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Why the best small UK companies have a global niche · Merryn Talks Money

0:00
Speaker 1: Hello, and with me today. As is becoming normal is
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Speaker 1: John Steppack, who is, as everyone now knows, the author
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Speaker 1: of Money Distilled the Bloomberg newsletter, which is becoming very successful,
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Speaker 1: isn't it, John? It is is we've delivered a real
0:15
Speaker 1: return of at least three over the last three months
0:18
Speaker 1: in terms of number of subscribers. So that's amazing that
0:21
Speaker 1: someone no one else who isn't running a coal company
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Speaker 1: can say yes. And I'm equally ethical. Absolutely, I'm sure
0:30
Speaker 1: you are. Now listen. This is our last podcast for
0:33
Speaker 1: the year, and so I want to ask both of
0:36
Speaker 1: us what we think is going to happen next year.
0:38
Speaker 1: Not everything, obviously, because we were going to get that wrong.
0:40
Speaker 1: But I've been sent by the wonderful Duncan Lamont of
0:44
Speaker 1: Schroeder's this great chart. And there's something that I mentioned
0:47
Speaker 1: in my column for Bloomberg Opinion this week about how
0:51
Speaker 1: it is that we have come to believe that the
0:55
Speaker 1: US market always outperforms and his historically always out performed,
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Speaker 1: when it's simply not true. So he sent me a
1:02
Speaker 1: chart which he calls an equity moment market hang on
1:05
Speaker 1: equity market performance quilt, because that's how they roll on
1:09
Speaker 1: the shows, which market or which sort of area has
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Speaker 1: outperformed in every year since n now before two thousand
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Speaker 1: and eleven. And he's the interesting bit. Before two thousand
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Speaker 1: and eleven, the US was the top performer in only
1:25
Speaker 1: two of twenty years, Right, the US was not number one.
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Speaker 1: If you look at the chart and see who was
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Speaker 1: number one, you can see emerging markets very very frequently,
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Speaker 1: particularly from two thousand and two thousand and five, down
1:41
Speaker 1: a bit in two thousand and six, but seven eight,
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Speaker 1: not eight totally eight was bad for emerging markets, obviously,
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Speaker 1: nine ten emerging markets. And then you've got Europe popping
1:49
Speaker 1: up occasionally, you've got the UK popping up only twice
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Speaker 1: as the top and the entire thing, and then come
1:55
Speaker 1: two thousand and eleven, suddenly it's all America, America, America, America,
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Speaker 1: America out performing all the way. But the key point
2:02
Speaker 1: is that this is a new dynamic. There is no
2:05
Speaker 1: reason to believe people when they say it was out
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Speaker 1: performs the US it was trades at a premium, etcetera,
2:10
Speaker 1: because it simply doesn't. Again for trading it a premium
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Speaker 1: thing only started in the nineties, and the constantly out
2:16
Speaker 1: performing thing only started in the twenty tens. And now
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Speaker 1: if you look at the UK and how it's done
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Speaker 1: in this quilt, um it's mainly coming in the middle,
2:27
Speaker 1: as is outperforms everybody else occasionally SA twice. As I said,
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Speaker 1: it underperforms also occasionally three times in this series, and
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Speaker 1: jury of the time it is knocking around the middle.
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Speaker 1: What I want to go on to say, tell me
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Speaker 1: when your boyd John, No, No, this is actually really interesting.
2:42
Speaker 1: It's a it's a good chart. Duncan has another great
2:46
Speaker 1: chart which we look at frequently, which shows what which
2:50
Speaker 1: markets are cheap and how they're cheap. It's not it's
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Speaker 1: not perfect. It only goes back fifteen years and it's
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Speaker 1: what is cheaper expensive relative to a fifteen year medium
2:58
Speaker 1: And you could argue perfectly we as me that the
3:00
Speaker 1: last fifteen years is entirely irrelevant because it's been mainly
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Speaker 1: a low interest rate environment. But nonetheless, nonetheless, if you
3:08
Speaker 1: look at the forward p for so the UK market,
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Speaker 1: it's on nine so below. It's a long term average.
3:15
Speaker 1: If you think fifteen years is long term trailing the
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Speaker 1: thirteen times nine percent below UM and the only measure
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Speaker 1: on which it's looking a little pricey is the secularly
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Speaker 1: adjusted PE. But even on that it's fourteen times, which
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Speaker 1: isn't out of the park. Go to the US, the
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Speaker 1: area which everyone expects to constantly outperform. An awful lot
3:32
Speaker 1: of analysts are expecting the U s to just come
3:35
Speaker 1: riding right back next year. But look at this. On
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Speaker 1: a forward P it's on seventeen times, eight percent above
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Speaker 1: normal trailing P twenty times, sort of knocking around the
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Speaker 1: average of the last fifteen years. But again, does the
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Speaker 1: last fifteen years count signally adjusted, it's on twenty eight times.
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Speaker 1: It was twenty above even the normally high US levels. Right,
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Speaker 1: US looks very expensive. UK looks very cheap. So look
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Speaker 1: at it like that, and look at the way that
4:03
Speaker 1: the market is changing, and why is everyone waiting for
4:07
Speaker 1: what has happened over the previous ten years to start
4:10
Speaker 1: to happen again next year. I'm looking at a report
4:14
Speaker 1: from gave Cattle gave cal. How do you say that?
4:17
Speaker 1: I say, gave cal? Yeah, over the French saw Charles
4:21
Speaker 1: gave Okay. So they've got a fabulous chart which they
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Speaker 1: roll out all the time when they're talking about boom
4:27
Speaker 1: and bust, which is of the top ten largest companies
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Speaker 1: by market capitalization globally, and you can look at it
4:34
Speaker 1: all the way through it. So in the nine eighties
4:36
Speaker 1: when we were talking about peak oil, that was companies
4:38
Speaker 1: that reflected that. In nine nineties, they were pretty much
4:41
Speaker 1: all Japanese because we believe then that the japan would
4:43
Speaker 1: big over the world, which we didn't by nine nineties.
