Transcript QAV 353 – Richard Ivers

Episode Name: QAV S03E53 – Richard Ivers

File Length: 00:52:58

[00:00:04] Cameron Reilly: All right. Well, we’re very excited to have Richard Ivers on the show, Portfolio Manager at Prime Value Asset Management. We’ve been trying to get Richard on the show for a while because a couple of months ago I saw an article about him in the Financial Review which I talked about on the show. We won’t go into the skipping, but we will talk about some of the comments that he made about his investing philosophy which seem to mirror what we talk about, looking for good quality stocks. So welcome to the show, Richard.

[00:00:38] Richard Ivers: Thanks for having me guys. Appreciate it.

[00:00:41] Cameron Reilly:  So, Richard, let’s find out a little bit about you. Do you want to give us your potted history before we get into your investing methodology? Tell us a bit about yourself. How did you end up in the investing game?

[00:00:53] Richard:  Sure. Yeah, I mean, I studied business at uni and I came from a family that didn’t have a lot of financial backgrounds. My dad was an engineer, my mom’s nurse. But I always found it very interesting the finance game and know a close relative of the family who worked in stockbroking. And he got me an initial role, maybe wise it was back then, which sort of had a tumultuous period in more recent years. But back then, it was one of the biggest brokers in Australia. And I got a role helping analysts out and it was sort of a secretary, like part-time secretary and part-time analyst. We were helping the analysts. So that was back in the days when research went out on paper versus digital. So I worked with them for about a year and then they got me to be an analyst in my own right. That was many years ago.

I’ve worked in the investment industry for about 18 years now. So 10 years in broking, covering stocks, so stockbroking that is. BBY and Ord Minnett, [inaudible 00:01:57] small caps and about eight years in funds management. So that’s the most recent eight years where I’ve been at three different funds. So I’m currently at Prime Value Asset Management. Before that, I was at a group called Contango. And before that, I was at a group called River Capital. River Capital is part of this [inaudible 00:02:15] family. Contango, when I joined them and we did manage to a buyout with the James Packer went well for a while and then things changed a bit towards the end as being sort of quite widely publicized. And then after Contango, I left and joined Prime Value. I’ve been for about, coming up three years.

[00:02:33] Cameron Reilly:  Started off as a secretary that pretty much sounds like my job. Secretary and part-time analyst, that’s pretty much what I do. So tell us the Prime Value story. They’ve been around quite a while; I see from their website.

[00:02:47] Richard:  Yes. So they were founded in 1998, so 22 years now. And it was started as a family office. So it’s quite a wealthy family that invested their own money and they decided to invite or enable external money or external investors to join them in their investing. And it’s been growing and consistent since then. So in total, we manage about just over one and a half billion dollars of money. A large chunk of that is in property. So over a billion dollars in property. We manage about 200 million inequities. There are a few different funds within the equities part of the business. So there’s my part, which is the small caps. I only invest in small cap stocks, so I manage about $70 million.

And then there’s a couple of other fund managers. So one guy does an all-cap fund. So we invest in both large cap and small cap. Then there’s a lady called Leanne who invests in an equity income fund. So we’re a little bit different in that we are a family office. So most other fund managers out there are either institutional funds. So they will take on money for big, big funds, particularly the super funds. You know, a lot of the likes of the industry funds will give them big licks of money to manage and they have a bit of a different focus. Because they’re particularly focused on leading indexes, very much index focused. Then there are others that are, you know, that maybe have LICs, listed investment companies, or risk investment trusts.

And ourselves, which is a family office, but about the family and myself, I’m not part of the family. So I have my own money invested in the fund and the family has their money invested in the fund which gives it a different approach. Because we are very much about making an investment return, not just beating an index. And that philosophy focuses all the way through to our benchmarks for the most part that’s small cap funds. Pretty much every small cap fund out there has a benchmark, which is the small cap index, which is small loans. Our index is 8% absolute, which is a long-term, the 40 year historical small loans return. So it’s in line with the historical returns, which are considered fair. But what it does is, it incentivizes us to generate a positive investment return, not just beat an index. We believe fundamentally that the index is not necessarily an efficient or an appropriate way to invest.

It’s filled with stocks which are the composition of the largest businesses within that index, a business that we might not be interested in investing in. When you’re benchmarked against an index is a temptation to manage your risk by investing in those businesses, just to ensure that you don’t underperform. Whereas we throw the index out, we’re not interested in, I don’t even look at the composition of the index. I’m interested in bringing or generating a return and beating that in our benchmark of 8%. And we typically target 10 to 15% per annum. That’s what we think about when we invest at a stock level. So a little bit unusual in the way that we’re structured and the way that we invest.

[00:06:09] Tony Kynaston: Yeah. Interesting. Hi, Richard interesting that you do that way and I guess what you’re saying is that’s because you’re part of a family office or your origins run a family office. Can you maybe just for our listeners who may not know what some of these terms mean, can you just expand a bit on what a family office does and who they might employ, and what their objectives might be?

