In this episode, we explore the factors driving performance in the global small and mid cap sector and its future outlook with James Abela and Maroun Younes from Fidelity. Discover the opportunities outside of Australia and why more investors should consider a global small and mid cap strategy.

Transcript

Paul O'Connor:
Welcome to the Netwealth Portfolio Construction Podcast series. My name is Paul O'Connor, and I'm the head of Investment Management and Research. Today we welcome from Fidelity International, James Abela and Maroun Younes, who manage the Fidelity Future Leaders and Global Future Leaders Funds. Fidelity International is a privately owned, a majority owned by its senior employees, with the balance held by the founding family.

POC:
Fidelity International is separate from the US based Fidelity Investments, with a separate shareholder base and separate business and investment organisations. Research and trading capabilities were formally separated back in December 2013. Fidelity International manage over 282 billion US dollars in assets across multiple asset classes as of March last year. James Abela is the portfolio manager of the Fidelity Future Leaders Fund, which was launched in 2013.

POC:
And he's the co-portfolio manager for the Fidelity Global Future Leaders Fund, which was launched in 2020. Prior to this, James spent 10 years as an investment analyst. Maroun Younes is a portfolio manager and analyst at Fidelity based in Sydney, and has 14 years experience in investment management. Maroun joined Fidelity is an investment analyst in 2012, and was appointed co-portfolio manager for the Fidelity Global Future Leaders Fund in 2020.

POC:
There were 11 Fidelity managed funds on the Netwealth super and RDPs investment menus, including both the Future Leaders and Global Future Leaders Funds, that James and Maroun manage. Australian investors have allocated to Australian mid and small cap equity strategies for many years. Basically, due to the larger alpha opportunities set available in these sectors. But we're now seeing an increasing interest in awareness in global mid and small cap strategies based on the same premise.

POC:
But these sectors also provide greater alpha opportunities to active managers. However, these strategies are typically more volatile when compared to the large and mega cap equity strategies. So it will be interesting to understand how James and Maroun view and manage risk. In addition, the recent economic and equity volatility post the outbreak of COVID, would have tested the risk management processes embedded in active strategies. And we'll explore this area with James and Maroun this morning.

POC:
Also with the recent spike in inflation, and debate now as to whether the recent rises hinge is short-term due to supply constraints or structural. I'll be interested to discuss how structural rise in inflation and interest rates may impact on the mid and global small cap equity sectors. To commence James, you launched the Australian Future Leaders Fund about eight years ago. And in 2020, the Global Future Leaders Fund.

POC:
There's been I guess, active global mid and small cap strategies in the Australian market for a long time. But I guess just in recent years, we've seen a particular increase in interest in these strategies. So what do you think is driving this increased interest?

James Abela:
I think it's just that the system is heading towards $3 trillion in Australia now. And logically, I think it's part of a very good diversification strategy to get some global exposure. And the global exposures I guess, just has very big opportunity set. And a lot of people want to get, I guess, more diversification beyond Australia, which can be quite narrow and shallow, I guess, in a broad sense. So when you want to go into the global marketplace, this is the vehicle that you can really go into. And the opportunity set I think is really large.

Maroun Younes:
Can I also add to that Paul? Increasingly as the last few years have unfolded, the global broad cap space has become increasingly dominated by a handful of very large companies. And almost to the same extent that you find in Australia where you have a very high concentration at the top.

MA:
And so the interest in global mid caps, in addition to all the reasons James mentioned, is also the fact that you have a much more diversified universe exposure to a broader range of companies. And the index itself isn't dominated by four or five mega cap names.

POC:
Yeah. It's interesting. Sorry, go on.

JA:
But just to come back, sorry, on Maroun's point. So we've looked at it and the global has much bigger I guess, long-term global leaders that are... As Maroun discussed, over the years a lot of them are business to business, as well as business to consumer, but they are really like Future Leaders and Global, like market share, winners and disruptors. So that's got 17% in tech and 70% in industrials.

