-term own­er, so it’s a, it’s a mute point. I, I, I’d like val­ue invest­ing com­pa­nies pay div­i­dends give the own­er the recip­i­ent of the div­i­dend, the right to rein­vest, not nec­es­sar­i­ly through a DRP, but he’s got the mon­ey. he can make a deci­sion where he wants to buy more shares. Um. I, [00:17:00] you know, and I think that’s being a, and that allows you look at some­thing like Nick Scali, which has gone through patch­es where the mar­ket has dis­liked it. It’s been a

Tony Kynas­ton: Hmm.

John Aber­nethy: oppor­tu­ni­ty to the buy­er. I, I used to do pre­sen­ta­tions a bit like you do, Tony, on, on val­ue invest­ing.

I always used to talk about Nick Scali and, uh, through, you know, five year finan­cial mod­els and I could show the, the audi­ence how Nick Scali would grow, you know, with­out draw­ing on new cap­i­tal. It just drew upon. The gen­er­at­ed cap­i­tal from the busi­ness and I used to do this pre­sen­ta­tion, turn off the screen, turn off the mar­ket for five years, don’t look at the share price, here’s the five year returns.

Are you hap­py as an own­er? And every­one said, fan­tas­tic. Then I turn on the share mar­ket and Nick Scal­ly’s gone from $4 to $6, back to $4 to $5, to free dol­lars to $8. That’s dur­ing the five years when it nev­er missed the beat. And we’ve got­ta be care­ful, and that’s the oppor­tu­ni­ty as some­one who’s look­ing for val­ue is the share mar­ket. Prices itself on some of the most [00:18:00] weird­est, weird­est basis day to day, and peo­ple look­ing at share prices think­ing that they’re, yeah, I’m not say­ing they don’t indi­cate trou­ble or indi­cate good news some­times, but often they indi­cate noth­ing rather than, you know, mad spec­u­la­tive trad­ing.

Tony Kynas­ton: Yeah, it’s a, it’s a, it’s always amazed me that they still teach effi­cient mar­ket the­o­ry and uni­ver­si­ties, um, when that’s a clas­sic exam­ple of how the mar­ket isn’t effi­cient.

John Aber­nethy: Well, I, I, I remem­ber giv­ing a pre­sen­ta­tion. I, I men­tor stu­dents from New South Wales Uni, but not about invest­ing. remem­ber giv­ing it, I was called to Syd­ney Uni one day to give a pre­sen­ta­tion and, and the, the guy was run­ning a trad­ing course. I don’t, I don’t men­tion, I don’t dun­no, his name.

Can’t remem­ber it. And, um, he was teach­ing stop loss sell­ing and, um. I was asked a ques­tion by one of his stu­dents and I, and I said, what do you think about stop-loss sell­ing? said, it’s total­ly appro­pri­ate if you dun­no what you own. You know, if you buy some­thing, you dun­no what it’s worth. Then hav­ing a stop-loss is, is [00:19:00] appro­pri­ate. But if you know what some­thing’s worth, hav­ing a stop-loss does­n’t make much sense, if you know what I mean. So, you know, when we talk the­o­ry or we, we learn the­o­ry at uni. often it’s based on naive naivety, you know, and I’m not being rude, I just think that’s, that’s the the­o­ry. Um, so, know, the mar­ket’s always right, you know, fair mar­ket the­o­ry, stop loss­es, you know, they’re just inter­est­ing.

But I think when you get into the real world and under­stand the real dynam­ics of invest­ing, you can see the flaw in a lot of that.

Tony Kynas­ton: Yeah, it’s a very good point. Um, I. Indus­try itself as well. So rather than push­ing on with val­ue invest­ing, which is fas­ci­nat­ing in itself, but, um, Clime is, uh, is in the fund man­age­ment game. Can you, can you talk about it from the indus­try side of things? What kind of trends are you see­ing in the funds man­age­ment indus­try in Aus­tralia now?

John Aber­nethy: [00:20:00] Well, when you talk funds man­age­ment, I think today you’re talk­ing mul­ti-asset, clear­ly. One of the things we did in Clime 10 years ago was go from being a, an Aus­tralian equi­ty man­ag­er to a mul­ti-asset man­ag­er, so what I would call a true funds man­age­ment busi­ness. And that took me back to the days at NRMA when, when we, when we man­aged port­fo­lios, we were man­ag­ing, you know, bonds bank for bank, uh, bills, short term mon­ey mar­ket leas­es, finance leas­es, then into equi­ties.

