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How This Fund Manager Finds ‘Diamonds in the Dust’ · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
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Speaker 2: Welcome to Maren Talks Money, the podcast in which people
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Speaker 2: who know the markets explain the markets. I'm Maren zum
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Speaker 2: zet Web. This week we've beat with Sean Pesh, portfolio
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Speaker 2: manager and founder at rand Moore Fund Management. Pest has
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Speaker 2: been in the investment industry since nineteen ninety seven, working
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Speaker 2: at a variety of institutions. He established ran More Fund Management,
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Speaker 2: his own company, in two thousand and eight. It's worth
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Speaker 2: noting he has a fairly stellar record of outperformance, outperforming
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Speaker 2: the index since inception and over pretty much every time
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Speaker 2: period since, except for the last twelve months, which we'll
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Speaker 2: discuss as we go. Sean, welcome, thanks for joining us.
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Speaker 1: Thanks Miren, lovely to be here.
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Speaker 2: Now listen, you have achieved fairly spectacular, as I said,
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Speaker 2: outperformance over the last decade plus, despite being a value
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Speaker 2: fund manager in a period when being a value fund
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Speaker 2: manager has been an absolutely terrible thing to be. This
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Speaker 2: has been a time for growth. Yeah, somehow you've succeeded
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Speaker 2: as a value manager. So let's talk a little bit
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Speaker 2: about how on earth you've done that.
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Speaker 1: I guess if we'd had this interview back in the
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Speaker 1: middle of the pandemic, when everybody was sitting at home
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Speaker 1: buying Apple iPhones and ordering stuff on Amazon will be
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Speaker 1: a different conversation. But we just try and invest in
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Speaker 1: decent companies that are generating cash with management on our
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Speaker 1: side and not paying too much for them. And it has,
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Speaker 1: as you rightly say, been a challenging time for value managers,
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Speaker 1: and I guess, I guess there are three reasons for that.
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Speaker 1: The first is, if you go back to nineteen seventy four,
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Speaker 1: when these indices first started, value outperformed growth with a
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Speaker 1: couple of hiccups along the way, pretty much in a
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Speaker 1: straight line up to the end of two thousand and seven.
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Speaker 1: And then you had the global financial crisis, and what
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Speaker 1: happened after that was quantitative easing, and that meant interest
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Speaker 1: rates collapsed and until late twenty one or so, and
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Speaker 1: so during that period, if you plot the if you
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Speaker 1: overlay those two average interest rates and value versus growth,
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Speaker 1: you'll see that value underperformed in during quantitative easing. That's
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Speaker 1: the first reason. The second reason is you had these
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Speaker 1: fast growing companies Microsoft, Amazon, those kind of guys at
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Speaker 1: the same time as you had low interest rates, and
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Speaker 1: so that meant their growth rates were discounted at lower rates,
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Speaker 1: and they became hugely huge companies in the markets. And
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Speaker 1: the third reason is at that very time that you
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Speaker 1: had these massive companies with huge market caps, passive investing
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Speaker 1: just exploded. When I started the business, I think it
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Speaker 1: was a trillion in dollars in passive investing is awfter
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Speaker 1: something nearly twelve, And so you had this wall of
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Speaker 1: money just moving into these companies, propelling them ever further.
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Speaker 1: Now what's changed. Quantitative easing is over. Okay, we saw
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Speaker 1: that reference to that in the FED statement last week.
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Speaker 1: The second thing is these companies are getting hard. It's
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Speaker 1: harder for them to grow. Microsoft grew revenue ten grew
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Speaker 1: earning specially ten percent last quarter. Costco grew revenue one
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Speaker 1: percent last quarter the other day. You've seen Nike falling
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Speaker 1: the other day. So you know, it's just getting harder
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Speaker 1: and harder for these giant companies to carry on out
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Speaker 1: performing in the way they have. And so we think
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Speaker 1: that's a really good time to focus and turn the
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Speaker 1: attention to value investing. You've got to be you've got
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Speaker 1: to go where the puck is going to be. This
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Speaker 1: is what way in Gretzky said, not where the puck's been.
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Speaker 1: The puck has been in quality and growth. The puck
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Speaker 1: is going to value. We firmly believe that.
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Speaker 2: But nonetheless you haven't been in those companies. I want.
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Speaker 2: The thing that really strikes me when I look at
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Speaker 2: your fact sheet is the very very small level of
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Speaker 2: exposure you have to the US. So if we look
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Speaker 2: at the MSCI world, that's seventy three percent US, right,
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Speaker 2: and an awful lot of that, of course is the
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Speaker 2: megasavan is the huge technology stocks in the US, but
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Speaker 2: you don't have that. You're about seventeen percent in the US.
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Speaker 2: And if I spin my eye over to your sector
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Speaker 2: exposure information technology three percent, that's against bround twenty five
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Speaker 2: percent in the MSCI. So you are very very far
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Speaker 2: away from the index, which is great, by the way,
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Speaker 2: and nothing we love more than a fund that doesn't
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Speaker 2: touch the index. If we wanted the index, we just
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Speaker 2: buy the index, right, So we love a fund that's
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Speaker 2: far away from it. But you know, you're you've really
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Speaker 2: differentiated yourself, then.
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Speaker 1: We have, and and I guess you know there are
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Speaker 1: a couple of points, So how we managed to generate
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Speaker 1: those returns well? The first is that we will typically
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Speaker 1: go where people are less interested because that's where we
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Speaker 1: find the value. So, you know, we made good money
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Speaker 1: in Japan in recent years. We were quite early in
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Speaker 1: moving into Japan. When the world was focused in Japan
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Speaker 1: with Warren Buffett and all of that, you know, we
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Speaker 1: were actually selling and redeploying those assets into China. And
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Speaker 1: so even last month, you know, we had more in
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Speaker 1: China than the US Hong Kong listed stocks. So what
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Speaker 1: we so, I guess there's two ways to make money.
