Maggie: [00:00:07] Welcome back to another episode of the Hearts and Minds podcast. I'm Maggie O'Neill, head of Marketing and Operations. Thank you for joining us today. This podcast is our way of bringing you in on the meaningful conversations we are privileged to engage in each and every day at Hearts and Minds. These meaningful conversations stretch our understanding of the world and the impact we can make. We invite you to hear from the brilliant minds that are part of our ecosystem today. It's my pleasure to be joined by Chief Investment Officer Charlie Lanchester. G'day, how are you?

Charlie: [00:00:34] Hey Maggie, it's great to be back. 

Maggie: [00:00:35] Good to have you back in studio. And today we're joined by another fantastic guest, none other than Phil King of Regal Funds Management. Phil's been a tremendous supporter of Hearts and Minds since the very beginning in all aspects of our organisation. He has been up on stage pitching long ideas as well as short. We're also invested in their long short fund as part of his role as a one core fund manager. Charlie, what did you make of the conversation today? 

Charlie: [00:00:58] Look, I loved it and I know Phil really well, both from the funds management industry, but also as part of his philanthropic interests. And he's been a key supporter for a particular charity that I'm involved in over the years. It's great to have him as one of our core managers. I think that the change that we made recently to allow us to invest in his long short fund was a great decision as his particular style of managing money, which comes through in the podcast, is a little different to other core managers. 

Maggie: [00:01:23] Yeah, it was really fascinating to hear not only how he invests, but how he got into investing really early on, slowly making his way via accounting, stockbroking and now to managing other people's money. 

Charlie: [00:01:34] I think Phil's actually been a stock market animal from the very beginning and this really comes across in the conversation. He's absolutely passionate about stocks and is constantly looking for opportunities. You can see this not just in how he runs his portfolios, but also in terms of rigour with the business in the funds management community. He's built a large diversified business now that spans a lot of different areas and he clearly has ambitions to keep going from here. He's intensely curious and gets excited by any mispriced opportunity. We had him in here today during market hours, which is amazing. It was great to spend time with him. 

Maggie: [00:02:06] Yeah, absolutely. A great honour. And it was a wide ranging discussion too, covering public and private markets as well as some of the sectors and stocks that he's really excited by right now. So please enjoy our conversation with Phil King. 

Charlie: [00:02:22] Welcome, Phil King. Thank you so much for being with us today. And thank you for being such a great supporter of Hearts and Minds since the very beginning. I will note that it's during market hours, so I'm particularly impressed that you're here talking with us. Thank you very much, Phil. 

Phil: [00:02:34] Thanks for having me, Charlie. That's lucky. We've got a great team at Regal, so it's all good where everything's under control. 

Charlie: [00:02:40] Excellent. Excellent. Look, let's go back in history. I'm really interested in how you got into funds management. I know you started off as an accountant, then you worked on the sell side for a little bit before going to London. What drove that path? I think you loved investing from an early age. So what drove those decisions in the early part of your career? 

Phil: [00:03:00] Yeah, I certainly bought my first shares when I was very young, when I was 14. Actually, when I was at school, an uncle of mine who was involved in the stock market got me into investing. I remember my first two shares, Lendlease and BHP, and fortunately for me they went well. And so I was hooked. And so, yeah, I bought a number of other shares during school. And in fact, one of my friends from school gave me some money and he's still an investor with us today. So I was always going to get into the stock market, but I kind of worked out that not many people went straight into the stock market from school. And so I kind of observed that a lot of people went through the accounting path. And so, yeah, when I was at school, I got told by a few people that some of the accounting firms actually paid you to go to university. And so that sounded pretty good to me. And I did a cadetship scheme with KPMG which allowed me to study commerce at New South Wales Uni. I spent about seven years with KPMG as an accountant and that included a couple of years of full time uni, but it also allowed me to work and travelling in the UK, which was a lot of fun. Working as an accountant was certainly a very valuable experience. I remember one of the companies we used to audit was a horse stud that was listed on the ASX at the time. I remember how profits would have wild swings depending on how we value their horses. A small change in the valuation of a stallion, say Palace Music could change the PNO from a profit to a loss, or vice versa. And that's something that's always stuck with me. And so even though I love my mass and I love it, if we could rely on the accounts like a scientific experiment, I'm always a little bit cynical about the accounts as well. I always try and understand the motivations of the board and management when they're forming the accounts, and so I'd certainly say the accounts are a bit more of a painting than a photo. And sometimes I think it's actually modern art that does need a bit of interpretation. But yeah, certainly my accounting experience I think is very valuable for my investing. 

