But, for those who don’t enjoy the sport, the only thing it holds in common with investing is the role of patience.

Adrian Ezquerro, the senior analyst and portfolio manager at Clime Asset Management knows this. As a former cricket player, he says the things he learnt from the team environment of playing cricket in England and Australia have carried through to the business world.

In this episode Adrian considers Clime’s mandate of finding or bettering funding solutions for retirement.

He tells us about:

·         The pros and cons of investing outside the ASX 200

·         The underappreciated growth opportunities in the market

·         The “alarm bells” to look out for when investing in companies

Thanks, Adrian, for joining the Nest Egg podcast. You can stay up to date with what he and Clime are up to here.

Full transcript

David Stratford: G'day and welcome to the Nest Egg podcast. My name is David Stratford and today I'm actually joined here with a familiar voice and also the managing editor for SMSF and Accounting, Katarina Taurian. Katarina, g'day.

Katarina Taurian: Good to be back.

David Stratford: Also, as well, we are here today with Adrian Ezquerro.

Adrian, thanks for coming along.

Adrian Ezquerro: Thank you very much for having me.

David Stratford: I think today is more of a case of we're going to look at a few things, but more importantly you're here today, Adrian, to tell us a bit more about the pros and cons in investing outside the ASX 200. Just before we get into that, can you just tell us a bit about where you're from and who you are?

Adrian Ezquerro: Sure, sure. As you've introduced, my name is Adrian. I grew up in Bullongong, came to Sydney about 15 years ago and joined Clime Investment Management a little over a decade ago, so that's been quite a journey.

Clime itself is an investment management group and has been around for over 20 years now, listed on the ASX, albeit a small company, and we're really about finding solutions for those in retirement or looking to better fund their retirement.

David Stratford: And for any avid cricket fans out there, Adrian, you're a pretty good cricket player I hear anyway.

Adrian Ezquerro: Once upon a time. Retired now, but that was a great experience. I guess it took me around the world, to a degree, met lots of wonderful people. I think a lot of the things I learnt in the team environment at Clime I've taken through the professional business world, which has been most useful.

David Stratford: So I think, Adrian, being the senior analyst and portfolio manager at Clime, that role in itself, to me it sounds almost a bit like are you almost like a weather man? You kind of got to get things right and if you don't it all comes down on you. How does that work? What's the daily working style look like for you?

Adrian Ezquerro: Sure. I think it's fair to say we are accountable. We invest alongside our clients and I think that's a very important principle, something we live and breathe. In terms of the daily routine, a large part of my role and our role at Clime is gathering information, filing that, synthesising it and turning it into actionable items in terms of investments.

You can't get everything right. I think anyone who tells you they get everything right is lying to you. But the reality is for us that we have a process that we follow, an investment framework, and that is something we follow diligently. In many ways that helps us to sort of assist us to mitigate the risk that we're taking on.

David Stratford: Good man.

Katarina Taurian: Just so I can get an idea as well, Adrian, in terms of the kind of people that you speak to on a day-to-day basis, what does your client base look like?

Adrian Ezquerro: Our client base, whilst there is a range of course, I think our average client would be a self-directed SMSF trustee. I think in terms of average age it might be in that 60 to 70 sort of range. We have a mantra at Clime about growing, guarding and generating. What that means is we're looking to grow our investors' capital, guard it along the way and generate meaningful income, and really that's the genesis of the whole Clime business is guarding capital and generating income, particularly for those in retirement.

I think part of the evolution of our business, and certainly the thrust of one of our newer funds, a smaller companies fund, which I'm directly responsible for, is just capturing that growth that we see from those companies that are emerging outside the ASX 200. It provides more of the growth element that some of our clients are looking for.

Katarina Taurian: Yeah, I think that guard perspective in particular is pretty important to SMSF trustees, just from my understanding at least-

Adrian Ezquerro: Very much so.

Katarina Taurian: ... and Adrian's nodding along so I think he agrees. How do you find the appetite for investing outside of the top 200?

Adrian Ezquerro: It really depends on the individual. I guess it's a natural human trait that you invest in those things that you're comfortable with, those things that you know. I think a large majority of the financial press will focus on the very large businesses in Australia. If you cut down the Australian market, there's 2200 listed companies. Of those that you generally see in the press really is dominated by 10 or 12 companies that comprise about half by market capitalization, half of the market, so we do see an opportunity to exploit that.