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Speaker 1: The one is you can buy a company that you
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Speaker 1: think is a fabulous business and hold it forever, and
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Speaker 1: that company will compound its earnings. What we prefer to
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Speaker 1: do is find an undervalued business, invest at the right time,
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Speaker 1: ideally the right time, and when the value is fully realized,
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Speaker 1: we will then sell that and compound the capital. Okay,
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Speaker 1: because sometimes you can be stuck in these businesses. You
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Speaker 1: think it's a great business, and look at Nike, look
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Speaker 1: at st Order, look at you know, Diageo or Unilever
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Speaker 1: in recent years, and things come unstuck. And so we
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Speaker 1: prefer to compound the capital and we move the capital around.
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Speaker 1: So we really don't shy away from from moving our
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Speaker 1: assets around the world based on where we find value,
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Speaker 1: and we're not scared of our turnover either. You know,
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Speaker 1: if I look at some of my some of the
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Speaker 1: best money managers in the world, the likes who've survived
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Speaker 1: and got fantastic crack records over multi decades, not just
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Speaker 1: in in recent years. You know, the likes of Paul
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Speaker 1: Tudor Jones and Bruce Kovner and David Tepper and those guys.
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Speaker 1: I've never ever seen a single quote from them about
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Speaker 1: low turnover being an answer.
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Speaker 2: That's intering because as a big part of the industry
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Speaker 2: that believe exactly that your buffet style you buy great
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Speaker 2: companies and you keep them in definitely, and you let
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Speaker 2: them compound until you're super rich. But of course I'm
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Speaker 2: the answer to that. Your answer might be, well, companies change.
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Speaker 2: A great company doesn't stay a great company, and you
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Speaker 2: have to be prepared to move out of it as
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Speaker 2: soon as you see signs that it's not great anymore.
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Speaker 1: Absolutely, And Warren Buffett said, my favorite holding periods wherever
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Speaker 1: you didn't say, I'm my only holding periods wherever, and
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Speaker 1: he sold half his apple every day. You know he's
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Speaker 1: selling bank of America. He's sold many positions along the way,
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Speaker 1: So I think people confuse that, I mean take it
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Speaker 1: to the extreme. Some of the early good businesses that
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Speaker 1: everybody knew about and loved were railroads and you know
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Speaker 1: those steel manufacturing et cetera. Where would you be today
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Speaker 1: if you'd own those forever. So, you know, we think
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Speaker 1: the right business at the right time, and we very
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Speaker 1: you know, things change. So we are not in that
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Speaker 1: camp where you think you can find a great business
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Speaker 1: and hold it forever, because we don't know what the
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Speaker 1: future is. And as I said, you can use look
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Speaker 1: at Nike. You know, Nike had the lunch to themselves.
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Speaker 1: Now you've got competitors with on Running and Hokka and
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Speaker 1: Sketches and those kind of guys. So the environment is
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Speaker 1: always changing and you have to be alert to that.
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Speaker 1: And so we're not in the sit in the zide
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Speaker 1: and do nothing camp.
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Speaker 2: Well, let's step back a little bit because you mentioned
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Speaker 2: Japan earlier, and I know a lot of our listeners
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Speaker 2: are very interested investing in Japan, have been for a while,
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Speaker 2: and John and I were like you very on it
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Speaker 2: when it was very cheap. You know, this is value etc.
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Speaker 2: I'm going to Tokyo next week, by the way, I'll
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Speaker 2: report back. But in the meantime, you say you're no
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Speaker 2: longer really invested in Japan, do you not consider that
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Speaker 2: to be a value opportunity anymore?
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Speaker 1: Oh? No, we are definitely still in Japan, and we
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Speaker 1: a little overweight there. What I'm saying is we've taken
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Speaker 1: profits on many of our positions and redeployed those. So no,
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Speaker 1: we still like Japan. In fact, I know we bought
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Speaker 1: some Mazda the other day. That again, you've got to
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Speaker 1: look at the second level thinking that hard Marks talks about.
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Speaker 1: You know, a lot of the Japanese companies fell in
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Speaker 1: a heap when the yen rallied and the exporters, et cetera. Well,
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Speaker 1: you get businesses that have used the week in and
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Speaker 1: that's how they've generated revenue and profit growth, and some
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Speaker 1: businesses that are growing. And you know, you look at
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Speaker 1: the company like Mazda, I mean it's US sales of
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Speaker 1: its current range is up thirty percent in the last months,
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Speaker 1: you know, and that's been like that for a little while,
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Speaker 1: with huge amounts of cash on the balance sheet. So
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Speaker 1: there's still lots of value to be unlocked. In Japan,
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Speaker 1: some of our companies had just we felt had run
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Speaker 1: the course and reached fair value, and so we redeployed
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Speaker 1: it to compound their capital.
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Speaker 2: Okay, let's move on to China, then, where you did
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Speaker 2: deploy some of that capital. There's one of the ongoing
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Speaker 2: conversations John and I always have about something maybe cheap,
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Speaker 2: but is it investable? Can you invest some webs of China,
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Speaker 2: like China where you don't necessarily have the same kind
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Speaker 2: of regulatory security that you might have somewhere else. And
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Speaker 2: John and might have this conversation around Russia and I said,
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Speaker 2: yes you can, and he said no you can't, and
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Speaker 2: he was right. And on China, I say yes you can,
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Speaker 2: he says, no, you can't. And this week at least,
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Speaker 2: I'm right.
