6 lessons from our wild, 50-bagger Afterpay ride

Andrew Mitchell, Ophir Asset Management

September 2021

In our Investment Strategy Note Andrew Mitchell takes a look back at our wild Afterpay ride from the very beginning and outline our six key lessons from our journey with this 50-bagger.

I met Nick Molnar for the first time in 2017. I had walked out of a meeting with a founder now considered one of Australia's best-ever CEO entrepreneurs. But back at the office, I said to colleagues: "The CEO is too young. And isn't layby dead?".

Yet something had stood out. How, I asked, does a microcap layby business attract Cliff Rosenberg and David Hancock to the Board. I knew them both. I had met Cliff through another listed business (Nearmap) where he had an incredible track record. That was before he went to LinkedIn in Asia-Pac as managing director. I'd worked with David at CBA where he was the enormously respected Head of Equities.

Lesson 1: Sometimes you need a bit of luck.

I often wonder if we'd have invested in Afterpay - or been too late to the party - if we hadn't known and respected Cliff and David. It goes to show it's often not what you know, but who you know and listen to. Sometimes the best investments are the ones you make because you've built a fantastic network.

My initial mistake was to view Afterpay through the eyes of a late-30-something-male who thought this was too obvious to work. I wasn't viewing it through the eyes of their original target market: a 20-year-old millennial female shopping in the fashion and beauty industries. I needed to throw off the shackles of my own experiences. As Warren Buffett has said, "if past history was all there was to the game, the richest people would be librarians".

When I sat down with Cliff following Afterpay's listing, he got me excited. He said the founders were dynamite. He hadn't seen a visionary like Nick before. Nick, Cliff said, was 25 going on 40 years' old. And Anthony Eisen's business acumen was first rate. They made a dream team. Importantly, Cliff noted that while Nick and Anthony could have heated debates, they'd always reach an agreement.

With a fresh set of eyes, I went and spoke to some of Afterpay's very first unlisted retailers, and it completely changed my mind. They loved it. Afterpay helped them convert more sales, it expanded the basket size, and it slashed returns. Many of these retailers were even taking stock in the IPO.

Ultimately, we invested following the IPO, and as time would tell, snag our first 50-bagger (assuming Square's acquisition proceeds as expected).

Lesson 2: Have an open mind and be prepared to keep learning.

In this case, we really needed to understand Afterpay's value proposition from the perspective of its target market. To do so there was no substitute to talking directly to Afterpay's customers.

Afterpay's addressable market exploded. It was broadening out of fashion and beauty into the likes of dentistry and airline tickets. More men used it. As, crucially, did older customers. This was vital for the share price. It meant 'Customer Lifetime Value' (how much a single customer is worth to the business), was expanding rapidly. As it swiftly increased its percentage of the checkout, we quickly started seeing the business as relevant for not just retail 'some things' but retail 'almost everything'.

Then, in 2018, the stock halved. It was Afterpay's first big test. ASIC was reviewing regulation of the Buy Now, Pay Later (BNPL) sector. Newspaper headlines blared doom and gloom about the company. Brokers sent through 'short reports' and many an Aussie fund manager bailed out. But rather than being caught in the headlights, we remembered the insights we got speaking to Afterpay's first retailers in Australia. So we got on a plane to speak to their first retailers in the US. And wow! It was going so well for them, driving online sales, and changing customer behaviour. It was like hitting replay on a recording of what those first Australian retailers said. As more negative headlines filled papers, and sellers were out in force, we bought a huge amount of Afterpay stock at dirt cheap prices, and our timing couldn't have been better.

Lesson 3: To perform as a fund manager, you can't follow the herd.

It would have been easy to get worried out of our holding in Afterpay. But Australia was going to be a sideshow if Afterpay successfully launched in the US, a market 15 times its size. Don't be lazy. You need to outwork your competitors.

Afterpay share price

At this time, I bailed up David on Collins St, Melbourne, and walked with him. He was so excited. Afterpay had just hired a new Head of Risk from Uber, and for the US expansion, they were attracting amazing talent with lucrative options packages. This was one of the company's most important acts because it allowed Afterpay to scale. It was no longer an Australian payments business, but on its way to becoming a global phenomenon.

Lesson 4: Pay up for amazing local talent when expanding globally.

This has been a hallmark of many of the great overseas success stories we have invested in. It now forms a part of our checklist for Aussie companies expanding internationally.

But then the company was tested again. COVID-19 hit. The stock price cratered. Nick, Anthony, and the board thought (as everyone did) they could be in big trouble. Brokers fired off reports telling investors to short the stock. The company pivoted quickly, though. It tightened its purchase approvals process. Then, spurred by lockdowns and massive government fiscal support, spending on 'stay at home' items took off. E-commerce got a shot of adrenaline and retail online adoption accelerated. Commentary from key customers confirmed the pick up in online sales. The company had just passed another big test.

We have often been asked over the years with Afterpay: "How can it be valued so high when it doesn't make a profit?" Our answer is simple: Afterpay's valuation, such as its price-to-earnings ratio (P/E), is so high because it is deliberately keeping the 'E' low to non-existent by reinvesting profits for future growth.

Its Australian business is highly profitable, but it is using that cash flow to grow and take market share in new geographies. This is crucially important when it is breaking into new markets with virgin soil. It can acquire customers dirt cheap where there is no incumbent. BNPL is a scale game - being slow or late can be deadly. Afterpay needed to win the land grab by expanding quickly and making big investments in marketing and technology. If they had stopped reinvesting for growth, and put today's profits first, we would have headed for the exit given the opportunities that lay in front of the company.

Lesson 5: Profit, and the valuation metrics based on it, matter less when a business is rapidly scaling and reinvesting cash flow to grow.

When growing rapidly, other metrics matter more to investors, such as return on capital, customer lifetime value, customer acquisition cost, and merchant and customer growth numbers. It's still important, though, not to overpay based on where you think the business will be at maturity.

Then, on August 2, Square announced it was going to buy Afterpay in a blockbuster deal that valued the company at $39 billion ...

So where to now for Afterpay? I think it's just the end of the beginning. Square seems a good match with lots of synergies. After the acquisition was announced, Square's share price rose significantly, because investors could see that when it came to Square and Afterpay 1+1 = 3. Someone else may bid for the company. Apple and PayPal are two possibilities, although this becomes less likely as time goes by.  We still own Afterpay in case a bidding war breaks out. We believe the BNPL industry will consolidate more, with perhaps 2-3 key players left when the market matures. I can see BNPL being just one, albeit very important, offering in a suite of products for the dominant payments providers.

But Nick and Anthony are rare. Leaders in the sector and the original entrepreneurs. They have made Afterpay a verb. I couldn't be happier to have had my initial thoughts proven wrong.

A large early investor in Afterpay told me they saw Nick present at a TEDx in Sydney when the company was in its infancy and the woman next to him said: "Who is this guy? He has such a presence; he would be perfect for my daughter". The investor replied: "I'm sorry to let you down, but he is very happily married".

The Board once told me they had to encourage Nick to fly business class overseas because he was so frugal. If Nick can keep that kind of mindset and culture in the business, it's got every chance of being one of the few established players at the end.

Lesson 6: Passionate, talented, visionary entrepreneurs are so scarce and valuable ... to their shareholders, employees, customers, and the economy at large.

Finding the next Nick and Anthony is what gets us out of bed in the morning. When we are lucky enough to find these visionary entrepreneurs, we are reminded that there is no better part of the market in which to invest than small caps.

