Paul O’Connor:

Welcome to the Netwealth Portfolio Construction Podcast. My name's Paul O'Connor and I'm head of strategy and development for the investment options offered on our investment menus. For today's podcast, we have two guests joining us, being Richard Ivers and Mike Young from Prime Value Asset Management or Prime Value, and we'll discuss Australian small cap stocks and portfolio management. Richard and Mike are the co-portfolio managers of the Prime Value Emerging Opportunities Fund, which employs a relatively concentrated portfolio of between 25 and 50 XASX 100 small caps stocks with a quality bias overlay. The fund can also invest up to 20% in cash and hold up to 20% of the portfolio in Australian unlisted equities and New Zealand stocks. We'll discuss this differentiated strategy in detail during the podcast today. Mike and Richard, thanks for joining us today. Hi Paul.

Richard Ivers:

Thanks for having us. Yeah, thank you. Paul

Paul O’Connor:

Prime value is boutique Australian Investment Manager established in 1998. It currently manages around 1.2 billion of assets in Australian equities, cash-like instruments and alternatives, namely agricultural assets and retirement living as at June, 2023 prime values owned by the law family office and operates alongside sister company, Shakespeare Property Group with total group fund in excess of 3 billion. Richard Ivers has 21 years experience covering Australian equities in both portfolio management and research analyst roles. Most recently Richard worked at Contango for two years and was the portfolio manager of the small companies fund, which generated top quar returns over that period. He's also worked as a portfolio manager at River Capital and as a senior research analyst at or minute where he was highly ranked. Richard has also gained an understanding of business strategy and finance through his roles working for a number of companies in the IT and sectors in Europe.

Mike Young has 25 years of Australian equity market experience prior to prime value. His most recent role was his portfolio manager of the REST Australian equity small cap portfolio and before this he served as head of small cap equity research at both Goldman's and Citi. So we have two eminently qualified and experienced small cap investors to take us through the small cap market and how their portfolio is managed. The Netwealth super and IDPS investment menus include two prime value funds being the opportunities fund that invests in listed Australian equities across all market cap segments and the emerging opportunities fund that Richard and Mike manage. Many Australian investors have allocated a portion of their Australian equities allocation to active Australian equities, small cap strategies basically in search of higher returns over large cap Australian equities and also due to the larger number of active small cap managers that outperform the market.

The search for higher returns though needs to be balanced with the higher volatility of the sector, but over the long term the return has compensated investors for the higher risk in recent years, however, the S and PASX small companies index has underperformed the broader large cap market. So many investors are now asking themselves is now an opportune time to consider an allocation to Australian small caps. The investment styles of small cap managers in the universe includes value growth and style neutral strategies and whilst investors might be attracted to growth style managers on the assumption the sector is basically full of many growth stock opportunities, these managers do typically produce higher vol compared to value and style neutral strategies. So I'll be interested in Richard and Mike's views on investment style and the differing risk and return outcomes they may generate. Maybe to start with gents, can you provide a few comments to the listeners on what attracted you to both managing small cap portfolios?

Richard Ivers:

I started basically looking at small caps from the very beginning of my career, so it was kind of what I learned from the beginning. I did do some large cap work. This is on the broking side on the sell side. In fact NewsCorp was one was actually the first company I ever looked at and we actually hold the portfolio now some 30 odd years later. But I think opportunities in the small cap space is really exciting. There's always some part of the market or economy that's doing well in almost any condition and so there's these niche opportunities and uncovered opportunities as well. So finding those diamonds out there that are uncovered is really exciting

Mike Younger:

And I'd say similar to Richard, it's really the opportunity set that you have at your disposal so the more you can increase the size of your investment universe, the more opportunity you have to find these great companies to in. And so in a small cap market, while there is 200 stocks in the index, there is 2000 that are listed on the A SX that sit outside of the top 100. And so there's plenty of areas to look at to find great opportunities.