And as we, as I said, uh, con­vert­ible debt finance, so the mul­ti-asset in those days. As you, you would, you would hear from that. I did­n’t talk about inter­na­tion­al, so that was in the eight­ies. Today, a mul­ti-asset man­ag­er, a true funds man­ag­er, is look­ing across a whole lot of asset class­es inside Aus­tralia and out­side Aus­tralia. and bonds, you know, cred­it prop­er­ty is anoth­er asset class devel­op­ing. Um, so Clime has devel­oped that exper­tise either in house or exter­nal­ly. So exter­nal part­ners. Uh, we’re build­ing up [00:21:00] our funds man­age­ment team so we can hit those mul­ti-mar­ket with solu­tions for our clients. Um, I think that’s reflect­ing what’s hap­pened in the broad­er mar­ket.

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Tony Kynas­ton: . What was, what was dri­ving the trend to mul­ti-asset, though? Why, why not stay just as an equi­ties com­pa­ny?

John Aber­nethy: Uh, look, the, the size of funds, Tony, I mean, Aus­trali­a’s went from where it was to now four and a quar­ter tril­lion dol­lars in super. And the Aus­tralian econ­o­my went from where it was prob­a­bly about a tril­lion dol­lar econ­o­my to. tril­lion econ­o­my in the stock mar­ket did a sim­i­lar sort of ratio. So you can see that the investible cap­i­tal through super­an­nu­a­tion was grow­ing a lot faster than the Aus­tralian econ­o­my, which means that you’ve, if you were equi­ty cen­tric, you had to, you had to extend your­self, um, and acknowl­edge that, um, uh, there are mul­ti­ple oppor­tu­ni­ties. But, and if you go back to 2 14, 1 of the rea­sons where we pushed heav­i­ly into Mabb asset, it was a time when the Aus­tralian dol­lar was. [00:22:00] Above par­i­ty against the US dol­lar. so it was trad­ing, that? 30% above Its long term aver­age since it float­ed, it was arguable and we got it right that the Aus­tralian dol­lar was over­val­ued.

So there was an oppor­tu­ni­ty to diver­si­fy into inter­na­tion­al mar­kets and pick up on the deval­u­a­tion Aus­tralian dol­lar. And that took us into a full, and, and also away from oth­er asset class­es, the deval­ued Aus­tralian dol­lar open up the oppor­tu­ni­ty for for­eign­ers to start buy­ing. Hard assets or fixed assets apart from the equi­ty mar­kets.

So prop­er­ty came into play, um, and fixed income came into play, and Aus­trali­a’s mar­ket went much stronger. It’s com­mer­cial prop­er­ty mar­ket. After we had that deval­u­a­tion, then the prop­er­ty mar­ket, prob­a­bly from about 2 16 17, prob­a­bly had three or four years of great returns for­eign enti­ties and insti­tu­tions said, well, there’s an Aus­tralian dol­lars now at fair val­ue. And the yields are pret­ty darn good com­pared to what we’re see­ing in our own mar­ket [00:23:00] and the qual­i­ty of the Aus­tralian econ­o­my. know, the bal­ance sheet of the Aus­tralian econ­o­my, the, the legal sys­tem, the account­ing sys­tem, big ticks. We are buy­ers. And so mov­ing to a mul­ti-asset before the for­eign­ers came in, know, that was just an oppor­tu­ni­ty we saw. Now that’s the past and we’re into a dif­fer­ent era now where, you know, we’re into the Trump era. an era where the whole funds man­age­ment indus­try of Aus­tralia has expand­ed, uh, to extra­or­di­nary lev­els. And there are much dif­fer­ent prob­lems to address today in terms of invest­ing. And, and mean­while, I did men­tion ear­li­er that the Aus­tralian mar­ket in the eight­ies and ear­ly nineties was a very diverse, uh, mar­ket. Today it’s not so diverse, so you’ve got more mon­ey to invest in a mar­ket which is tighter in terms of band­width, you know, indus­try sec­tors, you know, and that’s thrown up. Issues for par­tic­u­lar­ly equi­ty man­agers, push­es them think about oth­er asset class­es, push­es them to think about oth­er [00:24:00] economies.