JA:
But Australia's, domestically, it's a lot more cyclical. So today 23% of the index is materials, and 20% is consumer. And all of those sort of long-term leaders, like healthcare and tech are much smaller at around 7%. So you do get exposure to those long-term leaders, global platforms, disruptors, et cetera, innovators and leaders. And that's something that is available globally and just in much more volume domestically.

POC:
So the impact of COVID-19 has had a significant impact on the global economy and companies. So how has the global mid and small cap companies sector been impacted? And how have these companies I guess, adapted to a post COVID world? And I guess, compared to the large and the mega cap stocks, do they have enough capital to have adjusted quickly enough to the changing nature of the economy?

MA:
Yes. It's interesting, it's probably worth just taking a step back and just framing the definition of mid cap. So to a normal person, mid cap might sound quite small, but actually by global definitions, mid cap is quite a broad universe. So it encompasses anything really from a market cap of about one billion US up in excess of 30 billion. So despite the name, a lot of these companies are very well capitalised. And a lot of the companies, leaders in their respective fields, they may be very niche B2B providers, but they're quite dominant.

MA:
So a lot of companies, particularly in the high quality spectrum, have access to a lot of liquidity, a lot of cash, very strong balance sheets. And our process itself lends itself to finding those such companies. So we've been able to navigate the last 12 months by sticking primarily to high quality companies that can survive the pandemic. And then in terms of operational efficiencies, the companies can generate, it's the same playbook there that you would find in the large cap.

MA:
And a lot of companies saved money on travel expenses, a lot of companies were looking at unnecessary marketing expenses. A lot of companies got access to particular government funding or grants, things of that nature, R&D grants, et cetera. So there's been a lot of liquidity injected into the system as well from a fiscal and monetary perspective. So we haven't actually seen a lot by way of bankruptcies, we haven't seen a lot by way of very diluted equity or capital raisings either. So that's sort of been a surprising thing I'd say over the past 12, 18 months.

POC:
Yeah. It's an interesting point you make there that the global mid cap stocks if they are listed on the ASX, that probably would be a large cap stock. So I think it's an important point for investors to understand when they're allocating to these. So the mid cap companies are typically a lot larger by market cap when compared to an Australian mid cap company.

POC:
The sector's generated strong returns over the last 12 months, like all listed equity markets. But how did the global mid and small cap sectors performed over the last five years, and what's been driving the performance in the global mid and small cap sector? Is perhaps growth, IT related stocks like we mentioned earlier? What's been driving returns in the mega cap section of the MSCI World Exchange?

MA:
Yes. So the performance definitely over the past four months has been very strong. I think it's sort of been in the region of about 40%, but the returns over the past four or five years have been also quite healthy. That they probably haven't had as much airtime as sort of the mega cap, and just because of the attention grabbing headlines that you get.

MA:
But this is the sort of sector, this is a sort of space that could quite easily generate sort of low double digit returns through the cycle. And that's one of the things that we find very interesting and very attractive about it. In terms of what's driven that, there has been some growth driven by IT.

MA:
But it is, as James mentioned a little bit earlier, it is a more diverse universe by sector than what the large cap end of town. So really the drivers of the growth vary across sector, but the common theme across all of them is long-term structural winners that have been able to sort of compound and grow their revenue, compound and grow their earnings.

MA:
And those are the sorts of companies that have been able to drive the asset class performance over a longer period of time. And those sorts of business models, we can find them in technology, we can find them in healthcare, we can find them in a lot of dominant sort of consumer areas, as well as industrials. There's a group of very high quality industrials that sit within the global mid cap universe. And so it's really been split across multiple different sectors.

POC:
So James, you launched the Fidelity Australian Future Leaders Fund, just eight years ago. And Maroun, you've covered mid and small cap equities across most sectors of the Australian market. So you both have a lot of experience in Australian small caps. Can you take us through the differences between the Australian mid and small cap universe when compared to the opportunities in the global mid and small cap universe?

