Speaker 1: Bloomberg Audio Studios, podcasts, radio news. John Man, you know,
Speaker 1: we were chatting before we started recording, and you said
Speaker 1: something I didn't think i'd ever hear you say. You
Speaker 1: said just a matter of seconds ago, so you can't
Speaker 1: deny it. You said, you know, those charters they're onto something.
Speaker 1: I think they're right.
Speaker 2: I will, I will. I'm more than happy to acknowledge
Speaker 2: that I am proudly chartist.
Speaker 3: Curious.
Speaker 2: It's one of those it's one of those great things
Speaker 2: where see you, if you're talking to someone who's a
Speaker 2: nervous financial journalist, one of the first things they'll say
Speaker 2: is this charting stuff's just a lot of hocus pocused nonsense.
Speaker 2: But once you've been kind of in the markets for wile,
Speaker 2: we realize that it is as good a way to
Speaker 2: analyze markets as anything else. And if you are actually
Speaker 2: looking at markets on any time horizon that is not
Speaker 2: amenable to fundamentals, which is practically everything from five years down,
Speaker 2: then technicals are about the only thing you've got, and
Speaker 2: that a really good reflection of behavior and psychology in
Speaker 2: the market. So yes, I say, I am. I have
Speaker 2: a lot of time for technical analysis, and you're.
Speaker 1: Talking to someone who once wrote a column, admittedly a
Speaker 1: couple of decades ago, about how the movements of the
Speaker 1: moon could influence the stock markets. I'm sure that, by
Speaker 1: the way, I still have some sympathy for the idea.
Speaker 1: I still have some sympathy the ideas. I'm definitely chart
Speaker 1: is curious as well. And of course, I mean this
Speaker 1: is really just about momentum. And we started talking about
Speaker 1: charting before we started recording, because I was telling you
Speaker 1: about a conversation I'd had with a fund manager and
Speaker 1: we were talking about executive pay and all this fuss around,
Speaker 1: you know, ocado this week and stock exchange last week, etc.
Speaker 1: About whether it's reasonable for CEOs to be paid ten
Speaker 1: to fifteen million pounds year, admittedly less than they get
Speaker 1: at the top in the US, but nowethertheless, you know
Speaker 1: a lot of money. Is it reasonable? Is there a
Speaker 1: link between pay and performance? I mean, it's such a
Speaker 1: boring conversation. We have it over and over and over
Speaker 1: and Overright, you can find a study to back up
Speaker 1: either side whenever you like. Anyway, having this conversation and
Speaker 1: I said to him, well, you know, do you is
Speaker 1: this the kind of thing that might be a catalyst
Speaker 1: for the market what would make the UK market go
Speaker 1: up properly? And he said, well, what will make the
Speaker 1: market go up properly? Is it going up? Because all
Speaker 1: fund managers, all fund managers, whatever they tell you in
Speaker 1: the end, are to a degree momentum investors. And that's
Speaker 1: particularly the case with global investors. They won't buy something
Speaker 1: because it's cheap, they won't buy something because it's interesting.
Speaker 1: They won't buy something because of some sort of macrofaf
Speaker 1: They'll buy it because it's already going up. That's it,
Speaker 1: That's all there is.
Speaker 2: Yeah, and I mean benchmarking leads to this. You know,
Speaker 2: it's like if some's going up and you're not in it,
Speaker 2: then chances are you're going to be in trouble the
Speaker 2: next time you see your investors. So it does encourage it.
Speaker 2: And at the end of the day, the foot SAE
Speaker 2: one hundred has now going to a new high a
Speaker 2: while at the same time, the S and P five
Speaker 2: hundred has come off the boil, which I think is
Speaker 2: also important. And you've also got like this massive merger
Speaker 2: deal with BHP buying Anglo or you know, trying to
Speaker 2: buy Anglo, so that's suddenly drawing a load of attention
Speaker 2: to it, and I mean, to be fair. What's his name, Nick?
Speaker 2: Of course, sorry Nick? Nick Train said that to you
Speaker 2: the other day. You were mentioning that on last week's
Speaker 2: podcast the catalyst was going to be a foot sae
Speaker 2: one hundred deal, and you know, I think that's a
Speaker 2: reasonable point. So it's in the news. It's going up.
Speaker 2: Suddenly people are saying, wait a minute, maybe maybe the
Speaker 2: UK is not a complete disaster after all. So yeah,
Speaker 2: I guess.
Speaker 3: Yeah.
Speaker 2: Charts reflect psychology, and the psychology hopefully possibly has changed.
Speaker 2: Goven that the fundamentals are already there. No, we've been
Speaker 2: saying for ages that is cheap. So if it needs
Speaker 2: a catalyst, then a new high and a big deal
Speaker 2: sort of makes sense.
Speaker 1: Is that what your chart tells you? John?
Speaker 2: Yep, yep, New highs, beget new highs. That's what they
Speaker 2: always say, until you hit the next febnit tee number.
Speaker 2: That's properly, that's properly getting the right twisted.
Speaker 1: Okay, So marcuts go up because they go up. You
Speaker 1: heard it here. First, tell your friends. I wanted to
Speaker 1: ask you another question, and I don't. I don't know
Speaker 1: if you if you haven't looked at this, don't say anything.
Speaker 1: But John, a few weeks ago, maybe a few months ago, now,
Speaker 1: you wrote about China and you said you wouldn't buy
Speaker 1: it because it was uninvestable from your point of view,
Speaker 1: but nonetheless you thought it would probably go up and
Speaker 1: now would be a good time in the cycle to
Speaker 1: start buying into China. And that kind of looks right,
Speaker 1: doesn't it, because China is at the very least stopped falling.
Speaker 2: Yeah, and it did go up since then. I hate
Speaker 2: them out. Haven't properly looked at the chart. It's the
Speaker 2: exact team that I said, you should buy it if
Speaker 2: you have no models.
Speaker 1: I only ask you, John, because I've been reading a
Speaker 1: little bit of research from gav Cal Research where they
Speaker 1: have this great little bit of research they put up
Speaker 1: every now and then where they just ask questions and
Speaker 1: answer the questions, and one of them is about China,
Speaker 1: and they're pointing out that even a couple of months ago,
Speaker 1: bad news would have pushed equities down ten twenty percent
Speaker 1: drop of the hat because everything was bad and everyone
Speaker 1: was pulling out. But now lots of nasty macro developments
Speaker 1: for the Chinese markets. So a strong US dollar, rising
Speaker 1: treasury eels collapsing again, except when these are the kinds
Speaker 1: of things that in the past would have made the
Speaker 1: Chinese market go down, down, down, but now it's just
Speaker 1: kind of fair going up, and so they see a
Speaker 1: momentum driven shift there as well. So if we would
Speaker 1: go back to your charts or the moon, we may
Speaker 1: find that we're being told there that right now, while
Speaker 1: we might continue to say that China is uninvestable, its
Speaker 1: behavior is slightly different.
Speaker 2: Yeah, And I mean that's kind of the piece at
Speaker 2: the start of the year saying that it was the
Speaker 2: most obvious can trade and trade for twenty twenty four
Speaker 2: and that I still wouldn't put my money in it,
Speaker 2: but you know, feel free, and yeah, it looks if
Speaker 2: it's done, okay. I mean the other interesting thing I
Speaker 2: noticed was that, and I haven't read the actual piece
Speaker 2: behind this, but Goldman Sachs were apparently saying expected rotation
Speaker 2: now from unfortunately from Japanese stocks into Hong Kong stocks,
Speaker 2: and I thought that was an interest in coll because
Speaker 2: I also saw a note from my chap that we
Speaker 2: both knows friend lorenz On LinkedIn the other day where
Speaker 2: he was saying he's just current on a research trip
Speaker 2: in Hong Kong and a guy he was speaking to
Speaker 2: there was saying that he's had a lot more fund
Speaker 2: managers coming to see him asking about Hong Kong stocks. Then,
Speaker 2: you know, I think the same number in the quarter
Speaker 2: as he normally sees in the whole year. So I
Speaker 2: think there's definitely a sense of chasing around for things
Speaker 2: that haven't gone up, because beyond that, it's hard to
Speaker 2: see the micro story hasn't really changed that much. Is
Speaker 2: more just at the point where people are thinking.
Speaker 1: Why not.
Speaker 2: And I guess also with the S and P getting
Speaker 2: a little bit, I don't know, it feels as if
Speaker 2: the mootor has changed slightly and maybe they kind of lagguards,
Speaker 2: which is basically the rest of the world are going
Speaker 2: to start having the time in a sign I don't know.
Speaker 1: And you know you need in this kind of environment, John,
Speaker 1: what's that?
Speaker 3: Sorry?
Speaker 1: You know what you need?
Speaker 3: And what do we need?
Speaker 1: What do you need? You need an active fund manager?
Speaker 2: Ah, that's a good transition out like that one, Thank you, thank.
Speaker 1: You, so moving on, So my guest this week John
Speaker 1: is Simon Evan Cook, who I've known for a long
Speaker 1: time now. I've been reading his research for fifteen years
Speaker 1: or so, and here's someone who really really knows about
Speaker 1: active fund management and how to pick a good active manager.
