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Why Your Portfolio Needs Investment Trusts · Merryn Talks Money

• 0:00
  Speaker 1: John, Hello man, Hello, Now, John, I've got a question
• 0:04
  Speaker 1: for you.
• 0:04
  Speaker 2: Go ahead.
• 0:05
  Speaker 1: I want you to imagine, and I know you've got
• 0:07
  Speaker 1: a good imagination to imagine. They're a hugely successful entrepreneur.
• 0:12
  Speaker 1: You had a brilliant idea, maybe eight years ago, maybe
• 0:16
  Speaker 1: only five years ago, really good idea. You've worked very hard,
• 0:19
  Speaker 1: you've implemented your idea. Well, you've built up a business,
• 0:22
  Speaker 1: You've hired a parlor of people, you're making a parlor money.
• 0:26
  Speaker 1: And now you're thinking to yourself, do you know what
• 0:27
  Speaker 1: getting on a bet? Not you, personally, John, were all
• 0:29
  Speaker 1: in the world of imagination.
• 0:30
  Speaker 3: Now getting on a bet.
• 0:32
  Speaker 1: I think in the next ten years, fifteen years or so,
• 0:35
  Speaker 1: i'd like to retire. I'm going to list this company.
• 0:37
  Speaker 1: I'm going to let other people share in the growth here.
• 0:39
  Speaker 3: I'm going to list. So that's You's like me. It's
• 0:43
  Speaker 3: so like you. And then you look around the world
• 0:45
  Speaker 3: and you think, ah, where should I list? So here's
• 0:48
  Speaker 3: my question. You're going to choose the UK right because
• 0:50
  Speaker 3: you live here.
• 0:52
  Speaker 4: You like it.
• 0:53
  Speaker 3: It's a good place, aren't you.
• 0:55
  Speaker 1: Yeah?
• 0:55
  Speaker 5: I mean absolutely, of course I'm a Patriot. Although no,
• 1:01
  Speaker 5: wait a minute, what's this. I'm hearing the siren song
• 1:05
  Speaker 5: from across the Atlantic that says, well, what does it say?
• 1:08
  Speaker 5: Maland because this is the point of your excellent column
• 1:11
  Speaker 5: this week.
• 1:12
  Speaker 1: Ah, excellent, I like that. What it says that siren
• 1:16
  Speaker 1: call is it says money, money, Let me give you
• 1:19
  Speaker 1: more money. And we know that you're financially incentivized, right
• 1:22
  Speaker 1: because you've done this amazing thing already. So what the
• 1:26
  Speaker 1: call says is, come to us, Come to us in
• 1:28
  Speaker 1: New York, and you can list your company at maybe
• 1:31
  Speaker 1: forty percent more, and you could list it at home,
• 1:34
  Speaker 1: and you get to keep all that lovely money of
• 1:35
  Speaker 1: the percent of the company that you list, and then
• 1:38
  Speaker 1: then you can stay on a CEO for as long
• 1:41
  Speaker 1: as you like, and we'll pay you double, maybe triple,
• 1:44
  Speaker 1: maybe cold druple what you might get if you were
• 1:47
  Speaker 1: a CEO in the UK. And you know, if you
• 1:50
  Speaker 1: stayed in the UK after nine years or so, all
• 1:53
  Speaker 1: the big investors in the UK will be going, oh,
• 1:55
  Speaker 1: do you know what, that's kind of our limits. You've
• 1:57
  Speaker 1: got to go now, even if you were the dry
• 2:00
  Speaker 1: being forced behind the company, even if you've been taking
• 2:02
  Speaker 1: brilliant decisions all the way through those institutional investors will
• 2:06
  Speaker 1: be going, yeah, we're gonna have to vote against you.
• 2:08
  Speaker 3: Sorry.
• 2:09
  Speaker 5: See that sounds awful. Why would anyone less than the
• 2:14
  Speaker 5: UK let a lot? Also in the small numbers that
• 2:18
  Speaker 5: are actually doing it, where is.
• 2:20
  Speaker 1: That small number they're not?
• 2:22
  Speaker 3: I mean that's the problem.
• 2:23
  Speaker 1: We have very few listings in the UK at the
• 2:25
  Speaker 1: moment we had any of this year, five six, something
• 2:28
  Speaker 1: like that.
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  Speaker 3: Very few listings.
• 2:29
  Speaker 1: There are a lot of listings going on with China
• 2:31
  Speaker 1: is the big is a big place for listing to
• 2:33
  Speaker 1: them when most companies are listing there, or more companies
• 2:35
  Speaker 1: are listing there. There've been I think fifty six or
• 2:37
  Speaker 1: something in the US so far this year, and there's
• 2:39
  Speaker 1: been a reasonable smattering in Europe. But there is very
• 2:42
  Speaker 1: little incentive right now to list in the UK because
• 2:45
  Speaker 1: we have spent so much time by trying to make
• 2:49
  Speaker 1: ourselves to the gold standard of international governance. You know,
• 2:52
  Speaker 1: if you list in the UK, you are going to
• 2:55
  Speaker 1: be regulated into the ground. There's literally nothing you can
• 2:59
  Speaker 1: do that doesn't mean referring to to a code of
• 3:01
  Speaker 1: some kind or a compliance department of some kind.
• 3:04
  Speaker 3: And all the big institutions in.
• 3:05
  Speaker 1: The UK have huge stewardship and sustainability departments as a result,
• 3:09
  Speaker 1: and a lot of your life is going to be
• 3:10
  Speaker 1: spent talking to them. And if you talk to a
• 3:13
  Speaker 1: fund manager in the UK, they will say, you know
• 3:15
  Speaker 1: the guy who the woman who actually manages the money,
• 3:18
  Speaker 1: they will they spent they spend half their life listening
• 3:20
  Speaker 1: to the sustainability and stewardship company is telling them how
• 3:23
  Speaker 1: they have to vote against this, and vote against that
• 3:25
  Speaker 1: and vote against this. So it becomes a very kind
• 3:27
  Speaker 1: of a tight area to work. And of course everyone
• 3:31
  Speaker 1: was on your case about money. You get paid too much.
• 3:34
  Speaker 1: You shouldn't get that much, but you should be paid less.
• 3:36
  Speaker 1: This isn't right, You should leave, et cetera, et cetera.
• 3:38
  Speaker 4: Et cetera.
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  Speaker 3: You go to the US and all it kind of vanishes.
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  Speaker 3: So why wouldn't you at all?
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  Speaker 5: But one one on this is on the compliance said
• 3:48
  Speaker 5: and the ESG saide.
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  Speaker 2: I mean this sort of.
• 3:51
  Speaker 5: Stuff is is global, isn't it? How has it got
• 3:56
  Speaker 5: so much? Was in the UK? I mean the p
• 3:58
  Speaker 5: thing is is clear leave very different and always has been.
• 4:03
  Speaker 4: Well.
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  Speaker 1: I think you know, we love a bit of regulation,
• 4:05
  Speaker 1: we love a bit of bureaucracy. We've got endless people
• 4:09
  Speaker 1: and endless different organizations creating codes and sets of guidance
• 4:13
  Speaker 1: or remember a lot of stuff is guidance. But if
• 4:16
  Speaker 1: you're a company and you don't follow the guidance, then
• 4:18
  Speaker 1: nonetheless the big institutions will vote against you because they've
• 4:21
  Speaker 1: got sort of that stuck in their head as well.
• 4:23
  Speaker 1: So you know, there's there's a lot of different organizations,
• 4:27
  Speaker 1: different sets of guidance, different regulators or telling you that
• 4:30
  Speaker 1: you have to do this, and you have do that,
• 4:31
  Speaker 1: and you have to do this.
• 4:32
  Speaker 3: And when you you.
• 4:32
  Speaker 1: Know, each individual piece, if the likes of you and
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  Speaker 1: I are ordinary investors look at it, we're like, well
• 4:36
  Speaker 1: that that's entirely reasonable. People should have to do that,
• 4:38
  Speaker 1: and people should have to do that, and people should
• 4:40
  Speaker 1: have to do that. But as it piles up and
• 4:42
  Speaker 1: up and up and up and up, it gets the
• 4:44
  Speaker 1: point where, you know, what about the actual business, what
• 4:47
  Speaker 1: about the innovation, what about the wealth creation, what about
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  Speaker 1: the value creation, what about the productivity? You know, it
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  Speaker 1: becomes a sort of a heavy blanket lying over the
• 4:56
  Speaker 1: real activity of a company. So then you get this,
• 4:59
  Speaker 1: this this feeling from CEOs they're not allowed to do
• 5:03
  Speaker 1: what they do best, which is run a business. And worse,
• 5:06
  Speaker 1: they're not allowed to do what they do best, and
• 5:08
  Speaker 1: they're also not allowed to get paid for doing it,
• 5:10
  Speaker 1: maybe not as well as they'd like to do, if
• 5:12
  Speaker 1: that makes sense. Whereas you can go somewhere else and
• 5:14
  Speaker 1: get all those things out. There's so many problems here.
