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Find the future, don’t become toast

By Lucy Dean · April 17 2018


Find the future, don’t become toast

By Lucy Dean
April 17 2018
Wayne Peters

Find the future, don’t become toast

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By Lucy Dean · April 17 2018
Wayne Peters

Trying to navigate the disruptions of AI, online retail and energy innovations? Look to the Canon v Kodak late '80s showdown for a history lesson, a fund manager has said.

Speaking to the Nest Egg podcast team, Peters MacGregor Capital Management’s founder Wayne Peters said his experience of helming, and later selling Kodak Express was an example of the power of technology and the importance of sustainable investment decisions.

Explaining that he sold the Kodak Express chain in 1989 with the arrival of Canon’s first digital camera, he said when he first saw the digital camera, he realised it would not be too good for the Kodak business. 

I sold the chain, and interestingly, two years later, Bill Gates came out and said Kodak was toast.

“At that stage, Kodak was the second most valuable brand in the world. A very early lesson on how technology can change very quickly and impact values.”


With this lesson in mind, Wayne also told the Nest Egg team about:

1. Peters MacGregor’s three key portfolio themes

2. How he navigates the proven track record versus future dividend opportunity divide

3. And the European bank recovery story

Thanks Wayne, for sharing your insights with the Nest Egg podcast team!

You can stay up-to-date with what Wayne and Peters MacGregor Global Investing are up to here.

Have an investment story to share? Get in touch at This email address is being protected from spambots. You need JavaScript enabled to view it. and you might get featured on the next episode.

David: Welcome to The Nest Egg Podcast where we explore how you can grow, protect, and manage your wealth. Good day and welcome to Nest Egg Podcast, David here and of course joined with our home own Lucy. Lucy welcome back again.

Lucy: Thanks for having me.

David: As well, I'm actually joined with our guest here today, Wayne Peters. Wayne is the Chief Investment Officer at Peters MacGregor Global Investing. Wayne, welcome to the show.

Wayne: Yeah, good morning, David.

David: The name's in the title. It does what it says on the tin but there's a lot more to talking about global investing than we all think. Wayne's just been telling us behind the scenes a bit more about where he's focused in the space. Where trends are happening and what's going on in the world. We want to bring this to you guys over here and our listeners on Nest Egg.
Wayne, the first thing I like to do is just, for yourself, introduce a bit more about who you are, where you've come from, and why you're at Peters MacGregor these days and what your vision is at the moment. Can we just start off a bit more about who you are a bit more.

Wayne: Well, David my entree into the fund business is a little unusual. I was a professional squash player when I was younger. Moved to Germany when I was 19, and that top of opened my eyes to the world outside of the Australian shores. When I returned in 1983, I launched a photographic retail store and that build into a chain. We launched the Kodak Express Brand in 1986. Then, I sold that chain in 1989 when Canon brought out the first digital camera, but not anything like you see in digital cameras today.

It was a large box with a cord that connected to ...

David: Even I remember these. This wasn't that long ago.

Wayne: When I saw that, I thought, "This is not going to be too good for a business that has a lot of technology involved." I sold the chain, and interestingly two years later, Bill Gates came out and said Kodak was toast. At that stage, Kodak was the second most valuable brand in the world. A very early lesson on how technology can change very quickly and impact values. I became, once I sold that chain, I just started managing the money for my own personal account in international shares and through the '90s continued to do that.

Then, people came to me with a track record we built and then, in 1999, we formed Peters MacGregor capital management and we've taken the broader public's money since then. We've been through a lot of cycles and we just keep coming back to first principles in our investment approach and we take it from there.

David: It's amazing just to hear, say for example, just on the whole Kodak story. Having, and we talk about this with our investors a lot and it is relative to it, because exit strategy is so important and whether or not you think the company, like you said, was doing extremely well at the time. It's just reading the market and, in a way, going with what you believe in. Which can really benefit all or not in the long term. But it sounds like you made the right choice here. That, also as well, as it comes into a lot more around: how do you navigate into your investment?

For an investor, how can they navigate the global markets? We were just, like I said, having this conversation that there's so many things going on and you must cover so much ground in this space. I mean, we're looking at anything from Brexit, we were just discussing, to crypto currencies. There's just lots of things and lots of noise going on in the market in people's faces. But, give me an idea in terms of where your focus is at the moment.

Where are you honing in on at this stage?

