Monthly Report

The Longwave Small Companies Fund decreased by 2.9% during December 2022, outperforming the 3.7% decrease in the S&P/ASX Small Ordinaries Accumulation Index benchmark by 0.9% over the month (after fees).


1Return net of 0.50% p.a. management fee. 2S&P/ASX Small Ordinaries Accumulation Index. 3 Inception date: 1 Feb, 2019. Past performance is not a reliable indicator of future performance, p.a performance is annualised.

The Rise Of The Machines And A Triumph Of Process

“Kasparov’s Law:
Weak human + Machine + Better Process > Strong Machine, AND;
Weak human + Machine + Better Process > Strong Human + Machine + Inferior Process
The point is that process mattered most, not the raw brawn of machines or the artistic ability of humans. Process is the mechanism to target and structure which problems machines should solve and the selection of which recommendations to make to the human.” 

–   Garry Kasparov, 2022

Artificial intelligence (AI) has gradually become a part of our lives. While it has often failed to live up to its hype, we are seeing practical applications of this technology, such as in photo enhancement on iPhones and voice commands on Alexa, or through generative image tools and chat programs. Those who have experimented with AI in the past year have seen some truly impressive results, and we expect significant improvements in the next few years as innovators gain access to more capital and computing power. While it is difficult to predict exactly how these technologies will change the world, history does offer some clues on how we can adapt as investors.

As machines continue to improve their aptitude and capabilities, the world of chess can offer some clues on how human investors can remain competitive.

“In 1985, I had crushed 32 computers in simultaneous play… just 12 short years later, IBM DeepBlue ended the reign of human hegemony in chess. While others worried that AI chess would “perfect” the game, I began to suspect that, just as we humans need the power of machine intelligence, machines also need humans to augment their abilities. In 2005, my theory was put to the test [during] a “freestyle” chess tournament. The rules were wide-open – teams could employ as many human beings and as much computer help as they wanted – so it became a perfect experiment to test human and machine intelligence in collaboration. With several groups of strong grandmasters and powerful chess machines … in the mix, the competition seemed to be a test of grandmasters against chess machines. To everyone’s shock, the winners turned out to be a pair of American amateurs using three average computers, linked in a chain processing system to create a home-made supercomputer. The pair won by using human intuition to steer the reins of the raw, computing horsepower of machines.”

–   Garry Kasparov, 2022

At Longwave, we are fundamental investors at heart. We believe humans are still unparalleled in processing and applying pattern recognition to unstructured data and considering a present and near future that may differ significantly from the past. As evidence-based investors, we remain open to the possibility that this hypothesis may not always be true, and that the role of the human investor may change over time. Investors can learn a lot from the world of chess about the importance of having a strong process in achieving success when leveraging technology. Kasparov’s Law, which is based on his life experience, emphasizes the impact of having a strong process.

Our goal is not to find a technological solution that replaces human decision-making, but rather to use technology to improve decision-making, reduce biases, limit mistakes, and enhance the judgment and insights of our experienced investment team.

Technology Is A Tool For Humans

Humans bring unique qualities to the decision-making process, such as creativity, empathy, and the ability to consider ethical and social implications. These qualities are essential for contextualising and interpreting the data and analytics provided by technology and ensuring that decisions are made with a holistic perspective.

Human oversight can help to identify and mitigate any biases or errors in the data or algorithms used by technology systems. This is essential for ensuring any decision-making process is transparent and accountable. The importance of any investment program is the ability to stick with it during the market regimes when it underperforms. Without transparency into the algorithmic decisions being made we imagine the temptation to abandon the process during stressful periods of underperformance would be overwhelming.

The integration of human and machine decision-making can lead to a more collaborative and efficient process. Technology can handle routine tasks, providing data and analytics, freeing up humans to focus on more complex and creative tasks. This can result in more efficient and effective decision-making, as both humans and machines can leverage their respective strengths and expertise.

New technology often leads to outcomes that are the opposite of what was predicted. Forecasts from 20 years ago may have expected today, with all the world’s information at our fingertips, truth would be undeniable. However, we now have higher levels of misinformation and disagreement than ever before. This is due to human behaviors such as deliberate misinformation, confirmation bias, motivated reasoning, limited perspective, and differing standards of evidence, which make the world far more complex than any linear and logical forecast can account for.

Human beings are tribal and prone to biases that are hard-wired into us. While tools to improve decision-making have been available for decades, many investors choose to ignore them. We suspect this will continue, even as the tools themselves advance.

Portfolio Positioning And Performance

Investor focus is moving from the inflation no-one saw coming and now everyone agrees has peaked to the recession that everyone agrees is coming in 2023. We observe this in the way the market interprets new information from the retailers who provided weak Christmas trading updates. We continue to have sympathy with the slowing consumer argument, but we profess no advantage in out-forecasting the market on macroeconomics so we don’t build a portfolio around strong consensus views as foregone conclusions. Consumer discretionary was the worst performing sector over the month (for the market and our portfolio), suggesting the market’s recession fear has increased leading into the end of the year. Over the quarter it was technology that lagged significantly. Despite valuation pressure from interest rates easing and M&A activity picking up, the inability for many technology businesses to generate positive cash flow anytime soon continues to hold back share prices. This will become even more important in 2023 as cash balances reduce and markets less forgiving of funding dreams – with the corporate borrowing rate ending 2022 at 5.1% – almost 3.2% above where it ended 2021.

