Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello, it's Maren sums up web here. If you are
Speaker 2: a regular listen to the show, and I'm sure you are,
Speaker 2: you'll already know. But this is just a reminder. I
Speaker 2: will be at the Fringe Festival in Edinburgh once again
Speaker 2: this year, hosting four very interesting conversations in Adam Smith's
Speaker 2: old home, Panma House. I'll be there August the seventeenth
Speaker 2: to August the twentieth. You can get your tickets by
Speaker 2: heading to the main Fringe website and searching for Maren.
Speaker 2: We have some brilliant guests this year. Normally I don't
Speaker 2: tell you who the guests are until you know the
Speaker 2: absolute last minute, but I will reveal that we do
Speaker 2: have the marvelous Ed Conway.
Speaker 1: This year.
Speaker 2: We've got the fantastic Russell Napier, and we have James
Speaker 2: Ferguson who was on the podcast last week and had
Speaker 2: a lot more to say, and other wi guests I
Speaker 2: will reveal as the time gets closer.
Speaker 1: All the way, I should tell you, of course, that
Speaker 1: John will be on.
Speaker 2: One day now back to our regular programming twodays. Actual, John,
Speaker 2: Are you gonna come in two days?
Speaker 3: Yeah?
Speaker 4: Unless you get anyone better.
Speaker 2: That's what usually happens, jacksone better and chuck you off
Speaker 2: that of course that's not going to happen. Right back
Speaker 2: to our regular programming. This week on the show, I
Speaker 2: speak with Adam Ragley. It's the fund manager at Cape
Speaker 2: Wrath Capital rather the fund manager at Case for a Capital,
Speaker 2: a UK equity boutique with a deep value investment philosophy.
Speaker 1: We like deep value.
Speaker 2: Dowgate Wealth integrated the Cape Wrath investment team late last year.
Speaker 2: We talked about all sorts of things, including why small caps,
Speaker 2: why the UK, and what he would buy if I
Speaker 2: wouldn't let him buy either of those things. But first,
Speaker 2: as a senior reporter and author of Money Distilled newsletter,
Speaker 2: John Staffer gets with me.
Speaker 4: John, Hello, Maden. Isn't it great to have the adults
Speaker 4: back in the room. I feel that's the traditional way
Speaker 4: to open a podcast at this point.
Speaker 1: Yes. And isn't it great to live in a beacon
Speaker 1: of stability? Oh?
Speaker 4: Fantastic?
Speaker 1: I know that's the thing we say.
Speaker 2: If I read one more article that starts with the
Speaker 2: UK is now speacon of stability in a volatile world,
Speaker 2: it might get quite at Although I think I might
Speaker 2: have said it and possibly even have written it myself.
Speaker 2: And you know what's going to be awful if it
Speaker 2: turns out that we are not a beacon of stability.
Speaker 1: What if this goes wrong?
Speaker 2: You know, we're really bigging up the stability here and
Speaker 2: I can't really see any reason why we go drastically
Speaker 2: wrong in the short term, but none of the else.
Speaker 2: It's going to be really really embarrassing if something something
Speaker 2: happens that makes the UK look not stable again.
Speaker 4: We'd be embardison to be if your expectations are fairy
Speaker 4: law or have been.
Speaker 1: No, they're not low.
Speaker 2: Expectations are very high for stability, maybe not very high
Speaker 2: for other stuff, but very very high for nothing happening.
Speaker 1: They might scare the horses.
Speaker 2: True, Okay, right, fingers crossed, everything crossed, because we don't
Speaker 2: want to have to start these podcasts with, oh my god, volatility.
Speaker 1: Don't want that.
Speaker 2: Right, You've been writing this week about the amount of
Speaker 2: tax that the government is managed to get from something
Speaker 2: they really shouldn't be able to get it from.
