In this episode, Nicholas Cregan, Portfolio Manager and Partner at Fairlight Asset Management joins us to discuss the recent performance and outlook for global mid and small-cap equities, how they differ from Australian equities and why more investors should consider a global mid and small-cap strategy in their portfolio.

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Transcript

Paul O'Connor (POC):My name is Paul O'Connor, and I'm the head of Investment Management and Research. Today we have Nick Cregan from Fairlight Asset Management, who is a portfolio manager and partner in the business. Fairlight is a boutique funds management business that specialises in investing exclusively in global small and midcap equity markets. The investment team take an ethically-aware, quality-driven approach to investing, dedicated to deep fundamental research, both the qualitative and quantitative aspects of investee companies.

Fairlight offer both currency hedged and unhedged versions of their global small and midcap fund, and both funds are available on the Netwealth investment menus.

Nick has a Bachelor of Business and over 18 years experience in the domestic U.S. and international equity markets. And prior to founding Fairlight, worked at Evans and Partners for four years as a portfolio manager on the Evans and Partners International Fund. Prior to Evans and Partners, Nick worked at Schroeder Investment Management, where he held Senior Analyst and Portfolio Manager positions in the New York and Sydney teams, respectively, working on Schroeder's North American 7 billion small and midcap fund. Prior to this he was a co-portfolio manager for the Schroeder microcap fund, which delivered 11% per annum outperformance over a five year period, with volatility below the market.

So Nick's certainly got a lot of experience in the global small and midcap space, there, to be able to provide some good insights today. We've not a global small and midcap manager on the podcast serious, so it should be an interesting discussion to understand more about the opportunities that are available in this segment of the equity market.

Good morning, Nick, and thanks for joining us

Nick Cregan (NC): Thanks, so much, Paul, it's a pleasure to be on. 

POC: There have been many, I guess... Well, sorry. There have not been many global equities mid and smallcap strategies available to Australian investors, which, I guess, has surprised me over the years, given the appetite that Australian investors have had for emerging market equities and Australian smallcap funds. So whilst we've embraced those funds, yeah, I guess I'll be interested to see if there's good growth in this segment over time. Given the opportunity to generate excess returns over the global equity market as represented by the MSCI World Index. I'll also be interested in understanding how the global mid and smallcap equities have performed during 2020, given the extreme market volatility witnessed in March and April, and in the subsequent rally in the following months. 

So to start with, perhaps, Nick, you founded Fairlight just over two years ago, so how would you compare working at a boutique manager, your own boutique manager, to the larger investment businesses you've previously worked for?

NC: Very good question, Paul, and I have to say, absolute chalk and cheese. And so whilst the strategy's been up for two years, we've actually been at it for around three. So as you might well appreciate it, it does take a little bit of time to get these things up and running. And we didn't exactly roll out of a large institution. So, sometimes the model is rolling out of a large institution, and partner with a boutique sort of provider out of the gates. We didn't do that, so we had our own clients and we got the Unit Trust up and running from day one. Which, as I think you can well appreciate, isn't the easiest of tasks. 

So, sort of, that institutional support that you're used to isn't really there when you're getting a boutique up and running, but I have to say that we do now have some fantastic advantages once you get through that hump, that aren't really afforded to the large insto's, so we're kind of through that initial hump of having sort of 300 million in funds under management. But the nice thing, Paul, is that we're all partners, and I think that element is a little bit lost on people sometimes, or isn't as emphasised as it should be, so we don't have to go through those awkward end of year key performance indicator assessments where we all sit around a table and they're a little bit fake, and probably don't get to the true sort of motivations of people. So we're all sort of pulling in the same direction as partners in the firm.

And the second element which I think is also lost is that a huge portion of our net wealth is tied up in the fund itself, so we're investing alongside our investors. That's not always the case when you have institutional investors who are running strategies, and it just means that we tend to read the annual reports with a little bit more granularity, and a little bit more sincerity.

And you don't have to take my word for that. There was a paper put together by a group called AMG that looked at the performance going back from 1995 to 2015, and they're able to show that if you had just invested in boutiques, you'd have 20% more wealth now than if you'd had investing otherwise over that 20 year journey. So I think there are some learnings there, and whilst you don't have the support of an institution, I think that the behavioural aspects more than compensate for the lack of support.