JA:
Yeah. That's a great question Paul. And one that is very worth considering. It's two very big factor differences between them. So the first one is, there's a much higher valuation discipline at the index level, and then also at the stock level. So what we see at individual stock names, is you get some very high quality businesses that may generate, say 15 to 20% return on equity, but the valuations are maybe 20 or 30 times, sometimes 40 times.

JA:
But in Australia, when you do get these high ROI structural winners, they can get up to 100 times. There's a number of names, like today, you got WiseTech and also Promedica. So one in tech, one in healthcare, and they're on PAs that are over 100 times. Whereas in the global context, actually, there's lower frequency of that sort of incidents.

JA:
The second one, which is a big one, as well as a lower incidence of success in the momentum factor. And in Australia, and especially Australian small caps, it's a very significant factor. So somewhere between three to four, sometimes five years out of a decade, momentum is one of the key factors that drive success and our performance. Whereas globally, it's much less, it's one to two years out of 10 that drives the success factor.

JA:
So as a result of that, we've adjusted our long-term strategic weights in the portfolio construction matrix that we use, that we call QMTV, or quality, momentum, transition and value. And the mix of that in Australia, is 40, 30, 20, 10. So 40% quality, strategic long-term weight, 30% momentum, 20% transition, 10% value, with a 10% sort of movement either way for tactical positioning.

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JA:
The global basis, considering those two factors of greater valuation discipline and less momentum factor driving the market, we've ended up with a strategic weight of 40, 30, 20, 10 for quality, value, transition, momentum. So it's 40% quality, which is similar to the Aussie one again, you can see what Maroun and I are saying, it's a quality skewed portfolio. But then it's 30% value, 20% transition, 10% momentum, with again, that 10% tactical tilt either way.

JA:
And the portfolio that it's constructed today, is one that Maroun and I are very proud of. It's very high return in absolute sense, in a relative sense, but the valuation premiums were paying maybe 10 to 15% above the index, but the ROI is between 50 and 75% higher than the index.

JA:
So that's really a great portfolio construction process. And the filtering down of the number of names into that 50 to 60 names that we hold today is something that comes from the bottom up. But also the portfolio construction piece, and that factors in the differences between the Aussie market and the global marketplace.

POC:
So that's interesting, the comments you make there about momentum and not being as great a driver of returns in the sector there. And I guess as you were talking there, I was thinking in my mind, "I wonder what's actually driving that? Is that the increasing, I guess use of passive investment that's investing, or has a larger allocation to the large and the mega cap companies?" But I guess it's not surprising as well, it sounds quite rational. Well, ultimately, the take out there is that it's a bit more of a futile, I guess, fishing pond for active managers in a more true sense than the larger and mega cap stocks.

JA:
I think there's a lot more eyes looking at the global marketplace. And I think that tends to lead into a great evaluation discipline. And there are more people chasing ideas, but there's more discipline around what they pay for those ideas. Because I think they see the competition, they see the options, they see the marketplace much more broadly. And the number of options is also much broader.

JA:
So Maroun and I have commented many times over the years that, Australia is a narrow and shallow market. So when you get a great idea, whether it's Altium, or WiseTech, or Promedica, that is very unique and very different and very high returns, like 20 to 25% return on capital. That becomes very unique, and so that the chase to actually want to own it becomes quite aggressive and euphoric. And that's how their stocks end up on 100 times per years.

JA:
Whereas in a global marketplace, you may have, say two or three leaders in the market, they may be five or six metres. And in the marketplace, there may be two leaders, but there's a group of five or six groups of companies that are in a certain marketplace. And so it's not chased as aggressively and as euphorically as the Australian marketplace.

JA:
So that does lead to the momentum factor and the valuation discipline, kind of underneath being the outcomes of the market structure and also the visibility of investors on what the market is, the marketplace that they operate in.

POC:
No. Very interesting. The Australian small cap sector is concentrated as we've been saying by a number of industries, whilst the global mid and small cap universe is far larger and more diverse. So can you provide the listeners with some insights into how the sectors differ by industry type? And what type of industries can you get exposure to in the global sense that you really struggle to get exposure to in the Australian market?

