Peter Morgan: History is rhyming (and it could be bad for stocks)

Matthew Kidman

Centennial Asset Management

In this final episode of Success and More Interesting Stuff, we turn back the clock and talk to legendary fund manager Peter Morgan.

Peter was a 'master of the market' in the 1990s at the helm of Perpetual Investments. When he left in 2002, the group was managing about $12 billion and was outperforming the market year after year, notching up returns of more than 14% per annum.

Peter and Warwick Negus went on to turn heads with their boutique venture 452 Capital. But about a decade ago, doctors diagnosed brain cancer and gave Peter less than a year to live.

Although this diagnosis eventually proved incorrect (though not before an intensive round of chemo), his time as a professional money manager was over. He still avidly watches global markets, but with only his own funds on the line. Nonetheless, he thinks experience has made him an even better investor these days.

In this episode Peter talks about learning from the 1987 sharemarket crash and the dotcom bubble. He looks with the discipline of an ex-auditor at modern reporting metrics and shares his conviction that Australia's culture of regular dividends might be holding us back, closing with a timely challenge for domestic enterprises.


Edited transcript

Matthew Kidman

Peter "Grumpy" Morgan was a master of the market in the 1990s. He sat at the helm of Perpetual Investments, presiding over strong performance and billions of inflows. By the time he left the group in 2002, Perpetual had around $12 billion under management and a reputation as one of the most astute managers on the street.

Perpetual comfortably outperformed the market, notching up returns of more than 14% per annum during this period. Morgan then struck out on his own, forming 452 Capital with Warwick Negus.

Once again, Peter was instrumental in building a booming funds management business as the share market recovered from the tech wreck of the early 2000s.

In the end, Morgan, incorrectly diagnosed with cancer, walked away from 452 Capital and the public limelight, deciding that managing his own money was the preferred option.

During his 20 year tenure at the top of the funds management game in Australia, Morgan built a fearsome reputation as a unique value investor, willing to take on any company and any underperforming management and board in the country.

At the same time, Morgan garnered the nickname Grumpy, referring to his phone manner most brokers and analysts encountered over the years. The endearing term hardly describes the individual, who is always keen for a chat and is generous with his time.

Grumpy is still a keen follower of markets and occasionally makes a public appearance to express his views on the lay of the land. Morgan comes from a private school background, but has the personality of a streetwise brawler who likes to get his hands dirty when it comes to investing.

I first met Peter in the mid 1990s when I was a journalist at the Sydney Morning Herald. He interviewed me for a job as a resources analyst at Perpetual, and correctly gave the position to another candidate. Hi, Pete. Not sure whether you remember that day when you interviewed me.

Peter Morgan

I sure don't.

Matthew Kidman

I think you gave it to Rex Adams. Does that sound right?

Peter Morgan

I'd better stay away from that! Yeah, we weren't really good at resources in those days. We had the industrial team. That's true, mate.

Matthew Kidman

I think you said the same thing then. I thought, "I don't know if I can do this job," so I'm glad you said no at the time, and it all worked out okay in the end. So thanks for coming in today. It's good to see you after a while.

Why don't we start with your dad? He came from Queensland, ended up in Sydney. Ended up in real estate, correct me if I'm wrong, but this is my understanding.

Did quite well and retired early, but for some reason you didn't take his lead. Real estate in Sydney has got to be one of the best investments ever. What happened there?

Peter Morgan

Oh, well, I think you've got to put a little bit more history into that. My mum and dad got married and had me at a ridiculous age compared to today. I was born when my mum was 18 and my dad was 23. And they had no money. They had no money.

You say I came from a private school. I grew up with an early, I mean this sincerely, an early memory of a big bloke coming around a Saturday morning when I was about three or four to collect the rent and basically bashing the door down.

I suppose as time went on, they had to survive. My dad started in real estate and made that a success.

I watched them go from a one-bedroom apartment that they were renting to a house they were renting, to buying a house, and I watched my dad slowly succeed. I don't know why, I was young enough to watch that success and go with it, that I always wanted to be successful, but I wanted to do it on my own.

I had no idea, basically until I got to Perpetual, how I'd do it. But I had to find my own thing. I didn't want to take the route of being handed a real estate business or going to real estate just because my dad did it. I had to have something independent. So I don't know why, I just did it.

Matthew Kidman

Conversations in those early days as you grew up, around the kitchen table, in the lounge room, wherever, was there a lot of talk about business and money? Because it sounded like your dad had some objectives and he played them out and did quite well.

Peter Morgan

Yeah, I think he was a bit like myself. He was very quiet, but when he said something, I always respected what he said. I can still remember driving through, him taking me to school at primary school very early on, in through Cremorne (on the north shore of Sydney Harbour).

The first units had just gone up and he said, "Look at those units. One day they'll be all over Sydney." His mates had built these units, which are actually quite nice units and have stood the test of time. But they were the first units really to go into that area. He was right with regards to it.

I watched him go from having to rent a place to buying a townhouse to then eventually ending up in Mosman in 1972 and buying a place there for, I think from memory, for under $100,000 or $70,000 or something like that.

In those days in Mosman, it was completely different to what it is today. I can still remember there was a park across the road and one day, just after moving in, we got 20 from around the street to come down and play cricket in the park across the road. Try and do that today, or even get five to play a cricket game as neighbours that you'd never met, it's just not doable for whatever reason.

Matthew Kidman

So his property business was about development? Is that where he made his money?

Peter Morgan

No, it was real estate. It was a pure old real estate business.

Matthew Kidman

He was broking?

Peter Morgan

He was a real estate agent that worked for a guy called Peter Hill, that coincidentally used to own a lot of race horses. We'd go out and watch the race horses run. He took a liking to my dad, I think.

Put that again in context, he's working six days a week, he was going to council meetings on a Tuesday night to learn about what was going on in the property market basically, and what developments were going in. And he was doing most of his work on a Saturday. Then sometimes I'd go and watch him in the office and that sort of stuff.