Wayne: You're right, there clearly is with the internet, a development over the last 15 years. The amount of noise and information flow has just escalated and gone parabolic almost. The number one way we start our days out is reading the key journals. The highest quality sources of news and we're very focused on filtering out the majority of the noise because, otherwise, it just becomes very confusing. What we're looking for are businesses that we think provide a real service and are supplied by companies that have a very strong competitive position in the marketplace, one, and two are looking to or have the ability in our assessment to maintain that position for very long periods of time.

That is becoming more challenging because the internet and technology is changing even faster than we've ever seen before and I don't think there's many industries that aren't being touched and impacted by this change in technology. We're long term investors. We won't make an investment unless we're prepared to invest in a company for 10 years or longer. That is positive in the sense that allows us to really weed all the short term noise, but trying to make that assessment is becoming more challenging.

Where we're finding, we've got three key themes for our portfolio at the moment. The number one theme is the growth in internet data usage. That looks like, or even though it's categorised by the main indexes as consumer discretionary. We believe internet usage is a utility. I believe people will stop paying for other services well before they stop paying for their internet data base packages. Finding the companies that supply the pipes, the tracks for the internet to flow on, has been a key theme in the portfolio.

We're invested in the broadband cable operators around the world in the US, in Latin America, in South Korea, and in Europe. We believe that has a long runway and the prices of these businesses have been undermined because their original business are slightly in decline. But the growth in internet data is far surpassing that decline.

David: Of course. It's amazing to see that as well and a lot of people focus, when you think internet you think of huge multinational companies. The face, the brand, such as we're looking at Amazon. It's always a talking point for investors or Google, Tesla, whatever it is. People that are on that technology trade but the fact is you need the foundations. The foundations are under the ground. Not as glamorous as your Amazon's and everything like that but it's such an important component of the internet.
Without it, we wouldn't have it.

Lucy: Glamour can be deceiving as well. That's the other side of it.

Wayne: Yeah, exactly. If you bring it back to an Australian analogy with the resource companies. In this part of our portfolio, we're not investing in the resource companies themselves. We're investing in the picks and the shovels that are required to dig the commodities out of the ground and we believe that's a sustainable model simply from a cost perspective. I mean, to give you an example, in the US Google started a strategy called Google Fibre where they started digging up the streets. Laying fibre in their own name and after two years they gave up and it wasn't because they didn't have enough money, but the exercise was just too expensive and the cable companies that have the cables in the ground already, they got lucky as far as the technology's concerned because what was needed to supply cable TV previously just so happens to be the most cost effective way to deliver consistent high speed internet.
When I say high speed, I'm talking currently one gigabit of speed compared to 10, 5, 20, that we receive in Australia. We're really behind on the curve here in Australia.

Lucy: How do you reckon, I mean on that, what do you think of the NBN?

Wayne: Well, you know ...

Lucy: We had to ask.

Wayne: When governments get involved, there's high risk that they're slow to the game. It's a real shame for Australian business. I think productivity in Australia could be a lot, lot better. We rank somewhere in the mid 50's as far as speed in the world. There's countries like Colombia that have faster and more consistent internet speed and quality than Australia does.

David: You think, as well, that for not just in Australian investment, but looking outside to the broader picture there's a lot of improvement we can make. If we're sitting in mid 50's in terms of speed there's a lot of improvements and developments that Australians can expect, I think, going forward. Probably moreso than countries that have already been quite well established with their internet speeds up into super-duper speeds of 100 gigabits or 100 gigabytes a second.

Wayne: That's correct. The South Korean company that we're invested in currently, their minimum speeds are 1,000, so one gigabit.

David: Yeah.

Lucy: I don't really know what that means. What does that actually mean in terms downloading things. How much faster is that?

Wayne: 50 times.

Lucy: Okay, that's a lot faster. Yep.

Wayne: Yeah, so you can download a movie, a high quality movie in under one minute.

Lucy: That's really fast.

Wayne: Yeah.

David: People are sitting there like, "Please, Australia, can we just get to that level at the moment."

Wayne: Where it becomes important, David, is if you decide to cut the cable. You need high speed consistent internet if you want to watch your Netflix or your YouTubes because the YouTube and Netflix service providers, those two names alone account for 55% of all internet data. That just shows how much people are watching videos via the internet and you just don't want to be sitting back and having your programme interrupted.

David: Yeah, 100%. Looking at this as well, this is really interesting because coming from the UK where we've already got established speeds and the coming over here have seen the difference. But, what can we expect, would you say, in terms of when you think Australian cable you think Telstra. You think they're the people that put the cables in the ground. What other opportunities or what other avenues are happening right now which are looking to change that ecosystem underneath with the cabling?