POC: Yeah, I think, to one of the key points you made there, Nick, was around the fact that you're all partners, the investment team. And one of the things that always keeps me busy is the continual changing and people turnover at the larger investment management businesses. So the fact you're all partners, yeah, I think certainly aligns you more. 

And my observation would be, it certainly results in a more stable investment team. Because it's really the people you're backing when you're looking at active management, in my opinion, there.

Australian investors have embraced Australian smallcap strategies. So perhaps, can you provide the listeners with an overview of the global mid and smallcap market, and how it actually differs from the Australian equities mid and smallcap universe?

NC: Absolutely, and I think you sort of hit the nail on the head a little bit earlier, Paul, when you started talking about the opportunity offshore vs Australia. So the global small to midcap opportunities are some 40 times larger than you'll find here in Australia. And I think it's not too much of a stretch, right, when you think about how Australian investors have really embraced the small to midcap end of the market, recognising that there are some really great sort of alpha opportunities if you've got a manager who knows what he's doing in the space. 

But I would also note that the Australian market is just some 2% of global market cap, so whilst our markets perform admirably, very, very well over the last 100 years or so, there's just some fantastic franchises offshore, that's very, very difficult to get exposure to in the equivalent Australian market, which I think, if you look at the composition of the index, really does come through.

POC: So what type of biases do, I guess, or opportunities, does the global market present compared to the Australian market... in terms of industry sectors, and, yeah, that you can actually get exposure to? 

NC: Yeah, good question. I think that the starting point is just that the international index, just because it has got that breadth to it, it doesn't suffer from some of the narrowness that you find here in Australia. So to give you an idea, for the small and midcap index, our largest position in the global small MSCI World S-mid Index is just 30 basis points, whereas in Australia the equivalent is about 6%. So quite a bit of concentration in the index. 

And likewise, whilst the Australian equivalent is quite skewed towards materials and mining as we are fantastic producers in those industries, there is a much greater breadth in exposures in the global S-mid index.

So to give you an idea, industrials make up about 17% of the index, followed by tech at 16%, consumer at 12% and health care at 5%. So there are parts of the market where it's very, very difficult to get meaningfully diversified exposure in the Australian equivalent, so that would be a good starting point.

And secondly, the U.S. makes up about 50 percent of the index. So I think Americans do quite a few things well. Business seems to be one of them. So getting exposure to those smaller tech kind of exposures, or smaller health care businesses in the U.S., there is a really nice opportunity set.

POC: Yeah, I think it's a good point you make there given the increasing, I guess, access Australian investors have, that they're taking up on U.S. large and megacap stocks, that there's also a lot of opportunity in the mid and the smallcap sector in the market there, and I suspect the growth opportunity with some of those companies would be significant, too, if you can get on to them early enough there.

So you obviously spend a lot of time covering the U.S. market. What about emerging markets? China must be a potentially fertile ground for mid and smallcap stocks. But of course can come with some extreme risk. Do you invest in emerging market stocks?

NC: We don't, currently. We measure ourselves against the MSCI World Index which is the developed markets version of that index. But that said, we do keep an open mind to emerging markets. So there's nothing in  for instance that precludes us from investing in that part of the world. 

What we are mindful of, though, is that really, in places like China, or maybe India or Malaysia, some of these more, call them "frontierish" kind of markets, we will, 100%, be the patsies in the room. So we're not speaking the same language. We don't understand the cultural nuances. A lot of the time there's political ties you need to be quite mindful of. And the corporate governance at times isn't exactly the same as you'd find in developed markets. For instance, there's different rules around selective disclosure. There's different rules about when annual reports have to be released. And then there's also the language barriers that come along with that.

So we keep an- the language barriers that come along with that. So we keep a very close eye on emerging markets. And over the next decade or so as those markets mature we'll probably have more appetite. But at the moment we're finding more than enough opportunities in developed markets, and that hasn't been a particular handbrake to our returns over the past few years.