Paul O’Connor:

Yeah, well I guess to a degree my take is that it would be interesting in the fact that you're not spending 30 years covering the top four banks in Australia or the two biggest miners in Australia. So I guess the breadth of industry and companies and business models would make it quite attractive I would've thought from a career perspective. Maybe just moving into the questions for today's podcast, can we start by discussing the S and PASX small ordinary total return index? There is a higher prevalence of active managers such as yourselves who've outperformed the index, which certainly builds a strong case that investors should consider using an active manager in this sector, but what do you think are the core reasons for this alpha opportunity?

Richard Ivers:

The small cap part of the market is a more inefficient part of the market. As Mike highlighted, there's 2000 companies out there and the coverage on each of those companies is far, far fewer and less than there is in the large caps, which is only 100 and there's a lot of eyes and analysts looking at that smaller opportunity set. So by definition there's more opportunities to find mispriced opportunities in the small cap space. Being professional investors, us and our peers that focus a hundred percent of our time on looking for those opportunities means that there's just more opportunities to find growth in mispriced companies out there. There's also some structural factors that are happening as well. I think so the broker coverage of small caps in the market has been declining and there tends to be a fewer experienced analysts out there covering it as well.

So that as well helps the inefficiency of the market and provides opportunities for us on the buy side. The only other thing I'd say is that the breadth of opportunities means that there's niches in the market where you can find growth segments in just about any condition of the economy. There's just far better opportunities to get, generate positive returns through just about any condition. I mean sometimes you get the markets that mis price opportunities and misprice stocks such that they get hit down in the small cap space, but that's temporary. If you've got the fundamentals that are growing inevitably the value all come through and so you'll get those returns over time and what you've touched on is really important too because recent years, the small cap index perhaps hasn't performed as well as the large caps, but the opportunity for alpha in small caps is one of the main reasons why you invest. So you can't just look at it under the index level, you have to look at it on the returns that funds in this space generate. What

Paul O’Connor:

Do you think the sell side coverage of the small cap sector of the market's been reducing? I would've thought it would've been the opposite over the last decade, but I have heard a few other people make that comment there Richard.

Richard Ivers:

Yeah, I think commissions and turnover has been under pressure. The budgets of the brokers has been lower by definition and so there tend to be fewer analysts and less experienced analysts covering the sector just because those budgets are tighter on the broken side.

Paul O’Connor:

Is the index more diversified by industry compared to the large cap sector and I'm guessing it is given the dominance in the large cap sector of financials, energy mining. So what investment style do you think suited to managing an active small cap strategy?

Mike Younger:

Yeah, it certainly is more diversified. So financials as you touch on there, Paul is around a third of the A SX 100 index, whereas in the small cap index it's just over 10%. That's the single biggest difference. The other one where there's a large discrepancy is consumer discretionary, which is about just over 15% of the small cap index versus just over five of the large cap and consumer discretionary. It involves a lot of different sub-sectors within it, so it's not just retail but it's things like education, travel, auto parts and I think there's a couple of other sub-sectors in there as well. So it is a lot more diversified in the market and it's also diversified by stock. So if you think about the large cap index, CommBank might be, I don't know the exact number but nine or 10% of the market whereas in small caps the largest stock gets to about 2% of the index before it graduates or as we like to think of gets demoted to the ASX 100 index and so you do have a lot more diversity in the small cap index by both stock and sector.

As to styles, we're really focused on trying to pick companies that whose earnings are quite predictable and so we don't tend to throw the portfolio around a lot when you do get different types of market conditions and the last half dozen years or so you've had almost everything. You've had bull markets and bear markets and interest rates going up and down. You've had a global pandemic thrown in there for good measure and so it's very difficult to pick these inflexion points and we tend to manage to what we regard as more of a growth as a reasonable price type of style, which is really just focused on, as Richard mentioned, the underlying fundamentals of each company and trying to invest in those that we believe we have a better chance of predicting what the profit outcomes are going to be on a three to five year view.

Paul O’Connor:

Sort of makes sense there I guess Mike a GAPP style and to me it's about not overpaying for a business even if it is a quality business and growing that you've got to have some type of valuation discipline in your process there. So it sort of makes sense to me that managing your portfolio to a gap style. Do you invest in companies that are not yet profitable but you might believe they're really well run with good management and are receiving a strong, I guess growing market share for their goods or services?