• 5:16
  Speaker 1: You know, good governance is great. We're all very pro
• 5:19
  Speaker 1: good governance, but you cannot make investing safe. You shouldn't
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  Speaker 1: even try and make investing safe because risk is the
• 5:26
  Speaker 1: price of growth.
• 5:28
  Speaker 3: That's how it works.
• 5:29
  Speaker 5: I mean, yeah again doing desicree home, might you this
• 5:33
  Speaker 5: is just about the US have insucked all the oxygen
• 5:38
  Speaker 5: equity markets in jeninal over the last ten years because
• 5:41
  Speaker 5: everyone's been all these party growth stocks let's go. You know,
• 5:47
  Speaker 5: you test Etctera, et cetera, and Neil Harton to be
• 5:50
  Speaker 5: over there as oppose. They's a specific problem with the UK.
• 5:53
  Speaker 1: Yeah, that comes back to something that you and I've
• 5:55
  Speaker 1: talked about a lot about this, this idea that evaluation
• 5:59
  Speaker 1: gap in the US and the UK is is slightly
• 6:01
  Speaker 1: out of control. It's wider than it's ever been with
• 6:03
  Speaker 1: running what near forty percent still, but we've also looked
• 6:07
  Speaker 1: at you and I had a lot of the research
• 6:08
  Speaker 1: and the data that shows that even if you pull
• 6:11
  Speaker 1: out the growth, if you are just for that, there's
• 6:14
  Speaker 1: still a valuation gap between the US and the UK.
• 6:18
  Speaker 3: And so the question is really to ask what is
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  Speaker 3: that all about?
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  Speaker 1: Why is it that a companies prefer to list in
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  Speaker 1: the US but be one of the obvious reasons for
• 6:26
  Speaker 1: that is the valuation gap. You know, you spent all
• 6:28
  Speaker 1: this time creating a company, building up a company, and
• 6:31
  Speaker 1: putting the private equity dynamic to side for one moment
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  Speaker 1: we're just talking about genuine entrepreneurs. You've done all that,
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  Speaker 1: Why wouldn't you get the best price for it? Why
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  Speaker 1: wouldn't you want to get the best price for it?
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  Speaker 1: So why wouldn't you think about listing in the place
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  Speaker 1: you can get the best price. So we can't argue
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  Speaker 1: about whether the evaluations in the US are wrong or
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  Speaker 1: right and whether they'll mean revert or not mean revert,
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  Speaker 1: But right now that's where we are. So there's this problem.
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  Speaker 1: And then the other problem, of course, is the actual
• 6:56
  Speaker 1: pay of CEOs. And we like to think, don't we
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  Speaker 1: all us that you know, once you get above ten
• 7:01
  Speaker 1: million or so, it's neither here nor there how much
• 7:03
  Speaker 1: you get paid. But if the question is ten million
• 7:06
  Speaker 1: or two hundred million, I guess maybe it is here
• 7:08
  Speaker 1: or there. And we can also say, and I agree
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  Speaker 1: with this, that CEOs are paid too much across the
• 7:14
  Speaker 1: board in general in the US and in the UK.
• 7:17
  Speaker 1: But even if I feel that and you feel that,
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  Speaker 1: that doesn't mean that we feel that strongly enough that
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  Speaker 1: we prefer companies listed somewhere else.
• 7:29
  Speaker 5: Yeah, I mean, I guess. I mean this is the
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  Speaker 5: This is the tricky part of all of this, isn't it.
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  Speaker 5: Because on the one hand, we want this because, as
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  Speaker 5: you point out in your book, we want to have
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  Speaker 5: a thriving shareholder democracy and that's really important for the
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  Speaker 5: creation of capital and having a dynamic economy and all
• 7:51
  Speaker 5: the rest of those great things. And on the other hand,
• 7:55
  Speaker 5: a lot of the things that we don't like are
• 7:57
  Speaker 5: the things that America A lows. So it is things like,
• 8:00
  Speaker 5: you know, founders being able to have all of the
• 8:02
  Speaker 5: voting shares without actually owning that much of the company.
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  Speaker 5: Things like founders and more. Actually, I don't mind founders
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  Speaker 5: so much getting paid in saying amounts of money, but
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  Speaker 5: I do have a problem were essentially kind of like
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  Speaker 5: middle management executive equivalents who have become the chief executive
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  Speaker 5: getting generational, life changing wealth, which is one of the
• 8:22
  Speaker 5: objections that people have had to, you know, things like
• 8:24
  Speaker 5: the ridiculous the big bonus that the Persimmon guy got.
• 8:29
  Speaker 3: Well, here's the big battery, isn't he. There's always those
• 8:31
  Speaker 3: outliers for everybody.
• 8:34
  Speaker 2: Yeah, helped that. That was government subsidized as well.
• 8:38
  Speaker 1: But we're not going to go to help to buy today. No,
• 8:42
  Speaker 1: no beginning to get a rage going already. We're not
• 8:45
  Speaker 1: doing help to buy.
• 8:48
  Speaker 5: But yeah, things like how do we or rather can
• 8:51
  Speaker 5: we get the best of both worlds? I mean, I
• 8:54
  Speaker 5: suppose one of the things I was thinking in a
• 8:56
  Speaker 5: Regier column was does this boil down the act of
• 9:00
  Speaker 5: institutional investors needn't to be more engaged and to focus
• 9:05
  Speaker 5: on certain things that they're not focused and just know
• 9:09
  Speaker 5: because I mean, see, you don't get enough pupike on
• 9:12
  Speaker 5: my wage? Is any we in a we you want
• 9:16
  Speaker 5: more of that?
• 9:16
  Speaker 1: Get quite a lot in the UK Now there's quite
• 9:19
  Speaker 1: a lot of this. There's endless voting again to our tips, etc.
• 9:22
  Speaker 1: I think that that has really come a long way
• 9:24
  Speaker 1: since you and I started bitching about it. Fifteen twenty
• 9:27
  Speaker 1: years ago, so that there's been a shift there. But
• 9:30
  Speaker 1: I suppose that the real thing is that we need
• 9:32
  Speaker 1: to find it a middle way as usual, you know,
• 9:35
  Speaker 1: and the FCA and everywhere they are beginning to recognize
• 9:38
  Speaker 1: that the UK has gone too far in wrapping its
• 9:41
  Speaker 1: corporates up in endless regulation and too far towards trying
• 9:45
  Speaker 1: to make everything safe. And as you know, I'm a
• 9:47
  Speaker 1: huge advocate of shareholded democracy than my bookshere Power you
• 9:51
  Speaker 1: were just mentioning, is all about that. So I'm a
• 9:54
  Speaker 1: huge fan of that. But I'm also much more than
• 9:56
  Speaker 1: I'm a fan of anything. I'm a fan of economic
• 10:00
  Speaker 1: growth and fan of productivity growth, and a fan of
• 10:04
  Speaker 1: us finding ways to grow our economy. That means that
• 10:07
  Speaker 1: the entire country can benefit. And if we don't have deep, popular,
• 10:13
  Speaker 1: liquid capital markets in the UK, we don't get to
• 10:16
  Speaker 1: have any of the rest. So it seems to me
• 10:19
  Speaker 1: incredibly important that we look at what's happening now and say,
• 10:22
  Speaker 1: do you know what, this isn't working. We've gone too far,
• 10:25
  Speaker 1: so we've got to pull back from it a bit.
• 10:27
  Speaker 1: And when you see the fund managers coming out and going, oh, well,
• 10:30
  Speaker 1: I don't know that doesn't feel safe anymore. I just
• 10:32
  Speaker 1: want to go out and shake all of them and say,
• 10:34
  Speaker 1: this is.
• 10:34
  Speaker 3: Actually your job. Your job. Your job is to.
• 10:38
  Speaker 1: Go out there, look through the oputy markets, give it
• 10:40
  Speaker 1: a good sift around, and find the companies that are good,
• 10:44
  Speaker 1: that you know, aren't going to have governance issues, that
• 10:46
  Speaker 1: aren't going to go bust, that aren't going to you know,
• 10:49
  Speaker 1: turn out to be fraudulent, etc. That is your actual job.
• 10:53
  Speaker 1: So you know, don't be turning around and saying to
• 10:54
  Speaker 1: the regulators you need to do more because I can't
• 10:56
  Speaker 1: be asked to do the governance myself. Enough of this enough.
