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The Argument Against Relative Performance · Merryn Talks Money

0:06
Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. Hello, it's Meren sumsat
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Speaker 1: web here. This week our guest is John Warren, co
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Speaker 1: founder of Telworth Investments and manager of the TM Telworth
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Speaker 1: UK Select Funder. He's got eighteen years of investment experience,
0:22
Speaker 1: but that's not why we asked him on. He runs
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Speaker 1: an absolute return fund, which is something that John and
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Speaker 1: I find particularly interesting. So we talk about the way
0:31
Speaker 1: that works. But before we get to that very exciting conversation,
0:34
Speaker 1: as we always do, we start with what I think
0:37
Speaker 1: most of you consider to be the best part of
0:40
Speaker 1: the show, a conversation with money to Silve newsletter author
0:42
Speaker 1: John Steppek, John, let's talk and I'll tell you what.
0:45
Speaker 1: Let's talk about your absolutely favorite subject.
0:49
Speaker 2: New high after new high after new high.
0:51
Speaker 1: Who wouldn't want to hold the buddsy one hundred exactly?
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Speaker 3: And we've got another new high today as we're recording.
1:00
Speaker 3: In fact, actually I may need double check this, but
1:03
Speaker 3: Simon French over at paneers Gordon the other day tweeted
1:06
Speaker 3: out to me saying that if the food see manages
1:09
Speaker 3: to close a new record high twelve times in a
1:12
Speaker 3: row within a month, this will be like the first
1:13
Speaker 3: time that's happened since I don't know, years and years
1:16
Speaker 3: and years. So that's very exciting.
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Speaker 2: What's making it happen. What's making it happen.
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Speaker 3: John, the fact that fund managers are essentially held animals,
1:27
Speaker 3: and they've seen something hit and you high in the
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Speaker 3: suddenly like, oh my god, there's a bandwagon in this movie.
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Speaker 1: After interrupted briefly, we don't we don't call them herd animals.
1:38
Speaker 1: We don't call them. Oh yes, investor, Well we had
1:43
Speaker 1: this conversation before momentum investors.
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Speaker 3: That's the politically correct.
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Speaker 1: Okay, So finally global investors have noticed that the UK
1:53
Speaker 1: is cheap, that Brexit has not been the end of
1:56
Speaker 1: the world, and that there are some really great companies
1:59
Speaker 1: in the UK and they can have a significantly lesson
2:01
Speaker 1: they can buy companies elsewhere. But even after all these
2:04
Speaker 1: new highs, I think the UK is still in nineteen
2:06
Speaker 1: percent discounty global pays.
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Speaker 3: Right, Yeah, Still it's still cheap, and it is. It
2:12
Speaker 3: is interesting because I had a quick looks. So my
2:15
Speaker 3: go to for all of these things is the Bank
2:16
Speaker 3: of America Global Fund Manager Survey. It's actually really good
2:20
Speaker 3: sentiment indicator and it comes out every month. So I
2:24
Speaker 3: look back at the January one for this year, and
2:27
Speaker 3: the UK's been at the bottom for ages, and the
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Speaker 3: January one it was rock bottom. Fund Global fund managers
2:34
Speaker 3: said that they were more underway the UK relative to
2:38
Speaker 3: history than any other asset class, and it's like twenty
2:42
Speaker 3: one different asset classes, so big, big underweight, as in
2:45
Speaker 3: they don't like it compared to the benchmark. And then
2:50
Speaker 3: I looked at the same one for last month and
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Speaker 3: it's basically been the same, you know, February, March, April May.
2:56
Speaker 3: That's actually changed that they've actually moved some money into
3:00
Speaker 3: UK stocks and they're now ever so slightly just above
3:05
Speaker 3: average compared to the last twenty years. So that's been
3:09
Speaker 3: a real kind of there has been a real sentiment
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Speaker 3: shift in a fairly short period of time, and it
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Speaker 3: has pretty much coincided with a new record high. And
3:19
Speaker 3: to be fair, also they kind of move to value
3:21
Speaker 3: because people have started to get a bit kind of
3:24
Speaker 3: started to think that actually interest rates are going to
3:26
Speaker 3: be higher for longer. Some maybe or the growth stuff
3:30
Speaker 3: as in't necessarily the thing you stick with anymore. But yeah,
3:35
Speaker 3: but I do think mostly it's actually momentum as well,
3:38
Speaker 3: we just bought something moving and you don't want to
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Speaker 3: be left behind.
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Speaker 1: John, He respects. Nobody has want to see respect fund managers.
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Speaker 1: He's all over there absolutely right.
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Speaker 2: Listen.
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Speaker 1: So we're getting note of the note of the note
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Speaker 1: from various banks, brothers, et cetera telling us what we've
3:52
Speaker 1: been telling you for a long time now, that the
3:54
Speaker 1: UK is cheap and you should buy it. But I
3:56
Speaker 1: don't point you to one in particular, which is from
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Speaker 1: our podcast regular James Ferguson, and he has written a
4:03
Speaker 1: note and I will do a little summary of it
4:04
Speaker 1: and stick it on John's Money to Sold newsletter for
4:07
Speaker 1: you at some point. And his it's called it's called
4:10
Speaker 1: Union Jack in the box. Right. You know this is
4:14
Speaker 1: not and this is not an ordinary ball market. This
4:16
Speaker 1: is a British ball market, right. And his argument is
4:20
Speaker 1: that as slightly different to our argument, to be honest,
4:23
Speaker 1: it is that inflation is absolutely out of the picture.
4:28
Speaker 1: He says that as far as he can see, there
4:30
Speaker 1: is very little inflationary pressure left. There's an eighteen month
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Speaker 1: contraction in nominal money supply, two yearstagnation of GDPETE. There
4:37
Speaker 1: is absolutely no excuse for base rates to be knocking
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Speaker 1: around to this sixteen year high of five point two
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Speaker 1: five percent. So he thinks that once inflation is out
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Speaker 1: of the picture, and he thinks it, everybody will realize
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Speaker 1: that soon rates have a quoting here ample scope to
4:51
Speaker 1: be cut a long way, alleviating the pressure on both
4:53
Speaker 1: indebted retail and commercial property owners, stimulating productive bank growth,
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Speaker 1: and all without threatening a real acceleration in prices anti closures.
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Speaker 1: No wonder, the foot year is just broken out to
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Speaker 1: a new six year high, and so he's looking not
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Speaker 1: just at the cheapness, but at the fact that he
5:10
Speaker 1: expects interest rates to fall quite fast soon. And I
5:14
Speaker 1: did ask him about that and he said, there's just
5:17
Speaker 1: no reason for them to stay.
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Speaker 4: Hi.
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Speaker 1: I still feel as if I think you did, John,
5:20
Speaker 1: that that central bankers might be taking the opportunity to
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Speaker 1: try and normalize the idea that rach should knock around
5:27
Speaker 1: four percent one percent, and therefore the fall is going
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Speaker 1: to be slightly slower than a lot of other things.
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Speaker 5: Yeah.
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Speaker 3: I mean, I've got a huge amounty respect for James
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Speaker 3: because he's one of the few people that we in
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Speaker 3: order to explicitly got the two thousand and eight crisis
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Speaker 3: right and was one a book deflation even after all
5:44
Speaker 3: the money printing, so we knows we was talking about I.
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Speaker 3: Despite all that, I still struggle. We see that Hartman,
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Speaker 3: and it also depends, I mean, it depends partly what
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Speaker 3: he means by a fast drop in interest rates. I've
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Speaker 3: read some of the note, but not the whole thing.
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Speaker 3: And you know, if he means it will get to
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Speaker 3: four quicker than everyone's expecting, then that's one thing. But
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Speaker 3: I don't Again, I'm on the camp that says that
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Speaker 3: rates don't go below three percent effectively ever again, you know,
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Speaker 3: as a for a very long time. So I'd be
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Speaker 3: curious to know a bit more about exactly what he's expecting.
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Speaker 1: All right, I'll give him a call.
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Speaker 2: I'll give him a call.
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Speaker 1: We'll stick it in the newsletter. But he keeps using
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Speaker 1: the word substantially. The NBC has very clear part of
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Speaker 1: the courage substantially reduniate bank lending, et cetera, et cetera.
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Speaker 1: His only concern, of course, is the incoming labor government
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Speaker 1: and the Bank of England.
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Speaker 2: Will they work together and.
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Speaker 1: Keep policy relatively tight, unleashing the private sector to go
6:44
Speaker 1: for growth, or will they not? I think we can
6:46
Speaker 1: probably get see answer to that, but we'll come back
6:48
Speaker 1: that maybe in six months or so. Right down, anything
6:53
Speaker 1: else you want to say about this wonderful billmarket, No, I.
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Speaker 3: Think everyone should just sit back and enjoy it.
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Speaker 1: Now, before we get on to the conversation with John,
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Speaker 1: I want to point you to something we talk about
7:09
Speaker 1: during it that we didn't define and we should have.