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Speaker 1: I love the dynamic between you guys. Yeah, and I mean,
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Speaker 1: unfortunately included in our track record, we lost just over
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Speaker 1: ten percent in Russia, but we recovered in twenty twenty two,
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Speaker 1: you know, And that's our process. And those stocks are
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Speaker 1: still in the portfolio, but written down to zero. So
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Speaker 1: sometimes we get it wrong. In fact, portfolio managers, you
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Speaker 1: often get it wrong. And so we China, we thought,
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Speaker 1: and it's an interesting point. I think there was a
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Speaker 1: there was a conference in feb two thy or twenty
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Speaker 1: twenty four at a Goldman Sachs conference, and they surveyed
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Speaker 1: the participants and forty percent said China was uninvestable. Now,
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Speaker 1: when people tell us some market's uninvestable, you know, that
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Speaker 1: peaks our interest because there's got to be some diamonds
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Speaker 1: in the dust. And what's interesting is, you know, government
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Speaker 1: interference and regulation and all of that. And then you
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Speaker 1: stand back and think about it and you go, well,
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Speaker 1: when natural gas prices rallied Ireland and the UK and
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Speaker 1: posed windfall taxes on you know, oil companies here just
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Speaker 1: the other day, President Macron is in favor of of
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Speaker 1: taxes on large French companies. You've got the US Department
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Speaker 1: of Justice and you know, attacking the US tech companies.
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Speaker 1: You've got the Fair Trade commit Trade Commission FTC attacking
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Speaker 1: or trying to prevent mergers and takeovers. So I think
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Speaker 1: I think this government interference and regulation all the rest
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Speaker 1: is overplayed. It's around the world. It's not just in China.
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Speaker 1: And so that's our point to that. And in fact,
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Speaker 1: what you don't have in many of these Asian markets,
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Speaker 1: you don't have greedy management teams taking huge, you know,
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Speaker 1: swaths of share options and diluting shareholders, and you don't
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Speaker 1: have the short term thinking that you have in many
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Speaker 1: of the Western markets. So one needs to balance the
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Speaker 1: pros and the cons And when you get companies I mean,
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Speaker 1: I'll give you an example. In early September, we I
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Speaker 1: mean we owned Ali, Baba and Bider. You see those
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Speaker 1: in the top ten last month's fact sheet. But in
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Speaker 1: early September were buying ping An and ping An here
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Speaker 1: at five times earnings, with an eight percent dividend yield,
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Speaker 1: and trading below tangible book value for pretty much the
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Speaker 1: first time ever. You know, that's how deeply out of
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Speaker 1: favor it was. And we were buying it at thirty
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Speaker 1: three and you know we're selling it the other day
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Speaker 1: at fifty five. You make sixty percent in a month. Now,
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Speaker 1: we would quite happily hold it. We didn't want it
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Speaker 1: only hold ping An for a month. But when when
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Speaker 1: you've had this kind of move, you've been over awarded
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Speaker 1: in a short space of time, we are happy to
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Speaker 1: move on.
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Speaker 2: Okay, And the other market that until very recently we
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Speaker 2: kept being told was uninvestable, I kept being told, particularly
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Speaker 2: by American investors in the odd unreconciled remainer, that the
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Speaker 2: UK was an uninvestable market. We don't hear that so
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Speaker 2: much anymore. We're hearing much more positivity around the UK.
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Speaker 2: You invested here.
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Speaker 1: We are and you know we meaningfully overweight. I think
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Speaker 1: we're at six percent versus just less than four. Not
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Speaker 1: that we worry, as I said, we worry too much
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Speaker 1: about the benchmark. And you know we we bottom up investors,
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Speaker 1: so we less worried about the top down and interest
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Speaker 1: rates and you know, those kind of put political goings on.
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Speaker 1: I suppose that's the other thing is that China's had
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Speaker 1: quite a stable It's one of the few places in
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Speaker 1: the world that hasn't had an election this year. But
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Speaker 1: some of the companies there meren which might be of interest.
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Speaker 1: And again my compliance office or shot of me if
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Speaker 1: I don't say this is obviously not advice. But where
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Speaker 1: we do have some positions is in the and what's
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Speaker 1: deeply out of favor are the UK asset managers.
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Speaker 2: Why do you think that's out of favor? Why do
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Speaker 2: you think you look at that and you see the
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Speaker 2: value and other people do not.
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Speaker 1: Well, I think if you've owned Aberdeen all the way
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Speaker 1: for years and you've seen one corporate acquisition after another
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Speaker 1: just go wrong. You are biased and trying to avoid
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Speaker 1: biases is a key part of what we do. And
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Speaker 1: so if you come in fresh and you know you
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Speaker 1: haven't got that historic baggage, that helps you to look
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Speaker 1: at things with a fresh pair of eyes. And so
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Speaker 1: we'll do that. But we don't bet the ranch. We
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Speaker 1: are not in the high conviction camp. You know, we
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Speaker 1: are fully aware that stuff comes out of nowhere, but
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Speaker 1: we think we're getting paid to wait.
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Speaker 2: Now, the other back to traveling. Another stock that I
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Speaker 2: see that you are now holding is Ryan Air.
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Speaker 1: Yes, yes, yes, well Ryanair. I mean that's you know,
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Speaker 1: I remember when I first got over here from South
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Speaker 1: Africa in early two thousand and two thousand and one.
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Speaker 1: I mean, here was this business. It was highly highly
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Speaker 1: rated and we thought, goodness me, can you believe it?
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Speaker 1: But look at what Michael Earliery and his team have done.
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Speaker 1: And you know the interesting thing for us is we
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Speaker 1: don't meet management. But you didn't have to meet management.
