March 24, 2023 • 44 mins
British pension funds used to have up to 55% of their assets in UK equities. That might have been too much. Now it’s more like 5% (and 70% in US equities). That might be too little. Why? Because those UK equities are cheap and US equities are expensive, explains Temple Bar Investment Trust Portfolio Manager Ian Lance on this week’s episode of Merryn Talks Money.
He also argues that there’s an inverse correlation between the price you pay for an equity and the return you get on it long term. The less you pay, the more you get. So why are most investors holding lots of expensive things and not many cheap things? It is the “maddest thing in markets,” he says. Maybe it’s time to do something else: Lance says buy UK oil and mining companies—and maybe Marks & Spencers, too.
Sign up to John Stepek's daily newsletter Money Distilled. https://www.bloomberg.com/account/newsletters/uk-wealth
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
John. Things are beginning to break, aren't they. We've talked
about how interest rates rise after interest rates who've been
falling the main for kind of footy years or so.
Everything is geared around interest rates being lower, going lower. Still.
Entire industry is sectors, and particularly the entire financial industry.
(00:21):
This is what they're used to. And it's turned around
interest rates beginning to go up. Stuff beginning to break it.
Maybe the first clue was, you know, the LDI thing
under the short lived trust government. Stuff beginning to break.
And then credit sees definitely broken. Yeah, yeah, fairly comprehensively broken.
(00:44):
And then there is just tiny little things, more kind
of cracks at the moment, but things that you look
at and you think, well that might turn into a fracture,
you know, and then it might actually break looking at
So Scottish Mortgage, let's talk about Scottish mortgage. Let's talk
(01:05):
about Scottish mortgage. Now this is barely give it as
a fantastic company. Scottish Mortgage has always been an absolutely
brilliant trust. And we've talked about it for years and
we've written about it for years, and I hold it
my portfolio. I don't know if you do it. Pretty
much every retail investor in the UK does hold it,
and it's made this extraordinary name for itself on the
(01:26):
back of investing in growth companies mainly tech but you know,
let's just call it growth super high growth, both listed
and unlisted, with this idea that you know, you should
hold unlisted companies as well as listed if you're going
to be an exciting growth growth spaces. Because companies don't
list like they used to, they stay private for much longer.
(01:47):
There's lots of exciting stuff going on down there, and
so why should you differentiate between the listed and the unlisted?
And maybe this week we kind of found out. I mean,
there's a there's all been a logic to that, but
I think the well, there's there's a couple things. The
(02:08):
philosophy that went or goes with Scottish Mortgage and similar companies,
but Scottish Mortgage in particular, is that one about all
of the tons in the stock market come from like
a handful accompanies. Four percent, yes, and so you should
just buy the four percent. One reason I've always slightly
(02:30):
struggled with that theory is how do you choose the
four percent? But Scottish mortgage did a very good job
of it, for right to interest rates started to rise. Yeah. Well,
one of the things they always said, and let's not forget,
by the way, on this podcast that we did it
interview TOMPs later become manager of that fund eight weeks ago,
(02:52):
nine weeks ago and maybe longer than that, but relatively
weakning within the last three months. We interviewed him and
one of the things he said was that because of
this idea that all the returns come from four percent
of the companies, everything in his portfolio was the wrong price,
the wrong price. So the majority of the stuff in
(03:14):
the portfolio was grotesquely overpriced because it would never end
up being part of that four percent. But the companies
in the portfolio that are the four percent were hideously underpriced.
So nothing in the portfolio is the correct price. But
the risk, of course is that the four percent aren't
(03:34):
in there. Yeah, I mean, that's that is kind of
what I've always felt the fundamental problem with that app
which but I think I suppose the weird thing is
it's also it's the diametric corpus of passive investing and
buy an an index. It's sort of the ultimate technically
(03:56):
speaking an active investment in some ways to say there's
only like, you know, kind of lessons to a fifth
licensed five percent of companies actually make all of the tons,
and I am the person who can choose those points
um and then but then you're also kind of delving
amid the area that you think they're most likely to
(04:17):
come from, but the promise that that area kind of
largely thrives under certain conditions, and then those conditions are changing,
I don't know what. And then growth appears in other areas,
all that surprise growth and the energy industry price growth
in oil. But it's growth, right. But the problem is
Gottish mortgage, and it's not unique gottig mortgage. Of course,
(04:40):
is that with listed equities, you know the price. You
don't have to worry about what they're worth because the
market tells you. You You might not agree with the market. Yeah,
but the market gave you the price, and it gives
it to you every day, multiple times every day. No
one can ever be in any doubt what the price is.
Now with the unlisted investments, nobody knows the price. Nobody knows.
(05:01):
The press who can possibly know what these things are worth?
Nobody knows. So there's always the suspicion in the market
right now, when thing's going down that maybe they they're
on the books at the wrong price. No one cares,
No one cares what you value a private equity investment out.
When everything's going up up a lot is great. We
like up a lot, right, we don't need any precision
up a lot, hooray, right, yes, But when things are
(05:23):
going down and the valuation is down a little bit,
down a little bit, like, well, that's not enough any
more precision than that? Is it down a little bit down?
The medium matters it down a lot, and it was
not downe a lot? Why is it not down the
same as your listed investments? What's the difference? You invest
in the same stuff, right, yeah, So why why would
your unless the portfolio and not have gone down as
much as your listed portfolio? And now I'm worried. Yeah,
(05:44):
And I mean it's entirely understandable because the other problem
is that because they're not unless these companies don't benefit
from the one thing that well, there's a reason we
like public markets and they're very good. Yeah, they're good.
Are putting prices on things relative to everything else, So
you're not getting the ways to make modes along with
these unlisted companies. And then of course there's all kinds
(06:05):
of things you can do. UM, but you can do
all kinds of things to fight your fighters. But the
other thing is that there's also not accusing anyone of
that by the way, no, absolutely no basic stuffy leaning
for years. They know what they're doing. But but but
but it's a difficult environment. There's no actual answer. Yeah,
(06:28):
and it's the other problem is that the kinds of
companies that aren't listed are also smaller, and they're far
more vulnerable. And so I I, you know, I would
I don't have the data to hand. I am assuming
that politician sounds like politician you can't recall it hasn't
seen that full story earlier. They only told him the
(06:50):
story today. It wasn't the time to investigate properly. We
always go drinking a Friday. But they know the the
unlisted start it's probably has a higher propensity to go
to zero and unlested stuff. And the problem is that
this is the kind of environment where stuff goes to zero.
I think that's I actually think that's the main problem
(07:13):
with this UM And as you said, doesn't just apply
Scottish mortgage. It's all of the unlisted moment and our
ideas in a little trouble at the moment too. You're
about forty percent unlisted, you know. Anyway, Um, watching weight,
watching weight. Things are breaking, but you know one has
to failed. Sorry for I don't know, yes, probably sorry
for that. The chair of Scottish movies you had to
(07:34):
stand down this week, you know, and then she another
victim a rising interest rates. Yeah, well this is it.
It's it's interesting how you can say that the ultra
low rate environment didn't just create Um, it's all like
financial bubbles. There's a lot of tan gentle kind of
bubbles that you know you can think of. I mean,
(07:55):
I mean, I think there's a sattweeze sort of look
to where you can say that Nicholas Durgeon's career is
a kind of ultra low interest rate phenomenon. Um. You know,
it's it's just interesting shity step down along at the
same time as you know, credit sweet and all the
rest of them are going bankrupt. So maybe perhaps I
(08:16):
am reaching, but I think, well, now there's another one
to wait and watch. There's a lot of watching and waiting.
There was a lot of watching the day for those two.
I mean, I think that we've we've had like a
kind of like a fired blanket thrown over volatility, like
in all areas of our life since the Great Financial Crisis, UM,
(08:37):
in the form of kind of like ultra low interest
rates and complete safety rails on the government bond market,
the can equity markets, and that kind of suffocation of
volatility has got to come out somewhere UM. And I
think a lot of explains the whole sense because I
(08:57):
was writing to the readers the other day, so it's
talking to them about what decade is it most like?
And you know, whiteb the twenty tents so flat and
kind of miserable, really compared to even some of the
late sixties and seven or so, even some time period
like the seventies, which was nihilistic but quite energetic. It
was the twenty tents was nihilistic and totally lacking in
(09:19):
energy right in By the way, people don't tell me
if you'd say night nihilistic or nihilistic nihilistic that's a
good point. Moving on, sorry maybe, um Yeah, so where
it was it? Yeah, I was just kind of coughing,
So I was just going off in like a flight
of fancy there. But but basically, yeah, this idea that
almost as a like social mood has been kind of
(09:42):
crushed as well, and that's enabled these kind of long
periods of just trend following, whether that trend is Scottish
nationalism or whether that trend is something like Scottish mortgage
or growth triumphing over value. And so now that that's
the interests are going up and they're kind of like
(10:02):
putting bombs under things. A lot of the if you like,
the philosophical offshoots of a lower interest rate era are
also blowing up. Yeah, there's a book in that, John,
I think are right. I think I think that the
shift in interest rates doesn't change our economic life, it
changes our political life, and it changes our cultural life.
(10:22):
Follow on that, Uh, I think it's probably healthy. I
absolutely agree, But I also think that that we need
more than a podcast with us. We'll go for a
drink when we're done here, Okay, the idea right, Moving on,
Welcome to Marin Talks Money, the podcast in which people
who know the markets explain the markets. I'm Marin Sumset Web.
This week our guest is Ian Lance Temple Bar investment
(10:43):
Trust portfolio manager. Now he is the exact opposite of
John and I have just been talking about. He is
a genuine value investor. I started by asking about a
blog he wrote recently, the tankle of which was just
stop selling UK equities. The numbers to us that there
is a huge, a NonStop outflow from the UK equity market.
So I asked Ian to tell us exactly what is happening.