Charlie: [00:05:00] And how did you coming to the sell side at Macquarie, I think in those early days, what drove that decision?

Phil: [00:05:06] Yes, So I spent seven years or so with KPMG and then when I got back from the UK, I thought it was time to move into the stock market and you had a job on the sell side with Macquarie Bank was the first job that I saw. And so, you know, I joined Macquarie and I had a great five years at Macquarie. I researched various sectors like paper and packaging, media and telecommunications. Telecommunications was quite a new sector at the time and I remember one of the big things was just working out how many mobile phones there were in Australia and how many, you know, what the penetration was. And then I moved to Melbourne for six months to help with the IPO of Telstra, which was a wonderful experience. I've always been lucky to work with great people and when I was at Macquarie I had great mentors like David Rickards. He taught me a lot about the macro and Alex Pollack, who runs a great business called Loftus Peak. He taught me a lot about media and technology and then five years at Macquarie, I met an English nurse, got married, moved to London for seven years and worked mainly as a hedge fund manager at a firm, a firm called DPFM in London, and that was set up by black cop Peter de Putron. That was a great experience for me, and Peter taught me a lot about risk management, which I think has stuck with me today. And being an Australian in Europe was a great advantage because it gave me a different perspective on things. And I remember making a lot of money investing in things like motorways and stock exchanges where people in the UK didn't quite have the sort of experience that I had from having worked at Macquarie. And then equally, I think having the UK experience has made me a better investor in Australia. And then my dad actually got sick and I wanted to move back to Sydney and I was fortunate enough that I'd done quite well in London and so I was able to set up my own business and I did that with my brother Andrew, and he was focussed on the ABN in the marketing side and I was focussed on the investing side. So we set up a business called Regal and yeah, that's worked out incredibly well. 

Charlie: [00:07:08] Yeah, must have been a big step setting up your own business, I think, you know, to manage other people's money is a huge responsibility and yeah, there's a certain type of person that can deal with that pressure, you know. How did it feel first day when you opened up the of Regal Funds Management. 

Phil: [00:07:24] Well, it wasn't too stressful for us because, as I said with I'd been quite lucky in London, I've been paid well. And so even if we never attracted a customer, I knew that we'd be fine. But yeah, my mum was very loyal and she gave us a little bit of money to start as well, which is lovely. And she's always been very supportive. But certainly you are right, you know, managing other people's money can be a lot more stressful than managing your own. And you know, I'm very lucky that I don't have to worry about the monthly mortgage payment or anything like that. And so, you know, I don't always appreciate what, you know, rises and falls in stock price do to people. But, you know, sometimes I find that the smaller investors are the most stressful to manage for because for some of them, you know, what they have with us is very, very meaningful for them. And so, look, it is stressful managing people's money, but that is part of the job. I guess it also is worth pointing out that managing other people's money can give great pleasure as well. And certainly I've done well and I'm at this stage of life where actually I enjoy making money for other people a lot more than I enjoy making money for myself. And that's something that really keeps me in the game. And look, I'm proud to say that, you know, we manage a lot of money for foundations and charities like Hearts and Minds, and seeing the difference that that can make to people's lives is something that's also very satisfying.

Charlie: [00:08:43] Yeah, I think I've known you for a while, Phil, and I've seen you over the years at both the highs and the lows, and your demeanour doesn't seem to change very much. So I think you're exceptionally well suited to this job. And look, you know, you do have quite a different style to most other active managers here in Australia. You don't have any benchmarks, your high conviction, your high volume. And in fact, I think there's an article today in the paper talking about the plumbing of the market and just how important your role is within it. How do you deal with it? How does that system work? What is your investment process?