Richard Ivers:

We can but we rarely do. So we prefer business models that are tested and have proven economics and they can generate a profit. It's easy to grow market share. If you sell a product at an artificially low price, it's harder to grow market share and make a reasonable return on capital for. So we tend to focus more on those ones that are generating a profit and have proven those economics. We would be more willing to invest in a business that is losing money would be for some unusual downturn and Covid was a great example of that whereby we invested in Auckland airports tier one infrastructure asset. It was losing money just because aeroplanes stopped flying. That to us is a great opportunity and we did invest through that would possibly be more willing to invest in maybe loss making division or a company that has loss making divisions or the like comes into play because you can't throw the baby out with the bath water I guess and that you can have businesses whereby they have a core business that's profitable and growing and has a proven economics but they might have a division that's losing money and that's an optionality to us and we wouldn't capitalise that and put those losses on say 20 times earnings.

We would obviously put it as a neutral or potentially positive value depending on our view of that part of the business. There's actually an example of that recently where EQT or equity trustees, which is one of our holdings, they had some operations in UK and Ireland and were losing money and we basically valued that at zero rather than capitalising it out of the blue they decided to cease operations and exited there with pretty much minimal costs and so all of a sudden those losses were gone and then the reported profits rebounded not through anything changing in the core business but just by exiting a loss making business. So I guess we're more conscious of loss making and more forgiving of loss making in a business like that that has a core business that's profitable but has maybe have a growth option that's trying to drive another part of the business but is losing money. Yeah.

Paul O’Connor:

Well I guess that makes sense to me there Richard and history's full of companies that have had loss making arms and parts of their business and once they get that cleaned up, the rerating and repricing of the stock can be just phenomenal. Probably one that really bears home to mine was standard and pause when they actually got rid of the old publishing arm McGraw Hill and really unlocked the value of just being a pure financial services company there and the returns have just been fantastic since they did that restructure, so it certainly makes sense but you've really got to have an knowledge and understanding of the corporate business model I guess on the industry in which it operates to be able to capture that. So does the size of funds under management matter when it comes to generating alpha in small cap stocks and I know some small cap stocks are managing in excess of a billion dollars, others are sub 100 million and thinking if your universe is the complete X 100, you're getting down to some pretty small companies so I'd imagine the more funds under management you would have potentially the more limited that universes.

Mike Younger:

Yeah, absolutely. It does matter and there's a very high correlation or inverse correlation if you like of alpha to fund size. So small caps would be an asset class where you've got one of the smallest capacities and so it becomes really important where if you are too big, you own very significant amounts of each company that you're investing in. The largest small cap managers in the country almost have to be substantial in the majority of businesses they invest in that is above 5% of that company's issued capital. And so if you're making decisions to enter or exit and that's going to involve five or 10% of a particular company's capital, that can take a very long time to execute. But B, it puts upwards and downwards pressure on the price. Generally whenever you want to buy a stock, the share price inevitably rises as you're trying to buy it and when you're trying to sell one it inevitably falls as you're trying to sell it, which is quite frustrating. And so the bigger you are, the more exposure you have to that dynamic. So a lot of small cap managers will quote a number say around roughly a billion dollars as sort of the capacity of what they see as their strategy. We actually quote a number closer to $500 million as we feel like that gives us plenty of headroom to be able to grow without having any impost on performance.

Paul O’Connor:

I guess it's a fine line, you're walking there Mike, you've obviously got to have a profitable business arm there running small caps so I can't be too small. The funds under management and you also need enough income there to be able to be appropriately resourced coupled with what you've just articulated there about having two bigger funds under management then and hence your trading, your impact on the market, the size of a corporate that you can actually hold in your portfolio all starts to dissipate there. I guess that's in my experience why at times there can be such a large differential in returns of managers in the active small cap peer group. Small caps have historically outperformed mid and large cap indices, which is rational for a modern portfolio theory given they display higher volatility. Why then has the index underperformed large and mid cap stocks both in Australia and globally over the last three years or so?