JA:
Yeah. Look, the big thing is, global is really led by tech and industrials, as Maroun and I have mentioned. I think global tech, global industrials, and global sort of consumer names, and global consumer leading brands are the ones that are really the Future Leaders opportunities in Global. And I've said before, in terms of Aussie, a lot of it is years of time.

JA:
So in Australia, it tends to be small caps, it tends to be three to five year old company. So I think of them like a junior school, whereas high school is more mid caps. But once they get to sort of 10 or 11 years old, if they're successful, tend to end up in large cap land, which is above that 10 billion mark. But because we do have that $30 billion bandwidth, you can follow companies for 10, sometimes 20 years that are really successful, before they end up becoming large caps.

JA:
But the ultimate mix of the sectors is really, tech is 17%, industrial is 17%, and that dominates global. Whereas, Australia's a lot more cyclical. So you got 23% of the index is materials and consumers around 20%. And those sort of big long-term decade or two decade winners in healthcare and tech, they're really small in terms of seven, 8% of the index, or the opportunity set is fairly narrow.

JA:
And there's probably 10 to 15 really amazing companies, whereas in the global context, there are literally hundreds that we can find, and we've got to make decisions of which ones we want to own. And I think that that just gives you a feel for the scale of the opportunity set. And where the indexes has led over the years is a lot more of those, you have tech, industrials, healthcare and global, whereas Aussie, it's a bit more narrow and a bit more cyclical.


POC:
So given the differences, I guess, between the global and the Australian sectors, how do your strategy's investment styles differ in any way? And how do you actually cover the global mid and small cap universe to arrive at that portfolio, of say 50 stocks given, how big the indexes?

JA:
Yeah. Maroun, go ahead.

MA:
Yes. James sort of touched a little bit on the difference between QMTV and QVTM. So it's a starting point between looking at the Australian strategy and the global strategy, that's sort of the key difference in that regard. And that comes back to comments that I mentioned earlier about having a broader, deeper, wider market than is available in Australia. Now, just to sort of take a step back, I guess, our universe, if you sort of use the global definition of mid cap, the investable companies out there, is sort of in the region of about 4,000 names.

MA:
The index itself has about 1,000 names in there, and this is the MSCI global mid cap index. So it is a very large universe. And then we go through multiple steps to sort of filter it down and narrow it down to sort of a short list of names that we can sort of look at a lot more intensely. So the first step will be to employ a quality screening filter. And so this will involve looking at cash flow return on investment, this will look at screening out companies that have unsustainable debt, that have very poor ESG, and very low persistence.

MA:
So one of the key things that we employ is a three pillar process, which focuses on viability, sustainability and credibility. And this is sort of about the stock selection level. And so what we're looking for is high quality companies that can sustain the duration of the margin and return profile well into the future. So what we're looking for is persistency, we're looking for durability. And so that's sort of the first step.

MA:
The next step is utilising the extensive Fidelity network across the world. Now, we're very blessed to have a extensive network of portfolio managers and analysts around the world. And we have in excess of 100 analysts on the ground in almost every continent around the world looking at these companies. So here we're talking to our analysts, where we're finding what the best ideas are, we're finding the long-term winners, what are the higher conviction names, and we're really utilising the network itself.

MA:
The next step from there really is looking at a stock level, the viability, sustainability and credibility, which is something I sort of mentioned there a little bit earlier. So now that we've narrowed universe down, we can look at each stock that's left in a lot more detail, scoring them on those three factors. And then the next step from there is really looking at the portfolio risk from a QVTM perspective.

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MA:
So we're looking at, are there sort of concentrations of risks, are there pockets of risk, where we're exposed to a particular macro factor or a particular event? And this really infers how the portfolio is shaping up to be. And then the final stage is the valuation filter. So we're looking at things both from an absolute and relative valuation. And then sort of looking at valuations in the context of whether these are structural stocks or cyclical stocks. Because it is a sort of a major consideration for us.