Phil: [00:09:16] Look, I find it interesting and I understand why people have got this perception as real as very large traders, because, you know, we do do a lot of trading. But the reality is that most of our returns come from our long term positions. We trade around the edges because I understand that can be helpful for the brokers and it certainly can generate some extra returns for us. But most of our returns come from our core positions. And I actually consider myself and our team a lot more fundamental. The many investors in the market and many of our positions we hold for years at a time. And what might surprise some people is that we actually hold our shorts for a long time as well. And some of our shorts, yeah, we hold for years. I think one of the reasons we've been successful on the short side is that we actually have a very similar approach to our long side investments. We're very focussed on valuation and we're very long term in our thinking and so we don't always get shaken out by the market when something goes against us, whereas a lot of other people I think, are forced to cover when something moves against them. And so I think this fundamental mentality has meant that we're very successful on the short side. But look, I can understand, look, we do trade around our positions and, you know, we do have a very active trading portfolio. And so, yeah, I can understand, you know, why people see us as very heavy traders. 

Charlie: [00:10:38] And what do you think about listed versus private markets at the moment? A lot of good companies are staying private longer. You see some of those companies. I think you've done some pre-IPO stuff in some of your funds, but you know, when I visit private companies myself, they seem to be better at looking long term and reinvesting back into the business, whereas listed markets are very focussed on short term earnings. There's a lot of quant funds and HFT and computers driving the listed market. Do you think that's a problem? 

Phil: [00:11:06] Yeah, I kind of dispute it when yeah, management complain about the market's being short term, I think it's usually an excuse for poor performance. And I say that with all due respect to anyone there, you know, I think know markets are in fact incredibly longer term can look through things. But I think, you know, management often are making excuses for things not working out as well as they had hoped. Look, as you say, we have been very successfully investing in the unlisted space. I think, in fact, we launched our emerging companies business about eight years ago because we saw a huge opportunity. We saw this huge arbitrage between valuations in the unlisted space and valuations in the listed space. And yeah, we have been very successful in capturing that arbitrage as many of these companies move to listing their stocks through an IPO over a few years. But certainly that arbitrage has certainly changed and in fact has swung around the other way. Valuations in the unlisted space lag listed valuations. And so with that sort of volatility in the correction in the market that we've had over the last few years, we're actually finding that the valuations of many unlisted stocks remain above their listed comparables. And so there's often, I think at the moment, better opportunities in the listed market than the unlisted market. And that's very, very good. Now, that won't last forever. You know, valuations in the unlisted space are coming down. And in fact, I think there's good opportunities there for the brave. Sometimes we can negotiate terms where we basically get the equity upside, but we get an interest rate and protection on the downside as well. So there's tremendous opportunities in the unlisted space for people who are brave enough to invest. But it does seem like the IPO market in Australia is closed and will remain closed for an extended period of time. And I think that's just the fact that valuations in the listed space are still lower, so attractive as unlisted. And also just because the performance of some of the recent IPOs over the last few years have been so poor. 

Charlie: [00:13:19] And Regal itself has changed a lot over the last few years. You know, you made an acquisition in an hour, a listed stock. You've been linked to various other fund management businesses around Australia. What are your broader ambitions for the business and how do you see it playing out over the next few years? 

Phil: [00:13:36] When I was in Europe, I saw the opportunity for alternative investing and a lot of Australians over the years have been probably overexposed to equities and to a lesser extent bonds. And when I was in London, I saw many family offices, and I'm certain fourth generation family offices have large portfolios of alternative investments. And this obviously provides great diversification. And, you know, the old saying in finance is uncorrelated returns are the only free lunch. And by that we mean if you can get some extra return for no extra risk, then that's basically some free returns you can get. And I think, you know, our long short funds are great example of that. I think our Australian Long Short Fund aims to outperform the ASX 300. I think it's generated close to 14% annualised return since inception and maybe about 6% of that has come through alpha and 8% or so through beta. And that 6% is partly because we're running our gross gearing up to 200% or so and our net exposure is always around 100% so we can run our alpha positions a little bit larger than a long alley investor would with the same level of risk. And as a result, I think that's an unfair comparison. And we can, you know, we have significantly outperformed many long only investors. 

