Premium China Funds Management: ESG and Asia - Oxymoron?

With ever-growing concerns over firms and their collective conscientiousness for social and environmental impact, investors are increasingly utilising environmental, social and corporate governance (ESG) principles to analyse the market. In this webinar, Frank Tsui (Head Of ESG Investment) from Value Partners will provide an update on our current approach of utilising ESG to find the best opportunities in these volatile markets. Joining Frank will be Jonathan Wu (Executive Director and Chief Investment Specialist) to provide an update on our Asian equity funds and markets.

ESG and Asia - Oxymoron? Webinar Details: Asian Equities - ESG Update with Frank Tsui Date: 20th October 2021 Time: 12:00pm - 1:00pm AEDT Click below to register for the webinar Register Now!

Speaker                                Frank Tsui  Senior Fund Manager - Head of ESG Investment  Value Partners Group ABOUT PREMIUM CHINA FUNDS MANAGEMENT Premium China Funds Management (PCFM) is a boutique funds management group providing specialist Asian equity and fixed-income funds to both Australian and New Zealand investors. Capturing the growing economies and influence of emerging Asia, PCFM has developed 3 actively managed funds - the Premium China Fund, Premium Asia Fund and Premium Asia Income Fund. The funds are managed by a large and experienced team with offices in Hong Kong, Shanghai, Singapore and Kuala Lumpur. The directors and investment managers of Premium and its fund offerings have extensive knowledge in Asian equity and credit markets, wealth management, and other financial services.

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Active dividend income after the pandemic:

From 'pub with no beer' to multi-year growth outlook

Michael Price, Ausbil Investment Management

The pandemic and the COVID sell-down, a potential nightmare scenario for income investors, has given us a real-life stress test in which some companies lost almost all revenue in a demand shock from which we are still unwinding. Michael Price, Portfolio Manager, Equity Income, answers your questions on how dividends changed in the pandemic, with some encouraging and valuable lessons on active dividend investing for the future.

Q: Give us the 'elevator pitch' on what is happening in ASX dividends.

A: In short and simple terms, the elevator pitch on dividends is as follows. The recent boom in resources as part of a mega-cycle in bulk and base metals, and battery materials has seen dividends from resources companies take share from the usually dominant banks. At the end of 2021, this expected to see resource dividends exceed bank dividend payments in 2021 and 2022, as illustrated in Chart 1.

Chart 1: Banks ceded their traditional dividend dominance in 2020 (% of market dividends paid)

Banks had a tough few years, and in the pandemic they had to cut (cancel in Westpac's case) dividends to help provision for potential bad and doubtful debts (which did not eventuate to anywhere near the level projected), as illustrated in Chart 2. The recent dividends show the switch to growth momentum in bank earnings as the economy surges.

Chart 2: Bank dividends took a hit, but they are coming back

Banks, resources companies and the broad market are now looking at multi-year earnings upgrades that we forecast will result in multi-year dividend upgrades. An active approach to dividends can optimise the opportunities this brings, including capturing more franking credits across the year from this fundamental earnings growth.

Q: What do dividends look like compared to the past?

A: The long-term average dividend yield for the S&P/ASX 200 over the last 20-years has been around 4% before adjusting for any franking credits. During this period, there have been two major dividend tail events. The first was the GFC, with COVID-19 the second, as illustrated in

Chart 3. Chart 3: Dividend yields set for a rerate

The GFC saw dividends per share fall some 30% as the world entered financial crisis, and the US suffered a major recession. Move forward a decade, and the pandemic of 2020 saw an even larger disruption, with dividends falling some 33% during COVID.

The nature of the pandemic, which for many companies involved seeing their revenue line almost instantaneously run dry like 'a pub with no beer', impacted payout ratios through companies retaining earnings to fund the impact of COVID. This saw a general re-basing of dividends across the market in effected stocks, including banks, where APRA determined that banks should pay smaller dividends and retain additional capital for the purposes of provisioning. Contactus@ ausbil.com.au 2 Bank dividends 30% fall in GFC 3

Q: Why are dividends complicated, what are some of the considerations for investors?

A: The old heuristics around which companies are income generators and who pays the best dividends are out the window as markets have become increasingly volatile, and many of the perennial 'dividend darlings' have been supplanted. An active approach to dividend investing is more important than ever, for a number of reasons. Firstly, dividends are paid almost every month of the year, as evidenced in Chart 4. A simple buy-and-hold strategy cannot maximise the spread of dividends and franking credits on offer across the calendar year.