POC: So both Australian and global small and mid-cap stocks have traditionally been more volatile than the mega and large cap stocks. So can investors actually reduce their portfolio risk by investing in this sector?

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NC: Yeah. Well, there's a couple of questions embedded in there. And the first one is around volatility, and whether that's the greatest measure of risk. And I guess that comes down to your timeframe, and a lot of ways you can bear greater levels of volatility if you look out over a five or seven to 10 year time horizon. But that said, you're absolutely right. I mean, the small and mid-cap end of the market intuitively is going to be a sort of more volatile. The business models are less developed. They probably haven't developed into the monopolies and duopolies that you see in the mega cap end of the market. But there's also the adage that diversification is one of the only free lunches in finance. And so while the small and mid-cap end of the market is a little bit more volatile on a standalone basis, there are some great benefits that come from blending the two.

So by way of example, Paul, if you use a 75-25 large to SMID blend over the past 20 years, you would have experienced around a 40 basis points increase per annum in the performance that you would have generated over that period without a material increase in volatility. And when I say not material, you're talking basis points increase in volatility. And the reason for that is because the businesses move to the beat of a slightly different drum. So large cap, more impacted by macro economic events, what's happening in the trade wars across borders. Because multinationals, they're selling into different markets and can be a little bit more impacted by things like tariffs, et cetera.

But the smaller to mid-cap end of the market, these businesses are generally a little more local. So they're selling into the, if they're located in the UK, there'll be selling into the UK and Japan. Quite similar, even though Japan's quite a bit large exporting nation. And so they are a little bit more insulated for what's happening globally, and will be a little more driven by idiosyncratic risk or stock specific risk. So they're highly correlated over the longterm, but they tend to perform in different markets. And hence why you do get that diversification benefit.

POC: A lot of these global smaller, mid-cap stocks are more domestically focused than actual exporters. So they're going to perform slightly differently during the economic cycle compared to the large and mid-cap stocks.

NC: Absolutely right. And a lot of them are, they don't even have to be producing a widget, right? So we think about some of the stocks that we look at, and not necessarily in the portfolio, but there'll be media portals serving a domestic market. A good example would be, I think everyone in Australia is familiar with REA.com. So realestate.com, which is a fantastic business servicing the domestic, or retail housing market here in Australia. There's very similar businesses offshore. So you have this opportunity to really learn or look at what you've worked across borders. And you can look at places like the UK where Rightmove is a very similar business, but there were opportunities to buy that business at a 10 or 15 PE multiple discount to what REA was trading at here in Australia.

And that business is going to be very driven by what's happening in the local market. So the housing market and the local economy is going to be driving that particular business, as opposed to the geopolitical forces that have more of an impact on the Googles or the Apples of the world where they're mindful of what's happening in places like China. Where there might be some trade rebuttal from the rhetoric that's been coming, they've been throwing at them from the US, for instance.

POC: Yeah. Well it certainly, I think, highlights the fact that diversification, having different securities, and securities that behave slightly differently during the cycle is the key to building a resilient portfolio. I've observed the strong returns from US small cap stocks for many years. So should investors have an exposure to non mid and small cap stocks? And what type of allocation would you have in your portfolio to US stocks versus non-US mid and small cap stocks at the moment, Nick?

NC: I think, as I said earlier, the US do some fantastic things. But really one of the things that they do better than anyone else is building businesses. And you've got to go back over a long period of time to figure out the reasons for that, kind of culturally, politically, the way that their democratic system is set up. The competitiveness in the culture itself means that a lot of the fantastic global franchises that exist today have been born out of the US. And I can't see any major reason for that to be not the case over the coming decades. Now, that's one thing. So the businesses themselves are fantastic. But as you rightly pointed out, Paul, a good investment is not only about identifying great businesses, but also the price that you pay for them.

And you do need that margin of safety in the multiples that you pay for these businesses. And in some parts of the US, valuations have become quite stretched. So our allocation to the US is reasonably similar to what you'll see in the index, so we're not particularly overweight with US. And where we are finding our incremental ideas have been recently actually in the UK, where the overhang of Brexit is continuing to weigh on multiples in that part of the market. And I think we mentioned Rightmove as a pretty good example. There are some excellent businesses that will grow despite what's happening in the UK economy. So they continue to grow market share, and they've got some pricing power, and you can eek out a return separate from what's happening from GDP.