Charlie: [00:15:02] And obviously the team is a lot bigger than it was maybe ten years ago or so. How have you attracted the talent to come and work for you at Regal? 

Phil: [00:15:11] Yeah, the team is certainly a lot bigger. Brendan O'Connor, our CEO, has done a tremendous job since he joined Regal seven years or so, and we've got close to 100 people across the group. And there's many things happening at Regal that I'm not across fully, like farmlands and water investing, carbon, electricity. Last year we launched a private credit fund. We've got a resource royalty fund over the last couple of years that's going extremely well. So there's a lot of things happening at Royal, and I think it's a great place to work. You know, people enjoy working there. They do get paid well, but they also have to perform. And so I think we've built a very, very good culture and exciting culture, and that's how we've managed to attract some good talent.

Charlie: [00:15:54] Yeah, look, it's clearly working. And so when you look at the overall business of funds management in Australia, where do you think it's heading? I mean, the super funds are going to get bigger, much bigger, and they will probably continue to consolidate and control vast amounts of savings in Australia. You've got index funds growing, so growth, a passive, you've got still a lot of active managers out there and you know, there's almost more of a joke in active managers than there are investable stocks on the ASX, which is probably not quite true, but it's a good line. We know what's going to happen. Has the market going to shift over the next decade? 

Phil: [00:16:30] Yeah, look, that's a great question and that's something we get asked a lot. You know, a lot of people say is the growth in passive and the growth in industry funds negative? And I say no, it's actually very, very positive because the more money in industry funds, more money in passive, the better it is for us. And look, the growth in industry funds is very, very interesting and I'm following it closely. And I think one of the biggest challenges the industry funds will have is just as the growth in their fund continues, just moving large amounts of capital around. I find it interesting that the government, when they set up the Future Fund, they mandated the Future Fund to only use outside managers, but they're doing the reverse with the industry funds. They're forcing the industry funds to internalise by having a heavy emphasis on the costs of managing money. And so, you know, while the challenges of managing money internally is that it can often be harder to sack people than it is to sack external managers. And I think we're almost seeing the reverse trend occur in the US at the moment. At 30 years ago, some of the big university endowments like Yale and Harvard, were very, very successful with managing endowments internally. But one of their big challenges over the last 30 years has just been replacing their highly talented teams, and they have found that the challenge to attract the right talent at the right pay and so many of the big endowments and charities in the US are moving in the opposite direction to the industry funds in Australia. They're starting to outsource a lot more and more. And so yeah, it's going to be interesting to see what happens in Australia. You talk about the passive funds as well and you know, there are some people that think the trend towards passive is structural. I actually think it's cyclical. I think that the more money passive attracts, you know, the more impact they have. And for a while there that momentum is very attractive because it means that the passive funds get bigger and they continue to outperform. But then it gets to a point in time, and I think we're very close to that now where the passive funds are having too much impact. And I look at something like Airbnb, which is joining the S&P 500 at the moment. You know, the stock's almost double this year. And that move is not just by the fundamentals. I look at some of the stocks that are joining the ASX 200 in Australia in September and a lot of the stocks joining the index are up, I think 55% or so on average, whereas the stocks that are exiting the index are down something like 66% on average over the last 12 months. And so there's huge divergence in those returns that are not explained by fundamentals. And so I think the pendulum is almost swung too far to the passive funds, and that's creating opportunities for active managers. And so while the industry funds have probably done very well over the last few years, when it's easy to be an investor, you've just had to track an index. I think as the pendulum swings back towards active management, active managers. I think some of these industry funds will find things a bit tougher. 

Charlie: [00:19:44] Yeah, Yeah. And it's interesting, earlier you alluded to some of the cheap valuations on the ASX. And you know, I was going to ask you, you know, which parts of the market are most exciting to you? And it does seem that that shift to passive there's we're continuing to see in Australia underpins that large cap, those large cap valuations. And as you say, if you fall out of an index, you know, particularly for a small cap or market cap, the valuation can be decimated. So what is exciting at the moment in the market?

