Latest / Merryn Talks Money / Using Active Management to Cut Downside Risks

Transcript

Using Active Management to Cut Downside Risks · Merryn Talks Money

0:00
Speaker 1: John, do you know I'm feeling guilty, feeling a little grubby.
0:05
Speaker 1: I've spent the last two days doing absolutely nothing but
0:10
Speaker 1: criticizing the Bank of England. I've been on the radio,
0:13
Speaker 1: I've been on other people's podcasts.
0:15
Speaker 2: I mean, very active on Twitter, which is kind of fun.
0:18
Speaker 2: I see.
0:19
Speaker 1: I'm constantly saying the Bank of England have got this
0:22
Speaker 1: completely wrong, that models have been wrong all the way
0:25
Speaker 1: through there, massively behind the curve. They don't understand money supply.
0:30
Speaker 1: These people are useless. That Andrew Bailey should be at
0:33
Speaker 1: the very least apologizing to us and possibly thinking to himself,
0:37
Speaker 1: maybe I'm in the wrong job.
0:38
Speaker 2: Am we being unfair?
0:41
Speaker 3: Well?
0:41
Speaker 4: One thing that is, does that mean that this is
0:43
Speaker 4: your fault? What does the fact that the bank has
0:47
Speaker 4: just come out and put interest rates up by a
0:49
Speaker 4: full whopping half a percentage point up to five percent?
0:53
Speaker 4: I would love it if that was my fault, and
0:55
Speaker 4: I would expected to just put up by a quarter
0:58
Speaker 4: point now.
0:59
Speaker 2: I would love it if that pob I mean, I
1:00
Speaker 2: think they've done the wrong thing. By whatever. I love
1:02
Speaker 2: the idea of power.
1:03
Speaker 4: I think it's fair to blame you for mortgage rates
1:06
Speaker 4: going up.
1:07
Speaker 1: Now, No no, no, come on, because I love I say,
1:10
Speaker 1: held the usually address it actually get some Normally we
1:12
Speaker 1: don't get any.
1:14
Speaker 4: Oh yeah, I mean look no, so you're absolutely right
1:16
Speaker 4: to be criticizing them. Obviously, it's kind of it's difficult
1:20
Speaker 4: to come up with any defense. Really, the sort of
1:24
Speaker 4: is sleepy at the wheel, and an awful lot of
1:27
Speaker 4: central banking is about communication. It's like, I mean, Mario Draggy,
1:33
Speaker 4: I think proved is best. You know, we all these
1:37
Speaker 4: stuff about, you know, whatever it takes and all of that.
1:39
Speaker 4: The communication part of the central banking actually really matters,
1:43
Speaker 4: particularly when you're in a crisis, and the reality is
1:47
Speaker 4: that the Bank of England has not only been behind
1:50
Speaker 4: the cuff, but it has consistently given the impression that
1:53
Speaker 4: it's behind the cuff. And now it's given the impression
1:56
Speaker 4: that it's panicking about the fact that it has been
1:59
Speaker 4: consistently be the couv I know, it's risking reason too much.
2:03
Speaker 4: Precisely the point when inflation is actually coming back down,
2:06
Speaker 4: albeit not as quickly as you know, we may have.
2:09
Speaker 1: Hawked because we do think that it is entirely possible
2:12
Speaker 1: that inflation is about to take a massive turn down
2:15
Speaker 1: in that we saw PPI inflation falling fairly dramatically. We've
2:19
Speaker 1: seen a lot of talk about what we know through
2:22
Speaker 1: prices have rolled over. We've seen a lot of talk
2:24
Speaker 1: from pretty much everybody about their input. Prices are beginning
2:27
Speaker 1: to fall, and crucially, as are right in my column
2:29
Speaker 1: foo Bloomberg Opinion this week, we've seen money supply rolling over.
2:33
Speaker 1: So James Ferguson, who we often talk to about CROs
2:35
Speaker 1: Strategy partnership, He's been looking at the money supply numbers
2:38
Speaker 1: and pointed out that since March twenty twenty, money supply
2:42
Speaker 1: and four X you can see it in my column
2:44
Speaker 1: has risen twenty percent or so, as has CPI.
2:47
Speaker 2: So pretty much fits exactly.
2:49
Speaker 1: So those of you who have totally dismissed the idea
2:51
Speaker 1: that money supply makes a difference might have to have
2:53
Speaker 1: another look at that. And money supply growth has now
2:55
Speaker 1: of course rolled over. It's another thing that might lead
2:58
Speaker 1: us to believe that inflation might be about to start
3:01
Speaker 1: falling fairy dramatically.
3:04
Speaker 4: I do think it's very interesting because I I'm on
3:07
Speaker 4: the defense about that one way or the other. But
3:09
Speaker 4: I do think that if inflation falls faster than anyone
3:12
Speaker 4: expects then the entire economics establishing was the mondetarists massive apology,
3:17
Speaker 4: because you know, James is actually probably the only person
3:21
Speaker 4: I know who was one hundred percent right the Q
3:24
Speaker 4: wouldn't cause inflation or anything like hyperinflation after the two
3:29
Speaker 4: thousand and eight crash. He then was absolutely the right
3:32
Speaker 4: about the money printing lockdown causing inflation after twenty twenty.
3:37
Speaker 4: So if he's right again now then then nicely they
3:39
Speaker 4: should probably appoint them to the NPC.
3:41
Speaker 2: Time to have a bit of a rathin.
3:43
Speaker 1: And of course, you know, to be fair well, everyone
3:45
Speaker 1: with mainstream economists have for ages and I been saying
3:47
Speaker 1: the managers are wrong, the manager's wrong, the managers are wrong.
3:50
Speaker 1: This book from the Bank of England or two Bank
3:52
Speaker 1: of England economists, Roupeupatal and Jack Meaning, which was a
3:55
Speaker 1: little while ago, and I also write about in my column.
3:58
Speaker 1: The title of it is Can't we Just Print More money?
4:02
Speaker 1: Economics in ten simple questions? And can't we just print
4:06
Speaker 1: more money? As the title of one of the one
4:08
Speaker 1: of the chapters, chapter ten, which I strongly recommend that
4:10
Speaker 1: everybody read, because the answer is no, no, we can't.
4:15
Speaker 1: Because it causes inflation, they wrote a book about it.
4:21
Speaker 4: Don't you just tax it away or something? Because you've
4:24
Speaker 4: got perfect force? So things?
4:26
Speaker 1: What?
4:26
Speaker 2: No? Yes, well apparently not.
4:28
Speaker 1: And I think the most interesting thing about this book
4:30
Speaker 1: is that the foreword was written by the increasingly unpopular
4:35
Speaker 1: Andrew Bailey, who presumably did what everyone who writes forwards
4:38
Speaker 1: for booksport does is.
4:40
Speaker 2: Not actually read the book.
4:41
Speaker 1: Because you know, if you'd read to chapter ten, can't
4:44
Speaker 1: we just print more money? You might have had some
4:46
Speaker 1: idea of what was going to happen if you printed
4:48
Speaker 1: four hundred and fifty How much? How much did we print?
4:51
Speaker 1: Let's COVID four hundred and fifty billion?
4:53
Speaker 4: The thing is four hundred and fifty billion that I
4:55
Speaker 4: don't have the figure in front of it, but it was.
4:57
Speaker 4: It was money. Money was printed.
5:00
Speaker 1: There's money. Money was printed. And look where we are
5:02
Speaker 1: now here we are here, we are John. We can
5:05
Speaker 1: make it sound quite funny, but it's not actually funny
5:07
Speaker 1: at all. As previously discussed, and what we're finding here
5:10
Speaker 1: is that transmission mechanism has really not been working particularly
5:13
Speaker 1: well since the Bank we ENGDN started putting up rates.
5:16
Speaker 2: Because, of course, so many people own their homes.
5:18
Speaker 1: Out right well over thirty percent, and a lot of
5:20
Speaker 1: people are renteds, and so it takes a while for
5:22
Speaker 1: those rises in mortgage costs for the people who own
5:25
Speaker 1: the houses in which they live to feed through. So
5:28
Speaker 1: the percentage of people who live in houses that have
5:30
Speaker 1: mortgages on them is not particularly high. And most of
5:34
Speaker 1: those people have fixes, so they don't necessarily roll over
5:37
Speaker 1: in a hurry.
5:38
Speaker 2: So a lot of that pain is still to come, and.