[00:06:36] Richard:  Yeah, so a family office means that it’s essentially a wealthy family that’s set up. They have their own money. And some family offices just purely invest their own money and don’t allow external money to be invested. But Prime Value and a few others like River Capital, where I previously worked as well, allow external investors to come in and invest alongside them. So effectively investing in the same investments that the family is investing in and getting the same returns as the family. Some people find it appealing because they think, well, these people have got their own capital at risk and they’re proven successful clearly over a long period of time. And so there’s a lot more skin in the game with a family office like ours and with the portfolio manager myself, he’s also personally invested a significant amount of my capital in the fund.

And it also [inaudible 00:07:34]. So I’ve worked in institutional fund managers and also, you know, I’ve had a lot of friends in the industry that worked in them as well. And often the way when you are an institutional fund manager you have to tick a lot of boxes. And typically they look at things like the size of the teams. They have very big teams which means when you sit around the table and you’re trying to work out what to invest in, it can take a committee-type approach. Whereby you know, it’s sort of everybody will need to agree on investment, and it tends to move slowly. Sometimes when you fight to get an investment in the fund, it can be a reluctance to let that investment go out. So even though the fundamentals might change, you might not want your stock to go way out of the portfolio. So these sorts of dynamics come into play.

Whereas with us, there’s one key decision-maker, which is the portfolio manager. And in the case of the fund that I run, it’s me. And I’m 100% accountable for the performance of that fund. So, you know, like this one throat to choke as you might say. Now, if it’s doing well, then, you know, it’s maybe, but if it’s doing badly, then it’s me as well. I’m accountable for that. And you know, there’s a significant amount, many, many millions of dollars of my bosses, if you like, money invested in the fund that I managed. So he’s watching that performance quite closely and wants to understand what’s going on and you have that real skin in the game.

It also means that you can take a longer-term view. So when you’re an institutional fund, you can be very much focused on the quarterly performance, you answer to the people who have given you that mandate to manage the money. And they very much look at short-term performance and there can be a tendency to manage the funds that way as well. Whereas when you’re a family office or a fund like ours, you very much lookout, we can look longer. We can wear some volatility in the short term if you can understand why we’re underperforming in the short term. So the market, particularly in small caps where I am in, can go through periods where it becomes irrationally exuberant in some areas. And if you’re benchmarked against the index or you’re managing institutional money, you can be tempted to chase that index and keep up with it and take risks that you wouldn’t otherwise if it was your own money.

So it has a different approach. Like we sometimes, in fact, the periods where we have a stark [inaudible 00:10:04] to underperform have been when the market is really flying. And, you know, there’s a lot of risk being taken on. Like, there was a period early in 2019, where we underperform. And, you know, it’s that period. But then it turns very sharply. I mean, COVID has shown that as well, right. Things could turn really quickly. So when you’ve got that in your portfolio, you can get caught out. And so we’re not tempted to take that risk and we don’t get caught out when things turn quickly as they can.

[00:10:35] Tony Kynaston: So being held to an absolute number rather than an index, does that mean that if you happen to make, say 15%, nine months into the year, you’d shut up shop for the last three? Or do you wind back a bit, or do you sort of wind back to a nine, nine rather than taking your drive on the next position? Does that have a different dynamic to it compared to a large institutional fund that was trying to outperform the index?

[00:11:02] Richard:  No, it doesn’t. We very much just invest and we don’t worry about if we’re doing well or not. We’re focused on the investments and how we’re going. So it’s not about how much we are above the benchmark or not. It’s really about delivering long-term returns, particularly in a fund like mine as well. So even if I wanted to, I’m not incentivized to do that. So now the fund, as I said earlier I manage about 70 million. It’s sort of doubling every six months at the moment. It’s of course growing very quickly. But we’re very much at the early stages. So we’ve got a limit capacity to around 300 million. So most competitors in our space, you know, their capacity is about 500 million or billion, so meaning we’re much lower, and we’re in the growth phase.

And you know, I need to keep delivering good performance. And if I don’t deliver a good performance, the money will flow out again. And we definitely won’t get to that 300 million capacity that we hope to get to. And, you know, I’ll be managing this for the next 10, 15 years, at least depending on how I hold up physically and mentally and everything and also how the performance goes. So there’s absolutely not a temptation to do that. It’s very much focused on delivering good returns and my boss, he wouldn’t do it, he’s more focused on getting a return on his capital in the fund than know the performance phase that we [inaudible 00:12:29] on.

[00:12:31] Tony Kynaston:   Speaking of phase, if you’re using this sort of shared infrastructure or a family office, and you’re not out there chasing mandates from large institutions, is that reflected in your fees? How comparable are they compared to an institutional managed fund?

[00:12:47] Richard:  Yeah, so we would charge more for a retail client. So we charge a 1.25% management fee, and then we charge a performance fee of 20% above the benchmark of 8%. Now those fees that are very standard within small caps, the difference is though our benchmark is 8% absolute, as opposed to an index. If you are an institutional fund manager and say your client was Australian Super, the largest fund manager of a super fund in Australia, then they probably wouldn’t give us less than two or 300 million. It’s just around the area for them. They think about 150 billion. So when you’re giving someone two or $300 million, then obviously you get a big discount on the fees. So, you know, the small cap fund might charge 70 or 80 [inaudible 00:13:39] points 0.7 or 0.9% as opposed to 1.25% like we do.

