January 6, 2023 • 37 mins
Smaller UK companies were among the worst performing assets in the world last year. That made 2022 a tough time for small cap fund managers. But small caps very rarely see two down years in a row, says Anna Macdonald, fund manager at Amati. She joins host Merryn Somerset Webb on this week’s Merryn Talks Money. Macdonald shares her suggestions for the stocks to buy in this kind of environment—think trains, hospital software and specialty lenders.
Plus, senior reporter John Stepek joins to discuss Rishi Sunak's five pledges for British voters to hold him to.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
John, Welcome back, Happy New Year. Happy New Year to
you too. Did you have a nice Christmas? I told
you not to ask me that my and my family
is singlehandedly responsible for NHS waiting list at the moment,
as listeners can probably hear in my voice, let's just
start right in on NHS. But just go no, no,
(00:22):
let's not Parkard. Let's go straight in there on the NHS.
Now we are talking just after Rushie Soona came out
with his five promises or as we shall swallom in future,
five vague and pointless promises. And when she told us
that he would promise to do some of the things
that I think personally as a voter or and taxpayer,
I kind of assumed he was going to do anyway, Yes,
(00:44):
the sort of thing you can we take for granted.
It's like coming back and seeing I think, I think
my eam is to have a functional society again. I mean,
I think you know that's that's you know, that's that's
not you. You're not going to sit in the bar
very high us. You really not have was it the
the tax takes we're appatuning the GDP though it's I
(01:05):
think under the current forecast it heads up to nearly
thirty percent, which I'm not sure it will ever reach.
I mean, we've talked about this before, John, but we've
looked at the percentage of GDP that each country can
peek out at as a tax take, right, and the
UK very rarely gets to forty and we don't like it.
We won't pay that much as a society. So as
(01:27):
we start hitting forty percent, we start fiddling around with
our taxes, we start working less, We stop you know,
shifting shifting our income around the place, and you begin
to see the tax takes and peek out in the
high thirties. And other countries will go higher, you know,
the Scandinavian countries they're like, okay, we'll be at and
some of the other European countries will do it. But
in the UK it's almost impossible to get the tax
(01:48):
take up to the high thirties and keep it there
lettle and fourteen percent because we change our behavior and
it's just where they are. You can want it to
be different. I know a lot of people want it
to be different, but you can't make it different. Now speaking,
if you want to be different but can't make difference,
let's go back to Richie's and he's rather vague and
pointless inflation promise. He would like to promise us that
he's going to bring inflation down for all, I don't know,
ten eleven percent. What do you think he's after here?
(02:10):
Four or five something like that. Now that's the absolute
minimum minimum you could expect for the kind of thing
a prime minister would want to do in a country
like the UK. Right, But can you do it? Has
he got anything to do with him at all? No?
I mean it's probably his easiest promise to keep, because
either it's going to happen or it's not. And mathematically
(02:31):
it probably well go down here. I mean, even the
kind of beerish forecast was writing six percent is the
law next year, and lots of people are seeing White's
laud than that, so you'll probably had to be yeah,
it's gonna do him. It's barely getting to do with
the Bank of England. So as a promise, this is
the same as Riscie soon Make standing up and saying
I promise you that I will make sure that spring
arrives the Green Shirts, okay, and it's got nothing through
(02:56):
the Bank of England either. We've discussed this before. They
have ideas their powers that don't really exist. They can
raise interest rates as much as they like, but if
the old price went to two hundred dollars, wouldn't make
any different. Not for it's going to No probably not
not this year. Is that another one of your forecasts? No? No, no, no,
(03:17):
I'm not getting checked into that again. That's it. I've
still got to milk whose place one? For all this was? There?
You go prooflesseners. John learns I can trick and once
I can't trick him twice. Right, I have got our
guest coming up, And later in the podcast we do
talk about house prices and Anna McDonald fairly speaks as
though it's entirely reasonable to expect house prices to full
(03:39):
percent over the next year and for the banks to
be ready for that and prepared for that. So you know,
it's no longer an out their idea John, that house
prices will full thirty percent in normoral terms, So you
might have to up that forecast or down that forecast
depense you look at it, you want to get fifty.
It's not good. It's kind of like, you know, come
out with us, and suddenly everyone's copying me, I don't
(04:00):
I go higher or lower. I just want to like
point out that, yeah, you know, twenty normal terms just
takes us back to pandemic, early pandemic. But also it
was just I was fact I was rereading that paper
from the X Bank England chap Um from two thousand
nineteen where he talks about how real yields are the
important factor, and it's actually a line in there, but
(04:22):
he says that if real yields go from negative two percent,
which is where they were in two thousand, up to
zero percent, then house prices would follow by about thirty
one percent based on their model. Now real yields have
now going to zero percent and it looks like they're
just gonna stay there. Um. I mean I did talk
to David Miles briefly and he didn't go that far
(04:44):
this time around, but it's interesting just to know that.
So yes, it's it's quite a I think even if
the UK economy does better than lots of people expect
this year, and I actually think it will, Um, they
kind of we bust of trade and updates we've had
so far and make it look as if actually consumers
actually kept spending at Christmas, which makes sense because everyone
(05:05):
still get jobs, etcetera, etcetera. But even we're looking at
a wholesale replacing of asset markets. So the expensive icets
have got to come down because interest strates have gone up.
They starts straightforward, and UK properly falls into the category
of expensive usets. Thankfully, as I think you probably talk
about behind, UK shields don't fall into that category. They're
(05:29):
actually can cheap icets at the moment, so the interest
rate thing shouldn't actually cause them any major problems. It's interesting,
isn't it. I Mean, I agree with you that the
UK economy will probably do better than most people expect
this year, but that's largely because everyone expects it to
do it so incredibly badly, and the retail members etcetera.
Really haven't been that bad and I don't see the
major issues with consumer confidence yet. But one of the
(05:49):
things that you and I have written about over the
years and over and over and over is about how
GDP growth or decline is in no way correlated with
asset market returns. As a market returns are correlated to
interest rates, and they're correlated to the prices at which
they begin every year. Right, So the fact that the
UK economy, let's say it does do appallingly this year.
(06:10):
Let's see we say horrible performance from the UK economy,
It does not follow in any way that UK asset
prices would do badly as a result. I'm separating out
house prices here because the plumber goes an employment goes
to terms and lot of course house prices will full
further than you'd expect, But equities et cetera are not
correlated to the performance of the UK economy. That could
(06:31):
correlated to price and if they're already cheap than how
the economy performs from here as almost by the buyer. Right. Yeah,
and also yeah, there's a lot of space for sentiment
to change. Still just on the UK generally, we're still
the hardest hip when it comes to outflows from funds
for example, um and if you look at the Bank
(06:51):
of America, quibal find major end excepting minds, the UK
is down there is the most heated market. So you know,
I just think that it's why it loose can trade
in trades. That still has a massive amount of room
tom note whale. And that's that's despite the fact that
was basically the best performing developed market last year. Well
(07:12):
this could be this could be our year. Then you know,
the money always goes to things that are going up,
not things that are going down, So maybe that'll suddenly
appear in the UK this year. Anyway, John, it is
good to be back. Good to have you back. And
do you know, I don't know how to finish this
somewhere because I can't remember what happened next. Hello, and
(07:34):
welcome to Marin Talks Money, the podcast in which people
who know the markets explain the markets. I'm there in
some subweb with me. This week. Our guest is Anna McDonald,
fund manager at a Muti Global, specializing in UK equities
and in particular in smaller companies. Anna, welcome, Thank you
so much for joining us, Thank you for having me. Now, Anna,
(07:57):
tell me a little bit about last year, right, mean,
obviously that is a tough year for everybody working in
the market as well, not everybody. And I guess if
you held nothing but oil, gas and value stock, you
probably doing okay last year. But the majority of people
going into twenty two did not have that kind of portfolio.
