April 4, 2025 • 31 mins
It wasn’t long ago that China was considered “uninvestable” and that the “exceptional” US market was the only game in town. That’s not the case anymore. According to Edward Cole, Man Group’s head of multi-strategy equities, nothing is permanently exceptional or uninvestable. Once you accept that premise, the great rotation currently underway makes a lot more sense.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News. Welcome to Maren Talk
to Money, the podcast in which people who know the
markets explain the markets. I'm Meren sums Thatt Web. This
(00:22):
week I am speaking with Ed Cole, head of Multi
Strategy Equities within Solutions at Man Group. Complicated titl. Ed,
Thanks for joining us today.
Speaker 2 (00:30):
Thank you for having me Mere in complicated title, but
a simple person.
Speaker 1 (00:33):
Okay, and hopefully everything you're going to tell us is
also going to be really simple, straightforward and one hundred
percent accurate.
Speaker 2 (00:39):
I won't make that promise, but let's see where we go.
Speaker 1 (00:41):
What we want is correct forecasts on this show to
help us get through these difficult times. Listen, what I
really want to talk about is equity markets as a whole.
We've been writing a lot and talking a lot about
whether there is a great rebalancing going on from the
US equity market to effectively all of the rest of
the world. I don't know whether you would consider what
has been happening in the US market of the last
year or so well before January this year, whether they're
(01:03):
constituted a bubble or just a very expensive market. But
one way or another, possibly it's not that surprising to
see American exceptionalism begin to be questioned in the context
of the US equity market and for there to begin
to be flows into other markets, most obviously Europe at
the moment. But big question for our listeners, particularly as
we come up to the end of ice season, is
(01:23):
if they're investing now, should they say, Okay, do you
know what have made a lot of money in America
over the last decade, and maybe it's time to look elsewhere?
Speaker 2 (01:32):
And if that is the case, where yeah, extac question
a question of course that preoccupies those thinking about their ISA,
but also those that are allocating large sovereign pools of
money as well. I'd start with a bit of kind
of common sense thinking, which is, whenever you hear terms
like exceptional or uninvestable, it pays to think through whether
(01:55):
there's another side to that, because typically those things you
use the word bubble, but ply those types of words
start to reverberate when consensuses are so strong that things
are priced to some degree to perfection. You could take
one side of the world today China allegedly uninvestable, where
that's priced for uninvestibility, and you take the other side
(02:17):
of the world, the US, which is exceptional, and in
some parts of that market price for exceptionalism. I mean,
I tend to think that it really does pay to
think about the other side on that typically because that's
normally a moment of complacency. And indeed, if you were
to do something like Google trend search the word US exceptionalism,
I suspect it would probably peak sometime after the US
(02:40):
election in the fourth quarter last year, which was around
the time the market peaked. Big picture, nothing's uninvestable and
nothing's exceptional. It really markets and assets have values, and
those values have to be connected to reality, and I
think we could we should be thinking about things in
those terms. I think that what the sort of extraordinary,
if not exceptional, thing about US equities is the level
(03:03):
of concentration. And of course you've had times in the
past where equities have been highly concentrated. In nifty to
fifty was in the sixties was a period where we
saw kind of concentration in a broader basket of stocks
them Today, though, and what's extraordinary about today is that
if you take the S and P. Five hundred, you
have one and a half percent of the constituents by
(03:24):
number that account for thirty five percent of the index weight.
Speaker 1 (03:27):
And that's the Mega seven.
Speaker 2 (03:29):
And that's that that type of group that's problematic because
it means you are not really investing in a broad index.
You're investing in a kind of group of stocks. I
think that we are huge believers in everything that we
do in institutional portfolios at this company in diversification. And
where you end up today thinking investing in an SMP
(03:51):
tracker is I think you are in something that is
pretty undiversified, both in terms of number of stocks, but also,
and this is critical, in terms of the commonality of
the drivers of those stocks. Call them the mag seven
for example, are all broadly in a group technology, long
duration cash flows, as in like big growthy type companies,
(04:12):
high quality balance sheets. They've all got a certain type
of attribute and those attributes respond to macroeconomic conditions in
a very similar way. So if you're clustered into an
investment that is overweight one type of style, you have
to be prepared for the type to go out in
that type of style. That's a long intro to your question,
but in my mind, thinking about the medium term, let's
(04:34):
say the sort of five year plus time horizon, we
absolutely have to be thinking about diversifying holdings. It seems
unlikely to me that at the level of valuation that
US equities as a whole are to day and the
concentration of that group of stocks is at in particular,
that you're going to get super normal returns on a
(04:55):
multi year time horizon looking forward.
Speaker 1 (04:58):
But does that interrupt you briefly? Is that even the
case if these companies were to meet their long term
earnings forecasts. So if you look at some of the
forecasts for earnings for those huge companies there, I mean,
they're extraordinary, expecting earnings to grow twenty twenty five percent
five years out, et cetera. Look at that kind of thing,
and you say, well, if that was true, maybe these
valuations are justified. I wouldn't, by the way, but other
(05:19):
people mind.
Speaker 2 (05:20):
I would probably say, you need them to beat those
numbers to do well. So the bar's set high. That's
one thing. The bar is already set high. And that's
back to that point really about when you start getting
language like exceptionalism, it tells you that people are bought in.
There's a thematic or a narrative that starts to explain
things that you have to be a little bit skeptical
of the other side of it, though, quite simply, is
(05:42):
not the company earnings, which of course matter enormously for
the discrete stock if you buy that stock, but it's
also about the macroeconomic environment, and there are enormous cross
currents today in the global economy. I want to get
to inflation in a moment, but because it's critically important
and I think we're in a world today that's not
like one that any of us have really experienced in
(06:06):
our professional lifetimes. You could even just start with Europe
and what Europe today is intending to do with its
plan to rearm itself. Europe has been the big European
economies have been moribund for a long time, very stagnant,
very much lacking industrial policy in any form at all,
saddled with a lot of debt, low productivity growth. And
(06:27):
what you're talking about today, particularly coming out of Germany,
which she was an economy with plenty of fiscal room,
is something that I think dramatically changes the nominal growth
profile of that country, and in doing so, dramatically changes
the earnings growth potential of the companies in that country.
On a multi year view. Some estimates this is a
(06:48):
bigger stimulus for Germany than reunification for those who can
remember it, which was a big deal. So let's without
even necessarily having to wonder whether that group of exceptional
quote unquote exceptional US are going to beat their earnings,
you can start to think about the fact that there
are things moving in other parts of the world that
are probably not particularly well understood.
Speaker 1 (07:07):
The key thing to say is that they are alternatives
that until very recently, most equity investors will look around
the world and say, well, it's looking a little pricey,
But the truth is there isn't any alternative. And they
would also have believed, until relatively recently that all the
big gains in technology in AI and space and evs, etcetera, etcetera,
are all going to come from the US, not from China.