So yeah, but in terms of other, like many other funds take both institutional money and retail money, so you manage for both. And typically the phase will be similar to ours about 1.25 or thereabouts. Some up to 1.5. I know someone who charges 2. But it’s when you can see that through the returns that are being generated. So in the time I’ve been working, I’ve been managing the funds over the last two and a half, coming up three years, so the return has been about 15% per annum versus the index of plus two over that time. So, you know, 0.2 or 0.3 is really not a huge amount in the context of the return of it.

[00:14:30] Tony Kynaston:   Well, thanks for sharing that with us. Maybe, can you take us through your process on how you invest? I noticed in reading some of the bio on yourself, you talked about having lots of company meetings during the year. How does actually meeting face-to-face with management add value to your investment process?

[00:14:51] Richard:  Yeah, that’s a core or fundamental part of my process. So I may on average or pre-COVID, I was meeting two a day on average, so 500 a year. With COVID that’s gone up a lot. So it’s probably more like four, I would say. But I haven’t actually gone back and looked at the numbers in [inaudible 00:15:13] and that’s fundamental. I mean, there are around 200 or 2000 stocks in the small cap space. There’s about sort of 400 or so 25400 that is, I would consider in the space where I would invest. So I don’t invest in resource companies. I don’t think we invest in companies that are losing money. And have you ever heard much about quality bias?

So we strip out a lot of companies but it’s really about going and meeting the companies. 

And I think it’s much more important in the small cap space than it is in the large cap space and the top 100 being the large caps. So management is very, very important in small caps and you need to sit down and talk to them and understand how they’re thinking, what their aims and goals are, to really understand how that business has got to perform. And you also, I mean, I spend a lot of time just trying to get to understand the business. I don’t think you can do that well if you don’t sit and talk to the company and understand. You know, are they able to get pricing through? What are the risks in the business? What are the largest customer contracts they might have? When are those contracts due to be renewed? All these sorts of things. Are you getting to the nitty-gritty of the accounting of the business as well? What you really need to I think talk to the management to understand?

It also enabled you to triangulate the business. So a big part of what we do is we also talk to the competitors of the business. They are the ones who give you the dirt. So when you talk to the company, typically they tell you all the positives and all the great things about it. And it’s very hard to often get to feel where the negatives and the risks are, but when you go and talk to the competitors, the first thing they’ll typically do is they’ll tell you the risks and the issues and the weaknesses in the business that you’re thinking of investing in. We’re very lucky because a lot of the businesses that are listed, we have competitors who are also listed. So we have the ability to go and talk to their competitors, so to get a full understanding of the business. And often the customers are listed too, or their suppliers. So you can get a full sort of circular understanding of the business, which is where the real value is added.

[00:17:41] Tony Kynaston:   Yeah, it’s interesting. I mean, I have a different point of view. I have certainly done a little bit of that and worked in businesses. But I particularly would find it hard going out and talking to hundreds of businesses. And I think even if I could, I would find it hard to do a deep dive into enough industries to get value from that. I’d probably do it in one or two industries, but not across the whole breadth of industries. I know you said before, you don’t go into all industries. So you know, you’re obviously playing to your strengths there. Can you give us some examples where meeting with management has stopped you from investing in something or the reverse has made you invest in something you weren’t going to invest in before?

[00:18:25] Richard:  Yeah, that’s a good question. I mean, I would say just in terms of me too, I would say that I agree with you Tony about it’s hard to do that. But I guess I’ve been doing it for 18 years and you build up that depth, you know, and you build up the knowledge of how the business operates and you build up the knowledge of what the management is like. How much they like [inaudible 00:18:52] or not. And so the way they talk, you get an understanding and you can sort of either…Like, typically the interesting thing too, is you talk to the CEO and they’re typically bullish. Often they would come up through the sales part of the business. Talk to the CFO, and they’re often conservative and you know, the opposite and often the truth is somewhere in the middle. I like to talk to the two of them separately. And I’m trying to get line managers as well, and then work out whether they’re all saying the same thing or what’s different. 

But we all work differently. In terms of businesses where they’ve…I mean, just about all my ideas come through meeting the company. I mean, that’s essentially what I do and how… I mean, this financials, my background is in. Like when I was at uni, I did accounting and I skipped ideally. I did work in some finance and strategy roles outside of the investment industry. So that financial stuff as well is really important. So, you know, which you’re going to say externally things like return on equity, return on invested capital, all those sorts of things, you know, return on incremental investment which is really important.

I’m just trying to think, just bear with me. So I’ll give you an example. One business that I like at the moment, which we’ve just invested in recently, is a business called SG Fleet. That’s a business that I followed for a long, long period of time. It is a business that provides vehicle leasing to largely the corporates in government. So, you know, they’ll lease a car from SG Fleet and SG Fleet will make an income along the typically a three-year lease term and then the car will be handed back at the end. And they’ll make a loss or a gain when they sell that vehicle. So SG Fleet has very much had a tough period through COVID. So, you know, the corporate stops taking on new cars because they didn’t know the outlook.

