Latest / Merryn Talks Money / Has the British Equities Market Been 'Hollowed Out'?

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Has the British Equities Market Been 'Hollowed Out'? · Merryn Talks Money

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  Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. Welcome to Marrindrogs Money,
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  Speaker 1: the podcast in which people who know the markets explain
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  Speaker 1: the markets. I'm Marior in Sunset Web this week. Marks later,
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  Speaker 1: the chairman and chief investment Officer of Slater Investment joins me.
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  Speaker 1: We discussed the UK market, how to invest in it
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  Speaker 1: and what the government should do to make it a
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  Speaker 1: better market. Mark, thank you so much for joining us today.
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  Speaker 1: Very kind of you to come in pleasure. Now you
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  Speaker 1: have got three different funds at Slater, right, You've got
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  Speaker 1: an income fund, a growth fund and a recovery fund. Now,
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  Speaker 1: when we look at these three things, what does it
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  Speaker 1: all mean? I want to start by talking about the
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  Speaker 1: difference between these funds. What it is that you mean
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  Speaker 1: by growth, particularly when if you're investing in the UK,
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  Speaker 1: almost everything is what we used to call value, right,
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  Speaker 1: So what's growth, what's income? And what do we mean
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  Speaker 1: by recovery.
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  Speaker 2: The income part is very simple because it literally is
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  Speaker 2: that is a strategy which represents the relatively small part
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  Speaker 2: of what we do. That is seeking what we call
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  Speaker 2: good and growing income and some level of capital growth
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  Speaker 2: at the same time. So that fund pays a pretty
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  Speaker 2: significant yield premium to the UK market around five and
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  Speaker 2: a half percent versus the high threes for the UK market,
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  Speaker 2: and some capital growth.
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  Speaker 1: And that's what we're going to interrupt you immediately to say,
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  Speaker 1: so those will be mainly large companies.
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  Speaker 2: No, that's across the market cap spectrum. Something like ninety
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  Speaker 2: percent of interesting yield opportunities are outside the foot Sea hundred.
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  Speaker 2: So we're looking right across the piece for that strategy. Well,
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  Speaker 2: we have about a third back that thereabouts in foot
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  Speaker 2: See hundred, but we have a good chunk outside on
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  Speaker 2: the growth and recovery side. Both of those funds are
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  Speaker 2: basically our growth strategy. The recovery fund is small and
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  Speaker 2: therefore focuses on slightly smaller companies, but they're basically the
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  Speaker 2: same strategy and what we refer to as growth and
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  Speaker 2: always have done, by the way, so it's our thirtieth
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  Speaker 2: year is buying growth cheaply. So we're very much at
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  Speaker 2: the intersection of growth and value, whatever those terms mean,
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  Speaker 2: because obviously they mean a lot of different things a
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  Speaker 2: lot of different people.
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  Speaker 1: Well I always look at that and I think, well,
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  Speaker 1: surely everything is value. Is there anything except for value?
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  Speaker 1: It might be in the air of beholder. But who
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  Speaker 1: on earth would buy a stock if they didn't think
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  Speaker 1: it represented good value, So the terms are basically meaningless.
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  Speaker 2: They are, but I would say, if one were to caricature,
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  Speaker 2: you would say, you know, some people regard growth as
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  Speaker 2: momentum driven, very high multiples, that kind of thing, and
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  Speaker 2: they regard value as sort of cheap but utterly hopeless,
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  Speaker 2: and in decline that those are the extremes. What we're
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  Speaker 2: looking for is decent levels of earnings growth but at
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  Speaker 2: a reasonable price. So we're looking to pay a relatively
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  Speaker 2: low multiple in relation to the growth threa for the
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  Speaker 2: companies we buy. I would say in the last few
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  Speaker 2: years we've had a very different market complexion where suddenly
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  Speaker 2: even quite dynamic businesses are priced as if they have
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  Speaker 2: no prospects whatsoever, so they're priced on very low multiples.
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  Speaker 2: For us, our ballpark has always been somewhere between a
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  Speaker 2: ten and fifteen multiple of earnings a pe multiple. In
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  Speaker 2: twenty twenty one we were at the upper end of that.
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  Speaker 2: We can go up to twenty times on a prospective basis,
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  Speaker 2: but that's not something that happens very often. So in
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  Speaker 2: twenty twenty one we were at the upper end of
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  Speaker 2: that ten to fifteen range. Typically for a new holding
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  Speaker 2: these days were at the bottom of that range or
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  Speaker 2: below it. There's a plethora now of single digit multiples
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  Speaker 2: where you've got a very good business. So these days
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  Speaker 2: I think if growth and value didn't have much meaning
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  Speaker 2: in the past, I think now they really have converged
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  Speaker 2: in the UK.
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  Speaker 1: In the UK, Lisa, you must have the most spectacular
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  Speaker 1: hunting ground in the UK at the moment, you know,
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  Speaker 1: is absolutely downed, particularly the foot two two fifty, with
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  Speaker 1: very high quality companies with reasonably fast growing earning trading
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  Speaker 1: on very low valuations, not quite as low as they were. Admittedly,
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  Speaker 1: you know eighteen months ago valuations are even cheaper than
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  Speaker 1: they are now. But nonetheless, given what you've just said,
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  Speaker 1: this should be the most perfect time for your style.
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  Speaker 2: I agree with you. Yes, there have been little moments
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  Speaker 2: here or there where things have been cheaper, you know,
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  Speaker 2: the day after the Trust budget markets were obviously cheaper.
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  Speaker 2: But if I look at the thirty years I've been
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  Speaker 2: doing this professionally, I would say, right now, give or
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  Speaker 2: take a few percentage points, yes, it's spectacularly cheap. And
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  Speaker 2: the other aspect of it, which is really interesting. And
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  Speaker 2: this is again something that's fairly unique for me. I
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  Speaker 2: haven't seen this before to this degree, is the disconnect
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  Speaker 2: between public and private market valuations. The private equity players
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  Speaker 2: are rubbing their hands with glee, and that's actually been
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  Speaker 2: a real problem in the last eighteen months or so.
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  Speaker 2: A little bit less so now because there's a slight
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  Speaker 2: change in the mood for the better. But you go
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  Speaker 2: back a year and boards didn't feel they could resist
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  Speaker 2: a premium. Now, a premium to a really low number
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  Speaker 2: isn't very clever, but that's what we were seeing, and
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  Speaker 2: a lot of fund managers needed the cash, so they
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  Speaker 2: were accepting deals they should never have accepted. You know,
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  Speaker 2: go back into last year. I think that that has
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  Speaker 2: got a bit better this year.