How did it work out for you? Look, there's not
much more that I can say to add to that.
(08:19):
Apart from I think in the UK, as you say,
with energy stocks and some value names which composed most
of the foot see one hundred, which meant that it
had a very small positive outturn. It's been a really
pretty miserable year. We've had the aim all share of
felled by We've got the foot see two fifty down
(08:40):
by eighteen percent, so it's not been a fun time
being a small cap investor. In fact, I think UK
smaller companies were the one of the worst performing global
asset classes um, so that has been pretty miserable. I
think really it's because the markets are still reeling from
what the effects of the pen em it were and
(09:01):
that massive fiscal response to it, which now when we
look back on it looks a bit crazy. The central
banks printing money at a crazy rate and those really
loose military conditions meant that asset prices drove up really sharply,
and and now we're seeing the effects of inflation and
interest rates and that really hits the small and MidCap
(09:23):
in disease pretty hard. Yeah, and awful lot of what
happened during the pandemic is beginning to click increasingly crazy,
isn't it not just the money printing at the fiscal stimulus. Yeah,
the fiscal stimulus. I mean, I mean I'm even thinking
about it more broadly. I mean, what we see now,
the problems in NHS, the huge learning gaps in education.
I mean, some of it just looks like madness. Now
(09:44):
when we look back on it, I suppose we have
to try and remember how it felt at the time,
which was pretty scary, and it felt like the right
thing to do to protect lives at all costs, and
to and to do to protect businesses at all costs.
But we're now left in this stort of situation of
huge amounts of uncertainty all over the place. Um, so
it's it's it's not just difficult for investors. I think
(10:06):
it's difficult for a lot of people. Yeah. It's interesting though,
I mean when we talk about this kind of thing
now that a lot of the conversation is about how
could we possibly have known and how could anyone have
foreseen what would happen if we x, Y and z
during the pandemic. But it's quite important to remember, actually
there were a lot of voices out there even two
years ago saying if you produce fiscal stimulus like this,
(10:26):
if you print money like this, if you produce a
vast amount of demand into a market in which suppliers
being crunched, you will create inflation. But central banks flatly
refused to believe that. They were utterly convinced it wouldn't happen,
and then of course it did. When it comes to
the economics and the and the financial side of it,
there were voices out there saying, hey, you know what money,
(10:48):
great demand, crunched supply, what is it you expect people? No?
I completely agree, and I think that actually central banks
are at the risk of probably overreacting to to what
probably Blee is soon to be peeking inflation, because now
they they've sort of suddenly realized the mess that they've
got themselves into. I think that that a lot of
(11:11):
people in central banks just essue monitorist theory and and
have and thought that they could get away with it.
And I wonder if we hadn't had the zero COVID
policy in China, and if we hadn't had the invasion
of Ukraine, whether there might have been a chance of
getting away with it or it might not have just
(11:32):
been sort of compounded so badly all these inflation reissues
and supply chain problems and energy costs rising so much
and food costs rising so much. So it's quite interesting
to think about how perhaps that did just make everything
an awful lot worse. If there is some kind of
resolution in Ukraine, will that improve things? Who knows? Well?
(11:55):
These would be the interesting possible surprises over the next year.
Wasn't the resolution in uk ain um you know, a
COVID resolution? I don't even know what that means in
China anymore. One that one that didn't evolve zero COVID
and didn't evolve you know, full medical breakdown in China
is a middle way between that plus resolution in the
Ukraine could completely change the global dynamic that we are
(12:17):
expecting over the next twelve months. Whatever we think about
the what must be a pretty hideous situation in China
at the moment, they are going to get to her
immunity very quickly at this rate. So I mean, I
do think that has to be a short term issue.
What I do think is a long term problem is
that we've had such a deterioration in relations between the
(12:39):
Western China and we've had to really start thinking, I mean,
from small companies like Brompton Cycles yesterday to big companies
like Apple and Tesla, they're really having to think about
how embedded they are in Chinese supply chains and how
dependent they are, and so that I think over the
longer term is going to have to be considered, and
(13:00):
it's also probably going to be pretty inflationary, isn't it.
If you're gonna have to start trying to rebuild supply
chains in countries that you consider friends or nearby, it
doesn't that feel to you like the big theme over
the next not just this year, but over the makes
five years, the really big theme being that the resharing
or freend sharing of supply chains and a lot of
(13:22):
what we might in the past have considered to be
the incredibly productive activity that a good economy is based on.
If that comes home. While I accepted in the short
term it is inflationary and the long term possibly it's
a very good thing, it is possibly a very good thing.
I think that we've realized there is a limit to specialization.
(13:42):
Whatever Adam Smith said, you know, we we do have
to have that whole shift from justin time and to
just in case. We need to have more reliable sources
we can't trust, particularly some of these autocratic regimes, they
are not particul We're going to act in a way
that might suit our capitalist mentality. So if we're going
(14:05):
to bring some of the most brilliant parts of the
global economy home, it would seem to me that that
is a kind of thing that would really benefit your
kind of portfolio, and when you mainly invest in small
caps in the UK, right in which there's a lot
of exciting things happening, and a lot of the things
that we might have been outsourcing, the production and manufacturing,
and in a way some of the technology we might
(14:27):
have been outsourcing to China or to various other countries
that are not quite close enough for comfort. We bring
that home. That's exciting news for some of the companies
that you invest in, Right, Yeah, I think so. I mean,
I think we've got to caveat all this by saying
it is simple to say let's move things back on
shore or close by. It's incredibly complicated to do. We
(14:49):
were all aware now of those rising tensions we've got
around Taiwan, and that the impact of what we might
have whether China invades or blockades Taiwan, but it would
make COVID and the war in Ukraine I think looked
like a small side show. What I think is interesting
for the small companies that we look at is I
(15:10):
think the edge that we see in small caps is
that we are looking for those management teams that often
include the founders that have spotted a niche that they
understand upside down and inside out, and they explore that niche,
perhaps first in the UK, and if they're successful, they
can start to sell that overseas as well. We're looking
(15:33):
at really very much asset light businesses, you know, So
it's the human capital and whether they can get the
right talent on board and the right people on board.
I think that's something that we have to really work harder.
I think that's I mean, we all know that, but
you know, things like we are pretty good on the
life sciences, video games. Tax relief has there to a
(15:53):
huge amount of creativity in the UK and it's a
real hotbed of of that kind of talent um. So
I think if we can continue to build on that,
and also obviously we've got the big financial sector in
the UK that we really need to cherish and look after.
So I think if we can overcome some of the
problems and getting hold of the right people and keeping
(16:15):
the right people. I don't you know. So far Brexit
as not has been more of a hindrance than a
help to that. So I think that we can hopefully
see these smaller companies continue to gain their edge exploit
these niches, and we're really supportive of of management teams
trying to do that. But to each one I speak
(16:36):
to talks about the difficulty in finding the right talent,
does that not make you want to shift over away
from investing in asset like companies that are very dependent
on the right human capital into a different type of
sector where perhaps you might be asset heavy and the
human capital isn't so important because the systems and structure
is already in place a bit more time and I
(16:56):
don't know, the energy sector or something. We have always
thought it's not just about looking for for quality companies,
it's about looking for diversification. Having a well diversified portfolio
has meant having exposure to stocks like energy, which did
help us a lot in two. Arguably we would have
had higher waitings to those kind of companies and therewer
(17:17):
waitings to to more interest rate sensitive areas, which are
also quite quite asset heavy like house builders and property.