7:11
Speaker 1: We talk about Sonya, and he talks about wanting to
7:14
Speaker 1: outperform Sonya, and a lot of you are going to
7:15
Speaker 1: be looking at that and you're going to be thinking, well,
7:17
Speaker 1: what earth is Sonya? And what it is is an
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Speaker 1: interest rate benchmark. It's the average price that banks paid
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Speaker 1: to borrow stirring from each other overnight. So it's just
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Speaker 1: a standard, straightforward measure of basic interest rates. And if
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Speaker 1: you are going to attempt to outperform that, you're just
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Speaker 1: going to be making more than you would in cash,
7:35
Speaker 1: which seems like a good way to run a fund,
7:37
Speaker 1: right John.
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Speaker 3: It's the deplacement to libel because people may it here
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Speaker 3: to libel.
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Speaker 1: Ah, Okay, good point.
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Speaker 2: Right.
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Speaker 1: We'll come back to this in our conversation after our
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Speaker 1: conversation with John. Welcome to Maren Talks Money the podcast
7:54
Speaker 1: In which people who know the market is explain the markets.
7:57
Speaker 1: I'm marrin Sumset Web. Here's my conversation with John Warren,
7:59
Speaker 1: who launched Tellworth Investments in October twenty seventeen. Before lad,
8:02
Speaker 1: he worked at Casinos Capital Ubs an investor. We begin
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Speaker 1: the conversation with John explaining why the fund he runs
8:08
Speaker 1: Tmtelworth's Select just different to a standard fund.
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Speaker 6: The Tailworth fund that I run, the UK Select Fund,
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Speaker 6: is an absolute return fund. So what we are trying
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Speaker 6: to achieve is very consistent, low volatile returns for our investors,
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Speaker 6: and we achieve that by being both long and short shares.
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Speaker 6: We do that by being neutral to the market, so
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Speaker 6: we're not trying to take a big directional bet on
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Speaker 6: the market and basically be stock pickers. So we want
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Speaker 6: to buy stocks that are going up and be short
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Speaker 6: of stocks that are going down, and make consistent returns
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Speaker 6: with a very low volatility and importantly as well not
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Speaker 6: be correlated to the direction of the market or changes
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Speaker 6: in economic conditions or interest rate cycles, which is clearly
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Speaker 6: a big area for dat debate at the moment, and
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Speaker 6: really just we are targeting eight to ten percent returns
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Speaker 6: a year on a consistent basis. That's what we're trying
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Speaker 6: to achieve for our investors.
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Speaker 1: Okay, that's an extraordinary thing. Eight to ten percent a year. Now,
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Speaker 1: when you say absolute return, of course, we're all immediately
9:13
Speaker 1: thrilled because one of our big ripes me and John,
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Speaker 1: one of our big rights of the fund management industry
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Speaker 1: as a whole is benchmarking is the idea that returns
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Speaker 1: are always relative to something the returns of something else.
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Speaker 1: You're never judging yourself in absolute returns how much money
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Speaker 1: have you actually made for people year by year by year.
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Speaker 1: It's about, well, you know, I have performed this benchmark
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Speaker 1: by zero point five percent, or I have performed that
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Speaker 1: benchmark by one and a half percent, or.
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Speaker 2: Whatever it is. And we always look at it and
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Speaker 2: we think, well, hang, onlydic.
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Speaker 1: If you are judging yourself relative to something, it's got
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Speaker 1: to be quite hard to outperform it over the long
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Speaker 1: term because you're always looking at it and going, oh god,
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Speaker 1: you know, I'm scared I'm gonna underperform it. Therefore, you
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Speaker 1: do end up investing in a way that is much
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Speaker 1: closer to the benchmark you're tracking than then you should.
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Speaker 2: Right looking at active.
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Speaker 1: Active shares that the extent to which your fund is
10:04
Speaker 1: different from the indexit tracks, and so often you're still
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Speaker 1: looking at at fairly low percentages of funds being genuinely
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Speaker 1: different to their benchmarks.
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Speaker 2: And I always think that maybe one.
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Speaker 1: Of the great mistakes that this industry has ever made
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Speaker 1: is being relative.
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Speaker 6: I'd agree. And what are people trying to achieve with
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Speaker 6: their savings and what are savings products trying to do?
10:27
Speaker 6: In investment products trying to do?
10:28
Speaker 1: Well?
10:29
Speaker 6: You're trying to grow your wealth over time. That's surely
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Speaker 6: that what everyone is trying to achieve. It's certainly what
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Speaker 6: I try and achieve with my personal wealth and with
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Speaker 6: my investors' funds. In the in the fund. Clearly, if
10:42
Speaker 6: you are long only, there is always some elements of
10:45
Speaker 6: directional direction of them underlying market you're investing in that's
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Speaker 6: going to dominate returns. So very hard to make absolute
10:53
Speaker 6: returns if the market has a big bear crash, for example.
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Speaker 6: What we do, though, is by making sure that we're
10:58
Speaker 6: not taking that market. By having positions both sides, it
11:02
Speaker 6: means that we are generally should be expected to make
11:05
Speaker 6: returns irrespective of what's going on in the border economy.
11:09
Speaker 6: In the border markets, so we benchmark to cash, so
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Speaker 6: we have to outperform cash, so we use Sonya for that.
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Speaker 6: So clearly that wasn't much of a challenge for many years.
11:19
Speaker 6: It's more of a challenge now, but we benchmark against that,
11:21
Speaker 6: so we expect to make a return in excess of
11:23
Speaker 6: the cash return. And like I say, targeting eight to.
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Speaker 1: Ten, do you think all fund managers should do that?
11:28
Speaker 1: I mean, I always think that it will be polite
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Speaker 1: of fund managers to tell us they're going to make
11:32
Speaker 1: us cash plus three for example.
11:35
Speaker 6: I think it would be a nice thing to hope,
11:37
Speaker 6: and I think most people judge their wealth managers with
11:40
Speaker 6: that if you're looking at an overall portfolio. I think
11:43
Speaker 6: it's quite hard, though, if you're investing in a niche
11:46
Speaker 6: specialist fund to expect to be able to beat the
11:49
Speaker 6: direction of that fund. But I guess a lot of
11:51
Speaker 6: it comes down to your time horizon, doesn't it. And
11:54
Speaker 6: unfortunately many people now look at quarterly performance or half
11:58
Speaker 6: yearly performance. If you're looking over a five to ten
12:01
Speaker 6: year of view, then I would think that's a perfectly
12:02
Speaker 6: acceptable thing to expect to ask.
12:04
Speaker 7: Yeah, I mean, anyone charging you one and a half
12:06
Speaker 7: percent or one percent or even eighty basis points a
12:09
Speaker 7: year for their special skill should be able to give
12:12
Speaker 7: you cash plus three percentage points over a five year period.
12:16
Speaker 6: I think once you're getting into longer term periods, that's
12:17
Speaker 6: an absolutely fair, fair requirement.
12:20
Speaker 1: Okay, good with the established new rules for the fund
12:22
Speaker 1: management industry. Anyone who can find a reason to disagree
12:25
Speaker 1: with us, hate Melton John, Please, I know expect.
12:28
Speaker 6: I expect some colleagues will be getting in touch suit shortly.
12:31
Speaker 2: They always do. Okay, So here we are. You're invest
12:34
Speaker 2: in the UK market.
12:35
Speaker 1: I know that for you, it's not about direction of
12:38
Speaker 1: the market itself, because as you just said, you're short
12:40
Speaker 1: and you're long, and you're trying to be neutral. But
12:42
Speaker 1: nonetheless it feelds like I'm intensative here because you know,
12:47
Speaker 1: you can have the wrong feelings. But it feels like
12:49
Speaker 1: something is changing in the UK market. That thing people
12:53
Speaker 1: are beginning to get interested.
12:55
Speaker 2: The big banks, the ubs is, etc.
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Speaker 1: The brokers are beginning to change their view and suddenly say, well,
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Speaker 1: if not the market we eight most in the world.
13:02
Speaker 2: It's one of our favorite markets.
13:03
Speaker 1: Because it's cheap and it's interesting. There's a sense there
13:07
Speaker 1: might be some foreign buyers coming in with seeing new
13:09
Speaker 1: eyes and the footst forty one hundred over and over
13:12
Speaker 1: and the other and the other areas doing well too.
13:15
Speaker 1: Might even be some interest in mid and small caps
13:17
Speaker 1: coming through. Are you buying it that there's a turn here?
13:22
Speaker 6: It definitely feels like there has been a change in
13:24
Speaker 6: the sentiment into the UK market. I think that's come
13:28
Speaker 6: from a few reasons, one of which is just performance. Unfortunately,
13:31
Speaker 6: the market is a momentum chasing market in so many
13:34
Speaker 6: ways now, and the performance that the market has had
13:36
Speaker 6: is attracting some more plows of funds. I think one
13:39
Speaker 6: of the areas which has been much talked about on
13:41
Speaker 6: this podcast is the lack of equity inflows into the
13:45
Speaker 6: UK market that has been ongoing for a long long time. Interestingly, though,
13:49
Speaker 6: overseas investors have actually been met buyers of the UK
13:51
Speaker 6: for a period now, and the very noticeable factor as
13:55
Speaker 6: well has been the increase in M and A. So
13:58
Speaker 6: we always thought one of the big catalysts for the
14:00
Speaker 6: UK market sentiment change would be a footy one hundred bid.