5:40
Speaker 1: That has made the transition mechanism not work as fast
5:44
Speaker 1: or as efficiently as it has in the past. But
5:48
Speaker 1: that doesn't mean that there isn't pain, because there is pain.
5:52
Speaker 1: And what if we got eight hundred thousand people rolling
5:54
Speaker 1: off in the next six months who are going to
5:56
Speaker 1: have to remortgage at rates very considerably higher than they
6:00
Speaker 1: would have ever expected. So we should do something, right,
6:05
Speaker 1: we should do something to help these people. What do
6:07
Speaker 1: we do?
6:07
Speaker 2: Job?
6:08
Speaker 4: Ah? Yes, this is the this is the age old problem. No,
6:12
Speaker 4: we shouldn't do anything. Unfortunately, it's one of the it
6:18
Speaker 4: seems to be at least one of the few things
6:20
Speaker 4: that the government might resist poking its nose into. You know,
6:25
Speaker 4: the problem is that if you if this is the
6:27
Speaker 4: transmission mechanism. And I think you can have a whole
6:29
Speaker 4: other debate about transmission mechanisms, how they work, whether we
6:33
Speaker 4: should be doing any of that sort or not. But
6:36
Speaker 4: if the whole point of if your way of slowing
6:38
Speaker 4: the economy is to force people to pay more on
6:40
Speaker 4: their mortgages, then bailing those people out with taxpayer money
6:45
Speaker 4: is just going to be inflationary as well. So it's
6:49
Speaker 4: complete waste of time do that. But also I think
6:53
Speaker 4: we shouldn't be focusing on the mortgages side to they
6:57
Speaker 4: almost it's like people kind of like almost act as
6:59
Speaker 4: if this is the only trans mission mechanism. I mean,
7:02
Speaker 4: you know, there are a whole load of companies out
7:04
Speaker 4: there carrying a load of debt as well, and they'll
7:06
Speaker 4: be looking at that and thinking, maybe we shouldn't hire
7:10
Speaker 4: another x number of people because in the about six
7:12
Speaker 4: months time we need to refinance our debt, and the
7:14
Speaker 4: debt course is going to skyrocket. The other transmission mechanism
7:18
Speaker 4: is savings, so savers more people are locking in fixed
7:22
Speaker 4: rates on their savings now, so I know there's an
7:25
Speaker 4: argument to be said that when interest rates go up,
7:27
Speaker 4: savers get more income and therefore they can spend more.
7:31
Speaker 4: If you look at the actual figures, people are putting
7:33
Speaker 4: that money in time deposits rather than current accounts, which
7:38
Speaker 4: means obviously the money is locked up and it's not
7:40
Speaker 4: going to be spent. So I think there's a work
7:43
Speaker 4: at risky kind of confusing issues slightly if we focus
7:46
Speaker 4: solely on the kind of relatively small percentage of people
7:50
Speaker 4: who are about to come off mortgages and being a
7:52
Speaker 4: lot of pain, but they aren't the only ones who
7:55
Speaker 4: are being affected by rising interest rates a lot.
7:59
Speaker 1: Then listen before we finish up here, I just wanted
8:02
Speaker 1: to say a little bit more about the book which
8:05
Speaker 1: Jones flogs united at Macroschafty Partners and insist did I
8:08
Speaker 1: actually read rather than just give the introduction of which
8:11
Speaker 1: is you know is how I mostly read books. There
8:13
Speaker 1: is another chapter that I strongly suggest anyone everyone reads
8:18
Speaker 1: its chapter three. How do I get a pay rise?
8:20
Speaker 2: They're going to need it. Read that chapter and then.
8:23
Speaker 1: Should you be tempted to increase your levels of faith
8:26
Speaker 1: in the Central Bank, here's a couple of couple of
8:28
Speaker 1: quotes for you from the book.
8:29
Speaker 2: He is one of my favorites. You're ready for this?
8:30
Speaker 1: One suggests perhaps a little complacency maybe, and issue really
8:33
Speaker 1: a bit of varying. And let's see, the success of
8:36
Speaker 1: independent central banks targeting inflation directly has been palpable, having
8:41
Speaker 1: average more than ten percent in the nineteen seventies. In
8:43
Speaker 1: nineteen eighties, global inflation felt the five percent of the
8:45
Speaker 1: nineteen ninety three percent. In the two thousands, just two
8:48
Speaker 1: percent of the twenty tens. It stops there. They're going
8:51
Speaker 1: to have to add on a female lines for the
8:53
Speaker 1: twenty twenties.
8:54
Speaker 4: So already, no, I cannot way like all past with
8:56
Speaker 4: So just in case anyone thinks, does any I mean
9:00
Speaker 4: there were two percent in fleetion in the twenty tens
9:01
Speaker 4: because the entire global economy collapsed in two thousand and eight.
9:06
Speaker 4: It's like ten percent inflation in the nineteen seventies because
9:09
Speaker 4: the pricey oil rocketed and we had stag flesh three ages.
9:12
Speaker 4: It's got nothing to do with central banks. Ah, these people, Sorry,
9:17
Speaker 4: I'll show.
9:18
Speaker 1: You you are messing with Andrew Bailey's self esteem. You
9:21
Speaker 1: stop that right, Look one more quite for you. All
9:25
Speaker 1: this means that central banks can print money up to
9:28
Speaker 1: a point, but not endlessly. Less the economy falls into
9:31
Speaker 1: another age of uncomfortably high price increases and we failed
9:34
Speaker 1: DATO inflation target.
9:35
Speaker 2: Increases in money must be just right.
9:38
Speaker 1: These are the decisions that we at the Bank of
9:40
Speaker 1: ECN spend our days grappling with.
9:42
Speaker 4: Just right, just right. I'm sure we can all agree.
9:49
Speaker 2: It's not just right right now, is it?
9:52
Speaker 4: No? No, you need you need to we kill drinking.
9:56
Speaker 1: I reckon, I reckon. Mister Bailey's doing a little grappling today.
10:03
Speaker 1: Welcome to Maren Talks Money, the podcast in which people
10:06
Speaker 1: who know the markets explain the markets.
10:08
Speaker 2: I'm Maren Sunset.
10:09
Speaker 1: Well. This week our guest is Java's Williams, head of
10:11
Speaker 1: Equities at Premier Miton Investors. Javes, thank you so much
10:17
Speaker 1: for joining us today. May you say my pleasure?
10:21
Speaker 3: I didn't know. It's a great pleasure to be here.
10:24
Speaker 3: Thanks very much, Maren.
10:26
Speaker 1: Look, we haven't actually seen each other for ages, for
10:28
Speaker 1: which I blame COVID and all sorts of other things.
10:30
Speaker 1: But one of the last occasions we met was it
10:32
Speaker 1: was a long time ago, twenty sixteen, right, and you
10:35
Speaker 1: had just written a really interesting little book, which upfront
10:39
Speaker 1: I did write the introduction to it as well. So
10:41
Speaker 1: we're on the same page at the time, and it
10:43
Speaker 1: was called the retreat of globalization, and it was quite
10:45
Speaker 1: prescient because here we are seeing globalization retreating before our
10:49
Speaker 1: very eyes. So can we talk a little bit about that,
10:52
Speaker 1: about what's happened since you wrote that book and how
10:54
Speaker 1: you've turned out to be absolutely right?
10:56
Speaker 3: Now, the great thing about the retift of globalization was,
10:58
Speaker 3: in many way the seeds of the change already in place,
11:02
Speaker 3: only earlier stage. At that stage, we've seen more significant
11:05
Speaker 3: change since then. Specifically, we saw the pandemic, which is
11:07
Speaker 3: anything that's accelerated the trend, and that led to anxiety
11:10
Speaker 3: about long distance supply routes getting supplies. It wasn't just
11:14
Speaker 3: about the lowest cost. If you wanted ppe in the
11:16
Speaker 3: middle of the COVID crisis, you suddenly find you in
11:18
Speaker 3: a queue and suddenly container traffic was held up, etc.
11:22
Speaker 3: So anxiety about that reshawing, of course has come through
11:25
Speaker 3: as a result of that. But also this whole point
11:27
Speaker 3: about divisions political divisions again that was reinforced by the
11:30
Speaker 3: invasion in Ukraine, and that meant that was reinforced. So
11:34
Speaker 3: we're moving towards the retreat of globalization. I don't think
11:37
Speaker 3: we've really got into the main trends, which are going
11:39
Speaker 3: to be much more unsettled economic markets, corporates will come
11:42
Speaker 3: under margin pressure. I think it's going to be quite
11:45
Speaker 3: tough for companies not just survive but thrive in future.
