This week on Equity Mates

Hey there Equity Mate,

Last week was a week of records in markets - it pays to stay invested! Here are some headlines that caught our attention:

• Signs of slowing inflation pushed the US markets to record highs, with the Dow Jones, S&P500 and Nasdaq all hitting new heights last week

• The US consumer seems to be holding up okay. Walmart - America’s largest retailer - raised its forecast and beat market expectations with it’s latest quarterly results. It resulted in the sharpest single-day-gain for the stock since March 2020, with the stock hitting an all-time high.

• Despite repeated analysts suggesting Commonwealth Bank is overvalued, it hit a fresh record high of $122.55

• Reddit - which recently listed in the US - has struck a deal with OpenAI, allowing them to scrape the social media site for content for ChatGPT. Reddit has previously announced a similar deal with Alphabet to help train their AI models, reportedly worth $60m a year. This is good news for investors of Reddit, as they try to diversify their business beyond advertising revenue. Could be bad news for the quality of AI responses… tendies soon?

• Netflix has nearly doubled it’s users of their cheaper, ad-supported tier, with the company reporting it now has 40 million global active users. The stock is up nearly 250% from it’s fall, when they announced they were clamping down on password sharing.

With plenty happening in markets, make sure you’re listening to our two podcasts to keep up to date. Here’s what we’re releasing this week:

Equity Mates Investing (Spotify | Apple | YouTube)

• Monday - COVID stocks that haven't recovered (yet?), Pimp my portfolio & should I invest in gold?

• Tuesday - Buy or Sell: Roger Montgomery - Nick Scali, Megaport, NovoNordisk & more

• Thursday - Industry Deep Dive: Healthcare - Double the size of supermarkets, none of the hype

• Friday - Expert: Sam Gordon - How to find suburbs poised for growth

Get Started Investing (Spotify | Apple | YouTube)

• Tuesday - Introducing Pimp My Portfolio

• Friday - Superannuation: You’re Siting On A Monster | Anne Fuchs, Australian Retire ment Trust

Your questions, answered

Hugh asked via email:
“Who is the best small-cap manager in Australia and why? Or, should I just use a small-cap ETF?”

We put Hugh’s question to Luke Laretive, CEO & Investment Adviser at Seneca

Book a call with Luke and the team for investment advice.

I definitely wouldn’t use a small-cap ETF. The way the Small Ordinaries Index is constructed (it’s the ASX300 but excluding the ASX100, so company #101 to 300, by market cap) means that at the lower market cap end, fairly ordinary companies (no revenue, a lot of hype) are often included in the index. At the top end, those large caps that are permanently disrupted fall out of the top 100 and become heavy Small Ordinaries index weights.

Who is the best small-cap manager in Australia? Well, I’d argue that we are. But there are lots of other good managers too. It depends on what your definition of “best” is. The managers with the best historical returns and most clients/funds under management? Well, actually, the data shows that the bigger a small cap fund gets, the worse the performance gets – so the most well-known and “successful” small cap managers with the best historical returns are probably the worst place to invest your money.

In active management, outperformance is cyclical. Most quality fund managers have a distinct style or set of principles that sometimes cause underperformance, and at other times, this style generates amazing outperformance. It’s really the sum total of those periods, from the time you invest (not in the past!), to the time you realise your investment that matters.

When selecting a fund manager, you need to have a clear understanding of the drivers of outperformance and whether in the forward period, those drivers are likely to result in a period of above-average performance. This is the sort of work we do when selecting managers each month across our suite of managed accounts – hopefully resulting in our clients investing with managers who not only historically have generated outperformance, but are likely to continue to do so.

If you have a question you’d like answered, hit us up at [email protected] 

A word from this week’s sponsor, Australian Property Scout

The Scouting Australia Podcast is your go to platform for all the latest strategies and information for your success in property investing.

Hosted by Equity Mates regular property expert Sam Gordon. He unpacks everything from Real Life Investor Stories, Weekly Property News Bulletins, Investing Strategies and much more.

Listen in to The Scouting Australia Podcast on all your favourite listening platforms and start your property education journey.

What we’ve been reading

Elon Musk’s Neuralink has known about problems with its brain chip implant for years, report says

Last week, Neuralink disclosed that electrode-containing threads from its brain implant retracted from the brain of its first human patient. These threads are thinner than human hair and are used to record brain activity.

That in itself isn’t huge news. It was very unlikely that the first ever trial of Neuralink’s brain-computer interface would’ve worked perfectly. What is more concerning is a recent report that suggests Elon Musk’s company has known about this design flaw in its device for years.

Reuters has reported that both Neuralink and the US Food and Drug Administration were aware of the risk and decided to go ahead with human trials.

From all reports, there is no risk from these threads retracing. It just reduces the effectiveness of the device. And if enough threads retrace, the device may no longer work. This is the first blemish on what has been a pretty amazing human trial - 29-year-old quadriplegic Noland Arbaugh received the first implant in February and has been able to interact communicate through computers and play video games including Mario Kart, Civilization and chess.

Future participants in these human trials will want Neuralink to resolve this issue, and for the threads to stay connected longer than the 3 months Noland enjoyed.

Building embryos

When future generations look back at our current moment in history, what will we be remembered for? Undoubtedly Artificial Intelligence will be near the top of the list. Similarly, the world’s response (or lack of response) to climate change. But one that escapes our headlines today but will likely be equally as profound as these first two is the healthcare revolution underway.

Since scientists first mapped the human genome in 2003 (a project that took 13 years and cost $3 billion), we’ve seen accelerating breakthroughs in healthcare. It now costs about $600 and takes two weeks to map a genome, ushering in an era of personalised medicine. And technologies like CRISPR are offering more than just an understanding on the genome, they offer the opportunity to edit it (and all of the ethical questions that come with it).

That is just the start of a long list of medical breakthroughs that include AI-powered drug discovery, mRNA vaccines, GLP-1 drugs, 3D-printing organs - it truly is an amazing moment we are living through.

This article looks at another area of medicine where we have seen some incredible breakthroughs in the past few decades - developmental biology. All living organisms build themselves. We all start as embryos and it is our own cells that build our bodies. Developmental biology seeks to understand how.

This article takes us through the emerging knowledge of the past few decades. From IVF to stem cell therapy, there have been some amazing breakthroughs. But perhaps the most amazing is just emerging. In 2022, researchers were able to create their own embryos in a lab, introducing, in this article’s telling, “a period of tremendous excitement, but also upheaval”.