Richard Ivers:

It's been particularly evident since interest rates started to rise. So since that January, 2022 period, so the last two and a half years over that period, the small cap index, so the small odds accumulation is down 10% and the large caps or the ASX 100 accumulation is up 18%. So dramatic difference in performance. There's some compositional issues with that. The banks are a big chunk of the ASX 100 and they're up in the order of 40% if you include dividends over that time and obviously there aren't not much in the way of banks and particularly the major banks in the small cap index and I think likes of Rio is up 20% or so over that time as well. It's common to see when you go into a bear market or interest rate hiking cycle to small caps underperform, they tend to fall harder in the downturn if you like and then they rise faster in the upturn.

They are higher beta plays. I would highlight that our fund is particularly strong at downside capture, so our downside capture is only 50 to 60%, so it provides a much smoother profile of returns over time. So we are differentiated to the index and our peers in that regard. But back to the major question as well, I mean the reason for why the small cap index is underperformed so much over the last two and a half years, there's a few different reasons. So they're perceived to be much more economically sensitive than the large caps. They have a higher proportion of debt that's variable, so small cap companies don't have the level of sophistication whereby they can hedge their debt profile as much as the large cap stocks. There's some of those issues that come into play. Again, it's an interesting time to be talking about this because just last week we saw what can happen when the interest rate profile changes in the us we got that lower inflation number come out and the Russell 2000 rallied particularly hard and the magnificent seven that's really driven returns particularly over the last, this really strong period in the US was really underperformed the Russell 2000.

So you've got this reversal of what's been driving the market in just five days. The US small caps outperformed the magnificent seven by 14% so it can snap back really quickly. We haven't seen that here in Australia. We have a different interest rate profile here, so we have an interest rate decision coming in August where there's a potential for a hike rather than a cut like what's happening in the us but it does show you that you need to be ready and prepared and you can't just wait for that to happen before investing in small caps because it can happen really, really quickly. Which makes I think the small cap sector really interesting right now because of that significant underperformance over the last two and a half years versus large caps and then the potential for cuts coming in 2025. So you've got the underperformance and you can see the catalyst coming for that change.

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Paul O’Connor:

Small caps historically perform well at the start of each economic cycle, which I think you've alluded to there already Richard and tend to sell off quite hard towards the end of the cycle. So how much impact does momentum have on the index and can you manage momentum or the beta play in your emerging opportunities fund?

Mike Younger:

Yeah, it certainly does have a very big impact on the index as Richard's alluded to and in particular the last couple of weeks in the US with small cap versus the magnificent seven, you've seen a very big move relative, but in terms of the way that we manage the portfolio, it doesn't have as much an impact. As I mentioned earlier, we try to be a fund for all seasons if you like, and so the bulk of the portfolio is made up of companies where we view the earnings as being at relatively low risk compared to the investment universe we have at our disposal. We do play around at the edges if you like, where if we think that there's an economic recovery coming, we might have a couple of cyclical stocks that might come into the portfolio in relatively small weights, but they're always going to be the minority of the portfolio. Most of it's going to be those companies that we view as being a lot more resilient in terms of their earnings growth outlooks because at the end of the day we just can't pick the timing. We don't know exactly when markets are going to turn. Markets have a history of turning a good six to nine months before the actual economic data does. Trying to pick those peaks and troughs has proven very, very difficult for managers over a very long period of time.

Paul O’Connor:

And I guess it probably gets back to my earlier question and the comments you were making around buying, it's sort of about trying to build an all weather portfolio that may miss some of the real strong upside momentum, but over the course of the whole cycle we'll give you a lower volatility and a good consistent return above the index. So it certainly makes sense there Mike, further on your strategy, it's differentiated from most of the peers given you can hold up to 20% of the portfolio in cash but also in unlisted stocks and also New Zealand stocks. What sort of advantages and challenges does this bring?

Richard Ivers:

Just to start with the unlisted side, we can hold up to 20% unlisted but we never have, it's unlikely we will. I mean it has to be a very good opportunity for it to happen. Lack

Paul O’Connor:

Of IPO perhaps?