Speaker 1: Which is why I wanted to have him on at
Speaker 1: this point in the cycle, because it definitely feels to
Speaker 1: me like all change in the mind is everything widening out,
Speaker 1: everything moving around, magnificent seven in the US losing momentum.
Speaker 1: It looks like it might be if you're interested in
Speaker 1: this kind of thing, time to think about moving away
Speaker 1: from passive investments into something a little bit more active.
Speaker 1: It's very good at it, so that's why I asked
Speaker 1: him on.
Speaker 2: Well, I mean, I'm looking forward to here in this
Speaker 2: one because it is probably the single most controversial topic
Speaker 2: in investing active versus passive.
Speaker 1: It's emperting, isn't it? Because you and I we got
Speaker 1: you know, years ago as soon as that when passive
Speaker 1: really began to take off. We were so pro passive
Speaker 1: because we were so thrilled to see something that there
Speaker 1: was cheap and that would drive down fees across the industry.
Speaker 1: And it did exactly that. It's been a brilliant product
Speaker 1: for millions of millions of invested, Absolutely fantastic. But there
Speaker 1: comes a point, doesn't that, and I'm obviously two ear
Speaker 1: leagues that have been with everything for the last three
Speaker 1: or four years, I've going, oh, I don't know, that's
Speaker 1: a bit much passive. Maybe it's time for a shift.
Speaker 1: Maybe it's the age of the stock picker is back
Speaker 1: with us. Time to go back to active. One of
Speaker 1: the reasons why it's safe to go back to well
Speaker 1: say further than it used to be because fees have
Speaker 1: come down so much. And when you look at the
Speaker 1: fund when you're looking to invest, you look at the vehicle.
Speaker 1: The only thing you can know in advance is the
Speaker 1: compt You can't know anything else. So in the old days,
Speaker 1: when you look at a fund and you're like, wow,
Speaker 1: one and a half percent really And then of course
Speaker 1: in the old days there with that to you know,
Speaker 1: you had to pay that drag to your IFA for
Speaker 1: decades and all that kind of thing. It was super expensive.
Speaker 1: So the only thing you when you looked at it
Speaker 1: was wow, this is going to be a real drag
Speaker 1: on my performance, whereas you looked at passive, you know,
Speaker 1: not going to be such a drag on my performance.
Speaker 1: So the choice was kind of easy.
Speaker 2: Yeah, And I think it's interesting that the debate has
Speaker 2: become so polarized because passive took off to such an extent.
Speaker 2: But since those days when we were talking about it,
Speaker 2: the course on the active said half come down substantially.
Speaker 2: I mean, so you know we're talking maybe like twenty
Speaker 2: years ago. This was when I fees, as you said, well,
Speaker 2: basically getting paid commission from find managers for selling the
Speaker 2: products in their behalf. That will win out the window. Thankfully,
Speaker 2: the act of funds one more expensive and once ther
Speaker 2: came along and the passive competition that started to drive
Speaker 2: down the course of the active funds. So a lot
Speaker 2: of the arguments that were extremely cut and dried back
Speaker 2: then are not as cut and dried now. And yet
Speaker 2: the argument I would say has become far more will polarized. Basically,
Speaker 2: there's almost a kind of passive, kind of puritanical streak.
Speaker 2: In fact, I think we'll get more hate mail about
Speaker 2: this than we do when we see nasty stuff about
Speaker 2: MMT or bitcoin.
Speaker 3: And that is saying, some.
Speaker 1: Gosh say something. They say something nasty about Scottish politics,
Speaker 1: if that gets us more hate mail. But no, you're right,
Speaker 1: it has become a bizarrely polarized conversation and a conversation
Speaker 1: that is less about, you know, if there's a good
Speaker 1: way to combine the two, or a good way to
Speaker 1: use one in fun parts of the cycle and one
Speaker 1: another parts of the cycle, etcetera, to a complete division
Speaker 1: between only or only active. You're interesting anyway. Simon knows
Speaker 1: all this stuff, So we're going to move on to
Speaker 1: talk to the expert. Welcome to Maren Dogs Money, the
Speaker 1: podcast in which people who know the markets explain the markets.
Speaker 1: I'm there in Sunset weeb Here's my conversation with Simon
Speaker 1: Evan Cook, fund manager at Downing. Simon has more than
Speaker 1: twenty five years experience in the investment industry. Career started
Speaker 1: a long time ago at Fidelity before joining Rothschild Asset
Speaker 1: Management and then gartmore on to Premier Asset Management in
Speaker 1: two thousand and six. And this is where I first
Speaker 1: came across Simon and where he built his reputation as
Speaker 1: a member of an award winning multi asset team there
Speaker 1: and also wrote the fascinating research that we refer to
Speaker 1: pretty much all the way through our conversation. In twenty
Speaker 1: twenty two, he joined Downing to set up a manager
Speaker 1: Downing Fox range of funds, Simon, Thank you so much
Speaker 1: for joining us today.
Speaker 3: Hi, Maren, glad to be here.
Speaker 1: Now we have got a lot to get through, but
Speaker 1: I want to set us up by asking you to
Speaker 1: talk a little bit about you're in active manager. I
Speaker 1: think maybe clear now you're an active manager. I want
Speaker 1: to shut us up by asking you to talk a
Speaker 1: little bit about the rise of passive and what it's
Speaker 1: meant for the investment community as a whole.
Speaker 3: Yes, absolutely so. It's something I've come to peace with.
Speaker 3: If you've ever read any of my stuff, you know
Speaker 3: that I'm a massive advocate of active investing. I'm not
Speaker 3: an apologist for all active investors. I'm only an apologist
Speaker 3: for the great ones. So I think that's all we
Speaker 3: should be concerning ourselves with. But when you look at
Speaker 3: passive and the rise of it, it's something I've come
Speaker 3: to peace with recently. I used to almost attack anything
Speaker 3: passive just in the name of active, but I can
Speaker 3: now see that if Jack Bogel, the founder of Vanguard
Speaker 3: and basically the kind of father of passive investing, was
Speaker 3: a brit I fully concede that he should have been knighted,
Speaker 3: because he's probably done more for private or small individual
Speaker 3: wealth than anybody in history, because that product is a
Speaker 3: great thing, and it originally came about to solve a problem,
Speaker 3: which was that go back to the sixties and you
Speaker 3: had a lot of brokers and wealth who were picking
Speaker 3: I don't know, let's say twenty stocks, and those stocks
Speaker 3: would go up a lot, and then they would claim
Speaker 3: that was down to their skill. Now, of course, all
Speaker 3: stocks basically go up nearly all the time, so you
Speaker 3: could have bought anything and it would have gone up.
Speaker 3: So how do you know if that person was actually
Speaker 3: conning you or any good at their job at all?
Speaker 3: You didn't basically, whereas obviously the rise of benchmarks and
Speaker 3: then passive with that gave people an option to say, well,
Speaker 3: hang on a minute, mate, you're not actually picking good companies,
Speaker 3: so you're just buying any companies and then just conning
Speaker 3: them onto me. So the launch of that was a
Speaker 3: great thing. It's clearly gone from being a kind of
Speaker 3: disruptive small product in the seventies all the way through
Speaker 3: to where it is today, where it is he behemoth.
Speaker 3: It's a juggernault. It's various reports have the passive part
Speaker 3: of the market being more than fifty percent now so
Speaker 3: on that level, it's been an incredible success. But along
Speaker 3: the way you've had bumps in what it's done and
Speaker 3: how it's been perceived. But you're also now getting to
Speaker 3: the point where it's so huge that it's becoming potentially
Speaker 3: big enough to have its own impact on the market.
Speaker 3: And that to me is it's certainly raising a lot
Speaker 3: of concerns.
Speaker 1: Yeah, but let's stick with the core success before we beginning.
Speaker 1: And one of the things that's happened here is is
Speaker 1: enabled a lot of people to come into the market
Speaker 1: cheaply and easily track a benchmark, feel like they're doing everything.
Speaker 1: It feels low risk, it feels comprehensive, it is cheap.
Speaker 1: And I went on a podcast the other day which
Speaker 1: is aimed at beginner investors and people just beginning to
Speaker 1: get to start in the markets, et cetera. And their
Speaker 1: default advice to all investors is just to buy a
Speaker 1: global index man and be done with the whole thing.
Speaker 1: And that has been excellent advice for quite a long
Speaker 1: time now. You couldn't really go wrong with that, given
Speaker 1: that the US market just goes up and up, and
Speaker 1: then a global index treker is what about seventy percent
Speaker 1: the US, So you've got a lot of exposure in there,
Speaker 1: to the Magnificent Seven, to the big tech socks in
Speaker 1: the US, you've got a lot of exposure to the
Speaker 1: rest of the US market and very little exposure to
Speaker 1: the areas and the rest of the world that have
Speaker 1: been languishing around the place. So you've made good money,
Speaker 1: you haven't paid very much for it. That's been great.
Speaker 1: And at the same time that passive industry has put
Speaker 1: a lot of pressure on the rubbish parts of the
Speaker 1: active market, right, So Yes, work to bring down fees
Speaker 1: across the board because if you can get if you
Speaker 1: can get a good etf for a couple of basis points,
Speaker 1: why would you want to pay one and a half
Speaker 1: percent for allows the active manager, Alice, put pressure on
Speaker 1: that part of the market that you and I have
Speaker 1: often talked about before, the sort of the closet tracker,
Speaker 1: the active managers who are to actually activity all Yes,
Speaker 1: the tracker and they've paid, and they charge you more.