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Speaker 1: You just have to look at the return on equity
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Speaker 1: that here Michael O'Leary and his team have generated in
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Speaker 1: the toughest of industries. That he's built this business from
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Speaker 1: pretty much nothing to transporting something like two hundred and
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Speaker 1: twenty five million passengers a year. It's just been phenomenal
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Speaker 1: and that they didn't need, you know, lifelines from governments
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Speaker 1: during the pandemic Etcter survived. So phenomenal management team in
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Speaker 1: a great business. And I guess if the economy is tough,
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Speaker 1: you know, people will trade down to Ryan Air. You
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Speaker 1: might not be going on first class on some other
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Speaker 1: airline but betrayed going on holiday on RHINEIR. So people
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Speaker 1: want to go on holiday. Great great management team, strong
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Speaker 1: balance sheet, reasonably priced, buying back shares because they've got
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Speaker 1: excess capital. And the other thing which is interesting is
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Speaker 1: there's capacity constraints because you know, Boeing and Airbus are
14:28
Speaker 1: struggling to get aircraft out the door.
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Speaker 2: You say you don't meet management. Now, I find this
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Speaker 2: very interesting and I think I understand why you do it.
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Speaker 2: But I speak to an awful lot of fund managers
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Speaker 2: who's usp is how many management teams they took to,
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Speaker 2: and they tell me endlessly about well, this is what
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Speaker 2: I do. I visit sixty companies a year. Or one
14:46
Speaker 2: hundred companies a year, and I look the management in
14:48
Speaker 2: the eye. I have conversations with them, and I can
14:50
Speaker 2: see if they're honest, and I can well, I'm not
14:52
Speaker 2: getting inside information. I can pick up bits and bobs
14:55
Speaker 2: of levels of confidence that other people can't see. And
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Speaker 2: that is my value you as a fund manager. That's
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Speaker 2: how they sell themselves, how a lot of the industry
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Speaker 2: sells itself right, And you're just saying, Nah, I'm gonna
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Speaker 2: bother with that. I'm again to set my office and
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Speaker 2: play with spreadsheets.
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Speaker 1: Yeah, Maria, next time one of those fund managers tells
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Speaker 1: you that, please ask them to send a scatter plot
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Speaker 1: with the wire access showing our performance and the x
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Speaker 1: acts is showing the number of meetings. And let's see
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Speaker 1: if there's a direy correlation, because I suspect there probably isn't,
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Speaker 1: just as there isn't a direct correlation between large teams
15:26
Speaker 1: and our performance. It sounds so good and it sounds
15:29
Speaker 1: so obvious. Oh, we meet management, I mean in many
15:31
Speaker 1: cases they're meeting investor relations. You know, we want management
15:35
Speaker 1: teams to be out there running the business, not speaking
15:36
Speaker 1: to fund managers all the time. Now that said you know,
15:39
Speaker 1: we read conference call transcripts. We read a lot of them.
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Speaker 1: So it's not like we ignore what management say. We
15:44
Speaker 1: like to look and say, okay, well what are these
15:47
Speaker 1: What is management saying it quarterly reports, reporting portback periods
15:51
Speaker 1: or semi annual report back periods. But I don't want to.
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Speaker 1: I don't want to meet management and then think oh
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Speaker 1: they're a good guy and be more and more patient.
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Speaker 1: We can evaluate management based on the numbers. We can
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Speaker 1: see when did this management team take over, what we're
16:05
Speaker 1: return on assets and what we're operating margins? Then what
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Speaker 1: was market share and what is it now? Have they
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Speaker 1: added value? Have they detracted value? Have they done decent deals?
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Speaker 1: Or have they destroyed value? You know, you and you
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Speaker 1: look at that and you go, yeah, I mean it helps,
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Speaker 1: it helps me. That's how we evaluate management. So if
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Speaker 1: a company is doing a stupid deal and paying way
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Speaker 1: over the odds for an acquisition, you know, look at
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Speaker 1: Unilever acquiring Dollar Shave Club for a billion dollars was
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Speaker 1: a loss making business. You know, you just go, this
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Speaker 1: is going to destroy return on assets, is using company
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Speaker 1: cash to go and overpay for an acquisition, and this
16:42
Speaker 1: indicates a management are you know, or not of the
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Speaker 1: caliber we'd like. So that's how we evaluate management, the
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Speaker 1: numbers and we leave the niceties to everybody else.
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Speaker 2: And I suppose it helps you avoid being caught up
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Speaker 2: in stories and that you know, really investing is just
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Speaker 2: about stories, right, stories you believe, stories you don't believe.
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Speaker 2: And the extent to which a charismatic CEO can tell
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Speaker 2: a good story. I mean, that's that's the story of tech.
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Speaker 1: For example, when the story lines up with the numbers, fantastic.
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Speaker 1: But so often what will happen is, you know, you
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Speaker 1: look at the numbers and you'll go, okay, things are tough,
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Speaker 1: and you read the conference called transcript and you go,
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Speaker 1: my goodness, am I reading this my quarter out? Is
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Speaker 1: this the same period? You know? Is this the same company?
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Speaker 1: So they often, you know, they can be quite a spin.
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Speaker 1: And I mean even to the extent that that management
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Speaker 1: teams know that that analysts and AI are trawling through
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Speaker 1: conference called transcripts looking for those little you know, trying
17:39
Speaker 1: to work out of is the call positive or negative?
17:43
Speaker 1: Extracting positive phrases and negative phrases, so they gear things accordingly.
