March 14, 2025 • 35 mins
Troy Asset Management founder Sebastian Lyon joins Merryn this week to talk strategies for protecting your capital in these crazy markets. They also discuss how the low interest-rate environment hit the UK investment trust industry hard, and the way he sees it rebounding, as well as American exceptionalism and why there are good reasons to be cautious about investing in the US, and his outlook for gold.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:17):
Welcome to Maren Talks Money, the podcast in which people
who know the markets explain the markets. I'm Marin seven
Stweb this week as weeakless Aboutian Lion, founder and Chief
investment Officer of Troy Asset Management. Troy managed the Personal
Assets Trust, one of the UK's most popular capital preservation trusts.
They take it over in two thousand and nine. Since then,
the trust is up two hundred and four percent. The
(00:39):
UK retail price Index over the same period is up
eighty five percent, so you have very comfortably beaten inflation
since then. You've also beaten inflation comfortably over ten years now.
The last year has been much better for personal assets.
If you've been holding shares in the trust, you're up
nine point three percent when the UK retail price index
is up only three point seven percent. So we talked
to about you. Now find out what next. We discussed
(01:02):
the investment trust industry as well. We discussed American exceptionalism
and why there are good reasons to be cautious, and
also of course crushly his outlook for gold. Sebastian, thank
you so much for joining us today. It is a huge.
Speaker 3 (01:14):
Pleasure to have you on pleasure, Maren.
Speaker 2 (01:16):
Right now, we've got an awful lot to talk about,
so let's start rattling through this. It's the first thing
I want to talk about with you because you are
such an expert on the investment trust industry and our
audience is very interested in this. The investment trust sector
as a whole has found ourself in a bit of
a pickle, as exemplified by the Whole saga. Anyone, by
the way, who doesn't know about the SABA saga, the
(01:37):
activist attack on the sector, please go back and listen
to some of the many, many podcasts we've done on this,
and in particular John's interview with Boas Weinstein, the CIO
of SABA, who talks a lot about what he's trying
to do and why approve or don't approve. I suspect
Sabastian doesn't approve, but we'll get to that. So a
little history of Sebastian. How did we find ourselves in
(01:57):
the pickle that we're in?
Speaker 3 (01:59):
Yes, has disrupted the sector, Marin and some good trusts,
and some trusts have been punished for effectively poor liquidity
and not defending discounts, and effectively this started. We have
to go back to your favorite time in history, the
financial crisis. We love that because in two thousand and nine,
interest rates were cut to zero and stayed there. Effectively
(02:21):
what people realized it took a few years, the Penninty troll,
probably until about twenty twelve or twenty thirteen, when central
banks started introducing forward guidance. Takes you right the way
back to that. Effectively, forward guidance was when central banks
said we're not going to raise rates for a long
period of time two years, three years, four years, and
so suddenly everybody realized that interest rates weren't going to
(02:42):
go back to where they'd come and the effectively bond
yels fell very sharply, went down to you know, low
single digit percentages, and everybody was definitely looking around who
needed income for income and so there was a huge
amount of issuance from investment trusts, alternatives and equities between
(03:03):
from twenty thirteen for a decade, so from the decade
up until twenty twenty two, there was twenty five billion
pounds of issuance. Mainly that's primary issuance, that's either investment
trust issuing new shares to the existing investment trusts issuing
new shares to their shareholders to new shareholders, or it
was actually IPOs so new investment trust launching.
Speaker 2 (03:26):
It's the Bastian time. I'm going to interrupt you briefly
just to ask you to explain to listeners. You aren't
completely affair with this sector. Why if you need income
do you see new investment trust issuance?
Speaker 3 (03:37):
Because effectively, these investment trusts were offering a higher yield.
So they were offering that four to five percent yield
which everybody was looking around for in a zero interest
rate environment. In many ways they were investing in high
yield equities. They were investing in alternatives like infrastructure, those
sort of areas where there is on balance highild, also
(03:58):
private credit ways. And the other thing is is that
they were just looking for alternatives. They were looking for
alternative assets which were going to generate a return because
they weren't having a return from cash. That was the
key difference. And the problem is is that the primary
issuances are very easy to get in. It's not quite
so easy to get out, as we've discovered. So the
(04:18):
secondary market, ie, this is the buying and selling of
the investment trust shares is a lot more tight and
it's a lot less easy than the primary market, ie,
if you want to buy new shares, And effectively we
had record issuance for a decade, and then what happened.
What happened in twenty twenty two, Inflation went up, interest
(04:39):
rates went up to five percent, and suddenly shareholders didn't
need that yield any longer because they could get it
from guilts or they could get it from cash in
the bank, and there wasn't any liquidity within the investment
trust sector to effectively allow investors to move their money
and effectively liquidate those shareholdings that they'd they'd made during
(05:01):
that zero interest rates environment. So suddenly we've gone from
a period of lack of liquidity. And really the reason
why Saba was able to buy the shares that he
bought in twenty twenty three and twenty twenty four was
because there were no buyers. There were no buyers and
plenty of sellers, and the problem was that the boards
and the managers didn't buy back enough stock, so the
(05:22):
discounts just widened and that allowed Saba to come in
and buy the stakes that he did. And I think
that coming to SABA. I think that obviously, as you
within your podcast with John have reported on the votes
of the seven trusts which he was attacking effectively were
one and were one convincingly. That's the first sort of
(05:44):
battle won by the trust sector. But he's not going away.
He's got these huge stakes of twenty five thirty percent,
and he will probably find others to invest in and
perhaps vote along with him. But I'm actually optimistic about
the trust sector. And this might sound a bit strange
talking as we are today with the trust sector having
been under threats, but investment trust's got one hundred and
(06:05):
fifty year history. The one thing they have managed to
do is adapt. I think we will see over the
next five years a very material change. We will see
huge mergers, will need to see improve liquidity. That is
the key. That is the thing that's been missing, and
that is the thing that the trust sector needs to rediscover.
And there needs to be a concerted effort on the
part of boards and on the part of the managers
(06:26):
as well to put shareholders first to reduce those discounts.
So how do we do that.
Speaker 2 (06:32):
I'm going to interrupt against Sorry, it's about you. Yeah,
I take all that you're saying. But the answer from
much of the industry to that is, well, hang on
a tick. One of these spectacular things about the investment
trust industry, and one of the things that many think
has driven the very long term out performance of the industry,
is the idea that the capital inside each trust is permanent.
(06:52):
So you don't have to constantly, as a manager buy
and sell the assets in your botfolio to meet changing
the command for the shares. You just get to focus
on running the money and that's it. Now, if you
move into an environment where you constantly have to issue
by back, issue by back, issued by back, you take
away that advantage, and perhaps the whole thing becomes pointless.
(07:15):
You might as well just getting over an.
Speaker 3 (07:16):
End of that. I'm not sure about that. I think
the world has changed. I think that's a frankly a
bit of a naive view. I'm not sure that permanent
capital really exists anymore. The evidence is beginning to stack
up that that's not necessarily the modus operandi. Now, there
are some parts of the liquid market, particularly in alternatives renewables,
(07:36):
that sort of thing where there is a liquidity private equity,
and that has to be permanent capital because that's the
nature of the beast, and they will probably have to
offer liquidity on an annual basis or on a three
year basis, or whatever it might be. But I think
the whole idea of absolutely permanent capital forever. I think
(07:57):
that that the sector is going to struggle with that argument.
Speaker 2 (08:00):
But if you don't have permanent capital, you just have
a listed vehicle which you know the manages to buy
and sell them, really are just an active ETF.
Speaker 3 (08:10):
Ah Well, I think that the stock market doesn't need
active ETFs because they've got investment trusts.
Speaker 2 (08:15):
Well, wouldn't act active ets be cheaper?
Speaker 3 (08:18):
They might be marginally cheaper, not necessarily, not necessarily, I
don't think so. Not necessarily. I mean an active manager
has an active fee, so I mean it wouldn't necessarily
it might be marginal cheaper. I think the future of trust,
certainly equity investment trust could be could be an active ETF.