Classic defensive sectors like Communication Services, Consumer Staples and Real Estate performed best (A-REITs helped by an inflation and interest rate reprieve). Healthcare is conspicuously absent from the list of sectors performing well in a recessionary fear environment, until you realise a large part of the small cap index is composed of speculative early stage biotechs, rather than defensive cash producing healthcare companies.

The portfolio performed slightly better than the market over the month and in-line with the market over the quarter. The large swings of lithium stocks we don’t own dominated our relative performance (positively this month). We didn’t make it through entirely unscathed from last minute trading updates, with Domain Group and 29 Metals among a small number which hurt performance in December.


The Fund aims to outperform the S&P/ASX Small Ordinaries Accumulation Index over the long term.

The Fund aims to provide long term capital growth through investment in a diversified portfolio of highquality Australasian small companies (outside S&P/ASX 100 Index at time of investment or expected to be within six months).


Longwave’s investment philosophy is underpinned by the belief that the stocks of high-quality small companies outperform the benchmark over time, and as such, an active approach to investing in high-quality stocks provides value to investors who might otherwise have invested passively.

Longwave believes in the value of a deep and fundamental understanding of the securities in which we invest.


This communication is prepared by Longwave Capital Partners (‘Longwave’) (ABN 17 629 034 902), a corporate authorised representative (No. 1269404) of Pinnacle Investment Management Limited (‘PIML’) (ABN 66 109 659 109, AFSL 322140) as the investment manager of Longwave Australian Small Companies Fund (ARSN 630 979 449) (‘the Fund’). Pinnacle Fund Services Limited (‘PFSL’) (ABN 29 082 494 362, AFSL 238371)  is the product issuer of the Fund. PFSL is not licensed to provide financial product advice. PFSL is a wholly-owned subsidiary of the Pinnacle Investment Management Group Limited (‘Pinnacle’) (ABN 22 100 325 184). The Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) of the Fund are available via the links below. Any potential investor should consider the PDS and TMD before deciding whether to acquire, or continue to hold units in, the Fund.
Link to the Product Disclosure Statement: WHT9368AU
Link to the Target Market Determination: WHT9368AU
For historic TMD’s please contact Pinnacle client service Phone 1300 010 311 or Email
This communication is for general information only. It is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. It has been prepared without taking account of any person’s objectives, financial situation or needs. Any persons relying on this information should obtain professional advice before doing so. Past performance is for illustrative purposes only and is not indicative of future performance.
Whilst Longwave, PFSL and Pinnacle believe the information contained in this communication is reliable, no warranty is given as to its accuracy, reliability or completeness and persons relying on this information do so at their own risk. Subject to any liability which cannot be excluded under the relevant laws, Longwave, PFSL and Pinnacle disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information. This disclaimer extends to any entity that may distribute this communication.
Any opinions and forecasts reflect the judgment and assumptions of Longwave and its representatives on the basis of information available as at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this communication is prohibited without obtaining prior written permission from Longwave. Pinnacle and its associates may have interests in financial products and may receive fees from companies referred to during this communication. This may contain the trade names or trademarks of various third parties, and if so, any such use is solely for illustrative purposes only. All product and company names are trademarks™ or registered® trademarks of their respective holders. Use of them does not imply any affiliation with, endorsement by, or association of any kind between them and Longwave.
Lonsec Disclaimer:
The Lonsec Ratings (assigned as follows: Longwave Australian Small Companies Fund – assigned October 2022) presented in this document are published by Lonsec Research Pty Ltd (‘Lonsec’) (ABN 11 151 658 561, AFSL 421445). The Ratings are limited to “General Advice” (as defined in the Corporations Act 2001 (Cth)) and based solely on consideration of the investment merits of the financial products. Past performance information is for illustrative purposes only and is not indicative of future performance. They are not a recommendation to purchase, sell or hold Longwave Capital Partners Pty Ltd products, and you should seek independent financial advice before investing in these products. The Ratings are subject to change without notice and Lonsec assumes no obligation to update the relevant documents following publication. Lonsec receives a fee from the Fund Manager for researching the products using comprehensive and objective criteria. For further information regarding Lonsec’s Ratings methodology, please refer to Lonsec’s website at
Zenith Disclaimer:
The Zenith Investment Partners (‘Zenith’) (ABN 27 103 132 672, AFSL 226872) rating (assigned Longwave Australian Small Companies Fund – February 2022) referred to in this piece is limited to “General Advice” (s766B Corporations Act 2001) for Wholesale clients only. This advice has been prepared without taking into account the objectives, financial situation or needs of any individual, including target markets of financial products, where applicable, and is subject to change at any time without prior notice. It is not a specific recommendation to purchase, sell or hold the relevant product(s). Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own objectives, financial situation and needs. Investors should obtain a copy of, and consider the PDS or offer document before making any decision and refer to the full Zenith Product Assessment available on the Zenith website. Past performance is not an indication of future performance. Zenith usually charges the product issuer, fund manager or related party to conduct Product Assessments. Full details regarding Zenith’s methodology, ratings definitions and regulatory compliance are available on our Product Assessments and at Fund Research Regulatory Guidelines.

Receive news and insights