17:48
Speaker 1: If you attach yourself to a narrative to a story. Okay,
17:51
Speaker 1: how do you know when you're wrong? So if you'd
17:53
Speaker 1: said I want to buy wind because it's part of
17:57
Speaker 1: the energy transition, it's going to play an important part. Great,
18:00
Speaker 1: it's still going to play an important part. But you've
18:02
Speaker 1: lost seventy percent of you brought some of the go
18:05
Speaker 1: go windstocks, you know, the Vestus and those types of
18:08
Speaker 1: companies way back when, or the Solar. I mean, look
18:10
Speaker 1: at what a disaster solely is. So it's hard to
18:14
Speaker 1: identify when you're wrong. If you just focus on the story,
18:17
Speaker 1: the numbers will tell you when you're wrong. Margins are falling,
18:20
Speaker 1: revenue is falling, it's too overpriced, et cetera. You know,
18:23
Speaker 1: look at these obesity drugs at the moment, what's the story.
18:26
Speaker 1: The story is, we've got an obese population and there
18:29
Speaker 1: are only a couple of them that have been approved,
18:31
Speaker 1: and they're going to make a hundred billion of you know,
18:35
Speaker 1: in the next couple of years. In terms of like that,
18:40
Speaker 1: that basically is blue sky. Well, well, let's see, but
18:44
Speaker 1: there's one hundred and seventy competitors all trying to develop
18:48
Speaker 1: obesity drugs, and sooner or later that lunch will get
18:51
Speaker 1: eaten by the new competitors. And so if you're paying
18:53
Speaker 1: forty times earnings for the likes of Nova and ORDERSK,
18:56
Speaker 1: you know, it's going to be hard to make a return,
18:58
Speaker 1: we think, or.
18:59
Speaker 2: At some point everyone's going to be thin. The things
19:02
Speaker 2: work right, then that'll be that right. And then of
19:04
Speaker 2: course there are not one facts like that. The diet
19:07
Speaker 2: book industry collapses, maybe the gym business collapses.
19:10
Speaker 1: Well let's see. But you know, the problem is paying
19:14
Speaker 1: too much for stories is not a good thing, and
19:17
Speaker 1: it is hazardous to your health. And so we go
19:19
Speaker 1: to whatever steps we can to avoid over pain for strap.
19:23
Speaker 2: There's a lot of stories around around in the world
19:24
Speaker 2: of energy transition. You just mentioned that you've stayed stayed
19:28
Speaker 2: out of wind, stayed out of solar. How are you
19:30
Speaker 2: playing the transition or are you just sticking with oil?
19:33
Speaker 1: Well we've got a little bit of oil. But I mean,
19:35
Speaker 1: you know, one of the one of the stories is
19:37
Speaker 1: will go by the utilities because we're going to have
19:40
Speaker 1: to They're going to have to generate all the power
19:42
Speaker 1: that that is that these AI data centers are going
19:46
Speaker 1: to use. Until you look at the balance sheets of
19:48
Speaker 1: these utilities and see how much debt they've got from
19:51
Speaker 1: having you know, installed solar and wind farms at high prices,
19:55
Speaker 1: and you go, well, I don't know if I'm going
19:56
Speaker 1: to go there. I mean, we do have we do
19:58
Speaker 1: have a small position in Kazat and Prom Kazakhstan uranium minus.
20:03
Speaker 1: I guess there's a bit of energy there. But but
20:06
Speaker 1: we're not doing that because we think that AI demand
20:09
Speaker 1: is going to drive energy usage. You know, again that's
20:12
Speaker 1: a theme and we're not really we're not thematic investors
20:16
Speaker 1: because it comes back to that story. We're rather the stock.
20:18
Speaker 1: Each stock has to has to make it on its
20:21
Speaker 1: own merits.
20:22
Speaker 2: Okay, let's talk a little bit about South America where
20:25
Speaker 2: again looking at your waiting as relative to the ending.
20:27
Speaker 2: So it's a big fat zero in the MSCI world
20:30
Speaker 2: and it's eleven percent in your portfolio. What does that
20:32
Speaker 2: mean or is that just Petro bast.
20:35
Speaker 1: Well, we're not just Petro Brass, and we've got ins.
20:38
Speaker 1: We've got you know, bank at Columbia. It's a good
20:40
Speaker 1: bank at an attractive price. Petro Brass. You know, people
20:45
Speaker 1: were ignoring Petro Brass everybody after that. Again it was
20:48
Speaker 1: a concern. You know, there's always an opportunity if there
20:51
Speaker 1: that if you if you can the difference between perception
20:54
Speaker 1: and reality. The concern was, oh, Lula's coming back and
20:57
Speaker 1: he's going to do a lot of bad stuff and
21:00
Speaker 1: for skate shares or whatever. It was shortly after you'd
21:04
Speaker 1: had the goings on in Russia and people were running
21:06
Speaker 1: from emerging markets. But yet enshrined in their articles is
21:12
Speaker 1: that they'll pay out over twenty five percent of cash
21:15
Speaker 1: flow as dividends. And so here are you buying a
21:19
Speaker 1: lower one of the lowest cost producers that had paid
21:21
Speaker 1: off used their cash in recent years to pay off
21:24
Speaker 1: their vast amounts of debt which that incurred from from
21:28
Speaker 1: building up their fields in you know, from twenty fourteen
21:32
Speaker 1: the next ten years or so, and that's paying huge
21:36
Speaker 1: amounts of dividends and and so I mean, I think
21:38
Speaker 1: in the first year we got many forty percent of
21:40
Speaker 1: our money back from dividends. And so you know, who
21:44
Speaker 1: knows where oil is going to go. I guess if
21:47
Speaker 1: you'd said to me a year ago that we're going
21:49
Speaker 1: to have China stimulus and you know, lots of tension
21:53
Speaker 1: and war in the Middle East and the Ukraine war
21:55
Speaker 1: on the go, what's oil price going to be I
21:58
Speaker 1: probably wouldn't. I'd guess a lot higher than the current price.