14:05
Speaker 6: We've had that with the approach for Anglos from BHP.
14:09
Speaker 6: Clearly that hasn't actually come to any formal agreement yet,
14:14
Speaker 6: but just the fact that a business of that size
14:16
Speaker 6: is attracting M and A, and we've seen a lot
14:18
Speaker 6: of it further down the market caps as well. We
14:20
Speaker 6: invest a lot in the MidCap part of the market
14:22
Speaker 6: as well as the large cap part of the market,
14:24
Speaker 6: and we've seen lots of bid interest, so the trade
14:27
Speaker 6: buyers coming in seeing value in these companies at meaningful premiums,
14:33
Speaker 6: and the overall that just the valuation of the UK
14:35
Speaker 6: market is very very attractive on both an absolute and
14:38
Speaker 6: I hate to say it, Marian, but a relative basis
14:41
Speaker 6: as well. So when you're looking at the UK market
14:45
Speaker 6: relative to particularly the US, I think we're a second percentile,
14:49
Speaker 6: so you know, a two in one hundred year valuation
14:53
Speaker 6: cheapness against the US market.
14:56
Speaker 1: Well, we're happy to look at relative off we've already
14:58
Speaker 1: looked at absolutely so with ubernapps terms, and then it's
15:00
Speaker 1: also extremely cheap in relative terms.
15:02
Speaker 2: Then I think that's excellent news.
15:04
Speaker 1: But you said that foreign bius have been met bias
15:07
Speaker 1: for a little bit of time now, but.
15:08
Speaker 2: Domestic buiers consistently are not.
15:11
Speaker 1: And one of the other things we say we always
15:13
Speaker 1: say on this podcast to our listeners, particularly those who
15:16
Speaker 1: are UK based investors, if you don't buy these stocks
15:20
Speaker 1: somebody else?
15:21
Speaker 2: Will? We see that in the L and A Right,
15:24
Speaker 2: what is it do you think that might make UK
15:27
Speaker 2: investors start buying again?
15:29
Speaker 1: Will they dive into thisum momentum? Or they do they
15:32
Speaker 1: need something like the britt Eye Cerel something like that
15:34
Speaker 1: to make them stop with the domestic self loathing which
15:37
Speaker 1: we see not just in not just.
15:38
Speaker 2: An investment, right, we see that across the board. What
15:41
Speaker 2: might make them return to us?
15:43
Speaker 6: Well, like I say, unfortunately, some of it is fomo,
15:46
Speaker 6: so some of it is just needs to be the
15:48
Speaker 6: fear of missing out. We also have some long only
15:50
Speaker 6: funds that tell us. One of my colleagues pull Marriage,
15:53
Speaker 6: was seeing an investor only the other week and that
15:56
Speaker 6: investor said, well, I'm very happy to miss the first
15:58
Speaker 6: twenty five percent of a move. So sometimes that's the
16:01
Speaker 6: way that people want to move, and unfortunately people are
16:04
Speaker 6: trend followers and that may well be the case that
16:06
Speaker 6: we need that just that performance. I think changes from
16:11
Speaker 6: pension reforms, from the brit Isser, all of these things
16:13
Speaker 6: are great sentiment helpers. And actually I think the other
16:17
Speaker 6: point that we probably need to see is just people
16:20
Speaker 6: actually starting to look at value again and understanding what
16:23
Speaker 6: valuations mean in investing. The market has been very driven
16:27
Speaker 6: by momentum, earnings upgrades and almost wanting to buy growth
16:32
Speaker 6: at any cost. But at some point valuation does matter
16:37
Speaker 6: and that's what corporates are telling you. That's why they're
16:39
Speaker 6: buying these companies. And as we see interest rates hopefully
16:42
Speaker 6: started to move down in the UK, it seems like
16:45
Speaker 6: the UK economy is slightly different now from the US
16:49
Speaker 6: quite possible. We don't see rate cuts in the US,
16:51
Speaker 6: but we probably will see them in the UK. We
16:53
Speaker 6: think we probably get one in June, and that may
16:55
Speaker 6: well just bring people back to the UK a little
16:57
Speaker 6: bit as well.
16:58
Speaker 5: They will get one and do even with those rather
17:01
Speaker 5: than nice GDP now as we had the other day,
17:03
Speaker 5: showing that actually things are so badly.
17:05
Speaker 2: Economy is barreling along rather pleasantly.
17:07
Speaker 6: I think so, And the signaling from the NPC I
17:10
Speaker 6: thought last week was probably that we do still get
17:13
Speaker 6: one in June. I don't think it matters too much
17:17
Speaker 6: whether we get one in June or slightly later in
17:19
Speaker 6: the year. The main thing is that I think there's
17:21
Speaker 6: a very clear signaling now in the UK market that
17:24
Speaker 6: rates have peaked and the next move will be downwards.
17:27
Speaker 6: And when you look at the correlations of the Footsy
17:29
Speaker 6: two to fifty, particularly to rate expectations, and it's very strong.
17:33
Speaker 6: So if we start as those rate expectations come down,
17:36
Speaker 6: we see the Footsie two fifty starting to form really
17:39
Speaker 6: quite strongly. So I think that boats quite well for
17:41
Speaker 6: the domestic parts of the market, and maybe a broadening
17:45
Speaker 6: out of this rally that we've seen, which has actually
17:47
Speaker 6: been pretty narrow so far. It's been very driven by banks,
17:52
Speaker 6: miners and oils, and we would see that broadening out
17:55
Speaker 6: more into the Footsy two fifty as those expectations of
17:58
Speaker 6: rate cuts start getting priced into the market.
18:01
Speaker 1: Okay, so let's let's talk about where you're actually invested there. Now,
18:05
Speaker 1: you say that your your market neutral and you're set
18:09
Speaker 1: in neutral way of no specific adherence to any any favoraus,
18:13
Speaker 1: sectors or anything like that. So your pure stock pick
18:16
Speaker 1: is so where are you? Where are you finding the value?
18:19
Speaker 1: What is interesting?
18:21
Speaker 6: We do think the banks have been interesting for a while.
18:24
Speaker 6: We were a bit early into it into last year,
18:26
Speaker 6: but we still think that West Has is a fantastic business.
18:31
Speaker 6: It's got great opportunities. It's now growing its tangible and
18:34
Speaker 6: asset value. You've got the structural hedge which will have
18:39
Speaker 6: some meaningful impact on the on the P and L
18:41
Speaker 6: this year.
18:42
Speaker 2: Stop stop, go back structural hedge.
18:45
Speaker 6: So this is basically the way banks manage their balance sheets,
18:48
Speaker 6: so how they fund themselves, and that means that as
18:53
Speaker 6: interest rates expectations change and come down, that hedge starts
18:57
Speaker 6: paying them money. In simple terms, so we think at
19:00
Speaker 6: Thatwest it's about three hundred million pounds of profit a
19:04
Speaker 6: year generated from essentially the balance sheet where they have
19:07
Speaker 6: a fixed leg and a variable leg on their balance sheet.
19:10
Speaker 6: It's been a big negative impact on the P and
19:12
Speaker 6: L while rates go up, and it becomes supportive to
19:15
Speaker 6: the P and L as rates fall.
19:17
Speaker 2: Okay, so if rates don't fall, if.
19:19
Speaker 6: Rates don't fall, it will have a net zero benefit
19:22
Speaker 6: to that. You know, we won't impact. But as time
19:25
Speaker 6: moves on, you have some of that old leg of
19:27
Speaker 6: the P and L which was funded at very low
19:30
Speaker 6: rates that starts to roll off. So even if rates
19:33
Speaker 6: don't fall, just the passage of time benefits the balance
19:36
Speaker 6: sheet as well.
19:36
Speaker 2: So now with other banks, yeah.
19:39
Speaker 6: We are also think that One Savings Bank is interesting.
19:42
Speaker 6: This is a buy to let lender. It's had its issues,
19:45
Speaker 6: It's definitely had its issues with expectations management. Its interest
19:50
Speaker 6: margin has been its net interest margin has been under
19:53
Speaker 6: some pressure. But these are just very, very cheap equities now.
19:57
Speaker 6: So One Savings Bank is trading on a pee of
19:59
Speaker 6: less than five times, it has a you know, it
20:03
Speaker 6: will be returning some cash through dividends as well, and
20:07
Speaker 6: so we just think there's just incredible value and we
20:10
Speaker 6: have to be patient. I think it's very important to
20:12
Speaker 6: say that. Sometimes when we tell people that we're along
20:16
Speaker 6: short investors, they think hedge funds trading. All you're doing
20:19
Speaker 6: is taking short term bets. Now, we're very happy to
20:22
Speaker 6: take long term views on these businesses, and as long
20:25
Speaker 6: as we have that balance within the portfolio, we can
20:28
Speaker 6: take that long term view.