Wayne: There's a lot of talk about 5G and we're seeing those type of programmes rolled out in North America and Europe, but the bulk of the transport of that signal is still via cable and 5G technology still hasn't been tested. It's very good, but it's very short range so it can't cover a long distance and it can be interrupted by as little factors as wind. We believe the cable operators still have the big advantage and in Australia, I mean, I think unfortunately there's not a lot of light at the end of the tunnel at the moment.
We're just going to be having to persevere with spasmodic and slow speeds here in this country and it's a real shame.

David: It's interesting that you mention that as well. Going back to just 5G very briefly, I've noticed in the industry and out the industry, a lot more conversation happening around that for investors get involved in around. Well, they can invest for 5G technology. The fact is, I think, like you said. Stick to what you know and stick to what's historically proven and current at this stage. This is where we all come down to risk profiling as well. We're looking at something where this is myself, this is probably a majority of our readers out there. They're risk adverse.

I think, a lot of the time, they like proven statistics, hit statistics, history is super important to them so to have that mentality as a fund manager, that's pretty [inaudible 00:11:13] I'd say on that side.

Wayne: Yeah, that's exactly correct, David and the number one thing that people must remember with technology is as technology advances the consumer is usually the winner and unless the company has some form of monopoly or scale competitive mote, it's very difficult for the middle man to maintain the margin. I saw that in the photo business. Faster speed photo processing was an absolute boon and godsend to consumers, but the middle man, as the technology became more broadly used and available, really struggled to maintain margin.

We're looking for businesses that have high returns on invested equity. That we can buy and own for the long term. At the moment we've got that as a key theme, and then, of course you have to look at the strength of the balance sheets and the quality of the management and for us the quality of the management rates very high. You want managers that have a large amount of their own money invested in the shares so that they're taking the correct long term investments and not concerned about the short term manipulation or the short term targets.

Once companies start talking about and making decisions for the earnings for the next quarter in six months, those are really key signs that you've got to watch out for. You're wanting managers that are making investments today that'll improve their odds in 5 and 10 years from now.

Lucy: I suppose that's the interesting thing for me, at least, is balancing that. Looking at the historical returns but you can't base all of your decisions off that. But you also can't base your decisions off future dividends because there are so many ways that those can be influenced by things that actually aren't going to be sustainable and I imagine that, that's the really tricky thing hitting that sweet spot.

Wayne: Or it's squandered, or just squandered. I mean if you've got management that don't have a large amount of skin in the game, their number one concern is how much they get paid. How fast they can exercise their options and so they tend to make a lot of short term decisions which they believe will be advantageous for the market. I mean, just look at some of the Australian companies that pay a lot of their income out in dividends. While a lot of investors are invested solely on the presence of that dividend yield, and a lot of companies are paying dividends that just aren't sustainable long term.
Ultimately, if you're a long term investor, those dividends will fluctuate and then the shared price will move accordingly.

David: Absolutely, I think, and this is one thing which is so important. Most investment management decisions come from the mind and it's such a big psychological process. I'd probably say 80, 90, and even more percent would be completely psychological, so to have that backing and to be not just managing a fund, but to actually part of it as well you're essentially looking at it as an investor as well. Which is, for me, I look at the mentality where I investment is pretty much up to my own mind or I've educated myself on how much involvement I have in a particular assets or equities.
Having that across the board to match your business model is interesting. It sounds like you're backing it.

Wayne: Just wrapping up on the dividend aspect. What most people don't understand and I'm absolutely staggered the misunderstanding or lack of knowledge. Even at the board level by the directors that are actually setting the dividend policies. There's a mathematical formula that dictates what that dividend, sustainable dividend policy can be and it's tied to your return on equity, your margins, and your debt levels. You can pay out more than that formula allows over a short period of time but you can't do it over a long term.
Dividend policies have been set for a whole host of other reasons than that mathematical formula so it's very easy to look and see whether a company's paying out over the odds and whether that's sustainable.

David: No, 100%. We're going pop our pilot hats on and fly over to another country, so stay with us.

Lucy: That was great.

David: I know, I was waiting to say that. One thing which is interesting in being part of this is that Australia's great. Is we have all of these investment opportunities here. There's so much going on in Europe. There's so much going on across other parts of the world. You were talking to me about one particular initiative that happened. Which, I would say, is a huge milestone for the UK in the banking industry. I'll let you explain a bit more about that Wayne.