(07:28):
And maybe deepsek with the catalyst to say, do you
know what, Actually there's quite a lot going on in
AA and China. Maybe it's not uninvestable, maybe it is
an alternative. So Germany and China are two sides of
this beginning of an idea that there is an alternative.
Speaker 2 (07:42):
I think you're so spot on China. I think the
markets have this kind of tendency to have a sort
of single narrative that they latch onto, and the single
narrative on China has been deflationary bust. This is a
deflationary bust economy. And actually what you can see with
the emergence of deep sea with the news this week
about BYD's ultra fast battery charging for the electric vehicles,
(08:05):
is that actually, during this period of attempted containment of
the Chinese economy over the last almost decade, that China
has really learned to do more with less. This has
been an innovative catalyst for China, not a headwind, and
so I think that's an excellent point. But it's also,
by the way, just one part of what's going on
in China. Conviction has been building for some time that
(08:30):
the Chinese authorities, the policymakers there are really starting to
understand how to fix their deflationary risk. That there are
several pillars to this. The technology and innovation part is
of course a key one, but actually the really important
thing here, and we think we're probably likely to see
some much more concrete announcements on this later this year.
(08:52):
If the US and China do some kind of trade deal.
Is that we think we're moving into an environment where
the Chinese, as you makers, are going to reform their
social security system quite materially, and that's incredibly important because
China has a massive savings rate. In essence, what happens
in China is if you're a migrant worker, your social
(09:12):
security benefits are payable in the place that you were born,
not the place that you live, and that requires you
to save, and that means that consumption is repressed by that.
And the plan that's taking shape, we think, is one
which will allow social security benefits to follow your domicile
or your residence and will allow people to save less
and spend more. Which sounds boring, it will be enormous
(09:36):
for the Chinese economy, and actually we think we're on That's.
Speaker 1 (09:39):
Interesting because there's been talk for years about the Chinese
authorities understanding that they need to try and shift to
a more consumption based economy but finding it incredibly difficult
to do, not being able to find the route through
to make people start spending. But obviously this makes sense.
If you have a security net wherever you live, you're
much more likely to spend the money that you do have.
Speaker 2 (09:57):
Yes, and it's a different flavor to China. Let's say,
the one that people have been used to from the
twenty tens onwards has been a sort of luxury obsessed
China conspicuous consumption. And let's not forget that g was very,
very vocal about common prosperity. And we think that probably
the way this takes place is actually mass consumption, that
the shape of consumption in China will have changed. All
(10:19):
of which is just to say there are really interesting
opportunities outside the US. That the US is a dynamic market,
it's a phenomenal economy, It innovates brilliantly. It has a
place in everyone's portfolio. But there are opportunities today to
think about proper allocations outside the US before, if I may,
before we come onto inflation, which is really important. One
(10:39):
other thing, just so that I don't end up with
egg on my face. There is I think a real
possibility in the near term, call it the next few months,
that actually all this fear about the end of US
exceptionalism disappears. I think it's entirely possible. We've had this
big wobble in markets recently which has been very much
(11:02):
focused on the US, has been centered around unpredictable policy
around whether or not the economy will stay out of recession,
and it's I think reasonable to assume that actually, as
we get more clarity over policy, and it's entirely reasonable
for some of that risk premium to come back out again,
and we may well find ourselves in three months time
(11:22):
looking back at or near all time highs in US equities,
and people will think that's all over. It is not
to say that the earlier conversation about there being other
opportunities is wrong. It's just that actually these fears dissipate
quite quickly as prices change.
Speaker 1 (11:36):
I agree with you that could well happen. But I
also think that the perlavas over the last few months
and the shifts in the other markets relative to the
US might mean just a little bit of the spell
is broken. A little bit of the spell is broken,
and pretty much any global allocator sitting down now or
in three months or in six months is going to
have in mind that the US is not the only
(11:57):
market in the world, and have in mind that perhaps
they were far too concentrated in that market in a
fragmenting world.
Speaker 2 (12:04):
I don't disagree a soul.
Speaker 1 (12:05):
All right, I'm going to let you lose on inflation.
I know that's where you really want to go.
Speaker 2 (12:09):
I'm a child of the seventies in my blood, even
though I didn't know it. Inflation, yes, so inflation is
really important to markets. We have all through our professional
lives lived through this period that we call the Great Moderation,
which was really from the late eighties onwards. I think
the time was only coined in the early two thousands,
but it describes this environment that once central bankers in
(12:30):
the eighties and supply side reform in the US and
the UK and other countries had tamed inflation, we moved
to a much less volatile macroeconomic environment, and it was
a period in which asset prices obviously have done extraordinarily well,
and the world has grown tremendously through that period. What
we see in that time is that central banks explicitly
(12:53):
targeted inflation. Inflation has been very well behaved in general.
In fact, it's tended that the risks have been to
the downside, not the upside. So you would go through
a period like the dot Com bust, or the Great
Financial Crisis, or the Eurozone debt crisis, and central bankers
were always primed to act to defend against deflation, not
(13:14):
worrying about inflation. And we talk in markets about the
FED put this idea that the FED is there to
protect you. That comes from the fact that the Federal
Reserve the most important policy making central bank in the world,
even for us here in the UK, that when they
don't have to worry about inflation risks on the upside,
they can concentrate entirely on growth. So that's what that's
(13:36):
the world we've lived in. And what that's done for
markets and for savers is it's created this beautiful environment
where bond prices and stock prices are uncorrelated against each other.
And I'll explain a little bit what I mean by that.
It would mean that when you're in an environment like
(13:56):
the GFS either Great Financial Crisis twenty eight two thousand
and nine, as your equity allocation sold off on fears
of recession and systemic crisis, your bond portfolio performed extremely
well because the world could have conviction that central bankers
(14:18):
had your back. Effectively, they would cut rates and stimulate
policy sufficiently to rescue the economy, and in cutting rates
bonds would appreciate, bond values would go up on that.
So that was a world where to put some numbers
on it. In two thousand and eight or two thousand
and nine, by the trough of the Great Financial Crisis,
equities in the world had lost forty percent, but a
(14:41):
sixty to forty portfolio of bonds and equities had lost
about ten to twelve percent, really mitigated by having inverse
correlations opposite behavior of these two asset classes. What happened
in twenty twenty two when inflation came back is that
the conviction that central banks would be able to protect
(15:05):
you from disaster inequities dissipated. Suddenly, this policy goal that
no one had worried about for thirty five years came back.
So what we found was that actually, as equity prices
came down, central bankers not only didn't have our back,
they were making things worse by hiking interest rates, quote unquote,
(15:26):
making things worse. They were dealing with an inflation problem.
And what that did at that point in your portfolio
was it meant you lost money in both equities and bonds.
And that was a real shock, I think, to the industry,
and I guess what we worry about with inflation is
that it's a little bit a case that once the
(15:46):
genie's out of the bottle, it's quite hard to get
it back in again. Inflation expectations get very sticky. We
see this everywhere in the world. Japan, which has been
a good equity market story for the last couple of years.