And I don't think necessarily you need an active ETF
if you've got investment trusts that are liquid and large
(08:39):
and that are easily traded. Active ETFs in the US
have boomed, but they've boomed for a particular reason, which
has actually got a niche reason, which is tax mutual
funds are less attractive from a tax point of view
than than active ETFs. That's why the active ETF market
has grown. I don't think necessarily we need a big
active BTF mark in the UK because the tax benefits
(09:02):
are different in the UK. You get all the tax
benefits by investing in an investment trust that you would
in an active ETF. There's no difference. There is a
view out there that we need, you know, activetfs, the
new new products. We need. This. Actually, the way that
investment trust can adapt and ultimately grow in the long
run is perhaps to challenge the active ETF idea and
(09:24):
actually be an active ETF themselves.
Speaker 2 (09:26):
Okay, well, let's go back to how you think discounts
should be controlled so that we get to this point
where we're effectively an active ETF without being an activitia.
Speaker 3 (09:36):
So, Marin, as you well know, for the last fifteen years,
since I became investment advisor and latterly investment manager at
Personal Assets Trust, I've been howling into the void telling
investment the investment trust sector and investment trust boards and
managers that liquid portfolios, equity portfolios multi asset portfolios, et
(09:58):
cetera should put in place a discount control mechanism. Personal
Assets have had a discount control mechanism in place for
twenty five years. It is never traded at a discount
of more than two percent, so it can be done.
And by the way, if you're not trading at a
white discount, saber is interested. Arbitrageurs do not come on
your shelder register if you haven't got a discount. So
(10:21):
it is a way of keeping the arbitrages at bay.
And how you do this is you issue if you
move to a premium of more than two percent, and
you buy back if you go to a discount of
more than two percent. And that is how you do
it on a day to day or weekly basis. And
there are days where you buy back your stock if
the discount goes beyond one and a half two percent,
(10:42):
and if the share traded a premium, you can actually
issue and grow the trust. And we succeeded in growing
Personal afthlets for many years. Actually in this more recent
period we have been shrinking. That's fine, and the board
and the manager myself are very happy with the idea
of the trust shrinking. Over a period. We've brought back
about two hundred million pounds worth of stock in the
(11:03):
last two two and a half years since it was
probably since March twenty twenty three. Yeah, and we actually
issued chairs a week ago, so we're not just buying back,
we are also issuing as well.
Speaker 2 (11:18):
Now, I suppose the answer to that again would be,
it's all right for you, Sebastian personal assts. There's a
massive trust couple of billion. It doesn't matter if you
shrink a little. But there are a lot of trusts
out there in the market that are knocking around two
hundred million, three hundred million, some even less if demand
for their shares isn't out there either in the wrong
(11:38):
asset at the wrong time. Even though you know, maybe
let's let's talk about perhaps you know japan trusts before
you Pan started performing again, these weren't things that anyone
was going to go to for a while. But when
the market starts moving again, they're incredibly valuable vehicles to
have out there, right, But if they were to buy
back and buy back and buy back and by back,
they're going to disappear, And certainly the wealth man isn't
(12:00):
going to buy them because they're just too small. So
if you start down that road, you're going to lose
an awful lot of the investment trust market.
Speaker 3 (12:07):
I think there are too many trusts and I think
there does need to be consolidation. And there has been
consolidation merin you know you've seen I think there were
nine mergers last year, and I think that is what
we need. We need to see some larger trust I
go out and I see wealth managers very regularly. The
one thing they say to us is, you know, we
need more liquidity within the investment trust sector. Yeah, so
(12:28):
that is the future that you know, we've probably got.
I don't know how many Japanese trusts there are out there,
but there probably needs to be two or three, not
ten or whatever the number is, and they need to
be of greater scale. They need to be five hundred
million pound plus. We have another trust at Troy, the
STS Global Income Trust, which we do have a DCM.
We issued stock a few years ago. We have been
(12:48):
buying back, but we have a hard DCM there, so
it can be done even on a three hundred million
pound trust. I think that is the way to do it.
If we didn't have the DCM on STS Global income,
then probably the chairs would have gone out to a
discount and an arbitrager would have come on the board.
The problem is the board would be focusing on the
arbitrageur and the arbitrager's needs and not the wider Shareholderbate.
(13:11):
This is the problem with sabars. It's actually becomes a distraction,
becomes a huge distraction to the board and the manager,
and it's avoidable.
Speaker 2 (13:19):
Okay, DCM. By the way, anyone listening discount control mechanism,
I'm not sure if we said that earlier, just so
you know, right, So the message there Sevestia, and the
message you have for the rest of the sector is
be more like you.
Speaker 3 (13:30):
Well, be more like us. I mean, there are others
who have done this. There are four or five trusts
out there who've put in hard dcms over the last
five or ten years. We're not the only ones at all.
But I think if you want to solve this problem,
I think that is the future. And certainly for I
think there is this demand for larger trusts, more liquid trusts.
(13:50):
Investors want certainty. The one thing that they don't want
is to be able to think, am I goingness if
I buy this trust. Is it going to go out
to a twenty percent discount over the next year. They
want so, and they want liquidity, and the trust sector
needs to offer that.
Speaker 2 (14:04):
Okay, last question on this, what happens to the very
liquid renewables, trusts, the alternative renewable and equity, all these
things that are training at whopping great discounts. That liquidity
is not coming back because the underlying assets are not liquid.
You can't just say, oh, well, no one really fancies
distrust anymore, and then not much demand arounds orders I'll
pass on some of those private equity assets that I've
(14:25):
grotesquely overvalued and nobody wants.
Speaker 3 (14:27):
Look, there is a huge oversupply in alternatives. I mean,
seventy five percent of that issuance from twenty twenty two,
that twenty five billion was in alts. There are liquid
as you say, and their question is is how realizable
are those assets and particularly are those discounts real discounts
or how strong is the NAV And that's that's debatable.
(14:50):
I don't need the answer that question, but I think
the answer to your question in terms of what happens
to those is that and we've seen this with KKR
bidding for one that will be the solution effectively will
need to be consolidation in that area, and they will ultimately,
over a period of time, and it will take time
because of the nature of the assets, have to return
the cash to shareholders. But that's a much longer game.
Speaker 2 (15:12):
Okay, Well, let's put all that to this side. Let's
go on to the environment as a whole. Now you're
set up or the idea of personal assets trust and
try in generalist is to protect capital in every environment. Right,
Just give me an overview of where you see the
macro environment right now?
Speaker 3 (15:28):
What's changed?
Speaker 2 (15:29):
Where are we and we're seeing at the moment, John
and I've been talking about this, this momentum shift in
markets away from the US towards Europe exactly. Obviously, there's
lots of confusion around where inflation is, where economies are going, etc.
What does it look like to you in the round.
Speaker 3 (15:45):
There's one thing that's been consistent, and there's one particular
thing I think that's changed, and it's actually changed in
the last really month or two. So the thing that's
been consistent and we've been consistent on and when I
last spoke to you two years ago, I don't think
has changed is that we are in a rising environments.
I think everything changed during COVID. During COVID, we ended
a forty year bull market in bonds. Bond yields bottomed,
(16:10):
US treasuries and guilts yielded about zero point five percent
tenure guilts back in the summer of twenty twenty. Ever
since then, yields have been rising. And the reason for
that is that we move from an environment of purely
monetary stimulus ie zero interest rates and QE, to a
(16:30):
world of fiscal where governments began spending money on furloughs
and on defense as well. What we've seen within that environment,
and to some extent, Ukraine and the invasion of Ukraine
assisted with this, but nevertheless it was probably going to
happen anyway, is that inflation rose and then has become stickier,
(16:52):
and as a results, rates have remained higher than people
have expected. So there was an expectation that with inflation
spiking as it did in twenty twenty two in twenty
twenty three, that it would come flattering back down and
then everything we've refound to normal and interest rates would
go back down transient, transient exactly, and that hasn't transient,
hasn't happened, and inflation has remained stickier. You know, we
(17:13):
saw they're in the January RPI numbers three percent, which
were above expectations. We saw them in the US again
three percent above expectations. And they're actually talking about inflation
being above well above target for this year so effectively,
whereas in the last decade, in the twenty tens, inflation
was below target and central banks found it hard to
(17:36):
get it up to that two percent target. This decade,
actually the opposite is the case inflation. We've struggled to
get it down to target, and it's remained stickier than expected.