Speaker 1: So there've been great successes from passive before we look
Speaker 1: at the overall impact on that it might now have
Speaker 1: on the market for the individual inveasta. So far, the
Speaker 1: rise of the passive industry has been and I feel
Speaker 1: like you conflicted about this, but it's been a very
Speaker 1: good thing.
Speaker 3: Absolutely absolutely Now argument for me, it's just it's a simple,
Speaker 3: reliable product in a world that is endlessly complicated and
Speaker 3: for but a certain type of person. I always compare
Speaker 3: it to if I was ever asked God forbid to
Speaker 3: go on strictly come dancing. I have two left feet.
Speaker 3: If someone said at the start, you don't have to
Speaker 3: do the dancing, and we'll bring you in seventh out
Speaker 3: of twelve, I'm taking that all day long because I'm
Speaker 3: not a dancer. So for anyone who's not interested in investing,
Speaker 3: hasn't the time, expertise knowledge, it's been great. But it's
Speaker 3: where I've had taken issues with sometimes suggesting that everybody
Speaker 3: should go passive, and that's where my back starts to
Speaker 3: get up.
Speaker 1: So I talk me through a little bit. When you
Speaker 1: say reliable or what do you mean? You mean you
Speaker 1: always know what's in it?
Speaker 3: Yeah, you know what it's going to do. So I
Speaker 3: always talk about the two degrees of separation, and what
Speaker 3: I mean by that is how do you separate someone
Speaker 3: from their own money to being invested. Now, if you
Speaker 3: invest in just a passive fun I think you've got
Speaker 3: one degree of separation, which is that you have personally
Speaker 3: bought the market, so you only really need to consider
Speaker 3: whether it was the right thing to have bought the market.
Speaker 3: So there's only one kind of area where you could
Speaker 3: have it made a mistake, which is you bought it
Speaker 3: or you didn't. If you then bring in an active
Speaker 3: fund manager, you've got the second degree of separation, which
Speaker 3: is where you've got that market decision. But then you
Speaker 3: can also blame yourself for having picked the wrong active
Speaker 3: fund manager. So you've got two areas where you've got
Speaker 3: room for self doubt, and that, to me is the
Speaker 3: big difference, and that's where a lot of people can
Speaker 3: fall down, is that you've end up a lot of
Speaker 3: cases buying a very good active fund manager, but you
Speaker 3: just buy them at the wrong time, And that to
Speaker 3: me is the problem a lot of people have with
Speaker 3: active fund managers. They're very good at picking good fund managers,
Speaker 3: they are just appalling at timing it because they will
Speaker 3: buy them after the fund manager has done five years
Speaker 3: of good performance, and that invariably heralds two or three
Speaker 3: years of poor performance. That's a feature of a great
Speaker 3: fund manager. It's not a flaw, and so you end
Speaker 3: up just experiencing the downside of these fund managers, the
Speaker 3: bits where they underperform. And you do that once with
Speaker 3: a growth fund, you do it twice with a value fund,
Speaker 3: and then the third time you think it's all a
Speaker 3: giant con I can't be bothered anymore. Are just go passive.
Speaker 3: So there's more to understand if you're buying an active fund,
Speaker 3: which makes it more complicated. But that doesn't mean you
Speaker 3: don't need to understand what's in a passive fund, because yeah,
Speaker 3: for most part it makes sense and it's been a
Speaker 3: great investment. But there are certain times, and there have
Speaker 3: been certain times in history where what is contained within
Speaker 3: that benchmark can become dangerous and make the whole thing
Speaker 3: more dangerous than maybe you imagined it would be.
Speaker 1: We're going to come back to that bit, but I
Speaker 1: just want to ask you something. I have memories of
Speaker 1: a piece of research that you wrote a while, a
Speaker 1: long while that probably about how we always say that
Speaker 1: active funds on average underperform the market, But it may
Speaker 1: be that investors in active funds on average do not
Speaker 1: underperform the market because they're better at picking active funds
Speaker 1: than you might think. And if there are more of
Speaker 1: them in the big successful ones, then there might be
Speaker 1: in the others. Then it's entirely possible. And I remember
Speaker 1: you doing some researcher back this up. It's entirely possible
Speaker 1: that the individual retail investor on average does not underperform.
Speaker 3: It is, Yes, I do remember doing that. Yeah, I
Speaker 3: went deep geek for a number of months and recreated
Speaker 3: my own sector averages. Because when you look at when
Speaker 3: you see a lot of stats, the commonly used stats
Speaker 3: of the industry about active funds or funds in general,
Speaker 3: it doesn't apply any effect of the size of those
Speaker 3: funds are on performance, and so that can change the
Speaker 3: picture massively. I remember at the time, so we're going
Speaker 3: back ten years now, and I think I've just done
Speaker 3: it after a period when there'd been quite a bit
Speaker 3: of turbulence in emerging markets in Asia, and at that
Speaker 3: time you saw that actually the average Asian equity fund
Speaker 3: had done pretty badly, had underperformed the markets most people
Speaker 3: would have expected it would have done. But when you
Speaker 3: look within that and you looked at who the big
Speaker 3: funds were, and at the time, this was when firms
Speaker 3: like Steward Investors or even Aberdeen were the kind of
Speaker 3: fan favorites, the ones that were widely held. They were
Speaker 3: amazing funds, particularly the Stuart Investor funds run by Angus Tulko.
Speaker 3: I know you're aware of a lot of people back him.
Speaker 3: There was a lot of money invested in those and
Speaker 3: that meant that actually more people in that sector were benefiting.
Speaker 3: And actually you saw that active management was doing an
Speaker 3: amazing job for investors in that part of the market
Speaker 3: because everyone to have picked the great fund manager.
Speaker 1: Yeah, so that makes all the difference, or could make
Speaker 1: all the difference. Yeah, Okay, let's go back to then
Speaker 1: what you were just talking about times. And obviously this
Speaker 1: is the first time in the history of markets where
Speaker 1: we've reached any point with this percentage of assets under
Speaker 1: management inside passive, So we haven't got that much history
Speaker 1: to work with here. But there may be times, and
Speaker 1: possibly this might be one of those times where passive
Speaker 1: isn't the best place to be. Is that a fair
Speaker 1: reflection of what you're thinking?
Speaker 3: It is, absolutely, Yeah, it's something that would worry me
Speaker 3: about holding a pure global equity track, or particularly a
Speaker 3: US equitary tracker currently. Is that level of exposure to
Speaker 3: a handful of companies like The great advantage of or
Speaker 3: one of the great advantages of passive funds, is that
Speaker 3: they are supposedly diversified investments. You should have a lot
Speaker 3: of stocks, and you shouldn't have too much invested in
Speaker 3: any particular one stock. But every now and again, certain
Speaker 3: indices become very heavily concentrated in certain stocks. So go
Speaker 3: back to twenty ten, if you happen to be tracking
Speaker 3: a Latin America index, you were basically twenty thirty percent
Speaker 3: of your money in two or three oil companies or
Speaker 3: natural resource companies. Today we face a situation where the
Speaker 3: concentration in the S and P five hundred in am
Speaker 3: using turn of the year statistics. This has changed a
Speaker 3: bit since then, but in those Magnificent seven is twenty
Speaker 3: nine percent. So you got twenty nine percent invested in
Speaker 3: seven companies that are, to all extents and purposes variations
Speaker 3: on tech. Now you compare that to two thousand, which
Speaker 3: was the last time I think risks are built up
Speaker 3: to this any kind of this type of level that
Speaker 3: is more concentrated. So twenty nine percent today it was
Speaker 3: about twenty one percent in two thousand, and also in
Speaker 3: two thousand you had companies like Exon or Walmart which
Speaker 3: were in that top seven as well, which were diversified
Speaker 3: at least they weren't just tech companies. And I think
Speaker 3: that is a really instructive period, that two thousand because
Speaker 3: in the long march of passive from the nineteen seventies
Speaker 3: through today, that it's tempting to think of the whole
Speaker 3: thing as just a straight line where everyone has just
Speaker 3: been consistently buying passive. But it went into recession from
Speaker 3: about two thousand to two thousand and seven. Actually people
Speaker 3: were net selling Vanguard's biggest s and P five hundred
Speaker 3: tracker after two thousand. That was because of how badly
Speaker 3: it had done versus most active fund managers. And the
Speaker 3: reason for that was because it's concentration in megacaps, how
Speaker 3: expensive those megacaps had become, and then what happened in
Speaker 3: two thousand when all of that turned. It's quite a
Speaker 3: sort of instructive lesson for those of us who are
Speaker 3: interested in history.
Speaker 1: So could we say that over that period in general
Speaker 1: active outperformed.
Speaker 3: Ah, yeah, absolutely you can. I mean it was the
Speaker 3: time of when a lot of legends made the names
Speaker 3: in the UK. Anthony Bolton was the one that came forward.