In particular, Japan has had some central bank surveys on
inflation and they show almost unprecedented expectations of inflation, both
by households and businesses. In the UK here last week,
(16:09):
I think it was we had wage data private sector
earnings which are growing at about six percent. So you
think about the fact that this economy is really not
growing very much today at all, but there is an
entrenched expectation of wage growth and there isn't very much
productivity growth in the UK to support that. That's a
problem because that's starting to demonstrate that actually inflation is
becoming systemic to some extent, which is problematic. Now that
(16:33):
doesn't mean we believe that you're going to experience inflation
going back up to double digits again, as it did
in twenty twenty one twenty twenty two, but what it
may well mean is that we're in an environment where
it's a bit above target for quite a long time,
and if we find ourselves in a situation where growth
starts to disappoint, central banks will be constrained on how
(16:54):
much they can cut.
Speaker 1 (16:56):
Yeah. Well, there was an interesting survey that we talked
about at the time. You may have seen when inflation
was worth very high in the UK feedback that once
inflation goes over eight percent, it's really hard to get
it back to target. You know, it takes I think
it was an average of fourteen years from that sebect.
It doesn't mean that you get hyper inflation, doesn't mean
it goes fifteen percent. Just means that once you go
over eighty eight percent, people really notice. There's a new
(17:18):
generational understanding that this can happen to prices, and people
fight it. So it's hard to get it back down
to two. Maybe you can get it to four, and
maybe you can get it to three, two point eight,
two point nine. Man to get it back down to
two very hard.
Speaker 2 (17:30):
I think that's absolutely right. I think that's absolutely right.
I think it just tying it back to your very
first question, which is about US equity markets. The other
thing in all of this is that the companies today
that are the biggest, most successful, best performing companies in
US equities over the last five to ten years are
actually the ones that are most sensitive to inflation. We
(17:52):
have this concept that we think about, which is a
bit technical, but the duration of cash flows. And what
we mean by that is if you're a really growthy company,
if you're an AI company that's got a runway of
growth for the next twenty years, the market will award
you a really high multiple. Your valuation will be high
(18:14):
on the expectation of that incredibly long runway for growth.
In contrast, if you're a company that has a bunch
of factories that make ball bearings, and you know exactly
how many ball bearings are coming out every year and
what the price of those ball bearings will be, you've
got what we think of its short duration cash flows.
The latter is not very sensitive to interest rates because
(18:35):
it's very predictable and short in nature, so when you
discount it, the impact is not very much the former.
When you put interest rates up into your model on
how you value that incredibly long stream of earnings and
cash flows, it has a much much bigger impact and
so guess what, no surprise. In twenty twenty two, when
this inflation thing really bit, one of the worst performing
(18:56):
equity markets was the US relative terms of the UK,
which is a value market, did really well.
Speaker 1 (19:02):
Right.
Speaker 2 (19:02):
So there's two big implications for this. I think one
is your first question, which is we've got to think about,
if inflation is sticky, how we allocate in the world.
And the other is in thinking about multi asset portfolios,
which is a really sensible way to save, particularly depending
on where you are in your time of life, but
that multi asset portfolios may well not give you the
(19:23):
protection today that they have done for such a long
period of time in the past.
Speaker 1 (19:28):
Let's be the first bit of that. First, in a
global inflationary environment, in an equity sense, which markets look
the most attractive.
Speaker 2 (19:37):
Cheap ones?
Speaker 1 (19:38):
Yeah, cheap one one for the UK.
Speaker 2 (19:42):
Yeah, Look, there's certainly a case for it. I think
we have a lot of high quality assets in the
UK that trade it discounts. And I think there's also
this extraordinary thing that we've seen both of the UK
and continental Europe, which is what we think of as
the postcode phenomenon, which is you can have a business
that's domiciled in Europe or the UK, that trades at
(20:03):
a material discount to a US peer, even if it
has a large proportion of its assets or earnings coming
from the US, And that just speaks to the way
that capital is allocated, that it's been moving perhaps passively or.
Speaker 1 (20:19):
Yeah, I was going to say, it's a function of
passive investment. Right, People invest with an allocation into the
US and a very small allocation to the UK. So
the automatic result is that American companies will be more
highly valued than UK companies, regardless of what it is
that they do. A should be a great opportunity for
the stock pick or the individual investor, just hasn't worked
out that way recently.
Speaker 2 (20:37):
If you have a long enough time horizon, or even
a medium term time horizon, I think there is now
There are now tailwinds for that valuation gap to close
that there probably haven't been before.
Speaker 1 (20:48):
You say, cheap we said the UK, China, Japan, certain
emerging markets.
Speaker 2 (20:54):
Yeah, all of those.
Speaker 1 (20:55):
Basically everywhere except for America.
Speaker 2 (20:57):
And within the US, there are plenty of good companies
that also by virtue of size or style or sector,
are overlooked. So I think there is I think it's
a world in which active management probably guess what the
active manager says, as a world in which active management
couldn't work well. But actually there's a world.
Speaker 1 (21:16):
I think how many active managers we have who tell
us that the age of actor is back?
Speaker 2 (21:21):
It would be a shame if we didn't. But I
do think there is a lot of value to identify
in markets today, and there are a lot of different
macroeconomic impulses that are making those catalysts become a bit
more real versus where they were ten years ago.
Speaker 1 (21:32):
Perhaps the politics of America will probably mean because another
layer of inflation, doesn't it that there are new tariffs
and produced globally. Trade wars are expensive.
Speaker 2 (21:42):
It's such an interesting question. Actually, we've done an awful
lot of discussion of this. I work with it. For
those of your listeners who'd like to read, I work
with an extremely talented macroanalyst called Henry Neville, who writes
prodigiously and publishes on our website and anyone can read it,
and he writes on very interesting macro topics. But he
and I spent a great deal of time trying to
(22:03):
discussing the impact of tariffs on inflation because it is
it seems to be the case that all analysis we
see of it focuses on the mechanical impact of a
price increase for the consumer, which is, of course, in
the moment that it happens, inflationary. But actually, if you
look back over history, if you look at the nineteen thirties,
(22:24):
which had some obvious specific context of its own in
terms of the Great Depression that had preceded it, but
actually tariffs during that period were actually very disinflationary or deflationary.
And you can also think about a tariff in some
way like a sales tax, and we have a more
recent experience in the last decade of Japan implementing sales
(22:45):
taxes where when you look at the experience of inflation,
you have a bump that reflects the imposition of the
sales tax, and then as that comes out of the
year on year comparison, things just normalize again. So it
isn't obvious to me after tariffs what the inflationary consequences
of tariffs are. I think, what is I mean? It
(23:06):
is obvious that you will have a step change in
inflation to reflect tariffs. It's also the case that probably
a less globalized world with more fragmented supply chains is
something that will have a tendency to be more inflation.