(11:10):
I think there are a couple of things. One of
them is it's a long term phenomena, which is that,
as I mentioned in the blog, if you went back
to the nineties, I used to run balanced pension funds
at a firm called Gartmore, and back back in those days,
the big balance pension funds used to have about fifty
five percent of their allocation in UK equities and probably
another twenty percent or so in overseas equities. And that
(11:32):
meant two things. Number one is they were massively overexposed
to equities per se. But number two, they were probably
massively overexposed to the UK. And then of course along
comes two thousands. We have two things. We have the
eputy markets go down quite aggressively. Interest rates also come down.
That means the liabilities on the pension funds go up,
so complete tastrophe for lots of pension funds and they
(11:54):
were basically forced to adjust their positions quite aggressively. And
what they did was they cut their exposure to equities,
in particularly they cut their exposure to UK equities. And
we have a chart in the in the blog which
sort of tracks the decline of ukits from about fifty
five percent down to it I think about five percent now.
That's been the sort of long term trend. And then
(12:15):
I think the secondary issue is just colossal barishes about
the UK economy and that that probably started around the
time of Brexit. And then you know, we've had we've
just given investors, haven't we loads of excuses to be
negative on the UK over the last few years that
you know, the number of prime ministers we've had, the
number of chancellors, we've had, the strikes in et cetera,
(12:36):
et cetera. It is just sort of twenty four seven
negative sentiment towards the UK. So I think I think
that's been a factor as well, probably thrown in with
the fact that the UK has high exposure to sectors
that people don't really like or haven't really liked until recently,
so banks, energy miners, and it's got low exposure to
(12:57):
sext as people do like so technology. So I think
that's probably the sort of the background to it all.
There's a lot of fun back here. Let's go let's
go back a bit when the bench of the fun
started selling all their equities. If we accept that they
were overexposed to equities in the first place, but one
of the reasons they started selling equities as a whole
was because they felt they needed to do a little
bit more liability matching, so they moved into bonds in volume. Right,
(13:20):
So Land involved selling a lot of equities, which in
itself we can argue about whether that turned out to
be a good idea or not, but maybe that that's
the subject for another day. That's what they did. But
why was the majority of these equity sales in the
UK market? What made them think for themselves, if we're
getting get out of equities, we need in particular to
get out of the UK. It's almost a change in benchmark.
(13:42):
So back in the nineties, bench funds used to follow
something called the caps medium, which which is a bizarre
benchmark because it basically it just looked at all other
farm managers. So you were just benchmark in yourself against
other farm managers. Other farm managers have fifty five cent
in the UK, then you did. And I think over
time we drifted away from that, we more towards these
market cat weighted industries. So people began to look at
(14:04):
you know, MSCI World for instance, and if you look,
if you do look at MSCI World, you know, the
figures today are that the US market is seventy percent
and the UK market is about five percent. And so
I think there was that people basically moving towards that benchmark.
And one of the things that I say in the
blog is I think that is just crazy because what
that means is that people are forced towards having a
(14:28):
large percentage of their assets in large markets and a
small percentage in small markets, rather than a large percentage
in cheap markets and a small percentage in expensive markets.
And to me that just seems completely and utterly counterintuitive. Yeah,
so what it does if you're hugging global benchmark flate,
there's what you're doing is buying a whole pile of
stuff that has already gone up and selling stuff that
(14:50):
hasn't gone up yet. I mean, it seems that of
slightly mad everybody who is following exactly the same momentum
strategy exactly right. It's yeah, completely and utterly counterintuitive in
my opinion. Again, there's a nice chart in this blog,
and it basically just tracks returns of eperty markets against
(15:11):
the valuation of the valuation measure is effectively a sort
of market capture GDP. And then it's the subsequent returns
over the next twelve years. And the our square of
the chart is about point nine or you know, I'm
supposed to put that in simple terms, that there is
a very very close correlation between valuation inverse correlation between
valuation and subsequent returns subsequent twelve years returns from eptew markets.
(15:34):
And why people therefore would literally do the opposite of
what that chart implies and actually overallocate to expensive markets
and under allocates to cheat markets is just beyond me.
It's one of the maddest things in markets that you
actually just had to say that, So you actually had
to say aloud that there is a relationship between the
price you pay and the future returns that you make.
(15:57):
That is something that has been so completely gotten in
markets for the last decade, they were actually having to
remind people that the entire history of markets proves their
valuations matter absolutely, right. Do you ever do you ever
read the Credit Squeeze Investment Returns hand but when that
comes out, you know that that that comes out. I
(16:18):
have it right here, right here on my desk, the
Credit Squeee Global Investment Returns Yearbook twenty twenty three exactly.
And so so that thing is that thing is that
it's just a study of exactly what we've just been
talking about. Isn't it the fact that you know, you
you buy lowly value markets, or you buy lowly values,
you know, equities within those markets, and you subsequently make
(16:38):
higher returns not on not on a six month basis
or a one year basis, but but on a sort
of ten year basis. You know, there's a very very
strong correlation. And perhaps what I just said actually answers
that conundrum, which is that I don't know, maybe ten
years is just way too long for people these days.
Maybe people are that their time horizons are much much shorter,
(16:59):
and therefore sort of taking a bet that expensive markets
can get even more expensive. Well, I mean that's been
reasonably fair for some time. You know, if you look
at you and I I think would have said two
years ago, five years ago, eight years ago, goodness me,
the valuation gap between the US and the UK is
getting out of control. You want to be shifting back
into the UK. But if we'd been doing that, obviously
(17:22):
we would have been the ones who looked stupid, if
that were the ones who looked stupid. Because the UK
market one hundred continued to basically flatline and the US
market continued to go up, So this valuation got wider.
Gap got wider and wider and wider. And you now
talk to people, younger people obviously, who believe that it
is perfectly normal and natural for there to be a
(17:42):
huge valuation gap between the UK and the US. And
if you say to them, actually, this only happened a
couple of decades ago. It used to be valued in
roughly the same way that that's entirely new news. That's
right again. We you know, we have a chart which
looks at the looks at exactly that the difference in
valuations between the two markets, that is back over fifty years,
and I think you know, for most of that period
(18:04):
the average was about fifteen cents something like that, and
then last couple of years you're right, it blew out
to about forty five percent, and so you're right, you know,
it's a relatively new phenomenon, and what's the gap now?
It is it's a little bit less because you know, surprise, surprise.
Actually last year the SMP was down twenty percent and
the UK was up four percent, So so it's probably
(18:26):
about forty percent, but it's a way way wider. And
I think the other thing that I would add is
cause that's the average for the market. If you look
within the market, there are things within the market that
are much much cheaper. So there is, as I said,
quadlock going on here. But one thing I think we
can say, probably for sure with the fifty one hundred
(18:47):
is that the selling of UK equities maybe about the
perception of the UK economy as a result of breakcast,
but it's certainly not about the performance of the companies
as a result of breakit because the UK large have
been performing extremely well, right they have. And I think
you know, another thing I mentioned in the blog is
that there are lots of companies within the UK market
(19:09):
that have virtually no exposure to the UK economy, and
yet they are valued at massive discounts to their the uspers.
So the example within the energy sector, the example I
uses BP today trays on about five times earnings. X
X on trays on about ten times earnings. You know
that those are very very similar companies with very very
similar drivers to their profitability, and yet one trays at
(19:31):
half the valuation of the other. And yet and if
we picked up BP and dumped it in America, rehead
corded it with the share price double. Well, you know,
interesting thing you should they should say that BP had
results about about six weeks ago, and there are a
(19:52):
couple of things. The number one is they basically said
they were going to slow down their move into renewables
and invest more in upstream. But the stop went up
about thirty percent in the following sort a few weeks,
and that was attributed to US buying, interestingly, and the
management team. Interestingly, the CEO did his road show around
the US. The CFO was in the UK, and the
(20:12):
CEO went around the US, and there was as I said,
the share probably went up a lot and and apparently
that was that was US buying. So that's, you know,
just an interesting anecdotal point. And do you think they
were buying Um, I know you have, you have no
idea what I've interested in your opinion. Do you think
they were buying because they looked at and thought this
is extremely cheap, or they looked at it and thought,
(20:33):
we've known this as cheap for a while. But they're
backing away from renewables lass transition and focusing on what
they're actually really good at is a positive. Yeah. I
suspect they looked at the change in strategy and thought, actually,
that's a positive because even the company, even the company
themselves talk about returns in the upstream area being significantly
(20:54):
higher than returns in the renewable era. So I suspect
the US investors looked at that change in actually and thought, actually,
that's a good thing. And then they looked at the valuation.
I thought, my god, I can buy this for about
halfway one I'm paying for Excel. Interesting And because when
when you were talking earlier, you were talking about the
UK market being stuffed full of companies that people have
not been keen on for a little while. So we've
(21:15):
had what you might call it an ESG discount on
the UK market, but the conversation around ESG is changing
really fast. You'll have noticed that, I certainly have. You know,
if we go right back to the beginning of the
war in Ukraine, when suddenly defense doc turned from somethingl
something and evil and filthy to a social good. And
now again people are looking at the energy companies and
(21:37):
the commodity companies, and particularly commodity is pointing out that
we can't possibly have an energy transition without being really,
really very commodity heavy. And of course we can't maintain
our living standards in the short, medium and possibly long
term without being a little politer to the fossil fuel companies.
So that ESG discount is beginning to narrow as well. Yeah,
(21:57):
I completely agree with that. I think i'd also make
one other point, which is that the the ESG pressures
of the last sort of five to ten years on
these companies is the main part of our positive thesis
on the sector. In other words, the companies have basically
just been told you've got to stop investing in fossil fuels,
and they have. So, you know, a couple of statistics
(22:18):
for you. Aggregate capex for energy companies is down seventy
five percent adjusted for GDP over the last decade, isn't
it incredible? And for the equivalent for minors again, this
is adjusted for GDP going up down sixty seven percent.