Speaker 4: Right, Yes, the interest on your savings I've got. I
Speaker 4: really found this number quite shocking simply because of the
Speaker 4: size of it. So Before we do this, I just
Speaker 4: want to say, like, so, for context, in twenty three
Speaker 4: twenty four tax year, inheritance tax which everyone hates and
Speaker 4: understand why, raised about seven point five billion pounds for HMRC,
Speaker 4: and stamp duty on property raised about eleven and a
Speaker 4: half billion pounds. So that's the context for this number.
Speaker 4: So savan's interest in twenty twenty one to twenty two,
Speaker 4: when basically interest rates were at zero and so no
Speaker 4: one was getting paid interest, and also the amount of
Speaker 4: interest you could earn before you paid income tax on
Speaker 4: it was higher. HMRS made one point three billion from
Speaker 4: tax on that income. This year.
Speaker 1: The expense is killing me. Jump, the suspense is literally
Speaker 1: killing me. Just give us the number. Give us the number.
Speaker 4: Ten four billion this year there's more than the inheritance
Speaker 4: tax take. It's almost as much as the property transaction
Speaker 4: tax take. It's a significant number. Yeah, And.
Speaker 2: Imagine I'm interrupting, Sorry to interrupt, but imagine how many
Speaker 2: people don't know that they have to pay tax on
Speaker 2: the income from their savings because they haven't had to
Speaker 2: for so long, and people brought up in a very
Speaker 2: low income environment.
Speaker 3: You may I.
Speaker 2: Suddenly have savings because of course a lot of people
Speaker 2: have savings. Now they may suddenly have savings on which
Speaker 2: tax should be paid and they're not aware of it.
Speaker 2: So I bet there's a bigger tax gap there than
Speaker 2: you'd expect.
Speaker 4: As well, there probably is stuff that people should be
Speaker 4: declared on their self assessment forms that then not yeah, we.
Speaker 1: Don't have self assessment forms.
Speaker 2: Yeah.
Speaker 4: But the point this is a lot of money, and
Speaker 4: given the ser size of the allowances that we have
Speaker 4: to avoid paying this quite you know above broadly, it
Speaker 4: just surprises me that there is this much going to HMRC,
Speaker 4: and it feels like it's probably largely a voluntary tax
Speaker 4: on an apathy tax.
Speaker 2: That is interesting, isn't it? Because you don't have to
Speaker 2: do this. You can put your money inside a sick
Speaker 2: You can put it inside and I say, you can
Speaker 2: get one of the national savings accounts that does not
Speaker 2: attract tax, et cetera. There is absolutely no reason unless
Speaker 2: you really have maxed all that stuff out, there's very
Speaker 2: little reason to have savings that attract tax.
Speaker 4: No, And even then, if you've got so much money
Speaker 4: you've been able to max that, you can start looking
Speaker 4: at things that are even you know, whack your light
Speaker 4: enterprise investment schemes and venture capital trusts. If you really
Speaker 4: do have that amount of money, Yeah.
Speaker 2: If you've maxed all that out, what are you doing
Speaker 2: with your cat sitting around in a savings count of
Speaker 2: Barkley's in the first place.
Speaker 4: Exactly in the weird kind of way, this tax just
Speaker 4: shouldn't exist, This tax take shouldn't exist. And so yeah,
Speaker 4: get your finger out and sort of your personal finances
Speaker 4: if you're one of these people. And it is mostly
Speaker 4: additional rate tax payers, by the way, so the vast
Speaker 4: majority of this is coming from people in the forty
Speaker 4: five percent tax ban. So you know, go and have
Speaker 4: a look at billion money as and if it's somewhere
Speaker 4: it's paying that amount e tax on your interest income,
Speaker 4: then find something to do with it.
Speaker 2: On the other hand, I suppose what you might say is,
Speaker 2: if you don't pay tax this way, you're definitely going
Speaker 2: to pay it another way. You know, you can pay
Speaker 2: your interest, but something else is going to come. I'm
Speaker 2: quite internested in this idea by the way of means
Speaker 2: testing the state pension. It came up last week and
Speaker 2: we haven't heard much more about it this week, but
Speaker 2: it seems like one of those things that you would
Speaker 2: constantly say, if you're in the treasury.