Richard Ivers:

Yeah, yeah. But I guess our caution about it is that you can often get stuck in these assets whereby they're promising to IPO in 12 months, which is typical and often it doesn't happen so you get stuck without an option to exit. So that's our caution. We were to do it, it would probably have to be a relatively short term unlisted profile so would be IPOing very quickly the cash we can hold up to 20 we've never been above. Previously we could actually hold up to 100. We actually brought that down to 20% and just a few months ago and hadn't never been above 20 and our average has been about 10% over time and we don't really manage the cash, we manage it to the opportunity. So it's really cash as an outcome. Where it's more interesting perhaps is the New Zealand side of things and we do invest in New Zealand regularly and we travel to New Zealand regularly about, it's just under 10% of the portfolio is in New Zealand list as stocks at the moment.

We find it a really fertile hunting ground. It tends to be a lot of really high quality companies over there, even though it's a relatively small market, it has a really good breeding ground for new companies coming up, travelling over there. We tend to find that we get a really good understanding of the businesses and I think it's less well covered than the Australian market. It's just fewer fund managers over there and there's fewer Australian fund managers that travel over and invest in New Zealand companies as well. So like we're talking about inefficiencies in the market, I would argue that the New Zealand market is more inefficient than even the small cap market in here in Australia. It's also interesting too because there is differences in the economic cycle. So right here there's potential rate increase in August, well certainly not cuts coming whereas New Zealand, the Reserve Bank in New Zealand over there has pretty well flagged that interest rate cuts are coming. So you've got a potential economic upturn coming from very low levels. It's tough over there now, but there's potential upturn coming whereas Australia, that upturn is probably a bit further out. So it gives us the opportunity to diversify the exposure to the economic cycle by investing in New Zealand as well. Yeah,

Paul O’Connor:

Well I guess the central bank has been a little bit ahead of the Australian Central Bank in the cash rate move, so not surprising there that your comments there Richard, you think the cash rate will start to taper off soon in New Zealand, but I guess it also seems rational that if you're looking at Australian small caps, understanding the Australian economy, the more successful New Zealand companies I would assume have a growing market presence in Australia, you'd be bumping across them anyway in your research.

Richard Ivers:

Most Australian companies have operations in New Zealand so we're familiar with it. We can talk to peers and competitors very easily and it it's very intuitive for us, a common similar economic model, regulatory style. They're very welcoming of Aussies even though we compete a lot in sport. So yeah, it's a good place to invest funnily enough, but at our core we're Australian fund managers and that will always be the vast majority of our holdings.

Paul O’Connor:

We've touched on earlier the magnificent seven, those seven US mega cap stocks that have been responsible for a large portion of US equity market returns in recent years obviously have a large IT bias and obviously the flavour of the month being ai. So are there any opportunities to invest in any small cap IT stocks on the A SX or businesses with great opportunities to grow their market share in the AI space?

Mike Younger:

There are, but I caution that there's not many and even fewer that are profitable. And so we've tended to find that, I mean Australia as a whole has very small IT sector and so I dunno the constituency of the s and p 500, but I think it is well north of 15%, maybe even 20, 25% of that market cap. Whereas in Australia for the small cap market it's six or 7% and I think for the asex 200 overall it's even less than that. So it's pretty small. And the ones that have had success in small caps in recent times, they've actually moved through the index very quickly and moved into the top a hundred. So companies like WiseTech and LTM for example, but these are traditional software type companies. It's not the exciting AI chips and what have you that the magnificent seven are benefiting from. And so there are some opportunities but there's very few. That's potentially one of the reasons why they all also trade at very, very high valuations. Often on revenue multiples. The earnings isn't there or if it is there, it's very nascent the opportunities within that space. Few and far between as we see it.