Phil: [00:20:10] Yeah, so look, obviously one of the parts of the market that excites us most is the small cap sector. And in fact all our funds have an overweight to the small cap sector. That's where we're saying the best opportunities, that's where we're seeing the best valuations. And so that's where we're really, really focussed at the moment. You know, within that we have an overexposure to resources. We think our resources are starting what could be easily a five or ten year bull market. You know, it makes sense from the top down. You know, when inflation's rising, you want to be in real assets and it makes sense in the bottom out. I think we're seeing structural changes on both the supply side and the demand side of mining. We're seeing structural changes on the supply side, just in terms of how difficult it is to find new economic deposits and also how hard it is to get new mines approved even in mining friendly countries like Australia. And so there's going to be a real challenge for the supply side to grow, whereas on the demand side we're seeing huge structural factors like decarbonisation drive the growth in demand for commodities like copper. We're seeing the growth in things like electric vehicles drive the growth in demand for lithium and as a result, you know, the structural demands on the demand and supply side of commodities are making us very excited about the Australian mining sector. Apart from that, you know, one of our main areas of focus is what we call and the small caps base, the global leaders. And so we're attracted to these stocks because they have such a huge addressable market. And that means in our view, some of these stocks could easily go up 5 to 10X. We're talking like stocks like Life360, Cetire, Chrysos, Ordinate, Phineas, I4N and there's a number of these stocks that you know a true what we call true global leaders. And the beauty about these stocks is that you know profits aren't so affected by a weakening economy and valuations aren't so affected by rising bond yields because in most situations here, these stocks are moving from losses to profits and the profit growth in the first couple of years will be quite spectacular. And so they're probably the two areas of focus most for us at the moment, resources and small cap global leaders. 

Charlie: [00:22:35] Fantastic, Phil. Turning to Hearts and Minds, you are a founding member of our core manager team. You presented at the first conference, I think in 2006. What was your impression of Hearts and Minds? What brought you in and supported us through that period? 

Phil: [00:22:52] Yeah, well, I think I'm a bit of a psycho and someone asked me to help a charity. I find it hard to say no. And when Matty Grams rang me and said he wanted me to try and help him raise some money for his new initiative, Hearts and Minds. Well, the SOHN Conference, I think, as we called it back then, I found it very hard to say no. And so it's also something that, you know, I think I can use my skills to contribute to. And I'm very proud of the involvement we've had in Hearts and Minds since the first conference at the Opera House. And I remember that conference very well, because, look, to be frank, it was quite intimidating. I was pitching a short idea to many investors who were a lot more experienced than I was, and pitching a short idea can be dangerous because you can look very, very stupid. And I've had some of my shorts over the years go well, but I've also had some of my shorts knocked, not so well over the years. And I do remember, I think, that first conference, I think I might have followed Paul Keating onto the stage, which is quite intimidating in itself. But look, you know how you get more relaxed over the years and we've had lots of fun and I think we've made lots of money for investors and for medical research, which I'm very proud about. 

Charlie: [00:24:01] Yeah, look, I think it's a wonderful circular set up where we're able to, you know, give access to, you know, retail investors, a really amazing group of fund managers, of which you are one of them. And I think that the circular way of then giving back to medical research is just fantastic. So thank you for your support. Is there a moment on the medical research side that is particularly appealed to over the last seven years? 

Phil: [00:24:25] Yeah, look, obviously all the medical research organisations were involved in a terrific. My wife works in health, so it's an area that's close to my heart. Our third child, Sadie, spent a long time at Westmead Children's Hospital when he was first born and that was a very traumatic experience for us. And so, you know, we had lots of choices when we were thinking about what sort of charities to support. But in the end, I spoke to a few of my friends who were doctors and they suggested we support a charity that's not so widely known and not so well supported because a lot of the high profile charities get a lot of support. But I felt we could make the greatest difference by supporting something that wasn't so well known. And so one of the charities, the Hearts and Minds support is the green light charity at the Royal Prince Alfred Hospital here in Sydney. And literally the Green Light Charity would not exist without the support of Hearts and Minds. It's involved in research into emergency medicine, and this is an, I think, a bit of a neglected area because it doesn't have the sex appeal, if I can say that some of the children's charities and things like that, but it's still so vitally important. It's vitally important because the doctors and nurses can make such a difference in people's lives. If I treat people early and well when people first present. And also I think the emergency department, especially at the RBA, is very involved in a lot of disadvantaged people, a lot of people who probably don't find life as easy as we do. And I think that they can make a tremendous difference there as well. So look, I'm proud to say that, you know, we've made a real difference with the green light charity. Yeah, and I hope to continue to do so over the coming years. 