And that means that probably interest rates are likely to
remain higher as well, or rise rather than fall. Now,
what that means for markets is that whereas in the
(17:57):
past bonds and equities cheap by jow been a wonderful investment,
they've sort of been a self hedge for one another.
When growth accelerated, equities did well, when growth decelerated, bonds
did well. That hasn't worked and clearly didn't work at all.
In twenty twenty two, it was very very painful for
balanced funds that had both bonds and equities, and so
(18:19):
we have been more cautious about that concept, and we've
owned a mixture of assets. Particularly we've owned index linked
and shorter dated tips their Treasury inflation protected security, so
US index linked if you like. They have done much
better over the last five years than conventional bonds because
you've got that inflation coming through, and there are real
(18:40):
yields of around two percent, so you get two percent
plus whatever inflation is. So they're up about twenty five
percent in the last five years, whereas fixed in comes
up only about five percent. In the knowledge that inflation's
likely to be stickier and likely to hang around for longer,
we have been think considering inflation as the issue, and
(19:02):
clearly that's not great for fixed income, it's not great
for bonds. So we've been cautious about bonds and particularly
taking duration risk I investing in longer bonds. But the
thing coming back to, the thing that's changed in the
last couple of months is that I think that Marin,
we're in the reverse of what happened since nineteen eighty nine.
(19:24):
I started my career in October nineteen eighty nine. I
know you were still at school back then.
Speaker 2 (19:29):
Was definitely.
Speaker 3 (19:30):
But in November nineteen eighty nine, a month after I
started my career, the Berlin Wall came down, and ever
since then we've been in a sort of guns into
plowshares disinflationary environment, and that is now very clearly reversing
with a labor prime minister standing up and talking about
(19:51):
big additions to defend spending. So I think in that
respect the world has also changed, and that means that
is also incrementally inflationary. That will be defense bending means,
I'm afraid, means higher inflation. You look back in history,
wars are inflationary and defense bending is inflationary. So again
that adds to that uncertainty and also adds to that
(20:16):
those inflationary pressures. Now, finally, you talked about markets and
about the change in US leadership, and one of the
things that we've discussed a lot last year and the
year before really, but particularly last year, was this concept
of American exceptionalism. Yeah. I everybody was pouring money into
(20:37):
the US and no one was investing anywhere else. We've
been investing just a little bit less in the US
and a little bit more in the UK and Europe.
More recently, I think that the problem with American exceptionism,
there's no doubt that you know, one only has to
look at the numbers, one only has to look at
the companies. And I see this. I hear fund managers
talk about this, and there's a very cogent and coherent argument.
(21:01):
But it's now well known. It's now it's in the price.
Then I think that when you when you hear the
words exceptionalism about a market, alarm bells should ring. I
think there are a good good reasons to be cautious
and good reasons to perhaps diversify. Where whereas where we've
been adding is is particularly in Europe, so where evaluations
(21:23):
are now very very low. So so if you and
in good companies as well. One of the things that
I always pushed back on when people say, well, why
an't you buying in Europe is actually the good companies,
well diversified businesses that have good long term track records,
good returns on capital, they were always actually quite they
had a there was a rarity value within Europe and
(21:45):
there were actually quite highly value compared to their US
sometimes compared to the US peers. I'm going to think
of things like LVMH and laurel And and Heineken, et cetera.
And actually they're not anymore. That relationship has breaken down
and there are some attractive opportunities now in Europe.
Speaker 2 (22:02):
If I look at your top holding, they they didn't
budge much, do they. We'll come back to gold, but
gold is pretty much always your top holding and your
old gold.
Speaker 3 (22:12):
It's part of it's part of diversification.
Speaker 2 (22:15):
Yeah, we'll come back to that in a minute. But
the names at the top Unilever, Microsoft, Glasio, albab Visa, Nesti, Heineken.
I've seen all these at the top of your your
your list for years.
Speaker 3 (22:29):
Well, Heineken has only been there for the last eighteen months,
all right, not Heinegenn Then well they do move around, yeah,
but the top holdings don't move around a huge amount
because actually we like to have a low turnover. That
is the way that we've always done it. But we
like to collectively buy stocks from time to time as
they become available a very good prices. And Heineken is
(22:51):
a wonderful coming back to your European argument, Heineken is
a is a wonderful opportunity where we like to buy
companies that have been out of favor for a long time,
and Heineken is a good example of that. For the
last decade, it's gone nowhere. The share price, the valuation
is the lowest it's been in over a decade. So
that is where we have been allocating capital. It's those
sorts of places.
Speaker 2 (23:12):
And when you say valuation as the lowest it's been
for a decade.
Speaker 3 (23:14):
We were buying it in January at thirteen times earnings,
so it's pretty attractive we think from that level, and
that it might not go It actually had reasonable numbers
and the share price has bounced for the year to date.
But one swallow doesn't make a summer, so we will
wait and see what happens. We think from that sort
of valuation, the downside risk is actually pretty minimal and
the market just isn't interested. I mean, when we've made
(23:37):
good equity selection to your point about how the portfolio,
when we made good extually selections. So I think that
unially we were brought back in two thousand and four
in Microsoft, we brought in twenty ten. These were all
wonderful opportunities to buy these stocks when people were bored
of them and they were out of favor. They're not
bad businesses, but the market, for whatever reason, had lost interest.
(23:59):
And that's when things are interesting for us.
Speaker 2 (24:01):
Is there anything else you've bought over the last year.
Speaker 3 (24:04):
Rather embarrassingly, it has been a US stock, although it's
a very good example of markets ignoring a business which
is strong and robust and continues to deliver, but just
they lost interest. And that's a company called Versign, which
owns the dot com and dot net domain names based
in Virginia, and it got hugely popular during COVID. The
(24:28):
share price went up and the multiple went up to
forty times earnings. It was one we were watching. And
then last summer the multiple feiled evaluation fail to less
than twenty times earnings. This is a stock actually which
Barsher Hathaway owns a holding in. We brought back last
summer meaningful that's in our top ten and subsequent to
(24:48):
that the shares have done pretty well. And actually Warren
Buffett's been following us in which has been rather flattering.
I think it actually shows merin that there is a
dichotomy within we divergence between in the US market as well.
You know, there's clearly a very big dominance of the
large platform companies the apples of this world, which are
on thirty five times earnings, that are multi trillion dollar
(25:09):
companies which are effectively driving the index returns, but actually
scrap below the surface. Look at the unweighted index and
there are companies like vera sign out there that are
good businesses that are actually not as exceptionally priced as
some of the larger companies.
Speaker 2 (25:26):
Is there anything you've sold out of the portfolio?
Speaker 3 (25:28):
Recently reduced a couple of holdings that we reduced our
holding in Amex, which has been an exceptional performer, which
we've held for over a decade. And we've also reduced
our holding Procter and Gamble, which similarly conversely to Unilever,
has done very well over the last decade thanks to
Nelson Peltz coming in. So what Nelson Pelts has done
(25:50):
for Procter from Gamble, perhaps you can do for Unilever.
We will see, but we're actually rather optimistic about about that.
And the other holding that we sold last year with
bet to Dickinson, which is the world's largest syringe manufacturer
and medical divices business, which we also So that's another
US stock.
Speaker 2 (26:07):
Okay, Oh, as you know what I really want to
talk about is gold.