Funds operated by this manager:

Traditional Markets Stable in August; Trouble in September

Tony Bremness, Laureola Advisors

September 2021

Funds operated by this manager:

Laureola Australian Feeder Fund

Space exploration is going private

Michael Collins, Magellan Asset Management

September 2021

Neil Armstrong landed on the moon in 1969 and delivered his pre-prepared line that became famous: "That's one small step for man, one giant leap for mankind." Except he misspoke. What Armstrong said was nonsense. He meant to say "a man" rather than just "man".

Clive James in his book Fame in the 20th century explained that Armstrong's lapse was overlooked because eloquence, even personality, didn't matter. The first man on the moon would be famous "without ever having emerged from obscurity", even if Armstrong was so chosen because he was dispensable to the Apollo 11 mission rather than, as the official line had it, he epitomised the 'right stuff'.[1] The National Aeronautics and Space Administration supplies a transcript that corrects Armstrong's statement but the accompanying audio shows his slip.[2]

Whatever. Armstrong's statement rang true. From the start of the space age in 1957 when the Soviet Union's Sputnik satellite orbited the Earth, six-plus decades of mainly US government-funded, -designed and -staffed space exploration has brought many rewards. Apart from stirring national pride and showcasing bravery, space exploration has boosted knowledge of the universe and led to much innovation related to satellites, global positioning and weather forecasting.[3]

Even if Armstrong blew his line, he was more profound than Jeff Bezos on his return to Earth on July 20 after being blasted into the atmosphere just past the Karman line that, 100 kilometres (62 miles) from Earth, generally marks outer space. "Best day ever," was Bezos's verdict on flying for 10 minutes in a pilotless rocket built by Blue Origin, a company he founded in 2000.[4]

Perhaps Bezos should have said something more Armstrong-like as did Richard Branson when, nine days before Bezos, he zoomed to an altitude of 80 kilometres in a piloted space plane built by Virgin Galactic, which Branson set up in 2004. "We are at the vanguard of a new space age," Branson said.[5]

What's new is that an entrepreneur-led drive into space is underway. Bezos and Branson - joined soon perhaps by other private companies[6] - are vying with Boeing[7] and Elon Musk's Space Exploration Technologies Corp. to commercialise space.

SpaceX, as Musk's creation of 2002 is known, is ahead. The company in 2015 pioneered reusable rockets, the "single transformative technology shift" driving today's space race because it has slashed launch costs.[8] Among feats, since 2012, SpaceX has ferried cargo to the International Space Station, Nasa's lab that orbits the Earth. On May 30 last year, SpaceX became the first private company to propel people into space, when it sent astronauts to the space station, the first manned mission there since 2011.[9] In June this year, to the same destination, SpaceX launched a manned reusable rocket for the first time.[10] SpaceX, for US$2.9 billion, is building the 'Starship' for Nasa to land people on the moon for the first time since 1972.[11]

Many benefits are likely to flow from the commercialisation of space that already amounts to a US$350 billion industry and one that is forecast to swell to US$1 trillion by 2040.[12] Space tourism is likely to grow, after commencing on September 15 when SpaceX launched its first privately funded three-day spaceflight of just tourists; no professional astronaut was aboard a tripe paid for by US businessman Jared Isaacman who said it cost less than US$200 million.[13] The standard offering (at US$450,000 a pop with Virgin Galactic)[14] will be orbiting the Earth to experience weightlessness and gain an astronaut's view of the world. Another prospect is vacations on commercial space stations - US company Axiom Space is building such a facility that it hopes by 2024 will orbit 400 kilometres above the Earth at 27,000 kilometres per hour.[15] A later step could be tourist trips to the moon.

A second, and bigger, commercial motivator is adding to the more than 5,000 satellites already orbiting the Earth, a doubling in the past two years as part of efforts to boost economical internet coverage.[16] SpaceX, for instance, plans to add another 11,000 satellites via its Starlink mega-constellation and has filed for US permission for another 30,000.

Private enterprise heading into the cosmos is rekindling and aiding government space efforts. Nasa, as well as employing SpaceX to return to the moon under its Artemis Program, plans more voyages to Mars and intends to search Jupiter's moon Europa for life.[17] China in May landed a vehicle on Mars for the first time,[18] two years after the country became the first to land a craft on the far side of the moon.[19] Beijing and Moscow in June announced plans for a permanent base on the moon,[20] while about 40 countries now have national space agencies.[21]

Commercial space efforts are bound to advance scientific knowledge. The hope is that 'microgravity' will allow for unique research that could lead to "discoveries in medicine, materials, and manufacturing previously kept hidden by gravity," in the worlds of Axiom Space.[22] Another motive is to enable people to live beyond Earth. Bezos sees "a future where millions of people are living and working in space".[23] Musk talks of 'terraforming' Mars, by which he means nuking Mars to make the planet habitable for humans.[24]

The commercialisation of space comes with risks and disadvantages that could limit such exploration (ignoring complaints about the cost). The biggest risk is that space travel is dangerous. Much can go wrong with rockets. In September, the US Federal Aviation Administration grounded Virgin Galactic flights pending a probe that Branson's flight went off course during its descent.[25] The International Space Station is showing irreparable cracks.[26] Another danger is that much human debris is swirling around in space and could hit a spacecraft, as occurred in March when a Chinese military satellite broke up after it collided with debris left from a 1996 Russian rocket launch.[27] Fatal events could derail space exploration, as they have in the past.

Another problem is space exploration is likely to intensify global political tensions. Whoever rules space controls an avenue to deliver thermonuclear weapons via ballistic missiles and much else. China's moves into space look likely to intensify Chinese-US rivalry. The US in 2019 created a Space Command as its sixth military sphere to thwart China in space, such as China's ability to laser-cripple the satellites on which depend the US military.[28] A third drawback is the space race will come with environmental damage, especially with respect to climate change from fossil-fuelled rockets.  Scientists worry that satellite re-entries from the Starlink mega-constellation could deposit more aluminium into Earth's upper atmosphere than what is done through meteoroids.[29] But rocket numbers would need to soar to make a noticeable difference.

Whatever the doubts or drawbacks about the question, the better economics of space exploration are overriding them. A privately led space adventure has begun that has already notched achievements and, amid controversy and setbacks, is likely to post many more.

To be pedantic, private companies have long helped Nasa (Boeing for more than five decades) while the commercialisation of space could be dated to the turn of the century, so it's not new, just intensifying. The role of Nasa and other government agencies in this private quest shouldn't be underestimated. These private companies will need to be willing to lose much money - the listed Virgin Galactic lost US$94 million in the second quarter of 2021.[30] A techno-utopian element bordering on the unbelievable pervades the private space quest. Nasa's response to Musk's dreams, for instance, is that it would be impossible to make Mars liveable due to a lack of carbon dioxide,[31] while the technology for space mining is still to be invented. Some, perhaps much, disappointment lies ahead.

No doubt. But the entrepreneurs pioneering today's drive into space are wealthy visionaries who won't be deterred easily. Get set for a space race pursued by people who think they are on a philanthropic mission.