22:01
Speaker 1: So you know, one's got to always recognize that these
22:04
Speaker 1: cheap solar panels are displacing some of this oil demand
22:09
Speaker 1: and so that's uncertain. So if you're not sure where
22:11
Speaker 1: it's going to go, well then you want to go
22:12
Speaker 1: with the lowest cost producer, and petro Brass is one
22:14
Speaker 1: of those. And you're paying you know, very low single
22:17
Speaker 1: digit multiple for that, so with with dividends, so we'll
22:20
Speaker 1: we'll buy that.
22:21
Speaker 2: We're talking about so many different companies, so many different sectors,
22:26
Speaker 2: so many different countries. You're quite a small fund and
22:30
Speaker 2: I think you're quite a small team. How on earth
22:33
Speaker 2: are you covering the entire world?
22:35
Speaker 1: We don't waste mony time meeting manage.
22:37
Speaker 2: Well, okay, fine, do management.
22:41
Speaker 1: No, but I guess it's a bit like it's a
22:43
Speaker 1: bit like saying, well, hang on you if you're the
22:45
Speaker 1: coach of the English cricket team, Harneth, you know all
22:48
Speaker 1: the cricketers in England.
22:49
Speaker 2: Excellent question as well. I don't know the answer to
22:51
Speaker 2: that one either.
22:52
Speaker 1: No, you've just got to know what you're looking for
22:55
Speaker 1: and and of course, you know, you've got to know
22:57
Speaker 1: what you're looking for, have set up your screens, and
23:00
Speaker 1: then you wait until the fish swim into your pond,
23:02
Speaker 1: and then you know those companies. And so that's what
23:05
Speaker 1: we do. You know, we're not out there worrying about
23:07
Speaker 1: benchmarks and worrying that we haven't got meta rights and
23:10
Speaker 1: metas big in the index and we need, you know,
23:13
Speaker 1: form of view. If meta doesn't take our boxes, we
23:15
Speaker 1: don't look at better end off. So that's how we
23:18
Speaker 1: do it. We just focus on the fish that swim
23:21
Speaker 1: into our pond and know those fish.
23:23
Speaker 2: Yeah, and you don't have to worry about the index.
23:25
Speaker 2: I wrote a column recently about about active versus passive.
23:28
Speaker 2: When I say a column, I mean another column, and
23:30
Speaker 2: I've written so many of them over the years, and
23:33
Speaker 2: this one was about some data that someone said me
23:36
Speaker 2: showing that funds that are genuinely active I have an
23:41
Speaker 2: active share of seventy five plus and that shows that
23:44
Speaker 2: they're very diverse from the index, outperform on average over
23:48
Speaker 2: pretty much every time scale, and your active share is
23:51
Speaker 2: about ninety nine. So on that basis.
23:54
Speaker 1: Alone, Well, look, I read that article and I thoroughly
23:58
Speaker 1: enjoyed it. And there's one there's one topic I'd love
24:00
Speaker 1: you to explore in detail. Maybe you haven't, I've missed it.
24:03
Speaker 1: But there's this notion of active fee, which is how
24:07
Speaker 1: much you pay for your active share. And I think
24:10
Speaker 1: that's the answer because if we you know, if our
24:13
Speaker 1: OCF is just over one percent, but we got ninety
24:16
Speaker 1: nine percent active share, well that's one thing. But if
24:18
Speaker 1: you've got a fun next door which has got an
24:20
Speaker 1: OCF of seventy five BIPs, but they've got fifty percent
24:23
Speaker 1: active share, well actually you're paying them more for the
24:28
Speaker 1: active component to their portfolio than you are for us.
24:31
Speaker 1: And and so active fee, I think is an important
24:35
Speaker 1: number that a lot of people miss. Half the funds
24:37
Speaker 1: don't put their active share on their fact sheets, you know,
24:41
Speaker 1: and don't update it on a number of things. So
24:43
Speaker 1: I think it's a hard number to come after. But
24:46
Speaker 1: this notion of you know, at the end of the day,
24:48
Speaker 1: it's all about your returns, isn't it, you know? And
24:51
Speaker 1: I mean I had a conversation with somebody recently and
24:53
Speaker 1: they said, all you're twenty five BIPs. Your twenty five
24:55
Speaker 1: basis points out the running I said, do you know
24:57
Speaker 1: that that is a five percent move on a five
25:00
Speaker 1: percent position the whole year. I mean that is a
25:03
Speaker 1: rounding error. So if that's what's moving your the needle,
25:06
Speaker 1: then you know, let's focus on something else. But there
25:11
Speaker 1: is this, I think, this excess focus on costs because
25:15
Speaker 1: and this excess focus on benchmarks, because people seem to
25:19
Speaker 1: have forgotten, you know, we only that benchmarks also fall.
25:22
Speaker 1: I mean, since I've been running ran more the the
25:26
Speaker 1: S and P five hundred, I think is up double
25:29
Speaker 1: digits nine of the fifteen years and only down double
25:32
Speaker 1: digits one and that was twenty twenty two, and three
25:35
Speaker 1: months later you had AI, you know, removing that bad memory.