Matthew Kidman

Curiosity seems to be the key. He was curious.

Peter Morgan

Well, it was more his success. If you see someone go from nothing to being successful and he's your father and you respect what he's saying, it just influenced you. It influenced me.

Obviously I went to a private school after, it was part of that process, which again is part of the story, I suppose, of that success. But I went to a very big private school. I was just one of the numbers there.

It wasn't a great school, to be honest with you, looking back on it. There was a lot of bullying and a lot of other stuff going on. But there again, trying to stay away from all that, I still wanted to try and prove myself.

I said, "One day I'm going to beat you guys." The guys at Scots, and that sort of stuff. Shouldn't mention that, but anyway.

Matthew Kidman

Nothing like a bit of healthy competition. You moved and eventually you went into accounting and then you went into broking eventually, a bit like your dad was an agent for real estate. Broking, did that suit your personality?

Peter Morgan

No. Couldn't sell to save my dog or my mother. I was hopeless at it. Unless I liked what I was selling, I just couldn't spin anything, I was hopeless.

Going back through accounting, that was a hard slog in the sense that I didn't really like uni. I got through it, but basically all the way through from school, I was just trying to keep my options open.

I wanted to make some money and be independent. I think, as we've talked about before, I went from a chartered accounting firm to BT as an internal auditor, just basically to get to New York.

Matthew Kidman

What was the attraction there?

Peter Morgan

Well, just to get to New York. I just wanted to travel. BT at the time was effectively partly owned out of New York by Bankers Trust. I took that job, and it was in the glory days of BT.

I was running around auditing, basically these young guys and girls that were basically taking on the Australian financial markets, the incumbent banks and life offices.

It just opened my eyes up to financial markets. BT, in only the 18 months I was there, I think grew from about 350 to 500 and was still growing.

Matthew Kidman

They were the Macquarie of the day almost, weren't they? They were the benchmark.

Peter Morgan

Yeah, they were. Look at the guys that were there, Chris Corrigan, Jillian Broadbent, Peter Warne, Kerr Nielson was there. Olev Rahn was there. But they all went on to other things as well when it folded for whatever reason.

I can remember I used to have my little audit office. It wasn't a little office, it was quite a good office, opposite the boardroom at BT, and Rob Ferguson would turn up and Jillian would turn up and the whole management team would turn up every Monday morning at about 9:00 to go through where the lending exposures were.

It was a pretty clean book. I just used to watch them, just go in there. I couldn't imagine some of the major trading banks doing it because they all had exposure to Alan Bond and all that sort of thing at the time, and BT didn't have any of that.

As you remember, they had the big bet, the big put bet, against Robert Holmes a Court, and the '87 sharemarket crash came along. They were in swaps ahead of their time. They were in currency trading and all this sort of stuff. It was just exciting.

Matthew Kidman

So from there, that opened your eyes up. You go into a stock broking role.

Peter Morgan

Yeah. I'm sitting in the office one day and I'm looking at the ads in the paper. There's a small ad in the Sydney Morning Herald to join Valder Elmslie. I'm trying to find the next BT basically, because this one's moved.

So I get the job at Valders and go into stock broking in June '87. To his credit, the bloke that interviewed me said, "I don't know when this market stops, but one day it will stop." Well, it stopped in September '87. I can still remember that day.

Matthew Kidman

It's interesting you say September. For those who went through it, September was the peak and it had already trailed off. It was October when the obvious crash came.

Peter Morgan

Yeah, it was.

Matthew Kidman

But the writing was on the wall for little while.

Peter Morgan

It was. Even in those early days, I was doing a lot of the German accounts and just putting their orders on. They're all trading in these speccy mining stocks, a little bit like today in some way. Climax Mining and little oil companies coming out of Germany.

There were some big orders, but I can remember the October crash. The telex order that came in, and remember, we're talking about telexes coming in overnight there, not the internet. It stretched up and back the dealing desk. It was all sells.

It just was bizarre. I remember the guy that I was talking to in Germany saying, "We won't have a job next week," and that was the introduction to it.

Matthew Kidman

'87 doesn't seem to leave the people who went through it. We've been through a lot of ups and downs in the market since. The ghosts of '87 rattled pretty hard through the house.

Peter Morgan

Well, that does. And also "the recession we had to have". To be honest with you, I think that does taint you a bit. It did taint me for a long while.

We'll get to Anton Tagliaferro and the other guys soon, but it tainted them as well. Even though we didn't know it at the time, it was a little bit of a handicap in the sense we hadn't seen markets coming out the other side.

Matthew Kidman

I remember you said something interesting to us years ago in a different interview. You said when you did move to funds management, the old guys said, "Well, they've been through the recession."

It was always going to be hard. You were turning over — you and Anton and John Murray and these guys at Perpetual when you moved there — every rock you looked under, there was something to be found.

You needed fresh faces and fresh ideas because the guys who had been through it were tainted. They couldn't really see the way forward, but fresh set of eyes could.

Peter Morgan

What effectively happened at Perpetual is that there was a group of guys and girls, and I don't know why they left, but they left not long after '87.

But they'd left this portfolio that had stood the test of time through '87 and into the recession we had to have. Bruce Robertson was there. You know Bruce, and Amanda Miller, and a guy called Tony Scenna. And they left this portfolio. I've never really spoken to Tony about what went on, but they left.

Anton Tagliaferro went in and he was left with his portfolio. It had all these great old Australian companies, companies that were to all intents and purposes great companies, but they were somewhat illiquid.

So the brokers wouldn't talk to Perpetual, not only because didn't have a lot of money to invest, but because there was no liquidity in the stocks. But they were some of the greatest companies Australia's ever had.

Peter Morgan

That basically formed the basis for the way we approached investing. What did those companies have in terms of characteristics? There was basically four of them at the time. They all had a conservative balance sheet.

They all had a business that we could understand and it stood through cycles. Also, they had a management team or a group that seemed pretty dedicated to the business.