Space utopia

In 2015, SpaceX's Falcon 9 rocket blasted off. After 45 seconds, the rocket shed its first stage, which then descended to Earth in a controlled manner to a landing pad. "Welcome back, baby," Musk tweeted.[32] A broadcaster had a better technical perspective of SpaceX's third attempt at the feat: It's like "launching a pencil over the Empire State building, having it reverse, come back down, and land on a shoebox on the ground in a windstorm." [33]

Time has elevated the financial significance of Falcon 9's safe touchdown that day. The feat is taken as the start of economical near-Earth orbit space flight because it ended the era when rockets were dumped or imploded during re-entry into the Earth's atmosphere, even though Nasa's space shuttles were reusable (and Bezos's Blue Origin had landed an unmanned rocket the month before).[34] Companies are now spared the hundreds of millions of dollars it costs to build rockets for each flight. Since 2015, Falcon 9 rockets have recorded 82 landings and 64 have flown again,[35] though some have bungled the touchdown.[36]   

US taxpayers are among those benefiting from the improved space economics. SpaceX is ferrying Nasa astronauts and items to and from the International Space Station at far less cost than could the space shuttle that was retired in 2011[37] - Nasa in 2018 said reusable rockets reduced the cost of sending a craft to low Earth orbit by a factor of 20.[38] Nasa is estimated to be saving US$2 billion by using SpaceX's Falcon Heavy rocket for its mission to Jupiter's moon.[39] Having SpaceX and Blue Origin bid for Nasa contracts is another force driving down costs. Bezos in July, for instance, said Blue Origin would waive up to US$2 billion in payments over the next two years if Nasa were to award his company a moon-landing contract.^[40] (Blue Origin is suing in a federal court to force Nasa to do so.)[41]

Bezos's efforts are part of his drive to populate space and extract resources from space. He is reported to have assembled "the best space-resources team in the industry" to help people live on the moon and send material back to Earth.^[42] In what could well be taken as the start of the space-mining industry, Nasa in 2020 handed contracts to four companies to extract small amounts of lunar regolith, loose material that covers rock, by 2024.[43] In August, Nasa conducted its first drilling of Mars, to a depth of seven centimetres, as part of a search for microbial life on the planet.[44] Nasa in 2022 intends to launch a mission to investigate the Psyche asteroid, a unique metal asteroid that orbits the Sun between Mars and Jupiter that some say could contain US$10 quintillion of iron (that will presumably be claimed by whomever reaches it first).[45]

Space proponents say that microgravity will mean moon dwellers could create items that can be made only in space. Others talk of asteroid mining, whereby either resources are extracted and sent to Earth or asteroids are directed at Earth for extraction there. Others talk up space-based solar power; China has announced plans for a solar power station in orbit by 2040.[46] One day earth-controlled robots could mine the moon for water, which can become a rocket fuel once split into hydrogen and oxygen. They could mine for helium-3, another rocket fuel, and the rare-earth minerals that are used in electronics.[47] Nasa is making soil for space habitats by seeding asteroids with fungi.[48]

Morgan Stanley said satellite technology and space exploration could help assess and address climate change and sustainability on Earth. The benefits could flow to food security as imagery and weather-monitoring boost agricultural yields and farmer efficiency, the US bank says. Space-based aid could help greenhouse-gas monitoring, open remote areas to renewable-energy harvesting, help utilities manage renewable loads, and boost access to the internet for billions of people.[49]

Among advocates, the promise of space is essentially limitless.                 

Space dystopia

In 1985, US teacher Christa McAuliffe became a national celebrity when she beat more than 11,000 other applicants to win a seat on the space shuttle Challenger. When McAuliffe was asked if she was nervous, she repeated what she had been told: that the shuttle was as safe as an airplane. The Challenger blasted off on 28 January 1986, one of the coldest mornings ever at Cape Canaveral, Florida. The rubber O-rings that sealed the shuttle's rocket boosters didn't work as well in cold weather - a problem known to Nasa officials. The O-rings failed. The Challenger exploded during lift-off. But McAuliffe and her six crewmates didn't die immediately. The crew compartment sheared from the rest of the shuttle and rose for another 20 seconds, then fell for more than two minutes before smashing into the ocean at 333 kilometres an hour and killing all on board. The shuttle program was suspended for two years.[50]

The program was suspended for another two years in 2003 when the space shuttle Columbia fell apart on re-entering the Earth's atmosphere, killing its seven astronauts. Nasa's Apollo program from 1961 to 1972 had two notable disasters. In 1967, the crew of three on Apollo 1 choked to death when a fire erupted during a prelaunch test. In 1970, Apollo 13 abandoned landing on the moon and nearly failed to return to Earth after an oxygen tank exploded and destroyed the module's ability to provide electrical power.

The reality is that today's ventures are as dangerous. In 2014, a Virgin Galactic space craft disintegrated during a test flight, killing the co-pilot.[51] Only nine days after Bezos's flight, Nasa and Boeing abandoned the launch of Boeing's crewless Starliner space capsule due to valve problems,[52] which followed a botched launch in 2019 due to a software error.[53] Longer flights in space risk confronting 'solar flares', the most powerful explosive events in the solar system.[54] A fatal event could end, or at least suspend, today's space race.

An uninterrupted space race comes with concerns too. The exploration comes with "violent potential", in the words of Daniel Deudney, a professor of politics at the US-based Johns Hopkins University who wrote Dark skies: Space expansion, planetary geopolitics and the end of humanity that argues against the space optimism of Bezos, Branson, Musk et al. "What is going to be the likelihood that we'll have - as we have on Earth - wars and violent rivalries?" he asks, especially if descendants of Earth develop over time, possibly with genetic engineering, into different species.[55] 

The surge into space has led to calls for revamped multilateral pacts to manage any arms race, space debris, satellite traffic and resource extraction, amid warnings present treaties, such as the Committee on the Peaceful Uses of Outer Space[56] of 1959 and the Outer Space Treaty[57] of 1967 that sit with the UN, are outdated.

Mars is the likely point of confrontation after the moon. Simon Morden, author of the upcoming The red planet: A natural history of Mars, warns governments and space pioneers need to decide what they want to do with the planet. "Any crewed mission will be at the end of the most precarious supply line in history,' he says. Crews will thus need to rely on what resources Mars can offer "which is why future planned missions to Mars rely heavily on the anodyne-sounding practice of in situ resource utilisation". He suggests that to protect Mars an international agreement is needed similar to the Antarctic Treaty effective 1961 that saves that continent for science. "It's almost inevitable that, if we do nothing, the default (read guaranteed outcome) will be a chaotic and exploitative land grab."^[58]

Then there are the pollution concerns. The risks for the Earth relate largely to climate change. Rockets are propelled by the fossil fuels such as kerosene that emit carbon dioxide, chlorine and other chemicals. The problem is the pollutants including soot are emitted into the upper atmosphere and can destroy the ozone layer, while heat released closer to Earth can act like greenhouse gases. The greater the number of space flights, the greater the damage and the bigger the political problem confronting the space adventurers.[59]

When it comes to pollution in space, the immediate environmental concern is the amount of debris the space race will add into orbit that, if nothing else, increases the chance of collisions. Nasa estimates more than 100 million pieces of space junk are spinning around the earth.[60] The US Department of Defense tracks about 27,000 pieces of 'space junk' that have wrecked satellites (which only puts more debris in space).[61] One solution is that of Japanese firm Astroscale, which is testing magnetic satellites that can help remove debris.[62] A longer-term concern is damage by humans to planets on which they live, work and exploit.

Such challenges and no doubt setbacks are part of the space race. At the moment, though, the space joyriders are empowered. Without ever misspeaking, space superhero Buzz Lightyear from Toy Story probably best sums up the enthusiasm of Bezos, Branson and Musk and others as they seek to emulate the space heroes of yesterday. "To infinity and beyond."

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[1]Clive James. 'Fame in the 20th century.' Pages 123 to 124. Penguin Books. 1994. 