Speaker 3: Already mentioned Angus Tullock. I'm not sure if I should
Speaker 3: mention his name, but Lord Voldeford became of age at
Speaker 3: that time. He was did an amazing job for investors
Speaker 3: at that point. Obviously we know how that ended in
Speaker 3: due course, but it was a period when those investors
Speaker 3: had been brave enough and stuck to their guns and
Speaker 3: believed in fundamentals and value and all that stuff, and
Speaker 3: had therefore avoided those megacap growth stocks that were too
Speaker 3: expensive just shot the lights out over the bear market
Speaker 3: that followed. You had Anthony Bolton in his UK fund
Speaker 3: actually made money over that three year bear mark. It
Speaker 3: wasn't just that he fell by less than the mega
Speaker 3: caps did. He actually made money. And then obviously in
Speaker 3: the ballmarket it followed, they absolutely went to the moon
Speaker 3: that the returns you got from the likes of a
Speaker 3: Fidelity UK special situations were orders of one hundreds of
Speaker 3: percent better than you were getting from a Gloebil equity
Speaker 3: tracker at that time. So it really was the last
Speaker 3: real golden age of active fund managers, and conditions for
Speaker 3: me look very similar to how they looked in two thousand.
Speaker 1: So I suppose to be clear, we should say that
Speaker 1: if you stay impassive right now, you're going to have
Speaker 1: a very big exposure to these giant companies. If they
Speaker 1: turn you're going to lose a lot of money. And
Speaker 1: at the same time, maybe that active funds that have
Speaker 1: the freedom to go wherever they want find the best
Speaker 1: opportunities are not in those giant dogs, and you may
Speaker 1: find that you perform a long letter, I'm just trying
Speaker 1: to be simplistic about this.
Speaker 3: Yeah, there's a case study that I always use, which
Speaker 3: is and I remember this. So I started in the
Speaker 3: city in ninety six, ninety seven around then, and I
Speaker 3: remember at the time seeing buses advertising what was called
Speaker 3: the Mercury Global Titans Fund. I mean, amazing name for
Speaker 3: a fund. It was basically it was a bit of
Speaker 3: a closet tracker, but it was tracking the dal Jones
Speaker 3: Titans fifty index, which had performed amazingly coming into two thousand.
Speaker 3: The marketing people loved it, so they launched this fund
Speaker 3: and to a great fanfare, and the message was you'd
Speaker 3: be stupid to buy anything other than the world's biggest
Speaker 3: and most powerful companies. Why would you do that if
Speaker 3: you were buying anything that was domestic, or that was small,
Speaker 3: or it was UK or that was value. You're a
Speaker 3: bit of a square and you've missed the plot, and
Speaker 3: all that stuff is risky, and the big stuff is
Speaker 3: very safe and it's going to make you a ton
Speaker 3: of money. Mercury, who were later bought by black Rock,
Speaker 3: launched that fund. I think it was in March two thousand.
Speaker 3: It wasn't a badly run fund, but it lost you
Speaker 3: fifty percent of your money over the next three years
Speaker 3: and it didn't even break even. Seven years later, it
Speaker 3: was still underwater. And because of the weight of those
Speaker 3: fifty companies, the Global Tracker did a similar thing, lost
Speaker 3: you best part of fifty percent, and then it took
Speaker 3: you seven years from the turn of two thousand to
Speaker 3: two thousand and seven to break even again. And that
Speaker 3: is a long time to have made no money whatsoever.
Speaker 1: But when fund was launched, it must have felt like
Speaker 1: it's felt over the last year or so, that there
Speaker 1: really isn't any choice but to hold these very big
Speaker 1: companies because if you don't, you're going to underperform. Sleep
Speaker 1: everyone in a track of any kind is holding them
Speaker 1: but active funds as well, if they're not holding them
Speaker 1: at least at the benchmark level, they're going to underperform
Speaker 1: almost by default. So if you're an active fund manager,
Speaker 1: if you're an active fun raannger and you've been sitting
Speaker 1: there for the last three or four years, going that
Speaker 1: stuff's too expensive, I can see the concentration. I'm worried
Speaker 1: about this. Valuations are too high. It's been a disaster
Speaker 1: for you.
Speaker 3: It has been a disaster to the point where you've
Speaker 3: either given up or you've been sacked, or you're one
Speaker 3: of the very few who've managed to sit it out.
Speaker 3: And those are basically the fund managers them after because
Speaker 3: they're very conviction driven. They believe in what they do.
Speaker 3: They know that you should value a company, that you
Speaker 3: shouldn't get carried away, that you shouldn't just copy what
Speaker 3: everyone else is doing. But they become a vanishing breed
Speaker 3: as time passes by. And again, yeah, to take it
Speaker 3: back to the Anthony Bolton thing, that's what he was.
Speaker 3: It's one of the few who managed to survive with
Speaker 3: his job intact and allowed to continue doing what he did.
Speaker 3: And then you just saw the dividends afterwards when the
Speaker 3: world turned as it always does, and then he had.
Speaker 1: That disaster, didn't he It's not for today. But when
Speaker 1: he launched the China Special Situations Fund and everyone thought
Speaker 1: he was a god and then oh yeah, wrong, didn't
Speaker 1: it round and around? It goes in active fund?
Speaker 3: It does to say it, But he was I would
Speaker 3: defend him on that. He actually, contrary to popular belief,
Speaker 3: actually beat his benchmark over his tenure on that fund.
Speaker 3: He just didn't do anywhere near as well as he'd
Speaker 3: done in UK Special sit So he's got a bit
Speaker 3: of a bad rep for that. But yeah, compared to
Speaker 3: what he'd done on the UK side of him, it
Speaker 3: was a pale limitation for sure.
Speaker 1: I just remember being cross about the charging structure. Anyway,
Speaker 1: a different story. Well, he won't go back to that now.
Speaker 1: So let's talk about the survivors, right, Let's talk about
Speaker 1: this premise that that you have and that I have
Speaker 1: huge sympathy with, and I think you're absolutely right that
Speaker 1: we're coming to the end of this great run for
Speaker 1: these huge companies and and for the modern titans, and
Speaker 1: a shift in the assumption that passive is always the
Speaker 1: place to be. So who are the fund managers what
Speaker 1: is the fund managing companies and the managers who have
Speaker 1: survived this period and you think are going to come
Speaker 1: out the next decade and give us another mini Golden
Speaker 1: Age or maybe mega Golden Age for active fund management.
Speaker 3: You could find them in any market. They are still around.
Speaker 3: A lot did fall by the wayside, but a lot
Speaker 3: have carried on. You can find them in big houses.
Speaker 3: They're likes, you know, the Schroder Value team, a very
Speaker 3: good team because they've got a support network there and
Speaker 3: they've got a good story about it. So that's a
Speaker 3: good place to look if there's a big list of them.
Speaker 3: If you go on our website and look at our
Speaker 3: funds and our holders, we're very open about funds that
Speaker 3: we own because we like the fund managers. We invest
Speaker 3: with them, we want them to do well and we
Speaker 3: want them to raise assets. If you were to look
Speaker 3: through the UK, you're going to see names like Castle
Speaker 3: Bay in there, like Gresham House, like Cape Wrath. You're
Speaker 3: going to see very sooner fun from Tyndall. You're going
Speaker 3: to see I'm going to feel bad now because I'm
Speaker 3: going to leave someone out and they're going to be
Speaker 3: quite cross with me. But yeah, there are these are
Speaker 3: basically if they've got anything in common, they are obsessives.
Speaker 3: They're people who loving them testing and would be horrified
Speaker 3: to think that they are going to end up just
Speaker 3: copying the market.
Speaker 1: Well, and some of those ones you mentioned are very small.
Speaker 1: I mean Kate Rath for example. That's a tiny fund,
Speaker 1: doesn't it It is?
Speaker 3: Yeah, very small. I think there's a big misunderstanding in
Speaker 3: the industry that a small fund equals a risky fund.
Speaker 3: To give you an example of a fund we held
Speaker 3: in the past, which is tv IT. It's Edinburgh based
Speaker 3: Smaller Companies fund. We don't currently hold it because it's
Speaker 3: had manager changes, so it's just watching that as it
Speaker 3: beds down. But when in my previous job, I was
Speaker 3: in a company called Premier Might and we had a
Speaker 3: lot more assets under management. When we first bought that fund,
Speaker 3: it was about five or six million pounds in size. Tiny, yeah,
Speaker 3: but all of that money was the fund manager's money.
Speaker 3: We put forty five million pounds in it and a
Speaker 3: lot of people gasp begin to take a breath when
Speaker 3: they hear that amount. What you held forty five million
Speaker 3: of a fifty million pound fund. But it's like the
Speaker 3: old adage about banks. If you owe the bank a
Speaker 3: million pounds, they own you. If you own the bank
Speaker 3: ten billion pounds, you own them. If we're the owner
Speaker 3: of a smaller fund and we know that we're not
Speaker 3: about to sell because we're not flaky investors who are
Speaker 3: going to run for the hills at the first sign
Speaker 3: of underperformance, and we know that the other money is
Speaker 3: the fund manager, then there's no liquidity risk like there
Speaker 3: was with the Woodford thing. The Woodford thing was because
Speaker 3: there were bigger holders who are perhaps didn't understand the
Speaker 3: way the fun worked, the way it was supposed to work,
Speaker 3: and they all ran for the exits at the same time.
Speaker 3: It's not about the size of the fund. It's the
Speaker 3: important things about what is held within the fund. You
Speaker 3: need to make sure that the stocks that are held
Speaker 3: a liquid and an appropriate for the size of that fund.