When you talk to the management and understand how that was going recently back in August their results and this was all public too. So they do a public conference call. They talked about the pipeline of the business and how that had changed. So through COVID, they had a pipeline that completely shrunk. The amount of new business had just almost evaporated. And in the space of a few months, it had completely changed whereby Australia got on top of the virus. And you know, we felt like we actually had the ability to deal with it and go back to some sort of normal life. Then their opportunity to win new customers had changed significantly. And again, this is a business that I have followed for a long time. So I know what management is like and they’re pretty straight, straight down the line. So that changed my perception of that business in a positive way.

And the stock was at an all-time low. In terms of share price, the valuation multiple was at an all-time low as well. It was trading RPA around about eight times, typically trades on sort of mid-teens type RPA. So you had those, all those sorts of things lining up. That was one that really changed my view on it recently. I’m just trying to think of one where it changed me to sell. Sometimes it’s things like, where you might have a major contract coming up, and we’re very much around that capital preservation focus. So not losing money which I should have mentioned earlier, but that’s a big part of being a family office as well. 

You know, often the attitude of wealthy people is that you know, I’ve got enough money, more money than I can ever spend. Just don’t lose my money. That’s one of the key focuses often with very, very wealthy people, which permeates through our philosophy and through that absolute benchmark as well. And so with businesses that might have a big contract coming up or something like that where there is a big risk factor, we might reduce the waiting of the stock just to manage that downside risk. So that’s perhaps an example of that.

[00:23:14] Tony Kynaston:   Yeah. Kind of the reverse of buying the rumor, sell the fact, isn’t it? If something’s coming up, you don’t want to be exposed to it, but you may have to forgo some profit, but you also avoid a loss don’t you, if the contract doesn’t come off. Good point. So take me…So is meeting companies the beyond in all of your process, or are there other parts to the process like valuation, for example?

[00:23:38] Richard:  You know, it’s just where my ideas come from. Our ideas come from launching it. But it’s just part of the process. So we have quite a lengthy and in-depth process, which I probably won’t bore you with all the details with today. But we go through the process of investing. We forecast the earnings of businesses out three to five years. Beyond that, it becomes a little bit difficult to be accurate. We think particularly in the current economy where there’s disruption happening and the economy’s evolving and changing. And then we would put what we think is a reasonable valuation multiple on those earnings. So that might be like we tend to look at either multiple sides. That might be either a multiple of, I said, 10 or 15 times earnings as a rough figure.

So we’re going to say [inaudible 00:24:31] earnings interest in tax. We could use a PA just to, which is more broadly known, a similar sort of thing. And then you discount it back. So you look at what that value would be and what the dividends stream would be over that three-year period, for example. And then what’s the internal rate of return, or what’s the investment gain I’m going to get over that three-year period. I’m assuming my assumptions are right. And if that’s in that 10 to 15% return requirement, then we will typically invest. Now that’s a simplified way of looking at it because we also look at the risks. 

So if a business is like, our forecasts require some assumptions and some have a higher level of risk than others. If we have a business that where you have a high level of certainty, typically a business that is not very exposed to the economic cycle and has high barriers to entry, so has good sustainable earnings during the cycle. Then there’s a relatively low level of risk in those forecasts. And we would have been much more likely to invest and put a much bigger weight in the portfolio for that business as well.

So some other investors think about weigh ins in terms of what’s the biggest return I can get. When I think about it like that, we think about what’s the risk of that return that we’re going to generate. And it’s sort of like a tortoise and the hare approach, where they’re sort of side with the tortoise type approach, but trying to get good, consistent returns, not hit it out of the park and take big risks. So I’d probably not find out highlight areas of space now that’s really hot and everybody seems to, a lot of the others seem to love it. I don’t have a single hold in it. I’ve never had any investment in this space. Now I miss some upside clearly after it’s been an absolute cracking business, but that’s just not the way we approach it. And that’s not the way we invest. We’re just looking for good consistent returns over time.

[00:26:35] Cameron Reilly:  You don’t get a phone call from the patriarch of the family office saying, “Hey, how come we don’t have any Afterpay in our portfolio?”

[00:26:41] Richard:  I do get questions. I do get those questions but he understands that as well. So he’s very much…He agrees and accepts that approach, and that’s why I joined. That was very much my philosophy of investing. And he employed me on that basis. So we miss out on some of the good ones, but you know, we also missed the errors. You know things turn quickly. And in small caps, you think back, I remember a couple of years ago, it was all about medicinal cannabis and these stocks were absolutely flying and it was largely a concept or a promise. And then early last year it was a really speculative tech. So now tech or software businesses can make great businesses, but these are ones that were a long way from earning a profit and, you know, conceptual type businesses, may not fly. And it seems like this year it’s buy now, pay later. Now they could keep going. I don’t know when it’s going to turn, but Afterpay is a great business. But there’s a lot of tier two and tier three players, and you kind of lookout and we think I just, I can’t get anywhere near the valuation of these businesses. And I think it’s going to turn, I don’t know when, but I suspect it’s going to turn at some point.

