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Fear & Greed, Fear and Greed

Small caps have had an ordinary couple of years. Is 2024 the year things turn around?

Tobias Yao, Portfolio Manager at Wilson Asset Management, talks to Sean Aylmer about the next 12 months for small caps, and picks a couple of stocks he’s watching.

This is general information only. You should seek professional advice before making investment decisions.

Find out more: https://fearandgreed.com.au

See omnystudio.com/listener for privacy information.

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Sean Aylmer: Welcome to the Fear & Greed Business interview. I’m Sean Aylmer.
Generally

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Sean Aylmer: speaking, small cap stocks haven’t had a brilliant couple of

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Sean Aylmer: years. To be fair, it’s quite a broad category. A

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Sean Aylmer: small cap is generally considered a listed company with a

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Sean Aylmer: market capitalization of a few billion dollars or less. That

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Sean Aylmer: certainly covers lots of companies from retailers and miners to

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Sean Aylmer: travel and tech companies. So after an ordinary year or

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Sean Aylmer: two, is 2024 finally going to be the year for

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Sean Aylmer: small caps. Remember, this is general information only and you

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Sean Aylmer: should always seek professional advice before making investment decisions.
Tobias

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Sean Aylmer: Yao is portfolio manager across four of Wilson Asset Management’s

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Sean Aylmer: listed investment companies; WAM Capital, WAM Microcap, WAM Research and

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Sean Aylmer: WAM Active. Tobias, welcome back to Fear & Greed.

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Tobias Yao: Good day, how’s it going?

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Sean Aylmer: Great.
Tell me, is 2024 finally the year for small caps?

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Tobias Yao: Look, we do believe 2024 will be a good year

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Tobias Yao: for small cap companies given the change in the interest

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Tobias Yao: rate narrative towards the end of last year, and the

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Tobias Yao: fact that I think small cap companies in general have

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Tobias Yao: underperformed the broader market by more than 20% over the

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Tobias Yao: last two years. In fact, many small cap companies are

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Tobias Yao: trading at significant discounts to their long run averages, which

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Tobias Yao: is why we continue to see M& A activities in

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Tobias Yao: the space. Last year, we’ve had the likes of Estia

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Tobias Yao: Health, Silk Lasers, and then Healthier. However, I would caution

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Tobias Yao: that the recovery, it’s not going to be a straight

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Tobias Yao: line given the plethora of risks that’s still in the

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Tobias Yao: system, inflation, economic risks, geopolitical risks. And this year it’s

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Tobias Yao: going to be a huge year in terms of elections

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Tobias Yao: around the world, particularly in the US and there’s going

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Tobias Yao: to be rhetoric that’s going to come out of both

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Tobias Yao: parties leading up to the election that could impact equity markets.

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Sean Aylmer: Okay.
So just a couple of things I just want

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Sean Aylmer: to unpack on what you said there. It’s starting from

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Sean Aylmer: a lower base basic. So 2024 small caps are starting

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Sean Aylmer: from a lower base, so there’s a discount to their

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Sean Aylmer: average valuation in many cases, but as you say, it’s

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Sean Aylmer: apples and oranges. There’s plenty of different stocks in there.

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Sean Aylmer: So there’s that to think about. What about the interest

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Sean Aylmer: rate profile? So we’ve had 12 months ago, we knew

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Sean Aylmer: interest rates were going to keep rising. As we stand

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Sean Aylmer: here today, market consensus is there won’t be any more

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Sean Aylmer: rate rises. Certainly in the US there’ll be cuts and

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Sean Aylmer: possibly in Australia later this year there’ll be cuts. What

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Sean Aylmer: does that mean for the sector?

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Tobias Yao: Yeah, so the key for us is, directionally, it’s positive

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Tobias Yao: for small caps or risk assets, and we’re going to

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Tobias Yao: have a lot of macro data on inflation or commentary

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Tobias Yao: from the various central banks around the world over the

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Tobias Yao: next 12 months. And that’s going to create volatility in

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Tobias Yao: the equity markets in terms of beating or missing expectations

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Tobias Yao: and like it did when the race was going up

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Tobias Yao: on the back of the high inflation rates. So it’s

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Tobias Yao: not going to be smooth sailing. But in terms of

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Tobias Yao: our view, directionally, it is positive that we are going

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Tobias Yao: to rate easing environment. And in terms of how we

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Tobias Yao: approach the macro backdrop, we are bottom up stock pickers.

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Tobias Yao: So the key for us is to stick to our

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Tobias Yao: investment process, which is to just find undervalued growth companies

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Tobias Yao: with catalyst and to stick to what we’re good at.

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Sean Aylmer: Okay. I’m going to ask you about those in a

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Sean Aylmer: moment, but mid last year, you were on the show

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Sean Aylmer: and you gave us a couple of tips. How’d they

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Sean Aylmer: go? How was 2023 in some of your stocks? And

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Sean Aylmer: this is a bit of a Dorothy Dixer here because

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Sean Aylmer: I do know you did pretty well.