• 11:00
  Speaker 5: The one thing I actually did want to say, and
• 11:02
  Speaker 5: this is something you didn't mention to call them, but
• 11:03
  Speaker 5: I was just curious as to how much of this
• 11:06
  Speaker 5: you think ties in with the rise of passive investing,
• 11:12
  Speaker 5: both in terms of perhaps you know, because I mean
• 11:17
  Speaker 5: a lot of the kind of ESG stuff has ended
• 11:19
  Speaker 5: up being driven by people like black Rock to try
• 11:21
  Speaker 5: and differentiate their offering from other providers passive, and also
• 11:27
  Speaker 5: a lot of the fact that the a lot of
• 11:30
  Speaker 5: the auxygen being sucked out the global equity markets has
• 11:33
  Speaker 5: been partly because obviously passive funds the money. It gravitates
• 11:37
  Speaker 5: to where the most money is. And therefore, as other
• 11:41
  Speaker 5: markets I've got, as the US has got big, that's
• 11:43
  Speaker 5: attracted ever more money.
• 11:46
  Speaker 2: I just wonder how much.
• 11:47
  Speaker 5: Of this is kind of doubted that almost I don't know,
• 11:52
  Speaker 5: kind of automation equity markets have kind of lost some
• 11:55
  Speaker 5: of that.
• 11:58
  Speaker 2: Sparkle. I guess that then ended up going to Krypto.
• 12:02
  Speaker 4: You're an old romantic, aren't you.
• 12:04
  Speaker 2: Chance Well, yes, obviously.
• 12:08
  Speaker 1: The aswer is I don't know. I just don't know,
• 12:11
  Speaker 1: And you and I are always because we great believer
• 12:13
  Speaker 1: is in active management or I am anyway, you know,
• 12:15
  Speaker 1: I'm always keen to blame passive for absolutely everything, but
• 12:19
  Speaker 1: but I'm not convinced that that's what it is here.
• 12:21
  Speaker 1: It's driven by the do goodery of the far management companies,
• 12:26
  Speaker 1: of course, and as you say, their efforts to differentiate
• 12:28
  Speaker 1: themselves by by selling stewardship, ESG, etc.
• 12:31
  Speaker 3: But that's not necessarily part of passive.
• 12:33
  Speaker 1: But it's also driven by, I think, in the main,
• 12:36
  Speaker 1: by the regulatory environment in the UK, where we really
• 12:38
  Speaker 1: want to make everything a gold standard and we've done
• 12:41
  Speaker 1: our absolute best to add the best governance in the
• 12:44
  Speaker 1: world and to make one of the reasons why you
• 12:46
  Speaker 1: want to list in the UK because it has the
• 12:48
  Speaker 1: best governance. But in fact, you know what the best
• 12:51
  Speaker 1: governance isn't necessarily the best.
• 12:55
  Speaker 3: Thing for growth. So you know, we have to find
• 12:57
  Speaker 3: a middle way.
• 12:58
  Speaker 1: That's that's my view. I don't know quite how that
• 13:01
  Speaker 1: little way works, but I do know that the the
• 13:04
  Speaker 1: reforms to the listing environment the FCA came out with
• 13:07
  Speaker 1: earlier this week are an excellent start, but only a start.
• 13:16
  Speaker 1: Welcome to Merin Talks Money, the podcast in which people
• 13:19
  Speaker 1: who know the markets explain the markets.
• 13:21
  Speaker 4: I'm Merrit Sunset Web.
• 13:22
  Speaker 1: This week we are going to have a conversation with
• 13:24
  Speaker 1: Simon Elliott, who's a managing director at JP Morgan Asset Management.
• 13:28
  Speaker 1: He works as the client director for his absolutely vast
• 13:32
  Speaker 1: investment trust business. Now, Simon, you and I have been
• 13:35
  Speaker 1: talking about investment trust for I don't know how many years,
• 13:38
  Speaker 1: both getting old, Yeah, a good, good decade, possibly two decades,
• 13:42
  Speaker 1: maybe even more.
• 13:42
  Speaker 4: We've been talking about investment trust.
• 13:44
  Speaker 1: Now I want to start because I'm not sure that
• 13:47
  Speaker 1: all of our audience will be totally okay with what
• 13:49
  Speaker 1: makes an investment trust great.
• 13:51
  Speaker 4: So before, I believe makes them great.
• 13:53
  Speaker 1: So before we get into talking about the sector's problems,
• 13:56
  Speaker 1: it's difficulties and the fascinating things that are happening unders
• 13:58
  Speaker 1: so many bonnets at the moment, let's start by just
• 14:02
  Speaker 1: running through what it is that makes an investment trust
• 14:05
  Speaker 1: a special kind of investment. Yeah.
• 14:07
  Speaker 2: Well, at the end of the day, an investment trust
• 14:09
  Speaker 2: is a PLC. It's a publicly listed company. It has
• 14:12
  Speaker 2: the advantage over other forms of collectives of being a
• 14:16
  Speaker 2: captive pool of capital, so in theory at least, it
• 14:19
  Speaker 2: shouldn't be a full seller at times when market conditions
• 14:22
  Speaker 2: become more difficult. It also has a number of advantages
• 14:25
  Speaker 2: in terms of dividend payments. So this concept of dividend
• 14:30
  Speaker 2: heroes those investment trust companies that have records of twenty
• 14:33
  Speaker 2: or more years of consecutive dividend growth, of which I
• 14:36
  Speaker 2: think they're about eighteen or so at the moment, led
• 14:40
  Speaker 2: by City of London Investment Trusting. That's up to about
• 14:42
  Speaker 2: fifty five years now of consecutive diffident growth. In addition
• 14:45
  Speaker 2: to that, we've seen a number of investment trust take
• 14:48
  Speaker 2: on powers to pay out enhance dividends as well, so clearly,
• 14:53
  Speaker 2: dividends can be cut or can be suspended for investment companies,
• 14:56
  Speaker 2: but they've got a number of advantages which provides a
• 14:59
  Speaker 2: degree of creat dividends certainty.
• 15:01
  Speaker 4: Yeah, dividends is quite interesting, isn't it.
• 15:03
  Speaker 1: Because it used to be that you weren't allowed to
• 15:05
  Speaker 1: pay dividends out of capital. You couldn't, we couldn't effectively
• 15:08
  Speaker 1: change capital into income and pay it out.
• 15:11
  Speaker 4: As a dividend, and there were very good reasons for that.
• 15:13
  Speaker 1: But now it is possible, quite a lot of trust
• 15:15
  Speaker 1: of picking it up, and it's still quite a divisive.
• 15:17
  Speaker 4: Issue, isn't it. Yeah, No, it is.
• 15:19
  Speaker 2: You're right. There was a tax change a number of
• 15:21
  Speaker 2: years ago which meant it was possible. A few investment
• 15:24
  Speaker 2: trusts have gone down that route, including a few and
• 15:26
  Speaker 2: the JP Morgan ranges. It happens, and I think we've
• 15:28
  Speaker 2: got six pain enhanced dividends at the moment. I mean,
• 15:31
  Speaker 2: it's something to keep an eye on. I mean, the
• 15:33
  Speaker 2: arguments against it is that it's tax inefficient. Effectively, you're
• 15:38
  Speaker 2: turning capital into income, and we know the differential in
• 15:41
  Speaker 2: terms of tax rates between income and capital gains tax,
• 15:44
  Speaker 2: so you know, you could argue that perhaps it doesn't
• 15:47
  Speaker 2: quite make sense. However, the reality is it does appeal
• 15:50
  Speaker 2: seem to appeal to a wider range of investors, and
• 15:53
  Speaker 2: particularly retail investors who frankly, you know, are looking for
• 15:56
  Speaker 2: sources of income. So if I mean, probably the best
• 16:00
  Speaker 2: example is the JP Walgan Global Growth and Income Fund
• 16:03
  Speaker 2: that has a four percent enhanced evidend. It's probably gone
• 16:06
  Speaker 2: a natural yield between two two and a half and
• 16:09
  Speaker 2: then it converts an element of capital and that's proven
• 16:12
  Speaker 2: very popular with retail investors and really been a big
• 16:14
  Speaker 2: part of its story.
• 16:16
  Speaker 4: It's interesting and it.
• 16:17
  Speaker 1: Kind of makes those big trusts, I mean, that's a
• 16:18
  Speaker 1: classic of the genre.
• 16:20
  Speaker 4: Global Growth and Income kind of makes them into you.
• 16:22
  Speaker 4: It makes them into annuities to a degree.