[2] Nasa. 'July 20, 1969: One giant leap for mankind.' nasa.gov/mission_pages/apollo/apollo11.html

[3] See Nasa. International Space Exploration Coordination Group. 'Benefits stemming from space exploration.' September 2003. nasa.gov/sites/default/files/files/Benefits-Stemming-from-Space-Exploration-2013-TAGGED.pdf

[4] 'Jeff Bezos blasts into space on own rocket: Best day ever!' The Washington Post. 21 July 2021. washingtonpost.com/business/bezos-riding-own-rocket-on-companys-1st-flight-with-people/2021/07/20/29791bf8-e92c-11eb-a2ba-3be31d349258_story.html

[5] Virgin Galactic. 'Virgin Galactic successfully completes first fully crewed spaceflight.' 11 July 2021. virgingalactic.com/articles/virgin-galactic-successfully-completes-first-fully-crewed-spaceflight/

[6] Companies in Japan are interested. See Japan's Lunar Industry Vision Council. 'Toward the planet 6.0 era.' July 2021. ispace-inc.com/wp-content/uploads/2021/07/LIV_EXECUTIVE-SUMMARY_FINAL_20210710_EN_0712_2MB.pdf

[7] Boeing Space Launch System is the Boeing arm focused on space. Boeing in space. 'The future of space is built here.' boeing.com/space/

[8] Morgan Stanley. 'Space: Investing in the final frontier.' 24 July 2021. morganstanley.com/ideas/investing-in-space

[9] Nasa. 'Demo-2: Launching into history.' 1 June 2020. nasa.gov/image-feature/demo-2-launching-into-history. t

[10] National Geographic. 'SpaceX launches first astronauts on reused rocket.' 23 April 2021. nationalgeographic.com/science/article/spacex-launches-first-astronauts-on-a-reused-rocket

[11] SpaceX. Starship to land Nasa astronauts on the moon.' 16 April 2021. spacex.com/updates/starship-moon-announcement/index.html. Musk says this could happen before 2024. See 'Elon Musk says SpaceX ready to land humans on moon 'probably sooner' than 2024.' Newsweek. 15 August 2021. newsweek.com/elon-musk-spacex-ready-humans-moon-sooner-2024-1619475

[12] CNBC. 'Bank of America expects the space industry to triple to a $1.4 trillion market within a decade.' 4 October 2020. cnbc.com/2020/10/02/why-the-space-industry-may-triple-to-1point4-trillion-by-2030.html

[13] See, The Atlantic. 'Finally, a private spaceflight with a billionaire you've never heard of.' 13 September 2021. theatlantic.com/science/archive/2021/09/spacex-inspiration4-private-crew/620056/. See also, SpaceX. 'SpaceX to launch Inspiration4 mission to orbit.' 1 February 2021. spacex.com/updates/inspiration-4-mission/index.html

[14] Virgin Galactic. 'Virgin Galactic announces second quarter 2021 financial results.' 5 August 2021. investors.virgingalactic.com/news/news-details/2021/Virgin-Galactic-Announces-Second-Quarter-2021-Financial-Results/default.aspx

[15] See Axiom Space website. axiomspace.com/axiom-station. The facility will orbit 250 miles above the earth at 17,000 miles per hour.

[16] Nature.com. 'Satellite mega-constellations create risks in low earth orbit, the atmosphere and on earth.' 20 May 2021. nature.com/articles/s41598-021-89909-7. Other companies with plans to launch satellites in numbers include Amazon, Chinese state firm GW, UK-based OneWeb and Télésat of Belgium.

[17] Nasa. Artemis Program. 'Humanity's return to the moon.' nasa.gov/specials/artemis/. See Nasa. Europa Clipper mission. europa.nasa.gov/ See also 'Nasa perseveres through pandemic, looks ahead in 2021.' 5 January 2021. nasa.gov/feature/nasa-perseveres-through-pandemic-looks-ahead-in-2021

[18] Xinhua. 'China succeeds in first Mars landing.' 15 May 2021. xinhuanet.com/english/2021-05/15/c_139947277.htm

[19] Xinhua. 'China's Chang'e-4 probe soft-lands on the Moon's far side.' 3 January 2019. xinhuanet.com/english/2019-01/03/c_137716800.htm

[20] Xinhua. 'China, Russia invite international partners in lunar research station cooperation.' 17 June 2021. xinhuanet.com/english/2021-06/17/c_1310011788.htm

[21] UN. Office for Outer Space Affairs. 'World space agencies.' unoosa.org/oosa/en/ourwork/space-agencies.html

[22] Axiom. 'Why space?' axiomspace.com/why-space

[23] 'About Blue Origin'. blueorigin.com/about-blue

[24] Space.com. 'Elon Musk floats 'nuke Mars' idea again (and he has T-shirts). 17 August 2021. space.com/elon-musk-nuke-mars-terraforming.html

[25] Reuters. 'US grounds Virgin Galactic flights pending mishap probe.' 3 September 2021. reuters.com/business/aerospace-defense/us-bars-virgin-galactic-rocket-plane-flights-pending-mishap-probe-2021-09-02/

[26] The Times. 'Cracks in International Space Station cannot be repaired, Russia claims.' 1 September 2021. thetimes.co.uk/article/cracks-in-international-space-station-cannot-be-repaired-russia-claims-59dhbzs6r

[27] Space.com. Space collision: Chinese satellite got whacked by hunk of Russian rocket in March.' 16 August 2021. space.com/space-junk-collision-chinese-satellite-yunhai-1-02

[28] US Defense Intelligence Agency. 'Challenges to security in space.' January 2019. dia.mil/Portals/27/Documents/News/Military%20Power%20Publications/Space_Threat_V14_020119_sm.pdf  See Department of Defense. US Space Command. spacecom.mil/#/. See also 19FortyFive (a US-based publication focused on national security). 'Don't let China turn space into the new South China Sea.' August 2021. 19fortyfive.com/2021/08/dont-let-china-turn-space-into-the-new-south-china-sea/

[29] Nature.com. Op sit.

[30] Virgin Galactic. Second quarter result 2021. Op cit.

[31] 'Inventory of CO₂ available for terraforming Mars.' Nature magazine. 1 August 2018. nature.com/articles/s41550-018-0529-6.epdf

[32] Twitter. @elonmusk. 22 December 2015. twitter.com/elonmusk/status/679127406813188097

[33] National Geographic. 'Touchdown! SpaceX rocket makes a perfect upright landing.' 23 December 2015 nationalgeographic.com/science/article/151222-spacex-landing-rocket-video-space.

[34] See National Geographic. 'How SpaceX became Nasa's go-to ride into orbit.' 12 November 2020. nationalgeographic.com/science/article/how-spacex-became-nasas-go-to-ride-orbit

[35] SpaceX. Falcon 9. spacex.com/vehicles/falcon-9/

[36] Cnet. 'SpaceX Falcon 9 missed its landing last month because of a hole in the boot.' 1 March 2021. cnet.com/news/spacex-falcon-9-missed-landing-last-month-because-of-a-hole-in-a-boot/

[37] Forbes. 'Why SpaceX is a game changer for Nasa.' 4 June 2020. forbes.com/sites/niallmccarthy/2020/06/04/why-spacex-is-a-game-changer-for-nasa-infographic/

[38] Nasa Technical Reports Server. 'The recent large reduction in space launch cost.' 8-12 July 2018. ntrs.nasa.gov/citations/20200001093. See also Nextbigfuture.com. 'SpaceX starship is bigger and cheaper than the external shuttle tank.' 28 May 2020. nextbigfuture.com/2020/05/spacex-starship-is-bigger-and-cheaper-than-the-external-shuttle-tank.html

[39] arsTECHNICA. 'SpaceX to launch the Europa Clipper mission for a bargain price.' 24 July 2021. arstechnica.com/science/2021/07/spacex-to-launch-the-europa-clipper-mission-for-a-bargain-price/ 

[40] Blue Origin. 'Open letter to administrator Nelson.' 26 July 2021. blueorigin.com/news/open-letter-to-administrator-nelson