So that's one part of the world that we're seeing some good opportunities. And also in Japan, where traditionally corporate governance has been a little different to what you'd find in the Western world. So less of a focus on capital efficiency, diversification within business models where it doesn't make sense, and going on some interesting tangents. That at the margin is changing, and we're not proponents of it, we're not supportive of the idea that it's going to change overnight. But we are noticing at the fringes that there are some pretty interesting and unique changes to those businesses that are flying a little bit under the radar. So we are finding some pretty interesting opportunities in Japan also.

POC: Yeah, it's interesting that certainly resonated. Your comments you made around the US economy and it is so entrepreneurial. And it's always struck me as being more entrepreneurial than any other economy in the world. But evaluations can get stretched at times, so having a broad investment universe gives you the opportunity clearly to look at Europe and Asia for other opportunities to blend into the portfolio there. I think that's ultimately active management at work and what it's about. Environmental, social, and corporate governance, or ESG, seems to be incorporated into most equity strategies, both active and passive. So how does Fairlight assess a company's ESG, including the sustainability and societal impact of an investment in a company?

NC: Well, ESG is just becoming incredibly important across the board, and I think you'd be living under a rock if you weren't aware that environmental, social, and governance factors are more and more front of mind for investors. As they should be, right? I mean, the fact of the matter is, we've got a finite planet and we need to preserve the resources of that planet in a way that's going to be beneficial for future generations. I heard an adage the other day that we're borrowing the planet from our children rather than inheriting it from our predecessors. Which I think is a pretty good way of thinking about things, so leaving the world in a better place than we found it. But for Fairlight, we screen out all the major nasties, so tobacco, gambling, old growth forests. We go a little bit further than that in that we also screen out metals and mining, oil and gas, and some of these other more cyclical wins in the market.

Part of that is proactive, and part of it is really a nice beneficiary of the strategy for which we have formed the business, which is a focus on quality companies. Quality companies tend to generate a good return through the cycle, so generate cash all the way through the cycle. And they tend to be capital light. And that's got a really nice tailwind to it, in so far as capital light businesses tend to be pretty efficient in the way that they use resources. In fact, whilst we're not an ESG business, we have noticed that we are one of the lightest carbon emitters that you'll find outside of an impact fund that invests exclusively in say wind farms or other green initiatives. So whilst we're not simply ESG focused, we're incredibly compliant on that front, which has left us in pretty good stead. So for those investors that are focused on ESG, we've found that we've passed the 99% of the screens that have been thrown at us.

POC: That's interesting, the link you make between your idea of quality and ESG. That, here they're typically more capital-like businesses. And also, I guess, potentially more progressive businesses to quality businesses that are moving with the times to keep up with really society's expectations. I think of what a good corporate citizen is.

How did global mid and small cap stocks perform during the market recovery post April this year compared to the broader equity market? And what are valuations like now compared to the larger cap stocks?

NC: Yeah. Good question. I think the starting point is how did they perform during the sell off as well, right? So the small and mid cap index sold off about 6% more than the large cap index, as we sort of noted, tend to be a bit more volatile. As I think that you've picked up on doing your due diligence on our fund over the years, Paul, I feel like it takes a pretty defensive approach to this big market. So our strategy was down in line with the large cap index over that period.

But over the last few months where there's been sort of more positive news about the economy, the opening up of different sectors, and of course most recently the news around the vaccine, there has been a marked improvement in the small and mid part of the market. So if we sort of look back as of sort of recently as two weeks ago, the smid, small and mid cap part of the market underperformed large caps by about 12% over the last 18 months. And that gap is starting to narrow a little bit more recently. So the performance is really starting to close up there a tiny bit as the more economically sensitive parts of the market are getting a little bit more attention from investors.

POC: Now it's interesting there, Nick, that you guys clearly did a good job in managing the portfolio if you only sold off in line with the broader equity market, because I would have expected global small and mid cap stocks to out or underperform greater than the large cap sector of the market in the sell off. So during periods of market recovery, how have the smaller companies traditionally performed following a crisis?