20:30
Speaker 2: Well, I accept that you're not looking at sectors.
20:33
Speaker 1: Are there any other groups of stocks that feature prominently
20:36
Speaker 1: in their portfolio?
20:38
Speaker 6: Yes, so airlines and tour operators is a part of
20:42
Speaker 6: the portfolio. We were quite encouraged. We own we own
20:45
Speaker 6: Jet two, we own easy Jet, we also own Ryanair.
20:48
Speaker 6: We think that's the sector that's in really good health
20:51
Speaker 6: at the moment. It's one thing that it seems that
20:53
Speaker 6: the UK consumer is not prepared to give up on
20:56
Speaker 6: is there summer holiday and until this weekend you can
20:59
Speaker 6: see certainly see why with the weather we've had so far.
21:02
Speaker 6: One of the areas we like to look at a
21:04
Speaker 6: lot when we're analyzing businesses in industries is the supply side,
21:07
Speaker 6: and the supply side of the package holiday industry has
21:10
Speaker 6: changed a lot. We've seen some quite big exits. Obviously,
21:14
Speaker 6: Thomas Cook going bankrupt a few years ago has made
21:19
Speaker 6: big changes to that industry. But also the other area
21:22
Speaker 6: of supply side is in the supply of planes, and
21:25
Speaker 6: it's been well publicized that Boeing and Airbus as well
21:29
Speaker 6: now are having some problems delivering new planes. That means
21:32
Speaker 6: that a lot of these airlines have some real pricing
21:35
Speaker 6: power now because capacity is not coming back into the
21:37
Speaker 6: sector as quickly as people might have expected, and therefore
21:40
Speaker 6: they're getting good pricing. So unfortunately, although everyone is going
21:43
Speaker 6: on holiday, it's costing you all a bit more this year,
21:45
Speaker 6: but that is very good for the profits of the
21:47
Speaker 6: airline companies. Fuel prices have also come down as well,
21:50
Speaker 6: so we like the dynamics of that industry. Again, the
21:54
Speaker 6: valuations they are really attractive. You know, jet to seven
21:57
Speaker 6: and a half times earnings. I think for the forecast,
21:59
Speaker 6: you know, it's longer term average P has been twelve.
22:02
Speaker 6: This is a business that's grown revenues at twenty percent
22:05
Speaker 6: over the last decade and profits at thirty trading on
22:08
Speaker 6: seven and a half times earnings. So you know, we
22:11
Speaker 6: really see there's both good drivers for the P and
22:14
Speaker 6: L and also a very attractive evaluation metrics. Across the
22:18
Speaker 6: airline sector, there's.
22:20
Speaker 1: No sense at all that people are translating there in
22:22
Speaker 1: tense anxiety about climate change into their some holiday plans.
22:25
Speaker 6: Is that it definitely isn't impacting consumer behavior at all.
22:29
Speaker 1: Is there any long term risk to holiday companies and
22:32
Speaker 1: airline companies around saying regulation on the extent to which
22:36
Speaker 1: one can fly or not fly and constantly seeing stories
22:39
Speaker 1: in the newspapers about her won't be long before we're
22:41
Speaker 1: all limited to four long haul flights in a lifetime.
22:45
Speaker 6: Let's hope not. But look, I guess there's always longer
22:48
Speaker 6: term risks for companies. The one thing I would say
22:51
Speaker 6: is that we're paying seven and a half times earning.
22:53
Speaker 6: So it's a bit like when you look back at
22:55
Speaker 6: the tobacco companies. Clearly everyone has taken the view that
22:58
Speaker 6: tobacco is not good for us, not good for anyone,
23:00
Speaker 6: and they've been heavily regulated. But you know, when you're
23:03
Speaker 6: paying very low valuations for these for these types of shares,
23:06
Speaker 6: the shares can still do a really good job for you.
23:08
Speaker 6: And that's what we would see.
23:09
Speaker 2: And also, if you're one of the incumbents, you're set pretty.
23:11
Speaker 6: Fair well, exactly. And that's the thing. It stops new
23:14
Speaker 6: new entrants coming in and wanting to try and compete
23:17
Speaker 6: away those attractive margins that you're seeing.
23:19
Speaker 1: And that's also the case in energy, because no one's
23:21
Speaker 1: going to go out now and sort of set and
23:23
Speaker 1: your oil company.
23:24
Speaker 6: Are there, no, And you know, again, oil isn't a
23:27
Speaker 6: sector that we play a lot in a bit like
23:29
Speaker 6: the miners. What we're trying to do is as stock pickers,
23:32
Speaker 6: what we want to be able to do is analyze
23:33
Speaker 6: in actual company and value of value like that. What
23:36
Speaker 6: we don't want to have to do is make these
23:38
Speaker 6: big macro calls. By being market neutral and factor neutral,
23:42
Speaker 6: what it means is that we don't have to spend
23:44
Speaker 6: our time worrying about what the next GDP figure is
23:47
Speaker 6: or what the next interest rate cut is. What we
23:49
Speaker 6: can do is have a balanced portfolio in the way
23:52
Speaker 6: that you have with an oil company. Clearly, the most
23:54
Speaker 6: important thing for how that share price performs is what's
23:57
Speaker 6: happening with the oil price, and frankly, we don't really
24:00
Speaker 6: have a clue, so we'd rather not make that decision.
24:03
Speaker 2: All the evidence tells us that nobody has a cluience.
24:06
Speaker 1: You wouldn't be alone there, You don't only be alone
24:08
Speaker 1: and in missing it exactly. So what have you added recently,
24:13
Speaker 1: what's come what's come out recently, and what's coming in recently?
24:16
Speaker 6: I would say the most recent edition would be a
24:20
Speaker 6: business called Dowlay actually, which is another stock that very
24:23
Speaker 6: much falls into that value bucket. So Dowlay was a
24:28
Speaker 6: spin out for Melrose. It's an automotive supplier, so not
24:32
Speaker 6: particularly trendy, I guess in that, you know, and maybe
24:34
Speaker 6: if we're getting into ESG world, you can can we
24:36
Speaker 6: can talk about that. But they are a leading producer
24:39
Speaker 6: of drive trains, so these are the parts of them
24:42
Speaker 6: that actually changed the engines down through the wheel. So
24:45
Speaker 6: you have a drive train that comes down the middle
24:47
Speaker 6: of the car and that puts the power from the
24:48
Speaker 6: engine into the wheel. They're the leading provider of that
24:51
Speaker 6: in the world pretty much. That have some good products
24:53
Speaker 6: for electric vehicles as well. But this is a business
24:56
Speaker 6: that has really just been completely lost in the UK midcaps.
25:00
Speaker 6: Like I say, it's spun out of Melrose, So the
25:03
Speaker 6: shares got put into the hands of Meloe shareholders, who
25:06
Speaker 6: I don't think really wanted to hold a UK MidCap
25:08
Speaker 6: auto supplier. So that's been They've been sold heavily and
25:14
Speaker 6: now these shares are trading on ap of five times
25:18
Speaker 6: with a decent balance sheet in an industry that you know,
25:22
Speaker 6: they are growing revenues, growing profits, when we just think
25:26
Speaker 6: that's you know, just too cheap. What we've been watching
25:29
Speaker 6: there has been we've been watching the shareholder register and
25:33
Speaker 6: how that's evolved, and we've seen a huge churn in
25:35
Speaker 6: that and we think that that's pretty much at the
25:37
Speaker 6: end and on that valuation, we've decided that was an
25:40
Speaker 6: interesting time to come into the stock.
25:42
Speaker 1: It does see ridiculously cheap, doesn't it. Are you seeing
25:45
Speaker 1: a lot of that kind of price in the smaller
25:47
Speaker 1: MidCap sectors at the moment, and particularly in midcaps.
25:50
Speaker 6: In midcaps, I mean, there are a lot of stocks.
25:52
Speaker 6: I mean, we did some analysis at the start of
25:54
Speaker 6: the year and I'm afraid we haven't updated it since,
25:56
Speaker 6: but we looked at the footsy two fifty. So in
25:59
Speaker 6: the footsy two there's one hundred or at the start
26:01
Speaker 6: of the year, obviously is a few less now, but
26:03
Speaker 6: there are one hundred and sixty seven trading companies. So
26:06
Speaker 6: if you take out the investment trusts, et cetera, one
26:09
Speaker 6: hundred and sixty seven now a third of those were
26:12
Speaker 6: on a free cash flow yield greater than thirteen percent.
26:15
Speaker 6: There's really really strong cash flows and the market's just
26:17
Speaker 6: ignoring them. People often thought, don't they that profits are
26:20
Speaker 6: show and cash is you know, cash, cash is the king,
26:23
Speaker 6: and if you've got that genuine cash flow coming through
26:26
Speaker 6: in these companies, it's very hard to doubt that those
26:28
Speaker 6: those valuation metrics are for real. So, yeah, we see
26:32
Speaker 6: a lot of a lot of great opportunities in the
26:34
Speaker 6: medcap space, but also in the footy one hundred as well.