Speaker 1: Why don't you mean Texas state beensine?
Speaker 3: What do you mean?
Speaker 1: Says the state pension? And then you look at it
Speaker 1: more closely and you think, well, this is really hard.
Speaker 2: This is really hard because if you means test a
Speaker 2: state pension, what is it you mean touched?
Speaker 1: Do you look at just.
Speaker 2: Someone's pension income so you look at their dB and
Speaker 2: their DC and you look at what they're getting from that,
Speaker 2: or do you look at their income outside that?
Speaker 1: And if you start looking at.
Speaker 2: Them their income outside their pension assets, then you have
Speaker 2: to look not just at the income that they have,
Speaker 2: but the assets that they have that could be used
Speaker 2: to generate income. Right, So if you're can look at
Speaker 2: someone's pension and you say, well, I'm just looking at
Speaker 2: their income and then everyone immediately shifts everything over it
Speaker 2: to growth stocks that they don't have an income, then
Speaker 2: you think, well, hang on, that's not okay. So now
Speaker 2: we need to tax it as though they were in
Speaker 2: dividend producing socks. Now that doesn't work, So how do
Speaker 2: you do it? So suddenly what is it?
Speaker 1: Oh, it's a wealth tax.
Speaker 2: Because the only thing you can do is look at
Speaker 2: the absolute value of the potentially income generating assets people have,
Speaker 2: and tax on the base of that.
Speaker 1: I was thinking about this that there's no way that
Speaker 1: you can means.
Speaker 2: Test the state pension without effectively introducing a wealth tax.
Speaker 2: And I give that to you, Rachel Reeves, for free.
Speaker 4: I think that's a really good point law. And I
Speaker 4: think actually there is something then that which points to
Speaker 4: the thing that you are always talking about, which is
Speaker 4: that rather than having inheritance tax, we should have a
Speaker 4: gift tax. And that sort of encourages it both encourages
Speaker 4: wealth transferils. You only get tax when they've are something's crystallized,
Speaker 4: so you don't have all the evaluation golf hartening. And
Speaker 4: it is a wealth tax, but it's a wealth a
Speaker 4: wealth tax that has got far fewer skewed incentives than
Speaker 4: anything else.
Speaker 1: Yep, make it easy, make it easy, Make it easy.
Speaker 2: I mean, when we talk about growth, and there's new government,
Speaker 2: and all credit to them for this, at least they
Speaker 2: talk about nothing but growth, How to generate growth. I'm
Speaker 2: not sure they're going about it the right way, but
Speaker 2: we'll find out that over the next couple of years.
Speaker 2: But they talk about it all the time. But one
Speaker 2: of the things that you and I often talk about.
Speaker 2: One thinks that would make it easier for the economy
Speaker 2: to grow would be for the tax system to be
Speaker 2: more simple. I mean I had a little example myself
Speaker 2: this week, a boy with the details, but a little
Speaker 2: tax thing, and the admin neally defeated me. And I
Speaker 2: looked at it and I thought, I just don't think
Speaker 2: I'll bother with that. But we'll do that thing again
Speaker 2: because I can't deal with the admin.
Speaker 1: Now take that tiny.
Speaker 2: Little personal problem up to large companies, to small companies,
Speaker 2: to medium size companies all the time dealing with endless,
Speaker 2: relentless complications. If you just make it easier, I think
Speaker 2: you would find that growth would follow simplicity, and you
Speaker 2: might not need the endless parade of new institutions that
Speaker 2: we're hearing about at the moment, which moves me very
Speaker 2: nicely to the National Wealth Fund, yes, which is not
Speaker 2: really a national wealth fund.