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NC: Yeah, so whilst they have a bit of a tough time during the crisis itself... So if you look over the last hundred years or so, the worst monthly sell offs over those hundred years, smalls have tended to underperform during the crisis, which is kind of understandable in some ways. Investors worried about solvency risk and cyclicality and damage to business franchises. But once we come through the crisis, smalls tend to outperform large, not only on a one-year basis, but on a three, five and 10 year time horizon also, which is kind of interesting, right?

So we get the question from investors, "The smid, the small and mid end of the markets had a bit of a rally over the last month or so, have I missed it?" Our message would be if history is any guide, you've got some time for this to play out. So if we're thinking about the 10 year time horizon, it's sort of difficult to think that one month sort of quasi recovery in smalls to mids verse large is all we're going to see. Of course, every cycle is different and we're not going to rub the crystal ball too hard here, only to say that I think that the statistics of history are on your side here for a longer term recovery out of this crisis.

POC: So there's been a lot of debate recently about under-performance of value investing over the last 10 years or so. And with a quantitative easing, low cash rates, or even productivity gains through the IT revolution have driven growth stock valuations. In recent weeks, we've actually seen value stocks rally as the news of COVID vaccine has favoured cyclicals. So how does [Fairlight 00:25:22] think about the current debates surrounding value investing?

NC: Yeah. So I guess there's a few elements to this argument. So we are quite sympathetic of the view that the growth versus value equation has become incredibly stretched over the past few years. And there's a reasonable argument for why there should be a bit of a snapback, but also I think investors need to be mindful that there is a structural change or a structural decline in some of the industries that make up that value cohort. So if you look at the return on assets for the value cohort over the past 20 years, 20 years ago, the return on assets was around three and a half percent. And that's since dropped to one and a half to 2% now. So the run rate for the value cohorts clearly reducing.

That said, however, there was a material under-performance in the oil and gas discretionary retail and financials part of the market during the COVID period where there was literally shut downs, right? So people aren't going out shopping, they're not using their cars as much, so oil and gas demands obviously taking a bit of a hit. And financials on the banking side, not only rates being low, but also arguably less consumer demand from the banking outside of mortgages sort of drove that. So those parts of the market have been beaten up so badly that it's pretty logical in some ways that you're going to get a value rally at some point.

And I think the question from here is once this value rally plays itself out, do you want to be owning those types of businesses for the long term? We're a little bit less sure of that just given the structural sort of headwinds that those businesses are going to be facing. So as an investor, do you sort of try and sort of get more exposure to those cyclical businesses and try and play the cycle, or do you use stick to your knitting and own fantastic franchises that you think can compound wealth over long periods of time? We're a little bit inclined to stick to the latter rather than the former.

POC: No, interesting there. So I guess following on from that, do you believe there's an investment style that's better suited to actively managing global mid and small cap portfolios?

NC: Over long periods of time, there is some really good supporting statistics for certain parts of the market. And the biggest one for us, for what we can see going back over the last hundred years, is the argument for quality investing. Now quality is sometimes conflated with growth. They're actually slightly different things. And the academics use a whole bunch of different definitions for qualities or organic growth rates and margins and returns on assets and all sorts of bits and pieces. But for us, we're looking for businesses that generate great returns on capital. So for all of the assets the business puts in the ground and the acquisitions they make, and every sort of dollar they put into the enterprise, are they generating a sufficient cash return on that capital through the cycle? So remaining profitable in 2008, 2009, not having to raise capital during the COVID period, et cetera.

And there was a paper that was written actually in 2016 that looked at the last hundred years of returns in the US and they were able to demonstrate that quality businesses have outperformed junk securities by around 4% per annum. And that might not sound like a lot, but if you compound that out over a hundred years, that ends up being an enormous number. I guess the natural question there is what makes up a junk security? So this would be sort of your non-producing resources, stocks, or concept stocks, businesses in the IT space, for instance, that aren't yet generating a return. And by the way, that that is the part of the market where you can get your genuine sort of 10 or 20 baggers, but as a cohort statistically, they are a handbrake on return. So if you own them as a basket, they're going to be a drag on your returns rather than enhancing to your portfolio. So we think that managing the small and mid cap into the market with a quality mindset makes absolute sense.