Wayne: Two of our positions currently are in the UK. We own Lloyd's Bank and we own Metro Bank. What's interesting is the banking structure in the UK was very similar for a long time to the Australian structure. Four key banks in the UK. It's five, as it turns out. Then you've had, over the last 10 years, growth in what they call the challenger banks. Metro Bank was the first challenger bank. It was the first bank that was issued a banking licence in the UK in 150 years, and so that just showed you how little competition was in a key utility and the customer service levels were just atrocious.

Here you have Metro coming in and being very focused. It's number one priority is looking after the customer and serving the customer and it's reaping those rewards big time. The growth in it's loan book is just like a rocket because customers are finally saying, "Here's a bank that understands us, is looking out for what is important to us and providing us with a service."

David: It's interesting because just from my experience, banking as an actual customer in the UK, you've got the major banks and they are the bread and butter for everyone out there. But to see that there's non major banks coming into the pipeline. I think I remember Metro beyond the corner of High Street and correct me if I'm wrong, I swear they're never shut. They're always open, or something like that.

Wayne: They operate seven days a week and they have a policy that they open the stores 15 minutes before their stated opening times and they close 15 minutes later than their stated because what they want to do is never disappoint the customer. They spend zero dollars, which is almost unheard of in the banking industry here in Australia. Zero dollars on advertising. It's all word of mouth and there's only one way that word of mouth spreads is when you have satisfied customers. In their customer satisfaction surveys they rank us high as a top retailer in the UK and the other bank competitors are sub zero.

It's quite [crosstalk] and if you talk about customer satisfaction, bringing it back to the Australian banks. I mean, we've got a Royal Commission going on because of the lack of satisfaction at customer level. This morning, we've heard out of the commission that the banks have now, for eight years, and they've known about it for eight years, overcharged their clients on their mortgage interest offsets. To the tune of 90 million dollars.

Incentive cause bias is something, as a manger we look to. Very important in how management's [inaudible 00:18:07] packages are structured because incentive cause bias is a major bias and you can take the bank employees and none of them would've had any deceit or bad intentions but because the structures were incented for them not to come out and change the processes, they've raked in 90 million dollars of fees that were just incorrectly charged.

Lucy: Yeah, I think it's really fascinating. It seems like a lot that's been going on last year will be happening this year and probably into the next few years comes down to trust, or a lack of trust in our political leaders. In our institutions. I mean, it's manifesting in things like cryptocurrency and in the challenge of banks, and just in all the smaller players. I mean, not cryptocurrency, that's huge. But, like smaller guys coming in trying to get a piece of that.

Wayne: Well, trust is absolutely important. I mean, do you want me to get into the cryptocurrencies. I mean, in one sentence it's just a speculation. I think it'll end in a lot of tears. If any of your listeners are invested in that, they should be fully aware that it's a full speculation. It's not an investment. Trust, as you say, I mean sure there's people that are disappointed with the feared currencies and how the purchasing power of the feared currencies are whittled away due to inflation.

But that's the price, I guess, we pay for a medium that allows us to transact and, of course, the higher inflation a country has, the quicker that currency devalues. In every incidence, it's backed by a government and they have ... The beauty with governments is they have the ability to tax the broader people. These cryptocurrencies have no such backing and in my view, they lack the key essential for value creation or maintenance and that's trust. They don't have that and I have no predictions of when they may crash but I think it's a long term store of value. They just don't have the key ingredients.

David: Let's be realistic, we're talking about people's retirement fund here.

Lucy: Yeah, this is nest egg.

David: This isn't something that you want to put into a speculative investment.

Wayne: No, no that's exactly right.

David: Having that mentality is something where, like I said before, stick and educate yourself to what you know and what is proven and what is historically proven as well.

Wayne: David, that's the approach we run with Peters MacGregor global fund. We hold 20 to 30 names and every position is bought because we believe they have long term earning capacity. We're buying them at a significant discount to what we think they're really worth and we take our job very serious because we're dealing with people's retirement. Bill-age, retirement savings that are absolutely essential. Speculation does not hold a place in our portfolio and even though we may hold names that aren't the glamour stocks that is not even a consideration for us.

