Idea Brunch with Wayne Jones of Ganes Capital Management
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Wayne Jones!
Wayne is currently the fund manager of Ganes Capital Management, a Brisbane, Australia-based fund he co-founded in 2002. Before launching Ganes Capital, Wayne held senior finance roles in the private healthcare sector for many years and was a freelance analyst for The Intelligent Investor covering small-caps. Today, Ganes Capital focuses on long-term value investing in small-cap Australian equities. Since inception in October 2002, the fund has compounded at 11.6% net of fees compared to 9.0% for the ASX300. A $100,000 investment in the fund at inception is now worth $1,015,600.
Wayne, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Ganes Capital Management?
Good morning Edwin, and thanks for having me. I studied to become an accountant and have always been interested in business and the sharemarket. I bought my first share while I was studying at university in the early 80s and invested, and I used the term ‘investing’ very loosely for 10 years, until I discovered Warren Buffett and Berkshire Hathaway in 1990 through a book called The Money Masters by John Train. As soon as I read that it was a light bulb moment that my accounting background and valuing businesses could go hand-in-hand and I started to experience much better results. I also started writing for The Intelligent Investor, an investment newsletter in Australia, and had an interest in a private hospital which was my principal source of income at the time.
Starting Ganes was an extension of my investing and we literally started it with $100,000 and went from there. This was a time in Australia when there was a plethora of boutique investment firms specializing in small-caps being established so Ganes was far from unique at the time.
Before becoming an equity portfolio manager, you had experience owning and acquiring healthcare companies. How has your experience as a business owner affected you as an investor?
The experience of undertaking acquisitions and operating businesses has helped with my investing in several ways. Firstly, having an operational role I appreciate how much culture and the strength of the management team matters to small companies. It Is fine for the CEO to have a strategy but if the company doesn’t have the team with the execution skills to implement it, then it will be just another PowerPoint presentation.
I also had the misfortune to work in, and own, a capital-intensive business so I have a real appreciation for businesses that throw off lots of cash and don’t throw up one problem after another to solve. It helped form my views around searching for quality businesses with a competitive advantage. Business is hard most of the time, it is not a graph that goes up and to the right easily or consistently.
And lastly, having been part of an acquisition team and having sold a couple of businesses I also have an appreciation that an owner is always at an informational advantage in the transaction and it is foolhardy to assume, or worse believe, you know more than they do. I try and dial back my expectations for the future because of this.
You may have seen a July 2020 study by Alta Fox Capital titled, “The Makings of a Multibagger.” On slide 8, they show a breakdown of “multibagger” small-cap stocks by country and found Australia, along with Germany and Norway, is one of the best countries for producing high-performing small-caps. Why is this and why is Australia a good place to invest today?
It is an interesting and complex question and would probably make a good PhD thesis for a bright young person! I have some personal ideas on why this is the case, but they are my personal opinion and they should be treated as such. Maybe for a complex question the best way to think about it is to invert the question and ask what would make for a miserable investing environment for smaller companies?
Firstly, I imagine you need a government that is corrupt and bureaucratic, taxes ownership heavily and mismanages the economy to the extent that recessions are a common feature of the landscape. Next, possibly an uneducated population and authorities wanting to exploit that to maintain a status quo. And lastly, dominant competitive nations sitting on your doorstep making it impossible to secure an advantage in any field.
Australia has avoided pretty much all these factors, mostly by design, but some by geographic luck, and Australia is a fairly young country in comparison to other parts of the world where there may be an entrenched status quo at play.
For example, it is relatively easy to establish a business here, we have an educated workforce, and our compulsory voting system means our major parties compete towards the middle of the mainstream spectrum, not to the extreme ends of it.
We are lucky with the vast natural resources we have that we haven’t had a recession for 30 years, even during the Global Financial Crisis, and the standard of living is high so most of the population can afford the goods and services that we produce.
But equally, we are small enough that I think many international companies in the past avoided entering Australia because the market was not large enough for them, allowing smaller companies some breathing space to get established.
Lastly, Australia hasn’t really embraced a venture capital industry so companies were almost forced to list on the ASX before they would have to in overseas markets if they wanted to access capital. This meant some companies were inappropriately listed and failed, but equally investors have had access to some very small companies from a very early stage that have gone on to experience huge success allowing them to earn 100-bagger status in the process.
One of my holdings, ARB Corporation (ASX: ARB — AUD$2.86 billion), would fall into this category. It listed in 1987 with a market capitalization of a few million dollars and now has a market capitalization of more than $ 2.5 billion.
You have a pretty diverse portfolio – ranging from a large pizza franchisor (ASX: DMP) to a small advanced cooling systems company (ASX: PWH). How are you able to come up with off-the-beaten-path ideas in an industry with so much groupthink?
This is a common question as many of the names I own are not household names. The first point to make is what I don’t do. And that is I don’t use screening tools or use a macro approach to find ideas. For example, car batteries are going to be big so I should be in lithium, or interest rates are going up so I should be out of consumer discretionary stocks. This may work for others, but it’s not my approach.
I am looking to invest for the long term in businesses that I understand with managers that I trust. The process is built around finding individual businesses that tick these boxes, so it’s very eclectic and a bottom-up approach. And I find the best place to find these ideas are usually in the same or adjacent industries to those businesses I already own. As a result, I am reading a lot in these areas.
Interestingly, last year I had this confirmed when I re-read Investing, the Last Liberal Art by Roger Hagstrom. In the book, Hagstrom quotes a study from Edward Thorndike that found that learning in one area of expertise does not facilitate learning in another area, rather learning is transferred only when the original and new situations have similar elements. Michael Jordan learned this very publicly when he moved from basketball to baseball.
It’s the existence of commonalities that improves our learning, not just learning new concepts. The punchline is that intelligence can therefore be viewed as a function of how many connections someone has learned.
Buffett calls this ‘expanding his circle of competence’, but I think of it more like someone doing a jigsaw. It is far easier and more effective to start in an area that I can understand and keep adding pieces to it than it is to work in different and unrelated pieces of the puzzle just because someone is suggesting I should, or because some shiny new thing catches my eye.
Sticking to companies that look similar to existing businesses I own has important and lasting benefits because good businesses tend to have similar characteristics that you start to recognize and can act upon with some level of confidence.
And this is how it has worked out in the fund and its portfolio construction. I own PWR Holdings (ASX: PWR — AUD$1.06 billion) because I had already owned ARB Corporation for the previous decade. They are not exactly the same, but they have very similar characteristics. Similarly, I added PSC Insurance (ASX: PSI — AUD$1.75 billion) because I had also owned AUB Group for a decade. And finally, owning Domino’s Pizza contributed significantly to understanding Lovisa (ASX: LOV — AUD$2.54 billion) when I added it to the portfolio.
So you can start to see that the companies, particularly the larger investments, are not unrelated decisions based upon a theory of how I see or predict the world, but are individual decisions based on accumulated knowledge built up over years within the portfolio.