4:45
Speaker 1: Slightly earlier two thousands, you've got the t MT bubble,
4:48
Speaker 1: and so you can see Mt, T, Sisco Systems, etcetera,
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Speaker 1: all in their two thou and turned around and you
4:53
Speaker 1: get to the beginning of we get twenty one, and
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Speaker 1: we've got this idea that only tech can deliver growth.
5:00
Speaker 1: And so you've got Apple, Microsoft, Alphabet, Amazon, Facebook, Tesla, etcetera,
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Speaker 1: all at the top there, and everyone's looking at those
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Speaker 1: and thinking that that's going to continue. But you know, why,
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Speaker 1: why would it? Why would it? Surely, if you were
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Speaker 1: going to be late irrational that next year, you'd look
5:14
Speaker 1: at all these charts and you'd say, well, obviously, the
5:17
Speaker 1: thing that led the last great bull market is not
5:20
Speaker 1: going to leave the next one. It's got to be
5:22
Speaker 1: something else. What might it be? And you might want
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Speaker 1: to look at the thing that is, you know, basically
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Speaker 1: the cheapest in the world and the thing that has
5:30
Speaker 1: lots of companies related to where we suspect the next
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Speaker 1: bull market might be commodities, etcetera. And what would you do.
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Speaker 1: You'd buy the UK So I think that the UK
5:40
Speaker 1: might take one of its rare positions at the top
5:43
Speaker 1: of global performers next year. How mad is that it
5:47
Speaker 1: doesn't sink that's away if you have to see um,
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Speaker 1: I mean it makes a lot of sense. I mean
5:54
Speaker 1: your point about like why do people expect the US
6:00
Speaker 1: to keep out performing is purely just down a momentum
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Speaker 1: and extrapolating. I mean, that's that's what I mean. But
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Speaker 1: in a way, it's what this quiote shows as well.
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Speaker 1: It's like, extrapolation is why we get bubbles, and at
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Speaker 1: the end of bubble, the kind of conventional wisdom is
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Speaker 1: that the the same thing that's been happening for last
6:19
Speaker 1: ten years is just going to carry on because usually
6:21
Speaker 1: betting than what happened last year continuing is basically the
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Speaker 1: right bet, so it's the low risk bet. So there's
6:27
Speaker 1: both that there's a psychological reason for it, which is
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Speaker 1: that actually we do extrapolate very badly and that's just
6:33
Speaker 1: an instinctive thing, but it's also an organizational thing, which
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Speaker 1: is that the low risk forecast is basically the same
6:40
Speaker 1: again has happened last year. So I see why people
6:44
Speaker 1: can like think it's going to go back to you know,
6:46
Speaker 1: the US. But equally, you know, all the kind of
6:49
Speaker 1: I mean, I really don't think it's at all controversial.
6:54
Speaker 1: We turned around and say that, well, actually the environment
6:56
Speaker 1: has changed, I mean even I mean how it marks
6:58
Speaker 1: it kind of oak tree up to who's a kind
7:01
Speaker 1: of smart distress debt investor, had a big letter earlier
7:05
Speaker 1: this month saying that I think he thinks is only
7:07
Speaker 1: the third time in his entire career, and he's an
7:09
Speaker 1: old guy. Um, you know, by most investor standards, that
7:14
Speaker 1: he thinks that the environment has completely changed. And it's
7:16
Speaker 1: changed in the way that we've been talking about is
7:18
Speaker 1: kind of inflation in the environment. We're moving away from
7:21
Speaker 1: what has been the overvaluation of intangible assets and back
7:25
Speaker 1: towards tangible assets. And there's lots of different ways you
7:28
Speaker 1: can paint this. You know, what's we're moving away from
7:30
Speaker 1: kind of a kind of fairytale world. Two things you
7:33
Speaker 1: can touch and see again, Um, but either way that
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Speaker 1: favors I think cheap stuff over expensive stuff, and the
7:40
Speaker 1: stuff that's in the UK over the stuff that's in
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Speaker 1: the US. And the other thing about rising interest rates
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Speaker 1: is that that also favors financials, which were obviously they
7:49
Speaker 1: cannot I mean, one thing I do find interesting is
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Speaker 1: that so the TMT bubble bust in two thousand and
7:56
Speaker 1: then we had a financial bubble, but then bust in
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Speaker 1: two thousand and eight. And then just as the two
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Speaker 1: things and eight bubble was collapsing, stocks like Amazon and Orthers,
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Speaker 1: the few that had survived the TMT bubble was bottoming out,
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Speaker 1: and that that was broadly speaking, the time to buy them.
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Speaker 1: And then it took a little way for them to
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Speaker 1: get going again. And I can see his returning to
8:17
Speaker 1: that sort of cyc we have the tech stuff is
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Speaker 1: falling again, um and financials are coming back. So yeah,
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Speaker 1: long story shot. I agree for all of those reasons,
8:29
Speaker 1: and more good. I like it when you agree with me.
8:31
Speaker 1: It makes me feel relaxed. John, Happy Christmas to you.
8:35
Speaker 1: Close to Welcome to Marin Talks Money, the podcast in
8:46
Speaker 1: which people who know the markets explain the markets. I'm
8:49
Speaker 1: there in suset Web. This week, our guest is Harry Nimo,
8:52
Speaker 1: one of the most successful investors in UK smaller companies.