Speaker 1 (23:22):
Okay, let's go to your second part. Then, how in
environment like this, if you can't use your old sixty
to forty portfolio to protect you anymore, what do you
put in your multi asset portfolio? And we've had various
suggestions on the podcast over the last few months, and
it mostly end up coming down on global equities with
a lot more balanced than you have at the moment,
(23:42):
for sixty percent cash for forty percent, gold for forty
percent gold, or bitcoin for the other forty percent, etc.
And then we had the abliity as well, a big
part of private equity, which we wouldn't necessarily feel would
be the answer. What's your answer?
Speaker 2 (23:56):
I would frame it in a couple of ways. I
think that the multi asset portfolio has definitely still got
a real use. I think it's a really good way
for individual investors to get a diversified portfolio. But I
think if you're cognizant of the risk that I've mentioned,
that perhaps the bomb part of it doesn't protect you
(24:17):
when you need it. Now you need to think about
implementations of multi asset portfolios that then think about managing
risk a bit more dynamically. One way to think about
that is portfolios that can identify where correlations between different
asset classes are changing and dynamically shift the allocation or
(24:39):
reduce the allocation to one of those asset classes. So
that's something that we can do systematically, but it's a
way of ensuring that you can stay in a really
efficient multi asset portfolio but avoid some of the kind
of some of the extremes of equity volatility, particularly if
you don't believe you're going to get rescued by the
bomb market. The other thing that we think makes a
(25:03):
great deal of sense, and the conversations that we have
with big allocators, I think reflect this is the introduction
of liquid alternatives into your portfolio. And that's just a
bit of terminology that really requires some explanation.
Speaker 1 (25:15):
It does because when we think about alternatives, probably most
of our listeners, when they think about alternatives, they're mainly
thinking about things which are very I liquid, right, So
they're thinking, they're thinking about private equity, they're thinking about property,
they're thinking about forestry. Maybe they're thinking about a physical
portfolio of metals, etc. They're not thinking about anything that
is particularly liquid. So this is new for us.
Speaker 2 (25:36):
That way merin b dragons, we think, because the liquid
part's really critical if you think about what I've described
about the relationship between So let's say you have your
core exposure, your core portfolio that gives you some exposure
to bonds, which is a pretty good thing today. They
yield something nice. You get an income out of bonds
that you haven't had for many years. So you want
some bonds and you want some equities because they're a
(25:58):
good long term growth asset. If you have a year
like twenty twenty two and both of them draw down
at the same period of time, and you're not able
to tap your alternatives, which are by definition designed to diversify,
then in our mind, they've failed to do their job.
The problem that I think, the thing we worry about
(26:21):
with private equity is twofold. The first is that what
you're actually investing in is a portfolio of smaller companies
that are subject to the same macroeconomic and micro forces
that public equities are. So they are companies that have
to earn cash flows and deliver earnings and pay dividends
(26:44):
and pay off debt and do all the things that
public companies have to do, but you're doing it in
a liquid form. So the first question is it actually
an alternative? Is it a diversifier? People think it's a
diversifier because it doesn't price very regularly, but actually is
the inherent volatility and cash flow profile of that investment
different from what you have in public equities. So that's
(27:05):
question number one. But then question number two is even
if it is that, the value of a liquid diversifying
alternative is that you can tap it when you need it,
and if you can't tap it for seven or eight years,
then the question is it actually diversifying for you? And
does it have a function that allows you to opportunistically
add exposure when you need it. I'll give you an example,
(27:29):
a really recent example in the UK, which is twenty
twenty two September the LDI crisis. So that was a
period where the UK sixty forty portfolio lost about eight
percent in two weeks, which is a lot, right. This
is a balanced portfolio that many pension schemes are exposed to,
and it lost eight percent in two weeks. Over the
(27:51):
same period, a diversified portfolio of what we call liquid alternatives,
so things that perhaps incorporate equity market neutral, non directional
equities trend following multi asset investing, but in an alternative
form over a similar period, it made about four percent
(28:12):
now the liquidity of that portfolio. If you've got something
that's moving in the opposite direction to your core portfolio
and it's highly liquid, you can liquidate it and you
can buy more of the traditional assets that are at
that moment in time dislocated. And that's got a real value.
It's got a real value to institutional scale asset allocators,
and it's got a real value to retail investors as well.
Speaker 1 (28:35):
Okay, I'm going to put links in the show notes
to your very interesting sounding economist, was it Henry Neville?
Speaker 2 (28:41):
Henry Neville?
Speaker 1 (28:42):
Henry Neville, And I'm going to put a link if
you don't mind. The report that you wrote on this
type of diversification. Very good, so that we just going
to look at it more carefully because is super interesting.
Can I ask you one or two other quick questions?
Speaker 2 (28:54):
Please?
Speaker 1 (28:55):
China up a lot this year so far. I'm still
happy with that.
Speaker 2 (28:58):
For the rest of the year, yeah, I think it
will take a pause I think we've gone from uninvestable
to investable. So where I started, which is beware of
narratives and how they change in consensuses. Let me put
it this way, I wouldn't be surprised. I think I
said at the beginning of this year that a reasonable
bingo kard would be China for the best performing market
in the US to give you pretty much nothing, and
I still think that's probably recent.
Speaker 1 (29:19):
Okay, what are you reading at the moment?
Speaker 2 (29:21):
That's an excellent question. I'm reading a book of ts
Eliot's poetry, because I'm woefully poorly read when it comes
to T. S. Eliot. I have to say, actually that
if your readers are looking for advice on finance books,
I'm the wrong person because I'm trying to spend my
time learning more about the human condition and less about
financial markets.
Speaker 1 (29:41):
Some people would say those were the same things. Final
question bitcoin on gold, gold.
Speaker 2 (29:48):
I would It's not to say that I don't think
there's a regulatory tailwind that supports crypto, but I think
gold has an established use as a store of value
over millennia. We know that we've done some really interesting work.
We did a paper, an academic paper called the best
strategies for the worst times, in which we look at
(30:08):
different ways to protect wealth in the worst part of
equity drawdowns, and actually generally in bad times, gold gives
you a positive excess return or positive real returns. I
tend to think that for the long term, you want
to be in something that has a proven store of value.
Speaker 1 (30:23):
That's why we like it too. Thanks Ed, it's been
really good having you on Great pleasure, Maren.
Speaker 2 (30:28):
Thank you very much.
Speaker 1 (30:33):
Thanks for listening to this week's Maren Talk to Your Money.
If you like us, share rate, review, and subscribe wherever
you listen to the podcasts and keep sending questions or
comments to Merror Money at Bloomberg dot net. You can
also follow me and John on Twitter or x I'm
at Meren sw and John is John Underscore stepek Eddie
on Twitter. I am not I had a feeling you
were going to say that, but you know, if you're
interested in the human condition, it's all out there.
Speaker 2 (30:55):
I was once and then I found that it was
possibly a facet of the human condition I didn't like
too much.