Tony Kynas­ton: One of the, one of the things that I think has also hap­pened recent­ly, which you could elab­o­rate on is the rise of man­aged invest­ment accounts, and I know clien­t’s involved in that. Can you give us an out­line for our lis­ten­ers as to what they

John Aber­nethy: Yeah.

Tony Kynas­ton: and how they oper­ate?

John Aber­nethy: Yeah, well our his­to­ry was free prod­ucts. have obvi­ous­ly have Clime cap­i­tal as an LIC, man­aged invest­ment funds unit trusts, par­tic­u­lar­ly going into and com­ing out­ta the GFC. And then for high­er net worth clients, you know what we called indi­vid­u­al­ly man­aged accounts, and those imas were very much Aus­tralian equi­ty cen­tric. Uh, we could have tak­en them into inter­na­tion­al equi­ties, but it was very much the IMA was a, was a, an equi­ty asset class solu­tion. What’s devel­oped. the exten­sion of the IMA into, you know, what they call SMAs, you can do mul­ti-asset solu­tions. Now, um, SMAs, imas, they’re all a con­no­ta­tion of the same thing.

The dif­fer­ence is the [00:25:00] SMA is mul­ti-asset and, and prob­a­bly for small­er size clients where the man­ag­er can move invest­ments around, and does it. For mul­ti­ple clients at the same time. So it’s more a mul­ti-client, mul­ti-asset solu­tion the man­ag­er is mak­ing those deci­sions dai­ly adjust. Okay. It does­n’t have to to the client and, and the solu­tions may not only be direct stocks, but they could be, uh, man­aged funds. Or direct prop­er­ty. So that, that’s that. The MDA is a more tighter rela­tion­ship, very much equi­ty cen­tric, but can also go into oth­er asset class­es. And it’s more indi­vid­ual indi­vid­u­al­ly set to the client direc­tive. they’re big­ger type clients. So that’s your man­aged direct asset port­fo­lio as opposed to a sep­a­rate­ly man­aged asset port­fo­lio. then of course we’ve still got the IMA, which is equi­ty cen­tric. Uh, then you’re out­side, they’ve got your man­aged [00:26:00] funds, you know, again, which is. The thing about dif­fer­ence between a man­aged fund and an SMA, the SMA is in the clien­t’s name, so all the ben­e­fits of income, frank­ing cred­its, tax loss­es, if they occur, cap­i­tal gains goes direct­ly to the SMA own­er in a man­aged fund, it’s shared and the ben­e­fits, uh, are more shared at the end of the year.

So if you are being an investor at the end of the year, you can get a ben­e­fit, which you did­n’t get you left the man­aged fund the end of the year or dur­ing the end of the year. And you know, the man­aged fund trades at NTA gives peo­ple the oppor­tu­ni­ty to buy and sell it. So it’s a much dif­fer­ent con­cept, much more dif­fi­cult to man­age.

And I think the world has real­ized that that man­aged funds, unless they’ve got an over­lay and it’s con­trolled through an SMA prod­uct where the man­ag­er is decid­ing the allo­ca­tion to man­age funds not done direct­ly by the investor. And as I said ear­li­er in an answer about equi­ty mar­ket, [00:27:00] you get very strange. Equi­ty prices going on all the time. You know, investors can be spooked and can be liq­ui­dat­ing a man­aged fund at the worst pos­si­ble time. But what we saw in the GFC man­aged funds being hit with with­drawals and, um, the fund man­ag­er was forced to sell he want­ed to buy. And this played out in Clime when we had our invest­ment com­pa­ny clime, uh, Clime cap­i­tal. Which is a sort of a cap­i­tal solu­tion, but at the time it was very equi­ty cen­tric. Well, we had per­ma­nent cap­i­tal. Peo­ple could sell their Clime shares on the mar­ket, but it did­n’t affect our cap­i­tal. And what we’d done dur­ing the GFC is raised cash and we start­ed direct­ing invest­ments into con­vert­ible notes and con­vert con­vert­ible preps, and that became a won­der­ful return for us. Now, if we’d been an open-end­ed fund or. know, [00:28:00] a, a a, a man­age­ment agree­ment where the client could with­draw mon­ey, actu­al­ly man­age the mon­ey appro­pri­ate­ly for the client because they want­ed their cash, even if they were tak­ing a dol­lar’s invest­ment. And look, we’re just hap­py at 50 cents.