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  Speaker 1: But it is an extraordinary idea, isn't it, that a
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  Speaker 1: privately held company should have evaluation premium to a publicly
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  Speaker 1: held company, Because it's sort of upending everything that I
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  Speaker 1: ever believed was taught or was told, which is that
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  Speaker 1: a publicly listed company, given it to liquidity, should trade
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  Speaker 1: at a premium to a private company. And someone said
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  Speaker 1: to me only a few months ago, they talked about
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  Speaker 1: the liquidity premium and what they meant was the lack
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  Speaker 1: of liquidity premium, and that was an absolutely extraordinary thing.
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  Speaker 2: Yeah, I totally agree, it's not meant to happen, but
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  Speaker 2: it's happening here.
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  Speaker 1: Why has it happened?
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  Speaker 2: It's interesting. I mean, if you go back to twenty
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  Speaker 2: twenty one, prices were relatively high in a lot of
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  Speaker 2: asset classes, including UK med and small cap in some pockets.
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  Speaker 2: When rates changed, we fully expected there to be some impact,
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  Speaker 2: and particularly we expected it to be amongst high multiple companies.
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  Speaker 2: So the surprise has been that it, yes, it's hit
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  Speaker 2: high multiple companies, but it's hit low multiple companies too,
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  Speaker 2: And there hasn't been much distinction between companies that have
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  Speaker 2: had some kind of problem and some companies which haven't
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  Speaker 2: had a problem. So that's a huge surprise. I would
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  Speaker 2: say the reasons are partly fear of recession over the
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  Speaker 2: last couple of years. What concerns about earnings growth or
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  Speaker 2: the quality of earnings that's been an issue. I think
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  Speaker 2: on top of that, you've had the almost doom loop
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  Speaker 2: around flows, where outflows create selling, which create poor performance,
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  Speaker 2: which create more outflows. There's been an element of that
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  Speaker 2: that's a bit better than it was today, but it
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  Speaker 2: was definitely a factor in twenty twenty two and twenty
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  Speaker 2: twenty three. On top of that, you've got the kind
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  Speaker 2: of main year around large cap tech in America that's
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  Speaker 2: sucked a lot of money out of pretty well everything else.
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  Speaker 2: On top of that, we had the Trust budget, which
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  Speaker 2: I think just at a time where the UK was
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  Speaker 2: beginning that the perception of the UK was just beginning
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  Speaker 2: to improve. That was obviously a big setback. So lots
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  Speaker 2: of different things have happened. It's been the same in
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  Speaker 2: Europe to a degree, but I don't think quite as badly.
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  Speaker 1: It feels why we've had more of a discount in
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  Speaker 1: the UK. I think so, yeah, but people are noticing, yeah,
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  Speaker 1: and it is changing. We're beginning to see We're beginning
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  Speaker 1: to see balls take control themselves. We begin to see
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  Speaker 1: short rising buybacks where every seems like a very efficient
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  Speaker 1: thing to do it at a time like that, and
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  Speaker 1: we haven't seen significant buybacks in the UK in the past.
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  Speaker 2: That's right.
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  Speaker 1: And we're also seeing rising m and a rising bids
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  Speaker 1: for smaller companies, etc. And possibly maybe the beginning of
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  Speaker 1: some inflows back into the UK market or at least
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  Speaker 1: the end of the outflows.
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  Speaker 2: I think the flow situation has significantly improved in the industry.
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  Speaker 2: There have been one or two months where there's been
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  Speaker 2: signs of life, and then you find the next month
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  Speaker 2: it's sort of not so good, but the bad months
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  Speaker 2: are no longer very bad, so there's a slight improvement there.
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  Speaker 2: What's interesting, actually outside the fund data that are bigger
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  Speaker 2: flows into passive UK products like mid to fifty indices
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  Speaker 2: and things like that. So there's definitely some interest in
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  Speaker 2: the UK now that there wasn't before. We do quite
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  Speaker 2: regular investor meetings and lunches and webinars and things like that,
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  Speaker 2: and we have found in the last year that attendance
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  Speaker 2: has rocketed and pretty well everybody there is very interested
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  Speaker 2: in doing something about the UK. They recognize it's cheap,
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  Speaker 2: they recognize their underweight, but they're all waiting for a catalyst.
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  Speaker 2: Everyone's sort of waiting for someone else to jump. It's
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  Speaker 2: a bit like the sort of penguins in Antarctica, you know,
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  Speaker 2: when they're all waiting to do get in the water.
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  Speaker 2: So there's a nervousness, but there's a lot of money
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  Speaker 2: on the sidelines that could move very quickly, so I
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  Speaker 2: think there's a lot more interest the valuation piece. I
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  Speaker 2: think when it's interesting when people talk about catalysts, because
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  Speaker 2: I think when something is very cheap, you shouldn't be
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  Speaker 2: too worried about a catalyst. It's going to come. Valuation
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  Speaker 2: in and of itself is a pretty interesting catalyst. Is
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  Speaker 2: the most people are often.
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  Speaker 1: Not prepared to wait, are they. I mean, this is
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  Speaker 1: one of the problems with the fund management industry, and
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  Speaker 1: we always say that retail investors have this great advantage
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  Speaker 1: over institutional investors because they can afford to wait. No
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  Speaker 1: one's judging, no one cares. They can buy things that
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  Speaker 1: are cheap and consider around and wait with that endlessly
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  Speaker 1: wobbling way about catalyst because it doesn't matter.
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  Speaker 2: Yeah, that's true to me. The interesting thing is, I
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  Speaker 2: think the smart question would be what is the catalyst,
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  Speaker 2: for example, for Nvidia to double again whatever. But for
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  Speaker 2: very very cheap companies on low multiples, the risk is low.
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  Speaker 1: I mean you might say in the UK as well,
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  Speaker 1: that the big sellers of finished selling, so where we're
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  Speaker 1: just waiting, we're sort of plattered. So the pension funds
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  Speaker 1: of probably finished selling, the insurance funds of finished selling,
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  Speaker 1: they've been selling down their UK takes for years, years
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  Speaker 1: and years of practically no home bus at all, in fact,
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  Speaker 1: no home busts at all, negative and negative home bust
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  Speaker 1: most of them, so they can't really sell anymore. The
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  Speaker 1: defined benefit pension funds have nothing left to sell, so
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  Speaker 1: that that negative has effectively gone, and defined contribution pension funds,
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  Speaker 1: the assets inside those are rising and they tend to
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  Speaker 1: have a little higher allocation to the UK, so that
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  Speaker 1: makes a difference, a gradual one, but a difference in
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  Speaker 1: terms of weight of money coming to the market. So
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  Speaker 1: it's it's as much the negatives have been removed as anything.