[41] 'Jeff Bezos's Blue Origin files suit in federal court as it pursues a campaign to win a slice of Nasa moon contract.'  16 August 2021. The Washington Post. (Bezos owns the Post.) washingtonpost.com/technology/2021/08/16/blue-origin-spacex-rivalry-lawsuit-nasa/

[42] arsTECHNICA. 'Blue Origin has a secret project named 'Jarvis' to compete with SpaceX.' 27 July 2021. arstechnica.com/science/2021/07/blue-origin-is-developing-reusable-second-stage-other-advanced-projects/ 

[43] Nasa. 'Construction with regolith.' 6 March 2017. nasa.gov/api/citations/20170002067/downloads/20170002067.pdf

[44] Nasa. 'Assessing Perseverance's first sample attempt.' 11 August 2021. mars.nasa.gov/mars2020/mission/status/320/assessing-perseverances-first-sample-attempt/ See WIRED. 'Why Perseverance's first Mars drilling attempt came up empty.' 12 August 2021. wired.com/story/why-perseverances-first-mars-drilling-attempt-came-up-empty/

[45] Nasa. Mission pages. 'Psyche overview.' nasa.gov/mission_pages/psyche/overview/index.html. See Financial Times. 'Space mining: black holes await investors.' 14 August 2021. ft.com/content/7ede2b1e-2872-4c04-b0ba-0ae6486ea9ee

[46] China Daily. 'Scientists envision solar power station in space.' 27 February 2019. chinadaily.com.cn/a/201902/27/WS5c75c8b3a3106c65c34eb8e3.html

[47] Milken Institute Review. 'Space mining is coming.' 26 April 2021. milkenreview.org/articles/mining-in-space-is-coming

[48] Nasa. 'Making soil for space habitats by seeding asteroids with fungi.' 26 February 2021. nasa.gov/directorates/spacetech/niac/2021_Phase_I/Making_Soil_for_Space_Habitats/. See also Scientific American. 'Future space travel might require mushrooms.' 3 August 2021. scientificamerican.com/article/space-travels-most-surprising-future-ingredient-mushrooms/

[49] Morgan Stanley. Ideas. 'Does Earth's future depend on space?' 10 July 2020.  morganstanley.com/ideas/space-earth-sustainability

[50] Kevin Cook, author of 'The burning blue: The untold story of Christa McAuliffe and Nasa's Challenger disaster.' Henry Hold & Co. August 2021. This excerpt is from 'The case against space tourism.' 22 July 2021. The Wall Street Journal. wsj.com/articles/blue-origin-spacex-bezos-musk-galactic-branson-tourism-space-11626968962

[51] c|net. 'Branson on Virgin Galactic crash: Space flight is hard - but worth it.' 1 November 2014.   cnet.com/news/branson-on-virgin-galactic-crash-space-is-hard-but-worth-it/

[52] Boeing. Tweet from @BoeingSpace. 4 August 2021. twitter.com/BoeingSpace/status/1422716652727250945

[53] 'Boeing space flight postponed after mishap at space station.' 29 July 2021. The Wall Street Journal. wsj.com/articles/boeing-space-flight-postponed-after-mishap-at-space-station-11627589940

[54] Nasa. 'What is a solar flare?' nasa.gov/content/goddard/what-is-a-solar-flare

[55] Aie.org. Blog post. 'Space expansion, planetary geopolitics and the end of humanity. My long read q&a with Daniel Deudney.' 19 June 2021. aei.org/economics/space-expansionism-geopolitics-and-the-future-of-humanity-my-long-read-qa-with-daniel-deudney/. See also World Political Review. 'Colonising space is not the solution to our problems here on earth.' 26 July 2021. worldpoliticsreview.com/articles/29832/despite-dreams-of-colonization-space-won-t-solve-our-problems-on-earth

[56] United Nations. Office for Outer Space Affairs. 'Committee on the Peaceful Uses of Outer Space.'  unoosa.org/oosa/en/ourwork/copuos/index.html

[57] United Nations. Office for Disarmament Affairs. The Outer Space Treaty is formally the 'Treaty on Principles Governing the Activities of States in the Exploration and Use of Outer Space, including the Moon and Other Celestial Bodies.' treaties.unoda.org/t/outer_space

[58] Simon Morden. 'We are on the brink of a new space race - it's time to talk about Mars.' 9 August 2021. independent.co.uk/voices/mars-nasa-space-race-b1898113.html. The red planet: A natural history of Mars. Simon Morden. To be published by Elliott & Thompson September 2021.

[59] See The Guardian. 'How the space race could be one giant leap for pollution.' 19 July 2021. theguardian.com/science/2021/jul/19/billionaires-space-tourism-environment-emissions. See also, 'The rise of space tourism could affect earth's climate in unforeseen ways, scientists worry.' 26 July 2021. space.com/environmental-impact-space-tourism-flights

[60] Nasa. Office of inspector general. 'Nasa's efforts to mitigate the risks posed by orbital debris.' 27 January 2021. Page 3. oig.nasa.gov/docs/IG-21-011.pdf

[61] Science and history. 'Space is getting crowded with junk.' 3 July 2021. sciencendhistory.blogspot.com/2021/07/space%20debris%20in%20orbit.html

[62] Spacenews. 'Astroscale complete first test of satellite capture technology.' 25 August 2021. spacenews.com/astroscale-complete-first-test-of-satellite-capture-technology/

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Banning unvaccinated workers could impact our economy

Tim Hext, Pendal

22 September 2021

As Melbourne construction workers protest mandatory vaccinations, investors may want to consider how a ban on unvaccinated workers could impact the economy, says Pendal's Tim Hext.

THIS WEEK has been relatively quiet for bond markets, despite an attempt at excitement around China.

I learnt long ago that little happens by accident in China.

The government has the ability and the smarts to control what is going on. Letting Evergrande wobble is more about sending a message than a misguided step that will send the economy into freefall.

Of course the usual chorus line of doomsdayers have lined up to predict just that.

I am not one of them.

Maybe eventually they do stumble, but you'll go broke betting on it long before then.

The impact of banning unvaccinated workers

Our attention is more focused on what is happening domestically - in particular the how and when of re-opening in NSW and Victoria. 

The area of concern for us is how unvaccinated workers are treated.

The concern is less ethical - I will leave readers to their own views - but what it means for the workforce.

If one in ten workers end up unvaccinated, whether for health or personal reasons, their potential exclusion will have a significant impact on the supply side of the economy.

Most employers are currently awaiting government guidance, but until rapid testing is widely available it seems many will be banned from working.

The demand side of the economy is likely to return quicker than the supply side.

We are increasingly confident that 2022 will see higher - not lower - inflation and the RBA will be tested on its benign view.

Wages should also pick up faster.

Future inflation as measured by markets remains stuck around 2%, which to us provides an opportunity.

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This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at August 11, 2021. It is not to be published, or otherwise made available to any person other than the party to whom it is provided. This article is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient's personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.

The information in this article may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this article is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.

Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance.

Any projections contained in this article are predictive and should not be relied upon when making an investment decision or recommendation. While we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections.

When selling, what's better than a monkey throwing darts?

Spatium Capital

September 2021

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Crackdowns in China: Part 1

Arminius Capital 

September 2021

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Arminius Capital ALPS Fund, Arminius Capital GMMA Fund

Reduce your risk and pick outstanding companies

Emma Fisher, Airlie Funds Management

September 2021

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Global small caps: From unrecognised growth to future global titans

Tobias Bucks and Simon Wood, Ausbil Investment Management

September 2021

Small companies offer the potential for growth that can exceed their larger peers over the long term, an assertion supported by the data. Small Companies offer investors early stage entry into names destined to become future global titans. Tobias Bucks and Simon Wood from Ausbil's global small-cap team answer some key questions on how to access such unrecognised opportunities.