What I mean by that is there's plenty of high quality companies that don't get the attention. We call them underappreciated growth opportunities. But again that comes back to just applying that diligent investment process right across the spectrum and not simply focusing all your energy on the big banks: BHP, Rio, our large retailers.

David Stratford: I think so, and speaking for maybe quite a lot of our listeners out there saying that there's a lot of names that ring a bell with people that probably are quite heavily invested in the ASX 100, 200, but this, for our readers and listeners, they already know the ABCs of general investing but for this it might be quite different. This might be a bit of a new leaf for them to look at, so what can we see in the market these days, and where potentially could potential investors find respite in this area?

Adrian Ezquerro: I think firstly it's important to acknowledge exactly what you're investing in. I think with those companies at the top end of town, you are investing in stability. They are proven business models that have been around for a long time, left a lot of competitors in their wake. I think it's worthwhile acknowledging that.

However, the reality is, again, at the top end of the market cap spectrum, you're looking at very modest growth profiles, you are getting a reasonable level of fully franked income, and that, depending on where you are in your lifecycle, is certainly an important component of your overall portfolio. I think the angle that we take is just garnering a little more balance and trying to sensibly capture that growth that we're seeing outside of the ASX 20 or 50. And certainly in the space that we're more focused on, the ASX 200, we're seeing a wide range of high quality opportunities.

Still, these companies have competitive advantages, or they've got leadership within a specific niche, they have other characteristics that we look for in terms of a very strong balance sheet, strong cash generation. Typically, many of these companies have a strong owner-manager mentality where it may be a founder running the business or a long-term CEO that has a large ownership stake in the business, so it's important that we marry up these sorts of characteristics. We're not just throwing money at the next big thing, which you may read about from time to time. It really is sensibly and diligently applying that process to emerging companies.

David Stratford: So your role as well, I'm guessing, it's the more you move away from these familiar companies, the more minds that you get across that investing, that road that you cross upon. But how would you really identify that? What would you see in today's market as a mine or an opportunity?

Adrian Ezquerro: Sure. I think in terms of idea generation for me, I mean, I find it interesting anyway, so I'll read anything and everything that I can. That might be publications such as Nest Egg Financial Press.

Katarina Taurian: He just pointed at me so that's my work guys. Excellent.

Adrian Ezquerro: Well, I think being engaged in this line of work, I'm very lucky to come across a wide range of people and meet some quite brilliant people in fact, but for us we overlay that with a whole range of filters that we apply. We screen our companies that don't make money, we look for those companies that have strong track records. So whilst they may be small, there's many companies that we've invested in that they've been around for 10 or 20 years and have got a great track record of profitability and certainly growth. Basically we're trying to take in as much information as we can and then synthesise that to being an output in terms of investment decisions, I guess.

Katarina Taurian: On the flip side of that as well, are there any alarm bells that you look out for when you're looking at companies to invest in for those true DIYers listening that will be looking for themselves? What are some real red flags for you?

Adrian Ezquerro: Sure. I think, really, if you took our investment framework and turned it on its head you'd see red flags. I don't mean to sound trite about it, I think that's the reality. I think where you see, particularly in smaller companies, you do see more volatility and less liquidity, but really those companies that expose themselves typically have weaker balance sheets. By that I mean they've got a lot of gearing, they generate very small amounts of cashflow or no cashflow whatsoever, insider selling, or a very low proportion of management ownership. These are the sorts of things that we would generally screen out early in our process.

I think also, as well, at the end of the day, we're looking for those companies that can invest in their business, generate a profit, perhaps pay some out to shareholders, but then reinvest and compound those earnings, 'cause really it's that self-funded growth story that generates the long-term returns for our clients and for investors more broadly. That's what we're looking for and those that can't deliver on those sort of characteristics we seek to avoid.

Katarina Taurian: Right, and do you find that those opportunities for those, don't want to say hidden, but relatively unknown companies are pretty accessible? Because I think a lot of Australian investors in particular tend to go to what's familiar.

Adrian Ezquerro: Sure.

Katarina Taurian: So yeah, is there anything particularly different from an investor's point of view about finding these other companies and putting your money into these other companies?