11:48
Speaker 3: And I think for the first time in thirty years,
11:50
Speaker 3: I think it's going to be a real advantage to
11:51
Speaker 3: be a listed company as opposed to a privately financed company,
11:54
Speaker 3: because of course the cost of bonds and borrowing money
11:57
Speaker 3: is going to start to increase. Is going forward in
11:59
Speaker 3: a way which is very different to the trends we
12:01
Speaker 3: saw during globalization.
12:02
Speaker 1: That's really interesting. One of the things at the beginning
12:04
Speaker 1: of the COVID pandemic or policies around the COVID pandemic,
12:08
Speaker 1: one of the things that happened was that we started
12:10
Speaker 1: to see equity markets doing what they're supposed to do,
12:12
Speaker 1: and companies suddenly seeing the benefits of being listed, which
12:14
Speaker 1: they could suddenly go out for their shoholder and go
12:16
Speaker 1: cross they need some money, can I have it? And
12:18
Speaker 1: it was handed over and that happened incredibly quickly and efficiently,
12:21
Speaker 1: and at the time we looked at that and we thought, well,
12:24
Speaker 1: look at that, this is fantastic we're seeing equity markets
12:27
Speaker 1: seeing exactly what they're supposed to do in companies that
12:29
Speaker 1: for a long time, you know, we had seen this
12:32
Speaker 1: dynamic where companies think, well, they don't want to list
12:34
Speaker 1: thing and to stay private indefinitely, and it looked like
12:36
Speaker 1: this was going to be something of a turning point.
12:38
Speaker 1: And of course since then ypos have dried up completely
12:41
Speaker 1: and secondary offerings have as well, and that that wonderful
12:44
Speaker 1: to light bulb moment seems to have retreated rather.
12:47
Speaker 3: Yes, I think what we have seen is obviously markets
12:49
Speaker 3: have been unsettled, and we've seen this kind of naturally
12:51
Speaker 3: natural kind of minimizing of interest to the very largest megacaps.
12:55
Speaker 3: And we have all the same kind of trend. Actually,
12:57
Speaker 3: as inflation took off in the seventies, we had in
12:59
Speaker 3: those days and the fifty five, which is basically technology
13:01
Speaker 3: stocks in those days, they became you know, they sort
13:04
Speaker 3: of pinched out at the top, and then you've got
13:05
Speaker 3: a flat market in real terms. I think the US
13:08
Speaker 3: market S and P didn't go up for another eleven
13:10
Speaker 3: years after that, and I think we are entering a
13:12
Speaker 3: period when actually mainstream indices may actually flat line in
13:15
Speaker 3: real terms for extending number of years, maybe a decade
13:17
Speaker 3: or two, at which stage how are you going to
13:19
Speaker 3: add value? And that that's when active fund management comes in,
13:22
Speaker 3: and the message of the book back in twenty sixteen
13:25
Speaker 3: was we would move beyond indices back into active management.
13:28
Speaker 3: And active management isn't just about maximizing upside for your shareholders.
13:31
Speaker 3: Of course that's very much the case, but alongside the
13:33
Speaker 3: great value being an active managers, you can minimize downside
13:36
Speaker 3: risk alongside that, and you can also put portfolios together
13:39
Speaker 3: which aren't just correlated with the mainstream fluctuations of markets.
13:42
Speaker 3: We think these features, all three of them, are become
13:44
Speaker 3: incredibly important going forward.
13:46
Speaker 1: Okay, when you say flat line in real terms, the
13:48
Speaker 1: miserable thing about the last few years is that sounds
13:50
Speaker 1: really attractive. The idea one going to actually not lose
13:55
Speaker 1: anything in real terms. Suddenly it sounds like a distant dream.
13:58
Speaker 3: Well, of course, the problem with flat lining is bouse
14:00
Speaker 3: markets fluctuate is that coming in that you slightly above
14:02
Speaker 3: the line, but it can mean you can have a
14:03
Speaker 3: peers below the line. So my own view is that
14:05
Speaker 3: it's going to be quite lumpy, and we don't know
14:08
Speaker 3: where the loan is going to be, but they could
14:09
Speaker 3: be in the real terms, really quite disappointing all bit
14:12
Speaker 3: that they catch up. I mean, if you look back
14:13
Speaker 3: in Japan since nineteen eighty nine, it's almost flat lined
14:18
Speaker 3: and there's been all sorts of drawdowns along the way,
14:20
Speaker 3: so you know, it's not necessarily a very wonderful prospect,
14:24
Speaker 3: particularly when inflation in that case was so low.
14:26
Speaker 1: Yeah, and Japan is really interesting at the moment, and
14:29
Speaker 1: now as you're writing about this week and saying one
14:32
Speaker 1: of the extraordinary things about it is that you know,
14:35
Speaker 1: the index has gone up massively, but if you look
14:37
Speaker 1: at the kind of trusts in the UK that our
14:40
Speaker 1: listeners might hold, and you know, they might rush off
14:42
Speaker 1: looking their portfolios and look for those twenty percent year
14:44
Speaker 1: to day returns, and they're simply not there. And they're
14:47
Speaker 1: not there because everyone investing in Japan running those kinds
14:50
Speaker 1: of funds is holding the wrong stocks. They're not holding
14:53
Speaker 1: the big value stocks that have led the rise, that
14:56
Speaker 1: are holding more growthy stuff. And then on the other hand,
14:58
Speaker 1: the things that you would I think would really benefit
15:01
Speaker 1: from the corporate governance changes in Japan and I either
15:03
Speaker 1: very small value stocks, the ones that are trading below
15:05
Speaker 1: price to book. They haven't really benefited either because nobody
15:08
Speaker 1: knows quite how to buy them or which ones to buy,
15:10
Speaker 1: and so they ignore those and go for the large
15:12
Speaker 1: cat value. Those up form and very few people hold them.
15:15
Speaker 1: I wonder if we might see a similar dynamic in
15:17
Speaker 1: the UK.
15:18
Speaker 3: I think we will see. Well, we're always hard to
15:20
Speaker 3: start to see that. What we have seen over the
15:22
Speaker 3: last say two and a half years is the Footy
15:23
Speaker 3: one hundred is pretty much the best per pointing stock
15:25
Speaker 3: market in the world. It is that perform all others,
15:27
Speaker 3: even in lightfulight currency terms. And what's been interesting about
15:30
Speaker 3: that isn't just that we've seen the rise in evaluation
15:33
Speaker 3: of the Footsy one hundred just tiny bit it's gone
15:35
Speaker 3: up when the market's gone down. But specifically we've had
15:37
Speaker 3: near water wall selling of local investors of the ukoics
15:40
Speaker 3: in the UK over the lasta eighteen months and the
15:43
Speaker 3: UK is still carrying on being one of the top performers.
15:45
Speaker 3: That's really interesting, that says local sellers. Sure they've got
15:48
Speaker 3: quite a few holdings that they're pleased to see it
15:50
Speaker 3: go back up. They can put some money into bonds
15:52
Speaker 3: and equities which have more value than they did previously.
15:54
Speaker 3: But what that really says it's international investors pretty much
15:57
Speaker 3: for the first time in thirty years, are beginning to
15:59
Speaker 3: take some out of they're very high volatile stocks and
16:02
Speaker 3: put it back into companies which generates surplus cash, such
16:05
Speaker 3: as UK quoted companies paying good and growing dividends, which
16:08
Speaker 3: can obviously produce a return even when stock market's flat line.
16:11
Speaker 3: And the scale of that inflow into the UK is
16:13
Speaker 3: more than the redemptions. We just see the tiniest bit
16:17
Speaker 3: of reductions in selling in the UK. UK market breaks
16:20
Speaker 3: out just like we see in Japan.
16:22
Speaker 1: So who is still selling in the UK? And I
16:24
Speaker 1: do think this is really interesting. And then the big
16:25
Speaker 1: funds of the pension funds in particular, they're down to
16:28
Speaker 1: pretty small holdings in the UK. What if they all
16:30
Speaker 1: love to sell?
16:31
Speaker 3: So it's not really the pension fust The pension funds
16:34
Speaker 3: are coming to an end, although they're maturing as well.