Speaker 1 (31:00):
Fair enough, fair Enough. This episode was hosted by me
Maren zamzet Web. It was produced by Someersadi production and
support by Moses and especial thanks of course to ed
Cole
Bloomberg Audio Studios, Podcasts, Radio News. Welcome to Maren Talk
to Money, the podcast in which people who know the
markets explain the markets. I'm Meren sums Thatt Web. This
(00:22):
week I am speaking with Ed Cole, head of Multi
Strategy Equities within Solutions at Man Group. Complicated titl. Ed,
Thanks for joining us today.
Speaker 2 (00:30):
Thank you for having me Mere in complicated title, but
a simple person.
Speaker 1 (00:33):
Okay, and hopefully everything you're going to tell us is
also going to be really simple, straightforward and one hundred
percent accurate.
Speaker 2 (00:39):
I won't make that promise, but let's see where we go.
Speaker 1 (00:41):
What we want is correct forecasts on this show to
help us get through these difficult times. Listen, what I
really want to talk about is equity markets as a whole.
We've been writing a lot and talking a lot about
whether there is a great rebalancing going on from the
US equity market to effectively all of the rest of
the world. I don't know whether you would consider what
has been happening in the US market of the last
year or so well before January this year, whether they're
(01:03):
constituted a bubble or just a very expensive market. But
one way or another, possibly it's not that surprising to
see American exceptionalism begin to be questioned in the context
of the US equity market and for there to begin
to be flows into other markets, most obviously Europe at
the moment. But big question for our listeners, particularly as
we come up to the end of ice season, is
(01:23):
if they're investing now, should they say, Okay, do you
know what have made a lot of money in America
over the last decade, and maybe it's time to look elsewhere?
Speaker 2 (01:32):
And if that is the case, where yeah, extac question
a question of course that preoccupies those thinking about their ISA,
but also those that are allocating large sovereign pools of
money as well. I'd start with a bit of kind
of common sense thinking, which is, whenever you hear terms
like exceptional or uninvestable, it pays to think through whether
(01:55):
there's another side to that, because typically those things you
use the word bubble, but ply those types of words
start to reverberate when consensuses are so strong that things
are priced to some degree to perfection. You could take
one side of the world today China allegedly uninvestable, where
that's priced for uninvestibility, and you take the other side
(02:17):
of the world, the US, which is exceptional, and in
some parts of that market price for exceptionalism. I mean,
I tend to think that it really does pay to
think about the other side on that typically because that's
normally a moment of complacency. And indeed, if you were
to do something like Google trend search the word US exceptionalism,
I suspect it would probably peak sometime after the US
(02:40):
election in the fourth quarter last year, which was around
the time the market peaked. Big picture, nothing's uninvestable and
nothing's exceptional. It really markets and assets have values, and
those values have to be connected to reality, and I
think we could we should be thinking about things in
those terms. I think that what the sort of extraordinary,
if not exceptional, thing about US equities is the level
(03:03):
of concentration. And of course you've had times in the
past where equities have been highly concentrated. In nifty to
fifty was in the sixties was a period where we
saw kind of concentration in a broader basket of stocks
them Today, though, and what's extraordinary about today is that
if you take the S and P. Five hundred, you
have one and a half percent of the constituents by
(03:24):
number that account for thirty five percent of the index weight.
Speaker 1 (03:27):
And that's the Mega seven.
Speaker 2 (03:29):
And that's that that type of group that's problematic because
it means you are not really investing in a broad index.
You're investing in a kind of group of stocks. I
think that we are huge believers in everything that we
do in institutional portfolios at this company in diversification. And
where you end up today thinking investing in an SMP
(03:51):
tracker is I think you are in something that is
pretty undiversified, both in terms of number of stocks, but also,
and this is critical, in terms of the commonality of
the drivers of those stocks. Call them the mag seven
for example, are all broadly in a group technology, long
duration cash flows, as in like big growthy type companies,
(04:12):
high quality balance sheets. They've all got a certain type
of attribute and those attributes respond to macroeconomic conditions in
a very similar way. So if you're clustered into an
investment that is overweight one type of style, you have
to be prepared for the type to go out in
that type of style. That's a long intro to your question,
but in my mind, thinking about the medium term, let's
(04:34):
say the sort of five year plus time horizon, we
absolutely have to be thinking about diversifying holdings. It seems
unlikely to me that at the level of valuation that
US equities as a whole are to day and the
concentration of that group of stocks is at in particular,
that you're going to get super normal returns on a
(04:55):
multi year time horizon looking forward.
Speaker 1 (04:58):
But does that interrupt you briefly? Is that even the
case if these companies were to meet their long term
earnings forecasts. So if you look at some of the
forecasts for earnings for those huge companies there, I mean,
they're extraordinary, expecting earnings to grow twenty twenty five percent
five years out, et cetera. Look at that kind of thing,
and you say, well, if that was true, maybe these
valuations are justified. I wouldn't, by the way, but other
(05:19):
people mind.
Speaker 2 (05:20):
I would probably say, you need them to beat those
numbers to do well. So the bar's set high. That's
one thing. The bar is already set high. And that's
back to that point really about when you start getting
language like exceptionalism, it tells you that people are bought in.
There's a thematic or a narrative that starts to explain
things that you have to be a little bit skeptical
of the other side of it, though, quite simply, is
(05:42):
not the company earnings, which of course matter enormously for
the discrete stock if you buy that stock, but it's
also about the macroeconomic environment, and there are enormous cross
currents today in the global economy. I want to get
to inflation in a moment, but because it's critically important
and I think we're in a world today that's not
like one that any of us have really experienced in
(06:06):
our professional lifetimes. You could even just start with Europe
and what Europe today is intending to do with its
plan to rearm itself. Europe has been the big European
economies have been moribund for a long time, very stagnant,
very much lacking industrial policy in any form at all,
saddled with a lot of debt, low productivity growth. And
(06:27):
what you're talking about today, particularly coming out of Germany,
which she was an economy with plenty of fiscal room,
is something that I think dramatically changes the nominal growth
profile of that country, and in doing so, dramatically changes
the earnings growth potential of the companies in that country.
On a multi year view. Some estimates this is a
(06:48):
bigger stimulus for Germany than reunification for those who can
remember it, which was a big deal. So let's without
even necessarily having to wonder whether that group of exceptional
quote unquote exceptional US are going to beat their earnings,
you can start to think about the fact that there
are things moving in other parts of the world that
are probably not particularly well understood.
Speaker 1 (07:07):
The key thing to say is that they are alternatives
that until very recently, most equity investors will look around
the world and say, well, it's looking a little pricey,
But the truth is there isn't any alternative. And they
would also have believed, until relatively recently that all the
big gains in technology in AI and space and evs, etcetera, etcetera,
are all going to come from the US, not from China.
(07:28):
And maybe deepsek with the catalyst to say, do you
know what, Actually there's quite a lot going on in
AA and China. Maybe it's not uninvestable, maybe it is
an alternative. So Germany and China are two sides of
this beginning of an idea that there is an alternative.