We’ll just take the 50 cents. You know, so of course there’s a bit of chaos. So struc­ture is impor­tant, I think, is what I’m get­ting to. when a client comes to us, we, we, we talk to ’em about struc­ture. How much influ­ence do they want to have? How much do they want to see? Do they want us to, to run the mul­ti-asset solu­tion across the asset class­es? Do they just wan­na be in equi­ties? You know, we, that’s the dis­cus­sion we have with our advi­sors.

Tony Kynas­ton: And I think so from the cus­tomer point of view, they would come and talk to an advi­sor. They would then open an account which would be list­ed on a plat­form. So could you just explain how that plat­form process

John Aber­nethy: Well,

Tony Kynas­ton: Thanks.

John Aber­nethy: yeah, it’s a bit like a, it’s a bit like a bank account, isn’t it? We’ve got all these plat­forms and the. When I was in my ear­ly days, it was­n’t such a thing. It was, um, we just held all the script our­selves [00:29:00] NRMA, um, we had buck­et loads of script and set­tle­ment was five days in those days. It was quite amaz­ing.

Today it’s, it’s all a, a, a plat­form as you say, and admin­is­tra­tion ser­vice third par­ties, of ’em are list­ed com­pa­nies now, which is good. So very trans­par­ent with cap­i­tal and license and reg­is­tered, and their job is to. Hold the, the, the, the assets on behalf of the client. So they’re third par­ty away from the fund man­ag­er. That’s a good solu­tion. You, you fund man­agers and admin­is­tra­tors prob­a­bly should­n’t be in the same enti­ty. Uh, we’ve had issues about that in the past. So that’s a third par­ty ser­vice. uh, admin­is­tra­tion plat­forms have gone from, from pure equi­ties now into a whole lot of mul­ti­ple asset class­es, allow­ing the advi­sor a client or the client direct­ly to. and sell through the plat­form access prod­ucts across asset class­es and build their own, own mul­ti-asset [00:30:00] port­fo­lio alone, or as advised. Um, so it real­ly is a cus­to­di­an ser­vice, a set­tle­ment ser­vice all wrapped up in one.

Tony Kynas­ton: Yeah, it’s very flex­i­ble too. Is. So if I, if I

John Aber­nethy: Yeah.

Tony Kynas­ton: along and said, I, I like val­ue invest­ing, could open up an account, uh, there could be some advice around that. I could do some of it myself, uh, and it would be

John Aber­nethy: Yeah.

Tony Kynas­ton: a hub 24 or pre­mi­um or some­one like that.

John Aber­nethy: Yep. Yep.

Tony Kynas­ton: Uh, and don’t have to put it into a, a super fund or an indus­try super fund or any­thing like that.

I can, I can, uh, some­what do it myself.

John Aber­nethy: Yeah, yeah. Well you can use your super fund and put on a, put it into a plat­form ser­vice. So there’s lots of oppor­tu­ni­ty now, much dif­fer­ent to what it was, you know, 20, 30 years ago. So it’s, uh, it is user friend­ly and uh, I think as we’re see­ing with the head­lines today, it’s very much about trust and, um. It’s dis­ap­point­ing in an indus­try of $4 tril­lion or, or more when you add pri­vate invest­ments. And we do get bad [00:31:00] behav­ior, by some insti­tu­tions and enti­ties who, who pro­mote funds, which, uh, are not fit for pur­pose. And it, it, it, it’s, it’s dis­ap­point­ing. And, uh, what we do at Clime, we’re very trans­par­ent.

We’re a pub­lic com­pa­ny and you know who you’re deal­ing with. I guess you know me. If, if you fol­lowed me for a long time, we’ve got a bal­ance sheet. We report for stock mar­ket, we’re licensed with an A SL. We’ve got qual­i­fied advi­sors, got a bal­ance sheet, we co-invest with our clients. So we, know, that’s the sort of enti­ty I think you wan­na deal with, rather than these obscure pri­vate enti­ties who you don’t actu­al­ly know what sits behind them.