Speaker 3 (26:10):
Of course, you've taken a long time. I know.
Speaker 2 (26:13):
I've been holding myself back obviously as long as I've
known you. It's been the largest holding in the trust.
It's locked around between the nine and twelve percent pretty
much all the time, a bit lower, yes, yes, correct,
So tell us why in particular, tell us why you
hold it in the form of actual balls.
Speaker 3 (26:35):
Yeah, and why not miners or et cetera. We have
held miners in the past. We've held three miners and
one royalty in streaming business in portfolio. I'm pleased to
say that we've made money in a few of them
and lost money in one of them. We don't currently
hold any miners, and the reason for that is is
that it's actually much harder to make money in gold
(26:56):
mining than you think, even if the gold price is
rising by where an example, we had used to have
olding Franco Nevada, which was a streaming royalty business. We
pretty much doubled our money in it, but we sold
out of it in twenty twenty three because it's the
largest stream that it had was in Panama and the
Panamanian government and we saw this coming fortunately, so we
(27:19):
sold before this happened, but we could see the writing
on the wall. The Panama government decided to shut the mine,
and that led to Franco Nevada's revenues effectively falling by
almost quarter because if that mine wasn't producing gold, then
they weren't receiving their stream. It's a very messy business
gold mining. Actually, as you say, the gold mining sector
(27:42):
has been really dismal. I mean just on frank Nevada,
and the share price is around the price that we
sold it two years ago. The gold price is up
I think thirty percent, maybe a bit more, maybe thirty
five forty percent since we sold frank Nevada. Now, all
things being equal, Frank Devalda share price should be up
fifty to sixty percent with the gearing to the gold price.
(28:05):
Its fixed costs are actually very low because employs very
few people, so it's very operationally geared to the gold price.
And yet the share price is exactly the same as
it was when we sold it. So we have been
right to own billion instead of own miners, I'm afraid.
Speaker 2 (28:20):
Okay, So let's put gold miners to one side of
for the moment, and let's talk about gold itself. The
bullion that you hold. The price of gold is going up.
What do you think is going on in the gold market.
I mean, maybe you think it's just because they're about
to go and revalue everything in Fort Knox, But I
suspect you've got something more nuanced to tell us.
Speaker 3 (28:36):
Actually, interestingly, that hasn't really that all of that news
about Fort Knox and going to have an audit hasn't
actually moved the price particularly, So I think that's probably noise.
I think that what has happened in the last three
years we've seen the gold price in the last year
it was up thirty percent. Something has changed, and I
think the material change has been the marginal buyer. And
(28:57):
the marginal buyer has been not private individuals, not institutions.
It's actually been central banks. It's been Poland, Singapore, Czech Republic, Turkey, China, India.
They've all been buying. And why have they been buying.
I think it's all to do with de dollarization, and
(29:18):
it's all to do with the fact when do they
start buying. They've started buying very materially in the third
quarter of twenty twenty two, and they've been buying consistently
since then. What happened in twenty twenty two was the
invasion of Ukraine and the confiscation of Russian assets. Three
hundred and twenty billion dollars, most of which was held
in Europe was effectively frozen, and that has led to
(29:41):
governments around the world thinking, do we really want all
our reserve assets in dollars which they've been growing for
the last fifty years in dollars as the ultimate reserve currency.
And we've heard Scott Beston talk about this in terms
of gold being the reserve asset. And effectively, what these
(30:01):
central banks have been doing is they've just been diversifying.
Now when they look at their portfolio and their portfolio
is full of US dollar debt and other foreign currencies,
but predominantly US dollars, what else are they going to buy?
They're going to buy sterling? Well, I mean, sterling was
the reserve currency one hundred years ago. They're not going
to go back into sterling or go into euros, which
(30:22):
remains still somewhat of an unproven currency. And they're not
going to go into very small currencies like the Swiss
brank called the Norweg and kroner. So they've got less
choice and they're probably returning to the ultimate reserve asset,
the ultimate reserve currency, which is gold, and so that
is where the demand has come from. And I think
that the fact that private investors and institudent haven't been
(30:49):
buying means that this isn't some sort of rabid ballmarket,
a hugely spected ballmarket. We're not there yet. We have
trimmed our holding in the last year because of the
wise if we hadn't done that, shock horror. But if
we hadn't done that, stre holding would be up to
sort of sixteen percent. And as as somebody who's mindful
(31:09):
of value that one wants to decrease one's holding, wants
to manage one's risk. When an asset like that rises
as much as it has done, you want to do
it in the stock in the same way that you
want to do it in a a in another asset.
Speaker 2 (31:24):
But presumably you are expecting that central bank demand to
continue for a while. And you'd also expect in an
environment like those but sharply rising price for retailing versus
to start to come back in. I mean, yeah, we
all chase the rising price correct. So it would be
reasonable to expect gold to do relatively well over the
next few years.
Speaker 3 (31:43):
It would be reasonable to expect that, Yes, and the
other coming back to the earlier question about do you
expect central backs to continue to buy? Yes, I would
because if one looked back in the past, when they
start buying, they tend to buy for a very long
period of time. They didn't buy for a quarter or
two and then stop. You know, they buy for you know,
years and years. That is unlikely to suddenly suddenly stop.
(32:05):
And I with all the talk of geopolitics that's going
on and increased defense band et cetera, I don't think
that you know the reasons for them to actually start
buying and not like to reverse any time soon.
Speaker 2 (32:20):
Well, I know it's the best thing that you're also
a secret, very enthusiastic crypto buier, right No, No, okay,
so there's no dig So I'm too old.
Speaker 3 (32:33):
I'm too old for here are you?
Speaker 2 (32:36):
Why would you be too old for it? I mean,
if you thought it was a fabulous investment, you would
buy it regardless of your age.
Speaker 3 (32:43):
True, But I don't understand it. It's been explained to
me many, many, many times, and I prefer the concept
of an asset that's been around for six thousand years,
and it's been a store of value six thousand years,
rather than one's been a store of value also, hope,
I suppose the store of value for the last fifteen
And as we saw, Maren, we saw a one point
(33:04):
five billion dollar hack of a of a of a
platform of crypto, so it's not necessarily as a.
Speaker 2 (33:13):
Well, I suppose the thing is that if you hold
it on a platform, it's no safer than anything else
you hold on a platform. As soon as you go
from the middleman, all the benefits of it disappear.
Speaker 3 (33:21):
Yes, gold is no one's liability, and I suppose what
that demonstrates is actually perhaps it is crypto is somebody's liability.
But well, there's a.
Speaker 2 (33:34):
Lesson then the whole gold hold real gold. Is that fair?
Speaker 3 (33:37):
Okay?
Speaker 2 (33:38):
Excellent? That It's quite a nice place to end it.
So I think we will end it there were taking
up too much of your time, Thank you very much.
But before you go to ask you the question I
keep forgetting to ask people, which is, have you got
a book that you have read recently or are reading
that you think that our listeners should I would like
to talk.
Speaker 3 (33:55):
Yeah, So last summer I reread Jim Collins is good
to great. It's a fantastic book about how managements turn
businesses around and have the right effectively the right platform
to get businesses turning them around, but actually then get
getting them to grow. And there are some wonderful examples
(34:17):
of that. It was written in two thousand and three,
and yet the examples as relevant today as they were then.
Frankly so a very readable but in terms of having
that up your sleeve to ask questions of management and
see how businesses are evolving, that's a great book.
Speaker 2 (34:37):
Brilliant classian.
Speaker 3 (34:38):
Thanks so much pleasure.