Speaker 2 (07:42):
I think you're so spot on China. I think the
markets have this kind of tendency to have a sort
of single narrative that they latch onto, and the single
narrative on China has been deflationary bust. This is a
deflationary bust economy. And actually what you can see with
the emergence of deep sea with the news this week
about BYD's ultra fast battery charging for the electric vehicles,
(08:05):
is that actually, during this period of attempted containment of
the Chinese economy over the last almost decade, that China
has really learned to do more with less. This has
been an innovative catalyst for China, not a headwind, and
so I think that's an excellent point. But it's also,
by the way, just one part of what's going on
in China. Conviction has been building for some time that
(08:30):
the Chinese authorities, the policymakers there are really starting to
understand how to fix their deflationary risk. That there are
several pillars to this. The technology and innovation part is
of course a key one, but actually the really important
thing here, and we think we're probably likely to see
some much more concrete announcements on this later this year.
(08:52):
If the US and China do some kind of trade deal.
Is that we think we're moving into an environment where
the Chinese, as you makers, are going to reform their
social security system quite materially, and that's incredibly important because
China has a massive savings rate. In essence, what happens
in China is if you're a migrant worker, your social
(09:12):
security benefits are payable in the place that you were born,
not the place that you live, and that requires you
to save, and that means that consumption is repressed by that.
And the plan that's taking shape, we think, is one
which will allow social security benefits to follow your domicile
or your residence and will allow people to save less
and spend more. Which sounds boring, it will be enormous
(09:36):
for the Chinese economy, and actually we think we're on That's.
Speaker 1 (09:39):
Interesting because there's been talk for years about the Chinese
authorities understanding that they need to try and shift to
a more consumption based economy but finding it incredibly difficult
to do, not being able to find the route through
to make people start spending. But obviously this makes sense.
If you have a security net wherever you live, you're
much more likely to spend the money that you do have.
Speaker 2 (09:57):
Yes, and it's a different flavor to China. Let's say,
the one that people have been used to from the
twenty tens onwards has been a sort of luxury obsessed
China conspicuous consumption. And let's not forget that g was very,
very vocal about common prosperity. And we think that probably
the way this takes place is actually mass consumption, that
the shape of consumption in China will have changed. All
(10:19):
of which is just to say there are really interesting
opportunities outside the US. That the US is a dynamic market,
it's a phenomenal economy, It innovates brilliantly. It has a
place in everyone's portfolio. But there are opportunities today to
think about proper allocations outside the US before, if I may,
before we come onto inflation, which is really important. One
(10:39):
other thing, just so that I don't end up with
egg on my face. There is I think a real
possibility in the near term, call it the next few months,
that actually all this fear about the end of US
exceptionalism disappears. I think it's entirely possible. We've had this
big wobble in markets recently which has been very much
(11:02):
focused on the US, has been centered around unpredictable policy
around whether or not the economy will stay out of recession,
and it's I think reasonable to assume that actually, as
we get more clarity over policy, and it's entirely reasonable
for some of that risk premium to come back out again,
and we may well find ourselves in three months time
(11:22):
looking back at or near all time highs in US equities,
and people will think that's all over. It is not
to say that the earlier conversation about there being other
opportunities is wrong. It's just that actually these fears dissipate
quite quickly as prices change.
Speaker 1 (11:36):
I agree with you that could well happen. But I
also think that the perlavas over the last few months
and the shifts in the other markets relative to the
US might mean just a little bit of the spell
is broken. A little bit of the spell is broken,
and pretty much any global allocator sitting down now or
in three months or in six months is going to
have in mind that the US is not the only
(11:57):
market in the world, and have in mind that perhaps
they were far too concentrated in that market in a
fragmenting world.
Speaker 2 (12:04):
I don't disagree a soul.
Speaker 1 (12:05):
All right, I'm going to let you lose on inflation.
I know that's where you really want to go.
Speaker 2 (12:09):
I'm a child of the seventies in my blood, even
though I didn't know it. Inflation, yes, so inflation is
really important to markets. We have all through our professional
lives lived through this period that we call the Great Moderation,
which was really from the late eighties onwards. I think
the time was only coined in the early two thousands,
but it describes this environment that once central bankers in
(12:30):
the eighties and supply side reform in the US and
the UK and other countries had tamed inflation, we moved
to a much less volatile macroeconomic environment, and it was
a period in which asset prices obviously have done extraordinarily well,
and the world has grown tremendously through that period. What
we see in that time is that central banks explicitly
(12:53):
targeted inflation. Inflation has been very well behaved in general.
In fact, it's tended that the risks have been to
the downside, not the upside. So you would go through
a period like the dot Com bust, or the Great
Financial Crisis, or the Eurozone debt crisis, and central bankers
were always primed to act to defend against deflation, not
(13:14):
worrying about inflation. And we talk in markets about the
FED put this idea that the FED is there to
protect you. That comes from the fact that the Federal
Reserve the most important policy making central bank in the world,
even for us here in the UK, that when they
don't have to worry about inflation risks on the upside,
they can concentrate entirely on growth. So that's what that's
(13:36):
the world we've lived in. And what that's done for
markets and for savers is it's created this beautiful environment
where bond prices and stock prices are uncorrelated against each other.
And I'll explain a little bit what I mean by that.
It would mean that when you're in an environment like
(13:56):
the GFS either Great Financial Crisis twenty eight two thousand
and nine, as your equity allocation sold off on fears
of recession and systemic crisis, your bond portfolio performed extremely
well because the world could have conviction that central bankers
(14:18):
had your back. Effectively, they would cut rates and stimulate
policy sufficiently to rescue the economy, and in cutting rates
bonds would appreciate, bond values would go up on that.
So that was a world where to put some numbers
on it. In two thousand and eight or two thousand
and nine, by the trough of the Great Financial Crisis,
equities in the world had lost forty percent, but a
(14:41):
sixty to forty portfolio of bonds and equities had lost
about ten to twelve percent, really mitigated by having inverse
correlations opposite behavior of these two asset classes. What happened
in twenty twenty two when inflation came back is that
the conviction that central banks would be able to protect
(15:05):
you from disaster inequities dissipated. Suddenly, this policy goal that
no one had worried about for thirty five years came back.
So what we found was that actually, as equity prices
came down, central bankers not only didn't have our back,
they were making things worse by hiking interest rates, quote unquote,
(15:26):
making things worse. They were dealing with an inflation problem.
And what that did at that point in your portfolio
was it meant you lost money in both equities and bonds.
And that was a real shock, I think, to the industry,
and I guess what we worry about with inflation is
that it's a little bit a case that once the
(15:46):
genie's out of the bottle, it's quite hard to get
it back in again. Inflation expectations get very sticky. We
see this everywhere in the world. Japan, which has been
a good equity market story for the last couple of years.