Tony Kynas­ton: And you heard about them on Tik­Tok rather than a, you know,

John Aber­nethy: Yes. Well,

Tony Kynas­ton: advice

John Aber­nethy: not go there, Tony. I mean Yeah, but I, but we’re, yeah. But mar­ket­ing Tik­Tok for. Exces­sive pro­mo­tion is one thing, but Tik­Tok for edu­ca­tion thought lead­er­ship is where we are going with Tik­Tok and, and online media, [00:32:00] which is what you do as well. You know, I’m very much in your camp. One of the best things you can do for, clients and for the pub­lic and, and peo­ple will fol­low us, is edu­cate them.

And know, I guess on our side, Tony and your, I mean, we’ve been around a long time, uh, and I always say learn from expe­ri­ence. I mean. You know, and what I try to do and what client is, try to share our expe­ri­ence, what we’ve learned from wrong deci­sions, how we got things right. We cer­tain­ly talk broad­ly about the macro scene and try to edu­cate peo­ple on why macro’s impor­tant.

I, I, I con­stant­ly read this non­sense about, oh, uh, macro’s not impor­tant. It’s, it is absolute­ly impor­tant. Every day we wake up and we hear what the bond mar­ket’s doing in Amer­i­ca. What’s Jer own Pow­ell’s doing and what Don­ald Trump’s say­ing and what tar­iffs are doing if he, if you think that does­n’t have an effect on the val­ue of assets, you’re crazy.

Tony Kynas­ton: You, you’ve been a, a bit of a go-to thought leader on, on that kind of thing, so where could we, or where could lis­ten­ers [00:33:00] go to, to access your com­men­tary?

John Aber­nethy: Well, we’re rolling out exten­sive­ly on YouTube, so please fol­low us. We’ve got over a thou­sand fol­low­ers now, so you can tap on that, or you can come direct­ly to the client for our web­site and become a fol­low­er that way. Um, we do do week­ly emails to our direct clients and fol­low­ers, so which bun­dles every­thing up in, a three or four reports.

One is a ver­bal, uh, uh, is a pod­cast ques­tion answer and oth­er things are writ­ten. Uh, so we do a lot of that to our clients and fol­low­ers, we are branch­ing out to through the social media net­work. You know, we are, we’re a busi­ness. I mean, we, we, we do have to get our brand out there. And your first ques­tion of what does Clime stand for?

Well, you’ve got­ta pro­mote get an audi­ence. And then, you know, it’s, it’s a big game out. There’s lots of com­peti­tors. Um, first of all, get our brand out there and get our, and we, we do through thought lead­er­ship and edu­ca­tion. I think [00:34:00] that’s one of the most pow­er­ful ways to, um, your­self. And then peo­ple can decide whether you’re talk­ing non­sense or you’re talk­ing some sense. we are quite hap­py to have debates. I mean, I very often have debates on my pod­cast if peo­ple put in com­ments or direct ques­tions to me offline. I’m very inter­est­ed in what peo­ple think. I mean, um, I’m still being learn­ing even at my age.

I’m, fas­ci­nat­ed by, by oth­er peo­ple’s thoughts. If, if they con­test what I’m say­ing and I think they have some basis to it. I mean, that, that’s, uh, invest­ing mon­ey and hav­ing a view is very much being open to oth­er views. You don’t wan­na be dog­mat­i­cal­ly wrong, you wan­na be prag­mat­ic. You don’t wan­na be exces­sive­ly opti­mistic, nor do you wan­na be exces­sive­ly neg­a­tive, you know? I edu­cate peo­ple and say, look, just be open. Lis­ten to what peo­ple say, and then make up your own opin­ion try not to be dog­mat­ic, you know? Um. And that’s, I, I see [00:35:00] one of the biggest issues I see with peo­ple invest­ing is they just dog­mat­ic, have a dog­mat­ic belief, um, and that they’re Right. Well, you can’t always be right, can you?

Tony Kynas­ton: No. Very good. I’m con­scious of your time ’cause I think you’ve got a, a meet­ing to go and talk about con­vert­ible

John Aber­nethy: Yeah.

Tony Kynas­ton: pret­ty soon.

John Aber­nethy: Yeah. For Clime cap­i­tal, yeah. We have a Clime cap­i­tal note rollover going on, which is. Six and a half per­cent paid month­ly, which is quite attrac­tive. And we’re reset­ting the Clime cap­i­tal port­fo­lio to two types investors, peo­ple who want a con­stant steady yield. And I think there’s a big mar­ket for that.