Speaker 2 (34:43):
Thanks for listening to this week's Marin Talks Money. If
you like us a rate review and subscribe wherever you
listen to podcasts and keep sending questions or comments to
Merrorn Money at Bloomberg dot net. You would also follow
me in John on Twitter or x I'm at Marins
w and John is John Underscore Stepic. This episode was
hosted by me Merriorsum's That Web. It was produced by
Someasadi and Moroses and sound designed by Blake Maple's Special
(35:04):
thanks to Sebastian Lion
Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2 (00:17):
Welcome to Maren Talks Money, the podcast in which people
who know the markets explain the markets. I'm Marin seven
Stweb this week as weeakless Aboutian Lion, founder and Chief
investment Officer of Troy Asset Management. Troy managed the Personal
Assets Trust, one of the UK's most popular capital preservation trusts.
They take it over in two thousand and nine. Since then,
the trust is up two hundred and four percent. The
(00:39):
UK retail price Index over the same period is up
eighty five percent, so you have very comfortably beaten inflation
since then. You've also beaten inflation comfortably over ten years now.
The last year has been much better for personal assets.
If you've been holding shares in the trust, you're up
nine point three percent when the UK retail price index
is up only three point seven percent. So we talked
to about you. Now find out what next. We discussed
(01:02):
the investment trust industry as well. We discussed American exceptionalism
and why there are good reasons to be cautious, and
also of course crushly his outlook for gold. Sebastian, thank
you so much for joining us today. It is a huge.
Speaker 3 (01:14):
Pleasure to have you on pleasure, Maren.
Speaker 2 (01:16):
Right now, we've got an awful lot to talk about,
so let's start rattling through this. It's the first thing
I want to talk about with you because you are
such an expert on the investment trust industry and our
audience is very interested in this. The investment trust sector
as a whole has found ourself in a bit of
a pickle, as exemplified by the Whole saga. Anyone, by
the way, who doesn't know about the SABA saga, the
(01:37):
activist attack on the sector, please go back and listen
to some of the many, many podcasts we've done on this,
and in particular John's interview with Boas Weinstein, the CIO
of SABA, who talks a lot about what he's trying
to do and why approve or don't approve. I suspect
Sabastian doesn't approve, but we'll get to that. So a
little history of Sebastian. How did we find ourselves in
(01:57):
the pickle that we're in?
Speaker 3 (01:59):
Yes, has disrupted the sector, Marin and some good trusts,
and some trusts have been punished for effectively poor liquidity
and not defending discounts, and effectively this started. We have
to go back to your favorite time in history, the
financial crisis. We love that because in two thousand and nine,
interest rates were cut to zero and stayed there. Effectively
(02:21):
what people realized it took a few years, the Penninty troll,
probably until about twenty twelve or twenty thirteen, when central
banks started introducing forward guidance. Takes you right the way
back to that. Effectively, forward guidance was when central banks
said we're not going to raise rates for a long
period of time two years, three years, four years, and
so suddenly everybody realized that interest rates weren't going to
(02:42):
go back to where they'd come and the effectively bond
yels fell very sharply, went down to you know, low
single digit percentages, and everybody was definitely looking around who
needed income for income and so there was a huge
amount of issuance from investment trusts, alternatives and equities between
(03:03):
from twenty thirteen for a decade, so from the decade
up until twenty twenty two, there was twenty five billion
pounds of issuance. Mainly that's primary issuance, that's either investment
trust issuing new shares to the existing investment trusts issuing
new shares to their shareholders to new shareholders, or it
was actually IPOs so new investment trust launching.
Speaker 2 (03:26):
It's the Bastian time. I'm going to interrupt you briefly
just to ask you to explain to listeners. You aren't
completely affair with this sector. Why if you need income
do you see new investment trust issuance?
Speaker 3 (03:37):
Because effectively, these investment trusts were offering a higher yield.
So they were offering that four to five percent yield
which everybody was looking around for in a zero interest
rate environment. In many ways they were investing in high
yield equities. They were investing in alternatives like infrastructure, those
sort of areas where there is on balance highild, also
(03:58):
private credit ways. And the other thing is is that
they were just looking for alternatives. They were looking for
alternative assets which were going to generate a return because
they weren't having a return from cash. That was the
key difference. And the problem is is that the primary
issuances are very easy to get in. It's not quite
so easy to get out, as we've discovered. So the
(04:18):
secondary market, ie, this is the buying and selling of
the investment trust shares is a lot more tight and
it's a lot less easy than the primary market, ie,
if you want to buy new shares, And effectively we
had record issuance for a decade, and then what happened.
What happened in twenty twenty two, Inflation went up, interest
(04:39):
rates went up to five percent, and suddenly shareholders didn't
need that yield any longer because they could get it
from guilts or they could get it from cash in
the bank, and there wasn't any liquidity within the investment
trust sector to effectively allow investors to move their money
and effectively liquidate those shareholdings that they'd they'd made during
(05:01):
that zero interest rates environment. So suddenly we've gone from
a period of lack of liquidity. And really the reason
why Saba was able to buy the shares that he
bought in twenty twenty three and twenty twenty four was
because there were no buyers. There were no buyers and
plenty of sellers, and the problem was that the boards
and the managers didn't buy back enough stock, so the
(05:22):
discounts just widened and that allowed Saba to come in
and buy the stakes that he did. And I think
that coming to SABA. I think that obviously, as you
within your podcast with John have reported on the votes
of the seven trusts which he was attacking effectively were
one and were one convincingly. That's the first sort of
(05:44):
battle won by the trust sector. But he's not going away.
He's got these huge stakes of twenty five thirty percent,
and he will probably find others to invest in and
perhaps vote along with him. But I'm actually optimistic about
the trust sector. And this might sound a bit strange
talking as we are today with the trust sector having
been under threats, but investment trust's got one hundred and
(06:05):
fifty year history. The one thing they have managed to
do is adapt. I think we will see over the
next five years a very material change. We will see
huge mergers, will need to see improve liquidity. That is
the key. That is the thing that's been missing, and
that is the thing that the trust sector needs to rediscover.
And there needs to be a concerted effort on the
part of boards and on the part of the managers
(06:26):
as well to put shareholders first to reduce those discounts.
So how do we do that.
Speaker 2 (06:32):
I'm going to interrupt against Sorry, it's about you. Yeah,
I take all that you're saying. But the answer from
much of the industry to that is, well, hang on
a tick. One of these spectacular things about the investment
trust industry, and one of the things that many think
has driven the very long term out performance of the industry,
is the idea that the capital inside each trust is permanent.
(06:52):
So you don't have to constantly, as a manager buy
and sell the assets in your botfolio to meet changing
the command for the shares. You just get to focus
on running the money and that's it. Now, if you
move into an environment where you constantly have to issue
by back, issue by back, issued by back, you take
away that advantage, and perhaps the whole thing becomes pointless.
(07:15):
You might as well just getting over an.
Speaker 3 (07:16):
End of that. I'm not sure about that. I think
the world has changed. I think that's a frankly a
bit of a naive view. I'm not sure that permanent
capital really exists anymore. The evidence is beginning to stack
up that that's not necessarily the modus operandi. Now, there
are some parts of the liquid market, particularly in alternatives renewables,
(07:36):
that sort of thing where there is a liquidity private equity,
and that has to be permanent capital because that's the
nature of the beast, and they will probably have to
offer liquidity on an annual basis or on a three
year basis, or whatever it might be. But I think
the whole idea of absolutely permanent capital forever. I think
(07:57):
that that the sector is going to struggle with that argument.
Speaker 2 (08:00):
But if you don't have permanent capital, you just have
a listed vehicle which you know the manages to buy
and sell them, really are just an active ETF.
Speaker 3 (08:10):
Ah Well, I think that the stock market doesn't need
active ETFs because they've got investment trusts.
Speaker 2 (08:15):
Well, wouldn't act active ets be cheaper?
Speaker 3 (08:18):
They might be marginally cheaper, not necessarily, not necessarily, I
don't think so. Not necessarily. I mean an active manager
has an active fee, so I mean it wouldn't necessarily
it might be marginal cheaper. I think the future of trust,
certainly equity investment trust could be could be an active ETF.