MA:
And so ultimately, when you bring and distil all of that down together, the position size that you get in the end, and now our portfolio is designed to be 40 to 70 holdings. And since inception, we've sort of drifted around the 50, 55 mark. But the position size reflects our conviction, reflects the C-scores, it reflects the risk management at the portfolio level. And then making sure we balance having exposure to stocks without having a high degree of risk embedded in the portfolio.

POC:
Yes. And I guess, thinking as you're making the comments there Maroun, that, yeah, that extensive network of analysts that Fidelity have globally would be a real benefit I guess to being able to tap into their ideas, their thoughts and I'm assuming Fidelity have mid and small cap US equity strategies in the marketplace. So you would have quite a number of resources that you could also get views and opinions on.

MA:
Absolutely.

POC:
In terms of... I guess James and Maroun, are there any lessons or observations you've learned from managing Australian mid and small cap portfolios that can be applied to global mid and small caps?

JA:
And so look, many of the lessons that we've learned are really embedded in those two processes that Maroun's mentioned. So for me, I've been doing small caps for 20 years and then running money, specifically in Australian small caps for the 10 years. And what I've noticed is just it's very ingrained, that viability, sustainability, credibility, which is your stock picking tooling and stock picking filter to avoid future failures and find future winners, so Future Leaders is really the key at the bottom of the level. So I'll just touch on that in a bit of detail.

JA:
So viability is about returns. It's the level of the return, so the percentage of return on capital. What's the direction of that? What's the persistency of that? How cyclical is that? That's really what I call your return reality is. Sustainability is about how long that return reality lasts for. If it's a single mine in a single location, then that's pretty high risk.

JA:
If it's say Sydney Airport in one location with a 99 year monopoly asset, that's a phenomenal asset, or a global tech company, or a global healthcare company. Where you could fit the players of that marketplace on the palm of your hand. There are five players in the world that solve that problem for the world. And that is a phenomenal, very sustainable position for decades or more. And that's about duration.

JA:
And then credibility is really about trust. So, excuse me, do you trust yourself? Do you trust your accounts? Do you trust management? Can you verify what you're thinking and what you're saying? What management is saying? And then is it very transparent? So these are the things in terms of trust. So these are the three big lessons I've learned. And most of the future failures start from a credibility side. So you do have either a breach of trust in your own ability to trust management, in your own ability to see things.

JA:
All the accounts or the earnings, quality starts to deteriorate as a leading indicator, and that's where you find future failures. Whereas Future Leaders start from a very high return business, which is very long duration. There's very high trust in credibility, and it's important, and it's ingrained in management behaviours, processes, thoughts and culture. And that is a business that you want to find and hold on for. And that's really all the stock picking tool is.

JA:
And then above that, it's really about the portfolio construction tool and control of portfolio risks. And that's where QVTM comes in. So quality, value, transition and momentum. And that one is important because the paradigm of your mindset as an investor is very deeply ingrained in what you believe a company is. So if you do think it's a high quality company, your risk is you're falling in love with the stock, you fall in love with the business.

JA:
Just like a business school basic, it's high return, it's a beautiful business, it's what you could think of as a beautiful compound. But the reality is that businesses and the competition nature of the world, if the quality does break, quality does erode, and that love will eventually fade. And you will have either competition, high capex, managing complacency, or arrogance, or very excessive valuations. And when those things start to erode the beautiful love story, then the risks are there.

JA:
In value, you can also have value traps, or you can have a really good value opportunity. Your question is, if you've got a balance sheet that's going to blow up our management team, that's going to blow up... You're probably going to be in trouble, or for a structural loser, you're going to be in trouble. But if you've got a value opportunity, which is a good business, very stable and good returns, it can be really exciting.

JA:
Transition is more the in between world, and sort of a little bit like no man's land, but it's where things come through, value into transition. And momentum really is your consensus trades. Your really kind of hot things that are very symmetric, they're very cool, they're very hip, they're very now, there's upgrades and multiple expansion, they're very popular. And in that environment, much more like a herd environment, or the madness of crowds, you get into animal spirits risk.