• 16:24
  Speaker 1: I mean, if you think about what the retail investor
• 16:25
  Speaker 1: is after, and one of the reasons why perhaps a
• 16:27
  Speaker 1: retail investor is much bothered by the tax element of
• 16:30
  Speaker 1: this is because they hold a lot of these big
• 16:31
  Speaker 1: trusts inside their I sell or in particular, inside their
• 16:35
  Speaker 1: SIP and in the old days, you know, when it
• 16:38
  Speaker 1: came to pension time, you'd take all that money that
• 16:40
  Speaker 1: you'd saved up and you'd hand it over in exchange
• 16:43
  Speaker 1: for an annuity which was effectively turning your capital into
• 16:47
  Speaker 1: income over the period until you're death right. And if
• 16:50
  Speaker 1: you get one of these big trusts now and you
• 16:53
  Speaker 1: can see that they're only making a natural yield of
• 16:55
  Speaker 1: one percent or two percent or two and a half percent,
• 16:57
  Speaker 1: and they say, well, we're going to pay you four
• 16:59
  Speaker 1: and a half percent Now.
• 17:00
  Speaker 4: They may or may not.
• 17:01
  Speaker 1: Be making the capital game to back that up, but
• 17:03
  Speaker 1: they're becoming a type of annuity for the retail investor.
• 17:06
  Speaker 2: I mean, I think you make a good point about
• 17:08
  Speaker 2: where these investments are held. I mean, tax efficient rappers
• 17:10
  Speaker 2: are hugely important and probably explain why there has been
• 17:14
  Speaker 2: a good uptake from retail investors for these type of funds.
• 17:19
  Speaker 2: I mean, there are people in the wealth management community
• 17:21
  Speaker 2: who have greater issues with it, but I think as
• 17:23
  Speaker 2: the years have gone by and the kind of strategy
• 17:25
  Speaker 2: has become more proven, I think you know, you're likely
• 17:28
  Speaker 2: to see even more uptake.
• 17:30
  Speaker 4: Yeah, you're not picking up my innuity point.
• 17:32
  Speaker 1: I'm trying, really trying, really hard to get the investment
• 17:36
  Speaker 1: trust industry to take one of these great big trusts
• 17:38
  Speaker 1: and explicitly say, hey, guys, you know what we can make.
• 17:41
  Speaker 4: This indur in a nuity for you. You still get
• 17:43
  Speaker 4: to control the remaining capital.
• 17:45
  Speaker 1: But so far no one has taken my bait, and
• 17:47
  Speaker 1: I sense you're not going to either disappointing.
• 17:50
  Speaker 2: Well, we'll see. I mean, I think what I would
• 17:52
  Speaker 2: say about investment trust is that there's always innovation across
• 17:55
  Speaker 2: the sector. I mean, you know, as you well know,
• 17:57
  Speaker 2: it's in one hundred and fifty five years history of
• 18:00
  Speaker 2: investment trusts, and they have proven to be very adaptable
• 18:04
  Speaker 2: and innovative. So you know, things like enhanced dividends or
• 18:07
  Speaker 2: other policies or of a strategies that they pursued. I mean,
• 18:09
  Speaker 2: there's a reason why they've survived for so long.
• 18:12
  Speaker 4: Yeah, and it's not just survive.
• 18:13
  Speaker 1: I'm one of the fascinating things about investment trust is
• 18:16
  Speaker 1: they have a long history of regularly outperforming other types
• 18:19
  Speaker 1: of investment vehicles. So if we just be really simple
• 18:21
  Speaker 1: and call investment trusts closed down vehicles and the other
• 18:24
  Speaker 1: kind open ended vehicles in the main, over time, investment
• 18:28
  Speaker 1: trusts have outperformed, haven't they.
• 18:30
  Speaker 4: And we're never entirely sure why.
• 18:32
  Speaker 1: You know, we live at it and we say, well,
• 18:33
  Speaker 1: all the all the advantages that you listed earlier.
• 18:36
  Speaker 4: Which one is that that makes the difference.
• 18:39
  Speaker 2: Yeah, that's right. I mean, I think there there have
• 18:40
  Speaker 2: been some very interesting academic studies over the years that
• 18:43
  Speaker 2: would have you know, would would would suggest that that
• 18:46
  Speaker 2: is the case, and I mean there's various reasons why
• 18:48
  Speaker 2: that might be so. I mean, the fact that investment
• 18:50
  Speaker 2: trusts can deploy a modest amount of gearing obviously helpful
• 18:54
  Speaker 2: in a kind of rising market situation. The fact that
• 18:58
  Speaker 2: they can invest in less liquid companies is obviously important,
• 19:03
  Speaker 2: but I think it allows the portfolio managers to take
• 19:05
  Speaker 2: longer term investment decisions, you know, they don't have to
• 19:08
  Speaker 2: worry about any potential short term redemptions, which is obviously
• 19:12
  Speaker 2: the case for open ended funds or even just managing
• 19:15
  Speaker 2: flows in and out. I think that captive paula capital is,
• 19:18
  Speaker 2: you know, is a huge advantage, and particularly in the
• 19:21
  Speaker 2: times that we find ourselves in.
• 19:23
  Speaker 1: There's also been cost doesn't then that historical investment trusts
• 19:26
  Speaker 1: have been cheaper than open ended funds, which has been
• 19:31
  Speaker 1: one of the things that has probably driven out performance
• 19:34
  Speaker 1: And one of the things the industry might be concerned
• 19:36
  Speaker 1: about at the moment is that that cost gap has fallen.
• 19:40
  Speaker 2: Yeah, so certainly kind of pre RDR, which is one
• 19:42
  Speaker 2: of those horrible acronyms that the financial industry loves. But
• 19:46
  Speaker 2: there was a change. I mean, back in the day,
• 19:48
  Speaker 2: open ended funds would often have mechanisms to pay commission
• 19:53
  Speaker 2: to people advising them. Obviously that's in history books now
• 19:56
  Speaker 2: that's falling away, but that was one of the reasons
• 19:59
  Speaker 2: why investment trusts were something more cost effective than open
• 20:02
  Speaker 2: ended funds. That's no longer the case. But what we
• 20:04
  Speaker 2: have seen across the investment trust sector probably for a
• 20:07
  Speaker 2: number of years now, probably best amount of ten years,
• 20:10
  Speaker 2: is a repricing of management fees in particular, and I
• 20:13
  Speaker 2: think this is where one of the other grade advantages
• 20:15
  Speaker 2: of investment trust really comes into play, and that's the
• 20:17
  Speaker 2: role of an independent board. I mean, in my experience,
• 20:20
  Speaker 2: boards have been very much on the front foot to
• 20:22
  Speaker 2: ensure that the management fees, in fact, all the kind
• 20:25
  Speaker 2: of costs involved in running an investment company are kept
• 20:28
  Speaker 2: us as keen as possible.
• 20:30
  Speaker 4: Yeah, I mean, it is absolutely stranginary. We won't talk
• 20:32
  Speaker 4: about this now, but it still.
• 20:33
  Speaker 1: Blows my mind every time we remember the pre RDR
• 20:36
  Speaker 1: days when you went to a financial advisor and you
• 20:38
  Speaker 1: arranged to invest in a unit trust, and then they
• 20:41
  Speaker 1: paid that financial advisor of commission forever half of percent
• 20:45
  Speaker 1: or whatever it was of your investment went back to
• 20:48
  Speaker 1: that advisor as long as you held that investment, even
• 20:50
  Speaker 1: if you'd only spoken to him for half an hour.
• 20:52
  Speaker 4: It's amazing, wasn't it.
• 20:54
  Speaker 2: A different age?
• 20:55
  Speaker 4: Yeah? Thank goodness?
• 20:57
  Speaker 1: Right.
• 20:57
  Speaker 4: I mean, I agree with you, by the way, on
• 20:59
  Speaker 4: these things.
• 20:59
  Speaker 1: I do think that the cost is important, but also
• 21:01
  Speaker 1: the fact that there is a board of directors, and
• 21:02
  Speaker 1: regular listeners will know that I have a history of
• 21:05
  Speaker 1: sitting on investment trust boards, and I like to think
• 21:07
  Speaker 1: that those boards of directors do make a difference because
• 21:09
  Speaker 1: they're always there to stand up for the shareholder.
• 21:11
  Speaker 4: But obviously investors will turn to that for themselves.
• 21:14
  Speaker 1: Now, moving on all these wonderful things we have been
• 21:17
  Speaker 1: talking about the things that make this sector stand out,
• 21:19
  Speaker 1: the things that make it sound really fantastic. But last
• 21:24
  Speaker 1: year wasn't a good one, was it.
• 21:25
  Speaker 4: No?
• 21:25
  Speaker 2: It wasn't.
• 21:26
  Speaker 1: So.
• 21:27
  Speaker 2: I mean, the numbers for the investment trust company sector
• 21:29
  Speaker 2: last year I think it was in the sector underperform
• 21:33
  Speaker 2: the wider UK market substantially. And actually that's what we're
• 21:37
  Speaker 2: seeing this year. So the numbers are that the investment
• 21:38
  Speaker 2: companies were down about seventeen percent or so last year.