8:55
Speaker 1: He's been an investment nearly thirty eight years. He's about
8:58
Speaker 1: to retire from Aberdeen and the industry as a whole
9:01
Speaker 1: at the end of this year, so we decided to
9:03
Speaker 1: start our conversation by discussing the lessons that Harry has
9:07
Speaker 1: learned about investing during those four decades in the business. Well,
9:13
Speaker 1: I think you have to see the wood for the trees,
9:15
Speaker 1: and that's the right way is saying it. You can
9:18
Speaker 1: be an expert on a company, you can know everything
9:21
Speaker 1: about a company, but that nothing't necessarily make you a
9:25
Speaker 1: good investor. I think you've got to know the right things.
9:28
Speaker 1: That's the point one and point two is that you're
9:32
Speaker 1: I think you have to have a process that you
9:35
Speaker 1: have to be consistent in what you're doing. If you're
9:37
Speaker 1: if you're chopping and changing the whole time, that's that's
9:40
Speaker 1: kind of hopeless. And there's there's not one successful process.
9:44
Speaker 1: There are a good number, let's say, but you need
9:49
Speaker 1: to have it. You need to be consistent and when
9:51
Speaker 1: you go off piece, you're going to go to lose it.
9:54
Speaker 1: So you need to know the right things and you
9:56
Speaker 1: have to the right process. Okay, well let's start with
9:59
Speaker 1: the right thing. What are those right things. There's a
10:03
Speaker 1: various things we stick to. We like to to run
10:06
Speaker 1: our winners and cut our losers. Earnings earnings revisions momentum
10:10
Speaker 1: is is very important to us. I'm sure you've you've
10:13
Speaker 1: heard me go on about our our investment process and
10:16
Speaker 1: our stock selection matrix. We we've done a lot of
10:19
Speaker 1: back testing. We've checked what does work and what does
10:23
Speaker 1: not work, and we find an extrovisions momentum is. It
10:26
Speaker 1: is very important. If you're running large amounts of money,
10:30
Speaker 1: you have to be long term, so you can't chop
10:34
Speaker 1: and change quickly. And you know, in some ways that's
10:37
Speaker 1: a disadvantage, but but being a large investor gives you
10:41
Speaker 1: that discipline in terms of of what you are selecting.
10:45
Speaker 1: You have to select the right stuff. And as we
10:49
Speaker 1: as we invest in companies, we normally have a have
10:51
Speaker 1: a starter pack and then we will as we get
10:55
Speaker 1: more confident in the management, we will we will build
10:59
Speaker 1: up our are holding. We do think that growth is
11:03
Speaker 1: important in smaller companies and actually this helps you get
11:08
Speaker 1: through the the difficult times. The recession periods. You know,
11:14
Speaker 1: we like to think that we have a number of
11:15
Speaker 1: companies in our portfolio that can grow regardless of the
11:21
Speaker 1: state of the of the world economy. So so that's
11:25
Speaker 1: important to us. I want to go right back to
11:27
Speaker 1: the basics of when you say that you need to
11:29
Speaker 1: know the right things about a company. That includes includes
11:33
Speaker 1: what includes how good is management is, includes the sectors,
11:37
Speaker 1: and includes the level of growth you expect from it.
11:40
Speaker 1: What what makes a company right and what makes a
11:42
Speaker 1: company wrong. There's a persistency or dynamic change in within
11:48
Speaker 1: companies and within businesses is changing all the time, and
11:54
Speaker 1: that persistency means that a company that is moving in
11:56
Speaker 1: the right direction is going to can tinue to move
12:01
Speaker 1: in the right direction for some considerable periods. So we
12:04
Speaker 1: want to get on board with that. We also find that,
12:09
Speaker 1: you know, we we we are finding good success. We
12:11
Speaker 1: founder on businesses and at least a third of our
12:14
Speaker 1: our companies are founder run and I think a very
12:17
Speaker 1: important part is that it is the quality of the
12:20
Speaker 1: earnings and the predictability of the earnings. A company that
12:22
Speaker 1: has let's saying, negative working capital is in a much
12:25
Speaker 1: better position than a company that has to pay its
12:28
Speaker 1: supplies and hold hold large amounts of STOP or it
12:32
Speaker 1: actually gains gains revenue. So long term contracts are important
12:37
Speaker 1: to us and the companies that know where next year
12:40
Speaker 1: and the year after earnings are coming from. And in
12:44
Speaker 1: smaller companies, we think it's very important. If companies can
12:48
Speaker 1: be successful in the UK and then translate their business internationally,
12:52
Speaker 1: even if it's quite a small niche, then that can
12:56
Speaker 1: be you're a very very strong growth driver. I mean,
12:59
Speaker 1: I go A good example of this might be Games Workshop,
13:02
Speaker 1: which we don't own so much of it now. It's
13:06
Speaker 1: a large company, but we we owned it for many
13:09
Speaker 1: many years and successful in the UK and then became
13:13
Speaker 1: successful in Europe and North America and then the Middle
13:17
Speaker 1: East of Far East and and so it's, let's face it,
13:20
Speaker 1: it's not a big niche, but if it's a global leader,
13:25
Speaker 1: it can become a significant company. One thing you haven't
13:29
Speaker 1: mentioned when you talk about wanting to know the right
13:31
Speaker 1: things is valuations at the beginning. And I know that
13:33
Speaker 1: you tend to be interested in quality, you tend to
13:35
Speaker 1: be interested in growth, and maybe initial valuations or something
13:38
Speaker 1: you look at in quite the same way as other investors. Yes,
13:42
Speaker 1: we were now back testing. We have not found a
13:45
Speaker 1: correlation between low value stocks and out performance. Indeed, most
13:52
Speaker 1: of the time it's there are verse There are clearly
13:55
Speaker 1: exceptions to the rule, and an exception was in the
14:00
Speaker 1: first five months of the years. But we do not
14:04
Speaker 1: find any correlation in smaller companies. I think the danger
14:06
Speaker 1: is low value stocks are either low growth stocks or
14:11
Speaker 1: they are stocks with problems. There are stocks that are
14:14
Speaker 1: about to issue profits warnings, they are about to cut
14:16
Speaker 1: their dividends, and an as a dangerous place. I mean,
14:20
Speaker 1: smaller companies can go bust and if the momentum of
14:24
Speaker 1: the business is negative, it can it can go on
14:27
Speaker 1: for many years, and it can go all the way,
14:30
Speaker 1: it can go all the way to zero, and we
14:32
Speaker 1: really want to avoid that. And it's it's it's the
14:35
Speaker 1: dynamic of change. And stocks are, like I said, often
14:40
Speaker 1: cheaper a reason, and the reason is there, they're kind
14:43
Speaker 1: of going nowhere. So we are wary of valuation. That's
14:47
Speaker 1: not to say that we completely ignore it. We do
14:51
Speaker 1: build it in to our matrix. It's a it's a
14:54
Speaker 1: secondary factor. And another thing we tend to be wary
14:57
Speaker 1: of it is what I would call blue sky stocks.