Q: Can you give us the elevator pitch for what you do?

TB: We find global companies that are early in their stages of development, are not actively covered yet by the market, and have latent, unrecognised growth prospects with the potential for major rerates and sustainable unrecognised earnings growth. Finding uncovered 'gems', the names that offer what we call 'unrecognised growth' is where an active global investment manager like Ausbil can help investors take advantage of smallcap idiosyncrasies, while helping to reduce the typical level of risk that come with early-stage small-cap investing. We like global small caps because over the long-term, smaller companies consistently show outperformance against their larger peers, as evidenced in Chart 1

Chart 1: Small is beautiful: The compelling performance of smaller companies

From Chart 1, since the inception of the MSCI indices in 2000, small companies have compounded well in advance of mid and large-cap peers. Over this twenty-plus years, small caps have risen by a factor of almost 6-times, mid caps buy almost 4-times, and large caps by the best part of 2.5-times. The outperformance of small companies has been shown consistently in the empirical long-term evidence provided by esteemed researchers such as Siegel (2015). Banz (1981) and Fama and French (1992), and in the market data.

Q: Can you explain the term, 'unrecognised growth'?

SW: Unrecognised growth is where a company exhibits the signs and potential for future earnings growth that is conceptually ahead of peers or the market in general, but for which there is no consensus as the company is not yet covered by a bevvy of institutional analysts. The company is 'unrecognised' because, due to size, it is yet to become large enough to warrant broad institutional coverage. Chart 2 illustrates how analyst coverage changes as companies become bigger. Global small caps operate in a 'sweet spot' of opportunity that has yet to be noticed or acknowledged by the institutional equity research machine.

Chart 2: What 'unrecognised' looks like

Ausbil's global small-cap team seeks the opportunities in the 231 developed markets in which we invest before any reliable institutional consensus has been established. In the case of some companies, there might be a consensus based on the views of a handful of analysts, as illustrated in Chart 1, but there is typically a significant divergence in views on valuation, opportunity and risk. The essential idea is that we focus on companies where growth will surprise, in companies that are attractively valued, and which we believe demonstrate relatively less risk in proportion to the opportunity. Combined with a lack of analyst coverage, forward surprise potential at attractive valuations reveals companies with unrecognised growth, which ultimately drives share prices. 

Q: Why do these companies go 'unrecognised' for a period of time?

TB: Fast growing smaller companies are proving their business models, their sales and earnings can be volatile, and their businesses can be undiversified in terms of steady-state earnings. Institutions, like insurance companies which are not specialist small-cap investors, typically look for larger-cap equities with steady historical earnings, and more mature business models. However, large super and pension funds often carry significant allocations to small cap equities for the superior long-term returns they can offer in equity portfolios. Small companies, when the fundamentals are sound, the management is strong, and the business model is relatively unassailable, can offer upside potential for investors who are comfortable with riding-out shorter term bursts of volatility. From the sell-side perspective, small companies are often supported by specialist financiers, angel investors, cornerstone investors, large insider holdings and small broking houses in their early years, before they graduate into the bigger leagues and into larger capital raisings with larger investment banks. This creates significantly more opportunity for astute smallcap investors to participate in funding rounds for businesses that are on a trajectory for major growth, ownership transition events and other ongoing capital raisings and block trades that offer the potential to steadily build positions in companies with the potential to become the next global titans. Q: In your experience, what are the features of a good unrecognised opportunity? SW: Our fundamental and quantitative research seeks to unearth the unrecognised winners that have a high probability of earnings upgrades. Chart 3 illustrates how, to date, we have been able to consistently track ahead of the market on capturing earnings upgrades.

Chart 3: Beating the consensus on identifying quality and upgrades

There is no exact template for finding companies with significant unrecognised growth that are also in the process of exceeding market expectations on earnings growth, however there are some key elements that appear in the excellent examples we have found in the past.

A great, unrecognised growth company often starts as a niche leader, that has global ambitions and products that are capable of contesting position in the global market place. Unrecognised growth companies often invest capital into their own expansion, as opposed to paying higher dividends, as they are able to earn a greater return on capital for investors through reinvestment. Quality unrecognised growth companies seek expansion, but not at the expense of strong ESG characteristics, which ensure critical elements are in place for successful expansion: strong corporate governance; and low environmental and social risks. An attractive company that exhibits unrecognised growth offers the potential for earnings surprise in future years, which ultimately draws the attention of the institutional market and eventually catalyses significant re-ratings.

It may be an oft-repeated cliché, but what holds all together, from the development of great strategy to the execution of a successful local and global business strategy, is the quality of leadership. Great unrecognised growth companies invariably boast great management. People matter in successful companies, and as active investors, we are well positioned to meet with, review, question and assess management as part of our due-diligence process.

Q: What about risk? Aren't small caps riskier investments than larger companies?

SW: In theory, small caps should be riskier than larger companies when compared on crude measures of diversified income and size, however, when adjusted for risk, small caps can be surprisingly rewarding. As illustrated in Charts 1 and 4, using the Sharpe Ratio measure of risk adjusted returns, global small caps typically demonstrate a superior risk-adjusted returns (higher Sharpe ratios), than both mid and large-cap stocks. Moreover, an active investment approach can increase this Sharpe ratio through concentration in high-quality unrecognised growth companies, and the active avoidance of low quality small caps that do not match the criteria we apply.

Chart 4: The risk-return profile of small caps in perspective

In taking a wider range of risks into consideration with the application of additional ESG risk filters, it is possible to further improve the risk-return outcome for small caps. ESG considerations can help reduce many tangible and intangible, un-quantifiable risks that help select winners and deselect losers in the risk-return equation. 5 Contactus@ ausbil.com.au

Finally, liquidity management is key to success in global small-cap investing. Unlike mid and large-cap stocks that typically have deep order books in the marketplace, global small caps can display shallower order books, to the point of illiquidity. A company needs market trade flow in order for the execution of a clean investment thesis through the clean entry and exit of positions. In an illiquid stock, news can hamper the ability of investors to trade or exit. Ausbil manages exposure to liquidity risk very closely, and we will not enter positions that we cannot exit at any time, and within a reasonable timeframe. Relative to all small caps, this further improves the riskreward positioning of our approach, and can also materially improve our Sharpe ratio.

In today's volatile markets, large companies are not a guaranteed mitigation for risk. The market has rapidly sold down many large caps regardless of size, and institutional share registers can be brutal to large caps, as much as they can to smaller companies.

Q: So can you give us some examples of what a great, unrecognised growth story looks like?

TB: Australia is only 2% of the world market. There is a lot of potential on offer in the other 98% of markets, and a lot of companies and sectors that are just not available in Australia. Moreover, small caps in larger markets have a natural advantage in being 'small fish in very large ponds'. One such company is theTradeDesk (TTD). The Global SmallCap Fund invested in TTD in June 2018. At the time, TTD was marketing online banner ads and content that rivalled Google Ads, but protected the identity of advertisers. TTD was a small fish in a very large pond, but it offered a compelling challenger solution to the dominant player in one of the world's most profitable spaces.

TTD displayed many of the crucial characteristics we look for as a sign of quality, unrecognised growth. It was a niche leader in digital advertising, with global expansion ambitions for developed and emerging markets. It offered new and unique products, especially in universal IDs that was not being offered by Google. The management team were already proven, and reinvesting a growing earnings stream back into expansion of the business. With strong ESG credentials and a focus on improved data privacy, a competitive edge in the market, TTD was able to build and expand, and generate earnings surprises that were not recognised by the market. The result is that from the $87 entry price in June 2018, earnings surprises drove the stock price to $900 by January 2021, at which time the Fund exited, with TTD graduating 'with honours' as an emerging global titan, moving from the Fund's benchmark into the mid-cap benchmarks.