And you know you don't need to you don't need
to be a genius to work out you can't cut
(22:39):
your capex by that amount and expect to production levels
to remain at the same at the same rate, and
surprise prize, they haven't. So you know, so production has
gone down across the companies and demand despite everyone's expectation
that demand for demand has not gone down. So people
are forecasting that oil demand in the fourth quarter of
this year will be one hundred five million barrels a day.
(23:01):
So in others it keeps going up. All the one
keeps going up, oil production keeps going down. It's really interesting,
isn't it, Because we've been told for years, And the
first thing you tell analysts when they start training in
the city is that when it comes to commodity is
and energy of the solution to high prices is high pricess.
You know, high prices or solve their own problems. Because
as prices rise, capex rises, supply rises, and down we
(23:23):
go again. And this is the first cycle in my career,
and I'm guzzing in yours as well. When high prices
are not the solution to high prices. Yeah, fascinating, isn't it,
Because you're you're you're absolutely right, you know, you've some
people describe it as a sort of capital cycle down
though the fact that returns go up and that should
attract more investment into the sector and that eventually that
(23:44):
shows the seeds of oversupply. And you're right, this is
the first one I've seen where that market mechanism has
failed because at these sorts of returns that they're making,
the companies should be investing hugely and they're not. You know,
even in the last year or so, we've not really
seen kpex go up amongst either the energy companies or
the or the mining companies. And it's kind of hard
(24:07):
to see how, you know, in the absence of a
massive global recession, it's kind of hard to see how
that situation, that supply demand situation resolves itself. Interesting. But
let's go back to the energy company. Because you hold
for Shell and BP, don't you do you worry about
because what we're really talking about here is the political environment, right,
But We've been talking about the political environment in terms
(24:27):
of supply and demand, but the other element of the
political environment around the big energy companies is the windfall taxes,
and that you know, it may be that these companies
can continue to make a vast amount of money out
of the rising present and crimp to supply of their goods,
but we can't be absolutely sure that the government is
going to allow them to keep that money for the moment.
(24:48):
I don't. The reason I don't is because it goes
back to this point about the fact that BP and
She'll make a relatively small amount of their profits in
the UK, and therefore the government can only tax those
profits that are made in the UK. So when they
were hit with the windfall tax last year, it was
basically about one percent of profits. It wasn't very significant.
But what it did do, back to our conversation of
(25:10):
a few minutes ago about the capital cycle, is it
basically elongated the capital cycle, because within months we had
announcements from BP, Shell, Total Harbor Energy all saying bless it,
we're cutting back on norc oral investment. So you know,
I mean, it's just a crazy policy for the government
to be following because you know, the answer to the
(25:30):
energy crisis that people facing at the moment is more investment.
We need more supply, and for them to basically hit
the companies and naturally force supply down, it's just a
crazy policy in my opinion. Okay, so you'll hang on
to those those two big old companies, you know, the
other the other thing there. And as we stand today,
BP is trading on five times this year's earnings. And
(25:51):
because and you know, given and the yeld of five
percent or so, pretty much the same for Shell, And
because they translate nearly all their profits into cash, that's
a that's a kind of about twenty percent free cash
flow yield. So these companies are still even though even
though they've gone up in the best forming sector for
the last couple of years, because the earnings keep going up,
because community prices can keep going up, they still look
(26:11):
very very lowly value to us. So fascinating dynamic, isn't
it that in these sectors that people have been ignoring
for so long, share prices can can basically double and
valuations can fall at the same time because the rise
and earnings is so unexpected to the market. And yeah,
and yeah, people, people clearly don't believe these levels of
profits are sustainable. I think people still look at them
(26:33):
in the way that they used to that the assumption
is that, you know, we must be at peak oil prices,
because that's the only thing that explains PEP trading on
a on a pe of five. That people just think
the ear is is now at its peak and it's
going to go down. And for the reasons we've just discussed,
you know, I'm not convinced that is the case. And
one of the dividend eels on these stops at the
moment about about five percent, But don't forget, they're buying
(26:56):
back huge amounts of their stock as well, So so
you're getting a five centiveen and yield, but you'll probably
get another five six seven percent in terms of share
buybacks as well. Why do they buy back instead of
just paying out a special dividend. But I mean, I
know it's different in the institutional world, but certainly in
the retail world, I think people would prefer a special dividend,
and particularly if they're holding stock slates this as incomparabader.
(27:18):
I'm not sure, to be honest with you, why why
they favor buybacks? Over over special difference. I think mechanistically
they're very similar to each other, aren't they. But you know,
I don't really know the answer. Sum Yeah, but one
puts cash in our pockets and the other doesn't. Doesn't,
but I guess it increases the value of the business
over time. Don't know. If you looked at another blog
(27:39):
that I wrote on on this issue share buybacks, and
I just used the example of Next, which very briefly,
if you invested one hundred quid in Next in two
thousand and one, it was to day be worth one
thousand and eight hundred pounds, despite the fact that the
top line has only grown in line with uk GDP,
and it's been through three recessions due throughout that period.
(28:00):
And the answer is share buybacks. They brought back over
sixty percent of their shares. An issue, they only do
it when the shares are cheap. So when what Simon
Wolfson does is when when the shares are cheap, he
will basically buy about stop. When the shares get expensive,
he turns it off and then actually Mary and he
pays a special dividend at that point in time. Okay,
but if he keeps doing that indefinitely there'll be nothing left.
(28:22):
O the way, at some stays you you Mary and
will own the last share in Next and it'll be
worth five billion quid. I mean that is slightly my
problem with buy back. You know that has to be
the natural end game. Is the disappearance of the number
of shares. Yes, yeah, this is true, but you see
(28:45):
my point over over the last twenty years. But for
shareholders in Next who didn't sell, you know, it's been
a very very successful policy. Now I do see that,
And how is the Next looking at the moment? Would
you buy that in the portfolio? Just a bit too
expensive for us? Actually, as you know, we have a
strong value bias. So actually we own mark suspenses within retail,
but we don't own Next. Okay, I want to go
(29:07):
back to mark suspenses. That's interesting. But first, when you
say that you're a strong value bias, and I know that,
what are the parameters if you say something's a bit
too expensive for us? I mean Next is obviously a
company that you thoroughly approve of. What is it invaluation
terms that make something too expensive? Way you're looking at
in terms of its cash flows? You looking at on
a pe basis, Is it a price to book. What
(29:28):
tells you something is a little too expensive for us? Okay,
So without maybe getting too technical, So too technical, please,
no technical, give a big picture. I'll go board. I
will try to basically, what we what we try to
do is we assess what's called a company's long run
normalized earnings pounds. So what that means is we look
(29:48):
at where we think the earnings can get back to
on a five year basis. So we're typically are buying
stocks which are going through a sort of temporary downturn
in their own is either as a result of the
economic cycle or maybe because of a blunder the company
has made. So we'll basically assume a recovery. We convert
accounting earnings into cash earnings, and then we basically will
apply multiple to that and we will come up with
(30:09):
what we think is roughly the intrinsic value of the business.
So what do we think is the business worth on
a five year basis? And if we can buy something
at about half that soon others about one hundred percent upside,
then that's normally attractive for the portfolio. Okay, and Martin
and Spencers fits into that criteria at the moment yeah,
it certainly does. Actually so a share price in Marks
and Spencers today one pound forty. The management have given
(30:32):
out targets for where they think the sort of margins
of the businesses can get. So got two businesses here.
We've got food retail business and we've got a clothing
and home business. So they basically think food returning about
four percent margin, clothing and home about ten percent. And
we agree with those figures. They should be able to
get to those if they do make those margins that
that gives you about twenty seven pm earnings, So you know,
(30:55):
put stick that on I don't know, twelve thirteen times
or something, that would give you about about three quid
for the intrinsic value of the business. And as I say,
share price today about one pound forty. So that's, in
our opinion a potential doubler and I've obviously I've massively
simplified it there. But that's how we think about value.
We don't think about value in terms of priced a book.
(31:16):
I've been trying to do some research for you in
I did go to Marks and Spencers to day before
yesterday because I keep reading in the fashion magazines. By
the weekend magazines anyway that you know, markus Spencer's jeans
at the thing right now. So I was walking past
Marks and Spencer at the other day and I went
and I did buy a pair of jeans. But unfortunately
I can't tell you any more than that because my
house is such a tip I brought them home and
(31:37):
put them down somewhere, and I've been meaning to try
them on before we had this conversation, so I could
tell you whether you're doing the right thing or not,
because obviously it's all about the genes right in. Oh well,
on a serious point, or is it all about the food?
I mean, the food business is good, and you know
with that link cover with the cardo, I think it's
now a very very good business. Very briefly, the issue
(31:57):
with the clothing and home business was that they had
a gray, big, long tale of stores which are unprofitable,
and they they basically had no online business. So going
back to the next, you know, next to spent a decade,
hadn't they establishing next directory? And Mark's basically had no
online business at all. And they've effectively gone about solving
both of those issues. So, believe it or not, the
(32:18):
clothing of home business is now the number two online
online retailing business in the UK behind next Directory, so
that you know they've ticked that box and they have
shut down lots of the unprofitable stores. So that's this
is kind of the mechanism that you can see to
the improving profitability in our opinion. Okay, and what's the yield?
I've got a lot of income invest deserve. They're listening
to us. The yield is not great because they're sort
(32:39):
of they're coming off a recovery, coming off a tropho.
This is about two cent. Yeah, it's not all bad,
is it. It is not all bad. It's not it's
not it's not a disaster. But yeah, I want to
go briefly back to mining before we get to the
elephant in the room, which I read listeners can probably
guess by now with the elephant in the rooms. But
let's go back to to mining. What's your top holding
(32:59):
in the mind any sector? Anglo American? Yeah, what's good
about Anglo American. It's a similar it's a similar thesis
to the energy companies, and it is this idea that
the industry as a whole has basically been beaten up
by politicians and ESG Investors has, as I said earlier
on capex for the industry is down sixty seven percent.