Speaker 3: For example, a five million pound fund that owns megacaps.
Speaker 3: That's a good thing because if the fund needs to
Speaker 3: close down, they can sell it within the next seven minutes.
Speaker 3: It's not an issue. The problem and why people are
Speaker 3: paranoid about small funds, ironically is again because of the
Speaker 3: Woodford scandal, which is weird because it wasn't a small fund.
Speaker 3: It was ten billion pounds. But again it wasn't necessarily
Speaker 3: the size of the fund so much. Has the stuff
Speaker 3: that he was holding unlisted massive stakes in tiny companies.
Speaker 3: That's where the liquidity problem came from. It wasn't because
Speaker 3: the fund was small, because it wasn't a small fund.
Speaker 1: Have you signed up for Woodford Views?
Speaker 3: I saw that came out. Yeah, that's gonna yeah. Fun enough.
Speaker 3: Our firewall at work is blocking that, which may be
Speaker 3: a bit of satire or commentary. I don't know, but
Speaker 3: I haven't been able to see it yet. I'm intrigued.
Speaker 1: There's nothing to see it. Don't worry that your firewall
Speaker 1: hasn't punished you in any way it normally does. The
Speaker 1: first few hasn't come out. There's still time, all right,
Speaker 1: Let's go back to small funds because I've written quite
Speaker 1: a lot in the past, and I think that you've
Speaker 1: had input into these columns. I've written in the past
Speaker 1: about how to find a good fund manager, what's what
Speaker 1: of the parameters to look for in the fund, And
Speaker 1: one of the things that often pops up is that
Speaker 1: actually funds run by excellent managers tend to do particularly
Speaker 1: well in their first four or five years. So when
Speaker 1: there's small, when they're new, when the fund manager has
Speaker 1: their best ideas, A good manager is going to launch
Speaker 1: a new fund when they see a great opportunity, right,
Speaker 1: They're not going to just do it randomly into an
Speaker 1: average market. They're going to say, there's a reason for this,
Speaker 1: and I can see it. And so those first four
Speaker 1: or five years when the fund is small may actually
Speaker 1: be the best ones to be invested.
Speaker 3: Absolutely, there's reasons for that in terms of motivation. Maybe
Speaker 3: the age of the fund manager. I think there's a
Speaker 3: kind of mistake and belief that you want an old
Speaker 3: fund manager. There's nothing against old fund managers, but actually
Speaker 3: I think there's a sweet spot for fund managers where
Speaker 3: they've got enough experience and maybe they're into their thirties
Speaker 3: or the forties, but they've still got the enthusias and
Speaker 3: they're still building their track record. They've still got a
Speaker 3: point to prove, and to me, that is the real
Speaker 3: point to own a fund manager. And quite often that's
Speaker 3: the time they're running their first fund, or it's the
Speaker 3: first opportunity to go outside of a big company that
Speaker 3: we're at and begin something that is truly represents the
Speaker 3: way they think that it should have be done. So
Speaker 3: there is a human element to it, but there's also
Speaker 3: a fund size element to it as well. Now we've
Speaker 3: talked about the benefits of big great funds, but the
Speaker 3: only thing that's better than a big great fund is
Speaker 3: a small great fund because as a fund manager, it's
Speaker 3: so much easier to run a smaller fund finding better
Speaker 3: ideas and small caps and typically that's where you're going
Speaker 3: to find better ideas, less efficient part of the market,
Speaker 3: more room for growth for smaller companies to become bigger companies.
Speaker 3: Then having more access to that and the ability to
Speaker 3: come into and out of stocks without moving their price
Speaker 3: too much is a massive advantage. So absolutely all of
Speaker 3: the experience I've had in the past of when we've
Speaker 3: outperformed as a fund of funds has come from finding
Speaker 3: fund managers who are at the start of that journey
Speaker 3: rather than at the end, because all of the advantages
Speaker 3: are stacked in their favor. And the real benefit currently
Speaker 3: is that because the rest of the market, the UK
Speaker 3: fun buying market because of consolidation, because of a whole
Speaker 3: load of other stuff that's going on, career risk herding
Speaker 3: sheep like behavior. No one is prepared to buy these
Speaker 3: smaller boutiques because I don't know, they're all afraid of
Speaker 3: getting egg on their face because they're back to a
Speaker 3: fund that was operating out of the barn in Oxford,
Speaker 3: or they were.
Speaker 1: It wasn't something You've got to let this go, simon,
Speaker 1: I know you gotta let it go.
Speaker 3: No, I don't. I never have to let it go, absolutely,
Speaker 3: But the point of being that now these funds are
Speaker 3: offering much better fees. So the classic fee for a
Speaker 3: boutique fund going back fifteen years is one and a
Speaker 3: half percent. We're typically now paying half a percent as
Speaker 3: an early investor in these funds, which we're obviously passing
Speaker 3: back onto our clients as well. So I don't need
Speaker 3: to let it go now. I can just benefit from
Speaker 3: the great performance and have less of it eaten away
Speaker 3: by our fees.
Speaker 1: As tough for a new fund manager to survive on
Speaker 1: fees that low, I mean, I'm very pro fees as
Speaker 1: low as possible, But if you're launching a new funded
Speaker 1: you've only got or you mentioned TV eight earlier, starting
Speaker 1: with five six million, surviving on fifty basis points, and I'm.
Speaker 3: Unbelievable well, it's tough, right, It's tough. It's and it's
Speaker 3: wrong as well, because I think a thriving market, any market,
Speaker 3: it doesn't matter whether it's a financial market or a
Speaker 3: product or whatever it is, you need a lot of
Speaker 3: entrance into that market to give you choice. But we
Speaker 3: are now in the unfortunate situation where because of regulatory
Speaker 3: costs and the pressure of people not being prepared to
Speaker 3: kind of risk reputation and back a new fun it
Speaker 3: means that you are only getting funds who have got
Speaker 3: tremendous backing behind them. So they've either got personal wealth
Speaker 3: for they know a lot of rich people, or they're
Speaker 3: having to go to a company and if effectually give
Speaker 3: away their own kind of IP and skills. So it's
Speaker 3: unbelievably tough and it's not healthy for the funds market
Speaker 3: for sure.
Speaker 1: Okay, let's talk a bit about the other things to
Speaker 1: look for when you're looking for a good fund. Let's
Speaker 1: start by saying that there is this idea that a
Speaker 1: smaller fund is better. So let's say we're an ordinary
Speaker 1: retail versitor. We're out there thinking I'm going to go
Speaker 1: a bit active. Now I get this, I understand what
Speaker 1: Simon's saying, so I'm going to shift some of my
Speaker 1: money away from passive into actor. I like this idea
Speaker 1: of looking for a small fund. I get that. What
Speaker 1: are the other parameters that people might take into account?
Speaker 3: Well, I mean there's technical parameters, but then there's obviously
Speaker 3: human parameters. And so to give you a good example
Speaker 3: and to keep it relevant to what we're doing today,
Speaker 3: I know you spoke with Jonathan Asante a few months back,
Speaker 3: and I suspect if you scroll up you'll see his podcast.
Speaker 3: Basically have a listen to that. We don't back Jonathan
Speaker 3: Asante's fund yet, it's a relatively new one. We're looking
Speaker 3: at it, but he is exactly the type of fund
Speaker 3: manager that we like because he's entirely trustworthy. He's entirely
Speaker 3: focused on a particular way of investing that we know
Speaker 3: works in the past. And so if you can get
Speaker 3: access to hearing that fund manager talk and hear it
Speaker 3: or reading about their philosophy, and we've all read the
Speaker 3: letters of Warren Buffett or a Jeremy Grantham, and what
Speaker 3: comes across is the consistency their trustworthiness, their kind of
Speaker 3: focus on what they do. So those human factors. If
Speaker 3: you find a fund manager who fulfills all of those
Speaker 3: and has done it for a while and you just
Speaker 3: have a good feeling about don't dismiss that just because
Speaker 3: there's not a kind of mathematical factor behind it. Absolutely,
Speaker 3: that's important, and it's the biggest part of what I do.
Speaker 3: I'm lucky enough to be able to meet all these
Speaker 3: fund managers and see the whites of the eyes if
Speaker 3: you like, but that's essentially what I'm doing. Can I
Speaker 3: establish trust with this far manager? Do I believe that
Speaker 3: they're sort of and won't turn the heads and give
Speaker 3: up and invest in the global titans when they should
Speaker 3: be buying Japanese small caps.
Speaker 1: Yeah, because that's where a fum manager can become unreliable.
Speaker 1: Right when you talk about the reliability of the passive,
Speaker 1: you know what they're going to keep doing. Whereas you
Speaker 1: can choose a fund manager and he can effectively be unreliable.
Speaker 1: You buy the fund because you think he's a solid
Speaker 1: value investor, and next thing you know, he's chucked in
Speaker 1: the towel and brought in video.
Speaker 3: Yeah, exactly. That's the thing to watch out for. Aubert's
Speaker 3: warning signs that if you've bought a UK small cup
Speaker 3: fund and you see in video on the top list,
Speaker 3: then it's not a UK small cup value fund anymore.