There was none of this corporate governance and stacking boards just to make it look good on paper. These companies, a lot of them had owner wealth in them. They were just great companies.

I'll reflect back on it when I'm trying to find good companies today. In those days, it was probably, I don't know, 100 of them. Today, it's lucky to find four or five that are even close to being like what those companies were. They've all been taken over.

As I said, that formed the basis. Companies like Allgas Energy, Australian Chemical Holdings, Gibson Chemicals, all the way down to Wattle Paints, George Weston Foods, Reece was there.

Matthew Kidman

So in that time you had obviously some great mentors, the great Anton Tagliaferro who you know well and I know well. He's a unique character and he still beats the path. John Murray, who's gone on to extraordinary success.

What was interesting in my eyes was obviously you formed a great team and you had these gems in the portfolio and you were set up to a degree. But how did it grow? It wasn't a big business. It was $70 or $80, maybe $100 million.

What was the success about getting attention? Was there someone within the group who was just a great salesperson, a great communicator? Was that John? Was it Anton? Was it yourself? Because it took off incredibly over the next decade.

Peter Morgan

Oh, it took a while, to be honest. We were in that '91, '92 period. But going back one step from that, at the time, there was probably 20 fund managers around and five or six of those had been blown out of the water.

Matthew Kidman

In '87?

Peter Morgan

In '87, and going into 1991. Superannuation hadn't really started. Everyone at the time wanted to be a stockbroker, and there was 250 stock brokers out there and, as I said, about 20 fund managers. No one wanted to be a fund manager because there was more money in stock broking.

We started there, and Anton gave them the opportunity to go up there in the real early 1990s, John Murray was there. We were all chartered accountants. Even the others we had around us were all trying to survive.

There was bonuses in those days. I can still remember one of the guys above us saying, "Fund managers are a dime a dozen. This recession doesn't end, you probably won't be here again. That the same thing had happened before. That we won't won't have our job."

For a long time there, we didn't think we'd have a job. But you talk about Anton, and Anton's greatest asset is his passion. It's infectious.

Matthew Kidman

He presents that way.

Peter Morgan

But he's always been like that. Maybe that's his European background.

Matthew Kidman

His high-pitched voice. He's engaging.

Peter Morgan

But it's more than that. Everywhere you look today, everyone's talking about teams. If you haven't got a guy that can lead with passion, it's not much use having a team. You can fluff it up whichever way you like.

But I'll give you one example, which I was thinking about the other night before I was coming in here. This is in the very early days. I still remember the stock exchange floor still existed. There was a viewing gallery.

The big players in the market, such as AMP, National Mutual, CBA, they all had their broker panels. They're all being taken out to lunch and wined and dined by brokers wanting to get on the panel.

Anton would spend some of his lunch times just wandering down to the gallery at the stock exchange, getting a feel for what was going on. Probably talking to himself, making friends with all the characters down there.

I can distinctly remember him coming back one lunchtime. In those days, he was the only one with an office and I had a desk outside the office. I said, "Oh, what's going on, Anton?" He rapped his knuckles on the desk and said, "Billy the Bear says we should be buying Fleetwood."

The romance of just hearing a guy called Billy the Bear making a recommendation. I can imagine Anton's just down on the trading floor saying, "Look at MIM, what a dog." This bloke standing next to him suddenly starts a conversation with him called Billy the Bear.

So Anton says, "Get it up, get it up, Pete, on the screen." Well, I don't think it was the screen. "Look it up." So we looked it up. Fleetwood at the time was trading at four cents. I think the NTA (net tangible assets) was double that, and it was worth about $6 million. He goes, "What do you think?

I think, "Well, I don't think we're getting into too much trouble with it." It was too small for funds. So I said, "Why don't we just buy some for ourselves and just have a look at it?"

So I bought, I think at the time, 40,000 at four cents and Anton bought double that, 80,000 at four cents. It took maybe a year for it to double and triple. So I'm out on the triple. Anton's out on the quadruple. Today, where is Fleetwood? $4.

Matthew Kidman

It did go much higher than that.

Peter Morgan

Oh, where it went, I don't know. I just try not to look when you're out at 16 cents, having been in there at four cents. There's been plenty of those, but it was more an example of the passion.

Anton was very loyal and you knew you could say something to him and you would respect what he said. But he always had your back. John was much the same. John was a little bit different. John was better at the selling side, but we all came together.

From that John Sevior joined, Matt Williams joined, Paul Skamvougeras came along as well. And others. Amy Somes, Karen Towle. I often think back, I just go back for the laughs, to be honest with you. But it was fun.

Matthew Kidman

So Anton, I think left in about '94. Went down to Melbourne, went down to County Natwest. At that stage, obviously you were taking more of a senior role. Now let's get the elephant out of the room. Grumpy. You're universally known as Grumpy in the market.

Peter Morgan

Yeah. There's a bit of a story to that, for sure.

Matthew Kidman

Before you tell me who nicknamed you that — and I think it's more out of affection — there are a couple of stories, because your phone manner did scare a few people. I've got a couple of stories.

One broker told me that he used to ring you in the '90s and you would start a countdown from 10 to one and say in an inference of, "You better tell me something interesting, otherwise I'm hanging up after the 10 seconds."

Now these could be urban myths. So don't get too excited yet.

Another, an analyst told me that he was sending research to you, a new analyst. You rang the broker on the desk at the same company and said, "Here's an order. Tag that to yourself. If you get the analyst to stop sending me their research, you'll get another one."

Peter Morgan

Steady on — that was sarcasm!

Matthew Kidman

Pretty combative kind of stories out there. Now you can tell me the real story!

Peter Morgan

Look, to be honest with you, and I'm always honest with you, but even Anton would say it — in those days, we didn't know who to trust. We didn't. You pick it up pretty early.

One particular broker would write a research report in the morning to buy, I don't know, buy Adelaide Steamship — let's use that example.