Another example from the Fund's portfolio is Generac, a world leader in generators, based in the United States. Generac (GNRC) is another company that demonstrates the features of an emerging global titan, similar to our experience with TTD. Generac started as a niche leader in generators and smart energy. Growth ambition has since seen it expand globally, into South America and Europe. GNRC has expanded its product offering into inverters and smart grid tech, further investing through accretive mergers and acquisitions that expand both its capabilities and its footprint. GNRC has strong ESG credentials, especially with its link to future sustainable energy demand, and like TTD, it has a highly regarded management team. The Fund has seen its investment to date rise to over $280, from an entry point of $50 in May 2018, with the stock a key holding for future earnings surprise.

Q: Can you summarise the benefits of adding global small caps to a portfolio?

SW: We think the proposition for investors is simple. Global small caps offers a superior riskadjusted return from a global opportunity set of companies, many of which are not represented in Australian equity sectors. The opportunity to invest early in the next theTradeDesk, Google or even Tesla are waiting to be discovered in these 23 developed markets. They are not common, but with the criteria we apply in selecting companies demonstrating superior unrecognised growth potential, we believe the odds are significantly shortened for investors capturing the growth of future global titans.

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References

Banz, R. W. (1981). The Relationship between Return and Market Value of Common Stocks. Journal of Financial Economics, 9(1), 3-18. Fama, E.F. & French. K.R. (1992). The Cross-Section of Expected Stock Returns. The Journal of Finance, 47(2), 427. Siegel, J. J. (2013). Stocks for the long run: The definitive guide to financial market returns and long-term investment strategies. New York: McGraw-Hill.

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General

Research provided to a client may vary depending upon various factors such as a client's individual preferences as to the frequency and manner of receiving communications, a client's risk profile and investment focus and perspective (e.g., market wide, sector specific, long-term, short-term, etc.), the size and legal and regulatory constraints. This information is for distribution only as may be permitted by law. It is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located, in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or would subject Ausbil to any registration or licensing requirement within such jurisdiction. 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Prior to making any investment or financial decisions, any recipient of this document or the information should take steps to understand the risk and return of the investment and seek individualised advice from his or her personal financial, legal, tax and other professional advisors that takes into account all the particular facts and circumstances of his or her investment objectives. Any prices stated in this document are for information purposes only and do not represent valuations for individual securities or other financial instruments. There is no representation that any transaction can or could have been effected at those prices, and any prices do not necessarily reflect Ausbil's internal books and records or theoretical model-based valuations and may be based on certain assumptions. Different assumptions by Ausbil or any other source may yield substantially different results. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained in any materials to which this document relates (the "Information"), except with respect to Information concerning Ausbil. The Information is not intended to be a complete statement or summary of the securities, markets or developments referred to in the document. Ausbil does not undertake to update or keep current the Information. Any opinions expressed in this document may change without notice and may differ or be contrary to opinions expressed by other business areas or groups, personnel or other representative of Ausbil. Any statements contained in this Report attributed to a third party represent Ausbil's interpretation of the data, Information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party. In no circumstances may this document or any of the Information (including any forecast, value, index or other calculated amount ("Values")) be used for any of the following purposes: (i) valuation or accounting purposes; (ii) to determine the amounts due or payable, the price or the value of any financial instrument or financial contract; or (iii) to measure the performance of any financial instrument including, without limitation, for the purpose of tracking the return or performance of any Values or of defining the asset allocation of portfolio or of computing performance fees. By receiving this document and the Information you will be deemed to represent and warrant to Ausbil that you will not use this document or any of the Information for any of the above purposes or otherwise rely upon this document or any of the Information. Except as otherwise specified herein, these materials are distributed by Ausbil, to persons who are eligible counterparties or professional clients and are only available to such persons. The Information does not apply to, and should not be relied upon by, retail clients. The information contained in this document is given by Ausbil Investment Management Limited (ABN 2676316473) (AFSL 229722) (Ausbil) and has been prepared for informational and discussion purposes only and does not constitute an offer to sell or solicitation of an offer to purchase any security or financial product or service. Any such offer or solicitation shall be made only pursuant to an Australian Product Disclosure Statement or other offer document (collectively Offer Document) relating to an Ausbil financial product or service. A copy of the relevant Offer Document may be obtained by calling Ausbil on +612 9259 0200 or by visiting www.ausbil.com.au. You should consider the Offer Documents in deciding whether to acquire, or continue to hold, any financial product. This document is for general use only and does not take into account your personal investment objectives, financial situation and particular needs. Ausbil strongly recommends that you consider the appropriateness of the information and obtain independent financial, legal and taxation advice before deciding whether to invest in an Ausbil financial product or service. The information provided by Ausbil has been done so in good faith and has been derived from sources believed to be accurate at the time of completion. While every care has been taken in preparing this information. Ausbil make no representation or warranty as to the accuracy or completeness of the information provided in this video, except as required by law, or takes any responsibility for any loss or damage suffered as a result or any omission, inadequacy or inaccuracy. Changes in circumstances after the date of publication may impact on the accuracy of the information. Ausbil accepts no responsibility for investment decisions or any other actions taken by any person on the basis of the information included. Past performance is not a reliable indicator of future performance. Ausbil does not guarantee the performance of any strategy or fund or the securities of any other entity, the repayment of capital or any particular rate of return. The performance of any strategy or fund depends on the performance of its underlying investments which can fall as well as rise and can result in both capital gains and losses.

Canada This document does not pertain to the offering of any securities. This document is not, and under no circumstances is to be construed as, an advertisement or a public offering of the securities described in Canada. No securities commission or similar authority in Canada has reviewed or in any way passed upon this document or the merits of the securities, and any representation to the contrary is an offence.  

Sweden The information contained in the document is given by Ausbil and has been prepared for information and discussion purposes only and does not constitute an offer to sell or solicitation of an offer to purchase any security or financial product or service. It is provided to you as an institutional investor as that term is understood under Swedish law. By reading this document, you agree to be bound by these limitations, terms and conditions set out in the paragraphs above.

United Arab Emirates & Kuwait This information relates to a Fund which is not subject to any form of regulation or approval by the Dubai Financial Services Authority ("DFSA"). The DFSA has no responsibility for reviewing or verifying any Prospectus or other documents in connection with this Fund. Accordingly, the DFSA has not approved this or any other associated documents nor taken any steps to verify the information set out in this Prospectus, and has no responsibility for it. The Units to which this Report relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers should conduct their own due diligence on the Units If you do not understand the contents of this document you should consult an authorized financial adviser. This information does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment products in Kuwait, UAE (including the Dubai International Financial Centre) and accordingly should not be construed as such. Furthermore, this information is being made available on the basis that the recipient acknowledges and understands that the entities and securities to which it may relate have not been approved, licensed by or registered with the UAE Central Bank, the UAE Securities & Commodities Authority, the Dubai Financial Services Authority or any other relevant licensing authority or governmental agency in the UAE. The content of this Report has not been approved by or filed with the CBK, UAE Central Bank, the UAE Securities & Commodities Authority or Dubai Financial Services Authority.

United Kingdom This information may be issued in the United Kingdom to, and/or is directed at, only persons to or at whom it may lawfully be issued, or directed under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) including persons who are authorised under the Financial Services and Markets Act 2000 ("FSMA"), certain persons having professional experience in matters relating to investments, high net worth companies, high net worth unincorporated associations or partnerships, or trustees of high value trusts. The services described in it are only available to such persons in the United Kingdom and this document must not be relied or acted upon by any other persons in the United Kingdom. By reading this document, you agree to be bound by these limitations, terms and conditions set out in the paragraphs above.