Speaker 3: So it's yeah, there are little bits and pieces like that,
Speaker 3: but by and large, I think people's instincts about what
Speaker 3: is a good fund and what is a bad funder, right,
Speaker 3: it's just the timing that they foul up too often.
Speaker 1: What about the extent which a fund is active? How
Speaker 1: active does an active fund have to be to be
Speaker 1: considered active? Right? So you get a lot of funds
Speaker 1: out there that call themselves active but relative for the benchmark,
Speaker 1: but'll maybe a bit closer than you might expect. I
Speaker 1: think when we've discussed this in the past, you've talked
Speaker 1: about it being reasonable for a fund that called itself
Speaker 1: active to have what they call an active share a
Speaker 1: difference relative for the market of something in the region
Speaker 1: of seventy eighty maybe higher, whereas if you're down at
Speaker 1: say fifty or sixty, whereas it where you're pretty close
Speaker 1: to the market as a whole. So maybe you're not
Speaker 1: a fully active fund exactly.
Speaker 3: We look at a kind of cut off probably at
Speaker 3: about eighty percent. We might have one or two that
Speaker 3: have DipEd slightly below that, but not a lot. We're
Speaker 3: only interested in finding the active fund managers, and active
Speaker 3: share is a really good way of doing it. Basically
Speaker 3: measures What that eighty percent refers to is that if
Speaker 3: you look at you compared the fund to the market,
Speaker 3: eighty percent of it is different, twenty percent of it
Speaker 3: is the same, so they've got stock overlap with a
Speaker 3: few stocks, and so it's different enough. Our average active
Speaker 3: share of the funds we pick is ninety three percent,
Speaker 3: So we really do go for it in terms of
Speaker 3: we want active fund managers in terms of the theory
Speaker 3: why that works. Basically, what you want is someone who
Speaker 3: is just trying to find good ideas. And again we've
Speaker 3: mentioned nagus Tell a couple of times. I always remember
Speaker 3: one of his rules was in the past that if
Speaker 3: any of his team actually even mentioned the benchmark, who said, oh,
Speaker 3: hang on a minute, we've only got four percent in
Speaker 3: this and it's six percent of the benchmark, he sent
Speaker 3: them out of the room.
Speaker 1: And that, to me, I can imagine as doing.
Speaker 3: That exactly, and that's the perfect way to do it.
Speaker 3: It should be. You should just pick those companies that
Speaker 3: you like for whatever reason you like them, and invest
Speaker 3: more in the companies that you like more because they're cheaper,
Speaker 3: or you think they're going to grow more, whatever it
Speaker 3: might be, and ignore what everyone else is doing. That
Speaker 3: is what you want from your active fund managers. You
Speaker 3: want the ones who don't care about the benchmark. But
Speaker 3: obviously the quid pro quo of that is that those
Speaker 3: fund managers will look different from the benchmark, and that
Speaker 3: is not always going to be in a good way.
Speaker 1: And does a high active share automatically mean that you've
Speaker 1: got a relatively small concentrated portfolio you had one hundred,
Speaker 1: If you had one hundred and fifty holdings, your active
Speaker 1: share would automatically go up, wouldn't it, By and.
Speaker 3: Large, Yeah, the more holdings you've got, it should do.
Speaker 3: But if you had if you were a USA sorry
Speaker 3: go down, yes, down, I see what you mean. But
Speaker 3: if you're a US equity holder and you held one
Speaker 3: hundred and fifty small caps and your benchmark was the
Speaker 3: S and P five hundred, you could still have a
Speaker 3: very high active share because you're not holding in videos
Speaker 3: and the microsofts and the Google. Yeah, it's not as
Speaker 3: simple as as that. It tends to be what you're
Speaker 3: doing at the top end of what's in your market
Speaker 3: quite often. So if you take Microsoft as being I
Speaker 3: don't know, seven percent of its market currently, you can
Speaker 3: if you just buy Microsoft at four percent, you've reduced
Speaker 3: your active share by four percent against yesterday when you
Speaker 3: didn't hold it at all. So there's a bit of
Speaker 3: nuance to it, but it does. It's the best rule
Speaker 3: of thumb, or the best kind of rough guide that
Speaker 3: we have for sure.
Speaker 1: Yeah. Okay, so we've got us more fund we've got
Speaker 1: a manager we trust, we've got a high active share.
Speaker 1: Have we got anything else?
Speaker 3: Well, what else have you got for me? One of
Speaker 3: the things we rule out is people doing things that
Speaker 3: don't work.
Speaker 1: Sounds obvious, right, yeah, agaven, but tell us about it.
Speaker 3: Yeah, we don't back macro investors. So if the first
Speaker 3: thing you hear coming out of a fund manager's mouth
Speaker 3: is we're pulling out the market because we think it's
Speaker 3: going to go down, or we're going to go overweight
Speaker 3: to us because we're worried about the war in Europe,
Speaker 3: trying to guess what's going to happen in the US election.
Speaker 3: If they're positioning into industries because of their top down view,
Speaker 3: it sounds like the sort of thing that should make
Speaker 3: you a lot of money if you can get it right,
Speaker 3: but in practice, no one's ever really been able to
Speaker 3: get it right. So when you think of the greats,
Speaker 3: the Warren Buffets, the Peter Lynch's, the Anthony Bolt, what
Speaker 3: they did was to pick stocks and had different ways
Speaker 3: of doing it, but ultimately what they weren't doing is
Speaker 3: trying to guess the direction of economies or of politics
Speaker 3: or elections, or trying to spot a war coming, which
Speaker 3: nobody's ever been able to do really successful if they
Speaker 3: have for a very limited amount of time. So, yeah,
Speaker 3: you want stock because absolutely people are just assessing companies,
Speaker 3: sticking to their small part of the world that they're
Speaker 3: good at.
Speaker 1: Okay, when I look at what you've been saying about
Speaker 1: the last time, that track has turned out to be
Speaker 1: a problem, and what turned out to be the anti
Speaker 1: tracker effectively in the following period. So domestic stocks, value stocks,
Speaker 1: small cap stocks, and we can expect that to happen
Speaker 1: again this time around. Obstuly, nothing is identical, but it
Speaker 1: seems likely that if there was going to be a rotation,
Speaker 1: it would be into those underperforming areas. So if that
Speaker 1: were the case, which fund managers. Would you think would
Speaker 1: be interesting for ordinary investors to look at the moment?
Speaker 3: H yeah, it would be remissing me not to bang
Speaker 3: my own drum here?
Speaker 2: Could you go for it?
Speaker 1: Diamon?
Speaker 3: So the reason I set up down in Fox is
Speaker 3: exactly this problem, because you've probably had the same issue.
Speaker 3: So if someone asks you, Mary, can you recommend an
Speaker 3: investment for me? I know you're a big investment trust fan,
Speaker 3: so you might say, I don't know, Scottish mortgage. That
Speaker 3: might be a one you'd pick, but you.
Speaker 1: Would not right now, not right right now?
Speaker 3: Yeah, okay, not right now, Okay, So pick a trust
Speaker 3: for you, recommend a trust for me now, Marin, No,
Speaker 3: I can't do that.
Speaker 1: Because I'm not an investment professional. I'm merely Ah. You're,
Speaker 1: on the other hand, Simon, you're, on the other hand,
Speaker 1: are an investment professor.
Speaker 3: I haven't noticed that shyness of opinion in the past, Merrion.
Speaker 3: But okay, I'll take it now. But let's say it
Speaker 3: was Scottish mortgage. The trouble is, whenever you make a
Speaker 3: recommendation like that me as a professional investor, and people
Speaker 3: do ask me for fun picks all the time. I
Speaker 3: think that could be a great fund over ten years,
Speaker 3: but it's going to be a nightmare to hold it
Speaker 3: almost It definitely will be because the greatest fund managers
Speaker 3: are so focused on their little thing they do growth value.
Speaker 3: It'll look it'll look amazing for five years, and it'll
Speaker 3: look god awful for three years, and for two years
Speaker 3: it might be somewhere about average. Over ten years, that'll
Speaker 3: make you a ton of money. But in that two
Speaker 3: to three year period when it looks awful, people are
Speaker 3: going to hate me. They're going to think, what Simon
Speaker 3: done here? Why has he told me this? Particularly if
Speaker 3: it kicks off into that period straight away.
Speaker 1: Yea.
Speaker 3: So the reason for me to launch down in Fox
Speaker 3: was basically to find all these active fund managers and
Speaker 3: then just to put them all in the same portfolio
Speaker 3: so that you're not just in value managers, you're not
Speaker 3: just in growth fund managers. They take the edges off
Speaker 3: each other. So in twenty twenty two, for example, we
Speaker 3: held growth fund managers and they were having a really
Speaker 3: tough time of it. We also held value managers who
Speaker 3: actually made money in that year. So we call it
Speaker 3: the heroic Journey. All of our fund managers are on
Speaker 3: the heroic journey. We can get peaks and troughs and
Speaker 3: triumphs and slayings of dragons and near death experiences, but
Speaker 3: the average investor cannot handle that. Bailey Gifford have been
Speaker 3: an amazing fundhouse. I think they're very good investors, yes,
Speaker 3: but holding a Bailey gift of fund is a very
Speaker 3: hard thing to do unless you are a professional fund
Speaker 3: manager and you've been trained for it. You know that
Speaker 3: there are cycles that funds will go up and they'll
Speaker 3: go down, and you'll be in favor and you'll be
Speaker 3: out of favor. Most people aren't trained for that. They're
Speaker 3: not ready for that, so.