In particular, Japan has had some central bank surveys on
inflation and they show almost unprecedented expectations of inflation, both
by households and businesses. In the UK here last week,
(16:09):
I think it was we had wage data private sector
earnings which are growing at about six percent. So you
think about the fact that this economy is really not
growing very much today at all, but there is an
entrenched expectation of wage growth and there isn't very much
productivity growth in the UK to support that. That's a
problem because that's starting to demonstrate that actually inflation is
becoming systemic to some extent, which is problematic. Now that
(16:33):
doesn't mean we believe that you're going to experience inflation
going back up to double digits again, as it did
in twenty twenty one twenty twenty two, but what it
may well mean is that we're in an environment where
it's a bit above target for quite a long time,
and if we find ourselves in a situation where growth
starts to disappoint, central banks will be constrained on how
(16:54):
much they can cut.
Speaker 1 (16:56):
Yeah. Well, there was an interesting survey that we talked
about at the time. You may have seen when inflation
was worth very high in the UK feedback that once
inflation goes over eight percent, it's really hard to get
it back to target. You know, it takes I think
it was an average of fourteen years from that sebect.
It doesn't mean that you get hyper inflation, doesn't mean
it goes fifteen percent. Just means that once you go
over eighty eight percent, people really notice. There's a new
(17:18):
generational understanding that this can happen to prices, and people
fight it. So it's hard to get it back down
to two. Maybe you can get it to four, and
maybe you can get it to three, two point eight,
two point nine. Man to get it back down to
two very hard.
Speaker 2 (17:30):
I think that's absolutely right. I think that's absolutely right.
I think it just tying it back to your very
first question, which is about US equity markets. The other
thing in all of this is that the companies today
that are the biggest, most successful, best performing companies in
US equities over the last five to ten years are
actually the ones that are most sensitive to inflation. We
(17:52):
have this concept that we think about, which is a
bit technical, but the duration of cash flows. And what
we mean by that is if you're a really growthy company,
if you're an AI company that's got a runway of
growth for the next twenty years, the market will award
you a really high multiple. Your valuation will be high
(18:14):
on the expectation of that incredibly long runway for growth.
In contrast, if you're a company that has a bunch
of factories that make ball bearings, and you know exactly
how many ball bearings are coming out every year and
what the price of those ball bearings will be, you've
got what we think of its short duration cash flows.
The latter is not very sensitive to interest rates because
(18:35):
it's very predictable and short in nature, so when you
discount it, the impact is not very much the former.
When you put interest rates up into your model on
how you value that incredibly long stream of earnings and
cash flows, it has a much much bigger impact and
so guess what, no surprise. In twenty twenty two, when
this inflation thing really bit, one of the worst performing
(18:56):
equity markets was the US relative terms of the UK,
which is a value market, did really well.
Speaker 1 (19:02):
Right.
Speaker 2 (19:02):
So there's two big implications for this. I think one
is your first question, which is we've got to think about,
if inflation is sticky, how we allocate in the world.
And the other is in thinking about multi asset portfolios,
which is a really sensible way to save, particularly depending
on where you are in your time of life, but
that multi asset portfolios may well not give you the
(19:23):
protection today that they have done for such a long
period of time in the past.
Speaker 1 (19:28):
Let's be the first bit of that. First, in a
global inflationary environment, in an equity sense, which markets look
the most attractive.
Speaker 2 (19:37):
Cheap ones?
Speaker 1 (19:38):
Yeah, cheap one one for the UK.
Speaker 2 (19:42):
Yeah, Look, there's certainly a case for it. I think
we have a lot of high quality assets in the
UK that trade it discounts. And I think there's also
this extraordinary thing that we've seen both of the UK
and continental Europe, which is what we think of as
the postcode phenomenon, which is you can have a business
that's domiciled in Europe or the UK, that trades at
(20:03):
a material discount to a US peer, even if it
has a large proportion of its assets or earnings coming
from the US, And that just speaks to the way
that capital is allocated, that it's been moving perhaps passively or.
Speaker 1 (20:19):
Yeah, I was going to say, it's a function of
passive investment. Right, People invest with an allocation into the
US and a very small allocation to the UK. So
the automatic result is that American companies will be more
highly valued than UK companies, regardless of what it is
that they do. A should be a great opportunity for
the stock pick or the individual investor, just hasn't worked
out that way recently.
Speaker 2 (20:37):
If you have a long enough time horizon, or even
a medium term time horizon, I think there is now
There are now tailwinds for that valuation gap to close
that there probably haven't been before.
Speaker 1 (20:48):
You say, cheap we said the UK, China, Japan, certain
emerging markets.
Speaker 2 (20:54):
Yeah, all of those.
Speaker 1 (20:55):
Basically everywhere except for America.
Speaker 2 (20:57):
And within the US, there are plenty of good companies
that also by virtue of size or style or sector,
are overlooked. So I think there is I think it's
a world in which active management probably guess what the
active manager says, as a world in which active management
couldn't work well. But actually there's a world.
Speaker 1 (21:16):
I think how many active managers we have who tell
us that the age of actor is back?
Speaker 2 (21:21):
It would be a shame if we didn't. But I
do think there is a lot of value to identify
in markets today, and there are a lot of different
macroeconomic impulses that are making those catalysts become a bit
more real versus where they were ten years ago.
Speaker 1 (21:32):
Perhaps the politics of America will probably mean because another
layer of inflation, doesn't it that there are new tariffs
and produced globally. Trade wars are expensive.
Speaker 2 (21:42):
It's such an interesting question. Actually, we've done an awful
lot of discussion of this. I work with it. For
those of your listeners who'd like to read, I work
with an extremely talented macroanalyst called Henry Neville, who writes
prodigiously and publishes on our website and anyone can read it,
and he writes on very interesting macro topics. But he
and I spent a great deal of time trying to
(22:03):
discussing the impact of tariffs on inflation because it is
it seems to be the case that all analysis we
see of it focuses on the mechanical impact of a
price increase for the consumer, which is, of course, in
the moment that it happens, inflationary. But actually, if you
look back over history, if you look at the nineteen thirties,
(22:24):
which had some obvious specific context of its own in
terms of the Great Depression that had preceded it, but
actually tariffs during that period were actually very disinflationary or deflationary.
And you can also think about a tariff in some
way like a sales tax, and we have a more
recent experience in the last decade of Japan implementing sales
(22:45):
taxes where when you look at the experience of inflation,
you have a bump that reflects the imposition of the
sales tax, and then as that comes out of the
year on year comparison, things just normalize again. So it
isn't obvious to me after tariffs what the inflationary consequences
of tariffs are. I think, what is I mean? It
(23:06):
is obvious that you will have a step change in
inflation to reflect tariffs. It's also the case that probably
a less globalized world with more fragmented supply chains is
something that will have a tendency to be more inflation.
Speaker 1 (23:22):
Okay, let's go to your second part. Then, how in
environment like this, if you can't use your old sixty
to forty portfolio to protect you anymore, what do you
put in your multi asset portfolio? And we've had various
suggestions on the podcast over the last few months, and
it mostly end up coming down on global equities with
a lot more balanced than you have at the moment,
(23:42):
for sixty percent cash for forty percent, gold for forty
percent gold, or bitcoin for the other forty percent, etc.