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  Speaker 2: Else, very much, and I think a few others have
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  Speaker 2: been removed as well. So if you go back two years,
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  Speaker 2: the narrative was very much that the UK there was
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  Speaker 2: a kind of UK exceptionalism where the UK was extremely
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  Speaker 2: bad and a complete outlawer. Even in Europe. That narrative
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  Speaker 2: was actually just wrong.
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  Speaker 1: But it was never true in the first Leich just
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  Speaker 1: somehow developed well.
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  Speaker 2: I think it was all tied into Brexit, and a
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  Speaker 2: lot of the people who were anti Brexit sort of
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  Speaker 2: pushed that narrative because it sort of made them feel
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  Speaker 2: better but the reality is it wasn't true, and for
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  Speaker 2: a couple of years that's gone. That narrative was completely
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  Speaker 2: gone because the data for the UK is kind of
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  Speaker 2: in the middle of the pack for a European country,
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  Speaker 2: So it's not brilliant by the way at all, but
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  Speaker 2: it's just not exceptionally bad.
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  Speaker 1: You can't suggest that it's specifically worse than anybody else
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  Speaker 1: because of Brexit, all because of any one factor, and
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  Speaker 1: you can't. You also can't do the thing of looking
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  Speaker 1: around saying, oh, look, the UK is in political koes
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  Speaker 1: and everywhere else's stable, because that, of course isn't true
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  Speaker 1: either exactly.
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  Speaker 2: So I think we've had a shift in the narrative
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  Speaker 2: and the mood around the UK about the general economy,
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  Speaker 2: which is significantly positive. It was seen as uninvestable in
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  Speaker 2: twenty twenty two and now it's a very big shift
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  Speaker 2: to be seen to be investable. Whether people do it
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  Speaker 2: or not, it's not the matter, but that's a very
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  Speaker 2: big psychological shift. I think. On top of that, as
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  Speaker 2: you say, the election, whatever one's preference is, it was boring,
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  Speaker 2: and boring is good, so I think that was a positive.
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  Speaker 2: So I think a lot of the pieces of the
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  Speaker 2: jigsaw are in place. And the other thing is there's
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  Speaker 2: a lot of resilience amongst UK companies. The UK has
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  Speaker 2: been in a sort of not a technical recession, but
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  Speaker 2: it's kind of felt like a recession for quite a
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  Speaker 2: long time, and businesses are used to operating in that environment.
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  Speaker 2: Combine that with low valuation, they've taken an awful lot
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  Speaker 2: of pain. So of course there are circumstances which could
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  Speaker 2: be negative, but I think an awful lot of that
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  Speaker 2: is in the price.
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  Speaker 1: Yeah. Someone suggested to me earlier today that one of
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  Speaker 1: the reasons that UK companies is so resilient is because
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  Speaker 1: management became so much better during COVID. Managers really learned
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  Speaker 1: to understand their companies and the dynamics of their companies
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  Speaker 1: and every little detail of their companies in a way
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  Speaker 1: they wouldn't necessarily have had to at any point pre COVID.
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  Speaker 1: So coming out of COVID, or not out of COVID itself,
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  Speaker 1: but out of the pandemic regulations, etc. That changed the
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  Speaker 1: way they were able to manage companies made them much
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  Speaker 1: more resilient in the following years.
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  Speaker 2: Is that fair or I think it's fair, And I
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  Speaker 2: think there's a very significant contrast there between the private
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  Speaker 2: and the public sector. You know, I think companies got
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  Speaker 2: lean and mean in that period, and I think the
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  Speaker 2: public sector did the opposite, which you know, for a
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  Speaker 2: whole lot of reasons, but no, I think it's true.
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  Speaker 2: I think companies and not just COVID. Also, coming out
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  Speaker 2: of COVID was very complicated for a lot of companies,
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  Speaker 2: particularly around supply chain, and it's been tough. They've had
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  Speaker 2: an awful lot thrown at them, and they've managed throughout
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  Speaker 2: the last few years. Whenever we met companies, with the
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  Speaker 2: exception of the worst moments in COVID where people really
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  Speaker 2: didn't know what was going on, but outside that extreme moment,
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  Speaker 2: when you've met with companies, they weren't complaining about the
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  Speaker 2: economy or any of these other factors that one tends
• 13:54
  Speaker 2: to read about. They were just getting on with it.
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  Speaker 2: And that's what companies do. That's one of the things
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  Speaker 2: about meeting companies. They tend to be quite positive and
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  Speaker 2: they're just getting on with the work they have to do.
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  Speaker 1: Okay, So you've got pleasantly valued, very resilient companies sitting
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  Speaker 1: in an environment where what could go wrong mostly has
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  Speaker 1: Although I would say there's probably a little political risk
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  Speaker 1: in there. We've no adar about the budget in October.
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  Speaker 1: They're an awful lot of things there that may look
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  Speaker 1: unfriendly to business, unfriendly to growth. In this idea that
• 14:23
  Speaker 1: the UK is now stable place that could be derailed.
• 14:27
  Speaker 1: That could be derailed, So there is political risk.
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  Speaker 2: If you talk to a London they will definitely share
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  Speaker 2: that view. They would definitely say that they're very worried
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  Speaker 2: about things, but there aren't that many.
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  Speaker 1: There aren't that many of them, but that other people
• 14:38
  Speaker 1: may be worried about capital gains. We may see people
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  Speaker 1: selling their UK equities, for example, ahead of the budget
• 14:43
  Speaker 1: to crystallize capital gains in advance of the rate going up.
• 14:46
  Speaker 1: So the river is there are niggles about it. That's
• 14:49
  Speaker 1: not concerned about the direction of travel, but nonetheless optimistic
• 14:52
  Speaker 1: point of view, We've got a politically stable country with
• 14:55
  Speaker 1: a perfectly reasonable economy, interest rates very likely to come
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  Speaker 1: down for that very soon, and most of the world
• 15:02
  Speaker 1: in a rate cutting cycle as well, and great valuations,
• 15:05
  Speaker 1: so it would be entirely reasonable to think that you
• 15:09
  Speaker 1: could see a fairly nice couple of years coming from UK.