15:00
Speaker 1: I think they are dangerous in a smaller company world.
15:04
Speaker 1: They can be great for for a period, but then
15:07
Speaker 1: they you know, the rug that they're found too. It's
15:09
Speaker 1: it's a bit like Emperor's new clothes sometimes with these companies,
15:12
Speaker 1: and and they can completely completely fall apart. So we
15:18
Speaker 1: want to avoid that. So valuation is is secondary, we
15:21
Speaker 1: say in our investment process, Okay, can I stick with
15:24
Speaker 1: it for a for a minute, though in that it
15:26
Speaker 1: may be secondary, but putting aside blue Sky stocks, there
15:29
Speaker 1: must be some limits to valuations that when you say,
15:33
Speaker 1: at secondary, what do you look at and what counts
15:36
Speaker 1: in terms of valuation, it's old style metrics. It's perspective
15:41
Speaker 1: price earnings ratios and perspected DVID end yields. It's as
15:46
Speaker 1: simple as that. There's nothing particularly scientific in our valuation parameters.
15:52
Speaker 1: But I would say our portfolio is really in the
15:54
Speaker 1: last twenty five years, we've tended to be let's say,
15:58
Speaker 1: at a thirty percent pre me and to the market
16:03
Speaker 1: are smaller companies market in terms of valuations the entire time.
16:07
Speaker 1: I mean, really the last twenty five years, we've been
16:11
Speaker 1: investing in what are seen as expensive stocks. But I
16:16
Speaker 1: should sort of caveat that we're not in the sort
16:19
Speaker 1: of I don't know, Baily Gifford style and expensive stocks,
16:24
Speaker 1: but you know, you know, we are definitely more expensive
16:27
Speaker 1: than the market and in some ways you do you
16:30
Speaker 1: do get get what you pay for, or at least
16:33
Speaker 1: that's our job, is to make sure that we are
16:35
Speaker 1: indeed getting what we're paying for in terms of our
16:39
Speaker 1: analysis and research on individual companies. But just a point
16:44
Speaker 1: that maybe I should make is that you know, there
16:46
Speaker 1: are some of that seven or eight hundred stocks to
16:48
Speaker 1: choose from, and that's just in the UK, and we
16:50
Speaker 1: were on global and European smaller these funds. We've got
16:54
Speaker 1: to cut that down. You know, we've only got a
16:57
Speaker 1: small team and we need and may Chicks helps us
17:00
Speaker 1: to be consistent in our process and and to pride
17:03
Speaker 1: us with a shortness. After we have that shortness reduced
17:07
Speaker 1: that seven hundred down to one dred, then we can
17:10
Speaker 1: we can do our analysis, We can meet companies, We
17:12
Speaker 1: can you know, can look into the whites in the
17:15
Speaker 1: eyes of the chief executive and you know, figure out
17:19
Speaker 1: whether this is a quality business with predictability or not.
17:24
Speaker 1: I've seen these fund manager major things before and they're
17:27
Speaker 1: pretty complicated stuff pages and pages pro checklists. Ours is
17:31
Speaker 1: not it's not that complicated, But I have to be
17:33
Speaker 1: slightly caging here. We don't want to give away entirely,
17:39
Speaker 1: you know the state secrets here. But there's there's four
17:43
Speaker 1: earning servicious momentum factors, there's two the price of mental factors.
17:47
Speaker 1: There's two quality factors, there are two growth factors, and
17:52
Speaker 1: there are two value factors. Are told at the value
17:54
Speaker 1: factors and quality would include altman Z scores and patoy
18:00
Speaker 1: Sky scores. And growth is simply and needs to share
18:04
Speaker 1: and dividends shared growth, the price amountum ones, they're they're
18:08
Speaker 1: sort of ninety and thirty day moving averages, and a
18:13
Speaker 1: number of other technical measures. One thing you didn't mention
18:17
Speaker 1: on your metric sheets is E s G. Almost everyone
18:20
Speaker 1: has an E s G overlay of some kind at
18:23
Speaker 1: the moment. So when you look at most people's box
18:25
Speaker 1: ticking exercises, they tend to include a type of E
18:29
Speaker 1: s G score, whether it's lifted directly from MSCI or
18:31
Speaker 1: whether it's a mixture of MSc I ratings combined with
18:34
Speaker 1: internal ratings, etcetera. But it's not most checklists. Well, we
18:38
Speaker 1: certainly pay attention to it. And I think that's the
18:42
Speaker 1: it's a corporate governance aspect that I feel it's most important.