We're looking for business that can earn us above average return over the 5 to 10 year period and we just continually come back to first principles. For people investing in equity markets, the key principles there are clearly invest only in equities and shares if you have a five year plus time horizon because of the potential volatility in market prices in the interim. Do not leverage your investments because leverage is basically the only thing that can send you bust, or make you sell your shares at an inopportune time.
Then, have the right temperament. Having the right temperament in investing your shares is the number one criteria, and if you don't have that you need to find a manager that you feel can deliver that.

Lucy: Have you guys ever been stung? Like you followed your processes. You've ticked all the boxes and then ... ?

Wayne: We make mistakes but we've been operating now for three decades. We've been through a lot of cycles and our strike rate is a surprisingly high 76%.

Lucy: Okay.

Wayne: On average over the long term, if you can get more than 66% calls that are correct, you will do just fine. Of course, you learn most of your lessons in a more profound way from your mistakes.

Lucy: Exactly, yeah, because if you've ticked off all those boxes and then it still goes wrong like this. Obviously something very interesting going on.

Wayne: There are judgement calls and the longer your experience is, the better your judgement calls get. Just coming back to the overwhelming amount of data and opinions on investments. You must always just look ... I mean, for us, information's only important, it's only valuable if it's important and it's knowable. If it's neither of those two you can just discard it because it doesn't help you. This is why we got straight to the source documents. We don't spend much time thinking about the macro or the short term and just write expectation movements or what the talking heads are predicting in the near term.

Those factors don't come into our thinking. If we're going to own a business for 10 years or longer we're going to be in multiple cycles, business cycles. Interest rates are going to move in different ways over that period. There's going to be different political leaders. We're wanting businesses that are strong enough to take advantages of any downturns and just grow their competitive advantage over time. That's what we're focused on.

David: No, that's interesting another thing as well, and this is just interesting for me and I'm sure a few readers out there looking to get involved in a more international based portfolio. Rather than getting bogged down with the doom and gloom and trumps and market flumps, and all that stuff that comes with it. But, what kind of things are going to be happening or what do you have your sights set on over the next year to 10 years of trends that are going to be coming through? We've got a lot going on with, you know we were talking about earlier with Brexit.

Then, there's also the Trump presidency. Terrorists have come up recently in the news, there's a lot going on.

Wayne: Well, nothing in our portfolio will be impacted in a direct way by any changes to the tariff landscapes around the world. The three key themes in the portfolio at the moment we've just talked about are the European bank recovery story. We think that's very interesting. Remember, Europe has negative interest rates. None of us seen that situation and as that starts to reverse and we made no prediction on when that will happen, but it will reverse and draggy is starting to talk in those terms. Then we will play that game with our European bank stories.

We've got the broadband cable internet usage theme running through the portfolio and then we've got the China consumer story. We own 10Cent, BuyDo, and JD.com. China has this rise of the middle class consumer where you have the middle class looking to double in the next five years. That's, again, a long runway. A big tailwind, and we believe we're well positioned to take advantage of those. This idea of trying to time the market on whether things are going to get gloomier or more perspective is just a fools errand. More money has been lost sitting on the sidelines trying to time the market than actually being full invested and going through the dips.

When you're go into a dip, it's not what you earn going in, it's when you earn coming out that's most important. If there was any lesson to be learned from the 2008 - 2009 global financial crisis, it was exactly that. We just think strong businesses, we know the market allows the highest returns to come from those businesses and as an investor, especially based in Australia where your biggest asset could be your home. Totally reliant on the Australian economy, your income generally most peoples biggest asset and they don't really think about in those terms. They are highly concentrated and reliant on what happens to the Australian economy.
They've been lucky. We've had 26 years of no recession but I wouldn't be betting on that continuing and so having diversification for a portion of your portfolio into international companies and international currencies, I think, is enormously valuable and we offer that service.

David: Yeah, and it's just like we said before, just cutting out the noise and having that conversation. Really looking at what you want to invest in with more than a penny thought. Wayne it's been great having you in and I definitely want to get you back in here again. This has been really good for our investors, I reckon.

Lucy: Really interesting.

David: Yeah.

Wayne: Okay.

David: Wayne thanks for coming in.

Wayne: Thanks David, thanks Lucy.

Lucy: No worries.

David: You can always find out more information below on Pete's MacGregor. There's also plenty of insights that we've hosted across Nest Egg ourselves and for anyone else who wants to get involved in the pod cast you can always get in touch, our editor at nestegg.com.eu. We're also followed across social media platforms, LinkedIn, Twitter, and Facebook. Thanks for listening again and catch you next time.

Find the future, don’t become toast
Wayne Peters
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