The dealer would ring up in the morning, when the research has just come around in the morning meeting notes, spruiking this stock and saying why you should be buying it. He'd suddenly go through his book and — lo and behold — he's got Adelaide Steamship to sell on the other side.

So it was skewed like that, as a crude sort of example. You soon learn those tricks. We adopted a policy (remembering that the really big brokers didn't want to talk to us because we were perceived as being very small) that we'd talk to anyone until they did wrong by us.

We had a broking list that probably had 200 brokers on it. We were happy to talk to anyone as long as they didn't waste our time and added value, for want of a cliche.

Matthew Kidman

Over the years you sort out who does add value; who you want to speak to.

Peter Morgan

I think in business, and it's proved correct through time, friendships should be secondary, in a lot of ways. I know Anton didn't either. We never really wanted to get too close to too many people. It was like a sport to us. We never treated it as our money. It was other people's money. We were trying to survive. If I was tough and rough, that's the way it was.

Matthew Kidman

Well, tell us about the story of Grumpy. How did that come about?

Peter Morgan

If you really want to know the story, there's not much of a story. Originally I started working at a stock broking firm. I used to turn up early and there was always a girl there, not a bad looking girl, that was there before me. This is when I'm pretty young.

She was always there and she was always happy. She was always nice to me. I started calling her Happiness and she started calling me Grumpy. Then the firm bloke heard her one day call me Grumpy.

As Radar O'Reilly says in one of those MASH episodes, when Trapper starts calling him Stinky, the name stuck. It started from there. That broker became a good friend of mine and it rolled on from there. The name probably suited.

Matthew Kidman

No, it's great when a nickname does stick, I think.

Peter Morgan

Radar doesn't agree.

Matthew Kidman

No, but it does mean there's a certain amount of notoriety, but also affection.

Peter Morgan

I'll make no apologies for it. I apologise if I hurt anyone, if I was rough and tough.

Matthew Kidman

No, I think it was all in good fun. Everyone tells the stories with a lot of laughs involved. The 1990s, it wouldn't be overstating it as saying, I think it was the golden era of funds management.

It's definitely when funds management came into their own. You mentioned BT in the '80s. They were a bit of a standout, but the '90s, there were a lot of big names. You rose at the same time the Greg Perry and Ian Harding at Colonial. You had Rohan Headley at BT, who was a young star.

There was Robert Maple-Brown, who had been around for a long time but built an incredible boutique business. So there were a lot of names.

There was Greg Matthews and the guys at Merky Mutz (Mercantile Mutual) they were building a big business. And David Paradice and Ben Griffiths and a few others who we know these days. Golden era, very competitive though.

Peter Morgan

I can't speak to the other guys, but I think we respected everyone. I had a lot of respect for Greg Perry, Robert Maple-Brown.

Matthew Kidman

Did their success push you on, though? Did you sit there and say, "Well, these guys are setting the benchmark"?

Peter Morgan

No. It was more like a rugby league team going against someone else. It was like Souths playing Manly. There was five or six really good teams. It was a really good competitive competition. But I think much the same as at Perpetual, we were all driven to succeed.

Greg tells the same story about his background and where he was before and how lucky he was. Greg was a freak as far as I was concerned, but the others were very, very good too.

Matthew Kidman

All had their own style. All a bit different.

Peter Morgan

Well, they're all a little bit different. I think it's important for any investor to look at a fund manager, much the same as a company, is to work out what to expect that fund manager to be doing. If they go off on a tangent away from what you think, well, start asking questions as to why they're doing it. It can be a sign, as it is for a listed company.

But to answer your question, it was a competitive, enjoyable period, but it was also a period that was backed by very good growth and superannuation. It was in a period when the big super funds, such as Australian Super, could and did have about 20% of their funds spread right across the Australian marketplace, but across the fund managers that they chose to take on.

When I say that, I can distinctly remember managing money for Australian Super when it had about $3 billion, maybe $5 billion. I think it was less than that. Today it's got $200 billion.

Matthew Kidman

Incredible.

Peter Morgan

They've been successful. But I think the story that's not often told is that a lot of the things you see with superannuation funds are down to the guys like John Nolan and Peter Cooper, who generated fantastic performance for some of those big super funds in the early days, and are still doing it today.

Obviously the impact is somewhat smaller given the massive money that the big super funds have got. But that played its part in it as well. Super was taking off.

Obviously we're coming out of — the same old thing happens — we're coming out of a pretty bad period and markets are running and taking off. Everyone wants to be part of it, including the retail investor. Perpetual, like First State, had a lot of success in the retail market first before it entered the wholesale market or superannuation market. If that's the right word.

Matthew Kidman

I think you hit on a good theme there. I've always thought that the people you want to back, if you're going to back a fund manager, whether it be the smallest investor or the biggest, is ideally you want someone on the up.

In that period, there were a lot of guys in their 30s, and some women, obviously in the teams that you've mentioned. Some very good investors, a lot of them the same age, a lot of them ambitious, a lot of them with a lot of energy.

Do you subscribe to that view that there's a period when a manager's at their best and that's the time to invest with them?

Peter Morgan

To be honest, I think I'm better now than I was.

Matthew Kidman

Oh, really?

Peter Morgan

Just from the lessons you learn. But I think the best analogy, it's like a sport. You know who the good cricket players are or you know who the good soccer players are. I still believe today, investing is a lot like a sport.

Matthew Kidman

The score goes up every day, doesn't it?

Peter Morgan

It does. I and those other guys were competing against each other. It gets a little bit silly if you're trying to do it on a quarterly basis. I think at one stage there for us at 452 we were getting daily or minute by minute performance. It was just ridiculous. But we were getting asked on a basically a daily basis by some clients how our performance was. It just gets ridiculous.

It's like anything. If you find someone that's passionate, you can understand what they're doing and they're doing it for all the right reasons, I'd back them. It's the same with a CEO. You can tell it straight away with a CEO. Brian MacNamee at CSL. You could tell it.

