Munro equity partner and portfolio manager Qiao Ma is bullish despite the current global turmoil. She talks to Stewart Hawkins about the paradigm shift that is AI, why small-and mid-cap stocks can be like picking up billion-dollar bills off the pavement, and tells the tale of the two “great beasts wrestling each other” to shift the current market direction.
What are your long-term fundamentals?
There are hundreds of ways of making money out of the stock market. But the trick is to work out what works for your personal temperament and your intellectual curiosity. My personality leads to growth investing. A simple test score is if you see a line around the block, like people lining up outside a shop.
There are two types of people. There’s the type that walks past and sneers at it, which is like my dad, and there’s a type that will join the line no matter what.
I am that type. When there’s a line, that means there’s something that captures people’s imagination, desire, or something. In growth investing, I’m focusing on what changes. If nothing changes, then there’s no growth. What I’m most excited about are the structural changes, if something is changing forever and is changing on a big scale and going to change no matter what the interest rate’s going to be, what the GDP is going to be tomorrow.
We are doing something new as human beings. This could be, ‘Hey guys, we are all getting a smart phone.’ Or we are not using cash anymore, so some of these fundamental long-term behavioural changes tend to cause the long-term structural changes.
Once you find a structural change, it doesn’t mean every single stock in that structural change is going to be a winning stock. You have to have a process. We’re looking for stocks that are not just a story stock, not a hype stock. We’re looking for stuff that can double earnings in five years.
How is the world different now from five to 10 years ago? What have been the structural changes?
The structural change is loud and clear: artificial intelligence. The adoption of this new technology is so much quicker than anything we’ve seen. It took the world roughly a century for a billion people to be hooked up to a fixed-line telephone.
Personal computers took about 25 to 30 years to reach a billion people. The internet took about a decade. AI took less than two years. There is also an argument for saying the billion people using AI are far more engaged and using it in a far more intensive way than when grandma first picked up her telephone.
What’s been the paradigm shift?
AI is now a producing intelligence.
Our job is to produce long-term superior returns for our investors, and AI is helping us do that. It’s not helping Qiao do research. It’s helping [the firm] generate return.
It hasn’t gotten to the point that it’s going to replace me yet, but it’s already made me far more effective at producing that return, and it’s already replacing a part of the job that the analyst is doing because it’s basically skipping the human part. It goes straight to output. AI is now different because it’s not a web-based tool. It’s actually not a tool at all. It’s a factory producing intelligence.
It’s generating its own information already. The vast majority of the data that we generate in the world, like 99.99%, is actually generated by computers.
It used to be that if you had a self-driving car, for that car to understand how to drive autonomously, it had to observe human behaviour. It had to sit there for miles and miles to learn. Now, what the computer is doing is simulating situations; it no longer needs to sit there and watch how you and I drive.
It simulates 10 billion people driving on the road, driving in different kinds of situations and computes to the final node [how] the car should respond. It’s generating its own data, and it trains itself on that data.
What are the dangers and opportunities emerging across markets?
We’re at a particularly interesting point, which I haven’t seen in 20 years. There are two great beasts wrestling each other, and then depending on which beast comes out on top, the market moves a hundred basis points on a single day, one way or the other.
One [beast] is the fastest, biggest structural change we have seen in possibly three to five decades -that’s really artificial intelligence. You are looking at a steep change in demand across multiple massive industries.
And then you have the [other beast, the] biggest macro geopolitical issue, one of the biggest active wars that we [have] engaged in in decades, which has far-reaching implications on interest rates, on energy prices, on the entire supply chain.
Ultimately, you have a macro headwind with a structural tailwind.
Is that a recipe for a tornado?
This is how they are wrestling, and you have to answer a simple, fundamental question, which determines if you are a bear or bull on the market: which one do you think is going to win? One side is going to win, and the market is going to trade accordingly.
To us, ultimately, one way or the other, wars end. Structural change, by definition, compounds. What’s fascinating [recently] is if you read a newspaper article, things got so bad, yet the market refused to go down. You’ve got to ask, why?