16:35
Speaker 3: Remember so they've moved into bonds as people have become
16:38
Speaker 3: older and such light But most particularly what we have
16:40
Speaker 3: seen is actually many of the mainstream investors in the
16:42
Speaker 3: UK which have actually had an overweight position relative to
16:44
Speaker 3: the international industries for the last twenty or thirty years,
16:47
Speaker 3: and every time they look at their clients' portfolios, they say, oh,
16:50
Speaker 3: this dead weight has been holding me back, and they've
16:52
Speaker 3: reduced the UK and reduced the UK and reduce the
16:54
Speaker 3: UK and a bit like a supertanker. It may have
16:56
Speaker 3: turned round and starting to go up, but from the
16:58
Speaker 3: point of view of behavior, we're still talking about the
17:00
Speaker 3: behavior of it holding back investors. And I think there's
17:03
Speaker 3: a hangover, and I think that is going to try
17:05
Speaker 3: up quite soon, and ultimately people will stop selling in
17:07
Speaker 3: the UK. Indeed, I think they'll start buying in due
17:09
Speaker 3: course because I think the UK market won't just outperformed
17:12
Speaker 3: for the next year or two. In my view, I
17:13
Speaker 3: think we're in for another decade or two about performance
17:16
Speaker 3: of the UK. I think pretty much one of the
17:18
Speaker 3: best performing stock markets in the world for the next
17:20
Speaker 3: twenty years.
17:21
Speaker 1: Okay. Interesting, You know, we have a lot of people
17:23
Speaker 1: on the podcast to hold that view and very few
17:25
Speaker 1: people outside the podcast to hold that view. It's a
17:28
Speaker 1: niche view for Merin Talks Money.
17:30
Speaker 3: I think well, most particularly what's interesting about a twenty
17:32
Speaker 3: year view is that you've got to start off with
17:33
Speaker 3: nearly everyone underweight, and I think global investors specifically are
17:37
Speaker 3: very underweight. Local investors less underweight, but still relatively light
17:40
Speaker 3: wastings compared with where they worth twenty or thirty years ago.
17:42
Speaker 3: But most particularly, they also got to start on unusually
17:45
Speaker 3: low valuations. The UK stock market, even the Footy one
17:48
Speaker 3: hundred is on astonishingly low valuations compared with international comparisons.
17:53
Speaker 3: You need both those conditions low valuations, low current waitings
17:57
Speaker 3: in client's portfolios for the new trend to last for
17:59
Speaker 3: twenty years. That's why I'm so confident.
18:01
Speaker 1: And one of the lessons of past inflationary periods is
18:04
Speaker 1: that the only way to outrun inflation during those periods
18:07
Speaker 1: is to buy cheap equities at the beginning.
18:09
Speaker 3: And particularly cash compounding. The great advantage of cash compounding
18:12
Speaker 3: is one, of course, you get an income even if
18:14
Speaker 3: the market doesn't go up. If you don't need the income,
18:16
Speaker 3: you can reinvest it and compound your income going forward.
18:19
Speaker 3: But the best opportunity is about being socially useful. We
18:22
Speaker 3: don't often talk about social useful in the financial world,
18:24
Speaker 3: but companies which are quoted can take over insolvent businesses.
18:28
Speaker 3: These are businesses which may be quite viable businesses, but
18:31
Speaker 3: just overborrowed, they go bust. The debt is left with
18:34
Speaker 3: a bank. These are sold in a debt free basis
18:38
Speaker 3: to a new holder. All bit, there's extra working capital
18:40
Speaker 3: to be put in, and when you do that you
18:42
Speaker 3: can actually buy a really good business for a relatory
18:45
Speaker 3: low cost. We saw recently the made dot com, which
18:47
Speaker 3: came to market a few years ago is valued at
18:49
Speaker 3: five or seven hundred million at the time. Is all
18:52
Speaker 3: kind of very exciting, obviously, particularly joined covid when people
18:54
Speaker 3: are buying sobers online. Unfortunately, didn't survive. It made losses.
18:58
Speaker 3: It went bust and last year, the end of last
19:00
Speaker 3: year was bought by Next POC for three point four million. Now,
19:05
Speaker 3: don't guess let's get confused. It probably had to put
19:07
Speaker 3: twenty five million of working capital to get it going again,
19:09
Speaker 3: probably thirty million. We don't know what it's going to
19:11
Speaker 3: be worth in the future. It may be worth three
19:13
Speaker 3: and a thirty million, not seven hundred million, but that's
19:15
Speaker 3: three hundred million upside for Next for thirty million. Lovely stuff.
19:19
Speaker 3: What is really thrilling. The UK isn't just well known
19:22
Speaker 3: for cash compounding stocks. It's also known to smallness. We've
19:25
Speaker 3: had too much bigness during globalization. We need more smallness.
19:28
Speaker 3: And so if you had the same deal for an
19:29
Speaker 3: eight hundred and fifty million pound company, a company which
19:32
Speaker 3: is one tenth the size of next, then of course
19:34
Speaker 3: is saying uplift. Three hundred million for thirty million investment
19:38
Speaker 3: is like thirty or forty percent uplift.
19:40
Speaker 1: That's so transformative.
19:41
Speaker 3: And as you move down the market cap range into
19:43
Speaker 3: the eighty five million pound companies, and we have quite
19:45
Speaker 3: a lot of eighty five million pound companies quoted in
19:47
Speaker 3: the UK, not internationally, but the UK's leader in smallness.
19:50
Speaker 3: Then of course the opside is that you need to
19:52
Speaker 3: raise capital. You probably need thirty or forty million to
19:55
Speaker 3: raise from your shareholder. Is your market might be a
19:57
Speaker 3: hundred thirty hundred and forty million after you've raised the
19:59
Speaker 3: money three hundred million pounds upside on that becomes horribly
20:03
Speaker 3: interesting for the first time for thirty years. It's an
20:06
Speaker 3: advantage to be a listed company. It's advantage to be
20:08
Speaker 3: listed in the UK, and it's advanced used to be
20:10
Speaker 3: a small quoted company in the UK.
20:12
Speaker 1: Okay, exciting, right, Well, let's come back to the small
20:14
Speaker 1: quod company. Because you've got you run two funds, right,
20:16
Speaker 1: you want the Diverse Income fund and you run the
20:18
Speaker 1: microcap fund.
20:19
Speaker 3: Yeah, both investment trust.
20:20
Speaker 1: Yeah sorry, both investment trust sorry, not funds. So the
20:25
Speaker 1: Diverse Income Trust now that holds companies across the market
20:30
Speaker 1: cap spectrum. Right, that's not a small cap absolutely, yeah.
20:32
Speaker 1: So tell me about some of the interesting companies and that, Well,
20:35
Speaker 1: the nature.
20:35
Speaker 3: Of it is, actually these are companies which are going
20:37
Speaker 3: to generate good and growing income, so they can be
20:39
Speaker 3: mainstream companies. And there are some very large companies which
20:41
Speaker 3: produce good and growing income and we're very happy to
20:43
Speaker 3: invest in. There's someone that the financial sector, some of
20:45
Speaker 3: the you know, this is such a wide range of
20:47
Speaker 3: companies and quite a few.
20:48
Speaker 1: They've been I mean in terms of performances. Is kind
20:51
Speaker 1: of the wrong sectors for the last couple of years.
20:54
Speaker 3: Well you say that, I mean, you know, the energy
20:55
Speaker 3: sectors don pretty well. Shelves done extremely well, for example,
20:58
Speaker 3: some of the rios. Okay, it's peaked out, but it's
21:00
Speaker 3: it's done pretty well as well. So there are some
21:01
Speaker 3: mainstream companies which are often cap intensive. When capital was free,
21:05
Speaker 3: joint globalization and you suddenly have found that you were
21:08
Speaker 3: doing well. Suddenly you had loads of competitors. Now that
21:10
Speaker 3: capital costs money, competitors don't come in so fast and
21:13
Speaker 3: you get a premium return for a much longer period.