So it's about thinking about lots of different dynamics. I
suppose it's not just about whether something's asset heavy or
asset light. I think as an economy we tend to
be asset light, don't we. I mean we are much
(17:38):
more services oriented, and so we think the right kind
of companies will continue to attract the right kind of talent.
It's not being made easier by the last few years
and what's happened in the UK economy. I want to
come back with a few things that are a bit
UK specific in terms of the huge outflows from the
UK actual market and the liquidity problems in the UK
(17:58):
acting market that you know I've discussed before and that
out about just before for Christmas based on Simon French's work.
But given that you mentioned house builders, can I just
ask you about the UK housing market and if you
have any particular view on that. I don't actually know
if you're invested in any house builders or not, but
possibly done the smaller end you are. But also, is
there a challenge to the UK banking sector from a
(18:21):
possible significant fall in UK house prices? The health of
the housing sector does seem to have affected consumer confidence.
I would say that we're in a very different situation
than in two thousands and eight in terms of how
strong bank balance sheets are able to resist any kind
of big draw down in in housing values. I think
(18:44):
it's surprising to think that. I think only about a
third of houses do have mortgages outstanding on them, so
we're perhaps not quite so vulnerable as we as we
might have thought. And also we do have I mean,
I'm aware that fixed rate mortgages come to an end,
but we do have a certain level of fixed rate mortgages,
(19:05):
which is very different, for example, from what we saw
in the late eighties early nineties, where I think it
was about mortgages were variable. Now that's the other way around.
The most important thing to support mortgages is obviously high
levels of employment, and we certainly do have high levels
of employment at the moment, or or low levels of
(19:25):
unemployments perhaps more accurate. We have a lot of people
I suppose not in the workforce, but we do have
um low levels of unemployment and that is very supportive. Actually,
Next talked about that in their trading update. For them,
employment is the key indicator, you know, that is that
is the health of their customer base. It means that
(19:47):
their customer base can service their finance obligations and they're
not seeing any need to change the provisions that they
make in their finance business. There are many big banks
that fall within our investment universe. We do have a
specialty lender, a big position and a specialty lender. It's
one of our top top waitings in in OSB, which
(20:08):
used to be known as one Savings bank. They're already
assuming a fifty percent chance of a twenty correction over
the next year or two in in house prices, but
they feel that they're very well covered for that. They've
got a good back book which is cash generative, which
is well covered. So I think that in the worst
(20:28):
case scenario they can even become a landlord in case
they need to repossess properties. They're ready to do that.
So I think you can find whilst you might have
broader risks of of housing correction, you can try and
find nimble, um and interesting stocks that should actually prevail
during during a time of a house house price correction
(20:49):
and actually will hopefully come out the other side and
taking more market share. That's the kind of thing that
we look for even even if we're looking for a
niche in a sector that isn't growing very much her fully,
if they've got a genuinely superior service or pricing or product,
you know, even in times of difficulty, a good company
should be able to gain market share and come out
(21:10):
really strong. Yeah, I'm slightly more nervous than you, just
on the basis that the majority of those fixed rate
mortgages are two year mortgages, and you know, a lots
of them will be coming up for renewal relatively soon,
and they're going to find there's been a fairly stunning
jump in their rate. If lenders have done their job.
When you're when you do your mortgage, you're meant to
(21:31):
be able to survive. What is it? A three basis
point increase in rates? Is that what they test you for?
So we're probably testing the limits of that. Given what
we've seen in terms of interest rate rises over the
last the last year, I mean, I think it's probably
worth while also remembering the lot of this has been
reflected in valuations. House builders have been absolutely awful over
(21:54):
the last year. Percimmon down fifty seven percent, Barret down
forty seven percent, over the last year, hog spitals have
been have been pretty pretty rubbish, so I think quite
a lot of that might already be reflected in valuations.
It's interesting, isn't it, this idea of the terminal. I think,
all right, a lot of it is reflected in evaluations.
(22:14):
But there is a sense that of something has fallen
a lot, it becomes cheap. You hear people talking about
the tech sector in the US at the moment going oh, look,
you know, beasy down from twenty, from thirty to twenty,
whatever it is. Therefore, therefore stuff is cheap. But of
course falling in price doesn't make you cheap. It just
makes you conceivably less expensive. Or if earnings at full
earnings have fallen, it could make you just as expensive
as you were before. So we have to be very
(22:35):
careful about this idea that a fallen price makes something
less expensive, because it isn't necessarily so. However, in the
UK this is what I want to talk about. I
want to talk about price. You know, we can look
at the UK now and you can look at a
lot of the stocks in your portfolio and say things
are actually close to bizarrely cheap. There's an awful lot
of value knocking around in the UK market, which doesn't
(22:57):
mean that the only thing is going to necessarily go
and price as a result, but nonetheless, on evaluation basis,
a lot of UK equities and smaller companies in particular
perhaps are increasingly cheap, absolutely, and I think that is
highlighted by the fact that we consider continue to see
bids coming in for stocks that either we hold or
(23:19):
or in the wider market it's not a stock we hold,
but I noticed that Dignity yesterday had a cash offer.
We've had bids for a lot of our portfolio holdings
over the last year, and they've come from corporate and
private equity, so I think that's showing that they are
seeing compelling value in public markets. I think the kind
of companies that we look for, and at the risk
(23:42):
of playing sort of fund management bingo, of course we're
looking for well managed companies with strong balance sheet's a
good opportunity, but seriously, these are the kind of companies
that are being looked at. So Emis was was bought
by a big US corporate, United Health. They have a
nice sustainable, repeat revenue model that that is very attractive
(24:04):
to to an overseas bidder that the UK market in
particular does look vulnerable for bids, and I think that
as you raised it before, um, that we might talk
about liquidity. I mean, I think that some fund managers,
the risk is that they will take a bid that's
perhaps too low because they're just desperate for liquidity in
their portfolio. And this is interesting, isn't it If if
(24:28):
private equity can see the value in the UK market,
and so we see these bids coming not to private
equally but from wherever they come from, bids that come
in with with significant players in the global markets thinking
that looks cheap. But by the whole thing, why can't
equity investors boast in the UK and abroad look at
it and say, well, that looks cheaper by some of
(24:49):
the shirts. I think that we've seen outflows which have
caused some some force selling and actually in some cases
you where you might find liquidity, if you need to
find liquidity, it will be in some of those slightly
more favorite names because you can you can sell them,
(25:09):
So that might have been one of the issues. So, yes,
you've had those equity outclothes which have put pressure. You've
also got probably quite a sort of short term view.
Some some corporates and some private equity players might be
able to take a longer term view. That's something that
you know, we we find pretty frustrating because you know,
(25:33):
short particularly small cap investing, you know, it's volatility is
riskier and the over the long term that does give
better returns. But people don't like volatility in times like this,
particularly now, given the interest rate environment and the risks
that they see that that investors have been have been
very cautious. I think the we have seen outflows, I
(25:56):
mean very steady outclothes every year since Brexit. So presumably
there is some kind of Brexit effect as well here,
which is that is the UK seen as an absolutely
vital place to invest by an asset allocator. I think
that you should be looking at the value that there
is there, but perhaps that it's it's just not top
(26:18):
of mind for overseas and investors. So what catalysts might
there be for change here? And I always think of
something as it is absolutely cheap. If an area is
asuitely cheap and the institutional investors won't buy it or
don't buy it for whatever reasons they have, there's a
wonderful opportunity for the retail investor, because we don't necessarily
need a catalyst. We can wait a lot longer than
(26:39):
an institutional investor, but that decide what catalysts might there
be for for things to change, for us to suddenly
start seeing our performance in the UK. Well, I mean,
I think actually it is. It is incredibly unusual to
see bear market drawdowns that you see in the smaller
companies area. It's very very and usual for them to
(27:00):
happen more than more than one year in a row.