Speaker 4: Well no, because that would imply that we hid some
Speaker 4: wealth and that as opposed to mass of debts on
Speaker 4: the public balance sheet. So deally, it's just it's basically
Speaker 4: it's fine. Look, I mean, we've both been trying to
Speaker 4: work what there says, But it's basically a seed capital
Speaker 4: fund for projects that the private sector is not investing
Speaker 4: in because they don't offer every tourns that match the risk. Yeah,
Speaker 4: and I mean that's whatever kind of discussion we have
Speaker 4: about it is that's sort of the fundamental problem that
Speaker 4: you're going to come back to, is that no one
Speaker 4: is doing this stuff in the first place because it
Speaker 4: doesn't offer decent enough returns and therefore it needs a
Speaker 4: public subsidy some way. That subsidy doesn't need to necessarily
Speaker 4: be directly financial, but it's you know, if it's in
Speaker 4: the form of a guarantee or in the form of
Speaker 4: you know, favoritizing legislation or allowing you.
Speaker 2: To raise capital, lower rate or anything like that, anything
Speaker 2: that takes some of the sting out of the risk.
Speaker 1: But however you cut it, if they call it a.
Speaker 2: Public private partnership, it's a subsidy of some kind. And
Speaker 2: it talks about catalytic capital, which is a very nice
Speaker 2: phrase and when he use a lot of these days,
Speaker 2: but it also talks about crowding in private investment.
Speaker 4: Yes, that's a lovely phrase.
Speaker 1: And this is this is an interesting phrase that I
Speaker 1: don't think we've already seen used in this kind of
Speaker 1: context before.
Speaker 2: If you're crowding in private investment, what are you doing?
Speaker 4: I guess If you're crowding, then then you either have
Speaker 4: to have something extremely appealing for them to crowd down too,
Speaker 4: or you need to be running behind them with a
Speaker 4: cattle proude to force them crowed into the thing. So
Speaker 4: it's either a sold out tail, a swift coincert or
Speaker 4: a Japanese subway train. What about a board?
Speaker 1: Very good, John, that's very good, very thank you. It
Speaker 1: feels to me a little more like a subway train.
Speaker 4: Yeah, I didn't think it was going to be swifty. Unfortunately.
Speaker 1: Well, it kind of depends on the projects, I bet.
Speaker 1: But I do worry. I do worry that.
Speaker 2: You know, when we talk about who are going to
Speaker 2: be the co investor here, who is it going to
Speaker 2: be that it might be our pension funds. And how
Speaker 2: does our pension fund money get from a Viva legal
Speaker 2: in general whatever into the national welfund?
Speaker 1: How does that work? What is the incentive or what
Speaker 1: is the problem.
Speaker 2: We don't know that yet and hopefully we'll find that
Speaker 2: out over the next few weeks. But the key thing
Speaker 2: to remember is that one way or another you'll be paying.
Speaker 1: Welcome to Maren Talks.
Speaker 2: Money, the podcast in which people who know the markets
Speaker 2: explain the markets. I'm mere in Sunset Web and here
Speaker 2: is my conversation with Adam Ragley.
Speaker 1: Fund manager with Cape Breath Capital, a UK equity.
Speaker 2: Boutique with deep value investment philosophy.
Speaker 1: Adam, thank you so much for joining us today. Very
Speaker 1: kind of you.
Speaker 3: Thanks for having me.
Speaker 1: Now.
Speaker 2: The last time we spoke, we were in Hey on
Speaker 2: why right, at the Financial Festivals of Mistakes.
Speaker 3: That's right.
Speaker 1: Yeah, a lot of fun and Adam.
Speaker 2: By the way listeners, was extremely kind because I'd been
Speaker 2: on how many panels had I'd been on by then?
Speaker 1: Or paneled out?
Speaker 2: So I felt I thought, I'm taking audience members in
Speaker 2: for my next panel, and Adam was was dragged from
Speaker 2: obscurity onto the stage, well not exactly obscurity, and we
Speaker 2: had it. We had a great conversation.
Speaker 1: Then, and we're going to have another one now, right,
Speaker 1: y ah.