And then we had the abliity as well, a big
part of private equity, which we wouldn't necessarily feel would
be the answer. What's your answer?
Speaker 2 (23:56):
I would frame it in a couple of ways. I
think that the multi asset portfolio has definitely still got
a real use. I think it's a really good way
for individual investors to get a diversified portfolio. But I
think if you're cognizant of the risk that I've mentioned,
that perhaps the bomb part of it doesn't protect you
(24:17):
when you need it. Now you need to think about
implementations of multi asset portfolios that then think about managing
risk a bit more dynamically. One way to think about
that is portfolios that can identify where correlations between different
asset classes are changing and dynamically shift the allocation or
(24:39):
reduce the allocation to one of those asset classes. So
that's something that we can do systematically, but it's a
way of ensuring that you can stay in a really
efficient multi asset portfolio but avoid some of the kind
of some of the extremes of equity volatility, particularly if
you don't believe you're going to get rescued by the
bomb market. The other thing that we think makes a
(25:03):
great deal of sense, and the conversations that we have
with big allocators, I think reflect this is the introduction
of liquid alternatives into your portfolio. And that's just a
bit of terminology that really requires some explanation.
Speaker 1 (25:15):
It does because when we think about alternatives, probably most
of our listeners, when they think about alternatives, they're mainly
thinking about things which are very I liquid, right, So
they're thinking, they're thinking about private equity, they're thinking about property,
they're thinking about forestry. Maybe they're thinking about a physical
portfolio of metals, etc. They're not thinking about anything that
is particularly liquid. So this is new for us.
Speaker 2 (25:36):
That way merin b dragons, we think, because the liquid
part's really critical if you think about what I've described
about the relationship between So let's say you have your
core exposure, your core portfolio that gives you some exposure
to bonds, which is a pretty good thing today. They
yield something nice. You get an income out of bonds
that you haven't had for many years. So you want
some bonds and you want some equities because they're a
(25:58):
good long term growth asset. If you have a year
like twenty twenty two and both of them draw down
at the same period of time, and you're not able
to tap your alternatives, which are by definition designed to diversify,
then in our mind, they've failed to do their job.
The problem that I think, the thing we worry about
(26:21):
with private equity is twofold. The first is that what
you're actually investing in is a portfolio of smaller companies
that are subject to the same macroeconomic and micro forces
that public equities are. So they are companies that have
to earn cash flows and deliver earnings and pay dividends
(26:44):
and pay off debt and do all the things that
public companies have to do, but you're doing it in
a liquid form. So the first question is it actually
an alternative? Is it a diversifier? People think it's a
diversifier because it doesn't price very regularly, but actually is
the inherent volatility and cash flow profile of that investment
different from what you have in public equities. So that's
(27:05):
question number one. But then question number two is even
if it is that, the value of a liquid diversifying
alternative is that you can tap it when you need it,
and if you can't tap it for seven or eight years,
then the question is it actually diversifying for you? And
does it have a function that allows you to opportunistically
add exposure when you need it. I'll give you an example,
(27:29):
a really recent example in the UK, which is twenty
twenty two September the LDI crisis. So that was a
period where the UK sixty forty portfolio lost about eight
percent in two weeks, which is a lot, right. This
is a balanced portfolio that many pension schemes are exposed to,
and it lost eight percent in two weeks. Over the
(27:51):
same period, a diversified portfolio of what we call liquid alternatives,
so things that perhaps incorporate equity market neutral, non directional
equities trend following multi asset investing, but in an alternative
form over a similar period, it made about four percent
(28:12):
now the liquidity of that portfolio. If you've got something
that's moving in the opposite direction to your core portfolio
and it's highly liquid, you can liquidate it and you
can buy more of the traditional assets that are at
that moment in time dislocated. And that's got a real value.
It's got a real value to institutional scale asset allocators,
and it's got a real value to retail investors as well.
Speaker 1 (28:35):
Okay, I'm going to put links in the show notes
to your very interesting sounding economist, was it Henry Neville?
Speaker 2 (28:41):
Henry Neville?
Speaker 1 (28:42):
Henry Neville, And I'm going to put a link if
you don't mind. The report that you wrote on this
type of diversification. Very good, so that we just going
to look at it more carefully because is super interesting.
Can I ask you one or two other quick questions?
Speaker 2 (28:54):
Please?
Speaker 1 (28:55):
China up a lot this year so far. I'm still
happy with that.
Speaker 2 (28:58):
For the rest of the year, yeah, I think it
will take a pause I think we've gone from uninvestable
to investable. So where I started, which is beware of
narratives and how they change in consensuses. Let me put
it this way, I wouldn't be surprised. I think I
said at the beginning of this year that a reasonable
bingo kard would be China for the best performing market
in the US to give you pretty much nothing, and
I still think that's probably recent.
Speaker 1 (29:19):
Okay, what are you reading at the moment?
Speaker 2 (29:21):
That's an excellent question. I'm reading a book of ts
Eliot's poetry, because I'm woefully poorly read when it comes
to T. S. Eliot. I have to say, actually that
if your readers are looking for advice on finance books,
I'm the wrong person because I'm trying to spend my
time learning more about the human condition and less about
financial markets.
Speaker 1 (29:41):
Some people would say those were the same things. Final
question bitcoin on gold, gold.
Speaker 2 (29:48):
I would It's not to say that I don't think
there's a regulatory tailwind that supports crypto, but I think
gold has an established use as a store of value
over millennia. We know that we've done some really interesting work.
We did a paper, an academic paper called the best
strategies for the worst times, in which we look at
(30:08):
different ways to protect wealth in the worst part of
equity drawdowns, and actually generally in bad times, gold gives
you a positive excess return or positive real returns. I
tend to think that for the long term, you want
to be in something that has a proven store of value.
Speaker 1 (30:23):
That's why we like it too. Thanks Ed, it's been
really good having you on Great pleasure, Maren.
Speaker 2 (30:28):
Thank you very much.
Speaker 1 (30:33):
Thanks for listening to this week's Maren Talk to Your Money.
If you like us, share rate, review, and subscribe wherever
you listen to the podcasts and keep sending questions or
comments to Merror Money at Bloomberg dot net. You can
also follow me and John on Twitter or x I'm
at Meren sw and John is John Underscore stepek Eddie
on Twitter. I am not I had a feeling you
were going to say that, but you know, if you're
interested in the human condition, it's all out there.
Speaker 2 (30:55):
I was once and then I found that it was
possibly a facet of the human condition I didn't like
too much.
Speaker 1 (31:00):
Fair enough, fair Enough. This episode was hosted by me
Maren zamzet Web. It was produced by Someersadi production and
support by Moses and especial thanks of course to ed
Cole
Host
Merryn Somerset Webb
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