21:16
Speaker 3: But as it moves down the market cap range, you
21:18
Speaker 3: can get into those companies which are a billion market
21:20
Speaker 3: cap and three hundred million market cap and and fifty
21:22
Speaker 3: million market cap which are also producing income. Now a
21:24
Speaker 3: lot of people think small caps are just kind of
21:27
Speaker 3: small parts or look alike. So the big companies, they're
21:30
Speaker 3: just not. They're so much more agile. They're often in
21:33
Speaker 3: specialist sectors. Often they have a lesser degree of maturity
21:36
Speaker 3: and able to take advantage of the new sector perhaps
21:39
Speaker 3: a structural growth trend. So perhaps an XPS. I'm just
21:41
Speaker 3: mentioning the old company along the way, so XPS Pensions,
21:44
Speaker 3: which is a pension of advisory business. There's three major
21:47
Speaker 3: pension advisory businesses. They haven't you know, there have been
21:50
Speaker 3: around a bit of pressure. There's been the FCA which
21:52
Speaker 3: which suggested that they can do a better job when
21:54
Speaker 3: such like and this company's coming through and it's investing
21:57
Speaker 3: hard to become a major alongside the other three and
22:01
Speaker 3: most particularly, they don't just generate cash, but they generate
22:03
Speaker 3: good and growing income. And specifically, with you all the
22:06
Speaker 3: un settled nature of the pensions recently, pension funds need
22:09
Speaker 3: more advice than they ever did. So as a company
22:11
Speaker 3: which is growing at sales beautifully, it's generating stuff as cash,
22:14
Speaker 3: it's paying a good yield, and it's growing it yield,
22:16
Speaker 3: we would expect at a faster rate than most other
22:19
Speaker 3: mainstream companies. That's great at any time, but if we
22:23
Speaker 3: do get into a global recession, I'm working on the
22:25
Speaker 3: basis that you know, interest rates do eventually precipitate a
22:28
Speaker 3: global recession, then there's going to be fewer companies which
22:30
Speaker 3: are producing good and growing income. There'd be some footzy
22:33
Speaker 3: one hundred companies, not many, but there'd be lots of
22:35
Speaker 3: those further down on the aid market, quite a few
22:37
Speaker 3: small cap income stocks. And the opportunity for this fund
22:40
Speaker 3: is to continue to invest and in those companies which
22:42
Speaker 3: are continuing to succeed even when the market's unsettled. And
22:46
Speaker 3: then on top of that things get really unsettled and
22:48
Speaker 3: lots of companies become insolvent. But on that basis they
22:50
Speaker 3: can start to do deals to enhance their growth and
22:53
Speaker 3: actually accelerate their growth at a time when most other
22:55
Speaker 3: companies aren't producing much growth. It's you know, it's a
22:58
Speaker 3: very very exciting opportunity as far as we're concerned.
23:01
Speaker 1: When you say good yield, what do you mean, neal
23:04
Speaker 1: on the trust as well, pushing five percent.
23:06
Speaker 3: Yeah, it's just a bit under but we do change
23:08
Speaker 3: some of the charges against the income, so that hold
23:11
Speaker 3: it back. But most particularly, it's not just about the
23:14
Speaker 3: field which has been over four as you mentioned, but
23:15
Speaker 3: most particularly the ability for it to grow at a
23:18
Speaker 3: time when others are unsettled. So's we're set up back
23:21
Speaker 3: years ago with a two p dividend. It's grown it now.
23:23
Speaker 3: It's a bit over four now. But the point is
23:25
Speaker 3: it's a fun where the income and the income growth
23:27
Speaker 3: we would hope would be more attractive than most of
23:30
Speaker 3: the index funds and certainly one of the many of
23:32
Speaker 3: the mainstream funds as well.
23:34
Speaker 1: But you do find yourself concentrated in particular sectors.
23:37
Speaker 3: No, not so no, I mean, clearly we seek to
23:41
Speaker 3: be careful about investing in companies which are under real pressure.
23:44
Speaker 3: So in the retail sector, for example, plele clearly there
23:46
Speaker 3: aren't that many companies. We do have a company called
23:48
Speaker 3: Shoe Zone in the portfolio, which is a shoe shop.
23:51
Speaker 3: You've probably seen it very much at the bottom end
23:52
Speaker 3: of the market. It's very integrated. They don't buy in anything,
23:55
Speaker 3: they do it all themselves, include their internet side. So
23:57
Speaker 3: coming back to it, so they make margins when very
24:00
Speaker 3: few other people do. I mean they've just reported a
24:02
Speaker 3: couple of months ago they were training above expectations. There
24:04
Speaker 3: aren't many retailers which are training above expectations at the moment.
24:07
Speaker 3: So again we've got to find those companies across any sector.
24:10
Speaker 3: It doesn't need to be just one or another. But
24:11
Speaker 3: what we particularly look for is quite a range of
24:13
Speaker 3: different companies and quite a range of different sectors because
24:16
Speaker 3: the status quo want to always be the status quo.
24:18
Speaker 3: What we saw with you know, when we saw the
24:20
Speaker 3: invasion of Ukraine was unfortunately anyone who happened to have Polymetal,
24:24
Speaker 3: which is a gold company obviously mining in Russia. The
24:27
Speaker 3: share price came down eighty percent. And the advantage of
24:31
Speaker 3: having a broad portfolio is if you happen to have
24:32
Speaker 3: British Aerospace, that wound up forty six percent that day,
24:36
Speaker 3: So you've got to have a dura. You know, it's
24:38
Speaker 3: not just about having good companies. It's about having the
24:40
Speaker 3: range of companies that gives you resilience to unexpected news.
24:43
Speaker 1: Okay, well, let's talk about the microcap fund, because I
24:46
Speaker 1: know no everone will find that very interesting. I mean,
24:47
Speaker 1: u case more caps, particularly grows. Small caps have had
24:49
Speaker 1: a pretty horrible time over the last couple of years,
24:51
Speaker 1: haven't they.
24:52
Speaker 3: They've had a terrible time. So with this selling of
24:54
Speaker 3: the oiks, which has been a very key feature, we've
24:56
Speaker 3: seen offsetting buying of the international companies, So the foot
24:59
Speaker 3: one hundred has gone up even when most other industries
25:01
Speaker 3: have come off. But what's interesting about the smaller created companies.
25:04
Speaker 3: There aren't any international buyers with small companies. Nobody's really interested.
25:07
Speaker 3: So you've had marginal sellers, very few bars, and the
25:10
Speaker 3: share prices are as many of the smaller quated companies,
25:12
Speaker 3: particularly the microcap companies. These are often one hundred million
25:15
Speaker 3: or a hundred and fifty million market cap companies have
25:17
Speaker 3: fallen almost irrespective they've got good news, they've fallen a
25:20
Speaker 3: little less fast. Some have gone up a few, some
25:23
Speaker 3: of which have exceeded expectations have gone up, but hardly
25:25
Speaker 3: very as much as you might expect. And quite a
25:27
Speaker 3: lot of other companies which are just perfect ordering companies
25:29
Speaker 3: perhaps had a slightly slower order book or something. Their
25:32
Speaker 3: share prices have completely come down dramatically. And as long
25:35
Speaker 3: as you're investing companies with really strong balance sheets, what
25:37
Speaker 3: I mean by that is they have the ability to
25:39
Speaker 3: withstand a few quarters of not trading very well without
25:42
Speaker 3: having an emergency rights issue. Well, if they can do that,
25:44
Speaker 3: then when the recovery comes, the full up side is
25:47
Speaker 3: still there. So the recovery potential when the market changes
25:51
Speaker 3: it is very exciting, and we're looking for that slight
25:54
Speaker 3: reduction in local selling to come off and suddenly we
25:57
Speaker 3: could be into a period where these companies recover very substantially.
26:00
Speaker 3: We saw a period a bit like that going back
26:02
Speaker 3: to March twenty twenty when we had the pandemic. So
26:04
Speaker 3: during twenty nineteen we had the May government and they
26:07
Speaker 3: had all the kind of problems with what kind of
26:09
Speaker 3: Brexit agreement we're going to get, and of course the
26:11
Speaker 3: only thing we were certain about was that Parliament couldn't
26:13
Speaker 3: agree anything, and so there was a great danger that
26:15
Speaker 3: we actually had Brexit and an unplanned sort of chaotic
26:18
Speaker 3: wto kind of basis, and then of course we've got
26:21
Speaker 3: at least we've got a government who'd had a view,
26:23
Speaker 3: they negotiated an exit. But then we had the pandemic,
26:26
Speaker 3: and of course the share prices came back on that.
26:28
Speaker 3: But what was interesting about the period after the pandemic
26:30
Speaker 3: was that many of the smaller quoted companies which were
26:32
Speaker 3: able to continue to thrive even during global recession, and
26:36
Speaker 3: that meant that the share prices in microd cap Trust
26:39
Speaker 3: for example, rose dramatically, I mean not just a little bit,
26:41
Speaker 3: but dramatically, And so the share prices had been week beforehand,
26:45
Speaker 3: but the recovery potential was very, very substantial, and we
26:48
Speaker 3: could enter another period like that.