Adrian Ezquerro: I think it's a good question, definitely. The reality is it is dependent on the individual and their willingness to do the work. If you are seeking outsized returns, then you have to put in more research. The reality is that they're the people that are logging in, they're reading annual reports, they're dialling into the odd conference call, they're clients of the nest eggs or the world that are seeking to invest in themselves to learn and educate themselves.

I think for those that have an interest, but acknowledge that they don't have the time and/or energy to do that diligent legwork, they're probably better off researching a few managers that philosophically they're aligned to, and maybe invest in that way.

David Stratford: I think as well there's obviously a huge commitment towards moving over some of your assets into a market which you're not familiar with. I can already hear there's probably a few listeners that are already screaming, it's too risky or it's too volatile for me. But for someone that's never been involved in this space, what would you say the first stepping stones would be to take that initiative to add this to their portfolio?

Adrian Ezquerro: Sure. I think, as with anything, I don't think there's much point in just rushing headlong into anything. You've got to do your research, and for me that starts with listening to a few podcasts, reading a few annual reports and familiarising yourself with some companies. There's any range of different sources of information these days, so really it starts with getting a few ideas and putting that research into place, gaining a bit more comfort about it.

As I said before, I think firstly you need to make that call whether this is a path you wish to follow. As a do-it-yourself style investor, it is incumbent upon you to do the work if you're seeking to fund your retirement in a sensible sort of way, otherwise it's really, okay, this is what do I need to achieve, this is my objectives and these are the managers that can assist me to get to that point.

As with anything, it's just practise and putting the time in. If you do that with investing, particularly in smaller companies investing, I'm pretty confident that if you put the legwork in you'll get the results longer term.

Katarina Taurian: I'm really interested as well, just to take a bit of a selfish perspective, who are these opportunities available to? For example, I've got a mortgage in Sydney, no less, got some savings behind me. Am I an ideal candidate? Is there an ideal candidate? Is there an ideal starting base from a cash or asset perspective? I feel like you're going to say it depends on an individual's situation, but are there any types of investors that should actively avoid or actively be involved in this kind of space?

Adrian Ezquerro: Again, it's an excellent question and you're spot on. I think firstly it's important to qualify where you are in your lifecycle and what your objectives are, what you're seeking to achieve. The most stark example or contrast would be someone who's 30 years old and right at the early stage of their accumulation towards retirement, versus a client who might be 85 years old and is simply seeking to guard the capital that they have and generate income off that. Really, that's the first stepping stone. Asses where you are and what your objectives are.

One of the most empowering things that I've ever done, personally, was basically open up my own self-managed super fund account. That really encouraged me to take ownership of the decisions. Now, you might say, okay, well fair enough, you're in finance, you're inclined to do that, but I do know from a personal perspective, at that point super for me became a much more interesting topic and that was a decision that I've certainly benefited from. I think I've continued to do that. That runs parallel with whatever's happening with your own personal investment, so those investments may be in your own name or that of your family, be it the family home, share portfolios or property investment portfolios.

That for me was a defining point. It certainly empowered me to take charge of my own super and I think that's a point certainly for the younger members of your audience that they would perhaps like to consider. Otherwise, as I said, for those in or approaching retirement, really it's about assessing what your objectives are and what strategies you can put in place to help you achieve that.

Katarina Taurian: Unsurprisingly, as the editor of SMSF Advisor, I am very happy with that answer, but I think even for those who don't necessarily feel like they're ready for a self-managed fund, I think what you touched on there, the engagement piece is so important. When you can see something and you're actively managing something, it suddenly becomes a lot more important to you. In the same way that if someone uses ... 

Example with me the other day. When you're in the supermarket and you're standing there and wondering, "Do I get the thing on sale, do I not?" I mean, that's going too save you two bucks. But you can see it, it's in front of you, you're about to pay the money at the cash register. Superannuation is significantly more important than that, but you don't see it. You don't see it, you don't know what the fees are doing, you're not actively engaged with it on a day-to-day basis.

So I feel like when you bring that engagement in there, whether it's being as engaged as you can with an APRA fund or having an SMSF, suddenly it becomes more important, suddenly you start making better decisions for yourself. And that might be a very basic example, but I think it would probably ring true for a lot of people.

Adrian Ezquerro: It becomes real, and that was definitely the case for me that I started paying attention on one side of the ledger all the fees that were being paid, why they were being paid, but then, of course, how to better direct my own efforts to maximise, sensibly maximise, the returns that I could generate.