And I don't think necessarily you need an active ETF
if you've got investment trusts that are liquid and large
(08:39):
and that are easily traded. Active ETFs in the US
have boomed, but they've boomed for a particular reason, which
has actually got a niche reason, which is tax mutual
funds are less attractive from a tax point of view
than than active ETFs. That's why the active ETF market
has grown. I don't think necessarily we need a big
active BTF mark in the UK because the tax benefits
(09:02):
are different in the UK. You get all the tax
benefits by investing in an investment trust that you would
in an active ETF. There's no difference. There is a
view out there that we need, you know, activetfs, the
new new products. We need. This. Actually, the way that
investment trust can adapt and ultimately grow in the long
run is perhaps to challenge the active ETF idea and
(09:24):
actually be an active ETF themselves.
Speaker 2 (09:26):
Okay, well, let's go back to how you think discounts
should be controlled so that we get to this point
where we're effectively an active ETF without being an activitia.
Speaker 3 (09:36):
So, Marin, as you well know, for the last fifteen years,
since I became investment advisor and latterly investment manager at
Personal Assets Trust, I've been howling into the void telling
investment the investment trust sector and investment trust boards and
managers that liquid portfolios, equity portfolios multi asset portfolios, et
(09:58):
cetera should put in place a discount control mechanism. Personal
Assets have had a discount control mechanism in place for
twenty five years. It is never traded at a discount
of more than two percent, so it can be done.
And by the way, if you're not trading at a
white discount, saber is interested. Arbitrageurs do not come on
your shelder register if you haven't got a discount. So
(10:21):
it is a way of keeping the arbitrages at bay.
And how you do this is you issue if you
move to a premium of more than two percent, and
you buy back if you go to a discount of
more than two percent. And that is how you do
it on a day to day or weekly basis. And
there are days where you buy back your stock if
the discount goes beyond one and a half two percent,
(10:42):
and if the share traded a premium, you can actually
issue and grow the trust. And we succeeded in growing
Personal afthlets for many years. Actually in this more recent
period we have been shrinking. That's fine, and the board
and the manager myself are very happy with the idea
of the trust shrinking. Over a period. We've brought back
about two hundred million pounds worth of stock in the
(11:03):
last two two and a half years since it was
probably since March twenty twenty three. Yeah, and we actually
issued chairs a week ago, so we're not just buying back,
we are also issuing as well.
Speaker 2 (11:18):
Now, I suppose the answer to that again would be,
it's all right for you, Sebastian personal assts. There's a
massive trust couple of billion. It doesn't matter if you
shrink a little. But there are a lot of trusts
out there in the market that are knocking around two
hundred million, three hundred million, some even less if demand
for their shares isn't out there either in the wrong
(11:38):
asset at the wrong time. Even though you know, maybe
let's let's talk about perhaps you know japan trusts before
you Pan started performing again, these weren't things that anyone
was going to go to for a while. But when
the market starts moving again, they're incredibly valuable vehicles to
have out there, right, But if they were to buy
back and buy back and buy back and by back,
they're going to disappear, And certainly the wealth man isn't
(12:00):
going to buy them because they're just too small. So
if you start down that road, you're going to lose
an awful lot of the investment trust market.
Speaker 3 (12:07):
I think there are too many trusts and I think
there does need to be consolidation. And there has been
consolidation merin you know you've seen I think there were
nine mergers last year, and I think that is what
we need. We need to see some larger trust I
go out and I see wealth managers very regularly. The
one thing they say to us is, you know, we
need more liquidity within the investment trust sector. Yeah, so
(12:28):
that is the future that you know, we've probably got.
I don't know how many Japanese trusts there are out there,
but there probably needs to be two or three, not
ten or whatever the number is, and they need to
be of greater scale. They need to be five hundred
million pound plus. We have another trust at Troy, the
STS Global Income Trust, which we do have a DCM.
We issued stock a few years ago. We have been
(12:48):
buying back, but we have a hard DCM there, so
it can be done even on a three hundred million
pound trust. I think that is the way to do it.
If we didn't have the DCM on STS Global income,
then probably the chairs would have gone out to a
discount and an arbitrager would have come on the board.
The problem is the board would be focusing on the
arbitrageur and the arbitrager's needs and not the wider Shareholderbate.
(13:11):
This is the problem with sabars. It's actually becomes a distraction,
becomes a huge distraction to the board and the manager,
and it's avoidable.
Speaker 2 (13:19):
Okay, DCM. By the way, anyone listening discount control mechanism,
I'm not sure if we said that earlier, just so
you know, right, So the message there Sevestia, and the
message you have for the rest of the sector is
be more like you.
Speaker 3 (13:30):
Well, be more like us. I mean, there are others
who have done this. There are four or five trusts
out there who've put in hard dcms over the last
five or ten years. We're not the only ones at all.
But I think if you want to solve this problem,
I think that is the future. And certainly for I
think there is this demand for larger trusts, more liquid trusts.
(13:50):
Investors want certainty. The one thing that they don't want
is to be able to think, am I goingness if
I buy this trust. Is it going to go out
to a twenty percent discount over the next year. They
want so, and they want liquidity, and the trust sector
needs to offer that.
Speaker 2 (14:04):
Okay, last question on this, what happens to the very
liquid renewables, trusts, the alternative renewable and equity, all these
things that are training at whopping great discounts. That liquidity
is not coming back because the underlying assets are not liquid.
You can't just say, oh, well, no one really fancies
distrust anymore, and then not much demand arounds orders I'll
pass on some of those private equity assets that I've
(14:25):
grotesquely overvalued and nobody wants.
Speaker 3 (14:27):
Look, there is a huge oversupply in alternatives. I mean,
seventy five percent of that issuance from twenty twenty two,
that twenty five billion was in alts. There are liquid
as you say, and their question is is how realizable
are those assets and particularly are those discounts real discounts
or how strong is the NAV And that's that's debatable.
(14:50):
I don't need the answer that question, but I think
the answer to your question in terms of what happens
to those is that and we've seen this with KKR
bidding for one that will be the solution effectively will
need to be consolidation in that area, and they will ultimately,
over a period of time, and it will take time
because of the nature of the assets, have to return
the cash to shareholders. But that's a much longer game.
Speaker 2 (15:12):
Okay, Well, let's put all that to this side. Let's
go on to the environment as a whole. Now you're
set up or the idea of personal assets trust and
try in generalist is to protect capital in every environment. Right,
Just give me an overview of where you see the
macro environment right now?
Speaker 3 (15:28):
What's changed?
Speaker 2 (15:29):
Where are we and we're seeing at the moment, John
and I've been talking about this, this momentum shift in
markets away from the US towards Europe exactly. Obviously, there's
lots of confusion around where inflation is, where economies are going, etc.
What does it look like to you in the round.
Speaker 3 (15:45):
There's one thing that's been consistent, and there's one particular
thing I think that's changed, and it's actually changed in
the last really month or two. So the thing that's
been consistent and we've been consistent on and when I
last spoke to you two years ago, I don't think
has changed is that we are in a rising environments.
I think everything changed during COVID. During COVID, we ended
a forty year bull market in bonds. Bond yields bottomed,
(16:10):
US treasuries and guilts yielded about zero point five percent
tenure guilts back in the summer of twenty twenty. Ever
since then, yields have been rising. And the reason for
that is that we move from an environment of purely
monetary stimulus ie zero interest rates and QE, to a
(16:30):
world of fiscal where governments began spending money on furloughs
and on defense as well. What we've seen within that environment,
and to some extent, Ukraine and the invasion of Ukraine
assisted with this, but nevertheless it was probably going to
happen anyway, is that inflation rose and then has become stickier,
(16:52):
and as a results, rates have remained higher than people
have expected. So there was an expectation that with inflation
spiking as it did in twenty twenty two in twenty
twenty three, that it would come flattering back down and
then everything we've refound to normal and interest rates would
go back down transient, transient exactly, and that hasn't transient,
hasn't happened, and inflation has remained stickier. You know, we
(17:13):
saw they're in the January RPI numbers three percent, which
were above expectations. We saw them in the US again
three percent above expectations. And they're actually talking about inflation
being above well above target for this year so effectively,
whereas in the last decade, in the twenty tens, inflation
was below target and central banks found it hard to
(17:36):
get it up to that two percent target. This decade,
actually the opposite is the case inflation. We've struggled to
get it down to target, and it's remained stickier than expected.