26:50
Speaker 1: Yeah, so we're back at the bottom again. Now we
26:52
Speaker 1: are hoping for another recovery periods just.
26:54
Speaker 3: Slightly lower bottom the last time, but it does, you know,
26:57
Speaker 3: and it can always go lower. But coming back to it,
26:59
Speaker 3: the upside potential and in my view, and obviously who
27:02
Speaker 3: knows the future, We've got to be a bit careful
27:03
Speaker 3: about being too certain about the future. But when we
27:05
Speaker 3: get the recovery, I think it'll be quite substantial, but
27:08
Speaker 3: in contrast to the sort of twenty twenty to twenty
27:10
Speaker 3: twenty one period, I think when we get up there,
27:12
Speaker 3: we might rest for a while, but I think we'll
27:14
Speaker 3: have another one and then another one. And so I
27:16
Speaker 3: think over sort of a ten year period that the
27:18
Speaker 3: long term returns of the very smallest coded companies being
27:22
Speaker 3: part of the UK stock market, which itself might be outperforming,
27:25
Speaker 3: and possibly being the very best part in terms of
27:27
Speaker 3: returns of one of the best performing stock markets in
27:30
Speaker 3: the world. I mean, you know, the risk allD ratio
27:32
Speaker 3: is unusually attractive. If you go back to the nineteen
27:34
Speaker 3: seventies again, we had terrible local politics. We had three
27:37
Speaker 3: day weeks, the sterling was very weak. The IMF had
27:40
Speaker 3: to come and rescue the UK in nineteen seventy six.
27:43
Speaker 3: You know it'd be a wee, a bit like Argentina
27:44
Speaker 3: in those days, right, And yet you might have thought, well,
27:46
Speaker 3: why by local companies, why buy smallness because they can
27:50
Speaker 3: acquire assets from the receiver and make not just retain employment,
27:53
Speaker 3: but make disproportionate return for their shareholders on the back
27:56
Speaker 3: of it. So I think that's what we're going to enter.
27:58
Speaker 3: That's why we're so.
27:59
Speaker 1: Excited, and what are evaluations like in the small cat world.
28:03
Speaker 3: Amazing? I mean it's just quite easy side, you know,
28:07
Speaker 3: it's just it's almost I feel a little bit guilty
28:09
Speaker 3: sometimes they're so cheap. I feel worried for thee If
28:12
Speaker 3: you feel guilty, well it's for the companies. Just think
28:14
Speaker 3: of these staff working for them, think of them management teams.
28:16
Speaker 3: The cost of equity is really prohibitively high and so
28:20
Speaker 3: they can't invest in the way they would like to.
28:22
Speaker 3: It's very demotivating when you say to your staff, we've
28:25
Speaker 3: got a brilliant company here, but look at the share
28:26
Speaker 3: price and people say, you're quite sure, it's quite so brilliant.
28:29
Speaker 3: So there are some disadvantages, but obviously for investors getting
28:33
Speaker 3: in at very low valuations it's great. Obviously as they
28:36
Speaker 3: make acquisitions, as they invest in growth, as they do
28:38
Speaker 3: some of these transformational acquisitions, then the opportunity of rising
28:41
Speaker 3: writing further checks into these companies, which then can have
28:43
Speaker 3: disproportionate return is very exciting. So yes, as I touched on,
28:47
Speaker 3: we're very upbeat about the potential. Probably I've been more
28:50
Speaker 3: upbeat about the potential for UK small caps that I'm
28:53
Speaker 3: more upeat now than I've been for the last thirty years.
28:55
Speaker 1: Amazing, amazing. Okay, well, let's talk about some of the
29:00
Speaker 1: you know. Before I do that, I want to ask
29:01
Speaker 1: you one thing about inheritance tax, because there is a
29:04
Speaker 1: sort of growing fear that will be changes around the
29:07
Speaker 1: inheritance tax regime in the UK. A lot of the
29:09
Speaker 1: smaller listed companies on AIM benefit from being in ITHD
29:13
Speaker 1: portfolios held by the wealth managers. Right now, if those
29:16
Speaker 1: rules change and aimstocks are no longer able to be
29:19
Speaker 1: passed down inheritance tax free to airs, etc. Will that
29:22
Speaker 1: have a significant effect on the particularly the microcap world
29:26
Speaker 1: in the UK.
29:27
Speaker 3: It may well have an effect on some of the
29:29
Speaker 3: larger AIM stocks because of course, if you're close to
29:32
Speaker 3: the end of your life then basically you don't really
29:34
Speaker 3: want to be buying microcaps. You'll be buying some mainstream
29:37
Speaker 3: small caps which are of from some of the larger
29:39
Speaker 3: AIM stocks, So it might affect some of those. I
29:41
Speaker 3: don't think it's very likely. Even if it happens, I
29:43
Speaker 3: don't think it's going to be all AIM stocks. It
29:45
Speaker 3: might be some of the very largest companies. The truth
29:47
Speaker 3: is the UK desperately needs investment into the corporates to
29:51
Speaker 3: generate employment to productivity improvement, we need to actually generate
29:54
Speaker 3: investments so we get more taxation for staicles and hospitals
29:57
Speaker 3: and all that kind of thing. So when I engaged
29:59
Speaker 3: with government, and I engage with Treasury and others, the
30:02
Speaker 3: appetite for taking it any bit of extra tax out
30:05
Speaker 3: of this area versus the disadvantage of taking a bit
30:08
Speaker 3: of tax out of there is constricting these things is
30:11
Speaker 3: a really sort of it doesn't look very unattractive option.
30:14
Speaker 3: So I'm not saying I know the future, because numb
30:17
Speaker 3: must do, but I think it's extraordinarily unlikely. In fact,
30:20
Speaker 3: in my view, I think we're talking about something different.
30:22
Speaker 3: We're seeing delistings in the UK. We're seeing companies which
30:25
Speaker 3: are choosing to primitive their primary listing to the US
30:27
Speaker 3: because the evaluations are so much higher. I think there's
30:30
Speaker 3: a much bigger chance that actually we see some mainstream
30:32
Speaker 3: companies and some small caps choosing to delist in the
30:35
Speaker 3: UK make their primary listing overseas. Now, that is a
30:38
Speaker 3: trend which is very unattractive because we want the relevance
30:40
Speaker 3: of the UK market to very much in place. If
30:43
Speaker 3: we start to lose many of the major companies to
30:45
Speaker 3: perhaps listing overseas. Then ultimately the UK market loses its
30:49
Speaker 3: franchise to some degree. I still think there'll be a
30:51
Speaker 3: purpose in the smaller end of the market, but many
30:54
Speaker 3: of the main So if anything, you know, I think
30:55
Speaker 3: the government, I think all politicians are under real pressure
30:58
Speaker 3: to find ways to actually prove interest in the UK market,
31:02
Speaker 3: to reduce the cost capital so companies can invest in future.
31:05
Speaker 3: And so going back, I think there's all sorts of
31:07
Speaker 3: proposals which are on the table to try and speed
31:09
Speaker 3: that up, and I think some of those might actually
31:11
Speaker 3: move the UK market.
31:13
Speaker 1: Which of those I mean, I've written about this as well,
31:15
Speaker 1: and we talk about it a lot, John and I.
31:17
Speaker 1: Which of those proposals do you think might work? What
31:20
Speaker 1: can we do to encourage people to a list in
31:22
Speaker 1: the UK and be remain listed in the UK.
31:24
Speaker 3: So coming back to it, I think the one which
31:26
Speaker 3: I particularly favor is I think Hague and Blair are
31:30
Speaker 3: put together a proposal that icers for the next three years.