Anglos has got another dimension, which is that they were
(33:21):
probably one of the less efficient of the big miners
if you went back five or six years ago. So
if you compare them to Billetin or Rio, they were
less efficient than them, and they spent the last few
years taking costs out improving their profitability. They have they're
still very very disciplined in terms of capital spend. So
we just like the all companies, we haven't seen the
(33:42):
capolic spenders start to go up. And there is there
is one added dimension to this, where which is whereas
we can say probably that over time demand for fossil
fuels goes down. I think you can make a structural
growth case, can't you, with a lot of the materials
that they produced becaultously. They produced lots of the things
that we're going to need if we're going to transition
to a to a greener world, so namely copper and
(34:06):
things like that. So so again it kind of feels
there like there's a structural demand in the in these
types of things that they produce, and yet supply is
just not keeping up with that increasing structural demand, and
you know, normally one would therefore expect prices to go
up as a result of that. Yeah, I wonder if
we can really say that demand for oil is going
(34:27):
to fall. I think we could probably say that demand
for fossil fuels is a percentage of global energy demand
will fall. But as global energy demand just keeps going
up and up and up. Um. You know, let's say
that the fossil fuels that we use to provide our
energy globally falls from the current level of what's at
about eighty percent to seventy five percent, but the absolute
(34:49):
volume of fossil fuels that we use, and there's something
very dramatic happens very soon, it's still going to go up, right, Yeah,
I think I think you're probably right. And I think
you also have to think about where is the increase
in demand for energy usage coming from. Is basically coming
from areas like China and India and in Africa, And
in those regions, you're going to see an increasing demanding
(35:12):
fossil fuels, aren't you, as as demand continues to grow. Yeah,
So I think we have we have to be careful
about about thinking that fossil fuel demand is actually going
to fall just because we'd like it to the world works,
is this? Yes, no fair point, right, Let's come to financials.
So a large part of their portfolio is in financials
(35:32):
one way or the other. And you've got a couple
of big holdings in banks. You've gotten at worst, you've
got standard charters. And the wonderful thing about these is
that they're going to be significantly cheaper today as we
talk than there were a couple of weeks ago. Now,
we're not going to we're not going to delve too
deeply into whether we're in the middle of a banking
crisis or not in a banking crisis, and whether our
entire financial system is going to collapse, and whether you
(35:54):
and I should not be talking but attempting to figure
out how to put our entire net worth in bitcoin.
We're not going to delve into that. I just wanted
to ask you about the banks that you do hold
and how confident you feel in their well being. Yeah,
pretty confident. This is a sort of dangerous conversation we're having,
aren't with because but you know, by the time this
podcast airs, things could have changed dramatically. Things are moving
so fast at the moment. I suppose the serious point
(36:15):
that O make is the all of these banks, all
of the UK banks, have spent about the lost fifteen
years improving the state of their balance sheets. For all
of them, the financial crisis was a near death experience,
and confidently was for the regulators of the government, for
the country, et cetera, et cetera. And as a result
of that, thing's dramatically changed. So the management teams across
all of them are totally different and not in you know,
(36:36):
it's not Stread Godwin, et cetera, Restera still running these things.
It's Alison Rose running that West group, who is you know,
much more conservative. The balance sheets are much stronger, the
lending books are much much stronger. So take an example
of of n West of the loans to value ratio
and the mortgage book is about fifty three percent. So
(36:57):
house prices could go down quite a long way for
you know, before that would start to cause trouble. And
again that would be just completely different from what we
had during the financial crisis. And you know, they're very
tightly regulated. They have correpty Tier one ratios of sort
of fourteen percent and more they have very strong liquidity ratios.
So you know, my personal view is that what's going
(37:19):
on in the world at the moment shouldn't affect these banks.
It's a it's always hard to call, because George Soros
used to have that expression reflexivity didn't heed whereby movement
in share prices can actually influence things, and in this
case it could be movement in share prices eventually spooks
depositors who start to withdraw their deposits. So so it's
always hard to say these things with banks, you know,
(37:40):
for definite. But from from where I'm sitting at the moment,
I think these things are they're still well capitalized, and
they are and at the moment they're actually the prossibility
is going in the right direction. Again, you know, who
knows that that that might change. And the valuations bearing
are still very very low. So if you just let's
just go across the three that we own, that West following,
you know, following the markdown last week, it's now on
(38:02):
a price earnings ratio five times Standard Chartered six times
Barkley's four times give it and yields for your income
investors that West eight cent standards a bit lower three percent,
Barkley's six and a half percent. And for those who
you know, for those who like price to books point
seven point five point four, so trading a discounts to
(38:22):
Price to book as well. So they you know, they
to us they're much much better businesses than they used
to and they're still very lowly valued. And the tube
of they get, you know, based on what we were
discussing earlier, the tube of the get, the greater the
future returns, right should be, yeah, should be. As an aside,
house prices you said they had they could go down
(38:43):
a long way before we had to worry about the
stability of any of the banks. Have you got a
view on where UK house prices might there's the horribly
unfair questions not your area, but but lately is your
area if you're invested in UK banks, it is? It is?
I mean, So I write another I won't call it
a blog. It was more of a white paper last
year actually, and it was called Reversion to the long
(39:04):
run mean and and and it literally just asked the
questions that if you take actually valuations, bond yields, house
prices and you basically take them back to their long run,
you know, their long run averages. That that has some
quite significant implications across across all of those things. So
so for you know, for US extis, usxty should be
(39:25):
down fifty percent on more, you know. But I mean,
I finally love the bondial ones actually come come true
very very quickly, hasn't it? Because bond yields back then
were one and I was saying, you know, long run
bondyls are normally about four or five cent, and here
we are, you know, and here we are back at
four or five percent. And the other one that I
mentioned was house prices. I mean, you know, house prices
looked very very expensive on a long run basis, and
(39:45):
I just said that could be one of those things
that eventually mean reverts back to its long run average.
I have, I have kind of no reason to assume
that that it won't. And again, if it does, you know,
house prices should be probably thirty or forty percent lower
than they are to day nominal terms or real terms. Yeah,
nominal terms. Yikes. Yeah, that's not a prediction. But I suppose,
(40:06):
I suppose I'm just saying that almost Why why wouldn't
they Why why shouldn't why shouldn't ext markets mean reverts
to their long run average valuations and bondeal town house prices.
And we know what drove these things above substantially above
their long run averages, right it was you know, it
was low interest racing, it was contentated easing, etc. Et cetera.
(40:27):
Now to the extent that all those things are now
going away, why why wouldn't these things mean revert to
the long run averages? Well, now I agree with you,
but I have to spend a lot of time on
this podcast trying to goad people into making, you know,
making excitable forecasts about house prices, and just be clear,
you have not made a forecast. I get that. But nonetheless, nonetheless,
(40:48):
I think think forty was said nominal as the furthest
we've gone so far. So congratulations to both of us
on that. Thank you. Listen. Last question, last question, I'm
holding you down. I'm not leaking out of the house
for a decade. You're not going to be able to
trade again. You're going to beake gold or bitcoin. Oh,
gold gold definitely. Do you have any gold in the portfolio.
(41:08):
We own two gold miners. Actually, we own Barrack Barrack
Resources and New more mining. Point number one actually sorry
to be boring here, but similar thesis to the energy
and and and Anglo Americans, which is, you know that
they if you went back ten years, they just they
were just awful businesses. They were doing big mergers, they
were spending too much, et cetera, et cetera. And then
(41:29):
you had come of massive management change. Obviously price gold
prices fail, and they're now going through this cycle at
the moment where they have much much better capital, discipline,
costs much lower et cetera, et cetera. So you know,
big tick in the box there. But also it is
very interesting in a week like last week when lots
of are you know, more cyclically orientated things are going down,
is you know, those things just act as a fantastic hedge,
(41:53):
so that those share prices were going up last week
whilst everything else was going down, And obviously the gold
price was going up last week as well, wasn't it.
So you've got the hedges in their portfolio in the
films of goal, and of course in terms of the dividend,
because you know, a good dividend is one of the
greatest hedges we've got against chaos and against inflation, isn't it.
It certainly is. Yeah, it certainly is. I mean again,
(42:13):
this is you know, you're you'll you'll remember the days
when the income sector in the UK was I think
one of the most popular sectors wasn't absolutely money. Those
days are coming back. I'm pretty convinced of it. I
hope you're right. I hope you're right. But but you know,
the serious point is that in the long run again
(42:33):
again actually this is in your in your credit sueet
book that you've got there. In the long run, I
think dividend yield is about half of your total return. Yep. Yeah,
but we just got we got used to that environment
in which ext's were going up twenty percent a year,
and I think people just thought, well, who on Earth
and he's dived and yield? When your ex's are going
up twenty percent a year, we can just sell some capital. Now,
if we're moving back to an environment when we can't
(42:55):
rely on ext's going up to any percent a year,
then maybe divn and yield does become important again. And
I think your other point is right is I think
you know, historically given and yields has proved to be
a good inflation head as well. If you can start,
if you can start with your diven and yielding sort
of four or five percent, that gets your reasonable way there,
doesn't it? It does. It does to basically keeping up
(43:16):
with inflation. Yeah, well with inflation at temps enter and
it gets you halfway there. But it's an awful lot
better start than nothing, right, So Ian, I think we
better wind it up. But I think I can come
and sum up what you said to us in one sentence,
which is that you know, history tells you you have
to buy cheap stuff and lots of stuff that's cheap now,
so you know, maybe buy that stuff not the other stuff.
Would that be fair? I think that's a very good summary. Perfect. Perfect.
(43:40):
I don't know where we bother with the whole half
an hour, we could just do it like that. Thank
you so much for joining us today. We hugely appreciate it.
That's a pleasure. Thank you for listening to this week's
Marin Talks Money. We will be back next week in
(44:01):
the meantime. If you like our show, rate review and
subscribe wherever you listen to your podcasts, and please do
so positively. Will you'd appreciate that a lot more than
anything else. This episode was hosted by me Maria's Sumset Web.