26:37
Speaker 6: Like we've been talking about that, you know, the banks
26:39
Speaker 6: and the airlines are still very, very cheap yeah, and Marks.
26:42
Speaker 2: And Dispensers, is it still one of your top holding? Yes,
26:45
Speaker 2: I think I feel like I feel like in my career.
26:47
Speaker 1: Now I've been I've seen Marks and Spencers go around
26:50
Speaker 1: and so many circles.
26:51
Speaker 2: It's getting ridiculous.
26:52
Speaker 1: And so many times when people have looked at Marks
26:54
Speaker 1: Dispensers and gone on, my goodness, are so cheap.
26:56
Speaker 2: It's so cheap. It's so cheap. And and here we are, here,
26:58
Speaker 2: we are still cheap.
26:59
Speaker 6: I'm not sure myself as well how many times I've
27:02
Speaker 6: brought into a new market expenses recovery plan, but this
27:05
Speaker 6: one actually seems to be working, so yes, it's marketing
27:09
Speaker 6: expenses is actually the biggest position in the fund at
27:13
Speaker 6: the moment, single stock position. Yeah, we think it's it's actually,
27:18
Speaker 6: you know, the transition plan is working really well. The
27:20
Speaker 6: things we have looked at, particularly given US encouragement, is
27:24
Speaker 6: the full price mix. So that's improved from being in
27:27
Speaker 6: the sixty percent to eighty percent. So that's how many
27:30
Speaker 6: of their sales they're managing to sell at full price
27:33
Speaker 6: rather than having to discount.
27:35
Speaker 2: And so what's normal in the retail CITA.
27:38
Speaker 6: The best players in the industry will achieve ninety so
27:41
Speaker 6: next and Indo text will be in the nineties, so
27:43
Speaker 6: they're still a bit further to go and we would
27:45
Speaker 6: hope them to get there, but sixty was pretty awful
27:48
Speaker 6: again when you know, looking at the supply side. The
27:51
Speaker 6: one thing that's has been quite a lot of exit
27:53
Speaker 6: in clothing in the UK market. There's been lots of closures.
27:57
Speaker 6: Probably the most important one for the sector was Debenham's closing.
28:01
Speaker 6: They were the most disruptive in terms of that discounting
28:05
Speaker 6: on the high street, so that's probably helped them, but
28:07
Speaker 6: also better ranging. But interestingly, even with that move in
28:12
Speaker 6: full price sales, the gross margin hasn't really improved yet.
28:15
Speaker 6: Part of that was clearly cost inflation, but also that
28:18
Speaker 6: implies to us they're becoming much more cost competitive, which
28:21
Speaker 6: is clearly important in the economy at the moment where
28:24
Speaker 6: consumers have been a little bit under pressure, So we
28:27
Speaker 6: think that's really interesting. The food business has always been good,
28:31
Speaker 6: there's a big opportunity for them in homewares and beauty
28:34
Speaker 6: products where they don't push anywhere near their weight, and
28:36
Speaker 6: the balance sheet is much better as well. So yeah,
28:38
Speaker 6: we really like Maske expenses and as I say, it's
28:40
Speaker 6: the biggest long position in the fund of the moment
28:43
Speaker 6: as the two.
28:44
Speaker 1: The other two that I'm quite interested in. Your top
28:46
Speaker 1: holdings are the London Stock Exchange. Tell us about that
28:49
Speaker 1: a bit.
28:49
Speaker 6: London Stock Exchange is a really interesting business. We think
28:52
Speaker 6: it's one where there is lots of m and a
28:54
Speaker 6: opportunity for them. You know, we've seen consolidation in that space.
28:58
Speaker 6: Is also transferred transformed its profitability a lot into data
29:03
Speaker 6: products as well, so the Footzie and the Rustle indexes.
29:05
Speaker 6: And as a small business, we know how much we
29:08
Speaker 6: have to pay for these products. And there's definitely been
29:10
Speaker 6: strong inflation in there been a good performer for us,
29:13
Speaker 6: and it's actually been one we have been reducing because
29:16
Speaker 6: we do see that valuation as being pretty full now.
29:20
Speaker 2: So okay, so you reduce of that on a valuation basis.
29:23
Speaker 1: Is that how the shorts work as well your shorts
29:26
Speaker 1: to make your market neutrality.
29:28
Speaker 2: You've got longs and you've got shorts.
29:29
Speaker 1: The shorts are they companies that you think are lousy
29:32
Speaker 1: companies or are they companies that you think are just
29:35
Speaker 1: a little too pricey even if they're high quality.
29:38
Speaker 2: How did that work?
29:39
Speaker 6: It could be a combination of both. So generally we
29:42
Speaker 6: have about forty positions on both sides, so we have
29:45
Speaker 6: about forty longs and about forty shorts. So clearly, trying
29:48
Speaker 6: to find forty companies in the UK market that we
29:50
Speaker 6: think are going to go bust is probably unlikely. So
29:54
Speaker 6: we can't just be short bad businesses. Also, as I said,
29:57
Speaker 6: we want to be factor neutral as well, so if
30:00
Speaker 6: we're looking at the quality factor, we have to be short.
30:02
Speaker 6: If we're long quality businesses, we need to be short
30:05
Speaker 6: some quality businesses as well. So we have to accept
30:08
Speaker 6: the fact that we're going to have to be short
30:10
Speaker 6: businesses that we think are really good businesses where we
30:12
Speaker 6: just don't think the valuations are right or we think
30:14
Speaker 6: there's some risk out there. It's a tricky skill. Not
30:17
Speaker 6: many fur managers have done it successfully over the years,
30:21
Speaker 6: because you really need to have that ability to separate
30:24
Speaker 6: businesses and share prices and accept the fact that you
30:27
Speaker 6: can be a good business but you can be trading
30:28
Speaker 6: at the wrong valuation. And unfortunately we are a UK
30:32
Speaker 6: only fund here. We do a little bit in Ireland
30:35
Speaker 6: and a very small amount in Europe, but that means
30:37
Speaker 6: unfortunately we can't be short lots of the very highly
30:40
Speaker 6: overvalued businesses in the US.
30:42
Speaker 2: So it's pretty brutal stuff. Then the way that you work,
30:47
Speaker 2: you know, and there's an.
30:47
Speaker 1: Ordinary firm manager that says to meander around the bay
30:49
Speaker 1: finding something kind of like. But pretty much every time
30:52
Speaker 1: you find something that you like, you also have to
30:55
Speaker 1: find something you're prepared short.
30:57
Speaker 6: Exactly, and it is and it's hard work, and it's
31:02
Speaker 6: we need lots of ideas, but also sometimes it's accepting
31:06
Speaker 6: the fact that some of the shorts will not make
31:08
Speaker 6: you absolute returns. So you know, at the moment the
31:12
Speaker 6: last over the last month or two, it's been pretty
31:15
Speaker 6: hard to make absolute returns on your shorts because the
31:17
Speaker 6: market is going up very strongly. But as long as
31:19
Speaker 6: we can pick longs that go up by more than
31:21
Speaker 6: our shorts than clearly we are we can make good
31:24
Speaker 6: returns for our investors.
31:26
Speaker 2: Okay, but it's harder for you when the market is rising.
31:28
Speaker 2: So let's say that we're.
31:29
Speaker 1: Right, you and I, because we're bound to be right,
31:32
Speaker 1: said the UK market being in recovery and the momentum
31:35
Speaker 1: leading to more momentum, because the hardest John and I
31:37
Speaker 1: discussed last week all fund managers are really momentum managers.
31:40
Speaker 2: It doesn't matter what they tell you. Oh i'm value,
31:42
Speaker 2: i'm quality, I'm this, I'm that. Now, you're all momentum, right.
31:45
Speaker 1: So as it gets going, it'll get going more the
31:48
Speaker 1: market goes up and it becomes hard for you. You
31:51
Speaker 1: you're harder for you to consistently outperform other funds. Although
31:54
Speaker 1: we don't believe in relative but for the moment, let's
31:56
Speaker 1: talk about was relative to other funds. As the market covers,
32:00
Speaker 1: that becomes more difficult for you, not not easier. Surely,
32:03
Speaker 1: if everything's going up.
32:05
Speaker 6: It makes it more difficult to make absolute returns on
32:07
Speaker 6: our short book. That's correct. But clearly what we need
32:10
Speaker 6: to do is make sure that our lungs are going
32:12
Speaker 6: up by more than our shorts and when the market
32:15
Speaker 6: is performing very strongly, we are not going to make
32:17
Speaker 6: you the same amount of money as a long only fund,
32:20
Speaker 6: but what we will do is protect your capital much
32:23
Speaker 6: better and hopefully make you returns when the market is falling.