And that means that probably interest rates are likely to
remain higher as well, or rise rather than fall. Now,
what that means for markets is that whereas in the
(17:57):
past bonds and equities cheap by jow been a wonderful investment,
they've sort of been a self hedge for one another.
When growth accelerated, equities did well, when growth decelerated, bonds
did well. That hasn't worked and clearly didn't work at all.
In twenty twenty two, it was very very painful for
balanced funds that had both bonds and equities, and so
(18:19):
we have been more cautious about that concept, and we've
owned a mixture of assets. Particularly we've owned index linked
and shorter dated tips their Treasury inflation protected security, so
US index linked if you like. They have done much
better over the last five years than conventional bonds because
you've got that inflation coming through, and there are real
(18:40):
yields of around two percent, so you get two percent
plus whatever inflation is. So they're up about twenty five
percent in the last five years, whereas fixed in comes
up only about five percent. In the knowledge that inflation's
likely to be stickier and likely to hang around for longer,
we have been think considering inflation as the issue, and
(19:02):
clearly that's not great for fixed income, it's not great
for bonds. So we've been cautious about bonds and particularly
taking duration risk I investing in longer bonds. But the
thing coming back to, the thing that's changed in the
last couple of months is that I think that Marin,
we're in the reverse of what happened since nineteen eighty nine.
(19:24):
I started my career in October nineteen eighty nine. I
know you were still at school back then.
Speaker 2 (19:29):
Was definitely.
Speaker 3 (19:30):
But in November nineteen eighty nine, a month after I
started my career, the Berlin Wall came down, and ever
since then we've been in a sort of guns into
plowshares disinflationary environment, and that is now very clearly reversing
with a labor prime minister standing up and talking about
(19:51):
big additions to defend spending. So I think in that
respect the world has also changed, and that means that
is also incrementally inflationary. That will be defense bending means,
I'm afraid, means higher inflation. You look back in history,
wars are inflationary and defense bending is inflationary. So again
that adds to that uncertainty and also adds to that
(20:16):
those inflationary pressures. Now, finally, you talked about markets and
about the change in US leadership, and one of the
things that we've discussed a lot last year and the
year before really, but particularly last year, was this concept
of American exceptionalism. Yeah. I everybody was pouring money into
(20:37):
the US and no one was investing anywhere else. We've
been investing just a little bit less in the US
and a little bit more in the UK and Europe.
More recently, I think that the problem with American exceptionism,
there's no doubt that you know, one only has to
look at the numbers, one only has to look at
the companies. And I see this. I hear fund managers
talk about this, and there's a very cogent and coherent argument.
(21:01):
But it's now well known. It's now it's in the price.
Then I think that when you when you hear the
words exceptionalism about a market, alarm bells should ring. I
think there are a good good reasons to be cautious
and good reasons to perhaps diversify. Where whereas where we've
been adding is is particularly in Europe, so where evaluations
(21:23):
are now very very low. So so if you and
in good companies as well. One of the things that
I always pushed back on when people say, well, why
an't you buying in Europe is actually the good companies,
well diversified businesses that have good long term track records,
good returns on capital, they were always actually quite they
had a there was a rarity value within Europe and
(21:45):
there were actually quite highly value compared to their US
sometimes compared to the US peers. I'm going to think
of things like LVMH and laurel And and Heineken, et cetera.
And actually they're not anymore. That relationship has breaken down
and there are some attractive opportunities now in Europe.
Speaker 2 (22:02):
If I look at your top holding, they they didn't
budge much, do they. We'll come back to gold, but
gold is pretty much always your top holding and your
old gold.
Speaker 3 (22:12):
It's part of it's part of diversification.
Speaker 2 (22:15):
Yeah, we'll come back to that in a minute. But
the names at the top Unilever, Microsoft, Glasio, albab Visa, Nesti, Heineken.
I've seen all these at the top of your your
your list for years.
Speaker 3 (22:29):
Well, Heineken has only been there for the last eighteen months,
all right, not Heinegenn Then well they do move around, yeah,
but the top holdings don't move around a huge amount
because actually we like to have a low turnover. That
is the way that we've always done it. But we
like to collectively buy stocks from time to time as
they become available a very good prices. And Heineken is
(22:51):
a wonderful coming back to your European argument, Heineken is
a is a wonderful opportunity where we like to buy
companies that have been out of favor for a long time,
and Heineken is a good example of that. For the
last decade, it's gone nowhere. The share price, the valuation
is the lowest it's been in over a decade. So
that is where we have been allocating capital. It's those
sorts of places.
Speaker 2 (23:12):
And when you say valuation as the lowest it's been
for a decade.
Speaker 3 (23:14):
We were buying it in January at thirteen times earnings,
so it's pretty attractive we think from that level, and
that it might not go It actually had reasonable numbers
and the share price has bounced for the year to date.
But one swallow doesn't make a summer, so we will
wait and see what happens. We think from that sort
of valuation, the downside risk is actually pretty minimal and
the market just isn't interested. I mean, when we've made
(23:37):
good equity selection to your point about how the portfolio,
when we made good extually selections. So I think that
unially we were brought back in two thousand and four
in Microsoft, we brought in twenty ten. These were all
wonderful opportunities to buy these stocks when people were bored
of them and they were out of favor. They're not
bad businesses, but the market, for whatever reason, had lost interest.
(23:59):
And that's when things are interesting for us.
Speaker 2 (24:01):
Is there anything else you've bought over the last year.
Speaker 3 (24:04):
Rather embarrassingly, it has been a US stock, although it's
a very good example of markets ignoring a business which
is strong and robust and continues to deliver, but just
they lost interest. And that's a company called Versign, which
owns the dot com and dot net domain names based
in Virginia, and it got hugely popular during COVID. The
(24:28):
share price went up and the multiple went up to
forty times earnings. It was one we were watching. And
then last summer the multiple feiled evaluation fail to less
than twenty times earnings. This is a stock actually which
Barsher Hathaway owns a holding in. We brought back last
summer meaningful that's in our top ten and subsequent to
(24:48):
that the shares have done pretty well. And actually Warren
Buffett's been following us in which has been rather flattering.
I think it actually shows merin that there is a
dichotomy within we divergence between in the US market as well.
You know, there's clearly a very big dominance of the
large platform companies the apples of this world, which are
on thirty five times earnings, that are multi trillion dollar
(25:09):
companies which are effectively driving the index returns, but actually
scrap below the surface. Look at the unweighted index and
there are companies like vera sign out there that are
good businesses that are actually not as exceptionally priced as
some of the larger companies.
Speaker 2 (25:26):
Is there anything you've sold out of the portfolio?
Speaker 3 (25:28):
Recently reduced a couple of holdings that we reduced our
holding in Amex, which has been an exceptional performer, which
we've held for over a decade. And we've also reduced
our holding Procter and Gamble, which similarly conversely to Unilever,
has done very well over the last decade thanks to
Nelson Peltz coming in. So what Nelson Pelts has done
(25:50):
for Procter from Gamble, perhaps you can do for Unilever.
We will see, but we're actually rather optimistic about about that.
And the other holding that we sold last year with
bet to Dickinson, which is the world's largest syringe manufacturer
and medical divices business, which we also So that's another
US stock.
Speaker 2 (26:07):
Okay, Oh, as you know what I really want to
talk about is gold.
Speaker 3 (26:10):
Of course, you've taken a long time. I know.
Speaker 2 (26:13):
I've been holding myself back obviously as long as I've
known you. It's been the largest holding in the trust.