It was there in front of you. It was the same with a lot of the companies we had in the early days at Perpetual. Dick McIlwain, I remember going to the pub with him. I can't imagine doing that with too many CEOs.

Matthew Kidman

This is Queensland TAB.

Peter Morgan

Yeah. Queensland TAB. I think he passed away recently. He was a terrific guy. He was so passionate about the business. Alan Piper from AP Eagers. Alan Piper did a masters on cars at university.

I still remember him coming and telling me, "One day Australia will sell a million new cars in a year." And he was right. Sadly, he died early as well.

But the guy from Rothmans was so passionate about cigarettes. You'd go and see him. It was such a learning experience. He'd tell you about the bike he's bringing illegal cigarettes down from Queensland into the New South Wales towns to make money and all this sort of stuff.

I remember playing golf with John Gay from  Gunns and him telling me the story about how the week before he was out in his boat and he fell asleep and the boat blew up and he almost drowned. We had a big investment in Gunns at the time.

But you're always learning things. George Weston Foods. I still remember going out there and meeting management and that was so hard to do, to try and get in to see them, because we hadn't met them for years. But we knew the company was all right.

Right at the end of the day, there's an old bloke and the sun's coming in through the window and it's reflecting off him. He's the buyer in charge of the wheat purchases for George Weston Foods.

Somehow we got talking about silos and how much wheat's in the silos and that sort of thing. he said, "Oh, the silos are pretty full. But you've got to remember, the druggies, when they want to get rid of someone, they throw them in the silos and they drown." It was all this crazy stuff.

Matthew Kidman

Pretty heavy stuff.

Peter Morgan

But you would never have thought of that. But you knew that guy knew his business.

Matthew Kidman

He knew more than his business.

Peter Morgan

There were funny times too. There was a CEO that locked us in a room for an hour and a half and forgot about us. We're trying to get out. It was all that sort of thing. It was enjoyable.

Matthew Kidman

But sticking with competition, the one thing that evolved at at Perpetual was a lot of internal competition over the years. As you got bigger in the back end of the '90s, correct me if I'm wrong here, but I think you split the industrial fund up. John Sevior ran half and you ran the other half. So all of a sudden, two of you were going in the same building at the same time. That became competition. Was that good for you?

Peter Morgan

Oh yeah. I think it was good for us. It was hectic at times. But to take that a step back, even for stock brokers, it must be so hard for stock brokers, given that they've always got to come out with a buy recommendation.

All this skews very much towards a buy. It's very hard to theoretically judge an analyst, because I'll always remember the buy anecdotally or the sell that they came up with. And you have these big arguments and that sort of stuff.

So not very early on, but as time went on, we started giving the analyst a theoretical amount of money to run. It was measured pretty hard. So their calls were measured against a benchmark. At the end of the day the analyst would be paid a bonus based upon his or her performance.

It was pretty hard and fast. One of the problems a fund manager has is 99% of them I think are good at managing money. They're terrible at managing people because it's a different skill set.

But under that scenario, we could say to an analyst, "Well, here you are. This is the value you've had. These are the calls you've made." With the industrial share fund, John had done a terrific job with the small companies fund, and we split it. But that led to us both basically competing against each other.

Matthew Kidman

I played cricket with John for three or four years. Definitely competitive.

Peter Morgan

There were funny times. There were funny times where I was selling a stock and John was buying it. I can distinctly remember Graham Bradley, who was the CEO of Perpetual, walking past one day. John suddenly found out I'm the seller of the stock and he's buying it.

The computer's being thrown at the wall and Graham's walking past wondering what the hell's going on. But it was all that sort of thing, and probably the other way another time. But we had respect for each other.

Honestly, I think it was good. It was fine. It was a sport. That's what you want. You want people that are driven. You don't want it too closeted.

Matthew Kidman

So the '90s was the golden era of the funds management. The first decade of the 2000s, you could almost say, was the era of the boutique. A lot of these guys went off.

You talked about Peter Cooper, David Paradice out of Merky Mutz, Geoff Wilson, who I used to work for. Even Paul Xiradis went and set up with Ausbil. The list is pretty big. Maybe the only one who was around before that, as far as I can remember, was Robert Maple-Brown. He lasted a long time. So a lot of kudos to him.

Anton went out, John Murray went out — the list is endless. So the environment was right. People thought they could do it themselves, I suppose.

You went out to 452 Capital with Warwick Negus. Warwick sold some of his stake and went into CBA three or four years later.

Going into your own business, a lot of other considerations than when you work for an institution. There's a lot of other things you have to think about.

Peter Morgan

Looking back on it, it's to some extent, like a tech entrepreneur, if that makes any sense to you. Only trouble is that you learn things. A lot of tech entrepreneurs have failed before with some of the things they've done.

Then they've learned from that and gone on with it. But the era of the BT had a couple of things going for it in the sense that technology had come along.

The internet had come along and the telexes had gone. The trading floor had gone. Seats had gone. Superannuation had got bigger. I think settlement was down to two or three days. Your performance figures were coming out daily.

Matthew Kidman

That must be distracting.

Peter Morgan

That's side of it was because at Perpetual in the early days, we only got performance monthly and it was four days after month end that we got it. So we generally had an idea of what stocks had gone up.

Matthew Kidman

You'd know in your head how you were going.

Peter Morgan

Well, yeah, but you didn't know how well you'd done or how badly you'd done or if you'd lagged or whatever. But then it flipped too far the other way. As I said, it was coming out minute by a minute to us. it was just silly.

As more and more competition came into the marketplace, the clients were asking on a quarterly basis. They'd give you one quarter to underperform, but rarely did you get three from some of them, or a lot of them.

The pressure started to build. But to answer your question, they were the glory days and it was doable.

I look back and would I do it any different? There's probably a few things I'd change, but the idea of having Warwick effectively run the business and set it up, I think was the right idea. But when I joined with Warwick I said to him, "In 10 years time, your biggest part is trying to get us out of this, right? Hopefully."