The reason is that under the hood, under all these newspaper headlines, the AI adoption around the world, across all businesses, is going vertical.
Yes, the macro stuff could flare up, could be quite scary, it could roar, it could dominate the newspaper headlines, but eventually that structural change is going to win, and that sort of determines where I’m putting my money.
Even beyond AI, the US is starting to see real acceleration in infrastructure investments. We are investing in companies that build roads, companies that build hospitals, and build schools, and all of them are seeing real earnings re-acceleration here and now, not something that we are hoping the policy might or might not bring.
When we’re thinking about climate, we’re really focusing on the new power generation to support all this infrastructure build-out because you can’t do any of the things I just talked about with no power. That was the real bottleneck holding back a lot of this infrastructure investment.
What does all the noise in the energy space at the moment mean for the renewable sector, and what do you call climate investing?
We define the climate space as anything that takes carbon out of energy. Clean energy is one sub-sector of that. It could be energy efficiency. That also takes carbon out of the world. It could be the circular economy.
We started a climate fund roughly five years ago, and it’s literally the top-performing climate fund in the country, and this is through a Republican presidency.
This is all done through earnings growth, which comes back to single-stock picking. Having a trend is not enough. We also realise that, on top of the moral and environmental reasons to take carbon out, we also realise we’re just running out of energy and running out of power as a world.
All of a sudden, the shortage is forcing efficiency.
The shortage is forcing the build out of the lowest cost of energy, [clean energy], especially solar, which is simply just the cheapest form of energy generation. This is why oil companies in Texas, until the Trump administration’s recent deal to put the brakes on, were building wind farms: the energy was cheaper.
Correct. For economic reasons. And frankly, we like it more. We almost like it more than just the policy reasons, because you can see policies change, companies’ net-zero targets could change, but if you are building wind farms and solar plants for economic reasons, well, capitalism and profit-seeking motives are far more sustainable.
You say that picking small caps was “like picking $5 bills off the street”. Do you still feel that way? What are the opportunity differences between small, mid, and large-cap stocks?”
I still feel that way. Sometimes, I feel like it’s a billion-dollar bill lying on the ground. I’ll take that one! Give me a forklift.
If we take a step back, we started a small mid-cap fund almost three years ago. We’ve more than doubled our clients’ money since, but if you peel back the reason you come back to we are structural growth investors at the end of the day.
Yes, I run a small mid-cap fund, but I’m a growth investor first and foremost.
We started the small mid-cap fund to find the best up-and-coming companies in the structural change we understand, are excited about, and have already invested behind on the large-cap side. That’s really the secret to the hit rate.
If you take all the things we’ve learned investing in NVIDIA over the past decade and say, ‘I’m going to go down the S-curve of innovation to find the small and mid-cap semiconductor companies that are going to benefit the most, knowing what we know about the NVIDIA roadmap, immediately you filter out 95% of small mid-cap, semiconductors – but a small handful of companies we did find, we said, ‘You are going to be part of it in a really big way.’ We just went in.
Were they cheap, too?
They’re cheap, they’re overlooked, and we don’t need to go very far. We don’t need to go to the speculative stocks. Every single stock we hold in a small mid-cap fund from day one was profitable.
They all generate positive free cash flow. They have an average 10-year track record, and they’re in the structural change that we have identified. They have a strong tailwind behind their back.
If you just buy the S&P, you buy the top seven and eight tech companies, and you do really well. [But] the conventional wisdom is wrong. The conventional wisdom says you’re small, therefore you have more room to grow.
Well, in most of the technology areas, that’s wrong. A small mid-cap internet company very rarely outgrows Facebook and Google because these are winner-take-all companies; your size is a decisive scale advantage.
Then we say, ‘You know what?’ In most of the industries, these large companies are extremely well run, and they have the industry in lockdown. They lock down the supply chain, the customers and the traffic. As a small mid-cap company, just because you’re small doesn’t actually mean you’re going to grow faster at all.