• 21:41
  Speaker 2: That compares with a slight increase in the UK market
• 21:44
  Speaker 2: and the form of the foot Seat all share. So
• 21:46
  Speaker 2: far this year, I think we've got investment companies stand
• 21:48
  Speaker 2: about one point seven percent and that compares will rise
• 21:51
  Speaker 2: of five point three for the all share. So when
• 21:53
  Speaker 2: I'm talking about investment companies there it's worth noting there
• 21:56
  Speaker 2: all the investment companies that form part of the foots
• 22:00
  Speaker 2: all share, so there's about one hundred and ninety or
• 22:01
  Speaker 2: so at the moment. It's market gap weighted, so those
• 22:04
  Speaker 2: large investment trust companies you know, have a greater bearing
• 22:07
  Speaker 2: on that performance. But you know, take a step back.
• 22:09
  Speaker 2: Suffice to say, it has been a tough period for
• 22:11
  Speaker 2: investment companies And is.
• 22:14
  Speaker 4: That partly because in periods like we saw last year,
• 22:17
  Speaker 4: not only are their underlying.
• 22:19
  Speaker 1: Investments falling in value, but their discounts are widening. So
• 22:22
  Speaker 1: you get a negative account of negative double whammy with
• 22:25
  Speaker 1: an investment trust in difficult times.
• 22:26
  Speaker 2: Yeah, that's absolutely right. So if you look at the
• 22:28
  Speaker 2: sector average discount at the end of twenty twenty one,
• 22:30
  Speaker 2: it was probably stood about two two and a half percent,
• 22:33
  Speaker 2: so we did see a big d rating going back
• 22:35
  Speaker 2: to March twenty twenty at the time of the pandemic.
• 22:38
  Speaker 2: Obviously markets were very uncertain that that period of time,
• 22:41
  Speaker 2: but then there was a quick recovery since then. But
• 22:44
  Speaker 2: going through last year, I mean, the secretaries discount widened
• 22:48
  Speaker 2: out about thirteen percent at the end of last year,
• 22:51
  Speaker 2: and it's continued to widen this year. So I think
• 22:53
  Speaker 2: you hit about seventeen just more than seventeen percent at
• 22:55
  Speaker 2: one stage. It's recovered a little but still stands at
• 22:58
  Speaker 2: about sixteen percent, So historically that's at quite a wide level.
• 23:02
  Speaker 2: I mean, just to put some numbers on that, go
• 23:04
  Speaker 2: back to March twenty twenty, that pandemic period, I think
• 23:07
  Speaker 2: we bounced off about a twenty two percent sector average
• 23:10
  Speaker 2: discount you go back to the GFC probably a not
• 23:12
  Speaker 2: dissimilar level. So to be at sixteen seventeen percent does
• 23:16
  Speaker 2: suggest that there's something a little amiss in the world
• 23:18
  Speaker 2: of investment companies.
• 23:20
  Speaker 4: Okay, interesting.
• 23:21
  Speaker 1: I mean some retail investors would look at that and
• 23:24
  Speaker 1: immediately go, well, I'm going to buy everything insight because
• 23:26
  Speaker 1: when investment trust discounts are at loads like this, it's
• 23:29
  Speaker 1: usually historically it's been a bisignal.
• 23:32
  Speaker 2: Yeah, And look, I mean you're absolutely right. There are
• 23:34
  Speaker 2: I mean not just regal investors, frankly, but there are
• 23:36
  Speaker 2: those investors who will look at the discounts that were
• 23:39
  Speaker 2: seeing across investment companies at the moment and consider them
• 23:41
  Speaker 2: an opportunity. I mean, there's a few things to note here.
• 23:45
  Speaker 2: I mean, certainly, you know, investment companies have historically played
• 23:48
  Speaker 2: well to control and investors, So those that have looked
• 23:51
  Speaker 2: to take advantage of out of favor asset classes on
• 23:54
  Speaker 2: wide discounts and then wait for those asset classes to
• 23:57
  Speaker 2: come in favor and those discounts narrow, so you kind
• 23:59
  Speaker 2: of get a double whammy effect. But then the other consideration,
• 24:03
  Speaker 2: and this will be true particularly for those investment trust
• 24:06
  Speaker 2: companies exposed to private markets or private companies, is you know,
• 24:11
  Speaker 2: can we rely on those navy valuations because it's all
• 24:13
  Speaker 2: very well notionally saying it's on an x percent discount,
• 24:16
  Speaker 2: But if the NAV is not something that perhaps you
• 24:19
  Speaker 2: could rely on, then you've got to be a little
• 24:20
  Speaker 2: bit wary, clearly.
• 24:22
  Speaker 1: Okay, So let's talk about that because This is one
• 24:25
  Speaker 1: of the big questions in the sector at the moment
• 24:26
  Speaker 1: is about this trend there has been over the last
• 24:30
  Speaker 1: decade for investment trust to hold not just publicly listed
• 24:34
  Speaker 1: investments but private investments at the same time. And I'm
• 24:38
  Speaker 1: not going to ask you to talk to me about
• 24:39
  Speaker 1: companies such as Bailey Gived in particular, but they have
• 24:42
  Speaker 1: been the big leader here. You know, they went in
• 24:44
  Speaker 1: very strong making sure that the majority of their trust
• 24:48
  Speaker 1: hoold held not just listed investments, but private investments as well,
• 24:51
  Speaker 1: on the basis that on the perfectly correct basis that
• 24:54
  Speaker 1: that's where the growth was. If you want to be
• 24:56
  Speaker 1: invested in growth across the spectrum, then you.
• 24:59
  Speaker 4: Shouldn't distinguish what is public and what is private.
• 25:01
  Speaker 1: And then let result is that lots of other companies
• 25:03
  Speaker 1: follow this lead, and we now have an awful lot
• 25:06
  Speaker 1: of companies out there, investment companies that hold both public
• 25:09
  Speaker 1: and private companies as well as the traditional private equity
• 25:12
  Speaker 1: companies which.
• 25:13
  Speaker 4: Are only private. So that's where a lot of the
• 25:16
  Speaker 4: big discounts are, right.
• 25:17
  Speaker 2: Yeah, that's right. I mean, look, it's worth noting that
• 25:19
  Speaker 2: for those investment trust companies that are exposed to public
• 25:22
  Speaker 2: listed companies that's on a mark to market basis when
• 25:26
  Speaker 2: you invariably get daily navs, and frankly, you're still seeing
• 25:29
  Speaker 2: quite wide a discounts on those investment trusts as well.
• 25:33
  Speaker 2: So I mean, if you look at the JP Morgan
• 25:35
  Speaker 2: stable and we've got nineteen investment trusts with one exception,
• 25:37
  Speaker 2: they're all publicly listed underlying companies, and yet I think
• 25:41
  Speaker 2: our average discount is just inside a ten percent at
• 25:44
  Speaker 2: the moment, so you know, narrow or tighter than the
• 25:47
  Speaker 2: sect average discount, but still you know, relatively wide discount.
• 25:51
  Speaker 2: But then you're right if you look at those investment
• 25:53
  Speaker 2: companies that are exposed to private companies or private markets
• 25:57
  Speaker 2: or infrastructure whatever it will be. I mean, there's a
• 25:59
  Speaker 2: range of valuation methods used to kind of calculate those navs.
• 26:04
  Speaker 2: And frankly, I'm sure your listeners will be turning off
• 26:06
  Speaker 2: in their droves if we start going through each in turn.
• 26:10
  Speaker 2: But it is a question mark sure, I'm quite sure
• 26:12
  Speaker 2: they wouldn't.
• 26:12
  Speaker 4: By the way, i'mquite sure they wouldn't absolutely love it to.