Speaker 1: It's been very uncomfortable for a lot of people.
Speaker 3: It has been. Yeah, and you always do the worst thing.
Speaker 3: You always end up selling. You say no, lost, I've
Speaker 3: had enough of this fund. It's a give up on
Speaker 3: it and Sod's law. That's always the moment that it
Speaker 3: does really well. That is the whole point of downing
Speaker 3: Fox is for us to find these amazing fund managers,
Speaker 3: but to blend them together into such a way that
Speaker 3: actually you still get the advantages over ten years. If
Speaker 3: we hold thirty amazing fun managers, you're going to get
Speaker 3: the average of their returns, which if we do our
Speaker 3: job properly, is going to be amazing, but it's not
Speaker 3: going to be as intense as just holding one of them.
Speaker 3: There's almost a magic effect that when you put these
Speaker 3: funds together in a portfolio, they cancel each other out
Speaker 3: in terms of the wild swings, but you get left
Speaker 3: with the good stuff at the end of it. And
Speaker 3: so that recommendation having me trying to avoid giving people
Speaker 3: recommendations exactly why I launched the Downing Fox funds because
Speaker 3: it's a relatively easy thing for people to hold. It's
Speaker 3: all about the kind of user experience of holding it,
Speaker 3: which the industry, but the active industry hasn't been perhaps
Speaker 3: good enough at managing for people in the past.
Speaker 1: So people can just go and hang around on your
Speaker 1: website and see if they can find the names of
Speaker 1: funds and have a look at how your business. That
Speaker 1: would be great.
Speaker 3: Yeah, for sure, there are amazing funds in there. There's
Speaker 3: all sorts, and I'll get in trouble for mentioning one
Speaker 3: or two of them. I know you're a Japan fund,
Speaker 3: so I'll give you a Japan tip zena Japan. It's
Speaker 3: one fund we've held for a couple of years now.
Speaker 3: Again all that stuff about it being a small fund,
Speaker 3: intense managers, but they launched that particularly to capture that
Speaker 3: corporate governance change that's happening there.
Speaker 1: We've had them on the podcast. Is there anyone who
Speaker 1: wants to hear more from them? Can just go back
Speaker 1: and find that episode.
Speaker 3: What's another example of a great fund manager? Yeah, so
Speaker 3: you listen to that, listen to the Jonathan santi one
Speaker 3: and you'll get examples of the kind of managers that
Speaker 3: we think where you should have your money.
Speaker 1: Brilliant Simon. Let me finish by taking you well outside
Speaker 1: your comfort zone. We always ask at the end of
Speaker 1: this podcast, and I can't drop it now. It's going
Speaker 1: to go on forever, however boring it gets. Weather. Okay,
Speaker 1: you've got ten years. I'm going to take away all
Speaker 1: your funds. You can't have any of your lovely active
Speaker 1: funds at all. You're only allowed to have either gold
Speaker 1: or bitcoin, and you've got to hold whichever one you choose,
Speaker 1: and you can only choose one for ten years. What's
Speaker 1: it going to be.
Speaker 3: It's absolutely going to be gold. I do own some
Speaker 3: gold outside of my funds. We don't hold gold in
Speaker 3: the fund because it's a lump of metal and you
Speaker 3: shouldn't be paying me a management fee to hold it
Speaker 3: in a fund. You can do that yourself. The reason
Speaker 3: why I like gold is it's pretty good against light
Speaker 3: monetary debasement. It's going to be pretty good against heavy
Speaker 3: monitord's debasement, and unlike cryptocurrency, in the event of the
Speaker 3: zombie apocalypse, you're still going to be able to buy
Speaker 3: stuff with little lumps of metal that you won't be
Speaker 3: able to log onto your laptop and use cryptocurrency to
Speaker 3: buy the last bag of grain in the village. So
Speaker 3: absolutely gold.
Speaker 1: So if you're hedging against a genuine and the world meltdown,
Speaker 1: it's got to be gold.
Speaker 3: Cryptocurrency is zero use in that scenario.
Speaker 1: Brilliant Simon, Thank you so much.
Speaker 3: Pleasure, Thank you.
Speaker 1: So John. As interesting as you hope we just get
Speaker 1: a little bored in that one.
Speaker 2: I thought I was great. I do think to be
Speaker 2: over passive and active really interesting because good because that's
Speaker 2: a job exactly. But also you know, I agree with
Speaker 2: I think passive is like a great thing and it
Speaker 2: makes a lot of sense. I mean, I thought the
Speaker 2: distinction there that you both made about active basically requiring
Speaker 2: another step of removal from the process was actually spot on.
Speaker 2: It's like, I wouldn't recommend any of our listeners be
Speaker 2: individual stock pickups unless that's something they want to do,
Speaker 2: and I've prepared to do a lot of work. And similarly,
Speaker 2: I probably wouldn't recommend that, you know, every listener go
Speaker 2: and try and pick an active fund over a passive fund,
Speaker 2: because that also requires a bit more work. And I
Speaker 2: think that's an interesting distinction that is maybe not well.
Speaker 2: Partly lies it the part of the polarization. So it
Speaker 2: does make a lot of sense for most people, especially
Speaker 2: if they're already not really doing anything with the money.
Speaker 1: Easy, simple, straightforward, cheap and as he says, reliable continues
Speaker 1: he said it was going to do. I mean, it's
Speaker 1: the try that mars get what you pay for, You
Speaker 1: get what you pay for. But the you know, we
Speaker 1: took a lot in this, in this conversation about active
Speaker 1: or passitive, about how they both work, et cetera. But
Speaker 1: one of the things that I find most interesting in
Speaker 1: it is the conversation about how to actually pick a
Speaker 1: reasonably good fund manager. You know, when we ten fifteen
Speaker 1: years ago when we were writing about fund managers, you
Speaker 1: could accuse them of all sorts of terrible things, you know, greed, complacency,
Speaker 1: index are getting overcharging, whatever, all sorts of things. You
Speaker 1: can still accuse a lot of the active management industry
Speaker 1: of those things, particularly of being obsessed with their benchmarks
Speaker 1: rather than with the absolute returns that like siph you
Speaker 1: and I might prefer them to be obsessed with. We're
Speaker 1: not really interested in whether a fund manager is lost
Speaker 1: less than somebody else were, instant whether they actually managed
Speaker 1: to make us more money than we had in the
Speaker 1: first place. There's sort of thing. There's lots of places
Speaker 1: where you can dive into the active sector and say, god,
Speaker 1: this is awful, But in fact there are also a
Speaker 1: lot of really great managers in the sector, and several ways,
Speaker 1: as Simon was saying, to try and figure out which
Speaker 1: ones might do well from here, because they are always
Speaker 1: going to be obviously piles underperform the index. And of
Speaker 1: course if you want to do better than a passive fund,
Speaker 1: you have to do fairly significantly better than them before charges,
Speaker 1: before you even get to what happens after charges. So
Speaker 1: there are a lot of good fund managers out there,
Speaker 1: And what I'm really interested in is the part of
Speaker 1: the conversation with Simon where we talk about how to
Speaker 1: find them.
Speaker 2: Yeah, and I mean quotes a lot of the things
Speaker 2: that I would have.
Speaker 3: Assumed, so.
Speaker 2: Like the kind of the boutique kind of manager, the
Speaker 2: kind of manager that's will and they go off way,
Speaker 2: you know, a couple of million under their belt and
Speaker 2: therefore essentially not really earning a salary at all for investing,
Speaker 2: which which also I always find, I mean, I supposed
Speaker 2: to tell a frustrating thing because the smaller the fund,
Speaker 2: the harder it is to get into, particular as a
Speaker 2: retail investor, because you know, you look at all these
Speaker 2: reinvestment trusts are still in the stock exchange, and then
Speaker 2: you look at the spreads in terms of what you're
Speaker 2: you know, the gap between the buying and the selling price,
Speaker 2: and some of them are just awful. You know, you're
Speaker 2: effectively paying ten percent to get into the fund in
Speaker 2: the first place. So doing scale, ironically is a big
Speaker 2: issue there.
Speaker 1: Well, I think the problem with new smaller funds I'm
Speaker 1: I'm interested saying. I don't know if you've noticed, but
Speaker 1: there have been a couple of shifts away from big
Speaker 1: companies recently well nowfore managers leaving and talking about setting
Speaker 1: up their own businesses. There was Ben is It More
Speaker 1: at Jupiter, and then yesterday today we heard about Peter
Speaker 1: Rutter leaving Royal London. And these are both very well established,
Speaker 1: well known fund managers saying Okay, I'm going to go
Speaker 1: set up on my own now. And when you look
Speaker 1: at that, you think, well, this is brave. This is
Speaker 1: brave because maybe they already have large amounts of committed
Speaker 1: funds behind them, but setting up, think of the regulation,
Speaker 1: think of the compliance alone. And you can't go out
Speaker 1: there charging two percent anymore if you're if you're charging
Speaker 1: over one percent, no one's going to look at you
Speaker 1: when it comes to giving you seed capital. So it's
Speaker 1: got to be a low price. Everything is expensive, and
Speaker 1: so it's a really risky thing to do, but I
Speaker 1: think it's an interesting time to do it, because I mean,
Speaker 1: Simon and I have talked about this a lot in
Speaker 1: the Partner, I've written about it a bit. When you
Speaker 1: look at the types of funds that tend to perform well,
Speaker 1: they're very often smaller funds set up by people who
Speaker 1: have successful careers behind them and they tend to do
Speaker 1: well in the first four or five years before they
Speaker 1: get particularly big.