• 15:13
  Speaker 1: Smallerment caps in particular.
• 15:14
  Speaker 2: I think so, and the data is also supportive on that.
• 15:17
  Speaker 2: One can't invest on this basis, but it's interesting historically,
• 15:21
  Speaker 2: when particularly the small cap space has a bad period
• 15:25
  Speaker 2: for one, two or three years, the following years are
• 15:28
  Speaker 2: normally very strong. It's pretty good at bouncing back. So
• 15:32
  Speaker 2: it tends to exaggerate in both directions. So that's what
• 15:36
  Speaker 2: I would expect. Having said that, I didn't expect what
• 15:39
  Speaker 2: happened in the last two years, so you know. So
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  Speaker 2: I'm not putting myself forward as a sort of soothsayer,
• 15:44
  Speaker 2: but I think the facts are very supportive, very supportive.
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  Speaker 1: Okay, let's go back to the problems of the UK
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  Speaker 1: market as a whole and a potential catalyst or not.
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  Speaker 1: There's been a lot of discussion in the industry and
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  Speaker 1: among politics over the last couple of years about what
• 16:01
  Speaker 1: can be done to make the UK market a better
• 16:04
  Speaker 1: place to invest. And if you talk to an international investor,
• 16:07
  Speaker 1: they'll very often tell you that, yeah, it looks fine,
• 16:09
  Speaker 1: but the liquidity isn't there. They can't quite cope with it,
• 16:12
  Speaker 1: or they worry about stamp duty. They worry about the
• 16:14
  Speaker 1: fact that the UK is one of the highest stamp
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  Speaker 1: duties in the world, and they worry about the government
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  Speaker 1: not necessarily producing some kind of signal that they support
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  Speaker 1: the market. I mean, I felt that the counseling of
• 16:26
  Speaker 1: the brita Ice it was a very bad idea. I
• 16:28
  Speaker 1: don't know what you thought about that, but them should
• 16:31
  Speaker 1: be something that we can do to create that catalyst
• 16:36
  Speaker 1: for the UK market. What do you think there should be?
• 16:38
  Speaker 2: Well, I think it's necessary. Now I agree with you
• 16:41
  Speaker 2: with the British ISA. I mean, yes, it was messy
• 16:43
  Speaker 2: and complicated in all kinds of issues, but it was
• 16:46
  Speaker 2: a statement of intent and I think that exactly the sortant.
• 16:51
  Speaker 2: There are much bigger ways that could be done. But
• 16:53
  Speaker 2: I think the first thing is to try and work
• 16:55
  Speaker 2: out what the problem is, because there are a lot
• 16:58
  Speaker 2: of false narratives around the UK market, and I imagine
• 17:02
  Speaker 2: the average politician assumes that these are the kind of
• 17:06
  Speaker 2: basic assumptions are we're bad at taking risk and we're
• 17:08
  Speaker 2: bad at tech, and they look at the foot Sea
• 17:11
  Speaker 2: hundred as if it's representative of the entire UK market,
• 17:14
  Speaker 2: and I think that's wrong. Yes, a few companies have
• 17:18
  Speaker 2: listed in the States. They typically are actually companies where
• 17:21
  Speaker 2: all of their activities are in the US, so it's
• 17:23
  Speaker 2: not a particularly unusual phenomenon in my view. But the
• 17:27
  Speaker 2: real issue is that underneath the foot Sea hundred it's sick.
• 17:32
  Speaker 2: The patient is sick. It's been hollowed out over the
• 17:35
  Speaker 2: last probably twenty years, but in particular over the last five.
• 17:40
  Speaker 2: You know, the Fledgling Index has lost seventy five percent
• 17:44
  Speaker 2: of its constituents in the last five years. If you
• 17:47
  Speaker 2: exclude investment companies, which are aren't businesses, the small cap index,
• 17:51
  Speaker 2: it has lost half of its market value, ignoring again
• 17:55
  Speaker 2: investment companies, so it's not going to exist in a
• 17:58
  Speaker 2: few years on.
• 17:58
  Speaker 1: This is again because people can get money elsewhere. It
• 18:01
  Speaker 1: takes us back to private equity. Equity help waves of
• 18:04
  Speaker 1: private money that can that can if the companies don't
• 18:06
  Speaker 1: need a list because they can get hold of the
• 18:08
  Speaker 1: money earlier, or private equity can take them off because
• 18:10
  Speaker 1: they can buy them out at a premium and management
• 18:12
  Speaker 1: hasn't got the energy left put up a fight.
• 18:14
  Speaker 2: Yeah, that is the sort of the diagnosis in the
• 18:16
  Speaker 2: sense that you know, there is sickness down in the
• 18:20
  Speaker 2: lower reaches of the market, and it's a problem that
• 18:22
  Speaker 2: in the same way if a tree didn't have roots,
• 18:25
  Speaker 2: it would be a bit of a problem. I think
• 18:26
  Speaker 2: it's also analogous to the housing market. You know, when
• 18:29
  Speaker 2: the housing for the housing market market to succeed at
• 18:31
  Speaker 2: the very top level, ultimately you need health at the
• 18:34
  Speaker 2: very bottom as well. It ripples all the way through.
• 18:37
  Speaker 2: So I think there's a real issue down in that
• 18:40
  Speaker 2: the lower reaches. I think that the solution is actually
• 18:45
  Speaker 2: very simple. It's a lack of capital. You know, the
• 18:48
  Speaker 2: UK is the only major stock market on Earth that
• 18:52
  Speaker 2: doesn't have around half its ownership in domestic long term
• 18:57
  Speaker 2: capital either pension funds or insurance companies. Used to have
• 19:00
  Speaker 2: half not that long ago, maybe thirty years ago. Now
• 19:02
  Speaker 2: it's down to five percent roughly, and that's unique. Nobody
• 19:07
  Speaker 2: else does that, nobody, and that is a problem. And
• 19:12
  Speaker 2: basically another way of looking at it is we've had
• 19:14
  Speaker 2: roughly a trillion of outflows in the last few decades
• 19:19
  Speaker 2: in the context of a market that's worth just over
• 19:21
  Speaker 2: two trillion. So it's very significant, and it's for a
• 19:24
  Speaker 2: whole lot of reasons, but a lot of it relates
• 19:27
  Speaker 2: to errors by government and regulators over many, many years.
• 19:31
  Speaker 2: And I'm not a fan of government interference in markets.