• 26:15
  Speaker 2: Be fascinated, fascinated by it that you carry on well, no,
• 26:21
  Speaker 2: I mean, I think the point is that you know
• 26:24
  Speaker 2: there are various different valuation ways of doing this, and
• 26:28
  Speaker 2: you know, it can be quite a complicated area. But
• 26:31
  Speaker 2: we've been there before, so I mean, if you go
• 26:32
  Speaker 2: back to I mean, I started covering the investment company
• 26:35
  Speaker 2: sector back in the early noughties, so in the aftermath
• 26:37
  Speaker 2: of the tech boom, and obviously we saw the global
• 26:40
  Speaker 2: financial crisis in twenty and eight, and at both those
• 26:43
  Speaker 2: periods of time, there was this move, there was kind
• 26:44
  Speaker 2: of risk off move, and anything with exposure to to
• 26:48
  Speaker 2: private assets was derated by and large. I mean, some
• 26:52
  Speaker 2: of the list of private equity companies got hit very
• 26:54
  Speaker 2: hard by the GFC and there were a number of
• 26:56
  Speaker 2: issues there, but valuation amongst them. But there's this idea
• 27:00
  Speaker 2: of you know, how do value can we rely on
• 27:01
  Speaker 2: the valuation? I mean, ultimately it is a very difficult area,
• 27:05
  Speaker 2: and I have a huge degree of sympathy for people
• 27:07
  Speaker 2: involved in that because ultimately, you know, what is something
• 27:10
  Speaker 2: well we're talking about price discovery here, and ultimately it's
• 27:13
  Speaker 2: worth what someone is prepared to pay for it. So
• 27:15
  Speaker 2: you can use your various different valuation methods, being you know,
• 27:17
  Speaker 2: discounted cash flows and you change your discount rates. You
• 27:20
  Speaker 2: can look at predicted earnings versus comparable PE ratios, and
• 27:24
  Speaker 2: you know, all these different ways of doing it, but
• 27:26
  Speaker 2: ultimately it is very difficult, and we are at that
• 27:29
  Speaker 2: stage of the market where there is a degree of
• 27:32
  Speaker 2: skepticism about valuations.
• 27:35
  Speaker 4: Yeah, well, you know.
• 27:36
  Speaker 1: I mean, I'm often very simplistic about things, which you
• 27:38
  Speaker 1: can criticize for me or not. But one of the
• 27:40
  Speaker 1: things I look at when I look at the trust
• 27:42
  Speaker 1: that the whole both, and you can see that their
• 27:45
  Speaker 1: publicly listed assets have fallen significantly more in value than
• 27:48
  Speaker 1: they're privately listed assets have been revalued at. And I
• 27:51
  Speaker 1: loved it, And I think to myself, what seems to
• 27:53
  Speaker 1: me that an environment like it such as this, the
• 27:56
  Speaker 1: value of the private assets should have fallen at least
• 27:58
  Speaker 1: as much, possibly more than the publicly listed assets, because
• 28:01
  Speaker 1: of course the private ones should have a massive liquidity
• 28:04
  Speaker 1: discount attached to them, and also, in the case of
• 28:07
  Speaker 1: it are not profit making a hefty discount for that
• 28:11
  Speaker 1: as well. So it likely seems to me that if
• 28:13
  Speaker 1: you look at a trust that holds both and the
• 28:16
  Speaker 1: private assets haven't been written down at least as much,
• 28:19
  Speaker 1: if not more than the public assets, then there's definitely
• 28:22
  Speaker 1: more to come.
• 28:23
  Speaker 4: Is that overly simplistic and unfair of me.
• 28:25
  Speaker 1: Yeah.
• 28:25
  Speaker 2: I mean, look, people on the other side of that
• 28:26
  Speaker 2: would argue, yes, but what you don't take into consideration
• 28:29
  Speaker 2: there is the fact that we might not hold pure equity.
• 28:32
  Speaker 2: We might be holding preference shares or some form of
• 28:35
  Speaker 2: security that gives us some protection when valuations fall. They'd
• 28:39
  Speaker 2: also say, well, look, you know we've had a you know,
• 28:41
  Speaker 2: funding round recently and this was the valuation that was
• 28:44
  Speaker 2: set by that particular funding round. Or they might say, well,
• 28:46
  Speaker 2: look we've actually disposed of some assets. So you know,
• 28:49
  Speaker 2: you look at we're talking about you know, private equity
• 28:51
  Speaker 2: and private companies, but you look at what's going on
• 28:52
  Speaker 2: in the property market at the moment. Obviously we have
• 28:54
  Speaker 2: seen a big derating their valuations have come down, but
• 28:58
  Speaker 2: we also have seen disposals. You know, some of these
• 29:00
  Speaker 2: assets have been disposed of in very recent times, and
• 29:04
  Speaker 2: obviously there are exceptions, but you know, equally we've seen
• 29:06
  Speaker 2: some uplifts on carrying values as well. So it's a
• 29:09
  Speaker 2: it's a hugely complicated subject. I totally understand investors' wareness,
• 29:13
  Speaker 2: and frankly, that's one of the reasons we've seen discounts
• 29:16
  Speaker 2: widen out over the last eighteen months or so. However,
• 29:20
  Speaker 2: as I keep saying, you know, we have been there before,
• 29:22
  Speaker 2: it is that stage of the cycle. And I think
• 29:25
  Speaker 2: the kind of bottom line is it's it's a market
• 29:28
  Speaker 2: or it's a kind of situation where it pays to
• 29:29
  Speaker 2: do your homework, you know, it's you know, to your
• 29:32
  Speaker 2: listeners who are quite fascinated by the valuation issue, then
• 29:35
  Speaker 2: this is this is the time to kind of roll
• 29:37
  Speaker 2: up you sieves and get your hands dirty, actually have
• 29:39
  Speaker 2: a look at these things carefully.
• 29:41
  Speaker 4: And what should we've.
• 29:42
  Speaker 1: Talked about the boards of these investment trusts? What should
• 29:44
  Speaker 1: a board do if their discount is very wide? So
• 29:48
  Speaker 1: you've got assets on your books, and let's let's go
• 29:50
  Speaker 1: back to inve'sment acrus that only hold listed companies, right,
• 29:54
  Speaker 1: so we can see very clearly what they're actual as
• 29:57
  Speaker 1: a value of the portfolio is, and we can see
• 30:00
  Speaker 1: what the market value of the investment trust is. And
• 30:02
  Speaker 1: there's a gap there, let's say, for example, of fifteen
• 30:04
  Speaker 1: twenty percent, what do a board of the investment trust do?
• 30:08
  Speaker 4: Well?
• 30:08
  Speaker 2: Obviously some it differs is a short time, So I
• 30:11
  Speaker 2: mean there are some boards have been incredibly proactive. I mean,
• 30:13
  Speaker 2: there are a number of investment trusts that have pursued
• 30:15
  Speaker 2: a zero discount policy and have done for a number
• 30:17
  Speaker 2: of years and you know successfully.
• 30:20
  Speaker 1: So you know, that just means making it known that
• 30:23
  Speaker 1: they are going to buy back until the discount hits
• 30:26
  Speaker 1: zero and once the market absolutely understands that the discount
• 30:30
  Speaker 1: really moves out.
• 30:31
  Speaker 2: Yes, that's right. So you look at Personal Assets Trust
• 30:33
  Speaker 2: or Capital Gearing Trust, I mean, they've pursued that policy
• 30:35
  Speaker 2: very very successfully. And then there are other investment trust
• 30:38
  Speaker 2: companies who've used their buy back policy to kind of
• 30:40
  Speaker 2: dampen down volatility share price volatility. So you know, in
• 30:45
  Speaker 2: the jpm stay board, we've got the American Fund. They've
• 30:48
  Speaker 2: been very active in their buybacks this year and it's
• 30:49
  Speaker 2: probably you know, turned out about between a three and
• 30:52
  Speaker 2: a four percent discount, and that's very much intentional. But
• 30:55
  Speaker 2: you're right, there is criticism across the sector that you know,
• 30:57
  Speaker 2: there isn't enough being done in terms of buybacks. I mean,
• 31:00
  Speaker 2: we've seen a sixty four percent increase quarter on quarter.
• 31:03
  Speaker 2: In the first three months of this year. Eight hundred
• 31:05
  Speaker 2: and forty million pounds was brought back across investment trust
• 31:09
  Speaker 2: so there is certainly activity, but it can be difficult
• 31:12
  Speaker 2: as well. I mean, some investment trust companies are very
• 31:16
  Speaker 2: conscious of their size. Size is an issue in the
• 31:19
  Speaker 2: investment trust company sector, not least because of the trends
• 31:23
  Speaker 2: that were seen across the investor base, with consolidation in
• 31:26
  Speaker 2: the wealth management sector, for instance, being one factor. So
• 31:30
  Speaker 2: investment trust companies are quite wary at shrinking to become
• 31:34
  Speaker 2: too small that they become uninvestable. So other considerations as well.
• 31:38
  Speaker 2: But you're right, I mean there has been a number
• 31:40
  Speaker 2: of voices saying, well, look, if you've been prepared to
• 31:42
  Speaker 2: issue on a premium rating when the sun has been
• 31:44
  Speaker 2: shining equally, you should be the other side of that.
• 31:47
  Speaker 4: Yeah, But then you come to that problem.
• 31:50
  Speaker 1: I always feel that, you know, so you issue a
• 31:52
  Speaker 1: lot of shares when things are going well and your
• 31:54
  Speaker 1: shares are trading at a prim view on let us
• 31:56
  Speaker 1: in value, and that that feels good. But nonetheless it
• 31:59
  Speaker 1: does mean but instead of having a fixed pool of capital,
• 32:02
  Speaker 1: you are bringing in more money that you then expect
• 32:05
  Speaker 1: your manager to take care of. And then if you
• 32:08
  Speaker 1: then do the opposite, you start to buy back your
• 32:11
  Speaker 1: shares when you're at a discount to try and them
• 32:13
  Speaker 1: back up to let use at value. Then you are
• 32:18
  Speaker 1: asking your manager to release cash in order to allow
• 32:22
  Speaker 1: you to buy those shares back.