[00:27:53] Cameron Reilly:  No, I agree. I think they’re one regulation away from turning is how I look at it. But what you were describing is a very Buffett Munger approach, isn’t it? It’s an emphasis on the predictability of earnings rather than necessarily the upside of the earnings. It’s buying a company with bundled like qualities. Someone wants to… It was either Buffett or Munger, but that’s what you were doing basically, which is kind of value investing. And I know you don’t call it that. You call it GARP, I think from memory or something similar. So maybe we should call this episode, The World according to GARP, Cameron and we put it out on the podcast. But maybe you could explain what GARP is for us. Thanks.

[00:28:33] Richard:  Yeah. So it’s growth at a reasonable price. So what we’re really just trying to say is that we’re trying to buy businesses that are growing, but that we do have very much valuation overlay on it. So you know, we’re not going to [inaudible 00:28:50]. Like we spoke about Afterpay is an example of a business that you just kind of say, okay, this thing’s going to grow and I’m just going to look out maybe 10 years or 15 years and say okay, the valuation stocks up on that really long term basis. We don’t look out, as I said earlier, we look at more than three to five years. And so we’re trying to buy businesses that are growing. But we are focused on valuation and we’re actually, strictly speaking, have a GARP bias where we’re sort of a style like an [inaudible 00:29:18], if you want to be specific and can show that I’m consistent in the way I communicate with your listeners, as well, as the way we invest. We do have some value and some growth, but we are very much a GARP sort of buy.

[00:29:36] Tony Kynaston:   That’s an interesting difference to a value investor. We’re quality value, I guess, is the name of our podcast. Let me run some names past you, which are at the top of our value list, and just get your take on them for our listeners. So Eclipx ECX, and that’s probably a competitor of SG Fleet what you were talking about before. What’s your take on a stock like Eclipx?

[00:29:57] Richard:  Yeah. We actually own a little bit of Eclipx as well. We’re on both of them in the space. And I think it’s interesting in that space now. So like Eclipx is about to report their results in tomorrow, actually. So they’re very much been a turnaround. So the old management went and they did a lot of acquisitions. That didn’t really play out. The new management is coming. He is a guy who’s an ex-UBS Investment Banker, actually. There is a lot of assets, cleaned it up, and brought it back to its core. Like I mentioned earlier with SG Fleet, the key driver of this business is in their fleet business is essentially the customer contracts. So the earnings, they get on the revenue stream of those vehicles over the term of the lease, which is very much improving. Then the other big swing factor is the divestment of the vehicle at the end of the lease term, which is called the residual value.

And they take a profit or loss on the sale of that used car if you like after three or four-year-old car at the end. And that can move earnings around. I remember 20 years ago or so, some of these businesses blew up on the back of used car prices getting smashed. Now, where we are right now used car prices are absolutely booming. So, people, new car sales have been weak. They’re starting to improve. There hasn’t been a lot of new cars coming into the car package, you might say over the last few years. And people don’t want to catch public transport and they want a holiday locally. In fact, many times they should restrict it to holidaying locally. So they need additional cars. There’s more demand and there’s been less supply of cars, which means used car prices are up to 20 or 30% at the moment.

So you’ve got this big tailwind coming through, which is, I think people are starting to understand that that’s a real key earnings driver for both Eclipx and SG Fleet which should drive earnings pretty strongly over the next couple of years. In both cases, their valuations have changed, which is probably what’s coming up on your screen as well. And the other that’s likely to happen as well and this is where you get a feel for talking to the participants in the industry is that it’s been a very competitive space for many, many years. There are 10 big players in the space. One of the few industries in Australia where you have so many players and they all accept that the industry needs to consolidate. It’s too competitive. There are too many players, which means that M&A is likely and it almost happened a year or two ago.

There’s been a few bits in the industry a year or two ago, and I think it’s likely there will be M&A in the space and Eclipx has said publicly that they are a willing seller. So Eclipx is a Prime tent target for a takeover over the next year or two. That has to be at the right price. And, you know, there has to be a bidder, so it’s not certain, but it’s definitely a rational thing to happen. And that would be a rational business to be taken out.

[00:33:11] Tony Kynaston:   Yeah. And the deal fell over last year. And it’s my experience, the value end of the market as the player is taken out. Like, I’ll agree with you on Eclipx and M&A activity. Let me run another one by you. Michael Hill Jewellers, is that someone that you have met and know?

[00:33:27] Richard:  I have, yeah. I’ve met them a few times. Yeah. It’s an interesting business. It’s a retailer, as we probably all know Michael Hill in the jewelry space. Because of their jewelry and the interesting thing about them, when you look at the balance sheet and it’s got a huge amount of inventory, and you wonder why. And of course, it’s diamonds and gold and all that sort of stuff. But it’s very much [inaudible 00:33:46] cheaply at the moment. I think it’s on a page around about six times this year’s earnings. It’s a business that about 70% of its earnings are coming in the second quarter. So this quarter at the moment, so obviously the gift-giving for Christmas. So it’s very much dependent on how this next couple of months buys out.