Chart 4: An active dividend strategy can find more dividends and more franking credits for investors across the year

Secondly, stocks have become more volatile around reporting season, as illustrated in Chart 5. Understanding the underlying fundamentals of each company, and tactical allocation can help reduce the impact of this price volatility on overall portfolio value.

Chart 5: An active dividend income approach can help manage volatility around reporting

Q: So, what is your outlook for dividends in the coming years?

A: We are at an interesting point in time, where monetary policy has seen yields across non-equity asset classes fall dramatically to lows they are expected to hold for a number of years. Relative to bond, credit and cash yields, the yield on equities (excluding any potential from capital gains) is relatively higher, as illustrated in Chart 6. 

Chart 6: Investors continue to look to equity yields as an anchor for income strategies

While dividend yields fell away during the pandemic, they are showing recovery, as illustrated in Chart 6. Across 2020 and into early 2021, dividends across the year had fallen with lockdowns across Australia, and globally. The February 2021 half-year reporting season showed that company earnings were recovering on the back of a growing economy. As a result, the consensus outlook for dividends has also risen, showing growth not just for the coming year, but also into 2022 and 2023, as illustrated in Chart 7.

Chart 7: Recovery and a new dividend growth story

The two key sectors where we see the potential for earnings surprise are the banks and resources sectors. Banks, which offer primary exposure to a recovering economy, entered the pandemic after heavy barrage from the Hayne Inquiry and having already been sold down. The pandemic saw them sold down further on fears that the recession and COVID job losses would impact their lending books. All the banks provisioned majorly for the potential for credit loss, and APRA further enforced capital retention through limiting the dividends they were allowed to pay. Looking at the banks in the 2021 New Year, it was evident that the bad and doubtful debt experience was nowhere near predictions, and that the banks had over-provisioned for losses. With APRA allowing a return to more commercial dividend levels, and the economy resurging from the 2020 lows, we could see banks were in a position to reduce these provisions and grow their books further in a renewing real estate market. The result is that over the next few years, the unwind of this over-provisioning will see a rerating of earnings, ahead of the consensus expectation at the time we began up-weighting into banks.

Metals and mining are in the midst of two fundamental themes in global resources investing. The first is the super-cycle demand for Australia's bulk commodities including iron ore, from China in terms of building and infrastructure demand, and as a function of the growth path of the world economy. This theme is expected to drive earnings in companies like BHP, Rio Tinto and Fortescue Metals. The second is the fundamental shift in the energy transition to renewable energy, and the rapid adoption of electric vehicles, which is sparking a secular demand for bulk, base and battery materials (copper, lithium, cobalt, zinc, manganese and rare earths) that is expected to last for decades, underwriting the fundamentals of a strong resources market.

Ausbil has been overweight Banks and Resources (metals and mining) for some time. These overweights remain in place across our portfolios and have driven outperformance across our different strategies. Importantly, we are still in the early stages of the economic cycle, with a positive growth outlook for multiple years that is expected to drive performance in these megasectors.

Taking in the broader economic context, Ausbil's view is that economies will run 'hot' for some time, with the support of policymakers, and are delivering the best growth figures since 1983, across a multi-year growth profile. While inflation will remain an ongoing source of worry as the perennial flipside to growth, it is important to understand whether inflation spikes are intermittent or if they are moves to a higher sustained level. It is our view, and indeed that of most global central banks, that inflation will not be a problem for some years as the world economy returns to health.

Since the historic reversal in consensus across the February reporting season that saw the FY21 consensus earnings outlook for the broad market rebound from -1.6% to +15.6%, consensus earnings outlook for both indices has rerated to +22.5% (S&P/ASX 200) and +22.6% (S&P/ASX 300).

While these earnings figures are strong, Ausbil's house view is that consensus is still underestimating the rebound in earnings that will occur in the prevailing economic conditions, with rates to remain low, and with the world economy providing a tailwind to Australia's current expansion. This will only further benefit the dividend payers on the market, and most benefit investors who are able to actively allocate to the best blend of dividend and franking credits across the market, across each month of the year.

Funds operated by this manager:

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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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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.

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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.

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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.

Misunderstood Multiples

Amit Nath, Montaka Global Investments

September 2021

Funds operated by this manager:

Montaka Global 130/30 Fund, Montaka Global Fund, Montaka Global Long Only Fund

3 common features of inflation-proof businesses

Stephen Arnold, Aoris Investment Management

September 2021

Funds operated by this manager:

Aoris International Fund

Why have investors become theme junkies?