• 32:23
  Speaker 4: So you're doing you're taking away.
• 32:25
  Speaker 1: One of the great advantages of investment trusts, which is
• 32:28
  Speaker 1: that your investment manager never has to think about inflows
• 32:32
  Speaker 1: and outflows. He or she has got the pot of
• 32:33
  Speaker 1: money and they deal with that pot of money. So
• 32:36
  Speaker 1: as soon as you in produce very intense buybacks to
• 32:39
  Speaker 1: try and close your discount, you take some of the
• 32:42
  Speaker 1: attention of your manager away from trying to improve its performance.
• 32:46
  Speaker 4: Which, in the end is the thing. The closest discounts automatically.
• 32:49
  Speaker 4: Is that fair?
• 32:50
  Speaker 2: Yeah, I think there's a lot of merit in that argument,
• 32:52
  Speaker 2: to be honest. I mean, I've heard other people say
• 32:54
  Speaker 2: that effectively becoming a semi open ended fund. So you know,
• 32:57
  Speaker 2: what's the point I think, you know, my personal view
• 33:01
  Speaker 2: is I think if boards are considering discounts, they should
• 33:03
  Speaker 2: be very clear at what they're trying to achieve. Is
• 33:06
  Speaker 2: it a case of there just you know, providing a
• 33:08
  Speaker 2: kind of flaw on their discount so, you know, effectively
• 33:10
  Speaker 2: signaling to sholders and some are very you know, explicit
• 33:13
  Speaker 2: about it that we will not let our discount go
• 33:15
  Speaker 2: wider than say ten percent or whatever the level that
• 33:17
  Speaker 2: they feel comfortable is. And also you're looking across your
• 33:21
  Speaker 2: your peer group as well, because if you're in an
• 33:23
  Speaker 2: area of the market that is out of favor. So
• 33:26
  Speaker 2: I mean, where are we at the moment? UK mid
• 33:28
  Speaker 2: and small cup would be a good case in point.
• 33:30
  Speaker 2: You know, we have seen that area de rated. It
• 33:31
  Speaker 2: has been a very tough part of the market now
• 33:34
  Speaker 2: for a number of years, and we have seen discounts
• 33:36
  Speaker 2: widen out. So to be the investment trust that says, right,
• 33:39
  Speaker 2: we're going to pursue a zero discount policy in that space,
• 33:41
  Speaker 2: I think would be quite problematic. You're likely to shrink
• 33:44
  Speaker 2: your vehicle in very very quicker order.
• 33:47
  Speaker 4: Okay, let's go back to talking about science. You're saying
• 33:49
  Speaker 4: that investors us are very, very wary about buying that
• 33:54
  Speaker 4: too much or doing anything they might.
• 33:55
  Speaker 1: Reduce their overall size because that makes them uninvestable for
• 33:59
  Speaker 1: the well managers who need to hold a certain size.
• 34:04
  Speaker 1: What is the minimum size that an investment trust can be? Now,
• 34:07
  Speaker 1: do you think it can be to be attractive for.
• 34:10
  Speaker 4: The wealth managers and therefore have reasonable liquidity emissions.
• 34:13
  Speaker 2: Yeah, this is this is one of the great talking
• 34:14
  Speaker 2: points of investment trust companies and has been for the
• 34:17
  Speaker 2: couple of decades I've been involved in it. I mean,
• 34:18
  Speaker 2: to be honest, it used to be one hundred million.
• 34:20
  Speaker 2: You needed to have about market level one hundred million
• 34:23
  Speaker 2: to be viable. That number suggest is you know, a
• 34:26
  Speaker 2: multiple of that now. I mean anecdotally you here four
• 34:29
  Speaker 2: hundred million. But there's also kind of concentration risk as well.
• 34:32
  Speaker 2: I think most investors, or institutional investors or wealth managers
• 34:36
  Speaker 2: would be you know, uncomfortable becoming too great a proportion
• 34:40
  Speaker 2: of the sholder registers. So whether that level's you know,
• 34:42
  Speaker 2: ten percent, fifteen percent, it will vary, frankly, but I
• 34:46
  Speaker 2: think it is important. I mean, again a personal view,
• 34:49
  Speaker 2: I would expect to see more consolidation across the investment
• 34:51
  Speaker 2: trust sector. I mean we have seen a number of
• 34:54
  Speaker 2: deals in recent years. Again, we talked about the JPM
• 34:57
  Speaker 2: Global Growth and Income Fund earlier and that had an
• 35:01
  Speaker 2: emerged with Scottish Investment Trust, which was completed last year,
• 35:04
  Speaker 2: and in fact it then went on to merge with
• 35:07
  Speaker 2: GP Morgan elect So it's not two mergers in the
• 35:09
  Speaker 2: last year, and that would be my expectation. That said,
• 35:14
  Speaker 2: it becomes more difficult to pursue a consolidation of mergers
• 35:18
  Speaker 2: at a time when discounts are wide. You know, not always,
• 35:22
  Speaker 2: but invariably, you've seen those investment trust companies that have
• 35:24
  Speaker 2: been the beneficiaries of mergers invariably training on strong, not
• 35:29
  Speaker 2: premium ratings to their nav and frankly, they're not that
• 35:33
  Speaker 2: many of those around anymore.
• 35:36
  Speaker 1: Yeah, So might it be that some of the smaller
• 35:40
  Speaker 1: investment trusts stay languishing on quite big discounts indefinitely.
• 35:44
  Speaker 4: And one of the things that retail investors listening to this.
• 35:46
  Speaker 1: Might say, well, you know, if if the big wealth
• 35:48
  Speaker 1: managers aren't going to get into some of those smaller
• 35:50
  Speaker 1: investment trusts, that's a great opportunity for me.
• 35:52
  Speaker 4: But maybe it's just a long term trust.
• 35:55
  Speaker 2: Yeah, I mean, just on that particular point, I mean
• 35:58
  Speaker 2: this idea that consolidation in plays to larger investors, there's
• 36:02
  Speaker 2: a lot in it for smaller investors as well, Franklin.
• 36:04
  Speaker 2: And if you look at the spread, the bid off
• 36:06
  Speaker 2: for spread on the share price of investment trust companies,
• 36:09
  Speaker 2: that spread can be very wide. When you kind of
• 36:12
  Speaker 2: dip below a certain level and probably about one hundred
• 36:14
  Speaker 2: million pounds or so, as a rule of thumb, you
• 36:16
  Speaker 2: know equally the cost of running investment trust companies as well.
• 36:18
  Speaker 2: We talked about how important it was to make sure
• 36:20
  Speaker 2: that you know these vehicles are pricedly keen. But there
• 36:25
  Speaker 2: is an element of fixed costs with investment trust companies.
• 36:29
  Speaker 2: And again if you get if you're too small, and
• 36:31
  Speaker 2: probably one hundred million is the number, then those kind
• 36:34
  Speaker 2: of fixed cost elements can ratchet up. So I think,
• 36:38
  Speaker 2: you know, for retail investors, they should certainly be aware
• 36:42
  Speaker 2: of the spread, they should certainly be aware of the
• 36:44
  Speaker 2: ongoing charges, and I think consolidation does play to them
• 36:48
  Speaker 2: as well.
• 36:49
  Speaker 4: Let's talk about the wider market as a whole.
• 36:52
  Speaker 1: I mean, JP Morgan has gone on so many investment
• 36:54
  Speaker 1: trusts that it doesn't matter what you want to invest in,
• 36:56
  Speaker 1: you you can find something right.
• 36:58
  Speaker 4: Where do you see the value?
• 37:00
  Speaker 1: In his serious question for you, where do you see
• 37:02
  Speaker 1: the value in global stock markets right now?
• 37:05
  Speaker 2: Gosh, again a great debating point. I always think it's
• 37:10
  Speaker 2: certainly with investment trust companies it does pay to be
• 37:12
  Speaker 2: to take a bit of a controlling approach, and certainly,
• 37:15
  Speaker 2: you know, talking to investors across the sector and you know,
• 37:19
  Speaker 2: are very good in house people as well. I mean,
• 37:21
  Speaker 2: people will talk about the value that exists in Japanese
• 37:24
  Speaker 2: equities at the moment. People will talk about the opportunity
• 37:27
  Speaker 2: set for European companies. I mean, the European investment trust
• 37:32
  Speaker 2: sector is one of the best performing so far here
• 37:34
  Speaker 2: to date. Obviously had a pretty tory time for understandable
• 37:37
  Speaker 2: reasons last year, but that has come back. People talk
• 37:39
  Speaker 2: about emerging markets at a time when you know, arguably
• 37:42
  Speaker 2: that the dollar is weakening. But it's interesting that you
• 37:45
  Speaker 2: know this big debate, you know, growth versus value. Have
• 37:48
  Speaker 2: we seen a complete change? And one suspects that it
• 37:50
  Speaker 2: is going to be a more difficult period for growth investors.