18:47
Speaker 1: You know, are these are the honest people. Are they
18:49
Speaker 1: following the rules, so they are they following the rule
18:51
Speaker 1: of law, the regulations and such like in terms of
18:55
Speaker 1: their relationships with external investors. We want to be sure
18:59
Speaker 1: we're on the the you know, level playing field with
19:02
Speaker 1: other investors who are not being systematically disadvantaged. So that
19:06
Speaker 1: is the key one. We We do take take into
19:09
Speaker 1: account other factors, you global warming, all all all that stuff,
19:13
Speaker 1: but we what we don't want is for the E
19:15
Speaker 1: s G to be leading the investment process. It is
19:18
Speaker 1: it is, I would say secondary, You've got to pick
19:21
Speaker 1: the stocks first and then see how they how they
19:24
Speaker 1: track on on the s G. And we certainly we
19:27
Speaker 1: don't have any blanket and restrictions about investing in island
19:34
Speaker 1: gas on mining stocks. And I think that's an important
19:37
Speaker 1: case in point. And I was thinking about this recently.
19:40
Speaker 1: And you know, the UK for example, requires gas to
19:47
Speaker 1: to to to be able to sort of transform itself
19:50
Speaker 1: into a sort of carbon neutral economy and needs gas
19:56
Speaker 1: in that in that period. Let's see in the next
19:58
Speaker 1: fifteen years, all that is complete and the best place
20:01
Speaker 1: to get it is it's from the North Sea. So
20:04
Speaker 1: I don't I don't see any inconsistency in having let's say,
20:11
Speaker 1: an on gas stock in our smaller companies Porpolio and producing,
20:16
Speaker 1: guessing and ll C if it, if it fits our
20:18
Speaker 1: investment process. That's the first thing. E s G is
20:22
Speaker 1: the next stage. You look at s G and kind
20:25
Speaker 1: of the same way as valuations, right, and that it's
20:27
Speaker 1: the second bary thing. The process is followed first. If
20:29
Speaker 1: something isn't an absolutely extreme valuation, maybe you might think
20:32
Speaker 1: again and again with the s G secondary of something
20:35
Speaker 1: of a company was doing something absolutely disgusting, you might
20:38
Speaker 1: think again. But there's no heart and fast rules. I
20:40
Speaker 1: don't want to give the impression that we don't take
20:43
Speaker 1: E s G seriously, because we absolutely do. It's it's
20:47
Speaker 1: it's very important at Aberdeen. We do take it seriously.
20:50
Speaker 1: But for instance, I've never seen a correlation great E
20:57
Speaker 1: s G equals out performance. I mean, no academic has
21:01
Speaker 1: has proven that to us. So we should always put
21:05
Speaker 1: our our investors first and endeavor to provide best performance
21:11
Speaker 1: for them. And then other things followed, which are are
21:15
Speaker 1: clearly important too, but they followed Harry, that's really interesting
21:19
Speaker 1: that you say that, because I agree with you. No
21:21
Speaker 1: academic has ever yet proved to me that great E
21:24
Speaker 1: s G equals our performance. But that's a fairly standard
21:26
Speaker 1: thing for people to say in the industry at the moment.
21:29
Speaker 1: Is something people say to me all the time. Of course,
21:32
Speaker 1: we have an E s G overlay because the data
21:35
Speaker 1: shows us that starts with the highest here is G
21:39
Speaker 1: rating out performed those without one. I haven't seen that data,
21:43
Speaker 1: to be honest, now, I haven't either, but I'm constantly
21:45
Speaker 1: told about it. I've seen a lot of short term
21:47
Speaker 1: data that tells you that I haven't seen any long
21:49
Speaker 1: term data. But of course E s G only started
21:51
Speaker 1: to exist around the middle of your career, right. Well,
21:54
Speaker 1: it's it's it's it's developed, it's changed. I mean, we
21:57
Speaker 1: used to we used to have something called ethical and
21:59
Speaker 1: best thing, but that seems to be it kind of disappeared,
22:03
Speaker 1: you know. I remember that to I even remember sr
22:05
Speaker 1: I Investing, which I think was before ethical investing, and
22:08
Speaker 1: that had to be rebranded thanks to under performance. I
22:11
Speaker 1: think I might go back and check that. Well, I
22:13
Speaker 1: think you do need a long time before you can
22:16
Speaker 1: prove any any sort of consistency of let's see s
22:21
Speaker 1: G whether it does produce our performance. And if if
22:24
Speaker 1: statistics ever came on board that suggested this, then there
22:29
Speaker 1: will be a rush for that that type of investing,
22:33
Speaker 1: and that it would probably go into reverse. I don't know,
22:37
Speaker 1: it's not going to stop for me, So tell me.
22:39
Speaker 1: Here's the thing that I really want to ask you,
22:41
Speaker 1: which is that your career has been long and interesting,
22:45
Speaker 1: but has also, in the main happened during this period
22:50
Speaker 1: of low and falling interest rates from very very outgainning
22:54
Speaker 1: of your career too, very very low, now low and
22:57
Speaker 1: falling inflation in the main in the main, and an
23:00
Speaker 1: environment which a lot of people may included would say,
23:03
Speaker 1: is now changing completely and we're moving. This isn't just
23:06
Speaker 1: a business cycle. This is a generational secular change back
23:10
Speaker 1: towards rising industrates, higher levels of inflation, and possibly also
23:14
Speaker 1: a very different market environment now is at a money
23:17
Speaker 1: Week conference on Friday, but we had the amazing Russell
23:20
Speaker 1: Napier Equity Strategy speaking first, and he said, what most
23:25
Speaker 1: fund managers don't understand is that everything that they've learned
23:29
Speaker 1: over the last thirty years they must forget because the
23:34
Speaker 1: environment is different. So the question for you really is,
23:37
Speaker 1: has the last year that of of you know, shifting
23:40
Speaker 1: valuation shift from growth being on top to value being
23:44
Speaker 1: on top, albeit not for the entire year, etcetera. And
23:46
Speaker 1: the changing dynamics and interest rates, inflation in geopolitics, that
23:51
Speaker 1: change in our relationship with China, that change in the
23:53
Speaker 1: way our supply chains operate, etcetera. Does this make you
23:57
Speaker 1: think that if you were going to be investing for
23:59
Speaker 1: another ten years, you might do it differently? Okay, well,
24:03
Speaker 1: they answered, it's a world of big questions on this podcast. Sorry,
24:08
Speaker 1: there is no And I do sort of, I mean,
24:10
Speaker 1: I was sort of let's see a late teenager when
24:15
Speaker 1: the last period of galloping inflation occurred seventy three, seventy
24:20
Speaker 1: four up to the eighties, and I do I do
24:25
Speaker 1: it one time. I remember my my father was a
24:27
Speaker 1: little bit but twitchy about money. He normally was pretty
24:30
Speaker 1: phlegmatic about money, but he said he certainly was very
24:34
Speaker 1: concerned about, you know, stop marketing levels at that time.