32:26
Speaker 6: So it is that we don't sell this fund as
32:29
Speaker 6: a UK equity fund. So most people that invest in
32:32
Speaker 6: this fund are not buying it because they think the
32:34
Speaker 6: UK equity market is going up. They might be buying
32:37
Speaker 6: it because they think the UK equity market is going
32:39
Speaker 6: down and therefore they want the ability to have that
32:42
Speaker 6: absolute return. What they're saying is this plays a part
32:45
Speaker 6: in my portfolio of where we can get that consistency
32:49
Speaker 6: of return and uncorrelateable to turns, So it's not correlated
32:53
Speaker 6: to equity markets or bond markets, and it's producing that
32:56
Speaker 6: type of return stream. But yes, I mean, you know,
33:00
Speaker 6: is always hard. Most of the market is always positive,
33:03
Speaker 6: most analysts are always positive on stocks, So you have
33:05
Speaker 6: to be prepared to be cynical. You have to be
33:07
Speaker 6: prepared to go against what most people are telling you
33:11
Speaker 6: about that company, and usually the company managements as well,
33:14
Speaker 6: because clearly company management teams always want to tell you
33:17
Speaker 6: how great things are. They don't want to highlight the
33:19
Speaker 6: bad bits. So that's definitely a skill that you have
33:21
Speaker 6: to develop for running a strategy like this.
33:24
Speaker 5: Strategically speaking, for a retail investor, if you are thinking
33:30
Speaker 5: about how to constructure your portfolio, and perhaps you have
33:33
Speaker 5: a fairly big passive component to your portfolio, this is
33:37
Speaker 5: the kind of active fund that it makes sense to
33:39
Speaker 5: hold alongside a passive portfolio.
33:42
Speaker 2: Does that make sense absolutely.
33:45
Speaker 6: I think these funds are not very well understood by investors.
33:49
Speaker 6: I think sometimes people are scared of them. I think
33:51
Speaker 6: sometimes the regulate it scared of them as well. To
33:53
Speaker 6: be honest with you, with the risk ratings we get
33:56
Speaker 6: sometimes on these funds because we do shorts companies and
33:59
Speaker 6: we use we use CfDS in the fund, so that
34:02
Speaker 6: makes the regulator sort of a bit concerned about this
34:04
Speaker 6: product and can put quite high risk ratings. But actually
34:06
Speaker 6: when you look at the return profiles, these are incredibly
34:09
Speaker 6: low risk funds. And we spend a lot of time
34:14
Speaker 6: as fund managers managing the risk of this product to
34:16
Speaker 6: make sure that we're not taking market risk, that we're
34:19
Speaker 6: not taking interest rate risk, we're not taking domestic risk
34:23
Speaker 6: as well, so we don't want to be sort of
34:25
Speaker 6: just long the domestic economy as well. So I think
34:29
Speaker 6: they hold it a really they can play a really
34:32
Speaker 6: important part in an overall investor's portfolio for that sort
34:35
Speaker 6: of ballast of something that's trying to achieve. And when
34:38
Speaker 6: most people think what's an acceptable return on my investments
34:41
Speaker 6: over the years, as we say long term returns, people
34:44
Speaker 6: might usually assume us sort five or six. So if
34:47
Speaker 6: we can generate eight or ten in any market environment.
34:49
Speaker 6: We think that's a really attractive income stream.
34:52
Speaker 1: Makes we'd all say that, of course, do you worry
34:56
Speaker 1: that passive is getting is getting.
34:57
Speaker 2: A little too much?
34:59
Speaker 1: That you know, the beginning of the drive towards passive,
35:03
Speaker 1: we were all blother thrill that the idea that you
35:05
Speaker 1: could get a perfectly adequate.
35:08
Speaker 2: Long term investment at an incredibly low cost.
35:11
Speaker 1: But now that more and more of the assets under
35:14
Speaker 1: management are passively managed, do you.
35:16
Speaker 2: Think that affects the market? All? Of course, there any
35:19
Speaker 2: long term problem.
35:20
Speaker 6: I think it does, and I think that that the
35:22
Speaker 6: industry needs to have a look at this at some
35:23
Speaker 6: point and see where is the tipping point that we're
35:26
Speaker 6: not getting proper price discovery. And I think you know
35:29
Speaker 6: that is always a good risk that passive is. You know,
35:33
Speaker 6: you're just mentioning about how every investor is a momentum investor. Well,
35:36
Speaker 6: passive is the ultimate momentum and I think it brings
35:39
Speaker 6: real risk and the idea that well, I'm passive to
35:42
Speaker 6: the market, therefore I'm reducing risk just isn't the case,
35:45
Speaker 6: and particularly not when we're at stages right now where
35:49
Speaker 6: the mags seventh for example, is taking up so much
35:52
Speaker 6: of these global indices that you're actually taking a lot
35:55
Speaker 6: of risk that you probably don't realize you're taking by
35:57
Speaker 6: being passive. And as I say, one of the reasons
35:59
Speaker 6: why I think that's so the valuation argument is not
36:04
Speaker 6: being looked at, and the valuation attractions of certain markets
36:06
Speaker 6: and certain stocks isn't being taken into account. It's because
36:10
Speaker 6: the passives aren't looking at that. The passage just look
36:12
Speaker 6: at a weight and buy it. So it definitely brings risk.
36:16
Speaker 6: I think it was highlighted very strongly last year with
36:20
Speaker 6: Silicon Valley Bank. I read some statistics that there was
36:23
Speaker 6: one quite vocal short in that stock, but no one
36:26
Speaker 6: listened to him. But I think seven out of the
36:28
Speaker 6: top ten shareholders were all passive investors. And as they
36:33
Speaker 6: said that if you look for the problems, you could
36:35
Speaker 6: have seen them. But passive investors aren't looking for problems,
36:38
Speaker 6: and that means you get very bad by discovery, and
36:40
Speaker 6: that means that you get some big issues coming into markets.
36:42
Speaker 2: You have a price discovery problem potentially also a governance problem.
36:46
Speaker 6: Absolutely, Oh that's depressing.
36:52
Speaker 2: Sorry you carry on.
36:53
Speaker 6: No, I was going to say, well, I do think
36:55
Speaker 6: there's a sick clelement to these things. And clearly the
36:59
Speaker 6: market has moved strongly into passives and that's been partly
37:02
Speaker 6: driven by a regulator as well who's very focused on cost,
37:06
Speaker 6: not just on investment outcomes. So I think a more
37:10
Speaker 6: balanced approach on that will will help as well. And
37:14
Speaker 6: you know, maybe it needs a bit of a bear
37:15
Speaker 6: market or you know, a bit of a correction in
37:17
Speaker 6: some of these really big stocks and these really big
37:20
Speaker 6: you know, the areas of crowding in the market need
37:23
Speaker 6: to have a correction that they will then shake out
37:26
Speaker 6: and make people understand that cheapness of the investment product,
37:30
Speaker 6: just so the cost of its investing is not the
37:31
Speaker 6: only Is there any thing you should be solving for
37:34
Speaker 6: in portfolios.
37:36
Speaker 1: When you look around the world, which I know you're
37:38
Speaker 1: very focused on the UK, but I'm sure you're saving
37:39
Speaker 1: an eye for the rest of the world. Are there
37:41
Speaker 1: are any other markets that you find interesting from a
37:44
Speaker 1: valuation point of view? I'm guessing you wouldn't touch see
37:47
Speaker 1: you after the barge pole.
37:49
Speaker 6: No, I wouldn't. I mean, the KPE of the US
37:51
Speaker 6: market is thirty three times, so the KP is the
37:54
Speaker 6: long term pe. So the ten year pe that's at
37:58
Speaker 6: thirty three times, which I think is only been above
38:01
Speaker 6: that twice in its history. So no, I think the
38:04
Speaker 6: US looks like it's valued for perfection to me, with
38:08
Speaker 6: margins pretty much at peaks. So I think there's a
38:10
Speaker 6: lot of risk in the US market. I do think
38:12
Speaker 6: China might be getting interesting again. I mean a very
38:15
Speaker 6: uneducated view, so please, you know I'm a UK stock specialist,
38:19
Speaker 6: so please don't on global markets.
38:22
Speaker 2: We're interested in your instincts.
38:24
Speaker 6: So I think that you know, China has looked is
38:28
Speaker 6: starting to look interesting again, and maybe a few more
38:30
Speaker 6: of the emerging markets could be you know, Japan has
38:32
Speaker 6: clearly been had a good run. I think that the
38:35
Speaker 6: Japan is maybe a good indication of what could happen
38:39
Speaker 6: in the UK. You know, the valuation has got to
38:40
Speaker 6: extreme levels in it rallyed quite hard, and I think
38:43
Speaker 6: that we could be entering a period for the UK
38:46
Speaker 6: market a little bit like the rally we've seen in
38:48
Speaker 6: Japan over the last eighteen months.
38:50
Speaker 1: I'm not sure the jab may's been thrilled to be
38:52
Speaker 1: locked in with emerging markets.
38:55
Speaker 6: Sorry, yeah, I was thinking in China in that sense,
38:58
Speaker 6: but you're correct to pull me up on that, so
39:01
Speaker 6: thank you.