• 37:53
  Speaker 2: And yet if you look at what's happened here today,
• 37:56
  Speaker 2: growths outperformance value on a kind of global equity basis. Now,
• 38:00
  Speaker 2: maybe that's because of a small handful of tech companies,
• 38:02
  Speaker 2: but I don't think you write off growth ultimately. I
• 38:05
  Speaker 2: find that the debate between growth and value a little simplistic.
• 38:09
  Speaker 2: I think you've got to get behind that a bit.
• 38:10
  Speaker 1: Can I ask you about a couple of the trust
• 38:12
  Speaker 1: in particular, there's the jp of mergaging Europe, Middle East
• 38:16
  Speaker 1: and Africa Securities PLC.
• 38:17
  Speaker 4: Now that used to be the Russian Trust, right correct?
• 38:21
  Speaker 4: Is that the one I'm afraid I have to confess
• 38:22
  Speaker 4: to holding that.
• 38:25
  Speaker 1: Over the years on the basis that companies in Russia
• 38:28
  Speaker 1: was so cheap, so cheap, they pretty much discounted a
• 38:30
  Speaker 1: returned to communism and that didn't seem very likely.
• 38:32
  Speaker 4: Well, that'll teach me.
• 38:36
  Speaker 1: So that trust has now been expanded to invest in
• 38:38
  Speaker 1: in all sorts of different areas.
• 38:41
  Speaker 4: Tell me a little bit about the kind of thing
• 38:42
  Speaker 4: it invests in.
• 38:43
  Speaker 2: Yes, so you're absolutely right. So sharltles have approved a
• 38:45
  Speaker 2: change of mandate there so it can invest in Africa,
• 38:48
  Speaker 2: so obviously South Africa a key part of that particular market,
• 38:52
  Speaker 2: and also the Middle East as well, so you know
• 38:55
  Speaker 2: Saudi Q eight and so on and so forth. So
• 38:58
  Speaker 2: you know, a broader a broad to mandate, but still
• 39:01
  Speaker 2: relative early days following that strategy.
• 39:04
  Speaker 4: Okay, so worth watching, I think.
• 39:06
  Speaker 1: And then let's say we're worried about inflation, which of
• 39:08
  Speaker 1: course we all are, which are.
• 39:10
  Speaker 4: The trust would serve us best?
• 39:12
  Speaker 3: There?
• 39:12
  Speaker 1: What's in global call real assets for example, is that
• 39:15
  Speaker 1: something that we could buy as an inflation heah, yeah, No.
• 39:17
  Speaker 2: There's there's a range of exposure in that particular portfolio.
• 39:21
  Speaker 2: So it has what I ask, commercial property, so that
• 39:24
  Speaker 2: that's in the US and Asia Pacific. It then has
• 39:27
  Speaker 2: a whole range of kind of infrastructure type plays in
• 39:29
  Speaker 2: there as well, so transport being part of the story.
• 39:34
  Speaker 2: And yeah, I'm in very much keeping a close eye
• 39:37
  Speaker 2: on the inflation story and hoping to, you know, if
• 39:41
  Speaker 2: not be a beneficiary, certainly kind of navigate those those
• 39:44
  Speaker 2: turbulent waters.
• 39:45
  Speaker 1: And is the view from you that inflation is likely
• 39:48
  Speaker 1: to continue at the high level globally?
• 39:50
  Speaker 4: So what's the JP Morgan view on this?
• 39:51
  Speaker 2: Yeah, in a nutshell, yes, I think you know, inflation
• 39:55
  Speaker 2: will obviously come down. I mean we all know that
• 39:57
  Speaker 2: mathematically it has to come down, but it's not going
• 40:00
  Speaker 2: to settle at levels that we have become used to,
• 40:04
  Speaker 2: I think would be the view in house. What that
• 40:07
  Speaker 2: level is remains to be seen. But I think in
• 40:10
  Speaker 2: terms of interest rates, we're not going back to deminimous
• 40:13
  Speaker 2: interest rates anytime soon. So you know, you talk to
• 40:16
  Speaker 2: Karen Ward in our market insights team, for instance, and
• 40:19
  Speaker 2: she's clear, you know, particularly with regard to the UK market.
• 40:21
  Speaker 2: Then in fact inflation runs hotter for a period of time.
• 40:26
  Speaker 2: So you know, this idea of that the two percent target,
• 40:29
  Speaker 2: you know, almost falls away in the kind of the
• 40:31
  Speaker 2: short and medium term until we kind of get the
• 40:34
  Speaker 2: economy moving again.
• 40:35
  Speaker 4: No, someone told the Bank of England.
• 40:39
  Speaker 2: Well, you know, there's a difference between their messaging and
• 40:43
  Speaker 2: the reality. I think you'll find.
• 40:45
  Speaker 4: Yeah, now, I think we will all find that.
• 40:48
  Speaker 1: We've had lots of conversations on this podcast about jam
• 40:50
  Speaker 1: whether that two percent target will change or to the
• 40:53
  Speaker 1: extent of which it will be fudged and become as
• 40:55
  Speaker 1: little two to four percent excent. And let also lots
• 40:57
  Speaker 1: of conversations about how we ended up with the two
• 40:59
  Speaker 1: percent target in the first place, because anything anyone can
• 41:01
  Speaker 1: really quite remember how it came about that two percent
• 41:04
  Speaker 1: was the answer to all inflation.
• 41:06
  Speaker 4: Okay, So.
• 41:09
  Speaker 1: I think that pretty much casts it actually on the
• 41:11
  Speaker 1: basics of the investment trust industry and where we are.
• 41:14
  Speaker 1: But the key thing I supposed to say is that
• 41:16
  Speaker 1: you have full confidence going forward that this is a
• 41:18
  Speaker 1: sector that will remain successful and despite a dodgy year
• 41:21
  Speaker 1: or two.
• 41:22
  Speaker 2: Yeah, Look, it's a challenging period for investment trust companies.
• 41:24
  Speaker 2: I mean, nobody can die that at the moment, I
• 41:26
  Speaker 2: would expect to see an upticking corporate activity, and we've
• 41:29
  Speaker 2: already seen that. So investment trust companies decided to give
• 41:33
  Speaker 2: up the ghost, or return money to shareholders, or look
• 41:35
  Speaker 2: to pursue mergers or change of managers. I mean, I
• 41:39
  Speaker 2: think that's the period that we're in. That was certainly
• 41:41
  Speaker 2: the experience in the early noughties and after the GFC.
• 41:45
  Speaker 2: But you know, so a degree of rationalization I think
• 41:47
  Speaker 2: is likely going forward. But you know, as mentioned, you know,
• 41:50
  Speaker 2: this is a sector of one hundred and fifty five
• 41:52
  Speaker 2: year history. It has been very successful at adapting. There
• 41:55
  Speaker 2: are structural advantages that I think will stand it in
• 41:58
  Speaker 2: good stead. And I think it's a fascinating time to
• 42:01
  Speaker 2: be an investor in investment trass excellent, Simon.
• 42:05
  Speaker 4: I couldn't agree with you more.
• 42:06
  Speaker 1: And I tell you what, I didn't say that at
• 42:07
  Speaker 1: the end of all my podcasts, thank you being with us,
• 42:13
  Speaker 1: and thank you everyone for listening to this week's Marin
• 42:15
  Speaker 1: Talks Money.
• 42:16
  Speaker 4: We will be back next week, of course.
• 42:18
  Speaker 1: In the meantime, if you like us show rape review
• 42:20
  Speaker 1: and subscribe wherever you listen to podcasts, but do remember
• 42:23
  Speaker 1: the basic rule, only positive reviews. This episode was hosted
• 42:27
  Speaker 1: by me Maren Sumset Web. It was produced by Someasadi
• 42:30
  Speaker 1: and Mohammad Farup.
• 42:31
  Speaker 4: Additional editing by Blake Maples.
• 42:33
  Speaker 1: Special thanks of course to Simon and to John Steppek,
• 42:36
  Speaker 1: and finally a reminder to sign up to John's daily newsletter,
• 42:40
  Speaker 1: Money Distilled.
• 42:41
  Speaker 4: The link for that is in the show notes.
• 42:43
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• 42:46
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• 42:49
  Speaker 4: Thank you,