24:38
Speaker 1: And I do ask myself, what, well, what the hell
24:41
Speaker 1: happened to the gross stocks in the in the seventies
24:45
Speaker 1: and you know, the nifty fifty and all that this
24:47
Speaker 1: kind of stuff. They they probably did have a hard
24:50
Speaker 1: time for a while. And I'm sure it's not escape
24:54
Speaker 1: you that are our portfolio is that particularly badly, And
24:58
Speaker 1: let's say the first five months of of this year,
25:01
Speaker 1: and I think part of that was definitely about rising
25:07
Speaker 1: inflation and m and rising interest rates on the back
25:12
Speaker 1: of that. And I think what made it worse was
25:14
Speaker 1: that COVID had actually have anything been unnaturally favorable towards
25:22
Speaker 1: are kind of growth stock and grows share. So we
25:26
Speaker 1: saw just a humongous unwinding, very painful, very painful for
25:32
Speaker 1: our our investors. But I'd like to think, you know,
25:35
Speaker 1: maybe I'm speaking too soon, but I like to think
25:39
Speaker 1: that that period is over and actually a second half
25:41
Speaker 1: of the year has been, you know, much better for us,
25:45
Speaker 1: and we've actually had a really good last last month.
25:49
Speaker 1: And indeed the six months and three months numbers are
25:53
Speaker 1: looking saying quartile and pointing in the right directions. So
25:58
Speaker 1: you know, um value has its day and undoubtedly rising
26:04
Speaker 1: in shades and rising inflation are good for for value shares.
26:08
Speaker 1: But we well, we're hopeful that that period is kind
26:12
Speaker 1: of over. I don't think when your commentator is correct
26:18
Speaker 1: in saying that you kind of forget everything you've ever
26:20
Speaker 1: learned in the last dirty years and move on to
26:24
Speaker 1: some some new metric. I mean, for instance, well, you know,
26:29
Speaker 1: we do feel that inflation will come down, our prices
26:33
Speaker 1: will fall, hopefully for God's sake, this dreadful war in
26:38
Speaker 1: the Ukraine will be over some time, and and also
26:41
Speaker 1: China might get us get us act together in terms
26:45
Speaker 1: of how it deals with covid um. You know, I
26:48
Speaker 1: suppose you're you're one of your points was right. You know,
26:51
Speaker 1: the the globalization, which I suppose has been so important
26:55
Speaker 1: for keeping inflation down is kind of into reverse. You know,
27:03
Speaker 1: I'm an optimist, and I'm hoping that with goodwill and
27:07
Speaker 1: the right leaders in place that hopefully that will not
27:12
Speaker 1: be over for forever. So I just don't I don't
27:15
Speaker 1: really buy your your commentators words on this one. I
27:20
Speaker 1: think we're we've seen are kind of a one or
27:23
Speaker 1: very serious transition in the first half of the year,
27:26
Speaker 1: and we're kind of through that and wasn't held by
27:29
Speaker 1: by COVID either, So everything's going to be pretty much
27:33
Speaker 1: back to what we used to see as normal by
27:36
Speaker 1: next year on record is suggesting that we are within
27:40
Speaker 1: six months off the bottom, shall we say? And you know,
27:45
Speaker 1: but it's I think it's quite conceivable that we will
27:47
Speaker 1: test the test the loads of loads of October. Again,
27:53
Speaker 1: we've got a winter to get through and there's some
27:55
Speaker 1: some very serious issues on gas supply, particularly to us
28:00
Speaker 1: in Europe. So I'm not totally sticking stick in my
28:05
Speaker 1: neck out, but quite a lot of work and on
28:09
Speaker 1: these recovery periods, I'm might stop picker or rather than
28:12
Speaker 1: the top DIN specialists. But do you remember the banking
28:16
Speaker 1: crisis and let's say October November two thousand and eight,
28:22
Speaker 1: and things were horrendous. We were staring at the meltdown
28:29
Speaker 1: of the world banking industry roll bank. I was worried
28:34
Speaker 1: about what we dealing with a bank of Scolart here
28:37
Speaker 1: in Edinburgh. They looked like they within days of going under,
28:40
Speaker 1: and it was it was really really bad. But actually
28:43
Speaker 1: the low point was towards the end of November two
28:46
Speaker 1: thousand and eight. There's a tested new lows in March
28:52
Speaker 1: two thousand and nine. But actually, you know the point
28:57
Speaker 1: of recovery is quite often when things are looking at
29:00
Speaker 1: their grimaced and well before the the end of the
29:05
Speaker 1: downturn into in fact often at the start of the
29:09
Speaker 1: of the recession, and we are in it feels to
29:11
Speaker 1: me like we are in recession in the UK. The
29:14
Speaker 1: only thing I worry about I still want I still
29:17
Speaker 1: want to agree with you. I still want to think
29:19
Speaker 1: that you know, we'll have this, this recovery and everything,
29:21
Speaker 1: we'll go back to how it was, because that was
29:23
Speaker 1: you know, quite nice for investors, if not for a
29:25
Speaker 1: lot of other people. Um, but when we came out
29:27
Speaker 1: of a banking crisis, we did that with money printing
29:30
Speaker 1: and very negative interest rates, and I wonder if if
29:33
Speaker 1: we can really do that again. Okay, well, I mean
29:37
Speaker 1: you you have a point. And that is why our portfolio,
29:41
Speaker 1: as best as we can is it's full of companies
29:45
Speaker 1: that actually can we think right out very difficult times.