It's locked around between the nine and twelve percent pretty
much all the time, a bit lower, yes, yes, correct,
So tell us why in particular, tell us why you
hold it in the form of actual balls.
Speaker 3 (26:35):
Yeah, and why not miners or et cetera. We have
held miners in the past. We've held three miners and
one royalty in streaming business in portfolio. I'm pleased to
say that we've made money in a few of them
and lost money in one of them. We don't currently
hold any miners, and the reason for that is is
that it's actually much harder to make money in gold
(26:56):
mining than you think, even if the gold price is
rising by where an example, we had used to have
olding Franco Nevada, which was a streaming royalty business. We
pretty much doubled our money in it, but we sold
out of it in twenty twenty three because it's the
largest stream that it had was in Panama and the
Panamanian government and we saw this coming fortunately, so we
(27:19):
sold before this happened, but we could see the writing
on the wall. The Panama government decided to shut the mine,
and that led to Franco Nevada's revenues effectively falling by
almost quarter because if that mine wasn't producing gold, then
they weren't receiving their stream. It's a very messy business
gold mining. Actually, as you say, the gold mining sector
(27:42):
has been really dismal. I mean just on frank Nevada,
and the share price is around the price that we
sold it two years ago. The gold price is up
I think thirty percent, maybe a bit more, maybe thirty
five forty percent since we sold frank Nevada. Now, all
things being equal, Frank Devalda share price should be up
fifty to sixty percent with the gearing to the gold price.
(28:05):
Its fixed costs are actually very low because employs very
few people, so it's very operationally geared to the gold price.
And yet the share price is exactly the same as
it was when we sold it. So we have been
right to own billion instead of own miners, I'm afraid.
Speaker 2 (28:20):
Okay, So let's put gold miners to one side of
for the moment, and let's talk about gold itself. The
bullion that you hold. The price of gold is going up.
What do you think is going on in the gold market.
I mean, maybe you think it's just because they're about
to go and revalue everything in Fort Knox, But I
suspect you've got something more nuanced to tell us.
Speaker 3 (28:36):
Actually, interestingly, that hasn't really that all of that news
about Fort Knox and going to have an audit hasn't
actually moved the price particularly, So I think that's probably noise.
I think that what has happened in the last three
years we've seen the gold price in the last year
it was up thirty percent. Something has changed, and I
think the material change has been the marginal buyer. And
(28:57):
the marginal buyer has been not private individuals, not institutions.
It's actually been central banks. It's been Poland, Singapore, Czech Republic, Turkey, China, India.
They've all been buying. And why have they been buying.
I think it's all to do with de dollarization, and
(29:18):
it's all to do with the fact when do they
start buying. They've started buying very materially in the third
quarter of twenty twenty two, and they've been buying consistently
since then. What happened in twenty twenty two was the
invasion of Ukraine and the confiscation of Russian assets. Three
hundred and twenty billion dollars, most of which was held
in Europe was effectively frozen, and that has led to
(29:41):
governments around the world thinking, do we really want all
our reserve assets in dollars which they've been growing for
the last fifty years in dollars as the ultimate reserve currency.
And we've heard Scott Beston talk about this in terms
of gold being the reserve asset. And effectively, what these
(30:01):
central banks have been doing is they've just been diversifying.
Now when they look at their portfolio and their portfolio
is full of US dollar debt and other foreign currencies,
but predominantly US dollars, what else are they going to buy?
They're going to buy sterling? Well, I mean, sterling was
the reserve currency one hundred years ago. They're not going
to go back into sterling or go into euros, which
(30:22):
remains still somewhat of an unproven currency. And they're not
going to go into very small currencies like the Swiss
brank called the Norweg and kroner. So they've got less
choice and they're probably returning to the ultimate reserve asset,
the ultimate reserve currency, which is gold, and so that
is where the demand has come from. And I think
that the fact that private investors and institudent haven't been
(30:49):
buying means that this isn't some sort of rabid ballmarket,
a hugely spected ballmarket. We're not there yet. We have
trimmed our holding in the last year because of the
wise if we hadn't done that, shock horror. But if
we hadn't done that, stre holding would be up to
sort of sixteen percent. And as as somebody who's mindful
(31:09):
of value that one wants to decrease one's holding, wants
to manage one's risk. When an asset like that rises
as much as it has done, you want to do
it in the stock in the same way that you
want to do it in a a in another asset.
Speaker 2 (31:24):
But presumably you are expecting that central bank demand to
continue for a while. And you'd also expect in an
environment like those but sharply rising price for retailing versus
to start to come back in. I mean, yeah, we
all chase the rising price correct. So it would be
reasonable to expect gold to do relatively well over the
next few years.
Speaker 3 (31:43):
It would be reasonable to expect that, Yes, and the
other coming back to the earlier question about do you
expect central backs to continue to buy? Yes, I would
because if one looked back in the past, when they
start buying, they tend to buy for a very long
period of time. They didn't buy for a quarter or
two and then stop. You know, they buy for you know,
years and years. That is unlikely to suddenly suddenly stop.
(32:05):
And I with all the talk of geopolitics that's going
on and increased defense band et cetera, I don't think
that you know the reasons for them to actually start
buying and not like to reverse any time soon.
Speaker 2 (32:20):
Well, I know it's the best thing that you're also
a secret, very enthusiastic crypto buier, right No, No, okay,
so there's no dig So I'm too old.
Speaker 3 (32:33):
I'm too old for here are you?
Speaker 2 (32:36):
Why would you be too old for it? I mean,
if you thought it was a fabulous investment, you would
buy it regardless of your age.
Speaker 3 (32:43):
True, But I don't understand it. It's been explained to
me many, many, many times, and I prefer the concept
of an asset that's been around for six thousand years,
and it's been a store of value six thousand years,
rather than one's been a store of value also, hope,
I suppose the store of value for the last fifteen
And as we saw, Maren, we saw a one point
(33:04):
five billion dollar hack of a of a of a
platform of crypto, so it's not necessarily as a.
Speaker 2 (33:13):
Well, I suppose the thing is that if you hold
it on a platform, it's no safer than anything else
you hold on a platform. As soon as you go
from the middleman, all the benefits of it disappear.
Speaker 3 (33:21):
Yes, gold is no one's liability, and I suppose what
that demonstrates is actually perhaps it is crypto is somebody's liability.
But well, there's a.
Speaker 2 (33:34):
Lesson then the whole gold hold real gold. Is that fair?
Speaker 3 (33:37):
Okay?
Speaker 2 (33:38):
Excellent? That It's quite a nice place to end it.
So I think we will end it there were taking
up too much of your time, Thank you very much.
But before you go to ask you the question I
keep forgetting to ask people, which is, have you got
a book that you have read recently or are reading
that you think that our listeners should I would like
to talk.
Speaker 3 (33:55):
Yeah, So last summer I reread Jim Collins is good
to great. It's a fantastic book about how managements turn
businesses around and have the right effectively the right platform
to get businesses turning them around, but actually then get
getting them to grow. And there are some wonderful examples
(34:17):
of that. It was written in two thousand and three,
and yet the examples as relevant today as they were then.
Frankly so a very readable but in terms of having
that up your sleeve to ask questions of management and
see how businesses are evolving, that's a great book.
Speaker 2 (34:37):
Brilliant classian.
Speaker 3 (34:38):
Thanks so much pleasure.
Speaker 2 (34:43):
Thanks for listening to this week's Marin Talks Money. If
you like us a rate review and subscribe wherever you
listen to podcasts and keep sending questions or comments to
Merrorn Money at Bloomberg dot net. You would also follow
me in John on Twitter or x I'm at Marins
w and John is John Underscore Stepic. This episode was
hosted by me Merriorsum's That Web. It was produced by
Someasadi and Moroses and sound designed by Blake Maple's Special
(35:04):
thanks to Sebastian Lion
Host
Merryn Somerset Webb
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