POC: Yeah, it's interesting there that... Well, I guess it's just rational, isn't it, that a quality company should outperform a junk company. But it's also then in the nuances of the way that the manager defines quality, looks at quality, and assesses quality. And I think as you mentioned earlier on there, Nick, in your explanation, that even academics have all sorts of different views on what the definition of quality is. But I think as a general rule, you're spot on there that you invest in quality stocks and they may not be great stocks. There can be some good value stocks that are recovering there. But I guess an outtake is there that you need to keep an open mind essentially and not be set on a value mindset or a growth mindset if you're managing a portfolio with such a broad investment universe, such as yourselves. Have the stocks that have outperformed the market in the mid and small cap universe traditionally been growth stocks, or has it been a mix of growth and value?

NC: Yeah. That's where it gets a little more difficult. So whilst the data's pretty clear on quality, for value and growth, the signal becomes a little less efficacious. Only so far as that value goes for long periods of under-performance followed by sort of sharp snap backs like we're seeing now. And there was a similar period after the 2000 tech bubble where value beaten up stocks just have these enormous rallies and go on to outperform for some time. So that depends on the timeframe that you start with and it depends on historically which periods you're capturing. But there's been a reasonable mix of growth and value over time. But I would sort of point to the fact that to your point earlier, if you can stay somewhat style agnostic and you can look at opportunities in both value and growth, but with a sort of cash return mindset or businesses that generate great cash regardless, that you can sort of pick up to an extent the best of both worlds.

For Fairlight specifically, we have a overweight to sort of growth and stable compounders in a smaller bucket in what we'd call the value end of the market. So during these periods that you have a market rip in the value end of the market where it's financials, oil and gas, metals and mining, et cetera, we'd expect to be left behind a little bit in those periods. So good returns from an absolute point of view, but from a relative point of view, we're happy to sort of leave the sexier ends of the market to others.

POC: I see that Fairlight has a preference for listed businesses that have found a lead. So can you explain the reasons for this?

NC: Yeah, that's a good observation actually. So around 35% of the portfolio have businesses that are either founder-led or have a strong family input, so multi-generational family input, and there's pretty good reason for this actually. So there was a study put together by Bain & Company for the SNP companies where the founder remained meaningfully involved in its operations, and they were actually able to show that those businesses perform around three times better than the businesses that had some professional management from the period of 1999 through 2014. So that was one study. There was another one put together by a chap called Jeremy Siegel who had a book called The Future In-... called Jeremy Siegel, who had a book called, The Future Investors. And it presented the IPO data from 1968 through to 2000 and it showed the top 10 performing businesses were all founder led. So there was no exclusion to that at all. They were a hundred percent founder led and they weren't all in the tech space either, which I found quite interesting. So there were other businesses like Walmart and other companies outside of tech. So it doesn't necessarily have to be those sort of high-flying software businesses, but you don't even have to look at the share price point. The story is actually the same for internal measures of success as well.

So there was a 2016 academic paper put together that was able to show that founders take a longer-term view and prepare to take calculated risks. So that paper showed that CEO, founder CEOs were correlated with a 31% increase in the citation weighted [Peyton 00:33:57] count. So the amount of R & D done by these founders was far, far higher than their professional management counterparts. So they made the conclusion that founder CEOs were more effective and efficient innovators than professional CEOs, which we are a hundred percent on board with. So pretty compelling reasons really for why founders tend to... They're more involved in their businesses. And I think it's really good sort of cross pollination of the idea of founder led businesses, but also founder led investment firms as well. We subscribe to the idea that you go to bed thinking about how you can generate returns. You wake up thinking about how you can generate returns and I think that those founder led businesses are exactly the same.

POC: Yeah. Interesting. As you're making those comments, I was actually thinking a lot back about Netwealth being still, I guess, a founder led business and the passion that the founders have for the business and to continue growing the business. It certainly resonated some of those comments there, Nick.