So you do have that seasonality or risk to it if you like. And it’s also a business that’s relatively mature. So with retailers, the way that you can generate very, very high investment returns is if you’ve got a good store concept. It’s rolling out more stores. So, you have a concept, it’s a bit like copy-paste, copy-paste, copy-paste, profit standards. Whereas in Michael Hills instance, it’s actually relatively mature, so they don’t have a big store roll-out, which means you really more dependent on the sales growth at the store level. Well, the profit growth at the store level, which makes it a bit harder to grow and also makes the valuation multiple tends to be restricted because the doesn’t have that growth attached to it. So when you’re buying it, there’s no, as you really hoping or expecting, a turnaround in profit or something that’s going to drive it more. So, you know, there might be a big level of engagements and weddings, for example, that could happen in the post COVID. That could provide a big uplift.

So it’s kind of one that it’s definitely interesting because it’s cheap, but it’s not, it’s a business that you kind of get an uplift at a certain point because it doesn’t have that roll out when you get the earnings growth over a long period of time. It’s possible also that it might then go out of [inaudible 00:35:24]. So it’s sort of a business where you get sort of that wave type pattern as opposed to a consistent growth pattern.

[00:35:32] Tony Kynaston:   Being an ex-retailer, I also know that retailers love growth and oftentimes a company in this space, if it’s not rolling out stores, it’s got an eye on an acquisition some way to get a big store number increased quickly. So I don’t know if that’s the case with Michael Hill Jewellers. It might be different because Michael Hill might be like your family patriarch looking after his money rather than trying to necessarily grow it dramatically. But that’s always, I guess, the other side of the coin you don’t know about is what they’ve got planned in terms of acquisitions or bolt-on to increase that store footprint.

[00:36:07] Richard:  Yeah. And a great balance sheet. Doing that cash balance sheet so they’re well-positioned. Yeah. And there was a new guy that came in and manage the [inaudible 00:36:12]. The guy, his excellent. I can’t remember his name is [inaudible 00:36:14]. So he’s running it. So he’s very much got a growth mandate and to get this business growing again.

[00:36:20] Tony Kynaston: Yeah. Watch this space, I think with Michael Hill. And what about The Reject Shop? That’s probably the last one I’ll run by you. Another retailer.

[0036:27] Richard:  I’ve got a long history with The Reject Shop. I used to [inaudible 00:36:28] when I was an analyst at Ord Minnett. So it’s a business that we used back in those days. And this would have been sort of like, sort of [inaudible 00:36:37], say 2008, just previously to this, 2006, 2007, 2008. It was absolutely fine. And it’s gone through a few troubles and now they’ve had a new management team that’s coming beginning of January and it’s got a lot of things in place whereby it could do really well, but it is a turnaround. So turnarounds are inherently a little bit risky because they kind of get the business back on track.

And it takes a little bit of time as well because one of the issues with The Reject Shop is the merchandising. So the stock in the stores. So as we all know, you know, it’s a place where you go in and there’s a huge variety of products that you can purchase from it. And they lost their way a little bit with that. And it takes around nine months to turn that around, maybe even longer. So they typically order out six to nine months, the stock before it actually comes and gets into the store because they’re importing it. Then you’ve got to remove your old inventory. So it’s a bit of a big ship to turn around and get the business on the right track. So it takes a little bit of time to get to know how they’re performing. But they certainly got the management that is in there now, their ex came up in Target. So that’s a tick. That’s definitely a positive. Came out to be a fantastic retailer over the last few years and has taken a similar approach.

The way that they are changing The Reject Shop is very much about simplification. So reducing the number of products or SKUs they have in store. Getting the products per store, similar across most of the different stores. Refreshing the store look and feel. Reducing the number of supplies so they get better terms with their suppliers. All those things sound really good. They sound positive. What you don’t know is how the consumers are going to respond to it. And there’s just a little bit of hesitation with what I’m saying not because there’s anything wrong, but just because you’re so much need to see it in the numbers to really know whether it’s taking shape.

Certainly from an investment perspective and putting the numbers together, you can definitely get a big return. So you could expect your sales around about $800 million or so. And they’re targeting a 5% everyday margin of $40 million every day. You could easily put that on 10 times. If it’s growing and the turnaround gap [inaudible 00:39:03], you have to try it on a higher multiple than that. But let’s just assume it’s on 10 times, they got close to a hundred million of cash as well. You’ve got sort of $400 million of a business, and then a hundred million dollars of cash gets you to $500 million valuations of the equity, which is about a $15 share price, which is almost double where it is now. So you can definitely see the upside. There’s no doubt about that. It’s just nature to continue to really deliver. I think when, if it does deliver, it will move very quickly the stock. But it has had a couple of hiccups along the way. It has had a few turnarounds if you like that didn’t work out.

There’s a little bit of trepidation out there. It’s a very interesting one. Because when you’re in turning this business, they turn quickly. There’s a lot of operating leverage. A lot of operating fixed cost cover, which is a metric we use for retailers, which is basically the earnings, it’s coverage of fixed cost paying interest and rent. Because you know there’s a big rental cost for retailers and how much of its earnings cover that. So you know the big ones are like the [inaudible 00:40:13] and the calls can be up to three times the coverage. Reject Shop is more like, sort of one and a half times, which means there’s a lot of operating leverage. So when things are going bad, kind of, you can go down very quickly. But when they’re going well, they go up quickly as well. So if they can get the top line growing, sales growing, the earnings will really accelerate in this business. And as I’ve outlined, the valuation can really accelerate with it.