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Tobias Yao: Well, thank you. Look, fortunately a couple of the companies

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Tobias Yao: which I mentioned on the podcast last time actually were

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Tobias Yao: probably our best performers. The best performer in 2023 has

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Tobias Yao: been a company called Tuas Limited, ASX ticker is TUA,

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Tobias Yao: which is the fastest growing Singaporean telco. Now the board

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Tobias Yao: and the management team has done an exceptional job growing

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Tobias Yao: their business in Singapore. I mean, the share price rose

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Tobias Yao: from around, I think, about $1. 20 at the beginning of the year and

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Tobias Yao: finished at around $ 3.

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Sean Aylmer: Wow.

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Tobias Yao: And the company’s founder and largest shareholder is David Teoh,

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Tobias Yao: who we believe has had the most amazing track record

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Tobias Yao: in the telco industry globally, and he also founded TPG

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Tobias Yao: Telecom here in Australia, and he’s supported by the CEO,

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Tobias Yao: Richard, who’s in another industry veteran in Singapore, and they’ve

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Tobias Yao: grown their market share in mobile from 0% to now

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Tobias Yao: over 10% over the last four years.
So as investors, we’re

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Tobias Yao: really backing this team to continue this growth trajectory, and

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Tobias Yao: it continues to be one of our largest positions as

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Tobias Yao: we believe over the next three to five years, TUA

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Tobias Yao: or Tuas Limited would be able to continue its trajectory

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Tobias Yao: of growth.
Another stock I think I mentioned last time

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Tobias Yao: was a company called MMA Offshore. The ASX ticker is

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Tobias Yao: MRM, which provides marine and sub- sea services to the

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Tobias Yao: offshore energy, and I guess, the wider maritime industries. Another

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Tobias Yao: company with an amazing management team who came in, initially,

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Tobias Yao: fixed the balance sheet, optimized the business, and then given

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Tobias Yao: the favorable demand backdrop that we are seeing now is

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Tobias Yao: growing their business significantly. The share price, I think, is

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Tobias Yao: up around 60% over the last 12 months. While we have

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Tobias Yao: reduced our position size along the way, MRM continues to

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Tobias Yao: be a pretty important position in the portfolio.

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Sean Aylmer: Stay with me, Tobias. We’ll be back in a minute.

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Sean Aylmer: I’m speaking to Tobias Yao from Wilson Asset Management. When

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Sean Aylmer: we talk about large caps, many mom and dad investors

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Sean Aylmer: particularly invest in Commonwealth Bank or Telstra or something like

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Sean Aylmer: that for dividends. When we think about small caps, the

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Sean Aylmer: companies you’ve just mentioned there, I don’t know what their

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Sean Aylmer: dividend policy is, but I’m presuming their growth stocks, you

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Sean Aylmer: are looking for growth in share price more so than

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Sean Aylmer: dividends. How do we think about dividends with small caps?

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Tobias Yao: Yeah, you’re absolutely right. Look, we look at dividends as

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Tobias Yao: part of the overall capital management strategy by the board

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Tobias Yao: and the management team. In the small cap space, I

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Tobias Yao: guess most investors, we want to find the next ASX 100

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Tobias Yao: company, companies that start small and over time grows to

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Tobias Yao: be a much larger business, and you’re getting that capital

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Tobias Yao: growth along the way. And when companies pay out dividends,

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Tobias Yao: it typically means they can’t find areas where they can

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Tobias Yao: reinvest the earnings that they’ve achieved. So we don’t typically

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Tobias Yao: look at dividends just by itself mainly in the context

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Tobias Yao: of the overall capital management strategy. But I did have

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Tobias Yao: a look at some of the companies we hold in

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Tobias Yao: the fund and one company, it’s called SG Fleet. Now

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Tobias Yao: it’s a sort of fleet management and novated leasing business,

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Tobias Yao: has a very attractive dividend yield of around 7. 5%

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Tobias Yao: this year, and we believe they can probably grow that

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Tobias Yao: dividend yield to around 9% in 2026. So it’s a

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Tobias Yao: business with good gains and with a pretty large dividend yield.

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Sean Aylmer: Any other small caps that you just want to mention?

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Sean Aylmer: I mean, you’ve given us three there and all three

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Sean Aylmer: notwithstanding, you may have reduced your positions in at least

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Sean Aylmer: one of those anyway, but anything else that you’re also

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Sean Aylmer: holding that you’re pretty confident about?

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Tobias Yao: Yeah, so we quite like founder- led businesses where the

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Tobias Yao: founder has significant skin in the game and he’s focused

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Tobias Yao: on the next three to five years rather than the

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Tobias Yao: next six months. So one company in the portfolio that

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Tobias Yao: we have is a company that you’re probably familiar with,

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Tobias Yao: Temple & Webster, now it’s the leading online furniture and homeware-

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Sean Aylmer: Oh, Tobias, Tobias, Tobias.