• 19:35
  Speaker 2: But when they make a mess, I think they have
• 19:37
  Speaker 2: to think about whether they put it right. And I
• 19:41
  Speaker 2: think the starting point has to be do we want
• 19:43
  Speaker 2: to stock market at all, because on the current direction
• 19:46
  Speaker 2: of travel, we will not have one in a meaningful
• 19:48
  Speaker 2: sense in five or ten years.
• 19:50
  Speaker 1: Well, there's an interesting parallel. I was discussing with them
• 19:53
  Speaker 1: on the other day about regional stock markets in the
• 19:55
  Speaker 1: UK and as you know, we used to have so
• 19:57
  Speaker 1: many regional stock markets. We had Aberdeen, done Glasgow, Edinburgh, Leeds, Birmingham, Manchester.
• 20:03
  Speaker 1: I'm sure there are more, and the last one's disappeared
• 20:06
  Speaker 1: in the mid eighties with the Big Bang, But also
• 20:08
  Speaker 1: they gradually withered away because London became the best place
• 20:12
  Speaker 1: to less and their place with the other the biggest company's,
• 20:14
  Speaker 1: most expensive companies, most interesting companies, et cetera. And the
• 20:17
  Speaker 1: ones that were listed elsewhere just still slowly disappeared. Everything
• 20:20
  Speaker 1: gravitated to London, and there is suggested that this, you
• 20:23
  Speaker 1: know this, this could happen globally as the London comes
• 20:28
  Speaker 1: to New York because Dundee was to London and gradually
• 20:32
  Speaker 1: drifts away. So the question do we want to stop
• 20:34
  Speaker 1: market at all? Is no longer ridiculous.
• 20:36
  Speaker 2: No, it's not. Well, well, I think the question whether
• 20:38
  Speaker 2: we will have one is a very live question. I
• 20:41
  Speaker 2: think the question is whether we should have one. The
• 20:44
  Speaker 2: answer is very simple. I think it's a straightforward yes,
• 20:47
  Speaker 2: because I mean, you just take a few simple examples.
• 20:50
  Speaker 2: If private equity buys a company, a public company, the
• 20:54
  Speaker 2: day they complete is the last day they pay corporation tax.
• 20:58
  Speaker 2: They don't do it anymore. They loaded with debt, they
• 21:00
  Speaker 2: offset the debt against profit, and that if I were
• 21:03
  Speaker 2: in government, I'd find that pretty irritating. Also, you've got
• 21:07
  Speaker 2: a lot of disclosure. It is a source of capital.
• 21:11
  Speaker 2: I mean, yes, there are other sources of capital, but
• 21:13
  Speaker 2: it's a source of capital, and it's also a massive
• 21:16
  Speaker 2: provider of wealth and a big contributor to GDP. The
• 21:20
  Speaker 2: city writ large, I think is something like thirteen percent
• 21:23
  Speaker 2: of GDP. It's something like that. It's an enormous number.
• 21:26
  Speaker 2: And you know, seven hundred thousand jobs in the country,
• 21:30
  Speaker 2: in London and outside London are linked to it in some.
• 21:32
  Speaker 1: Way, and there's a high pad jobs.
• 21:34
  Speaker 2: Very it's important, and I know, you know it's fashionable
• 21:37
  Speaker 2: for people to bash bankers, but they're not all bankers.
• 21:39
  Speaker 2: You know, they're doing all sorts of things.
• 21:41
  Speaker 1: So in essence, having deep and liquid capital markets is
• 21:44
  Speaker 1: extremely important to GDP GDP growth overall. I think it's
• 21:47
  Speaker 1: instant and to pretend that it's not just silly.
• 21:49
  Speaker 2: And also what's interesting to me is labor needs money
• 21:54
  Speaker 2: to fulfill its subjectives. So, for instance, on the Green Agenda,
• 21:57
  Speaker 2: I'm not an expert on this sort of thing, but
• 21:59
  Speaker 2: they've had significantly reduce their ambitions. If we had a
• 22:04
  Speaker 2: thriving stock market, that will be another tool in the
• 22:06
  Speaker 2: kit for government as well. And what fascinates me is,
• 22:11
  Speaker 2: you know, yes, there's lots of focus at the moment
• 22:13
  Speaker 2: on the rules and you know, whether shareholders should be
• 22:17
  Speaker 2: able to vote on related party transactions or whatever it
• 22:19
  Speaker 2: might be. The rules are kind of I mean, yes,
• 22:22
  Speaker 2: there's work that needs to be done, but they're kind
• 22:24
  Speaker 2: of irrelevant. And I've pointed this out to some politicians
• 22:27
  Speaker 2: I've met over the last year or so, and you know,
• 22:30
  Speaker 2: I asked them the question, why is it that practically
• 22:33
  Speaker 2: every big fund manager on Earth is camping out in
• 22:36
  Speaker 2: read at the moment. Is it because they like the rules,
• 22:39
  Speaker 2: or is it because they think there's a big pot
• 22:41
  Speaker 2: of cash and they can get their hands on some
• 22:43
  Speaker 2: of it. And it all comes down to cash. If
• 22:46
  Speaker 2: we have large amounts of domestic capital pointed at the
• 22:50
  Speaker 2: UK market, everything else becomes possible. And the money's there,
• 22:54
  Speaker 2: it just needs to be repurposed.
• 22:56
  Speaker 1: So are you suggesting that the government direct pension fund
• 23:01
  Speaker 1: to invest in the UK market? Are you suggesting an
• 23:04
  Speaker 1: element of compulsion?
• 23:05
  Speaker 2: My view is if government is giving tax relief, they
• 23:09
  Speaker 2: have the right to attach strings. I don't like the
• 23:14
  Speaker 2: idea of government telling people where to invest, but I
• 23:17
  Speaker 2: think where they're giving tax relief, people don't have to
• 23:20
  Speaker 2: take the tax relief. You know, if they're giving tax relief,
• 23:23
  Speaker 2: I think then there's a very strong case for setting
• 23:27
  Speaker 2: some rules around that. And it's not as if others
• 23:30
  Speaker 2: don't do it. You know, plenty of countries have done
• 23:32
  Speaker 2: this sort of thing successfully. One of the simplest areas
• 23:35
  Speaker 2: is ices. You know, isers the original iso the PEP
• 23:40
  Speaker 2: had an obligue you had to invest in the UK.
• 23:42
  Speaker 2: I think it was either fifty or one hundred percent
• 23:44
  Speaker 2: had to be invested in the UK. That's been removed.