So you've actually got this and you've kind of got
a natural feeling that smaller companies which have been oversold,
are cheaper, are often a bit more cyclical. If we
do start seeing some sort of positive thoughts about inflation
peaking and things like that, you can see that money
would come back into into that sector, into the smaller
(27:24):
companies arena in particular. And we have had a big
drawdown last year, presumably if we do see some sign
that ect outflows have peaked, then you know it's some
kind of return and some kind of buying will kind
of have a double whammy effect. It's I suppose a
bit like buying an investment trust a great discount. You
(27:44):
know you can if you start feeling more confident on
the on the underlying holdings and on the region, and
you start getting you know, people can start buying it
and reducing that discount. You can have a double whammy effect.
Those two things could could be catalysts and as in
further M and A will also just start attracting attention
to to the UK market and make make it look
(28:06):
more attractive. You know, it's not to say that there
aren't lots of risks out there, but as I say,
in the UK, I think those are probably reflected. Now,
can we talk about some of the stocks in your
put earlier? I mean, you've talked a lot about macro things,
but really you're you're a bottom up investor, aren't you,
And we'd we'd love to know about a few of
(28:26):
the stocks are at the top of your top of
your list at the moment, your personal favorites. So no
fund managers are supposed to have favorites, but I knew
you all do. Yes, I mean I mentioned osp is
doing one of bigger positions, so that would reflect that
it's also one of our one of our favorite stocks.
I mean, it's on a very low valuation in terms
of pe multiple it's got a great yield and we
(28:49):
think that they are exceptionally well managed. They've got their
profitable cash generative back, but most of their funding is
actually from era to two year deposits, which cost less
than than Sonia, than you libel and so swap spreads
of widen. This means that OSB can be more profitable.
(29:10):
So that's that's the name that we really like. Another
one is Craneware. Now this is a stop that we own.
We've known for a very long time. We earn it
in our an BCT since since I p O and
and in the Smaller Companies Fund since I think early
last year, so we It provides hospital management software to
(29:32):
around forty of US hospitals. Now it doesn't have any
UK exposure at all. That's a shame. It sounds like
we can really do with some hospital managements. Yes, but
this is all about the US healthcare spending represents about
seventeen percent of g d P and European countries spend
around ten to twelve percent. So I mean, whilst arguably
(29:57):
we are underspending, I think there's a view that the
US healthcare system is is labyrinthy labyrinthin labyrinthine and its complexities.
Would that's a great word. That's a great word, and
it's because you know, it's it's all the it's it's
it's the healthcare billing, the pharmacy management, that pricing. There's
(30:18):
lots and lots of lots of complexities in US healthcare
and dealing with insurance companies and things like that. So
what Cramer does is it helps hospitals and other healthcare
providers navigate all this and they've developed a platform to
do this and lots of software solutions, and what they
basically ensure is that medical procedures and dispensing is correctly
(30:43):
coded for insurance companies, and so it involves it helps
them avoid over and under charging and improve administrative efficiency. Really,
so we think that they are very well set. I mean,
there were a lot much fewer and active operations during
the time of the pandemic and they're coming back on
(31:03):
now UM and so we we also just see that
that healthcare is a very resilient area of the market.
So UM craneware with good cash generation. They are slightly
indebted at the moment because of an acquisition they did
a couple of years ago but there are cash editors
(31:27):
to expect that debt to reduce rapidly UM And also interestingly,
whilst their sales team has to be based out the US,
most of the software development is done here in Scotland,
so you know you've got that natural arbitrage of of
having a lower costs and developing the software in the
UK and selling it overseas in the US. So that's
(31:49):
another name I suppose we like. Would you like another one? Oh? Yes,
it was like just one more? Okay we have Okay,
I think we might find Trackcess quite interesting. TRACKSS it
provides um software and consultancy to the transport sector, principally
(32:11):
the UK train operators and Network Rail. Now I think
you'd find it. You'd share the delicious irony that I
wanted to go to the tracks as Capital Markets Day,
but they were the only way of getting there was
with through three trains and one replacement bus service and
I wouldn't actually be able to get to lead some
back in a day, so I couldn't go to the
(32:33):
Capital Markets Day. But luckily a lot of it was
available online and I got to watch some of the
videos about the new products and services that they have
and it's it's super impressive. So so TRACKSS has grown
really through through acquisition of small software companies that service
the rail sector in the UK, and the Rail Tech
(32:54):
and Services Division has has really now established to serving
quite a lot of the train operating companies and our
network rail. The software delivers efficiency gains in terms of
improved operational performance and timetabling and staff rostering. They're one
of any three companies in the UK that is a
(33:16):
credited to do remote condition monitoring technology. Now this is
all the kind of stuff that the unions don't really like,
they think you need. The naked eye is better for
monitoring the condition of switches for example, and rail lines.
But although it does show has been shown that it's
very effective this remote condition monitoring. And what's been really
(33:38):
interesting is the products really do help companies run more efficiently.
So the amid the strikes and travel disruption, tracks has
been able to demonstrate that the train off companies that
use them can get back up to operational speed after
strike days way faster than others and save companies money
(33:58):
by more effective time tabling and staff management. So they
reduce the dependence on overtime. So that's something that you
might have heard about the unions talking about when no
one's you know, they're not going to do their overtime,
and that's that could be a big threat by the unions.
But actually tracks as can help operating companies really modernize
and this is something they desperately need to do. They
(34:19):
can help them really modernize and and and work more effectively.
Um and you know, there is despite the tough hand
that they were that the real industry has been dealt
through COVID, there is really a long term commitment to
grow real capacity and that's been laid out by whichever
flavor of government we have because it is greener than
(34:41):
cars or planes and it delivers big productivity improvements. So
we think tracks this is a really interesting little company
which is exceptionally well run, another one of those strong
balance sheet, cash generative, and it really delivers critical behind
the scenes soft for for all the operating companies and
(35:02):
apps and direct competitors are few and far between, so
it's something we think will continue to consolidate its market position.
It's also seeing lots of opportunities in the US where
they've made an initial acquisition there called Railcom and the
US US UM rail sector is even more complicated than
(35:23):
there's UM and obviously a lot bigger, so it's something
we really like. I believe bigger, I can't believe more
complicated evaluation, Anna, what is it going to cost us
to buy that one? So Tracks is not looking like
a cheap company. At the moment um. The price earnings
(35:44):
ratio is around twenty seven times UM. The free cash
field to be fair for looking out one year is
four point eight percent UM. We've seen quite a recovery
in the share price. I think since the since the
the Capital Markets Day is really highlighted the value of
(36:06):
the of the company. Sales have rebounded really strongly. So
we had sales growth of around thirty seven percent over
the last year. That's because they also have a smaller
division which is not core to them, which does events management.
So for example, they manage all the people and signposting
and stuff around Glastonbury. So there was no Glastonbury the
(36:28):
year before, there's Glastonbury this year, so that comes that
that is lower margin, but that's a non core part
of the business and I think that they will probably
if they get there might be a management buy out
there or something like that, which will release further value.
The good thing about Tracts is they can make really
good a creative acquisitions. So yes, it is. It is
not a cheap company on any metric. We feel that
(36:50):
it's exceptionally well underpinned and that the risks of down
grades are are very it's very low. Um and I
think we'll have to edit their that's fascinating and as
I say, anything that makes our rail sector work better
would be much appreciated, and anything that made our NHS
work but it would also be much appreciated. UM. And
some of the stocks are fascinating. And thank you so much. Okay,
(37:12):
thank you, thank you for listening for this week's Marion
Talks Money. We will be back next week. And please,
of course, if you like our show, which I do,
hope you do, rate, review and subscribe wherever you listen
to your podcasts. This episode was hosted by Meet Mary's
Somerset Web. It was produced by Summer Siety. Special thanks
(37:32):
to Anna McDonald and to John Stepic. And of course
this is your reminder which you will get every week
design up to John's newsletter Money Distilled. It's extremely good
and the link is in the show notes
John, Welcome back, Happy New Year. Happy New Year to
you too. Did you have a nice Christmas? I told
you not to ask me that my and my family
is singlehandedly responsible for NHS waiting list at the moment,
as listeners can probably hear in my voice, let's just
start right in on NHS. But just go no, no,
(00:22):
let's not Parkard. Let's go straight in there on the NHS.