29:53
Speaker 1: And I'm just looking at our largest tolling at the moment.
29:56
Speaker 1: You may have had a telecom plus, you might even
29:59
Speaker 1: be a subscribe. We're on their utility warehouse platform where
30:03
Speaker 1: they sell gas, electricity and mobile fixed the left Andy
30:06
Speaker 1: all arrest um. It's actually a positive beneficiary of the
30:11
Speaker 1: currents environment. It's a lot of its competitors have gone under.
30:15
Speaker 1: It's you know, wins awards from which magazine and daily
30:19
Speaker 1: mail or not for best service. So we like these
30:23
Speaker 1: sorts of companies that can actually are not dependent and
30:28
Speaker 1: the economic cycle that can can grow regardless of that.
30:33
Speaker 1: And if the economy gets really, really bad, then surely
30:40
Speaker 1: interest as inflation will start to come down and interest
30:45
Speaker 1: rates or eight of growth will start to come down too.
30:49
Speaker 1: So it's a sort of self correcting mechanism, shall we say.
30:56
Speaker 1: You know, that's what I'm banking on. Well, I think
31:00
Speaker 1: we're all hoping that. We're all hoping that. And anyway,
31:03
Speaker 1: of course, in the in the seventies and all these
31:05
Speaker 1: terrible things did happen economy, in the economy, et cetera,
31:08
Speaker 1: it was the small and MidCap stock pickers who excelled.
31:11
Speaker 1: That's where the real games were made. Even as well,
31:14
Speaker 1: I'm glad to hear you saying larger companies did badly.
31:18
Speaker 1: M Yeah, I'm really glad to hear you say that.
31:21
Speaker 1: But I mean I was in you know, I was
31:24
Speaker 1: before investments. I was in the oil and gas industry.
31:27
Speaker 1: I haven't always worked and in asset management, so you
31:32
Speaker 1: know that that was really in the in the period
31:35
Speaker 1: of when inflation was incredibly high. I suppose I was
31:40
Speaker 1: in a different industry so I didn't and then suffer
31:44
Speaker 1: as much in that respect. So you do have oil
31:47
Speaker 1: and gas in the portfolio at the moment. I'd love
31:49
Speaker 1: to talk about a few of the companies. We've just
31:51
Speaker 1: got one one stock, Serca Energy. It's a anc gas
31:57
Speaker 1: producer and it's I suppose so recently has been heard
32:01
Speaker 1: by these punitive taxes that are are being brought into
32:07
Speaker 1: place by the current government to raise money. But I
32:10
Speaker 1: do think that's a little They've got to be careful here.
32:13
Speaker 1: You don't want to sort of completely destroy the ability
32:17
Speaker 1: of all gas companies to develop what's left of our
32:23
Speaker 1: gas assets. And then we'll see we still need this gas.
32:26
Speaker 1: We will need it in the next fifteen years to
32:28
Speaker 1: to make that transition. I think that's quite important. I
32:31
Speaker 1: don't see it as inconsistent with E s G and
32:36
Speaker 1: carbon neutrality or anything like that. So funny does miss
32:38
Speaker 1: the wind full taxes, isn't it? It's it feels like
32:40
Speaker 1: a sort of a tax on luck, and as though
32:42
Speaker 1: they should probably be. Any other company that suddenly finds
32:45
Speaker 1: its making a normal profits should be taxed as well.
32:48
Speaker 1: So I don't know, the fund management industry should be
32:50
Speaker 1: under a windfull tax the whole time because margins are
32:53
Speaker 1: significantly higher than those of other sectors, and pharmaceutical companies
32:56
Speaker 1: in the pandemic, we should definitely win full tax. Then basically,
32:59
Speaker 1: any bit of luck should be taxed. Right. I can
33:02
Speaker 1: sense you're you're being attempting to be provocative here. No, no, actually,
33:08
Speaker 1: I really think these things. Yeah, it's it's a good
33:11
Speaker 1: it's a good argument. It's it's you're you're you're right there.
33:14
Speaker 1: Our margins are you know, certainly above average, and so
33:18
Speaker 1: the pharmaceutical industry, that's for sure. But you know, there
33:21
Speaker 1: are industries under pressure from the active side, from the
33:27
Speaker 1: fro the passive managers. And I would say, costs are
33:32
Speaker 1: you know, fe rates are consistently falling, and the amount
33:36
Speaker 1: we can charge our insts is fine continuously, I know,
33:40
Speaker 1: it isn't absolutely fantastic. Investment is getting cheaper and cheaper
33:46
Speaker 1: and cheaper for the ordinary person. This seems like phenomenally
33:49
Speaker 1: good news, great news, great news. Quite soon, fun fees
33:53
Speaker 1: will be back where they were at the beginning of
33:55
Speaker 1: your career, and they were very significantly lower, right, let
34:00
Speaker 1: to move on to what people really want here about,
34:01
Speaker 1: which is some of your favorite stocks in the portfolio.
34:03
Speaker 1: We talked about Telecomplus, we've talked about Seeka. You're often
34:07
Speaker 1: a few months. But if there were a couple of
34:09
Speaker 1: those stocks that you could take with you, which probably
34:11
Speaker 1: well um and hold for a decade, which would they be.