Speaker 2: Yeah, and I suppose there are things you've you've got
Speaker 2: that ability to be like properly active. And I guess
Speaker 2: this is the other thing that gives the selling point.
Speaker 2: I mean, one of the things that certainly to my
Speaker 2: mind has driven the private equity and private assets business
Speaker 2: in general. It's not just low interest rates a lot obviously,
Speaker 2: I think that's pushed a lot of it. There is
Speaker 2: also the rise of passive in the kind of you know,
Speaker 2: the move by the kind of asset management industry to
Speaker 2: try and differentiate itself. And so you get more of
Speaker 2: these funds that are going into these companies and then
Speaker 2: actually say taking big stakes in them and then saying, actually,
Speaker 2: we want you to do this or we want you
Speaker 2: to get better at that. And I think that's that's
Speaker 2: that's a proper differentiator from the passive funds, because you're
Speaker 2: never going to get a passive fund doing that. You
Speaker 2: might find a passive fund that can loosely give you
Speaker 2: a value strategy alow even then, I mean, one of
Speaker 2: the other main reasons I would go for active funds
Speaker 2: is simply because it's very hard to fit and nuanced strategies,
Speaker 2: you know. So like, if I want about UK value stocks,
Speaker 2: I'm probably not going to go for some kind of
Speaker 2: passive fund that pretends that that's when it does. I'd
Speaker 2: rather find a decent fund manager who knows how to
Speaker 2: tell the difference between what's actually a value stock and
Speaker 2: what's just got a low priced book ratio.
Speaker 1: Yes, and and as soon to go bust I exactly,
Speaker 1: rather than be taken over at a huge premium by
Speaker 1: a private equity company.
Speaker 2: Yes, so I do, I think only I think this
Speaker 2: is where you get down to the kind of brass
Speaker 2: tas of what a decent active investor does that pass
Speaker 2: It's not even so much the comparison between active versus passive.
Speaker 2: It's this is what active can do that passive just can't.
Speaker 1: Mm hmm. That's interesting. And it is it's this this
Speaker 1: number that I think we talk about in the in
Speaker 1: the conversation active share. Every time you look at buying
Speaker 1: an active fund, go and look at the active share
Speaker 1: and if it's I can't remember what number Simon used,
Speaker 1: but I think he's me is he said ninety or
Speaker 1: but a lot of people will say eighty. But you know,
Speaker 1: if it's anywhere below seventy, this is just not worth
Speaker 1: the bother. It's too close to the benchmark to be
Speaker 1: genuinely an active fund. You know, there used to be
Speaker 1: millions of these, the closet trackers. We used to go
Speaker 1: on them, and everyone feels like they're basically gone now,
Speaker 1: but there's still out there. And even if they're not
Speaker 1: proper closet trackers as we used to describe them in
Speaker 1: the all days, they are, there's still a little too
Speaker 1: close to the benchmark for comfort. So if you're going active,
Speaker 1: just go really active.
Speaker 2: Yeah, and then we look at the top ten Holden's
Speaker 2: and then look at the top ten holdings and the
Speaker 2: you know whatever bench market is that they fallow, and
Speaker 2: that will give you a good sense immediately it's just
Speaker 2: how active it actually is.
Speaker 1: Yeah. Did he convince you, John you're going out to
Speaker 1: change from passive to active any of your investments?
Speaker 3: I mean, I hate it.
Speaker 1: I'm not that.
Speaker 2: I didn't really need to convince it. I mean, I like,
Speaker 2: you know, I think, like I said, I've got all
Speaker 2: the time in the water pats of and I think
Speaker 2: that there's lots good uses for it. And obviously the
Speaker 2: other issue that I would probably manage more in investments
Speaker 2: much more actively if it wasn't for the job that
Speaker 2: we do, which makes it trickier to be a active
Speaker 2: minature of your own investments. But yeah, I think I
Speaker 2: think active is definitely worth way, and I think if
Speaker 2: you want to get exposure to stuff that isn't the
Speaker 2: S and P five hundred, then often active points will
Speaker 2: give you a more tailogged version of what you want
Speaker 2: than a passive fund.
Speaker 1: Before we end, I just want to point out one
Speaker 1: more thing that Simon said at the very very end
Speaker 1: when we were talking about gold and bitcoin, and that
Speaker 1: you know, when we talk about this, everyone most people
Speaker 1: go for gold, and they say it's because they understand gold,
Speaker 1: because it's got a long history, et cetera. But Simon
Speaker 1: actually went right to the cructer of the matter and
Speaker 1: said that in the end, in the event of a
Speaker 1: zombie apocalypse, you're still going to be able to use
Speaker 1: your gold. You're not going to be able to use
Speaker 1: your laptop or your cryptocurrency. So you know, he's right
Speaker 1: if you if you're thinking about something that is there
Speaker 1: to hedge everything else, should it be something that is
Speaker 1: also as value in the event of there being no
Speaker 1: such thing as the Internet.
Speaker 2: Yeah, I thought it was really interesting that Simon went
Speaker 2: to that so coinfidentally because he's clearly thought about gold,
Speaker 2: Because I kin I thought he's a he's a financial
Speaker 2: as it's guy, he's not going to have thought about gold.
Speaker 2: Might but he clearly actually knows his stuff about about it.
Speaker 2: So I thought that was quite interesting.
Speaker 1: Yeah, although anyone with a zombie apocalypse on their mind,
Speaker 1: I think it might be a prepper. I'm going to
Speaker 1: call Simon and find out if he's a prepper, and
Speaker 1: if he is, I'm going to put it in the notes.
Speaker 1: I'm also going to put in the notes various links
Speaker 1: to some of the things that John and I have
Speaker 1: written on the passive Active debate over the years, as
Speaker 1: so you can have a look and have a think
Speaker 1: about it all. And one thing that we have written
Speaker 1: about recently I think is quite important at the moment
Speaker 1: as the US, in particular loser's momentum at the top
Speaker 1: and as the rally broadens out. Important possibly to be
Speaker 1: in an equal weight ETF, not a market cap weighted
Speaker 1: ETF if you're investing in the US.
Speaker 2: Is that fair, John, I think that's fair But the
Speaker 2: one thing I would say is that is then that's
Speaker 2: an active choice.
Speaker 1: Everything is an active choice.
Speaker 2: That's what I mean. I mean, that's that's quite a
Speaker 2: substantial departure from the benchmark. So you're actually you get
Speaker 2: away from the transparency passive I mean, you know what
Speaker 2: it's aiming for, but you don't actually know what you're
Speaker 2: then going to get this and p FI fund could
Speaker 2: go up twenty percent, but it was all Apple on
Speaker 2: the video. I don't I actually agree that Timing wise,
Speaker 2: I would prefer an equal weight ETF, but I don't
Speaker 2: think it's that definite to go in for an active fund.
Speaker 1: Well, I would say, if you're going to go down
Speaker 1: that road, that there literally is no such thing as
Speaker 1: a passive fun I'd like to take out the fact
Speaker 1: that I said literally because I am not a teenager.
Speaker 1: But there is no such thing as a passive fun.
Speaker 1: Do you make an active choice whatever you buy? I mean,
Speaker 1: even if you go and buy a global passive fund,
Speaker 1: you've made an active choice to own an awful lot
Speaker 1: of American technology.
Speaker 2: Absolutely, And then that boils, don't Everyone has to be
Speaker 2: an active investorm when it comes to that asset allocation.
Speaker 2: And then it's about knowing what you want and then
Speaker 2: finding the best ways to execute on that investment. But
Speaker 2: that is then, yes, I saider, Well this is it.
Speaker 2: It's like, how do you actually debate the semantics of this?
Speaker 2: Passive is just a cheap way to get exposure to
Speaker 2: an asset class that you want exposure to.
Speaker 1: Yes, so it's not passive. It's not passive.
Speaker 3: Yeah, it is mis name.
Speaker 1: Really, we're going to stop bickering. We have to stop this.
Speaker 1: Thanks for listening to this week's Merit Chalks Money. We'll
Speaker 1: be back next week in the meantime. If you like
Speaker 1: our show, rate review, and subscribe wherever you listen to
Speaker 1: podcasts and keep sending questions or comment. It's a Merit
Speaker 1: and Money at Bloomberg dot net. We read all the emails,
Speaker 1: we really do, and we're working through some of the
Speaker 1: ideas for futures, but will also start answering some of
Speaker 1: the questions in the Friday edition of John's newsletter Money
Speaker 1: to Stelt, which by the way, is ex Clinton if
Speaker 1: you haven't signed up to what you really really should.
Speaker 1: This episode was hosted by me Maren Sumset Web was
Speaker 1: produced by some Sosiety. Additional editing by Blake Maples. Special
Speaker 1: thanks to Simon, Evan Cook and John Stepfork