• 23:47
  Speaker 2: Why not bring it back. There's two hundred and fifty
• 23:49
  Speaker 2: billion of pet of ices in non UK equity products.
• 23:55
  Speaker 2: That's a lot of money. In the context of our market.
• 23:58
  Speaker 2: I think the pension fund sector is more complex because
• 24:00
  Speaker 2: you've got some of it's in runoff, some of it's not.
• 24:03
  Speaker 2: So I think one would have to focus on the
• 24:05
  Speaker 2: areas where cash is coming in. But again, if tax
• 24:08
  Speaker 2: relief is being given, I don't think it's unreasonable to
• 24:11
  Speaker 2: set conditions similarly. Within the insurance companies, it's a slightly
• 24:15
  Speaker 2: different thing. We have the Mansion House Compact already with
• 24:18
  Speaker 2: this five percent target, which I think is very low.
• 24:22
  Speaker 2: I think that should be a higher number. I think
• 24:24
  Speaker 2: it should also very explicitly include quoted companies as well.
• 24:28
  Speaker 2: Ten to fifteen years ago, people used to talk about
• 24:31
  Speaker 2: matching liabilities from a currency perspective. No one ever does
• 24:35
  Speaker 2: that anymore because the US market's done so well in
• 24:37
  Speaker 2: the last ten or fifteen years. Everyone's conditioned by that. Interestingly,
• 24:42
  Speaker 2: those people weren't talking about buying the US ten or
• 24:45
  Speaker 2: fifteen years ago. It's all backward looking. But I think
• 24:49
  Speaker 2: that there's a strong argument for matching liabilities, and there's
• 24:52
  Speaker 2: also a very strong argument for using the Australian Superannuation
• 24:57
  Speaker 2: Playbook which I think is obvious where these massive funds,
• 25:02
  Speaker 2: these massive pension funds in Australia, they started out where
• 25:06
  Speaker 2: they had to invest all the money in Australia public
• 25:08
  Speaker 2: and private assets, infrastructure, things like that. They became so
• 25:12
  Speaker 2: big they had to branch out, but they still have
• 25:14
  Speaker 2: a very big proportion in Australia. And interestingly, if you're
• 25:18
  Speaker 2: a trustee of one of those bodies, every year you
• 25:21
  Speaker 2: have to write a report and you have to explain
• 25:24
  Speaker 2: how your investment actions have benefited Australia. And the argument
• 25:28
  Speaker 2: is that it's beneficial to an Australian retiree to be
• 25:33
  Speaker 2: in a country that's working, and if infrastructure is required
• 25:37
  Speaker 2: then it helps them.
• 25:39
  Speaker 1: It's the financial return. Yeah. No, it sounds a little
• 25:42
  Speaker 1: like finance for oppression. But I'm afraid I rather agree
• 25:45
  Speaker 1: with you. I mean, in fact, we're having a bit
• 25:46
  Speaker 1: of a meeting of miners. I wrote Colin last week
• 25:48
  Speaker 1: about the BRITE. I says, suggesting that instead of abolishing that,
• 25:51
  Speaker 1: you should bolish all the rest and them put the
• 25:53
  Speaker 1: entire twenty thousand a year only into British listed stocks.
• 25:57
  Speaker 1: And then the response to that was very much what
• 25:59
  Speaker 1: is a stock? What do you mean that bees most
• 26:02
  Speaker 1: of the thirsty one hundred is you know, large percentage
• 26:04
  Speaker 1: of the revenues come from abroad, and what about an
• 26:06
  Speaker 1: investment trust that's not a UK stock etc. And I
• 26:09
  Speaker 1: rather feel that was to completely miss the point, to
• 26:11
  Speaker 1: the point just being to pour money into the UK market,
• 26:14
  Speaker 1: to increase its liquidity, to increase its depth, to benefit
• 26:16
  Speaker 1: the economy as well. It doesn't really matter what's British
• 26:19
  Speaker 1: and what's not. Totally what matters is that as a
• 26:21
  Speaker 1: UK listed That was my feeling.
• 26:23
  Speaker 2: I totally agree, because I think the market is under
• 26:25
  Speaker 2: under pressure. Obviously there have to there have to be
• 26:28
  Speaker 2: some thought about the rules and all that. But I
• 26:31
  Speaker 2: think it makes perfect sense that you know, funds investing
• 26:34
  Speaker 2: in the UK, companies which are listed here, investment trusts
• 26:38
  Speaker 2: which have a focus here. You know, all of those
• 26:40
  Speaker 2: things are fine, and maybe they have to be certain thresholds.
• 26:43
  Speaker 1: But I say no for assaults. No for assaults, no,
• 26:46
  Speaker 1: I think no.
• 26:46
  Speaker 2: I think to get it done.
• 26:47
  Speaker 1: I'm with you.
• 26:49
  Speaker 2: But you know, even if there were thresholds, it wouldn't
• 26:51
  Speaker 2: worry me. The key thing is just to do something.
• 26:54
  Speaker 2: And I actually think one of the benefits of labor
• 26:58
  Speaker 2: is they have no just in their DNA. There's not
• 27:00
  Speaker 2: really an issue in terms of acting mandatory action forcing
• 27:04
  Speaker 2: people to do things, whereas the Conservatives were much more
• 27:08
  Speaker 2: hands off in that sense. I would worry me if
• 27:10
  Speaker 2: they start telling people how they invest their money in
• 27:13
  Speaker 2: a you know.
• 27:15
  Speaker 1: Very as long as they're inn a tax wrapper.
• 27:17
  Speaker 2: If there's a tax rapper, I think there's a very
• 27:19
  Speaker 2: strong argument.
• 27:20
  Speaker 1: Capital controls would be a problem, but things inside tax
• 27:22
  Speaker 1: rappers absolutely not. So fine. Out for a brush and light,
• 27:25
  Speaker 1: we'll call it.
• 27:26
  Speaker 2: It's fine.
• 27:26
  Speaker 1: Fine.
• 27:27
  Speaker 2: I think it's in everyone's interests.
• 27:31
  Speaker 1: Well, let's see if it's a no brainer in their view.
• 27:33
  Speaker 1: We'll find out. I mean, there's definitely a shift in
• 27:37
  Speaker 1: that in that direction. I think it's well underway already,
• 27:39
  Speaker 1: but we'll find out shortly. Listen, let's move on to
• 27:42
  Speaker 1: slightly more fun stuff and talk about some of the
• 27:44
  Speaker 1: stocks in your portfolios. I know you don't invest by sectors.