25:39
Speaker 1: So people have forgotten that benchmarks also fall. And performing
25:43
Speaker 1: in line with the benchmarks is not the be all
25:45
Speaker 1: and end all. It's it's am I getting wealthier in
25:48
Speaker 1: real terms is the key question? And if I happen
25:51
Speaker 1: to beat the benchmark, fantastic. If I don't, but I'm
25:54
Speaker 1: still getting wealthier in real terms, Well isn't that more important,
25:57
Speaker 1: you know than going down twenty percent when in the
25:59
Speaker 1: benchmarks full you know, twenty five and thinking you've got
26:01
Speaker 1: a good, good result. I mean, one of the things
26:04
Speaker 1: that you know as we're a boutique. We've got some
26:08
Speaker 1: three hundred and eighty million, eighty five million dollars under management.
26:12
Speaker 1: And when you're a small fund, obviously the costs are
26:14
Speaker 1: a higher component, but it also means that you can
26:17
Speaker 1: you know, you're a speedboat not a container ship, and
26:20
Speaker 1: you're not going to get stuck in the sewers canal
26:22
Speaker 1: and so you can move. But you know, with small funds,
26:25
Speaker 1: I think there needs to be a little bit of
26:28
Speaker 1: latitude for the small funds who you know, to be
26:31
Speaker 1: able to have a slightly higher OCF to to accommodate
26:34
Speaker 1: the fact that they are you know, this will going
26:36
Speaker 1: to keep the lights on.
26:37
Speaker 2: Yeah, I mean, I do think this is a very
26:38
Speaker 2: interesting point. It's really tough to start a new funder
26:41
Speaker 2: these days in Abertique because a lot of the wealth
26:44
Speaker 2: managers and people who might have given you seed capll
26:46
Speaker 2: previously are not going to do it if that if
26:48
Speaker 2: the cost come in over one percent, because that doesn't
26:50
Speaker 2: work for them. So you've got that, and then you've
26:53
Speaker 2: got the increasingly intense regulatory over lay to opening a
26:57
Speaker 2: new fund. So there does seem to be quite a
26:59
Speaker 2: competitive mote these days. Do you think that if you
27:02
Speaker 2: were starting right now, you would find it more difficult
27:05
Speaker 2: to get going.
27:06
Speaker 1: Definitely, I mean definitely. It's you know, it takes you
27:10
Speaker 1: a few years to get a rating or whatever rating.
27:14
Speaker 1: Some financial advisors won't look at you until you have
27:16
Speaker 1: a rating. You know, there is the whole scale element,
27:20
Speaker 1: so you'd have to absorb in the management company would
27:23
Speaker 1: have to absorb a lot of the costs themselves. And
27:27
Speaker 1: you've got to be doing something different, you know. I mean,
27:29
Speaker 1: how many quality growth companies are there? I look at
27:33
Speaker 1: our value peer there's only fifty one value funds according
27:36
Speaker 1: to this morning start at I'm looking at that have
27:37
Speaker 1: been around since we started, whereas if you look at
27:40
Speaker 1: you know, IA Global, there's one hundred and sixty seven.
27:43
Speaker 1: So it's you've got to be doing something different if
27:45
Speaker 1: you wanted to start today, and you've got to have
27:48
Speaker 1: some passioned capital, that's for certain.
27:50
Speaker 2: Is there anything that would persuade you to go out
27:52
Speaker 2: and buy n video?
27:53
Speaker 1: Do you know? I'm going to tell you something. A
27:55
Speaker 1: cram myself to sleep at night knowing that in twenty
27:58
Speaker 1: fourteen it was one of our largest positions. Wow, how
28:01
Speaker 1: about that? And so we spotted it a way back
28:04
Speaker 1: when when nobody else wanted it because they had licensed
28:08
Speaker 1: some technology to Intel and Intel was a big portion
28:10
Speaker 1: of their revenue, and everybody said, oh, they're not going
28:13
Speaker 1: to be able to renew that and all the rest,
28:15
Speaker 1: and you could buy Innvidia on ten times earnings. Of course,
28:18
Speaker 1: I had no idea that it was it was going to,
28:22
Speaker 1: you know, reach the levels that it has done. But
28:24
Speaker 1: it does highlight that and we made money out of it,
28:29
Speaker 1: but we moved on, and so you know that's that
28:32
Speaker 1: is going to happen, and people say, well, you know it,
28:34
Speaker 1: wouldn't it be wonderful if you were buy and hold investor,
28:36
Speaker 1: you could have held on to Nvidia and be three
28:38
Speaker 1: times a size of the fund. But there are a
28:41
Speaker 1: couple of other stocks. I'm glad we didn't hold onto you.
28:44
Speaker 1: So you know, you take it as it comes. You're
28:46
Speaker 1: going to get some right and you're going to get
28:47
Speaker 1: some wrong. But the good thing is our process identified it.
28:51
Speaker 1: So no Novidia, no, I mean, and you know, Meren
28:55
Speaker 1: you what And this is a problem with many of
28:57
Speaker 1: the tech companies and I'm actually writing a piece on
28:59
Speaker 1: this at the moment. Is I think they're far more
29:01
Speaker 1: expensive than people think they are, because what happens is
29:04
Speaker 1: in these technology companies, you've got your stock based compensation,
29:08
Speaker 1: they give you performance unit stock units or whatever and
29:13
Speaker 1: to the staff, so call it share options, and so
29:17
Speaker 1: in accounting terms and the income statement, that's included as
29:19
Speaker 1: a cost. But these companies love to focus on free
29:23
Speaker 1: cash flow because in free cash flow that is added back. Okay,
29:27
Speaker 1: the problem is what are the companies doing with the
29:30
Speaker 1: cash flow. They're buying back shares, but the buyback of
29:33
Speaker 1: shares is after the free cash flow number, and so
29:36
Speaker 1: these companies are buying back shares, but who they're buying
29:38
Speaker 1: the shares back from when they're not buying in the
29:40
Speaker 1: open market. Effectively, they're buying them back from employees who
29:43
Speaker 1: exercising the options. So you have removed the cost, you know,
29:49
Speaker 1: in terms of how profitable these businesses are from the
29:51
Speaker 1: free cash flow. But then they're using all the cash
29:52
Speaker 1: to buy back the shares. And I think I'm right
29:55
Speaker 1: in saying that. Well, one of the tech companies, I mean,
29:58
Speaker 1: I think it's a video. Two thirds of the shares
30:00
Speaker 1: that they're bought back last quarter were you know, options
30:05
Speaker 1: that have been exercised. So these companies are way more
30:08
Speaker 1: expensive than you think. They're not returning cash to shareholders.