JA:
And when you get, in my world peak valuation, peak sentiment, and also peak earnings, you've pretty much reached the top of the cycle and animal spirits risk is becoming very important, and you've got to be really careful. So for me, they're the big lessons that we've learned. And as Maroun's outlined our process, those two stock level processes and the portfolio construction, a little process, are embedded into our filtering process. Which lead us to finding for us the 50 or future leaders that we want to invest in.

POC:
So the US mid and small cap markets have been one of the best performing equity markets, I guess, over the long and long-term, and makes up probably about 57% of the global mid and small cap index on market cap. So I'm not surprised if it's the biggest overweight in your fund. Can you talk us through about why the US market continues to dominate this sector? And do you find many good ideas in other regions or countries, or should investors not even bother with European or Asian mid and small cap stocks?

MA:
Yeah. Look, the US as you mentioned, it's not surprising that it is the largest. The US has a very long and very ingrained culture of innovation. They attract the brightest minds from all around the world. They have very broad, very deep, very liquid markets. So it naturally is the home a lot of attractive long term growing companies. Now, today it makes up around 70% of our portfolio.

MA:
And it's really because we've been able to find a large number of high returning businesses based there. Also businesses that are dominant in the US usually find it a lot easier to expand outside the US and dominate the global universe. As opposed to sort of an Australian company, domain in Australia, and then going outside and try and dominate the world. Because the US market is so big.

MA:
If you become dominant in your home market, your revenues, your R&D, your cash flow, the magnitude of all of that and the resources that you can develop by dominating your home market, then just lets you go out and expand beyond very easily. So you end up finding a lot of global dominant companies that are based in the US. And then just that sort of culture of innovation, education, leadership, entrepreneurial spirit, it's very ingrained in the US culture.

MA:
The other two sort of major jurisdictions in our universe would be Europe and Japan. We do find ideas there, we have exposure to both of them. But it is fair to say for us and for our style and what we're looking for, it has been slightly slimmer pickings in Europe and Japan. So Europe has been going through obviously a very tough sort of post GFC period, growth has been very anaemic. There's some issues there around politics, some issues there around demographics.

MA:
And then Japan, similar sort of issues around demographics. And also in Japan, you find some governance issues, a lot of companies have got these cross shareholding structures and board representation isn't progressive. And so for those reasons, you sort of combine them together, it does make it harder for us to find ideas in Europe and Japan. But by no means have we given up on them, and we continue to find some ideas there. And they are represented in the fund.

POC:
So what are the key risks to focus on when you're managing a global mid and small cap portfolio.

JA:
So look, your markets have been really strong, as I've said, the index up sort of 40% for the year, but over time, it's sort of been that 10 to 15% compound return. But the risks at the moment, I definitely would say would be valuation, would be the big one, one that many people have commented on. Sort of to frame that risk return, we look at valuation quite a lot. So we look at the price to earnings ratio, of the fund today. The price to earnings ratio is around the 20 level, 20 times, which is elevated, but it's really not too far above average. And certainly it's very close to the index.

JA:
And the price to book of around 2.4 times is a little bit above average, but again, not very far away. And then if you look at returns on capital of the index, they're around sort of 11%, whereas the returns are around sort of 17. So we're quite a bit, as I mentioned, above the benchmark. But all those parameters look pretty normal. And the important one, when you think about valuations and also cheap debt, the debt levels are around 30%, which are also very normal and quite low and reasonable.

JA:
So for us, we're focused then back on risks, so we go back into our process. And I think today, the four key things you need to focus on beyond valuation is really pricing power, market structure, earnings, growth and sustainability. And certainly the fund is balanced between having those cyclical winners and the long-term winners. But also those factors that are really going to be changing.

JA:
Yeah. At the moment, we're still in COVID around the world. But as we come out of COVID and interest rates go up, and inflation starts to rise, you're really going to need to think about pricing power a lot more because you will have rising input costs, inflation, tight labour markets, which we're seeing everywhere. Sustainability will become more of an issue because credit costs are rising and competition is rising everywhere. Valuation discipline needs to be high, because asset prices are at record.