Now we are talking just after Rushie Soona came out
with his five promises or as we shall swallom in future,
five vague and pointless promises. And when she told us
that he would promise to do some of the things
that I think personally as a voter or and taxpayer,
I kind of assumed he was going to do anyway, Yes,
(00:44):
the sort of thing you can we take for granted.
It's like coming back and seeing I think, I think
my eam is to have a functional society again. I mean,
I think you know that's that's you know, that's that's
not you. You're not going to sit in the bar
very high us. You really not have was it the
the tax takes we're appatuning the GDP though it's I
(01:05):
think under the current forecast it heads up to nearly
thirty percent, which I'm not sure it will ever reach.
I mean, we've talked about this before, John, but we've
looked at the percentage of GDP that each country can
peek out at as a tax take, right, and the
UK very rarely gets to forty and we don't like it.
We won't pay that much as a society. So as
(01:27):
we start hitting forty percent, we start fiddling around with
our taxes, we start working less, We stop you know,
shifting shifting our income around the place, and you begin
to see the tax takes and peek out in the
high thirties. And other countries will go higher, you know,
the Scandinavian countries they're like, okay, we'll be at and
some of the other European countries will do it. But
in the UK it's almost impossible to get the tax
(01:48):
take up to the high thirties and keep it there
lettle and fourteen percent because we change our behavior and
it's just where they are. You can want it to
be different. I know a lot of people want it
to be different, but you can't make it different. Now speaking,
if you want to be different but can't make difference,
let's go back to Richie's and he's rather vague and
pointless inflation promise. He would like to promise us that
he's going to bring inflation down for all, I don't know,
ten eleven percent. What do you think he's after here?
(02:10):
Four or five something like that. Now that's the absolute
minimum minimum you could expect for the kind of thing
a prime minister would want to do in a country
like the UK. Right, But can you do it? Has
he got anything to do with him at all? No?
I mean it's probably his easiest promise to keep, because
either it's going to happen or it's not. And mathematically
(02:31):
it probably well go down here. I mean, even the
kind of beerish forecast was writing six percent is the
law next year, and lots of people are seeing White's
laud than that, so you'll probably had to be yeah,
it's gonna do him. It's barely getting to do with
the Bank of England. So as a promise, this is
the same as Riscie soon Make standing up and saying
I promise you that I will make sure that spring
arrives the Green Shirts, okay, and it's got nothing through
(02:56):
the Bank of England either. We've discussed this before. They
have ideas their powers that don't really exist. They can
raise interest rates as much as they like, but if
the old price went to two hundred dollars, wouldn't make
any different. Not for it's going to No probably not
not this year. Is that another one of your forecasts? No? No, no, no,
(03:17):
I'm not getting checked into that again. That's it. I've
still got to milk whose place one? For all this was? There?
You go prooflesseners. John learns I can trick and once
I can't trick him twice. Right, I have got our
guest coming up, And later in the podcast we do
talk about house prices and Anna McDonald fairly speaks as
though it's entirely reasonable to expect house prices to full
(03:39):
percent over the next year and for the banks to
be ready for that and prepared for that. So you know,
it's no longer an out their idea John, that house
prices will full thirty percent in normoral terms, So you
might have to up that forecast or down that forecast
depense you look at it, you want to get fifty.
It's not good. It's kind of like, you know, come
out with us, and suddenly everyone's copying me, I don't
(04:00):
I go higher or lower. I just want to like
point out that, yeah, you know, twenty normal terms just
takes us back to pandemic, early pandemic. But also it
was just I was fact I was rereading that paper
from the X Bank England chap Um from two thousand
nineteen where he talks about how real yields are the
important factor, and it's actually a line in there, but
(04:22):
he says that if real yields go from negative two percent,
which is where they were in two thousand, up to
zero percent, then house prices would follow by about thirty
one percent based on their model. Now real yields have
now going to zero percent and it looks like they're
just gonna stay there. Um. I mean I did talk
to David Miles briefly and he didn't go that far
(04:44):
this time around, but it's interesting just to know that.
So yes, it's it's quite a I think even if
the UK economy does better than lots of people expect
this year, and I actually think it will, Um, they
kind of we bust of trade and updates we've had
so far and make it look as if actually consumers
actually kept spending at Christmas, which makes sense because everyone
(05:05):
still get jobs, etcetera, etcetera. But even we're looking at
a wholesale replacing of asset markets. So the expensive icets
have got to come down because interest strates have gone up.
They starts straightforward, and UK properly falls into the category
of expensive usets. Thankfully, as I think you probably talk
about behind, UK shields don't fall into that category. They're
(05:29):
actually can cheap icets at the moment, so the interest
rate thing shouldn't actually cause them any major problems. It's interesting,
isn't it. I Mean, I agree with you that the
UK economy will probably do better than most people expect
this year, but that's largely because everyone expects it to
do it so incredibly badly, and the retail members etcetera.
Really haven't been that bad and I don't see the
major issues with consumer confidence yet. But one of the
(05:49):
things that you and I have written about over the
years and over and over and over is about how
GDP growth or decline is in no way correlated with
asset market returns. As a market returns are correlated to
interest rates, and they're correlated to the prices at which
they begin every year. Right, So the fact that the
UK economy, let's say it does do appallingly this year.
(06:10):
Let's see we say horrible performance from the UK economy,
It does not follow in any way that UK asset
prices would do badly as a result. I'm separating out
house prices here because the plumber goes an employment goes
to terms and lot of course house prices will full
further than you'd expect, But equities et cetera are not
correlated to the performance of the UK economy. That could
(06:31):
correlated to price and if they're already cheap than how
the economy performs from here as almost by the buyer. Right. Yeah,
and also yeah, there's a lot of space for sentiment
to change. Still just on the UK generally, we're still
the hardest hip when it comes to outflows from funds
for example, um and if you look at the Bank
(06:51):
of America, quibal find major end excepting minds, the UK
is down there is the most heated market. So you know,
I just think that it's why it loose can trade
in trades. That still has a massive amount of room
tom note whale. And that's that's despite the fact that
was basically the best performing developed market last year. Well
(07:12):
this could be this could be our year. Then you know,
the money always goes to things that are going up,
not things that are going down, So maybe that'll suddenly
appear in the UK this year. Anyway, John, it is
good to be back. Good to have you back. And
do you know, I don't know how to finish this
somewhere because I can't remember what happened next. Hello, and
(07:34):
welcome to Marin Talks Money, the podcast in which people
who know the markets explain the markets. I'm there in
some subweb with me. This week. Our guest is Anna McDonald,
fund manager at a Muti Global, specializing in UK equities
and in particular in smaller companies. Anna, welcome, Thank you
so much for joining us, Thank you for having me. Now, Anna,
(07:57):
tell me a little bit about last year, right, mean,
obviously that is a tough year for everybody working in
the market as well, not everybody. And I guess if
you held nothing but oil, gas and value stock, you
probably doing okay last year. But the majority of people
going into twenty two did not have that kind of portfolio.
How did it work out for you? Look, there's not
much more that I can say to add to that.