34:15
Speaker 1: Telecom Plus is certainly one of those. Another another one Kanos,
34:19
Speaker 1: which is a digitalization company. You know, all these processes
34:24
Speaker 1: that used to be done by on paper and we'd
34:28
Speaker 1: we'd go up to the High Street and get our
34:32
Speaker 1: parking permits and write a check and all that stuff.
34:35
Speaker 1: We now all do that online. It's the same with
34:37
Speaker 1: our our income tax, council, tax everything, you can name it.
34:41
Speaker 1: But it's almost inconceivable how much of this kind of
34:47
Speaker 1: stuff has happened and has yet to happen in Kanos
34:51
Speaker 1: is the as a leader and that it's it's it's
34:54
Speaker 1: quite an interesting company and it's now very significant in
34:57
Speaker 1: the United States. We think that's got a good two
35:00
Speaker 1: years to grow as well. And we also saw actually
35:04
Speaker 1: one of our largest tollings just before this meeting, Alpha
35:08
Speaker 1: Financial Markets Consultants, and we've owned it since the listed
35:13
Speaker 1: five years ago, and they are advisors to the financial
35:18
Speaker 1: services industry, first off the active managers, but also insurance
35:23
Speaker 1: wealth managers and the like. And they help businesses that
35:26
Speaker 1: are under pressure and you know our industry is under
35:30
Speaker 1: pressure and financial basis, and there are a consultancy to
35:34
Speaker 1: that business and again successful business in the UK that
35:38
Speaker 1: is expanding geographically but also by as sub sector into
35:44
Speaker 1: insurance and wealth management and the like. And they're now
35:47
Speaker 1: half their businesses in the US and they they provide
35:51
Speaker 1: a demonstrably their specialists and the remonstrably better service than
35:56
Speaker 1: the likes of ian Y, KPMG and all the other
36:00
Speaker 1: sort of jeneralist financial advisors. So we think that's a
36:05
Speaker 1: very very strong businesses. There one more, one more you
36:09
Speaker 1: might take with you. I'm always intrigued by Yugov, you know,
36:14
Speaker 1: the ones that seem to have to pull pulling results
36:19
Speaker 1: that they get it right the whole time in terms
36:22
Speaker 1: of the politics, and you know it's sometimes there you
36:27
Speaker 1: get sight slightly get the impression it's all a bit
36:30
Speaker 1: self fulfilling. If Yugov says Trust is going to be
36:33
Speaker 1: the next set of the Conservative Party on pulling Conservative
36:37
Speaker 1: members and it it's probably going to be the case,
36:39
Speaker 1: and people take so much notice, but they're they're more
36:44
Speaker 1: than that. It's really about their panels, which have hundreds
36:51
Speaker 1: of thousands of people on them, the information and feedback
36:55
Speaker 1: they get from these panels, and how they package and
36:59
Speaker 1: dicens information and and sell it, sell it on to
37:03
Speaker 1: companies who are obsessive about what the public thinks of
37:08
Speaker 1: their business and their brand. Okay, interesting, that's a good one.
37:11
Speaker 1: I think we're very glad to know what you're taking
37:13
Speaker 1: into your acquirement with you. Let me ask you one
37:15
Speaker 1: last question, and it's not a trick question, I promise
37:18
Speaker 1: all that might sound like one. Your interestident growth, you're
37:20
Speaker 1: interested in innovation, you're interested in governance, doing any Bitcoin?
37:25
Speaker 1: Absolutely not. You know. I find it extraordinary actually that
37:33
Speaker 1: the world has gone mad at it. Just even from
37:36
Speaker 1: the very earliest stages, it felt like an accident waiting
37:43
Speaker 1: to happen, and an unregulated it's it's dangerous. So I'm
37:47
Speaker 1: a little surprised that the the regulatory authorities haven't paid
37:54
Speaker 1: more attention to this. So I kind of feel that
37:56
Speaker 1: in five years time, they probably weren't the be ancient
38:00
Speaker 1: history and we want to think about crypto can't see
38:03
Speaker 1: any longer. I totally agree with you, and it's one
38:06
Speaker 1: of the one of the reasons I asked the question.
38:07
Speaker 1: I'm so happy to end with us in complete agreement. Um,
38:11
Speaker 1: I think five years is about I like I was
38:13
Speaker 1: thinking maybe it would take a shorter amount of time,
38:15
Speaker 1: maybe a longer amount of time, because there's such a
38:17
Speaker 1: big infrastructure around the crypto industry now live lawyers or
38:20
Speaker 1: those accountants or those everybody at the conferences and the
38:23
Speaker 1: big departments at all the banks, etcetera. But I can't
38:27
Speaker 1: see how it can survive. So maybe three years, maybe
38:30
Speaker 1: five years, maybe ten years. But yeah, they'll come a
38:32
Speaker 1: point when no one mentions it anyway. Thank you for
38:48
Speaker 1: listening to this week's Marion Talks Money. We are taking
38:51
Speaker 1: next week off, but you'll have a new Marion Talks
38:53
Speaker 1: Money in your podcast feed the first week of January. Please,
38:57
Speaker 1: if you like our show, which I'm sure you must do,
38:59
Speaker 1: great review and subscribe wherever it is that you listen
39:02
Speaker 1: to your podcasts. This episode was hosted by me Marin
39:05
Speaker 1: Someset Web. It was produced by Smersadi, Editing and sound
39:09
Speaker 1: designed by Blake Maple's Special thanks of course, to Harry
39:12
Speaker 1: Nemo and to John Steppeck and finally, don't forget to
39:16
Speaker 1: sign up to John's newsletter, Money Distilled. It's very good.
39:19
Speaker 1: The links in the show notes