• 27:48
  Speaker 1: You don't necessarily have an answer to this, but do
• 27:51
  Speaker 1: you find that your stock selection is leaving you at
• 27:54
  Speaker 1: the moment with a sectoral bise, A sectoral bise sectual bias.
• 27:58
  Speaker 1: You know what I'm trying to say.
• 28:00
  Speaker 2: Not right now, not really. We have had that over
• 28:03
  Speaker 2: the years, does happen occasionally, but nowadays most sectors they're
• 28:08
  Speaker 2: not that meaningful in the sense that you know, I
• 28:10
  Speaker 2: mean in the part we're not invested in house builders
• 28:13
  Speaker 2: in any real meaningful sense at the moment. But we
• 28:16
  Speaker 2: have had a couple of periods where we've been very
• 28:18
  Speaker 2: heavily in housebuilders, and they're kind of all the same.
• 28:21
  Speaker 2: You know, there's a very homogeneous sector, but there aren't
• 28:24
  Speaker 2: many sectors like that. So where we have sector concentration,
• 28:28
  Speaker 2: it tends to be in areas, you know, like support services,
• 28:32
  Speaker 2: which really is a catch all for a whole lot
• 28:33
  Speaker 2: of different types of companies which don't have a lot
• 28:36
  Speaker 2: to do with each other. So nothing not really at
• 28:40
  Speaker 2: the moment, there's not really a sector theme. The companies
• 28:42
  Speaker 2: we own are really in all sorts of different areas,
• 28:45
  Speaker 2: typically with some sort of niche, typically with that you know,
• 28:48
  Speaker 2: an obvious focus, but not not really a sector.
• 28:52
  Speaker 1: Any interesting recent acquisitions that we can talk about.
• 28:54
  Speaker 2: I made a ratherprizing investment earlier this year in Glaxo,
• 28:58
  Speaker 2: which is not.
• 28:59
  Speaker 1: Very any of the things we've been talking about.
• 29:02
  Speaker 2: But it's on a very low multiple and that's growing
• 29:03
  Speaker 2: around ten percent and everyone hates it and you know,
• 29:08
  Speaker 2: generates cash. It does all the things we like. Every quarter.
• 29:11
  Speaker 2: That's been improvement for now, probably for two years. The
• 29:14
  Speaker 2: management's doing a great job, but no one is interested.
• 29:17
  Speaker 2: So I was very happy to own that business.
• 29:19
  Speaker 1: Why do you think no one is interested in a
• 29:21
  Speaker 1: business like that, well known, good brand recognition. As you say,
• 29:24
  Speaker 1: growing fast with a multiple dividend.
• 29:26
  Speaker 2: It takes a long time. We had the same thing
• 29:28
  Speaker 2: with Astroseneka, going back a long way. There was a
• 29:32
  Speaker 2: bid from Pfizer. I think it must be twenty thirteen
• 29:34
  Speaker 2: or fourteen. We own the company at the time, and
• 29:38
  Speaker 2: the bid was defeated and the new chief executive did
• 29:42
  Speaker 2: a brilliant job. And now no one wants to hear
• 29:45
  Speaker 2: a bad word about Astrosenica. And it's on a fantastic rating.
• 29:49
  Speaker 2: It doesn't have any of these sexy weight loss drugs,
• 29:51
  Speaker 2: but it's still on a fantastic rating. And Glack so
• 29:54
  Speaker 2: I think is in a similar position. I think they're
• 29:56
  Speaker 2: doing all the right things. It's just that there's an
• 29:59
  Speaker 2: element have shown me there's an element of sort of
• 30:01
  Speaker 2: they have to prove it. The other fly annointment is
• 30:05
  Speaker 2: there's litigation around Zantac, which is a concern. I mean,
• 30:08
  Speaker 2: you can't ignore it, but it's massively discounted in my view.
• 30:14
  Speaker 1: What's the biggest holding in the small cap fund?
• 30:18
  Speaker 2: The biggest holding.
• 30:19
  Speaker 1: We've got small growth fund.
• 30:21
  Speaker 2: I mean, yeah, the growth fund. We've got several holdings
• 30:24
  Speaker 2: around the similar sort of size, but the biggest holding
• 30:27
  Speaker 2: right now is Circo, which it's a mid mid cap company.
• 30:33
  Speaker 2: It's got a fantastic cash generation, it's got a you know,
• 30:36
  Speaker 2: sort of eight nine ten percent free cash flow yield,
• 30:39
  Speaker 2: it's been generating nice steady growth for quite a long time,
• 30:43
  Speaker 2: good returnal capital, so all the things we like. They're
• 30:46
  Speaker 2: retiring around seven percent parannum of the equity on top
• 30:50
  Speaker 2: of all that, and it's just very prudently managed, you know,
• 30:56
  Speaker 2: not popular, but they just steadily do their thing. So
• 31:01
  Speaker 2: we bought that position around coming out of the COVID
• 31:05
  Speaker 2: pandemic because they did a lot of their they were
• 31:09
  Speaker 2: one of the big COVID beneficiaries, but obviously that revenue
• 31:12
  Speaker 2: was kind of one off in nature and it was
• 31:14
  Speaker 2: interesting it kind of put people off. But the fact
• 31:17
  Speaker 2: they'd done so well out of COVID people didn't like
• 31:19
  Speaker 2: that because they knew it was going to fall away.
• 31:21
  Speaker 2: So all of our analysis does strip COVID out as
• 31:24
  Speaker 2: if it never had never happened, and the underlying position
• 31:27
  Speaker 2: was very nice, very healthy. So that company we've owned
• 31:31
  Speaker 2: for since that time and it's done really well.
• 31:34
  Speaker 1: Okay, interesting, and then they recovery fund.
• 31:37
  Speaker 2: The biggest holding there is a company called Franchise Brands.
• 31:41
  Speaker 2: It has a few activities, but the primary activity is
• 31:46
  Speaker 2: hydraulic hoses, which in certain types of business you need them,
• 31:50
  Speaker 2: and sometimes you need them very quickly. And they own
• 31:52
  Speaker 2: a business called Perte, which is a franchise business but
• 31:55
  Speaker 2: in most countries in Europe and it's a market leader.