39:02
Speaker 2: Okay, Now the final question.
39:04
Speaker 1: If I were to not allow you to hold any
39:06
Speaker 1: small caps, any mid camps, any large caps, in fact,
39:09
Speaker 1: absolutely no, he's at all. But for a ten year period,
39:12
Speaker 1: you had to either hold bitcoin or gold and nothing else.
39:18
Speaker 2: Which would it be.
39:19
Speaker 6: I listened to this podcast, so I know this question
39:22
Speaker 6: was coming, and I really wanted to try and find
39:25
Speaker 6: a reason why I could say bitcoin, because no one
39:27
Speaker 6: else seems to say say bitcoin, but I can't. Unfortunately,
39:31
Speaker 6: so I can't find a compelling reason to own bitcoin
39:34
Speaker 6: anything that has the volatility that it has, and being
39:37
Speaker 6: an investor that looks at volatility, that can't be any
39:40
Speaker 6: store of value. So unfortunate, I'm going to have to
39:41
Speaker 6: go with the huge consensus and say gold.
39:44
Speaker 2: I don't think it's disappointing.
39:45
Speaker 6: Well, I know, but I'd like to think we as
39:49
Speaker 6: a long short investor, we like being contrarian at times,
39:51
Speaker 6: so I wanted to try and find that. Unfortunately, I
39:54
Speaker 6: couldn't find a good reason.
39:55
Speaker 2: Had you got any gold?
39:56
Speaker 6: Yes, in my personal investments, I have a bit of
40:01
Speaker 6: explosure to gold. I also have a little bit of
40:03
Speaker 6: explosure to bitcoin as well. I must say I must
40:05
Speaker 6: admit so, but that is very much as a trading position,
40:08
Speaker 6: as a not as a long term investment.
40:11
Speaker 2: Okay, well that you know that is interesting in itself.
40:13
Speaker 1: So this is just the first time we have had
40:14
Speaker 1: anybody on the podcast who has admitted to being a
40:17
Speaker 1: bitcoin trailer on the side. So you've given us something, yes, exactly,
40:23
Speaker 1: Thank you so much.
40:24
Speaker 2: Really enjoyed talking to you.
40:25
Speaker 6: Thanks very much, Marian.
40:32
Speaker 2: John.
40:33
Speaker 1: I think I think that John John John too many John's.
40:35
Speaker 1: I think that John is really interesting and I think
40:37
Speaker 1: also worth saying before we really go into talking about
40:40
Speaker 1: what he said, is that the performance of this fund
40:42
Speaker 1: has been excellent. It's very small fund, and the small
40:44
Speaker 1: funds that are easier to make out perform than big funds.
40:47
Speaker 1: I get that. But nonetheless, last five years he's up
40:50
Speaker 1: fifty four percent for one hundred over that time thirty
40:52
Speaker 1: three percent, but still you know, rising fast now, right,
40:55
Speaker 1: so we've massively outperformed the index he would use, which
40:59
Speaker 1: would be the investment station targeted and FLETE return index.
41:02
Speaker 1: I think although honestly, as we discussed in that conversation,
41:05
Speaker 1: he's not interested in the index. He's interested in making
41:08
Speaker 1: slightly more Hopefully, Brother a lot more than you will
41:11
Speaker 1: on catch.
41:12
Speaker 3: Yeah, and I thought, I mean, I thought it was
41:15
Speaker 3: really interesting. I think the lesters all have enjoyed the
41:18
Speaker 3: fact that this has actually been quite a good tippy
41:21
Speaker 3: one sliced talk about individual companies.
41:24
Speaker 1: I know it's not easy to get fund managers to
41:26
Speaker 1: do that, you know, I'm always trying to get them
41:28
Speaker 1: to come on, give us your top holdings, tell us
41:30
Speaker 1: your top tip, what would old for ten years or whatever?
41:32
Speaker 1: But mostly I think, you know, the compliance environment has changed,
41:35
Speaker 1: and in the old days it was quite easy to
41:37
Speaker 1: get fund managers just to sort of pour out a
41:39
Speaker 1: list of tips, but now they're rather more circum circumspect
41:43
Speaker 1: about it. Well, most of them are. John John being
41:45
Speaker 1: the exception to the rule there, Thank you, John is.
41:48
Speaker 3: Staff Because the top ten holdings obviously are public information,
41:51
Speaker 3: so you know, they should be able to come on
41:54
Speaker 3: and like feel free to talk enthusiastically about them, yeah.
41:58
Speaker 1: And explain why they hold them. But mostly, as they said,
42:00
Speaker 1: it's quite hard to get them to do it, isn't it.
42:01
Speaker 3: I did think the stuff about absolutely turn was really
42:04
Speaker 3: interesting because being able to go short is actually one
42:09
Speaker 3: of the few ways the active managers can properly differentiate
42:15
Speaker 3: themselves from passively. You can't do that with a passive fund.
42:20
Speaker 3: And even the most kind of like active retail investor
42:24
Speaker 3: is going to struggle to an extent to run you know,
42:29
Speaker 3: unless you're really kind of like doing a lot of
42:31
Speaker 3: CfDS and spread bit and things like that, you're going
42:33
Speaker 3: to struggle to run a long shot portfolio the way
42:36
Speaker 3: a kind of fund manager can. So it's interesting say
42:40
Speaker 3: that sector is I mean, I know, absolutely turn got
42:45
Speaker 3: a bad name for itself because the returns were absolutely
42:47
Speaker 3: awful as opposed to actually beating interest rates, you know
42:50
Speaker 3: whatever about a decade.
42:52
Speaker 1: I mean, that's true that they were awful, and it
42:54
Speaker 1: was all a bit, you know, all a bit awkward
42:56
Speaker 1: back then, But the truth is still a more honest
42:58
Speaker 1: way to run money. And even if you even if
43:01
Speaker 1: you are a long only manager, it's still more honest,
43:04
Speaker 1: I think, to compare yourself to what we would get
43:07
Speaker 1: if we struck our money in the bank, and to
43:10
Speaker 1: work to outperform inflation rather than to outperform other fund managers,
43:15
Speaker 1: because that's what's really all we care about, you and
43:17
Speaker 1: I right, and our listeners I think too, they're not
43:19
Speaker 1: interested in being in having your money in the best
43:22
Speaker 1: performing fund manager. That would be nice. Of course, what
43:24
Speaker 1: we're interested in is protecting our capital, protecting the purchasing
43:28
Speaker 1: power of our capital, and hopefully increasing the purchasing pawer
43:32
Speaker 1: of our capital. But first of all, mainly the thing
43:34
Speaker 1: that we want is, you know, don't reduce the value
43:37
Speaker 1: of our capital. I'm saving this up from my retirement.
43:40
Speaker 2: I need my money to be a time machine.
43:41
Speaker 1: I need it to be able to buy the same
43:43
Speaker 1: stuff in the future or more than it does now,
43:45
Speaker 1: not less. So let's work on that basis. And so
43:48
Speaker 1: I do think that even though there been periods in
43:51
Speaker 1: the past when this has not worked, and periods in
43:53
Speaker 1: the past when people have treated absolute return as hedge
43:56
Speaker 1: fund as opposed to cautious absolutely return, it's still honest
44:00
Speaker 1: and valuable way of running money.
44:03
Speaker 3: Yeah, I mean, you're right. I mean, making a consistent
44:05
Speaker 3: real return is what you really want from your mind.
44:10
Speaker 3: And obviously, yeah, you do eventually get to a point,
44:13
Speaker 3: hopefully where actually capital preservation is more important than capital growth.
44:19
Speaker 3: So there's also I mean, that's another conversation as well.
44:23
Speaker 2: But well, it's one of those things, isn't it. People,
44:25
Speaker 2: Or if you are. There's a risk things.
44:27
Speaker 1: When you sign up to a wealth manager or a
44:29
Speaker 1: fund etca, which which risk level are you? And if
44:31
Speaker 1: you're at the top risk level, you're supposed to accept
44:33
Speaker 1: that it's possible that you might need a lot of
44:34
Speaker 1: your money. But no one signing up for those things
44:36
Speaker 1: really believe that to do they I don't know what
44:38
Speaker 1: really signing up to risk level five things themselves. I
44:40
Speaker 1: might use might lose forty percent of my money and
44:43
Speaker 1: I'm fine with that.
44:44
Speaker 3: Exactly thinks that, Yeah, I mean, the risk question is
44:49
Speaker 3: is daft. I mean, you're where you're invested as an
44:53
Speaker 3: overall as an allocation level should broadly be based on
44:56
Speaker 3: your time horizon and not on any imaginary facity for
45:01
Speaker 3: temporary losses. Because that's the other thing. They're not actually
45:04
Speaker 3: asking you a YOKI will losing forty percent of money.