Warwick did it in about 18 months. CBA came knocking on the door within 18 months. There was no way in the world I was going back into to an institutional life. I'd just got out of that, even though I'd enjoyed 12 years at Perpetual.

We'd just set up 452 and CBA came knocking. I never thought they were going to buy the business, but Warwick got them over the line, I don't know, 18 months later. That obviously caused a problem between Warwick and myself, when I said no.

Matthew Kidman

It's an interesting scenario, isn't it? Because you are the brand, you're the fund manager that people follow.

Peter Morgan

Yeah, but Matthew, you and I both know that's overrated to a large extent. When you hear that sort of stuff, it irritates me. I enjoyed it, I enjoyed it. But I really enjoyed having Warwick as a partner, and I know some people don't believe that, but I really did.

Matthew Kidman

Because the business grew quite quickly, didn't it? You did well.

Peter Morgan

Well, it did grow quickly. It did take off, but go back a couple of months from that, I think we started over Christmas or in November. For about three or four months, I wasn't quite sure that we were going to get any money.

I'd just gone through a divorce. I didn't have a lot of money. I think all the money I had was basically the Perpetual shares that I had left. I think I tipped $250,000 into it and Warwick tipped $200,000 or something like that.

I know that sounds like a lot of money, but when you're leasing a place in Australia Square and you're not sure the money's coming, it does get a little bit interesting. But we eventually got one client, then we got another one and it started growing from there in probably March after we started.

Matthew Kidman

It would've been a pretty good market for you because we came out of the tech wreck then, and there was some value to be found, I would've thought.

Peter Morgan

Well only tech stocks. You say that. If you flip that the other way, actually, and it's not the right word. The value stocks had outperformed the tech stocks.

The tech wreck in Australia, wasn't a tech wreck. It was just a speccy wreck in a lot of areas, unlike the US, where Amazon did come again. There was something to Amazon. The craziness, not so much the craziness, but the vision was ahead of its time in the US.

Here it was a little bit different. It was just a follow-on in a lot of areas to the US. With the exception of News Corp.

I've told this story before that right at the height of the tech bubble or right near it, Time Warner bid for AOL; they merged. News Corporation, which going into that was about 18% of the index, suddenly in one day, went up 25%, 30% just on the back of that takeover. We didn't have a share.

That's the first time that I really experienced and really enjoyed coming out the other side, when News did eventually fall, because we had got that call right. It was a hard thing to take when it ran and we underperformed for a month or so there, but it was enjoyable to come out the other side of it.

That happened a few times. That happened in 2008, and again when we didn't own things like Babcock & Brown or Allco. I think we were underweight the major banks going into the financial crisis and heavily geared property trusts we weren't in.

Those calls can take time, but sometimes they come off. Not calls — the style that you invest comes up off eventually over time. But investing with a fund manager is cyclical.

Matthew Kidman

You can't be right every cycle.

Peter Morgan

Well, you're mad if you go in expecting a fund manager to do that. The thing that concerns me today is you turn on the TV and some of the big super funds have got their 20% returns flashing up on the TV for the last year in front of potential investors, with a little comment that past performance — the smallest writing you can see — is no guide to the future. I just think it's dangerous. But as they say, history doesn't necessarily repeat, but it rhymes in terms of selling at bull market performance.

Matthew Kidman

I'm going to take you forward a bit with 452. Obviously you had the diagnosis around the brain cancer. You've told the story before that you basically were told to get your affairs in order.

No one wants that call in their life. It's obviously incredibly confronting. Then later on you got a second opinion, because my understanding was you didn't feel that much worse. You thought it was worthwhile. That was revoked in some means.

But you're brave enough to say, I've heard you say publicly before, that soon after that period or around that period — you can clarify that — that you were emotionally feeling down. Today we might call it depressed.

How did that play out in terms of your own head and how did you work your way out of it? Because obviously you come out a stronger, well-adjusted individual these days. Do you remember that period and what you did?

Peter Morgan

Yeah. I obviously remember it. There's a lot to that period, but I remember it. I was pretty depressed going into it.

Matthew Kidman

Before the diagnosis.

Peter Morgan

Yeah. Before the diagnosis. Basically what had happened is that I wasn't right emotionally. I'd found that through various people, some very good doctors, and they weren't quite sure what was going on.

That led to an MRI scan that showed some shading on the brain. But then went down the path of me having a biopsy or an operation on my brain to see what that shading was. You learn all this stuff as you go through it. But the biopsy was cut by a pathologist that I never met. It came back saying that I had brain cancer.

The diagnosis was that it was such a severe case of brain cancer that you've probably got six, eight months to live. So I went on to chemo. I went through all that and met some incredible people.

The oncologist that I had, I can remember going in and seeing her and paying her $180 for a consultation to try and save my life. In the back of my mind, I'm trying to work out what would that be in brokerage, in a BHP share or a management fee?

The first meeting I had with her, she said, "We've got to give you rat poison to try and make you better." So it was pretty hard chemo.

She put me up for a trial drug in Germany, which is one of those tests they try and do with the drugs for COVID these days before they allocate them. But I got knocked back on that because the sample size was too small in terms of making the drug profitable and all that sort of thing.

But I went through all that process. As you said, I was told to get my affairs in order. But eventually it became a little bit obvious that maybe something was wrong in terms of the diagnosis.

Then again, I can still remember the oncologist ringing the pathologist and saying, "The cut may be wrong." This is six months into it. the pathologist, because I'm standing next to her and she's got him on loud speaker, he says, "Missy, just be glad that your medicine's working," and then hung up on her. I think, "Oh fuck this, there you go; sounds a nice bloke." So it was all that.

Matthew Kidman

How did she take that?

Peter Morgan

Well, she was just standing there. She obviously didn't want to make it look too bad when I'm just standing there next to her. But for want of a better word, she had a good bedside manner. I knew I could trust her.

I think we got the seven months in; I hadn't died. I wasn't feeling that good. Although the chemo was starting to affect my legs; I could hardly move some days for three hours in my legs. But a lot of people didn't think was the chemo. They thought that was the disease from the brain.