• 31:58
  Speaker 2: They also own metro Rod in the UK, which is
• 32:02
  Speaker 2: a you know, sort of plumbing related business run by
• 32:06
  Speaker 2: Stephen Helmsley, who is the man who built Pizza Express
• 32:10
  Speaker 2: from a three million pound company into a two billion
• 32:12
  Speaker 2: pound company. So I would say he understands the franchise
• 32:16
  Speaker 2: market better than anyone else in this country, and they've
• 32:20
  Speaker 2: done a great job. We invested in that company for
• 32:22
  Speaker 2: the first time, maybe even ten years ago, it's certainly
• 32:26
  Speaker 2: eight ten years ago, that kind of thing, but they've
• 32:28
  Speaker 2: done a fantastic job, and I expect that company to
• 32:33
  Speaker 2: motor for quite a long time.
• 32:34
  Speaker 1: Old any of these small silveral gold miners, we've been interested,
• 32:38
  Speaker 1: you know, we've been watching the Gold Prize and also
• 32:39
  Speaker 1: watching the miners and interested in the disconnect between them.
• 32:42
  Speaker 2: I don't. I looked at one yesterday, actually, but I don't.
• 32:47
  Speaker 2: And one of the challenges, particularly with the smaller ones
• 32:50
  Speaker 2: is costs. Costs moves so quickly in mining, and it's
• 32:55
  Speaker 2: a real challenge. It's incredible how quickly the margin is, you.
• 33:00
  Speaker 1: Know, eroded.
• 33:02
  Speaker 2: It happens very fast. So that's a major issue. I mean,
• 33:06
  Speaker 2: you look at things like the price of sulfuric acid.
• 33:09
  Speaker 2: It's so volatile and it can take a business from
• 33:13
  Speaker 2: profit to loss, you know, in a few months. It
• 33:16
  Speaker 2: moves around so much. So no is the short answer.
• 33:21
  Speaker 1: Okay, so we'll be better off holding gold and silver.
• 33:24
  Speaker 2: I think normally that that pays. I think where where
• 33:28
  Speaker 2: it's different is at inflection points. So I have in
• 33:31
  Speaker 2: my life. Back in two thousand and two, I made
• 33:34
  Speaker 2: a big investment in a private gold mining company where
• 33:38
  Speaker 2: we're just trying to get as much in terms of
• 33:40
  Speaker 2: gold in the ground as possible with really no intention
• 33:43
  Speaker 2: of mining it, just to sell it to someone else.
• 33:47
  Speaker 2: Because if the goal and the gold price then was
• 33:49
  Speaker 2: two hundred and fifty three hundred, it went up a
• 33:51
  Speaker 2: great deal over the next few years, and suddenly these
• 33:55
  Speaker 2: assets became viable. So I think at inflection points you
• 33:58
  Speaker 2: can make a lot of money, but once everyone knows
• 34:01
  Speaker 2: the price is high and they know you're in profit,
• 34:04
  Speaker 2: I think it's a tough game.
• 34:06
  Speaker 1: Well Mark. That brings me neatly to our final question,
• 34:09
  Speaker 1: which we do ask everybody on the podcast, although actually
• 34:11
  Speaker 1: I think I forgot last week. I think I forgot
• 34:14
  Speaker 1: to ask Diana, and Diana, I'm going to telephone you
• 34:16
  Speaker 1: and I ask you if you had to choose between
• 34:19
  Speaker 1: gold bitcoin and you had to hold the one you
• 34:23
  Speaker 1: chose for a decade, which one would it be? Can't
• 34:26
  Speaker 1: be both? No?
• 34:27
  Speaker 2: I mean, fortunately I don't have this problem in real life,
• 34:30
  Speaker 2: and I would just rather I'd rather hold a business
• 34:33
  Speaker 2: of some kind. But I think I'd go for gold.
• 34:37
  Speaker 1: I like the doubt.
• 34:38
  Speaker 2: Oh well, well, there is doubt because I think with bitcoin,
• 34:41
  Speaker 2: I think a lot of the doubts around bitcoin have
• 34:44
  Speaker 2: been addressed, not all of them, but quite a lot
• 34:47
  Speaker 2: of them. You know, it is used a lot by
• 34:50
  Speaker 2: quite a wide range of people. It's institutionally investable.
• 34:53
  Speaker 1: Now.
• 34:53
  Speaker 2: An awful lot of family offices and endowments own a
• 34:56
  Speaker 2: little bit of bitcoin, mainly just in case it goes
• 34:59
  Speaker 2: up one hundred times and then if you feel really
• 35:01
  Speaker 2: silly if you don't have it, if everyone.
• 35:03
  Speaker 1: Else, But that's not a good reason to.
• 35:06
  Speaker 2: But that's what people do. Fomo is a real phenomenon.
• 35:08
  Speaker 1: Although I mean, I hold some bitcoin just in case
• 35:10
  Speaker 1: it goes oh lot, by the way, so I'm guilty
• 35:12
  Speaker 1: of this one. But that doesn't make it rational.
• 35:13
  Speaker 2: No, it isn't rational, but it's well, it's semi rational
• 35:17
  Speaker 2: if if someone's buying a tiny little bit, it's like
• 35:19
  Speaker 2: buying an option like a hedge. Really, so I think
• 35:22
  Speaker 2: people are doing it for that reason. What I don't
• 35:25
  Speaker 2: like about bitcoin is its correlations are all over the place.
• 35:28
  Speaker 2: You know, yes, it correlates to gold and massively exaggerates
• 35:32
  Speaker 2: the movements in gold, but it also correlates to nasdak
• 35:35
  Speaker 2: a lot of the time, and it correlates to one
• 35:37
  Speaker 2: or two other things too, So it's it's a strange beast.
• 35:42
  Speaker 2: If I had to deliver a return of you know
• 35:45
  Speaker 2: over one hundred percent or two hundred percent, I probably
• 35:47
  Speaker 2: go to bitcoin just because I don't think gold will
• 35:49
  Speaker 2: do that and bitcoin could. But if I had to,
• 35:53
  Speaker 2: if it's a straight choice, I probably would go for God.
• 35:55
  Speaker 1: It's a straight choice. I'm not putting the restriction mark.
• 35:59
  Speaker 1: Thank you so much for us today.
• 36:00
  Speaker 2: That was great fun, great pleasure.
• 36:06
  Speaker 1: Thanks for listening to this week's Meren Talks Money. We
• 36:09
  Speaker 1: will be back next week in the Avenam. If you
• 36:10
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• 36:13
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• 36:19
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• 36:23
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• 36:50
  Speaker 1: Mark Slater.