’cause the pen­sion mar­ket of Aus­tralia is grow­ing at a great rate. And then there’s the accu­mu­la­tion mar­ket where peo­ple want a bit bet­ter growth, which will come from income the shares and, and, and good invest­ments if we find them. So, um. have that meet­ing in short­ly. So, uh, the pro­mot­er, but if any­one’s inter­est­ed, go, go to the CAM web­site or the ASX code and, and you can see what we’re doing there.

Tony Kynas­ton: And there [00:36:00] are two Climes, invest, uh, on the ASX uh, list­ed, aren’t there? There’s Clime

John Aber­nethy: Yeah,

Tony Kynas­ton: and

John Aber­nethy: yeah, it was,

Tony Kynas­ton: and they are dif­fer­ent com­pa­nies. Yeah.

John Aber­nethy: yeah. So we’ve got the Cli­mate Invest­ment Man­age­ment group, CIW, ASX code, and CIM is the lick. And a deriv­a­tive of the leak is CAMG, which is a con­vert­er note I just talked about, which will be mov­ing into a 6.5% month­ly income note, from 1st of Sep­tem­ber, I think. But, um, yeah, some­thing to watch.

Tony Kynas­ton: Very good. Well, John, thank you for your time. Um, I know you’re busy and, uh, appre­ci­ate the chat and, uh, I’m, I’m guess­ing it’s gonna lead to a few chats between our­selves over din­ner at some stage as well to go and debate some of the

John Aber­nethy: Exact­ly. I love those din­ners.

Tony Kynas­ton: have you.

John Aber­nethy: Yeah, yeah,

Tony Kynas­ton: Yeah,

John Aber­nethy: And

Cameron: It’s.

John Aber­nethy: our

I think that’s anoth­er, I think you said it ear­li­er, but you’re on our main board and I enjoyed, uh, your input and I think it’s, uh, we’re bet­ter for it, which is good. And I think. [00:37:00] The per­for­mance of CRW, which we report in our quar­ter­ly update.

You know, not all you, Tony, but I think you’ve been there as things have devel­oped in the last three or four months. So it’s been good and there’s more com­ing, you know, we wan­na talk to you guys about, you know, val­ue invest­ing and, and launch­ing some prod­ucts to our clients. So that’s some­thing to look out for as well, we can talk about.

Tony Kynas­ton: Ter­rif­ic. very much,

John Aber­nethy: Right? All right. Thanks Thanks, John.

Tony Kynas­ton: Okay, bye

Bernard: Q A V is a check­list-based sys­tem of val­ue invest­ing devel­oped by Tony Khigh­ne­ston over 25 years. To learn more about how it works and how you can learn the sys­tem, vis­it our web­site, Q A V Pod­cast dot com dot A U.

This pod­cast is an infor­ma­tion provider and in giv­ing you prod­uct infor­ma­tion we are not mak­ing any sug­ges­tion or rec­om­men­da­tion about a par­tic­u­lar prod­uct. The infor­ma­tion has been pre­pared with­out tak­ing into account your indi­vid­ual invest­ment objec­tives, finan­cial cir­cum­stances or needs. Before you [00:38:00] decide whether or not to acquire a par­tic­u­lar finan­cial prod­uct you should assess whether it is appro­pri­ate for you in the light of your own per­son­al cir­cum­stances, hav­ing regard to your own objec­tives, finan­cial sit­u­a­tion and needs. You may wish to obtain finan­cial advice from a suit­ably qual­i­fied advis­er before mak­ing any deci­sion to acquire a finan­cial prod­uct. Please note that all infor­ma­tion about per­for­mance returns is his­tor­i­cal. Past per­for­mance should not be relied upon as an indi­ca­tor of future per­for­mance; unit prices and the val­ue of your invest­ment may fall as well as rise. The results are gen­er­al advice only and not per­son­al prod­uct advice.

Trans­paren­cy is impor­tant to us. We will always be very open and hon­est about the stocks we own. We will also always give our audi­ence advance notice when we intend to buy or sell a stock that we are going to talk about on the pod­cast. This is so we can nev­er be accused of pump­ing a stock to our own [00:39:00] advan­tage. If we talk about a stock we cur­rent­ly own, we will make it known that we own it.

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