Australia The information contained in this Report has been prepared for general use only and does not take into account your personal investment objectives, financial situation or particular needs. Ausbil is the issuer of the Ausbil Australian Active Equity Fund (ARSN 089 996 127), Ausbil Australian Geared Equity Fund (ARSN 124 196 407), Ausbil Australian Emerging Leaders Fund (ARSN 089 995 442), Ausbil MicroCap Fund (ARSN 130 664 872), Ausbil Australian SmallCap Fund (ARSN 630 022 909), Ausbil Balanced Fund (ARSN 089 996 949), Ausbil Active Dividend Income Fund (ARSN 621 670 120), Ausbil Australian Concentrated Fund (ARSN 622 627 696), Ausbil Active Sustainable Equity Fund (ARSN 623 141 784), Ausbil Global SmallCap Fund (ARSN 623 619 625), Candriam Sustainable Global Equity Fund (ARSN 111 733 898), Ausbil 130/30 Focus Fund (ARSN 124 196 621), Ausbil Long Short Focus Fund (ARSN 642 635 498), Ausbil Global Essential Infrastructure Fund (ARSN 628 816 151), Ausbil Global Resources Fund (ARSN 623 619 590) and MacKay Shields Multi-Sector Bond Fund (ARSN 611 482 243) (collectively known as 'the Funds').The information provided is factual only and does not constitute financial product advice. It does not take account of your individual objectives, financial situation or needs. Before you make any decision about whether to invest in a financial product, you should obtain and consider the Product Disclosure Statement of the financial product. The information provided by Ausbil Investment Management Limited (ABN 26 076 316 473 AFSL 229722) has been done so in good faith and has been derived from sources believed to be accurate at the time of compilation. Changes in circumstances, including unlawful interference and unauthorised tampering, after the date of publication may impact on the accuracy of the information. Ausbil Investment Management Limited accepts no responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis of the information included. Past performance is not a reliable indicator of future performance. Ausbil Investment Management Limited does not guarantee the performance of the Funds, the repayment of capital or any particular rate of return. The performance of any unit trust depends on the performance of its underlying investment which can fall as well as rise and can result in both capital losses and gains. Consequently, due to market influences, no assurance can be given that all stated objectives will be achieved.

United States AN INVESTMENT IN THE FUND IS SPECULATIVE AND INCLUDES A HIGH DEGREE OF RISK, INCLUDING THE RISK OF A TOTAL LOSS OF CAPITAL. INTERESTS IN THE FUND WILL BE ILLIQUID AND SUBJECT TO SIGNIFICANT RESTRICTIONS ON TRANSFER. PROSPECTIVE INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE RISKS ASSOCIATED WITH SUCH INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. A PRIVATE OFFERING OF INTERESTS IN THE FUND WILL ONLY BE MADE PURSUANT TO THE FUND'S PRODUCT DISCLOSURE STATEMENT (THE "PDS"), AND RELATED DOCUMENTATION FOR THE FUND, WHICH WILL BE FURNISHED TO QUALIFIED INVESTORS ON A CONFIDENTIAL BASIS AT THEIR REQUEST FOR THEIR CONSIDERATION IN CONNECTION WITH SUCH OFFERING, WHO SHOULD CAREFULLY REVIEW SUCH DOCUMENTS PRIOR TO MAKING AN INVESTMENT DECISION. ANY INVESTMENT DECISION WITH RESPECT TO SUCH INTERESTS MUST BE BASED SOLELY ON THE DEFINITIVE AND FINAL VERSIONS OF SUCH DOCUMENTS.

The information contained herein will be superseded by, and is qualified in its entirety by reference to the PDS, which contains additional information about the investment objective, terms and conditions of an investment in the Fund and also contains tax information, information regarding conflicts of interest and risk disclosures that are important to any investment decision regarding the Fund. No person has been authorized to make any statement concerning the Fund other than as set forth in the PDS and any such statements, if made, may not be relied upon.

The information contained in this Report must be kept strictly confidential and may not be reproduced (in whole or in part) or redistributed in any format without the express written approval of AUSBIL INVESTMENT MANAGEMENT LIMITED (together with its affiliates, the "Firm"). Neither the Firm nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein and nothing contained herein should be relied upon as a promise or representation as to past of future performance of the Fund or any other entity. Except where otherwise indicated herein, the information provided in this Report is based on matters as they exist as of the date of the document and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after the date hereof.

This Report has not been approved by the U.S. Securities and Exchange Commission (the "SEC"), the Financial Industry Regulatory Authority ("FINRA"), or any other regulatory authority or securities commission in the United States or elsewhere and does not constitute an offer to sell, or a solicitation of any offer to buy, any securities. This Report is not to be relied upon as investment, legal, tax, or financial advice. Any investor must consult with his or her independent professional advisors as to the investment, legal, tax, financial or other matters relevant to the suitability of an investment in the interests of the Fund. The reader is urged to read the sections in the PDS addressing risk factors, conflicts of interest and other relevant investment considerations. The Interests may not be transferred or resold except as permitted under the Securities Act and any applicable U.S. or non-U.S. securities laws.

The Interests have not been reviewed or approved by any U.S. federal, other U.S. or non-U.S. securities commission or regulatory authority. Interests are not and will not be insured by the U.S. Federal Deposit Insurance Company or any government agency, are not guaranteed by any bank and are subject to investment risks, including the loss of an investor's entire principal amount invested. Investors should be aware that they may be required to bear the financial risks of an investment in the Interests for an indefinite period of time because the Interests (i) cannot be sold unless they are subsequently registered under any and all applicable securities laws in the United States, or an exemption from registration exists and (ii) are subject to the restrictions on transfer contained in the offering document or limited partnership agreement of the Fund. The reader must comply with all applicable laws and regulations in any jurisdiction in which it subscribes for an investment; and the reader, by its acceptance of this report, agrees that the Firm and the Fund will not have any responsibility for the reader's compliance with such laws and regulations.

The Firm is registered as an investment adviser with the U.S. Securities & Exchange Commission.

Certain information contained in this Report constitutes "forward-looking statements," which can be identified by the use of forward-looking terminology such as "may," "will," "should," "expect," "anticipate," "target," "project," "estimate," "intend," "continue" or "believe," or the negatives thereof or other variations thereon or comparable terminology. Due to various uncertainties and risks, actual results and performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements

A short notice on the COVID-19 public health event, and how it can impact investments

Given the currently evolving issues around the Coronavirus (or Covid-19) globally, which has officially been designated a pandemic by the World Health Organisation, we wish to notify that, as with many firms, business may be disrupted. A public health crisis, pandemic, epidemic or outbreak of a contagious disease, such as the recent outbreak of Coronavirus (or Covid-19) in Australia, Italy, China, South Korea, the United States and other countries, could have an adverse impact on global, national and local economies, which in turn could negatively impact investment returns in any of Ausbil Investment Management Limited's registered managed investment schemes (the Funds). Disruptions to commercial activity relating to the imposition of quarantines or travel restrictions (or more generally, an inability on behalf of authorities to contain this pandemic) may adversely impact any investment, including by delaying or causing supply chain disruptions or by causing staffing shortages. The outbreak of Coronavirus has contributed to, and may continue to contribute to, volatility in financial markets. The impact of a public health crisis such as the Coronavirus (or any future pandemic, epidemic or outbreak of a contagious disease) is difficult to predict, which presents material uncertainty and risk with respect to any investment or fund performance.

The Rate Debate - Episode 20

Yarra Capital Management

September 2021

Funds operated by this manager: