Speaker 1: John Man. We've been talking a lot over the last
Speaker 1: couple of years about the changing geopolitical situation. We've been
Speaker 1: talking about how the whole world and the financial world
Speaker 1: in particular, is at an inflection point and everything's going
Speaker 1: to change. And when we've been talking about it, one
Speaker 1: of the things that I'm afraid was not on our
Speaker 1: list was a new Israel Hama's conflict. But this does
Speaker 1: have massive impacts on the area that we talk about
Speaker 1: on economics and on finance, and in particular possibly on
Speaker 1: the way that inflation will move over the next couple
Speaker 1: of years.
Speaker 2: Right, Yeah, I mean it's all just more evidence of
Speaker 2: deteriory and overall kind of like geopolitical kind of sphere
Speaker 2: and more disruption to what the world that we kind
Speaker 2: of grew up and if you looked like, and what
Speaker 2: it no longer looks like, and what everyone's something to
Speaker 2: get used to it being. You invite them in, you know,
Speaker 2: a team, make it. You know, got a very long story.
Speaker 2: Short is just that you know it's going to be
Speaker 2: more inflationary and more volatile and more disrupted and more
Speaker 2: kind of nasty surprises, which is not very cheerful, but
Speaker 2: that is the way it is.
Speaker 1: It is.
Speaker 3: And one of the things that I've been thinking about,
Speaker 3: you know, I think about this a lot is ESG
Speaker 3: investing and the way that environmental, social, and government factors
Speaker 3: taken into account when you invest.
Speaker 4: And we talked after the war and the Ukraine began.
Speaker 4: We talked about had defense, which had long been considered
Speaker 4: something that you absolutely could not invest in because it
Speaker 4: was obviously bad, because owning shares in a company that
Speaker 4: creates things that kill people is clearly horrible.
Speaker 1: And then after that war started, everyone started to look
Speaker 1: at it again and say, well, actually, you know, defense
Speaker 1: is really a social good. Having an adequate, adequate defense
Speaker 1: in place for your population is surely a very definition
Speaker 1: of a social good, assuming you believe in democracy, freedom, etc.
Speaker 1: Of course, which clearly not everybody does. And so we
Speaker 1: got to the point where we're like, well, in wartime,
Speaker 1: maybe defense is about as ESG as you can get.
Speaker 1: And now everything is shifting as well in terms of
Speaker 1: energy and fuels, et cetera. And I got a note
Speaker 1: the other day from a fund manager explaining how investing
Speaker 1: in mining is now a good thing. And for years,
Speaker 1: of course, you and I have been told that you
Speaker 1: can't touch a mine with a barge pole because it's
Speaker 1: really dirty. And all the diesel big machines and the
Speaker 1: ecosystem destruction that's basically built in to mining, and of
Speaker 1: course the use of water. All these things make a
Speaker 1: mining non ESG. And now of course there's energy security
Speaker 1: flies to the top of everyone's to do list. Mining
Speaker 1: is very EESG. What can be more of social good
Speaker 1: than mining for the messols that allow the energy transition
Speaker 1: to happen to the extent that it can happen. So
Speaker 1: ESG is kind of it's disappearing. It's disappearing into reality.
Speaker 2: Yeah, yes, events have kind of overtaking it. It's I mean,
Speaker 2: the frustrating thing is this has been blindingly obvious from
Speaker 2: the start, you know, when all of these idiots were
Speaker 2: talking about stranded assets and all that sort of stuff.
Speaker 2: When you were like, well, okay, maybe they'll be stranded
Speaker 2: one day, But first of all, when you get to
Speaker 2: the point where we don't need this stuff anymore, you know,
Speaker 2: And it's somewhat frustrating that we can end up being
Speaker 2: at the point where it's only once you know, like
Speaker 2: push comes to shove, the kind of logic starts to
Speaker 2: kick in again. You know, we wasted an awful lot
Speaker 2: of time and an awful lot of paperwork because ESG
Speaker 2: was a useful way basically for you know, one group
Speaker 2: of people who virtue sign going for another another kind
Speaker 2: of like group of people in the financial industry, you
Speaker 2: find the sales pitch for John.
Speaker 1: It's been the most exciting, if you're a marketing man
Speaker 1: in fund management, most exciting marketing campaign since the beginning
Speaker 1: of fund management. You know, the amount of money that
Speaker 1: is poured into this nonsense because a lot of it
Speaker 1: is nonsense. Let's be clear at this point, a lot
Speaker 1: of it's completely nonsense that it's poured into this nonsense
Speaker 1: since what twenty fourteen, twenty fifteen when it kicked off.
Speaker 1: This has been a marketing man's dreams, but it's also
Speaker 1: been deeply misguided.
Speaker 2: Yeah, it's like a huge piste of time and I'm
Speaker 2: investment capital in the water cases. So it's it's good
Speaker 2: that we're coming out of this, but it's uh, you know,
Speaker 2: it all kind of pop up in other ways, you know,
Speaker 2: So it's like, so it's rebranded so that it's no,
Speaker 2: it's ESG. It's okay, it's good. It's good to Maine.
Speaker 2: As long as you're main in for lithium, you know
Speaker 2: that is that is you know, it's kind of you know,
Speaker 2: nobody's it's going to see in the Oh, yeah, it's
Speaker 2: good to mean for pool.
Speaker 1: Yeah, you know, I think when we're very nearly there,
Speaker 1: because let's not forget that you need coal to make steel,
Speaker 1: and you need steel to put up a wind turbine.
Speaker 1: Not all coalers, not all steelers is from coal. But
Speaker 1: you need coal to make the majority of steel around
Speaker 1: the world. So I don't think it's very long before
Speaker 1: I get a note from a fun manager saying mining
Speaker 1: coal for good, feel good with coal.
Speaker 2: Yes, yes, you can't be too cynical a bit there.
Speaker 1: Stuff that absolutely right, you can't be too cynical. And
Speaker 1: in fact, I was talking to someone about it the
Speaker 1: other day and I was thinking, once, once you take
Speaker 1: this pragmatic approach to es gee, there's no limit, no
Speaker 1: limit of where it can end. You know. Take tobacco
Speaker 1: companies right, amazingly well run, survived, longer, chucked out more
Speaker 1: cash than anyone could could possibly have begun to imagine
Speaker 1: when when the consequences of smoking became clear. So there's
Speaker 1: a lot of punches that's done really well out of that?
Speaker 1: Is that a social good? And we were told weren't
Speaker 1: we buy by Paul John the other day that the
Speaker 1: cash that they pour into our treasuries far was the
Speaker 1: medical cost of dealing with smokers and finances so many
Speaker 1: other things that the state do. Wow, what a social
Speaker 1: good you see? Once you get going, Once you get going,
Speaker 1: that there's no end. It all means nothing.
Speaker 2: I mean you're basically saying the bicigarettes to save our NHS.
Speaker 1: Yes, yes, that is what I said.
Speaker 2: But tobacco companies stop, just.
Speaker 1: Stop, just stop right, Okay, Moving on personal finance tip
Speaker 1: of the week, give me one John.
Speaker 2: O Well inter streets, interest streets Allo. The long term
Speaker 2: out look for infleetion is obviously volataile earned up and down.
Speaker 2: At the moment, it looks as if the Bank of
Speaker 2: England is probably I think that the Bank England's done
Speaker 2: at five and a quarter percent. Obviously it may go
Speaker 2: up a little bit further. But looking at the least
Speaker 2: we data and obviously we're we're recording this early, so
Speaker 2: we haven't had the inflation data for September yet, but
Speaker 2: chances are that it's going to that you can see
Speaker 2: that the bank is itching.
Speaker 1: They kind of like.
Speaker 2: Call an end to rate hikes now. And so we've
Speaker 2: seen NS and I the government bond kind of like
Speaker 2: retail facing bit remove its six point two percent interest straight.
Speaker 1: Not get round to it. I did not get round
Speaker 1: to that.
Speaker 2: I didn't. And this is what I'm thinking today is
Speaker 2: when we should be telling people, Look, okay, so maybe
Speaker 2: if you've not been getting around this stuff, you should
Speaker 2: start looking for your your one year fixed straight accounts. Now,
Speaker 2: if you've got a bit of cash, then you know
Speaker 2: it's probably time you have a look because you can
Speaker 2: still get if it's for a that for a tax
Speaker 2: paying account, you can still get one year at six
Speaker 2: point one percent, which is half decent. I think that's
Speaker 2: going through raising, you know, they kind of that's the
Speaker 2: the place that does the it. It puts your money
Speaker 2: into the best savings account that you can find, or
Speaker 2: you can go for a fixed cash Isa Paragan does
Speaker 2: one for five point five five percent. I'm just looking
Speaker 2: at money facts five point five percent with all the
Speaker 2: more Mansfield Building Society five point four we leeds in Yorkshire,
Speaker 2: so there's still you know, you can get a half
Speaker 2: decent rate and giving the inflation is probably gonna come
Speaker 2: down to blow five percent in the final quarter of
Speaker 2: this year, it's at least going to be getting a
Speaker 2: kind of real return.
Speaker 1: So it's looking it's amazing Tasday's John that the best
Speaker 1: we think we can help for is to get a
Speaker 1: rid of interest. It is only slightly below the right
Speaker 1: of inflation.
Speaker 2: Although this is slightly higher.
Speaker 5: It will be.
Speaker 1: It will it will be, it will be. So there's
Speaker 1: this John predicting inflation for you as well.
Speaker 2: Dangerous come December.
Speaker 1: All right, now, listen, I do want to make clear
Speaker 1: before we before we go on to our interview today,
Speaker 1: that we did record this interview a little while ago,
Speaker 1: so it was recorded before the Israel Helmuth conflict began.
Speaker 1: And that is why it doesn't mention it. Not because
Speaker 1: not because we didn't mention it. It just hadn't begun by dance.
Speaker 1: It was recorded a little early. And this conversation that
Speaker 1: John and I are having it's also been recorded a
Speaker 1: few days before the podcast comes out, so obviously things
Speaker 1: of us moving and may have changed by the time
Speaker 1: it does come out. Welcome to Maren Talk to Money,
Speaker 1: the podcast in which people who know the markets, Explain
Speaker 1: the markets. I'm Maren Zumsetweb. This week we bring you
Speaker 1: a conversation with Douglas abbotead of UK Welfish Rooders and
Speaker 1: Duncan Lamont, Global head of Pensions and Investments, also at Schroders. Duncan, Doug,
Speaker 1: thank you so much for joining us today. We really
Speaker 1: appreciate it. Great to be here.
Speaker 6: Thank you for having me.
Speaker 5: Yeah, thanks very much.
Speaker 1: Yeah. We've been waiting, Duncan to have you on for ages.
Speaker 1: John and I mentioned you all the time like it's
Speaker 1: a mini data celebrity, and we talk about you off
Speaker 1: was when will we get them to come on? When
Speaker 1: will we come on? And finally you're here. So I
Speaker 1: hope you're really really good, because you're really disappointing. If
Speaker 1: you're not, I will do my best.
Speaker 6: There's a lot to live up to there, I know, right.
Speaker 1: What I want to want to start by talking about,
Speaker 1: Duncan is you've done quite a lot of work into
Speaker 1: the shrinking pool of equities in the UK where we
Speaker 1: are gradually de equitizing in the extent to which that matters.
Speaker 1: So I wonder if we can start by talking about
Speaker 1: what's actually happening. Where is the UK a qreed market going.
Speaker 6: Yeah, so I think that there is an increased awareness
Speaker 6: about this, but I don't think people have quite got
Speaker 6: their head around the scale of what has been happening,
Speaker 6: both in the UK but also internationally. And maybe you
Speaker 6: can come on to the international element too. Just to
Speaker 6: give you some numbers, back in nineteen ninety six there
Speaker 6: was twenty seven hundred companies on the main market of
Speaker 6: the London Stock Exchange. Now there is one thousand and
Speaker 6: seventy seven, a sixty percent reduction if you look even
Speaker 6: low longer time horizon. So since the nineteen sixties there's
Speaker 6: actually been a seventy five percent reduction in the number
Speaker 6: of UK companies. Add an Aim Hey for Aim for
Speaker 6: a few years actually was attracting loads of companies and
Speaker 6: actually that kind of makes it look a bit better.
Speaker 6: But the number of AIM companies has also follow by
Speaker 6: half now, so there really is a situation where companies
Speaker 6: have been rejecting a UK stock market listing both from
Speaker 6: the and there's two sides here. One is less appetite
Speaker 6: for an IPO, but the other side is also a
Speaker 6: kind of sustained drip drip drip of de listings which
Speaker 6: is mainly from mergers and acquisitions.
Speaker 1: Yeah, and we've seen quite a lot of that this
Speaker 1: year already, haven't We seen quite a lot of transactions
Speaker 1: that have taken companies off the market, and pretty much
Speaker 1: in no IPOs but one one ips. Yeah, they give you.
Speaker 6: The de listing situation is interesting because it's been happening
Speaker 6: everywhere around the world. So I did some work looking
Speaker 6: at the number of companies that were listed on the
Speaker 6: UK stop market in twenty eleven and then what had
Speaker 6: happened over the following decade, like how many were still listed,
Speaker 6: what happened, what direction had gone in, And about a
Speaker 6: third of them had delisted over that period, and the
Speaker 6: overwhelming majority, almost all of them, it was because they'd
Speaker 6: been bought. Not many companies just decide, hey, I've had enough,
Speaker 6: I'm throw in the towel in and leave the stock market.
Speaker 6: Most of it's because they're being bought. And this kind
Speaker 6: is so far so global. It's the same in the US,
Speaker 6: it's the same in Europe. Lots of delistings, lots of
Speaker 6: m and A. But the big difference in the UK
Speaker 6: actually is that who have been the buyers of those companies.
Speaker 6: In the US, the biggest buyers of US public companies
Speaker 6: in the delisting trend have been other US public companies,
Speaker 6: So if you keep investing in the US stock market,
Speaker 6: you still kind of have exposure to those businesses that
Speaker 6: have gone just not on a standalone business. They're kind
Speaker 6: of subsumed in another company. In the UK, the majority
Speaker 6: of the people down the buyn have been overseas buyers,
Speaker 6: mainly US and Canadian ones. So what we have had
Speaker 6: is the UKPLC has been kind of seeping overseas into
Speaker 6: largely American and buyers and private equity buyers. So UK
Speaker 6: investors no longer have the same access to those companies
Speaker 6: if they're investing in the UK stock market, and that
Speaker 6: is quite a different compared to what we see in
Speaker 6: other markets.
Speaker 1: And can do you have a sense of why that
Speaker 1: is and why are our companies going abroad? Is it
Speaker 1: because that's so cheap? Because the UK market has been
Speaker 1: cheap for quite a long time, and so it's an
Speaker 1: easy thing to do to create growth of foreign companies
Speaker 1: just to snap up the cheap UK company and subsume
Speaker 1: intoin deal business.
Speaker 6: Very much. Yeah, we've spoken about this. I know you've
Speaker 6: spoken about this on many occasions that UK companies are
Speaker 6: trading at evaluation discount to those around the world. If
Speaker 6: you look at kind of forward price earnings multiples, the
Speaker 6: UK stock market is trading at about almost a fifty
Speaker 6: percent discount to the US, twenty percent discount to Europe.
Speaker 6: It's not just about sectors. It's not just because we
Speaker 6: don't have the tech companies the US has. Every single
Speaker 6: pretty much every single sector of the UK stock market
Speaker 6: trades at a pretty chunky discount to the US. Energy
Speaker 6: sector forty percent discount, Pharma biotech sector twenty nine a
Speaker 6: M is about a forty percent discount as well. Across
Speaker 6: all of the sectors it's about thirty percent discounts. So
Speaker 6: wherever you are looking, we have very kind of obviously
Speaker 6: very successful, world leading businesses that are very performing, very
Speaker 6: well operationally, but are not necessarily being valued to the
Speaker 6: in the same way they would be if they were
Speaker 6: listed in other country.
Speaker 1: And what do you put that down to, Well, I mean,
Speaker 1: I know what most people say that, oh, the UKs
Speaker 1: is a wreck. You know, we don't grow horrible inflation,
Speaker 1: we destroyed ourselves with Brexit, et cetera. But looking at
Speaker 1: the numbers coming through more recently, none of that is
Speaker 1: really really true. Our GDP our growth is no different
Speaker 1: to most other European countries, are inflation levels are converging
Speaker 1: with other European countries. There's really nothing worse going on
Speaker 1: in the UK than anywhere else that you can really
Speaker 1: put your finger on, Nothing you can back up with data.
Speaker 1: So what is the problem here?
Speaker 6: So the valuation discount we've always it did start emerging
Speaker 6: kind of post twenty sixteen, so there has been I
Speaker 6: think there has been an element of international investors in
Speaker 6: particular being less keen on the UK, and I kind
Speaker 6: of feel like there's maybe a bit of a situation
Speaker 6: that we've had with value investing in the same way
Speaker 6: that people have been saying it's cheap for a while,
Speaker 6: and then there were perhaps some investors who backed that
Speaker 6: view for a while. But the longer that valuation discount persists,
Speaker 6: the people's patience runs out. So I think there's a
Speaker 6: bit of that been going on. But to give a
Speaker 6: little bit more of a positive side, So the M
Speaker 6: and A side means that other buyers, both private equity
Speaker 6: and over these companies are saying these companies are worth
Speaker 6: more than they are. The other people who recently have
Speaker 6: actually started getting very interested in buying UK shares is
Speaker 6: companies themselves. So share buybacks in the UK about forty
Speaker 6: five percent of companies listed on the UK market last
Speaker 6: year bought back more than one percent of their shares
Speaker 6: in the previous year. In earlier years that figure was
Speaker 6: something like I'm just looking at a chart right now,
Speaker 6: we might be talking about twenty percent. So it's absolutely rocketed.
Speaker 6: So Directors of UKPLC has said, we think our shares
Speaker 6: are undervalued and we're going to start buying them back.
Speaker 1: And that's not just the investment trust sector. Just we
Speaker 1: came because there's a lot of buybacks in the investment
Speaker 1: trust sector which could be skewing the numbers.
Speaker 6: No, that's not just the investment trust sector at all.
Speaker 6: We're seeing there's been very large increases in buybacks across
Speaker 6: the UK corporate sector in general. So, and this is
Speaker 6: in previous years it was mainly the US where lots
Speaker 6: of the buybacks have but what we've seen more recently
Speaker 6: is that it's been picking up in a lot of
Speaker 6: non US markets, Japan as well as a market where
Speaker 6: we're seen buybacks. But I think there is an element
Speaker 6: here of directors saying well, actually we think our shares
Speaker 6: are not necessarily fully valued. And people criticized buybacks for
Speaker 6: the timing of them sometimes, but hey, if your shares
Speaker 6: are undervalued, then that's actually the ideal time to be
Speaker 6: doing some buybacks. That can be quite a value generator
Speaker 6: in time.
Speaker 1: Yeah. One of the long term criticisms of buybacks is
Speaker 1: that you quite often see them at levels that are
Speaker 1: definitely not cheap, and there's a relationship between top management
Speaker 1: long term bonuses and the buyback. So that's been a
Speaker 1: long term criticism. But you couldn't say that that was
Speaker 1: the case in the UK given the valuations.
Speaker 6: But actually to put a bit of an international perspective
Speaker 6: on this as well, so some of this has been
Speaker 6: maybe a bit downbeat on the UK and saying and
Speaker 6: I think we self flagellation. I do feel like as
Speaker 6: a British pastime, like war is us Look how awful
Speaker 6: we are compared with every in the world stage. And
Speaker 6: actually this trend of de equitization, of companies not wanting
Speaker 6: to join the stock market, of companies leaving the stock market,
Speaker 6: it's global. There's nothing, there's nothing that's making us special.
Speaker 6: And saying that we're having an awful situation and everybody
Speaker 6: else's is perfectly happy. The number of German companies is
Speaker 6: down forty percent since two thousand and seven. Like everyone said,
Speaker 6: puts the US on a pedestal and says how great
Speaker 6: it is, and it is having an increased share of
Speaker 6: kind of IPOs and of companies wanting to list there.
Speaker 6: But the number of US companies is down forty percent
Speaker 6: since the mid nineties. This isn't just a UK feature.
Speaker 6: This is something that's happening globally, I think. And when
Speaker 6: we come onto this, a big part of this is
Speaker 6: the growth of the private equity industry.
Speaker 1: Yeah, before we come on to that, I want to
Speaker 1: ask you possibly the most important question, which is this,
Speaker 1: why does it matter? Right? I mean, these are huge numbers.
Speaker 1: It's obviously a big shift, but people will be saying
Speaker 1: the companies continue to exist just in different ownly, ship abroad,
Speaker 1: at homes, it merged into other companies whatever. Why does
Speaker 1: it matter if there are a few elisted companies fall in.
Speaker 6: If you are a company, it is very easy for
Speaker 6: you to raise capital wherever you want in the world. Now,
Speaker 6: like we've seen obviously lots of UK companies raising money
Speaker 6: in the US. But if the UK stock market ceased
Speaker 6: to exist, it wouldn't necessarily stop some of these large
Speaker 6: companies from being able to raise capital. If you're an investor,
Speaker 6: you can allocate money to funds, to ats, to individual
Speaker 6: companies anywhere in the world for relatively low cost these days.
Speaker 6: That wasn't the case in the past. So actually, I
Speaker 6: don't think that it matters that much for individuals. I
Speaker 6: don't think it matters that much to companies. Where it
Speaker 6: matters much more is probably actually for the UK economy,
Speaker 6: the amount of conservices the industries that actually the financial
Speaker 6: services sector supports here. If we were to lose were
Speaker 6: standing on the world stage as a stock market, that's
Speaker 6: what would lose. And probably, actually I've been a bit
Speaker 6: simplifying as saying it doesn't matter to companies. It doesn't matter.
Speaker 6: If you are a big international company with the household brand,
Speaker 6: you can raise money anywhere. It matters a hell of
Speaker 6: a lot more for your small and medcap companies. You're
Speaker 6: going less than America. They've never heard of you. That's
Speaker 6: going to be a much harder situation. So I think
Speaker 6: it matters for the ecosystem of small and mid sized
Speaker 6: companies that we want to grow in the UK. I
Speaker 6: think it matters to the economy. I actually think it
Speaker 6: probably doesn't matter as much to investors as perhaps we
Speaker 6: sometimes claim it does.
Speaker 5: Possibly, even though we work together, it might disagree on
Speaker 5: one aspect. I think the decline of the listed market
Speaker 5: probably is a problem for the average punter who has
Speaker 5: their savings over time and focused on the listed markets
Speaker 5: or public securities. So if companies are coming to the
Speaker 5: market much later in their development, and I guess that
Speaker 5: kind of hyper gross stage that you see in companies
Speaker 5: just making funded by private capital, that means that kind
Speaker 5: of the bulk of the population you have are relying
Speaker 5: on the public markets to kind of help them generate
Speaker 5: a pot in retirement or generate you know, turn their
Speaker 5: savings into returns. Isn't getting access to that growth opportunity?
Speaker 5: And I think we always look at the history of
Speaker 5: the equity market and returns from equities and so on
Speaker 5: as a as a factor as to why you should
Speaker 5: invest them in the long run. But if the equity
Speaker 5: market looks quite different, either there's less interesting companies in it,
Speaker 5: or the companies that are on the market are later
Speaker 5: stage and where they are in their cycle. That could
Speaker 5: be a problem for people in the long run as
Speaker 5: they're sort of trying to beat inflation or save in
Speaker 5: the long run. So I think there's there's something about that.
Speaker 5: And actually, while I've been quietly listening in the background,
Speaker 5: I think one bit we've missed on UK so far
Speaker 5: in this discussion is actually that structurally we're seeing less
Speaker 5: domestic investment in the UK equity market from either retirement scheme,
Speaker 5: so we've had dB switching to more fixed income allications.
Speaker 5: We see we're seeing a shift from dB to d
Speaker 5: C schememes. In terms of people who get advice, we're
Speaker 5: seeing a shift towards passive and global, and those two
Speaker 5: things are related, right, So those solutions that people are
Speaker 5: being put into don't include asset classes like private equity,
Speaker 5: infrastructure and real estate en mass, I think wealth managers
Speaker 5: probably are offering solutions that do that because of the
Speaker 5: investment the listed investment trust market and the strength of
Speaker 5: that over the last ten years in the UK. But
Speaker 5: then also people are going more global and that's affecting
Speaker 5: the UK equity market, which kind of comes back to
Speaker 5: Duncan's point about having a throating economy. So I think
Speaker 5: there's quite a lot going on here, but the decline
Speaker 5: of the equity market, I think is it does have
Speaker 5: an impact if you think about where are people's long
Speaker 5: term savings being invested in. Have they got exposure to
Speaker 5: the exciting, innovative growthy asset.
Speaker 1: Yeah, it also seems important to me on a social level.
Speaker 1: You know, quoted companies, we can watch them there. I
Speaker 1: have a certain level of crutiny both there from individuals
Speaker 1: and from the state financially operationally, and we can see
Speaker 1: what they're doing. It's much more transparent than companies that
Speaker 1: are private, and we lose that as companies leave the
Speaker 1: equity equity market, we lose that sense that we can
Speaker 1: effectively see the UK economy via listed companies. That matters too.
Speaker 6: Yeah, hundred percent agree with that transparency to double edsord
Speaker 6: companies might not like it, but it's a great way
Speaker 6: to be able to hold management practices to account. It's
Speaker 6: harder when that's in the private markets. Albeit, then I
Speaker 6: suppose you can argue that the choice of who you
Speaker 6: invest with if you want to allocate to private markets,
Speaker 6: and then the types of investor they are and whether
Speaker 6: they care about particular things that align with your own beliefs.
Speaker 6: That starts to matter more, but you don't have the
Speaker 6: same look through to the companies at an investor. The
Speaker 6: flip side probably is private equity investors get much much
Speaker 6: more information than in public market investors. They can get
Speaker 6: access to regular cash flow projections, lots and lots of
Speaker 6: really in depth data that can help with their decision making,
Speaker 6: but it is more closely held between say the company
Speaker 6: the private equity invest It's not as visible and transparent
Speaker 6: for the kind of broader social goods that you were
Speaker 6: talking about.
Speaker 1: Yeah, and it means that for the individual investor a
Speaker 1: middle man is required, and one of the things that
Speaker 1: we really like to get rid of in the men
Speaker 1: or middle men, or certainly the necessity for middle men.
Speaker 1: But if you're going to invest in unlisted companies as
Speaker 1: an individual investor, you really have no choice but to
Speaker 1: do it via a professional and that makes it different too.
Speaker 6: Yes, Actually I completely agree with what Doug was saying. Actually,
Speaker 6: my points around it not mattering as much to investors
Speaker 6: were much more about the say the demise of the
Speaker 6: UK stock market relative to the global market still existing.
Speaker 6: I completely agree on the risks that might come from
Speaker 6: the public market being less relevant. If you take it
Speaker 6: to the extreme, it potentially feels inequality because those who
Speaker 6: have assets can access all of these exciting, sexy companies.
Speaker 6: Your ordinary retail investors basically cut out of that. They're
Speaker 6: too small, they f either are too high, they can't
Speaker 6: They basically don't get a seat at that table. So
Speaker 6: all the kind of have which is everybody with tons
Speaker 6: of assets, and here I actually include FIGN benefit pension funds,
Speaker 6: they get to access all the great areas you have
Speaker 6: not and in that and I'm going to include the
Speaker 6: fine contribution investors on the whole, not all of them,
Speaker 6: but it's a lot harder for them historically to have
Speaker 6: been able to access some of these private assets.
Speaker 1: Yeah, so the growth, the growth goes, whether money or
Speaker 1: already is Okay. Well, there's not much we can do,
Speaker 1: the three of us on this podcast in thirty minutes
Speaker 1: about the decline of the number of listed companies globally.
Speaker 1: We have to take what we have for now. So
Speaker 1: let's talk a little bit about how the private markets
Speaker 1: work and how investors can or should be accessing the
Speaker 1: non listed markets. Doug, is that really all area?
Speaker 6: Yeah?
Speaker 5: So, I mean I think it's it's interesting and it's difficult, right,
Speaker 5: So I think there's a lot of interesting companies and
Speaker 5: there's a lot of interesting assets you can get access
Speaker 5: to you but you know, the private markets are I
Speaker 5: think that I think Duncan you might have some stats
Speaker 5: on this, but there's something like seventy five percent of
Speaker 5: economic activities sits in the private markets world. But getting
Speaker 5: access to that is very difficult because they are assets
Speaker 5: which are complicated, their assets which are privately held, their
Speaker 5: assets that don't trade regularly, and the liquidity angle is
Speaker 5: the piece which a lot of people focus on, but actually,
Speaker 5: in many ways, the liquidity of these asset classes, because
Speaker 5: they have to trade between kind of willing bars and
Speaker 5: willing sellers and it's quite complicated, is where you often
Speaker 5: get the premium in the long term thinking that supports
Speaker 5: kind of these assets. So it's difficult. In the UK,
Speaker 5: we have this remarkable market that has been booming until
Speaker 5: sort of about eighteen months to two years ago, which
Speaker 5: is the listed investment trust market that actually tackles that
Speaker 5: issue really well. You know, there you have listed companies
Speaker 5: where you have a selection of you know, good, average
Speaker 5: and bad managers who are doing different things around asset managers.
Speaker 5: There's been some incredible success stories in that area and
Speaker 5: a huge amount of growth in terms of raising money
Speaker 5: and getting it into markets where anyone can buy a
Speaker 5: share and they can sell a share that gives them
Speaker 5: access to private assets on a daily basis. Of course,
Speaker 5: the difficulty of investment trust is when there's lots of demand,
Speaker 5: they trade really well, and when there isn't as much
Speaker 5: demand or things change, the share price can controp quite
Speaker 5: dramatically versus the price of the asset that you might
Speaker 5: have exposure to you. So we've seen a big decline
Speaker 5: in discounts in that particular area of the investment trust market. See,
Speaker 5: there is a really good vehicle there, but there's a
Speaker 5: whole bunch of new structures they're emerging, and there's a
Speaker 5: lot of support from the Treasury to try and give
Speaker 5: different types of access to private assets.
Speaker 1: Let's just stick with the investment trust for a minute.
Speaker 1: There are an awful lot of private equity investment trusts
Speaker 1: in the UK, most of which are now trading at
Speaker 1: sub science of discounts to the stated NV. But the
Speaker 1: reason for that is because no one's convinced that the
Speaker 1: stated NEV is the correct sorry, anyv being net asset value.
Speaker 1: No one's convinced that the net asset value is correct
Speaker 1: given the sharp price and interest rates, suggesting that a
Speaker 1: lot of these private assets should be revalued down. SI.
Speaker 1: Actually that's what's going on.
Speaker 5: Here, right, Yeah, that's definitely a feature, man. There's also
Speaker 5: a you know, there's an element of how do you
Speaker 5: work that out? What does the share price accurately reflect
Speaker 5: what the NAV is? And that is quite difficult. You know,
Speaker 5: that requires research, that requires understanding what's going on. You
Speaker 5: know that that is not straightforward.
Speaker 1: But it also involves private really managers confronting the reality
Speaker 1: of the new macroeconomic situation, which they'd be slow to do.
Speaker 6: That's right.
Speaker 5: And when you have a complete change in the regime
Speaker 5: around inflation and interest rates, that kind of completely changes
Speaker 5: the cost of capital on which you price everything, and
Speaker 5: that needs to filter through the system. And I think
Speaker 5: you know, one of the aspects of private assets versus
Speaker 5: public equities is that you know that takes time. That
Speaker 5: lag factor of where the pricing was and where it
Speaker 5: should be does take a bit of time in that. Yeah,
Speaker 5: And the question is how far have discounts actually reflected
Speaker 5: where the pricing should be, how far are they actually
Speaker 5: too far?
Speaker 1: And so on?
Speaker 5: And I guess that's the difficulty for the private investor
Speaker 5: is that discount versus nab piece is quite difficult to
Speaker 5: navigate unless you kind of do your research and you're
Speaker 5: an expert.
Speaker 1: But what's the answer. What's the answer, you're the expert.
Speaker 1: I think the.
Speaker 5: Reality is is that there is no straightforward answer. I
Speaker 5: think what you have to recognize is that if you
Speaker 5: want exposure to liquid assets, it isn't as simple as
Speaker 5: owning a listed public company or a fund that trades
Speaker 5: daily and so on. This is a fact of life
Speaker 5: within the area. There's always going to be risks and
Speaker 5: so on. But what is interesting is I think an
Speaker 5: awful lot of people own property in the UK. Obviously
Speaker 5: a large non people want to own more property, sit
Speaker 5: of the young people. But I think actually, if you
Speaker 5: think about private assets in the way that we think
Speaker 5: about real estate, most of us own a house. Most
Speaker 5: of us know that mortgage rates have gone up quite
Speaker 5: a bit. Most of us understand that probably things are
Speaker 5: coming off the boiler bit in terms of where real
Speaker 5: estate is, and that there's a dynamic there around what
Speaker 5: you think the house might be worth and what you
Speaker 5: might be bid for in terms of having an offer
Speaker 5: on a house, and that's how private assets work. And actually,
Speaker 5: if we think of it in that way and realize
Speaker 5: when you're going into an asset class, when you're buying
Speaker 5: sharing one of these companies, that there may be a
Speaker 5: risk that things are overvalued and things might come down,
Speaker 5: or that if you're buying a share and the naves,
Speaker 5: that the naves are where they are and there's a
Speaker 5: big discount and the nabs may come down a bit.
Speaker 5: If you think about it in that way, you know,
Speaker 5: you can get your head around it, but you do
Speaker 5: need to kind of people do need to recognize that,
Speaker 5: you know, this is an area where it's not straightforward
Speaker 5: and you need to think about more things that are
Speaker 5: going on, and also recognize that not everyone's purpose in
Speaker 5: this area, right. Some people are good, some people are averaged,
Speaker 5: some people are not so good in terms of what
Speaker 5: they're managing. And there isn't a capsule for private assets.
Speaker 5: You know, when we think about the equity market, we
Speaker 5: talk about sectors, we talk about themes, we talk about
Speaker 5: mids caps, we talk about small caps, we talk about
Speaker 5: emerging developed and so on, Well, that's exactly the same
Speaker 5: in private markets. You can't sort of tar let's call
Speaker 5: private equity. You can't say that is all kind of uniform.
Speaker 5: You really have to do your homework in terms of
Speaker 5: what you're trying to get access to. Essentially, So I
Speaker 5: don't think there is a perfect answer, Marion, but I
Speaker 5: don't think that means we should write these things off
Speaker 5: in the same way. There's lots of different ways of
Speaker 5: getting exposure to interesting investments in public markets.
Speaker 6: It's the same with private So can I just offer
Speaker 6: a slight defense of some of the way that the
Speaker 6: private asset valuations work. So one of the criticisms is
Speaker 6: that the valuations are not updated often only enough because
Speaker 6: of various raidings, you don't really know the true market value.
Speaker 6: And people would then say the volatility is dampened because
Speaker 6: of that.
Speaker 1: That is absolutely true.
Speaker 6: The volatility is effectively smooth because there's lags and the
Speaker 6: way these are updated. However, if you look at public markets,
Speaker 6: public market prices swing around all over the place based
Speaker 6: on factors which are nothing to do with fundamentals. As
Speaker 6: human beings, we are all prone to fear and greed,
Speaker 6: and when there is panic in market and prices will
Speaker 6: fall sharply, and that doesn't necessarily mean the fundamentals of
Speaker 6: the business have changed. And often these things have a
Speaker 6: habit of swinging back the other way once people decide
Speaker 6: that the world was not going to end. So whilst
Speaker 6: I think it is fair to say that private asset
Speaker 6: valuations are smooth and maybe under shoot the true volatility,
Speaker 6: I think you can also make an argument that public
Speaker 6: equity volatility is almost over egged by the behavioral biases
Speaker 6: that we exhibit. So I think that both are probably wrong.
Speaker 6: One is probably too low and one is probably too high.
Speaker 6: But I think that it's the inability to sell private
Speaker 6: assets easily during kind of stressy markets stops us all
Speaker 6: from doing the stupid things we might otherwise be tempting
Speaker 6: to do. So actually that illiquidity almost insulates us from
Speaker 6: some of our own behavioral biases. So I think that's
Speaker 6: kind of often a bit glossed over when people are
Speaker 6: thinking about about volatility when it comes to private asset.
Speaker 1: Yeah, it's a great way to protect ourselves from ourselves.
Speaker 2: I know.
Speaker 6: It's like a bet of friction is a good thing
Speaker 6: in that sense. Actually, a betfrection that stops just prevent
Speaker 6: you from the viney jerky reaction.
Speaker 1: Interesting, and Doug, there's something else you want to talk about.
Speaker 1: I know, it's a new structure for private assets that
Speaker 1: our listeners may find interesting. Yeah.
Speaker 5: So there's there's a new structure that's emerging in the
Speaker 5: UK which is called the long term Asset fund. Now,
Speaker 5: the idea here is that to create a structure which
Speaker 5: allows people some access to liquidity, so monthly or quarterly
Speaker 5: liquidity i e. You can get your money in or
Speaker 5: out fairly regularly, but not daily, and in return for that,
Speaker 5: you'll get access to a pool of private assets which
Speaker 5: will be a combination of things that are invested for
Speaker 5: the long term, the medium term or the short term
Speaker 5: to kind of help with that liquidity. And the idea
Speaker 5: there is that you get much more exposure to a
Speaker 5: pure nav rather than having to worry about, you know,
Speaker 5: the discount premium problem we discussed before investment trusts. Now
Speaker 5: that's an emerging structure and the FCA have allowed that
Speaker 5: for DC schemes because they're trying to encourage DC schemes
Speaker 5: to give people more exposure to this asset class. And
Speaker 5: they've also recently allowed people who are advised by a
Speaker 5: wealth manager or advisor to get access to this structure,
Speaker 5: and there's a few that are starting to emerge. It
Speaker 5: isn't established yet, but it's something that's coming. I guess
Speaker 5: the key point here is that you know, you need
Speaker 5: to choose the horse for the course. If you are
Speaker 5: somebody who requires daily liquidity, the investment trust market does
Speaker 5: a very good job, but you need to do your
Speaker 5: research and be aware that you can have discounts and premiums,
Speaker 5: and equally, if you're best worried about liquidity and you've
Speaker 5: got a long term time frame, then the new structure
Speaker 5: might be something that works really well for you. But
Speaker 5: the idea here is to try and give people exposure
Speaker 5: importantly to some of these companies, sectors, innovators that sit
Speaker 5: in the private world in order to enable them to
Speaker 5: kind of meet their financial objective. But I think that's
Speaker 5: the thing sometimes we forget, is we focus on liquidity
Speaker 5: and we focus on access and kind of the things
Speaker 5: that might go. But the reality is what we're trying
Speaker 5: to do is say, there's an awful lot of interesting
Speaker 5: investments and innovation that sits in the private world, and
Speaker 5: we're kind of trying to make sure that we can
Speaker 5: bring people access to that in their portfolios. And so
Speaker 5: that's what these structures are all about.
Speaker 1: Although it's like concern among the holders of pensions in
Speaker 1: the UK is that structure may be used to force
Speaker 1: them into investing in the private sector in the UK
Speaker 1: when they wouldn't necessarily have liked to. There's a type
Speaker 1: of financial repression built into that structure.
Speaker 5: Yeah, I think that's how you use the structure, right,
Speaker 5: and that's kind of pension times to have a fiduciary
Speaker 5: GT and I think overall the government's trying to encourage
Speaker 5: and kind of and give new structures. I think obviously
Speaker 5: they have a Every pension fund trustee has a duty
Speaker 5: to their underlying members and so it needs to be
Speaker 5: up to them how they think about this area. But
Speaker 5: I think our point of view would be let's make
Speaker 5: some structures available and then decide if you want to
Speaker 5: get access to private assets and use them, rather than
Speaker 5: you have to be forced into something like this.