31:33
Speaker 3: If you want your tax benefits, you need to invest
31:35
Speaker 3: seventy percent in the UK. It's pretty inconvenient a lot
31:38
Speaker 3: for the wealth managers. They'd have to move their class
31:39
Speaker 3: portfoilius run quite a lot. But my view is that
31:42
Speaker 3: would be a major improvement in terms of liquidity. First
31:46
Speaker 3: of all, if you were a UK local seller, why
31:48
Speaker 3: would you carry on selling the UK market? You might
31:50
Speaker 3: just hold off for a while. As I say, we've
31:52
Speaker 3: got international buyers coming in that would drive valuations. But
31:55
Speaker 3: many of those iceers, of course, we then have to
31:56
Speaker 3: move some of their capital from perhaps some international stocks
31:59
Speaker 3: back to the UK market. And again that would include
32:02
Speaker 3: many small companies as well as mainstream companies. So coming
32:04
Speaker 3: back to it, I think it would be a major
32:06
Speaker 3: trend difference and ultimately could not just help companies reduce
32:11
Speaker 3: their cost capital, but actually help the UK stock market
32:13
Speaker 3: itself break out on the upside and not what we've
32:15
Speaker 3: seen with Japan is everyone says all good, tell us
32:17
Speaker 3: about Japan, it's all breaking out, and we get the
32:19
Speaker 3: same pattern coming in the UK market.
32:21
Speaker 1: Forced to demand. Well about that, forcing people to invest
32:26
Speaker 1: in particular areas most you mean new money going in
32:29
Speaker 1: twice is new money that's already in isis. So if
32:32
Speaker 1: you're an ICE a millionaire, you've got a wider wide
32:35
Speaker 1: spread of global equities et cetera. And Tony Blair turns
32:39
Speaker 1: around you tomorrow and says, well, or that it would
32:40
Speaker 1: be inarticular, but you know it's on. Someone in the
32:42
Speaker 1: government turns around you and says that you're going to
32:44
Speaker 1: have to sell seventy percent of directories and bowld them
32:46
Speaker 1: into the UK.
32:47
Speaker 3: Well, you don't have to have the text benefits.
32:49
Speaker 1: I think that would cause riots in the streets of
32:52
Speaker 1: tumber as well.
32:53
Speaker 3: It might well be that it's inconvenient for some, But
32:55
Speaker 3: the bottom line is the great advantages you're getting into
32:58
Speaker 3: assets which are so nearly valued, scored ratio is unusually attractive,
33:01
Speaker 3: and many of these assets actually are set to outperform.
33:04
Speaker 1: So I mean that is the interesting thing about it,
33:06
Speaker 1: and that normally when governments force investments, they force you
33:09
Speaker 1: into expensive stuff at the wrong time, and this would
33:11
Speaker 1: be forcing you to take valuations into account and by
33:14
Speaker 1: chief stuff at the right time. But again it seems
33:17
Speaker 1: like a bonus.
33:18
Speaker 3: I think it all boils down to being social useful.
33:19
Speaker 3: That the financial world is socially useful, right, So people
33:22
Speaker 3: who have savings, the purpose of having savings is to
33:25
Speaker 3: responsibly invest it in companies so they can accel at
33:27
Speaker 3: growth and generate more local employment, skilled employment, right to
33:31
Speaker 3: generate companies generate.
33:33
Speaker 1: Quantity the UK's retail investors sees it. I mean, I
33:36
Speaker 1: agree with you, but I'm not sure that's how the
33:37
Speaker 1: retail investors sees it.
33:39
Speaker 3: I mean, we've all got to have social emission to
33:42
Speaker 3: the You know, if you just look after yourself and
33:44
Speaker 3: don't look after the wider population, then you will lose
33:47
Speaker 3: your authority to actually continue because the governments will eventually
33:50
Speaker 3: go with the population because they want the votes. So
33:52
Speaker 3: we do need to be very demonstrably socially useful. And
33:55
Speaker 3: I think this is another fat so particularly as I say,
33:57
Speaker 3: not just skilled employment. I think you degenerate extra productivity improvement,
34:01
Speaker 3: which means that you can pay staff at an elevated
34:03
Speaker 3: rate faster than inflation on a sustainable basis, and of
34:07
Speaker 3: course more local taxi. These are often local businesses paying
34:10
Speaker 3: local taxes. Again, you know, it's all very well getting
34:13
Speaker 3: this price of shell up, which is probably needed as well.
34:15
Speaker 3: Shellers on a rediitary low valuation compared with Chevron or Exon,
34:20
Speaker 3: and we want to see that gap close too. But
34:22
Speaker 3: this would be for smaller quoted companies and that's particularly exciting.
34:25
Speaker 1: Okay, you convinced me. I'm going to talk to John.
34:27
Speaker 1: We're going to start campaigning on this.
34:28
Speaker 3: Thank you.
34:29
Speaker 1: No, definitely win this one. Right, Let's go on to
34:32
Speaker 1: some of the exciting companies in the micro account fund.
34:35
Speaker 1: Everyone's interested in exciting small companies.
34:37
Speaker 3: Yes, what's amazing, is you get again? I sort of
34:40
Speaker 3: touched on it earlier. These are small companies relative to
34:43
Speaker 3: very largest megacaps around the world, but in themselves they
34:46
Speaker 3: are large businesses, often doing millions of pounds of sales,
34:50
Speaker 3: generating millions of pounds of profit, and in many cases
34:53
Speaker 3: they're able to sort of be world leaders in their
34:56
Speaker 3: certain little niche industry. And so you just find this
34:59
Speaker 3: it's kind of strange to time companies aren't just absurdly
35:01
Speaker 3: low valuations. It's calling over broken glass to raise capital
35:05
Speaker 3: at a time when there's so much little capital around. So,
35:08
Speaker 3: I mean, you know, a good example is a recent
35:09
Speaker 3: company which is called Shield Therapeutics. It's a technology company
35:13
Speaker 3: to some degree. It's got an FCA approval for something
35:16
Speaker 3: called Akroufer, which is a product which has very few
35:20
Speaker 3: side effects, particularly for people who are short of iron.
35:22
Speaker 3: And there's all sorts of different methods trying and getting
35:25
Speaker 3: more iron into you, but they all tend to be
35:27
Speaker 3: not that lovely and have side effects. This product's got
35:30
Speaker 3: FDA approval, they're selling it, and they've just done a
35:33
Speaker 3: deal with a very large company in the US to
35:35
Speaker 3: actually triple the size of their sales force so they
35:37
Speaker 3: can actually grow their sales much more rapidly. They've given
35:40
Speaker 3: a large part of the upside away forty five percent.
35:43
Speaker 3: But on you know, the FinCap note, which has just
35:45
Speaker 3: come out over two years, you know, to twenty twenty five.
35:49
Speaker 3: Actually I think maybe it's three years. The next three years.
35:52
Speaker 3: It's on a pye of perhaps one and a half, right,
35:55
Speaker 3: I mean net cash on the balance sheet.
35:57
Speaker 2: I mean it's just.
35:58
Speaker 1: What there's almost Japanese cheap.
36:00
Speaker 3: Yeah, you know, it's so many companies like that. I mean,
36:03
Speaker 3: we've kind of think of ourselves as a business where
36:06
Speaker 3: we haven't got many technology companies. But ARM came from
36:09
Speaker 3: the microcap area. It used to be part of Acorn Computers.
36:12
Speaker 3: You know, it was Acorn risk uric you know, reduced
36:16
Speaker 3: instructions chips machines that it came from. It was incubated
36:20
Speaker 3: by a small cap that's where you can build these
36:22
Speaker 3: kinds of opportunities going forward.
36:23
Speaker 1: Okay, give us another.
36:25
Speaker 3: Okay, go on, So another one which I quite like
36:27
Speaker 3: at the moment. We love we love all sorts of companies.
36:30
Speaker 3: These are just the ones which come.
36:31
Speaker 1: To the top of the I'm understanding how much you love
36:33
Speaker 1: a lot of company and getting that.
36:35
Speaker 3: So Plant Healthcare, for example, which is a biologic core
36:37
Speaker 3: company which is involved in the agri market. What we
36:40
Speaker 3: look for is for companies which have technologies but actually
36:43
Speaker 3: it's demonstrated by third parties and that gives us real
36:46
Speaker 3: confidence because they would have done loads of research and
36:48
Speaker 3: due diligence before they do a deal. So they're just
36:50
Speaker 3: done a deal with Wilbur Ellis, which is a very
36:51
Speaker 3: large corporation to sell. So here's a forty million pound
36:54
Speaker 3: company again already doing sixteen million of sales, but has
36:57
Speaker 3: technology which is sufficiently interesting to move the needle of wilburrowers.
37:00
Speaker 3: And again you know it's these are.
37:04
Speaker 1: There, What is their technology?
37:05
Speaker 2: What did they do?
37:06
Speaker 3: So so basically they brought biological they're particularly helping for
37:09
Speaker 3: control of diseases and pests in crops, but they're using
37:13
Speaker 3: natural products to do it. And it's wonderful that they
37:16
Speaker 3: can use that and so you get less obviously long
37:19
Speaker 3: term increications in term of the environment, but better outcomes
37:22
Speaker 3: as well. And another is sign Canode. For example, sign
37:25
Speaker 3: Conode is a business which is involved in I mean
37:27
Speaker 3: it spent the last ten years developing r F mesh
37:30
Speaker 3: for measuring meters meter readings really but not so much
37:34
Speaker 3: for the UK, particularly for international particularly those with quite
37:38
Speaker 3: uneven Internet connections. So of on mobile connections. Now a
37:43
Speaker 3: lot of mobile connections are pretty good in the emerging markets,
37:46
Speaker 3: but they do still have areas which are behind hills
37:48
Speaker 3: and you can put these meters in. They can't send
37:50
Speaker 3: the data back. So there are mesh passes, you know,
37:53
Speaker 3: because obviously they do a whole district or a whole
37:55
Speaker 3: range of houses and so they pass the data up
37:57
Speaker 3: from meter to meter and so here to peer basis
38:00
Speaker 3: until they get to a meter which does have Internet
38:02
Speaker 3: connection or possibly mobile connection. Again. I mean, what's amazing
38:06
Speaker 3: is they've spent ten years developing this. India's rolling out
38:09
Speaker 3: everyone's going to have a met electricity. Miss Moses said that,
38:14
Speaker 3: but most particularly he's putting billions into it. This company
38:16
Speaker 3: appears to have one of the leading market stitions, possibly
38:18
Speaker 3: the leading market mutition against forty million market cap net
38:21
Speaker 3: cash on the balance sheet tendering currently for a billion
38:25
Speaker 3: of sales. Now it's not going to get a billion
38:27
Speaker 3: because they're never win. All attenders a portion here, in
38:29
Speaker 3: a proportion there with all of the local utilities, which
38:32
Speaker 3: they all were responded. So again, these things are just
38:36
Speaker 3: so overlooked and the upside is so high. The great
38:40
Speaker 3: advantage of investing in microcaps isn't just that you can
38:42
Speaker 3: make thirty or fifty percent. We love making thirty or
38:44
Speaker 3: fifty percent, We get it right. But you have that
38:46
Speaker 3: sort of inbuilt option value that when they move, they
38:49
Speaker 3: can move very, very substantial amounts. A good example of that,
38:51
Speaker 3: perhaps in our current portfolio is You Group. You Group
38:54
Speaker 3: is a company which were set up actually by someone
38:57
Speaker 3: who basically used to run nursing homes and I think
38:59
Speaker 3: he didn't have very good time buying the extricity and
39:01
Speaker 3: other things for his nursing homes. And at the same
39:03
Speaker 3: time the government was encouraging new companies to set up
39:06
Speaker 3: and become utilities themselves to compete with Bush Gas and
39:09
Speaker 3: Eon and all the rest of it. And he set
39:10
Speaker 3: one up and in the end he thought, actually I
39:12
Speaker 3: don't need my nursing homes. I can just grow this business.
39:14
Speaker 3: So he came to market. He's grown the business. Then
39:16
Speaker 3: here's a business which is growing maybe twenty thirty forty
39:20
Speaker 3: percent a year. You know, it's outstanding levels of service.
39:23
Speaker 3: So it's taking market show. It's only go about one
39:25
Speaker 3: one and a half percent market share, but it's growing
39:28
Speaker 3: at extraordinary name rapidly. Share price has come up. You know,
39:31
Speaker 3: if you bought it two or three years ago, you
39:33
Speaker 3: could have bought it below a pound. It's now about
39:34
Speaker 3: six pounds. But it's still only capitalized at just over
39:38
Speaker 3: one hundred million market cap. It's got eighteen million of
39:40
Speaker 3: cash one eight eighteen million of cash in the balance
39:42
Speaker 3: sheet now and if you look at the forecast seven
39:44
Speaker 3: next three years for a Liberum, they will have seventy
39:47
Speaker 3: just on the seventy million of cash in three years time.
39:49
Speaker 3: And there's more more opportunity than do other deals along
39:52
Speaker 3: the way. Specifically, the opportunities are just wonderful.
39:57
Speaker 1: Is there a discount on the microcap trust at the moment?
40:00
Speaker 1: I mean, we get all these wonderful companies cheap, do
40:02
Speaker 1: we get discount on them too. Well.
40:04
Speaker 3: We're unusual because one of the features of the trust
40:06
Speaker 3: is we offer every one one hundred percent exit every year.
40:09
Speaker 3: And the reason we do that is one of the
40:11
Speaker 3: disappointments about investment trust is you can buy the right
40:13
Speaker 3: investment trust and you're doing fine, and it may be
40:15
Speaker 3: at a five percent premium, and then it goes to
40:16
Speaker 3: a twenty five percent discount and you've got the trend
40:19
Speaker 3: the market trend absolutely right, but you haven't made the
40:21
Speaker 3: return because the discount. So by offering everyone an unlimited
40:26
Speaker 3: exit every year, it means that when you buy the trust,
40:28
Speaker 3: you know there aren't any over hanging sellers. And if
40:31
Speaker 3: we have got institutional sellers, you need to get out
40:33
Speaker 3: well for God's sake tell us. And then we redeem
40:35
Speaker 3: the holdings as such like. So if we get too
40:38
Speaker 3: much too many redemptions, we put a small portion, say
40:40
Speaker 3: fifteen percent of all the holdings into liquidation pool, sent
40:43
Speaker 3: all back. We get smallish holdings. The boards all down
40:46
Speaker 3: to the board. But the board can just give three
40:48
Speaker 3: percent cash or whatever.
40:49
Speaker 1: It makes it quite hard to grow the trust.
40:50
Speaker 3: There no well, the great advantages it doesn't go too
40:53
Speaker 3: much discount and the great advance a band. It not
40:55
Speaker 3: going to a discount. Is then when people get excited
40:57
Speaker 3: about the future, they're happy to buy this trust because
41:00
Speaker 3: make me confident it's not go to a significant discount
41:02
Speaker 3: going forward. They can always get out. So by obviously
41:04
Speaker 3: leaving the door open, it means people can come in
41:06
Speaker 3: with more confidence. So we'd love to think that actually
41:09
Speaker 3: this fund can get considerably larger in the future. So
41:12
Speaker 3: it's very unusual. So coming back to answer your question,
41:14
Speaker 3: it's hardly on the discount of all it's.
41:16
Speaker 1: About three or four wall. It's very disappointing.
41:18
Speaker 3: I'm sorry about that. But the great advantage is when
41:20
Speaker 3: the upside comes, hopefully the share price will reflect the
41:23
Speaker 3: full value of the upside.
41:24
Speaker 1: Yeah, yeah, okay, brilliant and Jauve's thank you so much.
41:27
Speaker 1: That was very kind. I'm going to ask you one
41:29
Speaker 1: last question quick fire around. Okay, yep, bitcoin on.
41:33
Speaker 3: Gold Gold every time.
41:36
Speaker 1: We are never going to get on anybody who says bitcoin. Yeah,
41:40
Speaker 1: how many podcasts we've done that, We haven't had a
41:42
Speaker 1: single bitcoin by it. But wait, maybe we'll go out
41:45
Speaker 1: and get one. If you'd like to come on the podcast.
41:46
Speaker 1: You think you're suitable for the podcast, and you think
41:48
Speaker 1: that we'll find you extremely interesting, and you would say
41:51
Speaker 1: bitcoin not gold. Give us a cool Thank you so much.
41:54
Speaker 1: It is.
41:54
Speaker 3: It's a real pleasure. Thank you so much.
42:02
Speaker 2: Thanks for listening to this week's Marin Talks Money. We
42:04
Speaker 2: will be back next week in the meantime.
42:06
Speaker 1: If you like us show, rate, review and subscribe wherever
42:08
Speaker 1: you listen to the podcast. Comments on Andrew Bailey and
42:11
Speaker 1: the Bank of England to come direct. This episode was
42:13
Speaker 1: hosted by me Maren's Somerset Web. It was produced by
42:16
Speaker 1: Someasadi and Muhammad Farouk. Additional editing by Blake Maples Firsonal
42:21
Speaker 1: Thanks to Java's Williams and John Steppeck. As usual, I'm
42:25
Speaker 1: sorry I triggered you there, John, and of course our
42:27
Speaker 1: weekly reminder design up for John's daily newsletter Money to
42:30
Speaker 1: still link in the show notes