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