But it's the whole sense of being empowered. And having the information that you can turn into actionable ideas to build out your super fund, I think it's a wonderful thing, something that I found very exciting.

David Stratford: I think for me as well, personally, investing is a big part of what I like keeping an eye on and what I'm actually into myself, but at the same time if I'm going to go, after this podcast, and have a look into this market, would you say that I'm looking into it as a market that's undervalued or overvalued? What am I about to walk into straightway after this chat?

Adrian Ezquerro: Again, it's a good question. I think the beauty of it, and it's an enduring beauty, is that you have a couple of structural advantages here. I think the reality is in this world we have a small number of very large funds that cannot actually play in this space. They've got so many funds under management that they just gravitate to being top end investors, so that provides you with a structural advantage of what I call a pool of underappreciated growth focused opportunities.

Secondly, certainly in an institutional world for professional investors, they are assisted in their efforts in terms of research and gaining knowledge with the sell side or the broking community, and not to disparage their work, they do wonderful work, but a lot of it in reality is focused on the very large companies because that's simply where the turnover and brokerage commissions exist.

I can tell you now that there's more than two dozen companies I'm currently researching that have no broker coverage whatsoever. That for us provides us with an opportunity to gain an informational edge, so something that themself or our team can glean and learn about a company that no one else in the market currently understands, or understands as well as we do, and then overlaying that information with the pricing that we see.

So sometimes, thankfully for us, we can uncover these opportunities that meet our criteria that no one else is looking at, and that's where you can buy great companies at cheap prices. Over time, that allows us to earn decent returns.

David Stratford: When you look at these companies and their financials, would you follow them through their lifecycle of going through the next markets, maybe into the ASX 200, or even 100, and follow those key statistics, or would you stay back with the small caps?

Adrian Ezquerro: Again, it's a good question and something I've thought about a lot, in fact. Part of my role, really, is to try to find these great companies early in their development cycle and that provides an opportunity. If the investment thesis is still intact and the company's executing well, then it provides that opportunity for them to graduate up the chain towards the ASX 200 and in some cases beyond that.

I see the ASX 200, particularly those companies if you were to rank from one to, say, five hundred, two to three hundred is that fertile ground where you've got those companies that have generally stood the test of time. They've got critical mass, they've got a product or service that is resonating and is providing growth, so we see that as a fertile opportunity.

David Stratford: Yeah, for sure. I think as well, just to give it a nice round off into this whole conversation, I'm quite keen personally to know a bit more about the cons. I know we've spoke a lot about the pros and what opportunities do lie in front of those guys that are keen to explore this market, but what kind of things have you seen that people should be wary about?

Adrian Ezquerro: I think the fact that a lot of the smaller companies, as I've said, they haven't stood the test of time when compared with the top end of town. They generally have management teams that are very highly focused on one or two key people, so you've got key people risk. Also, in smaller companies, there may not be as much liquidity as well, so if you make a decision that for whatever reason you'd like to be out of the market, in some cases it's not as easy as just turning up on a Monday and selling your stock, and that sometimes it will take you some time.

That can work both ways in terms of volatility or liquidity, more generally. Those companies, they're just more immature in their development cycle, so the range of outcomes from a given point in time for a smaller company can be much broader than versus a Westpac or a NAB or a Woolworths, for instance, that have a tighter range of outcomes in terms of the earnings power that they have and, I guess, the path forward from a given point in time.

David Stratford: Adrian, thank you very much for coming in. Really do appreciate your insights and very well justified across the market, I'd say.

Adrian Ezquerro: Thank you both for having me. I really appreciate it.

David Stratford: No worries. Thanks again for tuning in on the Nest Egg Podcast. Don't forget, check out nestegg.com.au for the latest investment insights and news. We're genuinely building a hub of information and education to help you guys out, build more wealth in your portfolios.

If you've got a story where you've invested outside the ASX 200, or if you're looking at small caps and there's something you want to say to us as well, get in touch at This email address is being protected from spambots. You need JavaScript enabled to view it.. That's This email address is being protected from spambots. You need JavaScript enabled to view it.. We'd love to hear more about your stories and your insights as well, and you may even be able to join us on the podcast next month.
 
Apart from that, thanks very much for tuning in. My name's David Stratford. Speak soon. Bye.