(08:19):
Apart from I think in the UK, as you say,
with energy stocks and some value names which composed most
of the foot see one hundred, which meant that it
had a very small positive outturn. It's been a really
pretty miserable year. We've had the aim all share of
felled by We've got the foot see two fifty down
(08:40):
by eighteen percent, so it's not been a fun time
being a small cap investor. In fact, I think UK
smaller companies were the one of the worst performing global
asset classes um, so that has been pretty miserable. I
think really it's because the markets are still reeling from
what the effects of the pen em it were and
(09:01):
that massive fiscal response to it, which now when we
look back on it looks a bit crazy. The central
banks printing money at a crazy rate and those really
loose military conditions meant that asset prices drove up really sharply,
and and now we're seeing the effects of inflation and
interest rates and that really hits the small and MidCap
(09:23):
in disease pretty hard. Yeah, and awful lot of what
happened during the pandemic is beginning to click increasingly crazy,
isn't it not just the money printing at the fiscal stimulus. Yeah,
the fiscal stimulus. I mean, I mean I'm even thinking
about it more broadly. I mean, what we see now,
the problems in NHS, the huge learning gaps in education.
I mean, some of it just looks like madness. Now
(09:44):
when we look back on it, I suppose we have
to try and remember how it felt at the time,
which was pretty scary, and it felt like the right
thing to do to protect lives at all costs, and
to and to do to protect businesses at all costs.
But we're now left in this stort of situation of
huge amounts of uncertainty all over the place. Um, so
it's it's it's not just difficult for investors. I think
(10:06):
it's difficult for a lot of people. Yeah. It's interesting though,
I mean when we talk about this kind of thing
now that a lot of the conversation is about how
could we possibly have known and how could anyone have
foreseen what would happen if we x, Y and z
during the pandemic. But it's quite important to remember, actually
there were a lot of voices out there even two
years ago saying if you produce fiscal stimulus like this,
(10:26):
if you print money like this, if you produce a
vast amount of demand into a market in which suppliers
being crunched, you will create inflation. But central banks flatly
refused to believe that. They were utterly convinced it wouldn't happen,
and then of course it did. When it comes to
the economics and the and the financial side of it,
there were voices out there saying, hey, you know what money,
(10:48):
great demand, crunched supply, what is it you expect people? No?
I completely agree, and I think that actually central banks
are at the risk of probably overreacting to to what
probably Blee is soon to be peeking inflation, because now
they they've sort of suddenly realized the mess that they've
got themselves into. I think that that a lot of
(11:11):
people in central banks just essue monitorist theory and and
have and thought that they could get away with it.
And I wonder if we hadn't had the zero COVID
policy in China, and if we hadn't had the invasion
of Ukraine, whether there might have been a chance of
getting away with it or it might not have just
(11:32):
been sort of compounded so badly all these inflation reissues
and supply chain problems and energy costs rising so much
and food costs rising so much. So it's quite interesting
to think about how perhaps that did just make everything
an awful lot worse. If there is some kind of
resolution in Ukraine, will that improve things? Who knows? Well?
(11:55):
These would be the interesting possible surprises over the next year.
Wasn't the resolution in uk ain um you know, a
COVID resolution? I don't even know what that means in
China anymore. One that one that didn't evolve zero COVID
and didn't evolve you know, full medical breakdown in China
is a middle way between that plus resolution in the
Ukraine could completely change the global dynamic that we are
(12:17):
expecting over the next twelve months. Whatever we think about
the what must be a pretty hideous situation in China
at the moment, they are going to get to her
immunity very quickly at this rate. So I mean, I
do think that has to be a short term issue.
What I do think is a long term problem is
that we've had such a deterioration in relations between the
(12:39):
Western China and we've had to really start thinking, I mean,
from small companies like Brompton Cycles yesterday to big companies
like Apple and Tesla, they're really having to think about
how embedded they are in Chinese supply chains and how
dependent they are, and so that I think over the
longer term is going to have to be considered, and
(13:00):
it's also probably going to be pretty inflationary, isn't it.
If you're gonna have to start trying to rebuild supply
chains in countries that you consider friends or nearby, it
doesn't that feel to you like the big theme over
the next not just this year, but over the makes
five years, the really big theme being that the resharing
or freend sharing of supply chains and a lot of
(13:22):
what we might in the past have considered to be
the incredibly productive activity that a good economy is based on.
If that comes home. While I accepted in the short
term it is inflationary and the long term possibly it's
a very good thing, it is possibly a very good thing.
I think that we've realized there is a limit to specialization.
(13:42):
Whatever Adam Smith said, you know, we we do have
to have that whole shift from justin time and to
just in case. We need to have more reliable sources
we can't trust, particularly some of these autocratic regimes, they
are not particul We're going to act in a way
that might suit our capitalist mentality. So if we're going
(14:05):
to bring some of the most brilliant parts of the
global economy home, it would seem to me that that
is a kind of thing that would really benefit your
kind of portfolio, and when you mainly invest in small
caps in the UK, right in which there's a lot
of exciting things happening, and a lot of the things
that we might have been outsourcing, the production and manufacturing,
and in a way some of the technology we might
(14:27):
have been outsourcing to China or to various other countries
that are not quite close enough for comfort. We bring
that home. That's exciting news for some of the companies
that you invest in, Right, Yeah, I think so. I mean,
I think we've got to caveat all this by saying
it is simple to say let's move things back on
shore or close by. It's incredibly complicated to do. We
(14:49):
were all aware now of those rising tensions we've got
around Taiwan, and that the impact of what we might
have whether China invades or blockades Taiwan, but it would
make COVID and the war in Ukraine I think looked
like a small side show. What I think is interesting
for the small companies that we look at is I
(15:10):
think the edge that we see in small caps is
that we are looking for those management teams that often
include the founders that have spotted a niche that they
understand upside down and inside out, and they explore that niche,
perhaps first in the UK, and if they're successful, they
can start to sell that overseas as well. We're looking
(15:33):
at really very much asset light businesses, you know, So
it's the human capital and whether they can get the
right talent on board and the right people on board.
I think that's something that we have to really work harder.
I think that's I mean, we all know that, but
you know, things like we are pretty good on the
life sciences, video games. Tax relief has there to a
(15:53):
huge amount of creativity in the UK and it's a
real hotbed of of that kind of talent um. So
I think if we can continue to build on that,
and also obviously we've got the big financial sector in
the UK that we really need to cherish and look after.
So I think if we can overcome some of the
problems and getting hold of the right people and keeping
(16:15):
the right people. I don't you know. So far Brexit
as not has been more of a hindrance than a
help to that. So I think that we can hopefully
see these smaller companies continue to gain their edge exploit
these niches, and we're really supportive of of management teams
trying to do that. But to each one I speak
(16:36):
to talks about the difficulty in finding the right talent,
does that not make you want to shift over away
from investing in asset like companies that are very dependent
on the right human capital into a different type of
sector where perhaps you might be asset heavy and the
human capital isn't so important because the systems and structure
is already in place a bit more time and I
(16:56):
don't know, the energy sector or something. We have always
thought it's not just about looking for for quality companies,
it's about looking for diversification. Having a well diversified portfolio
has meant having exposure to stocks like energy, which did
help us a lot in two. Arguably we would have
had higher waitings to those kind of companies and therewer
(17:17):
waitings to to more interest rate sensitive areas, which are
also quite quite asset heavy like house builders and property.
So it's about thinking about lots of different dynamics. I
suppose it's not just about whether something's asset heavy or
asset light. I think as an economy we tend to
be asset light, don't we. I mean we are much
(17:38):
more services oriented, and so we think the right kind
of companies will continue to attract the right kind of talent.