NC: That's interesting, Paul. Did you have any examples of that sort of day to day, how that sort of permeates your group?

POC: I think there's just clarity and focus for starters in what we're trying to achieve in investment platform and the product that we have in the market there. And everyone, I guess, is very much committed there, whereas from experiences working for some other businesses, they at times have felt like they've been pulled in different directions and some competing tensions then can rise. So I think it's really that focus.

And yeah, I think, as you made the comment about being prepared to have a go and have conviction in what you're trying to achieve there, I think that that culture has certainly been embedded into the Netwealth day in idea. So it's interesting there, but no, when I had noted that you guys do like founder led businesses, I thought that would be a great opportunity to have a chat about your thoughts in that area.

NC: Yeah. Yeah. And I think that anyone has worked in both, worked in a big institution and then have had the opportunity to work in a founder led business, it's almost a universal. It's not a hundred percent hit rate, but it's certainly in the high nineties that there's this clarity of purpose and there's this sort of sense of leaving the politics at the door wherever possible and all pulling in the same direction. Because you're less focused on working for your salary and you're more focused on building enterprise. So that's a good observation, Paul.

POC: So finally has the escalating US and China trade war impacted on the mid and small cap companies? And I guess going back to a couple of comments you made earlier, I'm guessing maybe less so than the larger mega cap because of the more domestic focus typically of those companies.

NC: Yeah. Spot on. There are obviously some businesses in the small and mid end of the market that are going to be impacted. So if you're providing equipment into the ag space where there's some tension around sort of where quotas should be, or if you are further enough developed in the tech space where you starting to sell into China, then there's obviously some considerations there, but by and large, the small and mid cap end of the market is quite domestically focused into the markets that they're serving. And so they're not as exposed to some of the geopolitical tensions you see around the world. So yeah, you're actually spot on there that, whilst not a hundred percent immune, slightly less so than the large end of the market.

POC: Has it perhaps impacted on the CapEx that they might invest on the mid and small cap companies? And I'm thinking that a lot of those companies being growth companies, they're starting to look at off shore markets. Have they decided to pull their risk appetite in a little, in terms of their growth ambitions?

NC: It's kind of hard to draw the conclusion there. Only so far as the timing has been a little bit interesting. So we have this tension on the geopolitical front, but we've also had this sort of once in a lifetime, hopefully once in a lifetime, COVID event. And I think it's been the latter that's really put a ding in confidence and had a lot of these companies pulling their horns in, in terms of not only CapEx, but how they're investing through the profit and loss statement during the downturn.

Now that said, we have a strong preference for those companies that use a downturn as an opportunity to grow their competitive position. And you don't actually have to take too many heroic assumptions to see how these businesses do. Especially if they're founder led. So if you've got a founder led business that was around in 2008, 2009, you can go back and you can read the transcripts on how they performed during that period. And whether they were sort of saying, "Look, we're going to double down on research and development and expenditure because we're going to come out of this period with a better product set or we're investing in our sales force and we're going to take market share. It's going to hurt our margins in the short term, but on a five to ten year journey, we're going to end up in a much better position."

They're the kind of companies during COVID that when we're speaking to management teams, we're asking them those questions, "What are you doing? Are you investing or are you pulling in costs?" And it was those companies that were investing over a five to 10 year time horizon that we're more interested in. So I guess it's less about sort of geopolitical tensions at this point and really those companies that are happy to spend the CapEx during a unsure macro environment.

POC: Nick, it's been a fascinating discussion this morning and I certainly thank you for sharing your time with us and the listeners to go through, I guess, the global mid and small cap segment of the market, the investment opportunities and the return potential. I think you've really made some key points around the benefits potentially, a diversified portfolio could guess by in allocation to a strategy such as the Fairlight strategy. And interesting too that you're not really increasing risk match at all there.

So again, I thank you very much for your time and your input to the podcast this morning. To the listeners, thank you very much for joining us today. It's very much appreciated. We're certainly getting dragged towards Christmas soon, but I'll look forward to joining you soon on the next instalment of the Net Wealth Investment podcast series. Thank you all.