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Tobias Yao: Yes.

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Sean Aylmer: My partner, Jackie, she’s going to love this. I reckon

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Sean Aylmer: that we are Temple & Webster’s number one customers. Well, we’re

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Sean Aylmer: not, but I’ll tell you what, over Christmas, we bought

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Sean Aylmer: a lot of stuff from Temple & Webster.

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Tobias Yao: That’s great to hear.
So Temple & Webster, in our view, is

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Tobias Yao: a long- term idea for us. We’ve been there for

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Tobias Yao: quite a while. They continue to take market share away

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Tobias Yao: from the brick and mortar businesses, but they’re the leader

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Tobias Yao: in online, but they’re at a stage where they’re large

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Tobias Yao: enough now to reap some of the scale benefits. And

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Tobias Yao: the platform is very modern. They are going into artificial

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Tobias Yao: intelligence, they’re spending money on TV advertisements, and they’re really

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Tobias Yao: trying to create, I guess, the JB Hi- Fi equivalent

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Tobias Yao: in the homeware and in the furniture space. So we believe

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Tobias Yao: that Australia’s about five years behind the US, but there’s

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Tobias Yao: a company in the US called Wayfair that experienced extraordinary

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Tobias Yao: amount of growth, given the online penetration rate kept going

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Tobias Yao: up. And so we believe Temple & Webster could follow a

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Tobias Yao: very similar path over the next five years.

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Sean Aylmer: Well, I mean, I’ll remind listeners that you should always

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Sean Aylmer: get professional advice to suit your circumstances when investing, but

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Sean Aylmer: I’m now going to give another shout out to Temple &

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Sean Aylmer: Webster because I reckon their delivery is really, really good

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Sean Aylmer: comes when it says it does it is what it

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Sean Aylmer: is well- packed.
Anyway, I digress. Before we finish, maybe

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Sean Aylmer: you can just remind us if I’m a mum and

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Sean Aylmer: dad investor, I’m a bit different to you, Tobias, because

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Sean Aylmer: Wilson Asset Management obviously has a lot more money and

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Sean Aylmer: invests in a broader spectrum, but there’d be rules that

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Sean Aylmer: you follow that a mum and dad investor might be

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Sean Aylmer: able to follow too. Now, you sort of alluded to

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Sean Aylmer: some of them already about longer term investing and stuff

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Sean Aylmer: like that, but what are the two or three things

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Sean Aylmer: that maybe retail investors can take from this podcast about

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Sean Aylmer: how to invest?

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Tobias Yao: Yeah, I guess for long- term, I guess stock ideas,

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Tobias Yao: the ideal stock typically ticks three boxes. Firstly, I think

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Tobias Yao: I’ve touched it on earlier, it needs to be a founder-

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Tobias Yao: led business or where the management team has significant skin

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Tobias Yao: in the game. So in the case of Tuas Limited,

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Tobias Yao: the founder owns 35% of the company or 37% of the company,

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Tobias Yao: I think. So that’s a huge chunk of the business.

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Tobias Yao: In the case of Temple & Webster, the founder who’s a

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Tobias Yao: CEO also owns quite a large part of the business

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Tobias Yao: as well. And so their focus is on the next

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Tobias Yao: three to five years, and they have a very strong

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Tobias Yao: alignment of interest with minority shareholders like us.
The second

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Tobias Yao: box you need to take is the business needs to

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Tobias Yao: be able to grow organically, and in particular growing volume

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Tobias Yao: or the number of new customers instead of just putting

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Tobias Yao: out prices. So we spend a lot of time trying

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Tobias Yao: to understand and verifying why certain companies are winning and

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Tobias Yao: how sustainable is that winning advantage.
And the final box

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Tobias Yao: is that it needs to have a very healthy balance

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Tobias Yao: sheet. So ideally, with cash on the balance sheet and

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Tobias Yao: no debt, this is both downside protection during periods of

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Tobias Yao: volatile economic environment, but also provides management the flexibility to

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Tobias Yao: acquire strategically important assets or grow in adjacent areas.

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Sean Aylmer: Fantastic.
Tobias, thank you very much for talking to Fear & Greed.

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Tobias Yao: Thank you very much for having me.

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Sean Aylmer: That was Tobias Yao, portfolio manager at Wilson Asset Management.

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Sean Aylmer: This is the Fear & Greed business interview. Remember, this is

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Sean Aylmer: general information only and you should seek professional advice before

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Sean Aylmer: making investment decisions. Join us every morning for the full

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Sean Aylmer: episode of Fear & Greed, Australia’s best business podcast. I’m Sean

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Sean Aylmer: Aylmer. Enjoy your day.