It's not being made easier by the last few years
and what's happened in the UK economy. I want to
come back with a few things that are a bit
UK specific in terms of the huge outflows from the
UK actual market and the liquidity problems in the UK
(17:58):
acting market that you know I've discussed before and that
out about just before for Christmas based on Simon French's work.
But given that you mentioned house builders, can I just
ask you about the UK housing market and if you
have any particular view on that. I don't actually know
if you're invested in any house builders or not, but
possibly done the smaller end you are. But also, is
there a challenge to the UK banking sector from a
(18:21):
possible significant fall in UK house prices? The health of
the housing sector does seem to have affected consumer confidence.
I would say that we're in a very different situation
than in two thousands and eight in terms of how
strong bank balance sheets are able to resist any kind
of big draw down in in housing values. I think
(18:44):
it's surprising to think that. I think only about a
third of houses do have mortgages outstanding on them, so
we're perhaps not quite so vulnerable as we as we
might have thought. And also we do have I mean,
I'm aware that fixed rate mortgages come to an end,
but we do have a certain level of fixed rate mortgages,
(19:05):
which is very different, for example, from what we saw
in the late eighties early nineties, where I think it
was about mortgages were variable. Now that's the other way around.
The most important thing to support mortgages is obviously high
levels of employment, and we certainly do have high levels
of employment at the moment, or or low levels of
(19:25):
unemployments perhaps more accurate. We have a lot of people
I suppose not in the workforce, but we do have
um low levels of unemployment and that is very supportive. Actually,
Next talked about that in their trading update. For them,
employment is the key indicator, you know, that is that
is the health of their customer base. It means that
(19:47):
their customer base can service their finance obligations and they're
not seeing any need to change the provisions that they
make in their finance business. There are many big banks
that fall within our investment universe. We do have a
specialty lender, a big position and a specialty lender. It's
one of our top top waitings in in OSB, which
(20:08):
used to be known as one Savings bank. They're already
assuming a fifty percent chance of a twenty correction over
the next year or two in in house prices, but
they feel that they're very well covered for that. They've
got a good back book which is cash generative, which
is well covered. So I think that in the worst
(20:28):
case scenario they can even become a landlord in case
they need to repossess properties. They're ready to do that.
So I think you can find whilst you might have
broader risks of of housing correction, you can try and
find nimble, um and interesting stocks that should actually prevail
during during a time of a house house price correction
(20:49):
and actually will hopefully come out the other side and
taking more market share. That's the kind of thing that
we look for even even if we're looking for a
niche in a sector that isn't growing very much her fully,
if they've got a genuinely superior service or pricing or product,
you know, even in times of difficulty, a good company
should be able to gain market share and come out
(21:10):
really strong. Yeah, I'm slightly more nervous than you, just
on the basis that the majority of those fixed rate
mortgages are two year mortgages, and you know, a lots
of them will be coming up for renewal relatively soon,
and they're going to find there's been a fairly stunning
jump in their rate. If lenders have done their job.
When you're when you do your mortgage, you're meant to
(21:31):
be able to survive. What is it? A three basis
point increase in rates? Is that what they test you for?
So we're probably testing the limits of that. Given what
we've seen in terms of interest rate rises over the
last the last year, I mean, I think it's probably
worth while also remembering the lot of this has been
reflected in valuations. House builders have been absolutely awful over
(21:54):
the last year. Percimmon down fifty seven percent, Barret down
forty seven percent, over the last year, hog spitals have
been have been pretty pretty rubbish, so I think quite
a lot of that might already be reflected in valuations.
It's interesting, isn't it, this idea of the terminal. I think,
all right, a lot of it is reflected in evaluations.
(22:14):
But there is a sense that of something has fallen
a lot, it becomes cheap. You hear people talking about
the tech sector in the US at the moment going oh, look,
you know, beasy down from twenty, from thirty to twenty,
whatever it is. Therefore, therefore stuff is cheap. But of
course falling in price doesn't make you cheap. It just
makes you conceivably less expensive. Or if earnings at full
earnings have fallen, it could make you just as expensive
as you were before. So we have to be very
(22:35):
careful about this idea that a fallen price makes something
less expensive, because it isn't necessarily so. However, in the
UK this is what I want to talk about. I
want to talk about price. You know, we can look
at the UK now and you can look at a
lot of the stocks in your portfolio and say things
are actually close to bizarrely cheap. There's an awful lot
of value knocking around in the UK market, which doesn't
(22:57):
mean that the only thing is going to necessarily go
and price as a result, but nonetheless, on evaluation basis,
a lot of UK equities and smaller companies in particular
perhaps are increasingly cheap, absolutely, and I think that is
highlighted by the fact that we consider continue to see
bids coming in for stocks that either we hold or
(23:19):
or in the wider market it's not a stock we hold,
but I noticed that Dignity yesterday had a cash offer.
We've had bids for a lot of our portfolio holdings
over the last year, and they've come from corporate and
private equity, so I think that's showing that they are
seeing compelling value in public markets. I think the kind
of companies that we look for, and at the risk
(23:42):
of playing sort of fund management bingo, of course we're
looking for well managed companies with strong balance sheet's a
good opportunity, but seriously, these are the kind of companies
that are being looked at. So Emis was was bought
by a big US corporate, United Health. They have a
nice sustainable, repeat revenue model that that is very attractive
(24:04):
to to an overseas bidder that the UK market in
particular does look vulnerable for bids, and I think that
as you raised it before, um, that we might talk
about liquidity. I mean, I think that some fund managers,
the risk is that they will take a bid that's
perhaps too low because they're just desperate for liquidity in
their portfolio. And this is interesting, isn't it If if
(24:28):
private equity can see the value in the UK market,
and so we see these bids coming not to private
equally but from wherever they come from, bids that come
in with with significant players in the global markets thinking
that looks cheap. But by the whole thing, why can't
equity investors boast in the UK and abroad look at
it and say, well, that looks cheaper by some of
(24:49):
the shirts. I think that we've seen outflows which have
caused some some force selling and actually in some cases
you where you might find liquidity, if you need to
find liquidity, it will be in some of those slightly
more favorite names because you can you can sell them,
(25:09):
So that might have been one of the issues. So, yes,
you've had those equity outclothes which have put pressure. You've
also got probably quite a sort of short term view.
Some some corporates and some private equity players might be
able to take a longer term view. That's something that
you know, we we find pretty frustrating because you know,
(25:33):
short particularly small cap investing, you know, it's volatility is
riskier and the over the long term that does give
better returns. But people don't like volatility in times like this,
particularly now, given the interest rate environment and the risks
that they see that that investors have been have been
very cautious. I think the we have seen outflows, I
(25:56):
mean very steady outclothes every year since Brexit. So presumably
there is some kind of Brexit effect as well here,
which is that is the UK seen as an absolutely
vital place to invest by an asset allocator. I think
that you should be looking at the value that there
is there, but perhaps that it's it's just not top
(26:18):
of mind for overseas and investors. So what catalysts might
there be for change here? And I always think of
something as it is absolutely cheap. If an area is
asuitely cheap and the institutional investors won't buy it or
don't buy it for whatever reasons they have, there's a
wonderful opportunity for the retail investor, because we don't necessarily
need a catalyst. We can wait a lot longer than
(26:39):
an institutional investor, but that decide what catalysts might there
be for for things to change, for us to suddenly
start seeing our performance in the UK. Well, I mean,
I think actually it is. It is incredibly unusual to
see bear market drawdowns that you see in the smaller
companies area. It's very very and usual for them to
(27:00):
happen more than more than one year in a row.