Paul O’Connor:

So what kinds of stocks and sectors do you believe can deliver consistent returns and what does an attractive small cap stock look like to you guys? When

Richard Ivers:

We look for stocks, we love stocks or businesses that have duration of revenues, but that, I mean you can actually have visibility of these revenue streams out many, many years. The largest holding in the portfolio at the moment is a company called Equity Trustees, A QT. Their business has revenue streams that typically can last decades in some instances they're in theory infinite, they grow over time, which is as you can imagine, highly, highly valuable. That company itself was founded in 1888. It was an auspicious year, but it was also shows you a business that's been around that long, it has duration of earnings and sustainability as a business and they're the sort of businesses we like. I think in small caps there's often a tendency to get excited by what is new and exciting or happening at the particular moment. So it might be buy now, pay later or there was medicinal marijuana otherwise known as pot stocks a few years ago as well.

And these things tend to come and go a bit and they typically, the valuations go astronomic, everyone gets excited by it because I think it's a quick easy win. We tend to avoid those tend types of spaces and invest in businesses that are growing and a high quality but are potentially a bit less exciting but can actually consistently grow over time To be a top performing small cap fund manager, you don't have to shoot the lights out every year. It's really about consistency. That's how we think about it. We're not trying to be the number one every year, although we have been in the past, but we're trying to be a consistent generator of investment returns and we think by doing that over time the cream will rise to the top and then on average when you look at over a good time period, like three or five years, the investment returns will be really strong and we'll measure up really well against our peers and the index, which is evident in the numbers that we've been producing. So that's how we go about investing. It sounds boring but it's actually it's not and it can generate really, really good returns. You

Paul O’Connor:

May not be the life of the party at a dinner party talking about the latest and greatest stock or sector. But to would agree what you were saying there, Richard is very rational and that's what I would expect out of a quality active manager. Not to get carried away with the old fear and greed that drives human beings, but to just stick to your knitting and stick to trying to buy good quality companies. Can volatility be managed in small caps given the sector can at times be highly volatile and I guess managing downside risk can have a material impact on the long-term performance of a portfolio?

Mike Younger:

Yeah, absolutely Paul, it can be and the answer is really portfolio construction and so the weightings that you attach to the various that you hold in your portfolio is ultimately one way that you can manage volatility. It's one thing that we have looked at as an output across our portfolio and it's a coincident maybe or maybe it's just the general nature of how Richard and I manage the fund, but we tend to have our larger holdings in companies that tend to exhibit less share price volatility. And so when we plot the chart, it's almost bottom left to top right in that manner and it's really, that's the risk mitigation process that is coming out there. It's not something that we target, we don't design the overall portfolio standard deviation, but the way that we tend to think about companies and portfolio construction is such that we tend to have the larger holdings in the less volatile companies.

And what it does is it means that you're not susceptible to one or two big winners or big losers in any particular performance period. It results in more consistent returns over time because those companies that are your larger holdings that have less volatility, essentially they're moving around not as much as some of the other spicier stocks in your portfolio that do exhibit a lot more volatility, but they are lower weights and so they have less impact on the overall portfolio return. So that's one way you can do it. And downside protection is certainly one way to outperform the small cap index. And so when we look at our historic performance we've had over the last six years or so alpha against the index of something like 7% per annum. When we look at how that's been generated, when we break down on a monthly basis in all the months where the market has been up, we broadly outperform half the time, whereas in all the months where the market has been down we've outperformed in 80% of those months. And so that's really where we've been getting our alpha is we don't draw down as much but then we keep up with the market as it runs. That's essentially the way that this portfolio has been managed over time.

Paul O’Connor:

Maybe to wrap things up in the interest of time there, can you guys just give us a brief overview of what you think are the current opportunities in the marketplace and what's getting you really interested?

Mike Younger:

The

Richard Ivers:

Largest holding in the fund, like I've mentioned a couple of times is equity trustees and it's had a bit of a good run this year, but we think there's a lot more upside in it. It's a business that as highlighted earlier, has a really long duration revenue streams and a very high quality business, very sticky customers, strong cashflow, strong balance sheet and is priced at a market multiple. So it's rerated from below market multiple to market multiple now and it's going through a very strong earnings period. It's typically relatively, dare I say boring company, a high quality revenues not very volatile, but it doesn't grow that strongly whereas at the moment it's actually going through a growth spurt because of a couple of reasons. One, the key reason is that they made an acquisition of Australia executive a couple of years ago from IOOF as it was known or insignia, and that business was very complimentary to EQT and the synergies coming out of it that's driving earnings upside and really accelerating earnings growth over the next couple of years.