The best way I can put it, it was a grandstand view on cancer, terminal cancer. A lot of people don't survive. I often get asked, "Are you disappointed that 452 didn't work out?"

Well, I can tell you what, I'm meant to be dead 12 years ago. I'll take that trade any day of the week. That just led to everything else. But my confidence was shot to a large extent for a little period of time after it.

Through the whole process, I'd been seeing a psychiatrist. I can remember her saying one day, "You've got to try and get your confidence back without overdoing it."

This will sound how bizarre, but one of the ways I did that is that a guy called Alan Kohler, which we all probably know, and a guy called Dean Paatsch at Ownership Matters had these road shows. He asked me to go and talk at them.

I probably didn't do a good job because I still was trying to recover from things, but just getting up and standing in front of people and talking about investments, it just all helped, if that makes sense. It's a very small example.

As time went on, it just opened my eyes. Life's got its ups and down. I often think there were times at Perpetual where I was offered jobs elsewhere. I could have taken those jobs and it would've been a disaster and 452 would never have happened. But as I said to you, I'd much rather be alive today than the reverse.

Matthew Kidman

Well, what doesn't kill you makes you stronger.

Peter Morgan

It did. It did. Particularly in that industry, where it does get to the stage where it becomes a performance ladder with regards to your own wealth. I often think about guys and girls that have done really well out of it that I know.

Have they really enjoyed it as much as they could, the wealth that they've amassed? I did well out of it. I self funded. On the other side of that, in the next eight years after diagnosis, one of the things I did was I travelled the world at various times.

If I hadn't done that then and we came 10 years later, well, we've got COVID now. I wouldn't be able to do that now. I would never have had that experience.

Matthew Kidman

I remember at the time running into you. I'm pretty sure it was on Pitt Street in Sydney and you'd been to Texas. You said you'd been a few times and there was a moment there I said, "Well, would you ever move there?"

Matthew Kidman

You said, "Oh, you never know." So obviously there was an intrigue with what was happening in the US.

Peter Morgan

I loved it. This is a crude example — it was the cowboy spirit of Texas. It was very much like Australia in a lot of ways. The guns get done to the death here. But one of the big conferences we went to four or five times was South by Southwest in Austin.

Austin at the time was still reasonably small. The crowds would come from all over the world into Austin. It's the home of Willie Nelson, and as Willie Nelson would say, it's a weird place.

Matthew Kidman

It's a patch of blue in a state of red in those days.

Peter Morgan

Well, it was just really good. It's become the place to be now and it's grown out of its comfort zone, I think. But it was a really good time. But more recently, the most unexpected fun was when we went to Russia with the Socceroos and travelled all over Russia.

Matthew Kidman

Who's we? Did Anton go to that?

Peter Morgan

No, Anton didn't come. Well, he was there, but he didn't come. A guy called Lee IaFrate, who was behind the setting up of Treasury Group and making it successful, and another bloke. We've done a few soccer World Cups.

It's not a bad way to see a country actually, going to a World Cup. But we basically travelled all over Russia following various teams and getting on trains.

I can remember getting on a train. It was a 14 hour train trip across Russia. The carriage next door to us, there was this big Russian military guy that suddenly was so intrigued with us. He became our instant friend.

He could only speak a little bit of English, but he communicated all right. But every time he tried to speak English, he'd put the wrong English pronunciation. We'd tell him he was wrong, he'd smash himself in the head.

He was actually on the train every three weeks and it was a five day train trip going across Russia. Russia was so surprising, the wealth, the poorness, the people, which were lovely. It was nothing what you expect, particularly landing at that airport, which is still from the Iron Curtain days. But outside it, there's some lovely places. It may well have all been put on for the soccer and the like.

Matthew Kidman

A real eye opener.

Peter Morgan

Yeah, it was good fun.

Matthew Kidman

Now I'm going to take you forward as a private investor to the modern world that we live in, and the markets we're in. Something you said on a podcast a few months back with Livewire's Patrick Poke was that companies now and analysts and fund managers are looking at things that are not necessarily audited.

That worried you as a way of measuring the value of a company. If we go into that a bit further, there's terms like annual recurring revenue. Now revenue is audited, but the forecast figure of annual recurring revenue is not. There's other things like the lifetime value of a customer.

I'll never forget, on a couple of those things, one company I asked, "Well, how long is your average contract for?" Because they were quoting annual recurring revenue. They said, "The average contract is 12 months." I said, "Well, that's not really recurring."

So there's all these different measures that companies make up. They're watched and followed religiously now, especially the software companies. Does that worry you?

Who do you blame for us getting away from traditional ratios and metrics that do go through the audit process that we relied upon? Do you blame the companies? Do you blame the investors? The analysts?

For me, a lot has come out of the companies, especially out of San Francisco. They've got everyone to look over this way when they're burning a lot of money. Have you got a view on that? Because it worries me.

Peter Morgan

It's part and parcel of a bull market cycle to a large extent. It's happened before, I suppose, to some extent with mining companies here and the Poseidon boom in terms of drilling holes and that sort of thing. They'd only put up the returns from one assay.

This is in the Poseidon days, which is somewhat similar. Crudely, somewhat similar. But let's take something I'm reasonably familiar with, something like Twitter.

How on earth with Twitter, with all these bots on it, how on earth is that a reliable figure in terms of users that you've got? A lot of the names are not so much fake names ... Well, a lot of them are fake names, but they're unreliable names. They could be anyone.

Just to quote a lot of the industry today, they're using figures that aren't audited, that aren't necessarily technically correct in terms of what's being sold. It's the same with Facebook. It's the same with Snapchat.

Just because you've got a follower, it doesn't necessarily mean that follower is connecting every day of the week. That follower could be anyone. None of this stuff is audited. To some extent, it's the same where companies put out same-store sales growth and that sort of thing. You've got to be a little bit wary. As you've alluded to, we're in a pretty good bull market at the moment.

