Investment update with John Pearce - April 2022

John Pearce: : Hello and welcome to this new update. Today, I'd like to spend a bit of time talking about our exciting new partnership with Uniseed—a venture capital fund with a difference. However, before we get onto that, I'd like to take stock of where we are in the economic and financial market cycle.

Many of you have been following these updates over time. You’d be very familiar with this diagram. It's a cycle that we've been following very closely. We've had the crisis, we've had the policy support, we've had the recovery. Inflation is now looming. We've now got policy tightening so there's one leg of the cycle to go. The good news is that we have a diagram that actually follows the real world.

Chart 1: Chart showing the economic / financial cycle. Typically, recession and higher unemployment is followed by: policy stimulus and market rallies; a recovery in growth and a fall in unemployment; inflation and market falls; policy tightening. Then the cycle repeats. A question mark signifies that uncertainty exists in relation to what might happen following policy tightening.

The not-so-good news is the last leg of this cycle could be very, very bumpy. The real question is, is runaway inflation going to be high enough that it forces the central banks’ hands to raise rates to the point where we actually move economies into recession? Or can the central banks somehow orchestrate a smooth landing. Hard landing or smooth landing?

Time will tell. But I must say, obviously, the war has really complicated the issue as well. On the one hand, we are seeing inflationary pressures because of energy prices skyrocketing, particularly in Europe. On the other hand, the war is dampening consumer confidence. And of course, high prices also act to dampen demand. So we might see some slowing pressures on the global economy on top of the central banks rising rates. And therefore, the world might actually slow down without the need for excessive rate tightening.

What are stock markets saying? After a lot of volatility in January and February, it turns out that markets have really calmed down and are showing some resilience. The markets are actually telling me that they have a fairly sanguine look. We could be orchestrating a smooth landing.

I'm not so sure. But what I am pretty sure about is that the volatility we have seen in January and February is going to be repeated some time again this year. Our response is that we will be holding more cash than we usually do.

On a more positive note, the Australian share market is doing really well. If we look at the ASX 200, it's up to where it was pre-GFC. That's right—pretty close to its record levels. Have a look at this graph.

Chart 2: Chart showing the ASX 200’s value between 2013 and 2022.

Now the question is, are we in a bubble? Well, there are some supporting factors. The first thing is, Australia is looking like a pretty good place to be, given what's happening in the rest of the world.

If you look at the composition of our market, it’s very heavily dominated by resource companies and banks. Now, resource companies, with commodity prices rising so fast, are doing really well. They're literally printing cash. Banks are doing pretty well because the Australian economy is doing very well. So, given they are the two dominating sectors, it's not all that surprising to see the Aussie market doing well.

We look at the dividend yield at about 6.2%, which compares to bond yields of around 2.5% to 3%. Once again, a support for the Australian market. And then of course that all adds up to strong earnings. Have a look at the earnings line here. It turns out that while the Australian share market is at all-time highs, it's actually followed pretty closely the trajectory of corporate earnings. Fundamentals are supporting the rally.

Chart 3: Chart showing that the ASX 200’s value between 2013 and 2022 has closely followed the trajectory of corporate earnings.

On another positive note, I do want to come back to Uniseed. To provide a bit more insight, I'd like to share with you a discussion I recently had with Kent Robbins, who heads up a team that manages our private equity investments.

Hi, Kent. Now, most of our members would realise that our universities are a hotbed of innovation and great ideas.

However, it's fair to say that Australia as a whole—we don't often convert those great ideas into commercial outcomes, great products, great applications. So it’s in that context that I'm absolutely delighted that we are now involved with a venture capital fund by the name of Uniseed. We'll actually be able to play a role in converting ideas into useful products and applications.

Your team was heavily involved in this investment. Uniseed is just another venture capital company, but it is special. Tell us why you think it's special.

Kent Robbins: Uniseed is a group that's owned by the University of Melbourne, the University of Sydney, the University of New South Wales, the University of Queensland, plus the CSIRO. So, you think of those five organisations—over 50% of the patents in research in Australia go through those five entities.

So from our point of view, it's harnessing all of that power into an investment thesis. They see over 500 opportunities in a year, so we get the benefit of that through our partnership with the groups.

John Pearce: There are clearly some heavyweights among those names. In terms of portfolio, we will be investing in about 16 different companies. Maybe you can just give the members a few highlights of the existing portfolio and a flavour of what's in the pipeline.

Kent Robbins: Thanks, John. The examples I give maybe is LM Plus, which is a technology that converts carbon dioxide and other greenhouse gases into… one of the elements is carbon. So if you think of the greenhouse gas emissions converting through to carbon, a useful product, that's an idea that uses a lot less energy than its previous situations. From our point of view, that's in a in a phase now where it's going through its proof of plant concept. That's one example I give.

In the health sector we've got Cardihab, which is a really useful technology. It's a smartphone app that essentially allows people who have had a cardiac event to go through their rehabilitation. You can imagine often rehabilitation, it is very structured, it’s not accessible to everyone. If you're in a remote community, you've got a situation where you're probably not going to adhere to your cardiac rehab. If you're not adhering to cardiac rehab, you face the risk of ongoing issues. So for us, that's a really great opportunity. It's being used by most of the hospitals throughout Australia, and it's in it's in production now. So that's another example.

Maybe to round that out, another one is Kinoxis, which is treating people with addictions to alcohol, prescription and illicit drugs, and that tries to eliminate the issues faced by those groups. That's in clinical studies at the moment, but is another one that would have enormous social and community benefits.

In terms of the pipeline, it's very varied. As I said earlier, the 500 opportunities coming through, you can imagine the pipelines. It's clean technology, it’s treatment of breast and brain cancers, it’s carbon fibre recycling. There's a long list of opportunities that the team is looking at.

John Pearce: Excellent. Hopefully doing good while making money at the same time. You know, when you go through those companies, it's pretty clear to me that these are perfect companies to sit in our sustainable options, and that's precisely where we're planning to allocate them. So it will be another point of differentiation for these fast growing options that our members have access to.

It's only a $75 million commitment by UniSuper at this point. However, over time I hope it'll be a much greater commitment. Furthermore, I hope that it expands beyond the four universities that we currently have. It would be great if Uniseed and UniSuper were actually seen as the first port of call to commercialise great ideas.

So there it is. In a world gripped with inflation, rising rates, a lot of market volatility, a war—there's no shortage of bad news. And in that context, it's fantastic to be talking about an initiative that we believe will be the source of many good news stories in future. Thank you very much for tuning in.