[00:40:42] Tony Kynaston:   Yeah. Good. Well, we’ll pencil in $13 for that one. Hey, listen, I’ve got one more question before I throwback to Cameron and this is one we’ve asked about the fund managers. What’s your take on the argument that value investing is dead? Is it dead?

[00:40:58] Richard:  No, it’s not dead. Absolutely not dead. Sometimes, I struggle a bit [inaudible 00:41:03] essentially a long, long time. And when you ask people what value is, and there are different views on it. You know, like I think there’s a broad perception out there that value is actually beating down structurally challenged, cheap stocks. That’s not actually true. I think what’s true, I think what you outlined earlier, Tony, is that you’re buying businesses that are either intrinsic value or, you know, you’re buying them on a good quality business. Like the Charlie Munger and Buffett approach, you’re just buying them on the value below what they were. And that’s how I think about it. And that’s definitely not that is the tried and trusted way of making good investment returns.

If you’re thinking about it, in terms of buying cheap stocks that are structurally challenged, then that’s not dead either. But the time in the sun is probably shorter than it was in the past because the world is changing and technology is having a big impact. And businesses that are structurally challenged, it can be a lot tougher for them to turn around and improve their business. You’ve got to make big decisions. Stocks that are low P/Es, you need to be careful about because of that. They can be value traps. And it just can be that perhaps the structural change is not quite evident to you yet when you’re buying it. So you just need to be a little bit careful about low P/E type businesses. That’s the only thing I’ll say, but definitely, value investment is not dead. Absolutely not.

[00:42:36] Tony Kynaston:   Well, thank you. Thanks for that Richard, that was a great discussion. Cam, we’re going to throw it over to you if you’ve got any questions. Thanks.

[00:42:41] Cameron Reilly:  Yeah. A couple of softballs. Richard, one thing I did want to call back to something you said at the beginning was you don’t invest in resources stocks, is that correct?

[00:42:51] Richard:  That’s right. Yeah.

[00:42:53] Cameron Reilly:  And why is that? Is that just a general philosophical position of the firm?

[00:43:00] Richard:  No, it’s not. So, my colleagues, manage the other funds. They invest in resources businesses. That’s not my strength, so I don’t have a resources background. And so I’ve definitely applied to my strengths. Secondly, it also comes down to philosophy. So I could try and like learn resources and get to understand them. But with the philosophy is trying to invest in businesses where there’s a predictability to the earnings and clearings drivers. With resources companies, looking at one of the biggest drivers is of course the commodity price and the commodity prices are very, very hard to predict. Think, if you’re looking at three to five years, it’s very, very, very hard. So it doesn’t really fit into that style of investing, our style of investing either. My colleagues have invested, they typically invest in the larger ones are the BHPs and the RIOs. Well, I mean, I’m small caps, which means I’m not, I can’t, my manager doesn’t allow me to invest in the top 100. And so on my end of the spectrum, it tends to be a high-risk resource. So yeah. It doesn’t fit our philosophy and our [inaudible 00:44:03].

[00:44:04] Cameron Reilly:  Right. Thanks for clarifying that. Okay. Well, I was just going to ask you a couple of recommendations that you might be able to give our audience. A book, is there a book that you like recommending in terms of investing?

[00:44:21] Richard:  I think there are the old trustees, like The Intelligent Investor, which is, you know, kind of one of the Bibles in investing but it’s hard, heavy going. I think Snowball, which is a book on Buffett, I think is a really good book. It shows some of his [inaudible 00:44:41] as well. It’s not just a pure you know, [inaudible 00:44:45] based on him. And it really gives insight into the way he thinks. 

One of the other things I like doing is reading monthly updates from fund managers, other fund managers. Like global investors as well outside, which gives you a perspective. And most fund managers, you can just go to their website and you get their monthly update. Like ours is free. You can see who our largest holdings are, and what we’re thinking about the market at any time. And there’s a lot of good fund managers out there and which are giving away information and insights for free. So you know, if it’s a fund that you’re interested in, or you look at who are the best performing funds over a prolonged period or when you just look at funds over a short period. But you know, have a look at their website and read what they’re saying. You can learn a lot.

[00:45:38] Cameron Reilly:  What about outside of investing? What are you reading anything good recently you can recommend?

[00:45:47] Richard:  I’m reading finance books. How boring is that?

[00:45:52] Cameron Reilly:  That’s pretty boring.

[00:45:53] Richard:  Yeah, it is. I read books to my son. I’ve got a seven-year-old son. So I, every night I read to him, which is a bit more recent. So we’re reading Dr. Zeus at the moment.

[00:46:03] Cameron Reilly:  Not investing in books? You’re not reading Buffett’s biographies to him?

[00:46:07] Richard: No.

[00:46:07] Cameron Reilly:  Not yet?

[00:46:07] Richard:  Yeah. I’m taking some pocket money and put it in the fund. I’m trying to get him interested, but he’s more just spending on toys.

[00:46:15] Cameron Reilly:  I’ve got a six-year-old and he is the only investor in the QAV fund at the moment. He gets paid a dollar a day interest on his investment in the fund. So he does very well.