Andrew Macken, Montaka Global Investments

October 2021

Funds operated by this manager:

Montaka Global 130/30 Fund, Montaka Global Fund, Montaka Global Long Only Fund

Touch gives investors a slice of Afterpay talent

Graeme Carson, Cyan Investment Management

01 October 2021

"The next Afterpay" has to be a candidate for the most overused phrase in investment circles at the moment.

Companies and investors alike are finding comparisons to draw, growth ambitions to conquer and lofty pricing to justify, in the hope that they have uncovered the next global growth super start-up.

The APT story has been truly exceptional, driven by very talented individuals and superb execution of a clear strategy. When trying to find the next Afterpay, perhaps investing alongside the team at Afterpay is a good place to begin.

Touch Ventures (ASX:TVL) is an investment company that listed on the ASX on Wednesday 29 September.

It was founded in late 2019 and Afterpay, its largest shareholder, now owns about 24% through its wholly owned subsidiary Touchcorp - hence the name.

Touch's strategy is to own up to 10 material investments in unlisted companies that are truly scalable, operating in the retail innovation, consumer, finance and data segments.

These opportunities, into each of which Touch will initially invest $10-$25m with the aim of acquiring a 10%-40% non-controlling interest, will be identified by Touch Ventures' own management and investment team or referred by Afterpay through a formal collaboration agreement, which is in place until at least 2025.

To date, Touch has made 5 investments, 4 of which have been originated by Afterpay.

It appears this is the vehicle Afterpay has assembled to work with, invest in and add value to some of the best emerging businesses it finds as it works with retailers, consumers, investment banks, financial markets and investors around the globe.

Since Cyan first encountered this business just over a year ago, three things have caught our eye:

1. The team
2. The portfolio strategy
3. The portfolio

This is a winning team

By team, we mean everyone involved, including management, board, shareholders, investors and advisers.

The easy starting point was obviously Afterpay. Since we invested in that business at its initial public offering in 2016, it has become an international success story.

Afterpay has built a powerful position with the biggest players in the biggest markets in the world in retail, data and consumer finance. Not a bad potential investment partner!

The team within Touch, led by Hein Vogel, is also high-pedigree. Then there's the board and advisers, including Mike Jeffries and Hugh Robertson, both of whom have been directly involved in Afterpay since its unlisted days.

Touch looked compelling a year ago but then earlier this year a material investment from US firm Woodson Capital Management, now its second largest shareholder, and a board seat for the highly regarded Jim Davis offered further validation.

Follow that strategist

It's not easy to get exposure to a portfolio of high-growth, scalable, emerging businesses that have come from a reliable source.

This portfolio also comes with a shareholder that can enhance these businesses either directly within the Afterpay ecosystem, or by providing expertise and a supported pathway to scalability.

This is a unique opportunity to get a listed vehicle that offers liquidity while investing in emerging companies with exposures well beyond Australia's shores.

What's in the box

Since we first invested in Touch it has expanded its portfolio to 5 investee companies, deploying around $75m in invested capital.

This table from the recent prospectus shows the portfolio.

Source: Touch Ventures Prospectus

The portfolio is expected to grow to around 10 large holdings in the short to medium term, with potential for smaller investments (generally less than $2m each) in even earlier stage companies.

The next round of investments will be funded by the $100m raised through the IPO, in which all the larger existing shareholders invested.

Touch is a listed investment company. It aims to make money via growth in the value of its underlying investments rather than their revenue.

All investments are carried at their original entry-point valuation until there is a capitalisation event or very clear reason for a revaluation. The collective value of all the investments is the net asset value.

It's likely that the stock market will value Touch at a significant premium to its net asset value. The carrying value of these businesses is largely unchanged from Touch's entry point (Happay has been increased but offset by PlayTravel).

If I owned an emerging tech business and an Afterpay-led investment company took a stake, I would assume my business had been strongly validated and its value had just increased - and that's before any value my new share holders could add.

It's worth noting that at the price investors paid in the IPO, the company has the same valuation it had when Woodson Capital Management invested in February.

We think Touch Ventures is a unique vehicle and a compelling opportunity. It's also worth remembering that Square will be acquiring Afterpay early next year, which could lead to greater value creation for Touch shareholders.

Funds operated by this manager:

Webinar: Performance Update & Outlook

Friday, 8 October 2021 at 12:00PM AEST

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.

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