And then they're also benefiting from perpetual, their largest competitor in the space. There's only really two players, EQT and Perpetual and Perpetuals under takeover offer has been distracted and is about to be taken over by KKR In terms of the perpetual trustees business, that means a competitor that is about to go into private equity ownership and means that it's typically easier for equity trustees to win when they come up against that competitor. If you are an individual or a business looking to use a trustee organisation, I think you probably prefer one that's not private equity owned and I think that's flowing through into market share gains for equity trustees.

Mike Younger:

Yeah, one I'd throw in is one that we recently actually added to the portfolio timing was a little fortuitous in that we first invested in Capital Health only a couple of months back and the company since has received a takeover bid from Integral Diagnostics, but the attraction of capital in the first place was really down to I guess the industry itself in radiology whereby you've got this wonderful dynamic of price and volume growth each and every year. And that's something we really like to see in companies that we invest in population growth and the ageing population is something that is driving up volumes and will for the long term. And similarly with pricing, it's one of the areas in healthcare that does get indexation, which helps these companies cover their costs and that's obviously been a really big issue as we've come through the inflation years in recent times.

And so for capital, you've also had more recently some budget changes which are going to prove positive for the industry in terms of being able to get Medicare funding on more MRIs that are in the field. And the acquisition by Integral is one which is going to make for obviously a larger scale player companies, whenever they announce merger transactions, they give a synergy estimate and they always want to be very, very conservative. And so it's not uncommon that you ultimately see more synergies being extracted than what the companies initially are suggesting. And we think this will be no different in this time around. It's an industry in which if you went back to the pre covid years, it was one which some infrastructure plus funds were starting to get involved in this sector sort of viewing radiology as an infrastructure plus type of asset class.

And so it is one that is very attractive, but the valuations are similarly relatively attractive now. And we've got this nice dynamic going forwards in terms of this long-term growth in volume and price as well as a little bit of catch up still to come from the covid years, which has seen a lot more telehealth and as telehealth has grown that has resulted in less referrals for X-rays and the like than typically is the case. We're starting to see a little bit of an unwind of that and over the next couple of years I'd expect that you will get a bit more of that normalisation in volumes post the covid years as well. Yeah,

Paul O’Connor:

Well I would imagine there market would also be a good diversifier in the portfolio given anything related to healthcare is not linked to the economic cycle, so it would behave differently to a lot of the other stocks I would imagine in the index. Thank you, Mike. Thank you Richard very much for joining us on today's instalment of the Netwealth Portfolio Construction podcast. Been a farewell since I've had a discussion with a small cap manager, so it's been really enjoyable and educative to myself there, so I certainly do appreciate the time and your input today there, gentlemen.

Mike Younger:

Thanks Paul. Yeah, thanks very much for the opportunity.

Paul O’Connor:

Absolutely happy to assist there. Mike and Richard, A couple of the takeouts that I've had from today is certainly consistency of return of a small cap portfolio is really about buying a quality business that is profitable but certainly not overpaying in terms of a valuation for that business and also avoiding not following the latest trend or populous theme, but stick your knittings and stick to your research there. Just a more general comment, and I guess I've had this view for many years now, but if you're considering an allocation to small caps, small cap Aussie equity, small caps are certainly a more inefficient, more volatile sector. Any sector of a portfolio that is more volatile, less efficient, I think is where the listener should really consider seriously the use of an active manager there because of that alpha opportunity, because of the inefficiencies that exist. And a good quality manager like Mike and Richard from Prime Value certainly I think have well articulated that opportunity. And also to the listeners, thank you very much for joining us again on another instalment of the Netwealth Portfolio Construction podcast and I look forward to joining you on the next instalment. Have a great day everyone.