Speaker 1: A couple more questions for both of you. The first is,
Speaker 1: I know I said earlier that we couldn't fix the
Speaker 1: public markets in this podcast, but if there was one
Speaker 1: thing that either of you could do that might make
Speaker 1: public markets begin to be more attractive again. What would
Speaker 1: it be? Is there allegative change, is shift and regulation?
Speaker 1: What could there be that might bring people back to
Speaker 1: the listed market? I mean our own view, by the way,
Speaker 1: John and I have been talking about this, and we
Speaker 1: have a slight sense that the shift in the interest
Speaker 1: rate environment might bring people back automatically.
Speaker 6: The thing that I think we would need I would
Speaker 6: really love to see in this country, and I'm not
Speaker 6: sure how we engineer it, is that we have a
Speaker 6: culture I think where our attitude to risk is that
Speaker 6: should be minimized. So a lot of the way that
Speaker 6: people think about investing is trying to think about ways
Speaker 6: to remove all of the risks, which whereas actually I
Speaker 6: feel if we can have a culture which is much
Speaker 6: more were embracing, and I think with that it probably
Speaker 6: comes with a better understanding from an earlier age. So
Speaker 6: somebody mystifying investing from people and they're still at schooliage
Speaker 6: rather than weaken until they're in their for seasons, they
Speaker 6: decay to talk to a financial advisor.
Speaker 1: And the only thing I would say about that is
Speaker 1: that you're very young, right, so you know they do
Speaker 1: and we're you know, we're an aging society, and the
Speaker 1: older people get, the more frightened they are of risk
Speaker 1: perfectly reasonably. You know, if you're in your fifties or sixties,
Speaker 1: what do you want? You want a risk of capital. Also,
Speaker 1: you want a six percent dividend yield. I know what
Speaker 1: I'm going to want in my sixties, and it's certainly
Speaker 1: not going to be embracing risk in small, growing, unlisted companies.
Speaker 1: I'm going to want my dividend yield and I'm going
Speaker 1: to want to protect my capital as best as possible.
Speaker 1: So in an aging society, there's always a bias against risk,
Speaker 1: and there is no getting away from that.
Speaker 5: Well, they're interesting, there maybe none for another podcast. We
Speaker 5: know that people when they're at are consistently underestimate how
Speaker 5: long the honey their income for and probably don't take
Speaker 5: enough risk to keep their capital pool strong. But that's
Speaker 5: that's probably one for another day.
Speaker 1: It is one for another day. They also don't take enough
Speaker 1: out of their part they you know, they don't have
Speaker 1: to stand the importance of dying broke. Everyone should die broken,
Speaker 1: of course, you wouldn't have to worry about inheritance. To
Speaker 1: excite that that list before we finish up you too, Duncan.
Speaker 1: One of the things that you do at short is
Speaker 1: that I absolutely love is that valuation table you provide
Speaker 1: for us every every month. And when we look at
Speaker 1: that again, of course the UK is consistently looking cheap, cheap, cheap,
Speaker 1: But what are the markets look cheap on your valuation
Speaker 1: metrics at the moment? Fan emerging markets as well.
Speaker 6: Emerging markets have paddy particularly bad period for quite an
Speaker 6: extending period now compared to developed markets, and valuations are
Speaker 6: quite a feeling there. I think Japan is a really
Speaker 6: interesting one though, and you know you've spoken about this
Speaker 6: before the fact that a large proportion of Japanese companies
Speaker 6: are valued at less than the book value with the
Speaker 6: accounting the value of their businesses and the regulator that
Speaker 6: you had said something Americans, it's explain your anstitution tails
Speaker 6: for what you're going to do about it. And that's
Speaker 6: where were we didn't see more changes in share buyback,
Speaker 6: other worship held for friendly activities. So I think that
Speaker 6: Japan is people again been saying sheep for a while,
Speaker 6: but it don't feel like this year is actually having
Speaker 6: a bit of a resurgence.
Speaker 1: Excellent, and the final question this is for both of you. Doug,
Speaker 1: you ready, okay, okay, I'm going to lock you in
Speaker 1: a run for ten years, well not really metaphorically. And
Speaker 1: before you go, you can only invest in one thing
Speaker 1: gold Bitcoin. Not strictly an investment, but you know what
Speaker 1: I mean. Gold Bitcoin. You can stick your money in
Speaker 1: a UK deposited account. What's it going to be? Gold?
Speaker 1: Good answer. We've had a couple of bitcoins recently. We're
Speaker 1: getting very confused.
Speaker 6: Duncan yeah, go too.
Speaker 1: Gold is kind of one of you would be bitcoin,
Speaker 1: but both Gold is absolutely fine with us. We've been
Speaker 1: we've been related by the bitcoin as recently. It's made
Speaker 1: John and I have to think about how we can
Speaker 1: tell people to invest in bitcoin, which is which is
Speaker 1: aw OWI thank you both so much for joining us.
Speaker 1: That was absolutely fascinating. And listeners, there you go. Japan
Speaker 1: is cheap, the UK is cheap, and you know gold.
Speaker 1: Thanks for listening to this week's Maren Talks Money catch
Speaker 1: idea brief on this week's conversation on the Merrin Talks
Speaker 1: Money after show under our normal feed. Now that is
Speaker 1: only accessible to Apple new subscribers, but if you're a
Speaker 1: Bloomberg subscriber lookally after show online in the meantime. If
Speaker 1: you like a show, rate review and subscribe wherever you
Speaker 1: listen to your podcast. This episode was hosted by me
Speaker 1: Maren Sunset where but it was produced by Some Society.
Speaker 1: Additional editing by Blake matlespcial thanks to Duncan Lamont, Doug
Speaker 1: Abbott and of course, as ever to John Steppek. Be
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Speaker 1: where you can hear something from him every day and
Speaker 1: it's always good. Link in the show notes