It was produced by Samersadi, additional editing by Desta wonder Rad,
special thanks to Ian Lancer and to John Steppock of course,
(44:21):
and finally, a weekly reminder to sign up to John's
daily newsletter, Money Distilled. You will like it. The link
is in the show notes
John. Things are beginning to break, aren't they. We've talked
about how interest rates rise after interest rates who've been
falling the main for kind of footy years or so.
Everything is geared around interest rates being lower, going lower. Still.
Entire industry is sectors, and particularly the entire financial industry.
(00:21):
This is what they're used to. And it's turned around
interest rates beginning to go up. Stuff beginning to break it.
Maybe the first clue was, you know, the LDI thing
under the short lived trust government. Stuff beginning to break.
And then credit sees definitely broken. Yeah, yeah, fairly comprehensively broken.
(00:44):
And then there is just tiny little things, more kind
of cracks at the moment, but things that you look
at and you think, well that might turn into a fracture,
you know, and then it might actually break looking at
So Scottish Mortgage, let's talk about Scottish mortgage. Let's talk
(01:05):
about Scottish mortgage. Now this is barely give it as
a fantastic company. Scottish Mortgage has always been an absolutely
brilliant trust. And we've talked about it for years and
we've written about it for years, and I hold it
my portfolio. I don't know if you do it. Pretty
much every retail investor in the UK does hold it,
and it's made this extraordinary name for itself on the
(01:26):
back of investing in growth companies mainly tech but you know,
let's just call it growth super high growth, both listed
and unlisted, with this idea that you know, you should
hold unlisted companies as well as listed if you're going
to be an exciting growth growth spaces. Because companies don't
list like they used to, they stay private for much longer.
(01:47):
There's lots of exciting stuff going on down there, and
so why should you differentiate between the listed and the unlisted?
And maybe this week we kind of found out. I mean,
there's a there's all been a logic to that, but
I think the well, there's there's a couple things. The
(02:08):
philosophy that went or goes with Scottish Mortgage and similar companies,
but Scottish Mortgage in particular, is that one about all
of the tons in the stock market come from like
a handful accompanies. Four percent, yes, and so you should
just buy the four percent. One reason I've always slightly
(02:30):
struggled with that theory is how do you choose the
four percent? But Scottish mortgage did a very good job
of it, for right to interest rates started to rise. Yeah. Well,
one of the things they always said, and let's not forget,
by the way, on this podcast that we did it
interview TOMPs later become manager of that fund eight weeks ago,
(02:52):
nine weeks ago and maybe longer than that, but relatively
weakning within the last three months. We interviewed him and
one of the things he said was that because of
this idea that all the returns come from four percent
of the companies, everything in his portfolio was the wrong price,
the wrong price. So the majority of the stuff in
(03:14):
the portfolio was grotesquely overpriced because it would never end
up being part of that four percent. But the companies
in the portfolio that are the four percent were hideously underpriced.
So nothing in the portfolio is the correct price. But
the risk, of course is that the four percent aren't
(03:34):
in there. Yeah, I mean, that's that is kind of
what I've always felt the fundamental problem with that app
which but I think I suppose the weird thing is
it's also it's the diametric corpus of passive investing and
buy an an index. It's sort of the ultimate technically
(03:56):
speaking an active investment in some ways to say there's
only like, you know, kind of lessons to a fifth
licensed five percent of companies actually make all of the tons,
and I am the person who can choose those points
um and then but then you're also kind of delving
amid the area that you think they're most likely to
(04:17):
come from, but the promise that that area kind of
largely thrives under certain conditions, and then those conditions are changing,
I don't know what. And then growth appears in other areas,
all that surprise growth and the energy industry price growth
in oil. But it's growth, right. But the problem is
Gottish mortgage, and it's not unique gottig mortgage. Of course,
(04:40):
is that with listed equities, you know the price. You
don't have to worry about what they're worth because the
market tells you. You You might not agree with the market. Yeah,
but the market gave you the price, and it gives
it to you every day, multiple times every day. No
one can ever be in any doubt what the price is.
Now with the unlisted investments, nobody knows the price. Nobody knows.
(05:01):
The press who can possibly know what these things are worth?
Nobody knows. So there's always the suspicion in the market
right now, when thing's going down that maybe they they're
on the books at the wrong price. No one cares,
No one cares what you value a private equity investment out.
When everything's going up up a lot is great. We
like up a lot, right, we don't need any precision
up a lot, hooray, right, yes, But when things are
(05:23):
going down and the valuation is down a little bit,
down a little bit, like, well, that's not enough any
more precision than that? Is it down a little bit down?
The medium matters it down a lot, and it was
not downe a lot? Why is it not down the
same as your listed investments? What's the difference? You invest
in the same stuff, right, yeah, So why why would
your unless the portfolio and not have gone down as
much as your listed portfolio? And now I'm worried. Yeah,
(05:44):
And I mean it's entirely understandable because the other problem
is that because they're not unless these companies don't benefit
from the one thing that well, there's a reason we
like public markets and they're very good. Yeah, they're good.
Are putting prices on things relative to everything else, So
you're not getting the ways to make modes along with
these unlisted companies. And then of course there's all kinds
(06:05):
of things you can do. UM, but you can do
all kinds of things to fight your fighters. But the
other thing is that there's also not accusing anyone of
that by the way, no, absolutely no basic stuffy leaning
for years. They know what they're doing. But but but
but it's a difficult environment. There's no actual answer. Yeah,
(06:28):
and it's the other problem is that the kinds of
companies that aren't listed are also smaller, and they're far
more vulnerable. And so I I, you know, I would
I don't have the data to hand. I am assuming
that politician sounds like politician you can't recall it hasn't
seen that full story earlier. They only told him the
(06:50):
story today. It wasn't the time to investigate properly. We
always go drinking a Friday. But they know the the
unlisted start it's probably has a higher propensity to go
to zero and unlested stuff. And the problem is that
this is the kind of environment where stuff goes to zero.
I think that's I actually think that's the main problem
(07:13):
with this UM And as you said, doesn't just apply
Scottish mortgage. It's all of the unlisted moment and our
ideas in a little trouble at the moment too. You're
about forty percent unlisted, you know. Anyway, Um, watching weight,
watching weight. Things are breaking, but you know one has
to failed. Sorry for I don't know, yes, probably sorry
for that. The chair of Scottish movies you had to
(07:34):
stand down this week, you know, and then she another
victim a rising interest rates. Yeah, well this is it.
It's it's interesting how you can say that the ultra
low rate environment didn't just create Um, it's all like
financial bubbles. There's a lot of tan gentle kind of
bubbles that you know you can think of. I mean,
(07:55):
I mean, I think there's a sattweeze sort of look
to where you can say that Nicholas Durgeon's career is
a kind of ultra low interest rate phenomenon. Um. You know,
it's it's just interesting shity step down along at the
same time as you know, credit sweet and all the
rest of them are going bankrupt. So maybe perhaps I
(08:16):
am reaching, but I think, well, now there's another one
to wait and watch. There's a lot of watching and waiting.
There was a lot of watching the day for those two.
I mean, I think that we've we've had like a
kind of like a fired blanket thrown over volatility, like
in all areas of our life since the Great Financial Crisis, UM,
(08:37):
in the form of kind of like ultra low interest
rates and complete safety rails on the government bond market,
the can equity markets, and that kind of suffocation of
volatility has got to come out somewhere UM. And I
think a lot of explains the whole sense because I
(08:57):
was writing to the readers the other day, so it's
talking to them about what decade is it most like?
And you know, whiteb the twenty tents so flat and
kind of miserable, really compared to even some of the
late sixties and seven or so, even some time period
like the seventies, which was nihilistic but quite energetic. It
was the twenty tents was nihilistic and totally lacking in
(09:19):
energy right in By the way, people don't tell me
if you'd say night nihilistic or nihilistic nihilistic that's a
good point. Moving on, sorry maybe, um Yeah, so where
it was it? Yeah, I was just kind of coughing,
So I was just going off in like a flight
of fancy there. But but basically, yeah, this idea that
almost as a like social mood has been kind of
(09:42):
crushed as well, and that's enabled these kind of long
periods of just trend following, whether that trend is Scottish
nationalism or whether that trend is something like Scottish mortgage
or growth triumphing over value. And so now that that's
the interests are going up and they're kind of like
(10:02):
putting bombs under things. A lot of the if you like,
the philosophical offshoots of a lower interest rate era are
also blowing up. Yeah, there's a book in that, John,
I think are right. I think I think that the
shift in interest rates doesn't change our economic life, it
changes our political life, and it changes our cultural life.
(10:22):
Follow on that, Uh, I think it's probably healthy. I
absolutely agree, But I also think that that we need
more than a podcast with us. We'll go for a
drink when we're done here, Okay, the idea right, Moving on,
Welcome to Marin Talks Money, the podcast in which people
who know the markets explain the markets. I'm Marin Sumset Web.
This week our guest is Ian Lance Temple Bar investment
(10:43):
Trust portfolio manager. Now he is the exact opposite of
John and I have just been talking about. He is
a genuine value investor. I started by asking about a
blog he wrote recently, the tankle of which was just
stop selling UK equities. The numbers to us that there
is a huge, a NonStop outflow from the UK equity market.
So I asked Ian to tell us exactly what is happening.
(11:10):
I think there are a couple of things. One of
them is it's a long term phenomena, which is that,
as I mentioned in the blog, if you went back
to the nineties, I used to run balanced pension funds
at a firm called Gartmore, and back back in those days,
the big balance pension funds used to have about fifty
five percent of their allocation in UK equities and probably
another twenty percent or so in overseas equities. And that
(11:32):
meant two things. Number one is they were massively overexposed
to equities per se. But number two, they were probably
massively overexposed to the UK. And then of course along
comes two thousands. We have two things. We have the
eputy markets go down quite aggressively. Interest rates also come down.