So you've actually got this and you've kind of got
a natural feeling that smaller companies which have been oversold,
are cheaper, are often a bit more cyclical. If we
do start seeing some sort of positive thoughts about inflation
peaking and things like that, you can see that money
would come back into into that sector, into the smaller
(27:24):
companies arena in particular. And we have had a big
drawdown last year, presumably if we do see some sign
that ect outflows have peaked, then you know it's some
kind of return and some kind of buying will kind
of have a double whammy effect. It's I suppose a
bit like buying an investment trust a great discount. You
(27:44):
know you can if you start feeling more confident on
the on the underlying holdings and on the region, and
you start getting you know, people can start buying it
and reducing that discount. You can have a double whammy effect.
Those two things could could be catalysts and as in
further M and A will also just start attracting attention
to to the UK market and make make it look
(28:06):
more attractive. You know, it's not to say that there
aren't lots of risks out there, but as I say,
in the UK, I think those are probably reflected. Now,
can we talk about some of the stocks in your
put earlier? I mean, you've talked a lot about macro things,
but really you're you're a bottom up investor, aren't you,
And we'd we'd love to know about a few of
(28:26):
the stocks are at the top of your top of
your list at the moment, your personal favorites. So no
fund managers are supposed to have favorites, but I knew
you all do. Yes, I mean I mentioned osp is
doing one of bigger positions, so that would reflect that
it's also one of our one of our favorite stocks.
I mean, it's on a very low valuation in terms
of pe multiple it's got a great yield and we
(28:49):
think that they are exceptionally well managed. They've got their
profitable cash generative back, but most of their funding is
actually from era to two year deposits, which cost less
than than Sonia, than you libel and so swap spreads
of widen. This means that OSB can be more profitable.
(29:10):
So that's that's the name that we really like. Another
one is Craneware. Now this is a stop that we own.
We've known for a very long time. We earn it
in our an BCT since since I p O and
and in the Smaller Companies Fund since I think early
last year, so we It provides hospital management software to
(29:32):
around forty of US hospitals. Now it doesn't have any
UK exposure at all. That's a shame. It sounds like
we can really do with some hospital managements. Yes, but
this is all about the US healthcare spending represents about
seventeen percent of g d P and European countries spend
around ten to twelve percent. So I mean, whilst arguably
(29:57):
we are underspending, I think there's a view that the
US healthcare system is is labyrinthy labyrinthin labyrinthine and its complexities.
Would that's a great word. That's a great word, and
it's because you know, it's it's all the it's it's
it's the healthcare billing, the pharmacy management, that pricing. There's
(30:18):
lots and lots of lots of complexities in US healthcare
and dealing with insurance companies and things like that. So
what Cramer does is it helps hospitals and other healthcare
providers navigate all this and they've developed a platform to
do this and lots of software solutions, and what they
basically ensure is that medical procedures and dispensing is correctly
(30:43):
coded for insurance companies, and so it involves it helps
them avoid over and under charging and improve administrative efficiency. Really,
so we think that they are very well set. I mean,
there were a lot much fewer and active operations during
the time of the pandemic and they're coming back on
(31:03):
now UM and so we we also just see that
that healthcare is a very resilient area of the market.
So UM craneware with good cash generation. They are slightly
indebted at the moment because of an acquisition they did
a couple of years ago but there are cash editors
(31:27):
to expect that debt to reduce rapidly UM And also interestingly,
whilst their sales team has to be based out the US,
most of the software development is done here in Scotland,
so you know you've got that natural arbitrage of of
having a lower costs and developing the software in the
UK and selling it overseas in the US. So that's
(31:49):
another name I suppose we like. Would you like another one? Oh? Yes,
it was like just one more? Okay we have Okay,
I think we might find Trackcess quite interesting. TRACKSS it
provides um software and consultancy to the transport sector, principally
(32:11):
the UK train operators and Network Rail. Now I think
you'd find it. You'd share the delicious irony that I
wanted to go to the tracks as Capital Markets Day,
but they were the only way of getting there was
with through three trains and one replacement bus service and
I wouldn't actually be able to get to lead some
back in a day, so I couldn't go to the
(32:33):
Capital Markets Day. But luckily a lot of it was
available online and I got to watch some of the
videos about the new products and services that they have
and it's it's super impressive. So so TRACKSS has grown
really through through acquisition of small software companies that service
the rail sector in the UK, and the Rail Tech
(32:54):
and Services Division has has really now established to serving
quite a lot of the train operating companies and our
network rail. The software delivers efficiency gains in terms of
improved operational performance and timetabling and staff rostering. They're one
of any three companies in the UK that is a
(33:16):
credited to do remote condition monitoring technology. Now this is
all the kind of stuff that the unions don't really like,
they think you need. The naked eye is better for
monitoring the condition of switches for example, and rail lines.
But although it does show has been shown that it's
very effective this remote condition monitoring. And what's been really
(33:38):
interesting is the products really do help companies run more efficiently.
So the amid the strikes and travel disruption, tracks has
been able to demonstrate that the train off companies that
use them can get back up to operational speed after
strike days way faster than others and save companies money
(33:58):
by more effective time tabling and staff management. So they
reduce the dependence on overtime. So that's something that you
might have heard about the unions talking about when no
one's you know, they're not going to do their overtime,
and that's that could be a big threat by the unions.
But actually tracks as can help operating companies really modernize
and this is something they desperately need to do. They
(34:19):
can help them really modernize and and and work more effectively.
Um and you know, there is despite the tough hand
that they were that the real industry has been dealt
through COVID, there is really a long term commitment to
grow real capacity and that's been laid out by whichever
flavor of government we have because it is greener than
(34:41):
cars or planes and it delivers big productivity improvements. So
we think tracks this is a really interesting little company
which is exceptionally well run, another one of those strong
balance sheet, cash generative, and it really delivers critical behind
the scenes soft for for all the operating companies and
(35:02):
apps and direct competitors are few and far between, so
it's something we think will continue to consolidate its market position.
It's also seeing lots of opportunities in the US where
they've made an initial acquisition there called Railcom and the
US US UM rail sector is even more complicated than
(35:23):
there's UM and obviously a lot bigger, so it's something
we really like. I believe bigger, I can't believe more
complicated evaluation, Anna, what is it going to cost us
to buy that one? So Tracks is not looking like
a cheap company. At the moment um. The price earnings
(35:44):
ratio is around twenty seven times UM. The free cash
field to be fair for looking out one year is
four point eight percent UM. We've seen quite a recovery
in the share price. I think since the since the
the Capital Markets Day is really highlighted the value of
(36:06):
the of the company. Sales have rebounded really strongly. So
we had sales growth of around thirty seven percent over
the last year. That's because they also have a smaller
division which is not core to them, which does events management.
So for example, they manage all the people and signposting
and stuff around Glastonbury. So there was no Glastonbury the
(36:28):
year before, there's Glastonbury this year, so that comes that
that is lower margin, but that's a non core part
of the business and I think that they will probably
if they get there might be a management buy out
there or something like that, which will release further value.
The good thing about Tracts is they can make really
good a creative acquisitions. So yes, it is. It is
not a cheap company on any metric. We feel that
(36:50):
it's exceptionally well underpinned and that the risks of down
grades are are very it's very low. Um and I
think we'll have to edit their that's fascinating and as
I say, anything that makes our rail sector work better
would be much appreciated, and anything that made our NHS
work but it would also be much appreciated. UM. And
some of the stocks are fascinating. And thank you so much. Okay,
(37:12):
thank you, thank you for listening for this week's Marion
Talks Money. We will be back next week. And please,
of course, if you like our show, which I do,
hope you do, rate, review and subscribe wherever you listen
to your podcasts. This episode was hosted by Meet Mary's
Somerset Web. It was produced by Summer Siety. Special thanks
(37:32):
to Anna McDonald and to John Stepic. And of course
this is your reminder which you will get every week
design up to John's newsletter Money Distilled. It's extremely good
and the link is in the show notes
Host
Merryn Somerset Webb
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