45:06
Speaker 3: They're asking a you OK if we spreadsheet we send
45:09
Speaker 3: you every month sometimes says you've lost forty percent of
45:12
Speaker 3: your money, but at the end of that it won't
45:14
Speaker 3: be forty percent because the whole point of taking the
45:17
Speaker 3: you know the maximum risk is that you know it's
45:20
Speaker 3: a bumpier ride along the way, but you make more
45:22
Speaker 3: by the end of the twenty years or whatever it is.
45:25
Speaker 3: So I think that that whole concept at risk is very,
45:31
Speaker 3: very confused, and I mean, I appreciate it's it's a
45:35
Speaker 3: confusing subject, but that's the kind of thing that people,
45:38
Speaker 3: you know, IFAs and things like that should be explained
45:40
Speaker 3: to people.
45:41
Speaker 1: So really, really, instead of just taking a home like that,
45:44
Speaker 1: you should have a full psychiatric assessment, absolutely to make
45:48
Speaker 1: sure that you have a kind of person. Yeah, you
45:51
Speaker 1: can deal with the stress of that kind of fluctuation exactly.
45:54
Speaker 3: You can get your prozac alongside your asse.
45:57
Speaker 1: I mean, we get out a whole new layer of
46:00
Speaker 1: complicated compliance too, investing by insisting that everyone has some
46:04
Speaker 1: kind of analysis done before they're.
46:06
Speaker 3: Allowed to take five Yep, I'm I'm sure that. Yeah,
46:10
Speaker 3: I said, think of the bit of the complaints industry
46:11
Speaker 3: would thank you for that. I'm not sure the stry.
46:14
Speaker 1: But anyway, sir, I've gone off topic, John, I've gone
46:18
Speaker 1: off topic. Told me what else you found interesting about
46:21
Speaker 1: this conversation.
46:21
Speaker 3: I thought it was all very interested the well you
46:26
Speaker 3: liked it.
46:26
Speaker 2: Because he was his pro the.
46:28
Speaker 1: UK market just like, yeah, he thinks the turn is
46:31
Speaker 1: in and he's talking about trade by trade bias, seeing
46:34
Speaker 1: value that really quite impressive premiums, and he's saying, you know,
46:38
Speaker 1: this is this is trying to on absolute levels. And
46:40
Speaker 1: although who's a bit embarrassed to say the word relative,
46:43
Speaker 1: he didn't say on a relative basis as well, So
46:45
Speaker 1: you know, he's very pro all the things that were pro.
46:48
Speaker 1: So we like that.
46:49
Speaker 3: It's massive coinformation bias basically, I know loved that. And
46:53
Speaker 3: the other thing I thought was interesting was the shortened element,
46:57
Speaker 3: this idea that he's got and I must have met.
46:59
Speaker 3: There was a part, I mean, it was kind of train.
47:01
Speaker 3: It was struggling with that a bet and that I'm
47:03
Speaker 3: thinking were everything you buy a stock, you're going to
47:07
Speaker 3: have to shine. Wen't is short even if you don't
47:10
Speaker 3: think you know that are any that are great shortened candidates?
47:16
Speaker 3: But I guess that's how you make it market neutral.
47:20
Speaker 1: Yeah, well, you know, you own the really good ones,
47:22
Speaker 1: and even if they aren't any bad ones, you know
47:24
Speaker 1: you sell the less good ones.
47:26
Speaker 2: The other thing that's quite interesting.
47:28
Speaker 1: We talked a little bit in here about about ESG
47:30
Speaker 1: and about people not following through on their beliefs on
47:34
Speaker 1: climate change, et cetera with their consumer performance and that,
47:37
Speaker 1: you know, so we looked easy Jet and Ryan Air
47:39
Speaker 1: except they like and that made me think again about
47:42
Speaker 1: the divestment that we've been though I mentioned earlier. You know,
47:45
Speaker 1: how how you get there is that we don't have
47:47
Speaker 1: very many miners or oil companies. But if you were
47:50
Speaker 1: ESG minded, and if you were climate change minded, then
47:53
Speaker 1: you wouldn't want to hold any of these things, either,
47:54
Speaker 1: would you. And once you start not holding easy Jet
47:57
Speaker 1: and not holding Ryan Air and then not holding anything
48:00
Speaker 1: that creates jet fuel or anything that has a shop
48:02
Speaker 1: in the airport or anything like that, why do you.
48:04
Speaker 3: End it's the fundamental issue, isn't it. It's kind of
48:07
Speaker 3: like the fund management industry in the SG side of
48:09
Speaker 3: things is the you know, I think this is where,
48:14
Speaker 3: even at a more fundamental level, is kind of green
48:17
Speaker 3: washing anyway, because an awful lot of the harder core
48:24
Speaker 3: arguments like you know, no one should fly again, you
48:28
Speaker 3: should never die in and out of the ground, are
48:31
Speaker 3: essentially anti capitalist, and you can you know, I don't
48:36
Speaker 3: mind if you think that. I think you're stupid if
48:38
Speaker 3: you think that, But it's fine, you know, that's a
48:40
Speaker 3: valid you know, kind of it's your opinion. But at
48:44
Speaker 3: the same time, in that case, you just wouldn't invest
48:46
Speaker 3: in anything at all, because you know, you're propping up
48:49
Speaker 3: the market, you're propping up the system that you're trying
48:52
Speaker 3: to you know, unravel or destroy. So I think there's
48:55
Speaker 3: a very fundamental conflict, which is I guess coming more
49:00
Speaker 3: to light now anyway. But yeah, so not I get
49:06
Speaker 3: that's the other reason why I think in a talk
49:07
Speaker 3: a bit of this stuff at one level it's both
49:10
Speaker 3: incredibly superficial and kind of pointless in the way because
49:15
Speaker 3: it's almost like two groups of people completely talking past
49:18
Speaker 3: one another, and the people in the middle who kind
49:22
Speaker 3: of like know they have to save for their pension,
49:24
Speaker 3: but they want their pension to be doing nice stuff
49:26
Speaker 3: and inverted comments because they're somewhat scared of money. It's
49:32
Speaker 3: a whole different thing. I mean, in fact, that goes
49:33
Speaker 3: back to the psychiatric evaluation. Maybe because people get shed
49:37
Speaker 3: your taboos about money.
49:39
Speaker 4: You know, Okay, this is going to be quite a
49:42
Speaker 4: long psychiatric session for everybody. Yeah, fund management, fay, they're
49:47
Speaker 4: going to gout massively, and so wealth management.
49:49
Speaker 1: And faith we're all going to have to go shopping
49:51
Speaker 1: to get over it. I love that he's got Marks
49:53
Speaker 1: Responses in the top ten, and as I said to
49:55
Speaker 1: him during our conversation, I don't know how many cycles
49:58
Speaker 1: of Marks and Spenses is cheap. Marx Suspensive, Oh my god,
50:01
Speaker 1: Mark Suspense is awful, cell Max Suspenses. I've been through
50:04
Speaker 1: in my my quite a long career, actually, but I
50:07
Speaker 1: do I do think that right now, Mark Suspensis does
50:10
Speaker 1: look like they've finally got the hang of this retail thing. Yeah.
50:14
Speaker 3: Actually I agree. Yeah, I feel exactly the same way
50:17
Speaker 3: as you. I had kind of got to the point
50:20
Speaker 3: where I was like, I'm never believing in the Mark
50:22
Speaker 3: Suspenser's turn the round story again.
50:25
Speaker 6: But it does.
50:26
Speaker 2: Then you went to the food hole, and then you went.
50:30
Speaker 3: I mean, I've still got to see I still think
50:33
Speaker 3: why not just spend that off, split the manty two things,
50:36
Speaker 3: and then you've got, uh, you've got a clothing unit
50:40
Speaker 3: that occasionally performs, and you've got a food unit that
50:45
Speaker 3: is like, you know, a massive challenge. It likes waitros
50:48
Speaker 3: and all the rest of it.
50:49
Speaker 1: Yeah, I don't want them to do that because they
50:51
Speaker 1: might move the two areas to different sites. And I
50:54
Speaker 1: like to buy nikas and food at the same time.
50:57
Speaker 1: And I think you'll find this a lot of other people
50:59
Speaker 1: out there who do as well. A non started John
51:01
Speaker 1: as a non starter.
51:07
Speaker 2: Anyway.
51:07
Speaker 1: And this of course is why we said I said
51:10
Speaker 1: at the beginning, and I'll say again this is not
51:12
Speaker 1: just a bullmarket, it's a British bullmarket.
51:16
Speaker 3: Good right, that's good. That's good.
51:23
Speaker 1: Thanks for listening to this week's Maren Talks Money. We'll
51:26
Speaker 1: be back next week in the meantime. If you like
51:27
Speaker 1: our show, rate review and subscribe wherever you listen to
51:30
Speaker 1: your podcast, and keep sending questions or comments to Merron
51:32
Speaker 1: Money at Bloomberg dot net. This episode was hosted by
51:35
Speaker 1: me Maren Sunset Web. It was produced by some Sidy Adriginal,
51:39
Speaker 1: editing by Moses and and special thanks to John Warren
51:42
Speaker 1: and to John da