That means the liabilities on the pension funds go up,
so complete tastrophe for lots of pension funds and they
(11:54):
were basically forced to adjust their positions quite aggressively. And
what they did was they cut their exposure to equities,
in particularly they cut their exposure to UK equities. And
we have a chart in the in the blog which
sort of tracks the decline of ukits from about fifty
five percent down to it I think about five percent now.
That's been the sort of long term trend. And then
(12:15):
I think the secondary issue is just colossal barishes about
the UK economy and that that probably started around the
time of Brexit. And then you know, we've had we've
just given investors, haven't we loads of excuses to be
negative on the UK over the last few years that
you know, the number of prime ministers we've had, the
number of chancellors, we've had, the strikes in et cetera,
(12:36):
et cetera. It is just sort of twenty four seven
negative sentiment towards the UK. So I think I think
that's been a factor as well, probably thrown in with
the fact that the UK has high exposure to sectors
that people don't really like or haven't really liked until recently,
so banks, energy miners, and it's got low exposure to
(12:57):
sext as people do like so technology. So I think
that's probably the sort of the background to it all.
There's a lot of fun back here. Let's go let's
go back a bit when the bench of the fun
started selling all their equities. If we accept that they
were overexposed to equities in the first place, but one
of the reasons they started selling equities as a whole
was because they felt they needed to do a little
bit more liability matching, so they moved into bonds in volume. Right,
(13:20):
So Land involved selling a lot of equities, which in
itself we can argue about whether that turned out to
be a good idea or not, but maybe that that's
the subject for another day. That's what they did. But
why was the majority of these equity sales in the
UK market? What made them think for themselves, if we're
getting get out of equities, we need in particular to
get out of the UK. It's almost a change in benchmark.
(13:42):
So back in the nineties, bench funds used to follow
something called the caps medium, which which is a bizarre
benchmark because it basically it just looked at all other
farm managers. So you were just benchmark in yourself against
other farm managers. Other farm managers have fifty five cent
in the UK, then you did. And I think over
time we drifted away from that, we more towards these
market cat weighted industries. So people began to look at
(14:04):
you know, MSCI World for instance, and if you look,
if you do look at MSCI World, you know, the
figures today are that the US market is seventy percent
and the UK market is about five percent. And so
I think there was that people basically moving towards that benchmark.
And one of the things that I say in the
blog is I think that is just crazy because what
that means is that people are forced towards having a
(14:28):
large percentage of their assets in large markets and a
small percentage in small markets, rather than a large percentage
in cheap markets and a small percentage in expensive markets.
And to me that just seems completely and utterly counterintuitive. Yeah,
so what it does if you're hugging global benchmark flate,
there's what you're doing is buying a whole pile of
stuff that has already gone up and selling stuff that
(14:50):
hasn't gone up yet. I mean, it seems that of
slightly mad everybody who is following exactly the same momentum
strategy exactly right. It's yeah, completely and utterly counterintuitive in
my opinion. Again, there's a nice chart in this blog,
and it basically just tracks returns of eperty markets against
(15:11):
the valuation of the valuation measure is effectively a sort
of market capture GDP. And then it's the subsequent returns
over the next twelve years. And the our square of
the chart is about point nine or you know, I'm
supposed to put that in simple terms, that there is
a very very close correlation between valuation inverse correlation between
valuation and subsequent returns subsequent twelve years returns from eptew markets.
(15:34):
And why people therefore would literally do the opposite of
what that chart implies and actually overallocate to expensive markets
and under allocates to cheat markets is just beyond me.
It's one of the maddest things in markets that you
actually just had to say that, So you actually had
to say aloud that there is a relationship between the
price you pay and the future returns that you make.
(15:57):
That is something that has been so completely gotten in
markets for the last decade, they were actually having to
remind people that the entire history of markets proves their
valuations matter absolutely, right. Do you ever do you ever
read the Credit Squeeze Investment Returns hand but when that
comes out, you know that that that comes out. I
(16:18):
have it right here, right here on my desk, the
Credit Squeee Global Investment Returns Yearbook twenty twenty three exactly.
And so so that thing is that thing is that
it's just a study of exactly what we've just been
talking about. Isn't it the fact that you know, you
you buy lowly value markets, or you buy lowly values,
you know, equities within those markets, and you subsequently make
(16:38):
higher returns not on not on a six month basis
or a one year basis, but but on a sort
of ten year basis. You know, there's a very very
strong correlation. And perhaps what I just said actually answers
that conundrum, which is that I don't know, maybe ten
years is just way too long for people these days.
Maybe people are that their time horizons are much much shorter,
(16:59):
and therefore sort of taking a bet that expensive markets
can get even more expensive. Well, I mean that's been
reasonably fair for some time. You know, if you look
at you and I I think would have said two
years ago, five years ago, eight years ago, goodness me,
the valuation gap between the US and the UK is
getting out of control. You want to be shifting back
into the UK. But if we'd been doing that, obviously
(17:22):
we would have been the ones who looked stupid, if
that were the ones who looked stupid. Because the UK
market one hundred continued to basically flatline and the US
market continued to go up, So this valuation got wider.
Gap got wider and wider and wider. And you now
talk to people, younger people obviously, who believe that it
is perfectly normal and natural for there to be a
(17:42):
huge valuation gap between the UK and the US. And
if you say to them, actually, this only happened a
couple of decades ago. It used to be valued in
roughly the same way that that's entirely new news. That's
right again. We you know, we have a chart which
looks at the looks at exactly that the difference in
valuations between the two markets, that is back over fifty years,
and I think you know, for most of that period
(18:04):
the average was about fifteen cents something like that, and
then last couple of years you're right, it blew out
to about forty five percent, and so you're right, you know,
it's a relatively new phenomenon, and what's the gap now?
It is it's a little bit less because you know, surprise, surprise.
Actually last year the SMP was down twenty percent and
the UK was up four percent, So so it's probably
(18:26):
about forty percent, but it's a way way wider. And
I think the other thing that I would add is
cause that's the average for the market. If you look
within the market, there are things within the market that
are much much cheaper. So there is, as I said,
quadlock going on here. But one thing I think we
can say, probably for sure with the fifty one hundred
(18:47):
is that the selling of UK equities maybe about the
perception of the UK economy as a result of breakcast,
but it's certainly not about the performance of the companies
as a result of breakit because the UK large have
been performing extremely well, right they have. And I think
you know, another thing I mentioned in the blog is
that there are lots of companies within the UK market
(19:09):
that have virtually no exposure to the UK economy, and
yet they are valued at massive discounts to their the uspers.
So the example within the energy sector, the example I
uses BP today trays on about five times earnings. X
X on trays on about ten times earnings. You know
that those are very very similar companies with very very
similar drivers to their profitability, and yet one trays at
(19:31):
half the valuation of the other. And yet and if
we picked up BP and dumped it in America, rehead
corded it with the share price double. Well, you know,
interesting thing you should they should say that BP had
results about about six weeks ago, and there are a
(19:52):
couple of things. The number one is they basically said
they were going to slow down their move into renewables
and invest more in upstream. But the stop went up
about thirty percent in the following sort a few weeks,
and that was attributed to US buying, interestingly, and the
management team. Interestingly, the CEO did his road show around
the US. The CFO was in the UK, and the
(20:12):
CEO went around the US, and there was as I said,
the share probably went up a lot and and apparently
that was that was US buying. So that's, you know,
just an interesting anecdotal point. And do you think they
were buying Um, I know you have, you have no
idea what I've interested in your opinion. Do you think
they were buying because they looked at and thought this
is extremely cheap, or they looked at it and thought,
(20:33):
we've known this as cheap for a while. But they're
backing away from renewables lass transition and focusing on what
they're actually really good at is a positive. Yeah. I
suspect they looked at the change in strategy and thought, actually,
that's a positive because even the company, even the company
themselves talk about returns in the upstream area being significantly
(20:54):
higher than returns in the renewable era. So I suspect
the US investors looked at that change in actually and thought, actually,
that's a good thing. And then they looked at the valuation.
I thought, my god, I can buy this for about
halfway one I'm paying for Excel. Interesting And because when
when you were talking earlier, you were talking about the
UK market being stuffed full of companies that people have
not been keen on for a little while. So we've
(21:15):
had what you might call it an ESG discount on
the UK market, but the conversation around ESG is changing
really fast. You'll have noticed that, I certainly have. You know,
if we go right back to the beginning of the
war in Ukraine, when suddenly defense doc turned from somethingl
something and evil and filthy to a social good. And
now again people are looking at the energy companies and
(21:37):
the commodity companies, and particularly commodity is pointing out that
we can't possibly have an energy transition without being really,
really very commodity heavy. And of course we can't maintain
our living standards in the short, medium and possibly long
term without being a little politer to the fossil fuel companies.
So that ESG discount is beginning to narrow as well. Yeah,
(21:57):
I completely agree with that. I think i'd also make
one other point, which is that the the ESG pressures
of the last sort of five to ten years on
these companies is the main part of our positive thesis
on the sector. In other words, the companies have basically
just been told you've got to stop investing in fossil fuels,
and they have. So, you know, a couple of statistics
(22:18):
for you. Aggregate capex for energy companies is down seventy
five percent adjusted for GDP over the last decade, isn't
it incredible? And for the equivalent for minors again, this
is adjusted for GDP going up down sixty seven percent.
And you know you don't need to you don't need
to be a genius to work out you can't cut
(22:39):
your capex by that amount and expect to production levels
to remain at the same at the same rate, and
surprise prize, they haven't. So you know, so production has
gone down across the companies and demand despite everyone's expectation
that demand for demand has not gone down. So people
are forecasting that oil demand in the fourth quarter of
this year will be one hundred five million barrels a day.
(23:01):
So in others it keeps going up. All the one
keeps going up, oil production keeps going down. It's really interesting,
isn't it, Because we've been told for years, And the
first thing you tell analysts when they start training in
the city is that when it comes to commodity is
and energy of the solution to high prices is high pricess.
