James Abela: Covering small companies for over 20 years of my life I have found that there are, what you call, the pillars of success. So, I call that viability, sustainability and credibility. So, viability is really about the returns on capital, how higher those returns, how volatile those returns. Really, it all comes down to returns. The second one is really about sustainability, which is about duration, how long that return reality lasts for, is it 1 year, is it 10 years or is it, like, 99 years, like an airport lease or something like that. So, that's really about sustainability, which is about balance of power, pricing power, cash generation, organic or acquired growth. So, that's really about sustainability. And then credibility for me is really about sort of trust, your ability to trust the accounts, your ability to trust management and that credibility score is typically where the disasters – you can start to say the disaster, there's cracks appearing in a story or a business model you will start to see on the credibility end.

Overall, in the portfolio structure, it's really analyzed, and risk managed by, what I call, QMTV, so quality, momentum, transition and value. And that's where you look at the stocks in a portfolio context. That's really looking at where the risks will come from. So, quality, I call the love quadrant; momentum is kind of like the night club or what's hot is consensus; transition is really no man's land, it's sort of the in between; and then, value is really out of favor neglected environment. I think you can find opportunities in each of those environments, but you need to look for different things at different points of the cycle in those environments and that's really how I do manage risk.

So, if I just go through quickly, value is you want to find – if you are an articulate pessimist, you want to find things that have good free cash flow yield, no balance sheet issues, no credibility issues and they are quite clean companies, just very out of favor. So, neglected but out of favor. And if you are an articulate pessimist, you can see opportunity in holding those. So, Qantas, for example, was a big one that the fund did very well in, bought that under about a $1 and it subsequently went to $4 before it went out of the index. So, that's a four bagger from a value situation.

Transition is, as I said, the no man's land. So, value tends to come through transition where there's either a catalyst, there's a definite plan. So, Qantas, for example, Alan Joyce had a plan. There was cost cutting; there was streamlining of the fleet; there was an attitude to significantly improve the service level and that really moved it away from being value to being, what I call, transition. So, it's moving out of this kind of neglected environment to having milestones and actual active management changes in place to move it out of that value space. And then you really had for Qantas the oil price fell and earnings upgrades, you had cost cutting upgrades, you had a fee coming out of the stock as those milestones and plans did actually become executed. So, it went from $1 to effectively $2 and then from $2 up to $4 when it got into momentum.

Momentum, as I mentioned, is the night club segment. It's where things are hot; it's where things are cool; it's really consensus is very happy and very comfortable. So, earnings are going up, risks going down, multiples are expanding, and the markets are moving towards those stocks. But they are short duration. So, cyclicals typically go through these value, transition, momentum cycle.

On the other side, you've got quality businesses which are, what I call, the love quadrant. They are beautiful businesses which from a business perspective, they are the classic things you want to own. High ROE, strong sustainability, strong management, long duration, structural winners, typically in healthcare and technology. That's where you find those structural long-term winners. And they can be 5, 10, 15-year stories and they are the stocks that I do spend my life trying to find that you go from small-cap to mid-cap and mid-cap to large-cap over a 10-year period, and that's a phenomenal return.

It's really psychology, human psychology and psychology of accounting and mathematics and multiples and returns. It all fixed together very neatly in my experience because the paradigm of what you think about and what you look at is blinded by, kind of, where you are, and I think of these journeys as kind of little jungles. So, love jungle is very comforting but the downside of that is you get very complacent, complacent of valuation, complacent of competition, complacent at things are changing and that's where your risk is. Momentum is, like I said, the night club. So, your risks are that you are in the middle of a herd or in the middle of the night club. And so, the lights go on or you stop drinking the Kool-Aid. You don't realize it until it's too late. So, you need to be very, very self-aware in that momentum jungle.

Then transition is no man's land. You are going to be very uncomfortable. You are going to see milestones, but you are not going to have consensus on your side. So, you are doing things that are out of favor, but management are doing things that you can see and touch and feel and earnings are improving. So, you should feel comfortable, but you don't have consensus behind you. And then value is even a far more riskier in terms of it's vary against consensus and you need to think about balance sheets and bankruptcy risk and is this business broken. And that's really the value jungle, I guess. And these are four, I guess, environments where the opportunity of why you win and then the opportunity of the risk is really driven by where you are in that journey. And the journey changes, so you need to sort of change your paradigm of thinking it goes through this journey.