JA:
And also duration needs to be brought back to the thought process because you've had a lot of cyclical winners, are winners because of very generous markets, very cheap debt, very easy bond market, as Maroun mentioned. And liquidity has been over $20 trillion liquidity pumped into the system.

JA:
So that's been a very favourable market for a lot of companies and made things a lot easier, in terms of cost to capital and burdens to capital. So you need to think is this a structural or cyclical winner? And is it all sustainable? So I think there are the key issues you really need to think about at this point in time.

POC:
Does the potential structural rise in inflation worry you, and the impact it will have on the global mid and small cap sector?

JA:
Maroun, do you want to touch on inflation?

MA:
Yeah. That's definitely something that we have spent a lot of time over the past sort of seven or eight months thinking about. That was sort of something that we thought long and hard about. Probably about a year ago, just sort of seeing the policy response, and we started to take some steps towards positioning for that. And that sort of started to come to fruition earlier this year, probably the first four or five months of this year.

MA:
But I think it's one of those things where you want to have a balance, I'm not sure you want to skew heavily one way or the other and get the entire portfolio on inflation coming back or disinflation. And so what we're really trying to do is find the right balance of having companies that will benefit if inflation comes back. But then also having companies that will benefit if inflation subsides once again, and bond yields start to drift back down again lower. And it's really finding that middle ground that works for us.

POC:
Maybe to conclude, what role do you guys believe a global mid and small cap strategy plays in an investor's diversified portfolio?

JA:
I'd say, look, it's a very attractive risk return profile. There are many amazing ideas that I've witnessed, delivered phenomenal returns for clients over the last 10 years. And just to give the Australian context, we've had realestate.com today. Yeah. It's gotten 20 cents, it's like 20 years ago, so now it's $160, that's a phenomenal return. Domino's was a few dollars when it went IPOed 15 years ago. And today it's over $100. JB Hi-Fi as well, a few dollars IPO and today it's at $50.

JA:
Around Sydney Airport, was a small cap today it's a large cap and now being offered for takeover. James Hardie, again, a small Australian company is now going global. And we even own that in the Global Fund because it has been a huge success story globally. And then things like Cochlear and CSL, these are names over 10 to 20 years have gone up multiple times. So that's what you're really looking for.

JA:
So for me, we're very looking forward to finding these ideas over the next decade in the global context. And I do think they're a very good part of the diversified portfolio for a very attractive risk return for individual investors and for the Australian superannuation system, which is $3 trillion in scale. It's a very attractive market for that world as well.

POC:
Yes. And I guess my thoughts there would be that the global mid and small cap sector is a fertile ground for alpha and opportunity. And as an investment consultant, I think that I have a higher level of confidence if I find the right active management team that we can genuinely add value. Whereas, it obviously gets more difficult and challenging in the mega cap section of the marketplace.

POC:
So I think A, for opportunity. And then B, I do think there has been some... Australians very much embrace emerging markets in their portfolios from a risk budgeting perspective, well over a decade ago. And I think the question is still out there about how successful some of those strategies have been. So I have, I guess, seen a number of portfolios move the risk budget from AEM to now global media and small cap stocks.

POC:
So for me, now, I think that investors really need to think about in their diversified portfolio, what sources of alpha opportunity do they genuinely have? And I do believe that a mid and small cap active strategy can really add value overall in the portfolio. So on that note, I think we will conclude. But James and Maroun, I would just like to thank you very much for the time and your insights this morning.

POC:
It's certainly been interesting to have the discussion and to understand more about global mid and small cap stocks there. So I thank you for your input this morning to the Netwealth Portfolio Construction Podcast series. To the listener, thank you again for joining us. I hope you have found today's podcasts valuable and informative.

POC:
And I wish you all the best through these challenging times that we're continuing to live through. So again, James and Maroun, thank you again for participating in the podcast. And to the listeners, I look forward to joining you on the next instalment.

JA:
Yeah. Thanks Paul

MA:
Thanks for this.