You know, high prices or solve their own problems. Because
as prices rise, capex rises, supply rises, and down we
(23:23):
go again. And this is the first cycle in my career,
and I'm guzzing in yours as well. When high prices
are not the solution to high prices. Yeah, fascinating, isn't it,
Because you're you're you're absolutely right, you know, you've some
people describe it as a sort of capital cycle down
though the fact that returns go up and that should
attract more investment into the sector and that eventually that
(23:44):
shows the seeds of oversupply. And you're right, this is
the first one I've seen where that market mechanism has
failed because at these sorts of returns that they're making,
the companies should be investing hugely and they're not. You know,
even in the last year or so, we've not really
seen kpex go up amongst either the energy companies or
the or the mining companies. And it's kind of hard
(24:07):
to see how, you know, in the absence of a
massive global recession, it's kind of hard to see how
that situation, that supply demand situation resolves itself. Interesting. But
let's go back to the energy company. Because you hold
for Shell and BP, don't you do you worry about
because what we're really talking about here is the political environment, right,
But We've been talking about the political environment in terms
(24:27):
of supply and demand, but the other element of the
political environment around the big energy companies is the windfall taxes,
and that you know, it may be that these companies
can continue to make a vast amount of money out
of the rising present and crimp to supply of their goods,
but we can't be absolutely sure that the government is
going to allow them to keep that money for the moment.
(24:48):
I don't. The reason I don't is because it goes
back to this point about the fact that BP and
She'll make a relatively small amount of their profits in
the UK, and therefore the government can only tax those
profits that are made in the UK. So when they
were hit with the windfall tax last year, it was
basically about one percent of profits. It wasn't very significant.
But what it did do, back to our conversation of
(25:10):
a few minutes ago about the capital cycle, is it
basically elongated the capital cycle, because within months we had
announcements from BP, Shell, Total Harbor Energy all saying bless it,
we're cutting back on norc oral investment. So you know,
I mean, it's just a crazy policy for the government
to be following because you know, the answer to the
(25:30):
energy crisis that people facing at the moment is more investment.
We need more supply, and for them to basically hit
the companies and naturally force supply down, it's just a
crazy policy in my opinion. Okay, so you'll hang on
to those those two big old companies, you know, the
other the other thing there. And as we stand today,
BP is trading on five times this year's earnings. And
(25:51):
because and you know, given and the yeld of five
percent or so, pretty much the same for Shell, And
because they translate nearly all their profits into cash, that's
a that's a kind of about twenty percent free cash
flow yield. So these companies are still even though even
though they've gone up in the best forming sector for
the last couple of years, because the earnings keep going up,
because community prices can keep going up, they still look
(26:11):
very very lowly value to us. So fascinating dynamic, isn't
it that in these sectors that people have been ignoring
for so long, share prices can can basically double and
valuations can fall at the same time because the rise
and earnings is so unexpected to the market. And yeah,
and yeah, people, people clearly don't believe these levels of
profits are sustainable. I think people still look at them
(26:33):
in the way that they used to that the assumption
is that, you know, we must be at peak oil prices,
because that's the only thing that explains PEP trading on
a on a pe of five. That people just think
the ear is is now at its peak and it's
going to go down. And for the reasons we've just discussed,
you know, I'm not convinced that is the case. And
one of the dividend eels on these stops at the
moment about about five percent, But don't forget, they're buying
(26:56):
back huge amounts of their stock as well, So so
you're getting a five centiveen and yield, but you'll probably
get another five six seven percent in terms of share
buybacks as well. Why do they buy back instead of
just paying out a special dividend. But I mean, I
know it's different in the institutional world, but certainly in
the retail world, I think people would prefer a special dividend,
and particularly if they're holding stock slates this as incomparabader.
(27:18):
I'm not sure, to be honest with you, why why
they favor buybacks? Over over special difference. I think mechanistically
they're very similar to each other, aren't they. But you know,
I don't really know the answer. Sum Yeah, but one
puts cash in our pockets and the other doesn't. Doesn't,
but I guess it increases the value of the business
over time. Don't know. If you looked at another blog
(27:39):
that I wrote on on this issue share buybacks, and
I just used the example of Next, which very briefly,
if you invested one hundred quid in Next in two
thousand and one, it was to day be worth one
thousand and eight hundred pounds, despite the fact that the
top line has only grown in line with uk GDP,
and it's been through three recessions due throughout that period.
(28:00):
And the answer is share buybacks. They brought back over
sixty percent of their shares. An issue, they only do
it when the shares are cheap. So when what Simon
Wolfson does is when when the shares are cheap, he
will basically buy about stop. When the shares get expensive,
he turns it off and then actually Mary and he
pays a special dividend at that point in time. Okay,
but if he keeps doing that indefinitely there'll be nothing left.
(28:22):
O the way, at some stays you you Mary and
will own the last share in Next and it'll be
worth five billion quid. I mean that is slightly my
problem with buy back. You know that has to be
the natural end game. Is the disappearance of the number
of shares. Yes, yeah, this is true, but you see
(28:45):
my point over over the last twenty years. But for
shareholders in Next who didn't sell, you know, it's been
a very very successful policy. Now I do see that,
And how is the Next looking at the moment? Would
you buy that in the portfolio? Just a bit too
expensive for us? Actually, as you know, we have a
strong value bias. So actually we own mark suspenses within retail,
but we don't own Next. Okay, I want to go
(29:07):
back to mark suspenses. That's interesting. But first, when you
say that you're a strong value bias, and I know that,
what are the parameters if you say something's a bit
too expensive for us? I mean Next is obviously a
company that you thoroughly approve of. What is it invaluation
terms that make something too expensive? Way you're looking at
in terms of its cash flows? You looking at on
a pe basis, Is it a price to book. What
(29:28):
tells you something is a little too expensive for us? Okay,
So without maybe getting too technical, So too technical, please,
no technical, give a big picture. I'll go board. I
will try to basically, what we what we try to
do is we assess what's called a company's long run
normalized earnings pounds. So what that means is we look
(29:48):
at where we think the earnings can get back to
on a five year basis. So we're typically are buying
stocks which are going through a sort of temporary downturn
in their own is either as a result of the
economic cycle or maybe because of a blunder the company
has made. So we'll basically assume a recovery. We convert
accounting earnings into cash earnings, and then we basically will
apply multiple to that and we will come up with
(30:09):
what we think is roughly the intrinsic value of the business.
So what do we think is the business worth on
a five year basis? And if we can buy something
at about half that soon others about one hundred percent upside,
then that's normally attractive for the portfolio. Okay, and Martin
and Spencers fits into that criteria at the moment yeah,
it certainly does. Actually so a share price in Marks
and Spencers today one pound forty. The management have given
(30:32):
out targets for where they think the sort of margins
of the businesses can get. So got two businesses here.
We've got food retail business and we've got a clothing
and home business. So they basically think food returning about
four percent margin, clothing and home about ten percent. And
we agree with those figures. They should be able to
get to those if they do make those margins that
that gives you about twenty seven pm earnings, So you know,
(30:55):
put stick that on I don't know, twelve thirteen times
or something, that would give you about about three quid
for the intrinsic value of the business. And as I say,
share price today about one pound forty. So that's, in
our opinion a potential doubler and I've obviously I've massively
simplified it there. But that's how we think about value.
We don't think about value in terms of priced a book.
(31:16):
I've been trying to do some research for you in
I did go to Marks and Spencers to day before
yesterday because I keep reading in the fashion magazines. By
the weekend magazines anyway that you know, markus Spencer's jeans
at the thing right now. So I was walking past
Marks and Spencer at the other day and I went
and I did buy a pair of jeans. But unfortunately
I can't tell you any more than that because my
house is such a tip I brought them home and
(31:37):
put them down somewhere, and I've been meaning to try
them on before we had this conversation, so I could
tell you whether you're doing the right thing or not,
because obviously it's all about the genes right in. Oh well,
on a serious point, or is it all about the food?
I mean, the food business is good, and you know
with that link cover with the cardo, I think it's
now a very very good business. Very briefly, the issue
(31:57):
with the clothing and home business was that they had
a gray, big, long tale of stores which are unprofitable,
and they they basically had no online business. So going
back to the next, you know, next to spent a decade,
hadn't they establishing next directory? And Mark's basically had no
online business at all. And they've effectively gone about solving
both of those issues. So, believe it or not, the
(32:18):
clothing of home business is now the number two online
online retailing business in the UK behind next Directory, so
that you know they've ticked that box and they have
shut down lots of the unprofitable stores. So that's this
is kind of the mechanism that you can see to
the improving profitability in our opinion. Okay, and what's the yield?
I've got a lot of income invest deserve. They're listening
to us. The yield is not great because they're sort
(32:39):
of they're coming off a recovery, coming off a tropho.
This is about two cent. Yeah, it's not all bad,
is it. It is not all bad. It's not it's
not it's not a disaster. But yeah, I want to
go briefly back to mining before we get to the
elephant in the room, which I read listeners can probably
guess by now with the elephant in the rooms. But
let's go back to to mining. What's your top holding
(32:59):
in the mind any sector? Anglo American? Yeah, what's good
about Anglo American. It's a similar it's a similar thesis
to the energy companies, and it is this idea that
the industry as a whole has basically been beaten up
by politicians and ESG Investors has, as I said earlier
on capex for the industry is down sixty seven percent.