They have an advantage when there is a massive change in the industry. Suddenly, you and I are no longer the portal where internet traffic starts. It used to be that unless a human opened a browser, there was no internet traffic. Now, AI agents are consuming a hundred times more internet traffic.
Are they sometimes well placed to create the picks and shovels?
Exactly. But you need the gold rush. You need the boom for the picks and shovels to really benefit.
Small mid-cap companies are exciting only when you can identify what’s disrupting the existing industry dynamic and holding the big guys back.
We’re looking for the future mega caps.
In the age of increasing reliance on ETFs and thematic and passive investing, how do you go about stock picking?
In general we follow our own philosophy, identify the structural change, find stocks that double earnings in five years and manage it when we’re wrong. We have a stringent risk management system.
We ask a very different question than most investors. Most investors, in some ways, have a grid line of the world in terms of industry and geography. ‘I want to allocate more to emerging markets,’ or ‘I want to allocate more to industrials’. We ask a very different question. We say, ‘Okay, what is the change?’
Have you ever got it horribly wrong?
Yes, all the time. I’ll tell you one of the insights. I believe that most stocks don’t work out. Most stocks that come across my desk are losers. The data will back you up, but you will be really surprised by how many stock pickers end up in a losing trade that they know about and refuse to give up. I acknowledge that I’m often wrong.
I also acknowledge that because our traffic in growth stocks, when I’m wrong, the stock could have an spectacular decline. What do you do? You have to have a really disciplined process.
When a stock declines 20% for whatever reason, it’s not an automatic stop loss, but it’s a trigger. Within a week, any stock that triggers has to be presented in front of the entire team and basically re-pitched every element of that investment thesis, every line of math gets re-examined as if this were a new stock and only when the entire team unanimously agrees to keep the stock, do we keep the stock for a short period of time and we don’t add to the stock when it’s triggering. When you have one dissenting voice, we are committed to selling the stock, and that has saved me over and over again.
It’s a lack of hubris, really, isn’t it?
Yeah, it is humility. It’s a deep humility.
Let me open my mind to the odds that I’m wrong. That’s the number one thing you’ve got to admit to yourself. And two is, let me bring the whole team in. Let me not hide behind my mistakes. Let me pitch it in front of everybody, and the last thing is let me do it on a timely basis. Don’t keep your head in the sand like a turkey.
Onshore or offshore, do you have a preference?
We don’t look at Australian stocks that much. Not that many Australian companies actually participate in this really big structural change. We can find things overseas that tend to be a lot cheaper and set up in the same trend. You just have a little bit better bang for your buck. We don’t own Australian stocks, but if I were an Australian domestic holder, I would find stuff that benefits from AI.
You’re bullish on the market overall, but what’s your doomsday scenario?
If we find that AI is useless and makes lots of mistakes, and we don’t want to use it, and it stops the AI build-out.
Do you think that’s even possible now?
The empirical evidence suggests no. Everything is pointing to people using it a lot more. That’s why we’re bullish, but if we start to see pauses in AI build-out and AI adoption, or some constraint comes out that is so severe, that will probably change our market view.
What keeps you awake at night?
To be wrong on a single stock and given how often we are wrong, I worry about it a lot. You worry about your math, your research and your data points. What we’ve concluded is that the single stock ideas are the biggest risk that tend to cost permanent, irrevocable loss of capital.
What’s your best piece of advice?
Focus on the earnings. The sentiment is all over the place. The headlines are all over the place. Corporate earnings are accelerating, and in the longer term, earnings drive stock prices.
This article represents the views only of the subject and should not be regarded as the provision of advice of any nature from Forbes Australia. The article is intended to provide general information only and does not take into account your individual objectives, financial situation or needs. Past performance is not necessarily indicative of future performance. You should seek independent financial and tax advice before making any decision based on this information, the views or information expressed in this article.
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