Maggie: [00:26:17] Well, it's been fascinating to hear Phil's perspectives on not only investing, but also the business of funds management in Australia. It's particularly interesting to sort of hear as well, where people think the next ten years is heading, where in an ever changing world. And whilst we never have a crystal ball, it's fascinating to sort of here where people are starting to look for the decade ahead. Now let's get back to Charlie’s conversation and hear about Phil's investing approach, particularly when it comes to the fund that HM1 is invested in and that Phil oversees the Australian Long Short Fund. 

Charlie: [00:26:49] As you know, Hearts and Minds invest in the highest conviction recommendations of our managers. With Regal, we actually decided to go with your Australian long short fund within our portfolio. I think it makes perfect sense given how you manage money. How did that decision, how was it made between your sort of stable of funds?

Phil: [00:27:06] Yeah, good question, Charlie. And look, we're obviously very proud of the returns generated for Hearts and Minds over many years, but we felt like Hearts and Minds wasn't getting the full exposure to our returns because they had exposure to some of our investment ideas. But they were missing out on the exposure to our trading profits. And so we thought the best way for Hearts and Minds to invest was to invest in one of our funds. And our long short fund aims to outperform the ASX 300. It's done a great job of this into a set up about 15 years ago, just over half the returns that come from Beta, just under half the returns to come from Alpha. And so, it provides investors with great exposure of stock picking. And so I think it's a great initiative for Hearts and Minds, and I think it's working extremely well. 

Charlie: [00:27:55] Fantastic. And finally, to finish off this podcast, through our conversations with our partners, both scientists and fund managers, a common theme is always an innate sense of curiosity, which I can tell you you have Phil, do you want to share something with us today that's piqued your interest that's exciting you at the moment. 

Phil: [00:28:15] Look, obviously the biggest topic on everyone's minds at the moment is AI. And what does it mean for markets? What does it mean for our lives? And so that's something we're all grappling with. I had a bit of an earlier this year when I got one of the AI machines to write my wife a poem for Valentine's Day. I think she was quite chuffed, but she didn't quite believe that I wrote it and I couldn't kind of continue the lie, so I had to finish up pretty quickly. But it was it was good fun. And I think she was just still placed to receive a poem, which I don't think she's ever done before, but we're all kind of grappling with what AI does mean. Look, in some ways, AI is just an extension of quantitative investing, which has been occurring in the markets for many, many years. I think Jim Simons was at Renaissance was one of the pioneers. He set up that business something like 35 years ago and there's been some extreme, extremely good returns made by quantitative investors and fortunes made. And so there's always been a role for them. And AI just take that to another level. You know, machines can learn a lot quicker about what's actually working in markets and where the best returns are. So, you know, what does that mean for poor old fundamental guys like myself? Look, again, that's a bit like passive. I think, you know, there's always opportunities there for people and machines that look at things differently. But the problem is if there's too many of those investors, they can pay to the Y. And so if we have too many passive investors, then those returns are compared to the Y, and there's a room for active managers, and it's the same with AI. Great returns, possibly for the best AI machines. But if there's too many investors in the market, that's going to be good for active managers like Regal. And so to be an equity investor, you've always got to be optimistic. You gotta have hope. And certainly we have hope that they'll still be very good returns around every moment competing with iron. 

Charlie: [00:30:14] Absolutely. And thank you for that tip. I might give the poem writing a go myself, but most importantly, thank you for being here today and thank you for being a founding member of Hearts and Minds. Thank you for looking.

Phil: [00:30:25] Thank you, Charlie.