Anglos has got another dimension, which is that they were
(33:21):
probably one of the less efficient of the big miners
if you went back five or six years ago. So
if you compare them to Billetin or Rio, they were
less efficient than them, and they spent the last few
years taking costs out improving their profitability. They have they're
still very very disciplined in terms of capital spend. So
we just like the all companies, we haven't seen the
(33:42):
capolic spenders start to go up. And there is there
is one added dimension to this, where which is whereas
we can say probably that over time demand for fossil
fuels goes down. I think you can make a structural
growth case, can't you, with a lot of the materials
that they produced becaultously. They produced lots of the things
that we're going to need if we're going to transition
to a to a greener world, so namely copper and
(34:06):
things like that. So so again it kind of feels
there like there's a structural demand in the in these
types of things that they produce, and yet supply is
just not keeping up with that increasing structural demand, and
you know, normally one would therefore expect prices to go
up as a result of that. Yeah, I wonder if
we can really say that demand for oil is going
(34:27):
to fall. I think we could probably say that demand
for fossil fuels is a percentage of global energy demand
will fall. But as global energy demand just keeps going
up and up and up. Um. You know, let's say
that the fossil fuels that we use to provide our
energy globally falls from the current level of what's at
about eighty percent to seventy five percent, but the absolute
(34:49):
volume of fossil fuels that we use, and there's something
very dramatic happens very soon, it's still going to go up, right, Yeah,
I think I think you're probably right. And I think
you also have to think about where is the increase
in demand for energy usage coming from. Is basically coming
from areas like China and India and in Africa, And
in those regions, you're going to see an increasing demanding
(35:12):
fossil fuels, aren't you, as as demand continues to grow. Yeah,
So I think we have we have to be careful
about about thinking that fossil fuel demand is actually going
to fall just because we'd like it to the world works,
is this? Yes, no fair point, right, Let's come to financials.
So a large part of their portfolio is in financials
(35:32):
one way or the other. And you've got a couple
of big holdings in banks. You've gotten at worst, you've
got standard charters. And the wonderful thing about these is
that they're going to be significantly cheaper today as we
talk than there were a couple of weeks ago. Now,
we're not going to we're not going to delve too
deeply into whether we're in the middle of a banking
crisis or not in a banking crisis, and whether our
entire financial system is going to collapse, and whether you
(35:54):
and I should not be talking but attempting to figure
out how to put our entire net worth in bitcoin.
We're not going to delve into that. I just wanted
to ask you about the banks that you do hold
and how confident you feel in their well being. Yeah,
pretty confident. This is a sort of dangerous conversation we're having,
aren't with because but you know, by the time this
podcast airs, things could have changed dramatically. Things are moving
so fast at the moment. I suppose the serious point
(36:15):
that O make is the all of these banks, all
of the UK banks, have spent about the lost fifteen
years improving the state of their balance sheets. For all
of them, the financial crisis was a near death experience,
and confidently was for the regulators of the government, for
the country, et cetera, et cetera. And as a result
of that, thing's dramatically changed. So the management teams across
all of them are totally different and not in you know,
(36:36):
it's not Stread Godwin, et cetera, Restera still running these things.
It's Alison Rose running that West group, who is you know,
much more conservative. The balance sheets are much stronger, the
lending books are much much stronger. So take an example
of of n West of the loans to value ratio
and the mortgage book is about fifty three percent. So
(36:57):
house prices could go down quite a long way for
you know, before that would start to cause trouble. And
again that would be just completely different from what we
had during the financial crisis. And you know, they're very
tightly regulated. They have correpty Tier one ratios of sort
of fourteen percent and more they have very strong liquidity ratios.
So you know, my personal view is that what's going
(37:19):
on in the world at the moment shouldn't affect these banks.
It's a it's always hard to call, because George Soros
used to have that expression reflexivity didn't heed whereby movement
in share prices can actually influence things, and in this
case it could be movement in share prices eventually spooks
depositors who start to withdraw their deposits. So so it's
always hard to say these things with banks, you know,
(37:40):
for definite. But from from where I'm sitting at the moment,
I think these things are they're still well capitalized, and
they are and at the moment they're actually the prossibility
is going in the right direction. Again, you know, who
knows that that that might change. And the valuations bearing
are still very very low. So if you just let's
just go across the three that we own, that West following,
you know, following the markdown last week, it's now on
(38:02):
a price earnings ratio five times Standard Chartered six times
Barkley's four times give it and yields for your income
investors that West eight cent standards a bit lower three percent,
Barkley's six and a half percent. And for those who
you know, for those who like price to books point
seven point five point four, so trading a discounts to
(38:22):
Price to book as well. So they you know, they
to us they're much much better businesses than they used
to and they're still very lowly valued. And the tube
of they get, you know, based on what we were
discussing earlier, the tube of the get, the greater the
future returns, right should be, yeah, should be. As an aside,
house prices you said they had they could go down
(38:43):
a long way before we had to worry about the
stability of any of the banks. Have you got a
view on where UK house prices might there's the horribly
unfair questions not your area, but but lately is your
area if you're invested in UK banks, it is? It is?
I mean, So I write another I won't call it
a blog. It was more of a white paper last
year actually, and it was called Reversion to the long
(39:04):
run mean and and and it literally just asked the
questions that if you take actually valuations, bond yields, house
prices and you basically take them back to their long run,
you know, their long run averages. That that has some
quite significant implications across across all of those things. So
so for you know, for US extis, usxty should be
(39:25):
down fifty percent on more, you know. But I mean,
I finally love the bondial ones actually come come true
very very quickly, hasn't it? Because bond yields back then
were one and I was saying, you know, long run
bondyls are normally about four or five cent, and here
we are, you know, and here we are back at
four or five percent. And the other one that I
mentioned was house prices. I mean, you know, house prices
looked very very expensive on a long run basis, and
(39:45):
I just said that could be one of those things
that eventually mean reverts back to its long run average.
I have, I have kind of no reason to assume
that that it won't. And again, if it does, you know,
house prices should be probably thirty or forty percent lower
than they are to day nominal terms or real terms. Yeah,
nominal terms. Yikes. Yeah, that's not a prediction. But I suppose,
(40:06):
I suppose I'm just saying that almost Why why wouldn't
they Why why shouldn't why shouldn't ext markets mean reverts
to their long run average valuations and bondeal town house prices.
And we know what drove these things above substantially above
their long run averages, right it was you know, it
was low interest racing, it was contentated easing, etc. Et cetera.
(40:27):
Now to the extent that all those things are now
going away, why why wouldn't these things mean revert to
the long run averages? Well, now I agree with you,
but I have to spend a lot of time on
this podcast trying to goad people into making, you know,
making excitable forecasts about house prices, and just be clear,
you have not made a forecast. I get that. But nonetheless, nonetheless,
(40:48):
I think think forty was said nominal as the furthest
we've gone so far. So congratulations to both of us
on that. Thank you. Listen. Last question, last question, I'm
holding you down. I'm not leaking out of the house
for a decade. You're not going to be able to
trade again. You're going to beake gold or bitcoin. Oh,
gold gold definitely. Do you have any gold in the portfolio.
(41:08):
We own two gold miners. Actually, we own Barrack Barrack
Resources and New more mining. Point number one actually sorry
to be boring here, but similar thesis to the energy
and and and Anglo Americans, which is, you know that
they if you went back ten years, they just they
were just awful businesses. They were doing big mergers, they
were spending too much, et cetera, et cetera. And then
(41:29):
you had come of massive management change. Obviously price gold
prices fail, and they're now going through this cycle at
the moment where they have much much better capital, discipline,
costs much lower et cetera, et cetera. So you know,
big tick in the box there. But also it is
very interesting in a week like last week when lots
of are you know, more cyclically orientated things are going down,
is you know, those things just act as a fantastic hedge,
(41:53):
so that those share prices were going up last week
whilst everything else was going down, And obviously the gold
price was going up last week as well, wasn't it.
So you've got the hedges in their portfolio in the
films of goal, and of course in terms of the dividend,
because you know, a good dividend is one of the
greatest hedges we've got against chaos and against inflation, isn't it.
It certainly is. Yeah, it certainly is. I mean again,
(42:13):
this is you know, you're you'll you'll remember the days
when the income sector in the UK was I think
one of the most popular sectors wasn't absolutely money. Those
days are coming back. I'm pretty convinced of it. I
hope you're right. I hope you're right. But but you know,
the serious point is that in the long run again
(42:33):
again actually this is in your in your credit sueet
book that you've got there. In the long run, I
think dividend yield is about half of your total return. Yep. Yeah,
but we just got we got used to that environment
in which ext's were going up twenty percent a year,
and I think people just thought, well, who on Earth
and he's dived and yield? When your ex's are going
up twenty percent a year, we can just sell some capital. Now,
if we're moving back to an environment when we can't
(42:55):
rely on ext's going up to any percent a year,
then maybe divn and yield does become important again. And
I think your other point is right is I think
you know, historically given and yields has proved to be
a good inflation head as well. If you can start,
if you can start with your diven and yielding sort
of four or five percent, that gets your reasonable way there,
doesn't it? It does. It does to basically keeping up
(43:16):
with inflation. Yeah, well with inflation at temps enter and
it gets you halfway there. But it's an awful lot
better start than nothing, right, So Ian, I think we
better wind it up. But I think I can come
and sum up what you said to us in one sentence,
which is that you know, history tells you you have
to buy cheap stuff and lots of stuff that's cheap now,
so you know, maybe buy that stuff not the other stuff.
Would that be fair? I think that's a very good summary. Perfect. Perfect.
(43:40):
I don't know where we bother with the whole half
an hour, we could just do it like that. Thank
you so much for joining us today. We hugely appreciate it.
That's a pleasure. Thank you for listening to this week's
Marin Talks Money. We will be back next week in
(44:01):
the meantime. If you like our show, rate review and
subscribe wherever you listen to your podcasts, and please do
so positively. Will you'd appreciate that a lot more than
anything else. This episode was hosted by me Maria's Sumset Web.
It was produced by Samersadi, additional editing by Desta wonder Rad,
special thanks to Ian Lancer and to John Steppock of course,
(44:21):
and finally, a weekly reminder to sign up to John's
daily newsletter, Money Distilled. You will like it. The link
is in the show notes
Host
Merryn Somerset Webb
Popular Podcasts
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.
Therapy Gecko
An unlicensed lizard psychologist travels the universe talking to strangers about absolutely nothing. TO CALL THE GECKO: follow me on https://www.twitch.tv/lyleforever to get a notification for when I am taking calls. I am usually live Mondays, Wednesdays, and Fridays but lately a lot of other times too. I am a gecko.