Matthew Kidman

So it's not different this time.

Peter Morgan

Oh, they rhyme. They sort of rhyme. Obviously the difference this time is that things like crypto, if that's the right word, US$2.8 trillion in value all up (Editor's note: This figure was correct at the time of recording, but has fallen to US$1.65 trillion since then), if you added all the coins up, or all the crypto assets up.

There's probably something in of Blockchain being successful and something will be successful in that area. But there's a lot of speculation going on there. But away from the stock market, I think venture capital, and to a lesser extent, private equity.

Interest rates have never been lower. There's a lot of money going into venture capital in companies that haven't made a lot of money.

The other thing that never really gets talked about is a lot of the employees are working for the promise of the shares or the options that they're being issued being worth something later on.

It leverages on itself a bit, and they're not getting paid probably in dollar terms what they should be getting paid. They're getting scrip and that sort of stuff, which, when the market corrects, similar to what happened in the dotcom boom ending ...

Matthew Kidman

I was going to say, we've seen this movie before, but we don't seem to be too scared of it this time.

Peter Morgan

Again, this time it's a little bit ... There was something to Amazon, for example, with the dotcom boom. It was too early. It was there and it almost didn't survive, but there was obviously something to Amazon because it was around then. But a lot of the other companies weren't worth a lot.

But you've got this other phenomenon going on in the market at the moment, again particularly in the US, that passive money is in the market, index funds are in the market. Apple, which was trading five years ago on 13 times earnings, is now trading mid-30s.

Matthew Kidman

Well, another phenomenon is brokers now talk to a lot of machines. Brokers are attuned to an analyst and they're attuned to saying certain words that the machine reacts to because they've been trained to. That to me is a situation where a filter that you need in any common sense investing, is being taken out.

Peter Morgan

Yeah. But at the end of the day, if you are a true investor and true to label, you know on a medium to long term basis the implicit value of what you want to be buying a share at. You're right. There has been plenty of occasions where I've wondered what's going on in the market.

I'm pretty sure that when there's a decision made that everyone wants to be out of building material stocks globally, it impacts our market here with Boral and Reece, for example, on a particular day when that flow goes the other way. So the markets have become globalised.

We're getting down to sector betting in a lot of areas. Reopening betting, or for want of a better word, COVID betting, if it comes back again. But that's all been played out in funds and ETFs and the like. You're right.

But at the end of the day, if your investing decision is based upon fundamentals and the right reason, you're not always going to be able time a price. But it can benefit on the other side, when you're trying to get out. It can shoot up to stupid levels, and at times it comes back to you.

Matthew Kidman

You were well known as a value investor. I know value is in the eye of the beholder, and it's not always in the P/E multiple, it's in the prospects of the company, but value is value. In the last few years, it hasn't paid to be a value investor.

We were all taught that you had to read Benjamin Graham. Warren Buffet told us that. He grew up out of the Depression era, where he could buy stocks below their cash backing or their net asset backing. That's become virtually impossible today.

Will value investing reappear, or do you think it is a part of history and that in the future we won't see the opportunities you might have seen in the early '90s or Ben Graham saw out of the '20s Depression into the '30s?

Peter Morgan

I think Peter Lynch had it right in terms of the way he classified the way he invested. Whether it was an asset play, a growth stock, a cyclical. That's basically what I tried to do as the years went on.

When you focus on a company, you try and determine whether it's a cyclical or whether it's an asset play as to why you're buying it. I don't like the word value too much, but I fell into that style because there wasn't a lot of growth stocks in Australia.

The best growth manager Australia has ever had was Greg Perry. I'd hate to think what Colonial's funds would be worth if they just didn't sell any of the shares he bought. The Transurban, the Hills Motorway, which got knocked off. But all those great names that he had in there.

I suppose, as I said to you earlier, I think I'd be better today investing because I've had the experience, but I've also learned a lot about what goes on in the US. That's the one thing I have found being out on my own, is that there's a bigger world out there.

Australia's basically a taker in a lot of ways of management styles, if they do get to Australia. There's a few problems we've got in Australia at the moment. We lack that founder mentality. We lack companies taking risk. There's too much focus on dividends and franking.

Matthew Kidman

It should be reinvested into the company.

Peter Morgan

Well, you look at how everyone waffles on about how great franking and dividends is, but two of Australia's greatest companies have been CSL and Cochlear. They've never really paid out 100% of earnings or anything like that.

I think the wheel's twisted too far the other way. I think that's one of the problems we've got in Australia. Companies aren't reinvesting. That's why there's not a lot of really good technology developments in Australia.

Look at the boards. None of them, up until recently, have had much technology experience on the boards. I think other things, like corporate governance, have become far too prescriptive.

Matthew Kidman

As a consequence, the Australian market hasn't performed that well since the GFC.

Peter Morgan

Well, it hasn't. They'll all quote dividends. In terms of an accumulation index, it hasn't done too bad, but it hasn't kept up with the US. We just haven't had the entrepreneurial spirit.

You've got everyone running around at the moment talking about, "Oh, we've got a skills shortage." Well, maybe we have, but the reinvestment of companies, or the lack thereof, has played a big part in that result.

I made a bit of money early on in AMP, but if you look at that company all the way through, it probably ticked every box with regards to corporate governance and it's been an absolute, catastrophic disaster.

Things can become too prescriptive. I think we're going too far in a lot of ways, whether it's dividends or whether it's corporate governance or whether it's just companies taking risks. I think there should be more of that.

Matthew Kidman

There's nothing like finishing a conversation on the AMP. A lot have in the financial markets of Australia. Peter, I want to thank you coming in. Thanks for your honesty. It's always a terrific chat.


Matthew Kidman
Principal and Portfolio Manager
Centennial Asset Management

Matthew is the Principal and Portfolio Manager at Centennial Asset Management. Prior to this, Matthew was the CIO at Wilson Asset Management between 1998 and 2011, achieving 18% p.a. over the period.

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