Music, got any music recommendations? What are you listening to that’s good?

[00:46:33] Richard:  I actually have signed up with, COVID in particular, you know being stuck at home and not able to go out, more time listening. And I’m a little bit, well, I like [inaudible 00:46:43]. I’m 47 years old, but this is younger, like Rufus. I think they’re going to listen to a bit of them. Thom Yorke has done some good solo stuff recently. And then a lot of stuff that like, I sort of, you know, all the stuff like The Stones and that sort of stuff, like [inaudible 00:47:07] and all that as well. [inaudible 00:47:09]

[00:47:10] Cameron Reilly:  All the stuff that all guys like us with gray hair listen to.

[00:47:16] Tony Kynaston:   Yeah.

[00:47:16] Richard:  Quality stuff.

[00:47:17] Cameron Reilly:  Quality stuff. Yeah. What about podcasts? Do you listen to podcasts?

[00:47:22] Richard:  Yours, I actually did listen to yours on the weekend to get a bit of background information. And so that was good. Live Wire is an interesting one. I actually you know, you can listen to, you know, a lot of fund managers. I’ve just done an interview with them in the last week, and we’ll be going on with them. So they do some good stuff. Again, you can listen to in-depth interviews with fund managers which gives you a good understanding of how they invest.

And then the other one that I’ve listened to recently too, is Build it. They’ll come which has been called [inaudible 00:47:58] investment in Redbubble, and that’s how I came across it. They interviewed Martin Hosking and talked a lot about, his experience in building that business up to be a billion-dollar business now, homegrown and global marketplace out of Melbourne here. And they took a lot to entrepreneurs and some investors to which is quite good.

[00:48:19] Cameron Reilly:  What about film, TV recommendations? What’s good? What are you watching lately?

[00:48:25] Richard:  You weren’t allowed to the cinemas here in Melbourne, not even [inaudible 00:48:28] actually as of last night. But I’ve been watching on Netflix, there’s a great show at the moment called The Queen’s Gambit, which is about a female chess player. [inaudible 00:48:35] fantastic. I watched that last week and I thought it was brilliant. Brilliant shine.

[00:48:39] Richard:  Yeah. I’ve got that in my to watch queue. I’ve heard good things about it. I’m a chess player. Are you a chess player?

[00:48:45] Richard:  I’m actually not very good. My wife is actually a very good player and she wins me whenever I play. So I don’t play that often.

[00:48:53] Cameron Reilly:  I can’t get my wife to watch anything that’s chess related. So I’m hoping. I showed her the trailer for that. I’m like, look, you know, young girl, like with big Anime eyes you’d like that. The chess thing, I don’t worry about that. I’m sure that’s a minor storyline. I’m going to try and trick her into watching it.

Okay, so just to wrap up. So in terms of outside investors, if any of our listeners are interested in checking out Prime, is there a process, or is there a certain kind of investor that should take a look at your stuff? Give us the pitch.

[00:49:30] Richard:  Yeah, so we’ve got a website which is And my name is Richard Ivers and I run the Emerging Opportunities Fund at Prime Value. So that’s my fund. There’s a lot of information there. There’s also an ability to send an inquiry through. If you’re interested in doing that, do that, it’s definitely monitored. Like it doesn’t go into a [inaudible 00:49:53] file, it’s not answered. You get answered very promptly. There’s a lot of information on our funds on there as well. All the performance history, there’s the recent articles that we’ve done. And you can also get in contact and if you send an inquiry through the website, then you’ll come to a Business Development guy [inaudible 00:50:18] the project manager typically, he’ll talk to you about the fund. And we’ll typically talk to investors as well because we’re building a business and we are investing for the long-term and we want investors to understand and know what they’re investing in. Not to come in and in some way be disappointed.

And so we are a little bit different in that way as well. We’re boutique but we are accessible. So definitely encourage people to have a look. If it suits them, the fund has, as I said is generally a return of around 15% per annum in the time I’d be managing the last two and a half years. Over that period as well, the volatility has been lower than the index. So [inaudible 00:51:01] 15% versus the index return of 2%, but the volatility, which is generally considered a way of measuring risk is 20% below the index over that time. So I retain a lower risk. It’s a loan only fund, not our [inaudible 00:51:52]. We manage every step. So yeah, have a look. And if you’re interested, like inquire.

[00:51:23] Cameron Reilly:  I see that it was ranked the number one Small Cap Fund in Australia by Mercer for performance over the 12 months to the 30th of June, 2020. So congratulations.

[00:51:35] Richard:  Thank you.

[00:51:37] Cameron Reilly:  Hope you got a bonus.

[00:51:39] Richard:  It doesn’t work that way. I have to perform. It’s all about investment with [inaudible 00:51:42]. So yeah.

[00:51:47]  Cameron Reilly:  Well, thanks again for taking time out to come on and talk us through some of that stuff, Richard. That was great. We appreciate it.

[00:51:56]  Richard:  No problem. Thank you for having me.

[00:51:57] Tony Kynaston:   Good. Thanks, Richard. See you.

[00:51:59] Richard:  See you, Tony. See you, Cameron.