30:11
Speaker 1: They're giving cash to employees.
30:13
Speaker 2: Effectively, they're not they're not returning cash to shareholders. They're
30:16
Speaker 2: bumping up their wage bill. But it doesn't quite come
30:19
Speaker 2: out like that.
30:20
Speaker 1: Yeah, Meta, the last time I looked there, you know,
30:22
Speaker 1: they'd spent almost all their free cash for Biomax shares
30:26
Speaker 1: and the share can't had not fallen. So you know,
30:28
Speaker 1: this is the thing. So what you actually wanted to do,
30:30
Speaker 1: you've got to look at that. And so that just
30:32
Speaker 1: means these companies are more expensive. And so you know
30:34
Speaker 1: every day Jensen Wong is selling one hundred and twenty
30:37
Speaker 1: thousand shares. Now that's a rounding eraror according to his holding.
30:40
Speaker 1: But you know, here you've got a company with Nvidio.
30:43
Speaker 1: Every single one of their large customers is trying to
30:46
Speaker 1: eat their lunch. You know, the tech bubble. And not
30:48
Speaker 1: to say that we're in a tech bubble at the moment,
30:50
Speaker 1: but but you didn't have with Cisco and you know,
30:53
Speaker 1: custom their customers being at and T and Verizon and
30:56
Speaker 1: the guys, they weren't trying to develop their own router
30:59
Speaker 1: and switch. But yet in the video. All the customers
31:02
Speaker 1: are trying to develop AI, their own AI, chips, Apple, Meta, Amazon,
31:06
Speaker 1: the whole lot. And so why on earth do I
31:09
Speaker 1: want to pay thirty five times sales when I'm up
31:13
Speaker 1: against my biggest customers who are cash flash and cash generative,
31:17
Speaker 1: trying to eat my lunch.
31:19
Speaker 2: Yeah, particularly when you can build a portfolio very significantly
31:22
Speaker 2: lower valuations that you have higher expectations for.
31:25
Speaker 1: My son was reading the Little Book of Value Investing
31:27
Speaker 1: the other day and I said, Tom, what are your
31:29
Speaker 1: key takeaways? And he said, the future is unfocostable. Don't
31:33
Speaker 1: pay too much for it. And I said, well, that's
31:34
Speaker 1: exactly it. The future is unforecastable. Don't pay too much
31:38
Speaker 1: for it. You know, don't be too convinced that you
31:41
Speaker 1: know what's around the corner, because history keeps reminding us
31:45
Speaker 1: we don't. And so the only way you can protect
31:47
Speaker 1: against that is not is by not paying too much
31:50
Speaker 1: for it.
31:51
Speaker 2: Sean, I know that I have to ask. I have
31:53
Speaker 2: to ask what everybody is thinking, How old is your son?
31:56
Speaker 1: My son is twenty okay.
31:57
Speaker 2: All right, And I'm glad he's not a teenager because
32:00
Speaker 2: that makes me feel a lot better about my own teenagers. Gosh,
32:04
Speaker 2: they're not reading investment books of an evening. They're absolutely not.
32:08
Speaker 2: Now listen, we have one last question. You've got ten years.
32:10
Speaker 2: I'm gonna give you a choice of two things, gold
32:13
Speaker 2: or bitcoin.
32:14
Speaker 1: It is definitely gonna be gold. I am not in
32:17
Speaker 1: the bitcoin camp. I'm afraid, Merron, and I'm disappointed. I'm
32:20
Speaker 1: sorry we don't have more gold mine at where we
32:22
Speaker 1: don't have any gold miners in the portfolio. But there
32:25
Speaker 1: have not been great businesses, you know, they very difficult businesses.
32:29
Speaker 1: But if I had to go for if it's either
32:31
Speaker 1: or it's gold all the way.
32:33
Speaker 2: Okay, And what would make you change your mind on bitcoin?
32:36
Speaker 1: Nothing?
32:37
Speaker 2: Absolutely nothing, nothing.
32:40
Speaker 1: I'm with Charlie Mungo all the way on bitcoin. And
32:43
Speaker 1: it's a family radio, so I bit not repeat what
32:45
Speaker 1: he said, but.
32:46
Speaker 2: Okay, all right, we'll repeat that when we get to
32:48
Speaker 2: the end. Family Radio. I wish thanks for listening to
32:56
Speaker 2: this week's Maren Talks Money. If you like us show,
32:59
Speaker 2: rate review and whatever, you listen to podcasts and keep
33:01
Speaker 2: sending your questions and your comments to marrin Money at
33:03
Speaker 2: Bloomberg dot net. You can also follow me and John
33:05
Speaker 2: on Twitter or x I'm at Marinas W and John
33:08
Speaker 2: is John Underscore Steppek. This episode was hosted by me
33:11
Speaker 2: Marrin's Unset Web. It was produced by Somesidi and Isabella Ward.
33:15
Speaker 2: Production support and sound designed by Murders and Them and
33:18
Speaker 2: special thanks to Sean Tsh