Speaker 3: Yeah, that was a lot of fun. I enjoyed it.
Speaker 2: It was I'm sad we don't have a live audience
Speaker 2: today to heckle and ask questions, but you know that's
Speaker 2: something comments. So, Adam, let's start by talking about how
Speaker 2: you invest. You run a pretty focused fund that invests
Speaker 2: in UK small caps, So let's start by asking why
Speaker 2: the UK? Why small caps? Why then when you started
Speaker 2: the fund and why now?
Speaker 5: Sure, so I've always invested, or most of my career,
Speaker 5: I've been involved in small cap investing, either in the
Speaker 5: UK or kind of UK and Europe. I think small
Speaker 5: caps a really interesting market because it's generally less well
Speaker 5: covered than larger companies. Smaller companies generally have fewer analysts
Speaker 5: looking at them, fewer people interested in them, and that
Speaker 5: makes it a less efficient market, and so I think
Speaker 5: there's a bigger opportunity in small caps as an active
Speaker 5: manager to generate alpha.
Speaker 3: So that's kind of why small cap is that.
Speaker 2: More the case now then it was even a decade ago,
Speaker 2: And that regularly change in the UK has meant that
Speaker 2: there are even fewer analysts following a lot of our
Speaker 2: small cap companies and they were ten to fifteen years ago.
Speaker 5: With a kind of whole unbundling thing. There's definitely less
Speaker 5: research coverage around than there was, and so there are
Speaker 5: many reasonable site well for it. For us a reasonable
Speaker 5: sized company, there are kind one hundred two undred million
Speaker 5: pound companies that might have just the house broker covering them,
Speaker 5: and in those situations, the housebroker you know, is working
Speaker 5: very closely with the management team and so their forecast
Speaker 5: may reflect more what the management team would like them
Speaker 5: to say than what you know, necessarily the kind of
Speaker 5: independent view of the of the analysts. So there's all
Speaker 5: sorts of things kind of going on there. But what
Speaker 5: it means is, yes, I think the coverage is probably
Speaker 5: not as good as it was ten years ago, and
Speaker 5: that can create more opportunities for active So.
Speaker 2: Small caps make sense because of that risen But why
Speaker 2: UK small caps?
Speaker 5: So I think that plenty to go for in the
Speaker 5: UK basically, I mean I have looked at European small
Speaker 5: caps in the past. I think there is a benefit
Speaker 5: from operating kind of in your in your home market
Speaker 5: in terms of understanding the culture and the language. And
Speaker 5: I think, you know, investing in Europe some countries probably
Speaker 5: worse than others. There was always a sense that there
Speaker 5: was a local cabal of investors who probably had you know,
Speaker 5: an edge versus us sitting in the UK because they
Speaker 5: were that much closer to the management or you know,
Speaker 5: the information flow is was you know, it was easier.
Speaker 5: So I think there is a benefit to investing in
Speaker 5: UK companies if you're sitting in the UK.
Speaker 1: But there's also value in the UK, A.
Speaker 3: Lot of value. Yeah, huge amount of value in the UK.
Speaker 5: I mean, this is the I mean I've been investing
Speaker 5: in the UK for kind of twenty odd years. I've
Speaker 5: been running a kind of deep value strategy for fifteen
Speaker 5: years or so, and I'd say this is, you know,
Speaker 5: post COVID, we are in a fantastic market for value
Speaker 5: in the UK, particularly in smaller companies. Over the last
Speaker 5: five years, smaller companies in the UK and globally have
Speaker 5: underperformed their larger peers, and I think that's not surprising
Speaker 5: given the environment we've been in. If you're expecting a recession,
Speaker 5: then you don't invest in small caps because generally they're
Speaker 5: kind of more more volatile, more leveraged into economic growth.
Speaker 5: And in the last five years we've had you know,
Speaker 5: the whopper of all recessions with COVID in the UK.
Speaker 5: We had a short kind of technical recession at the
Speaker 5: end of last year. So it's not been a kind
Speaker 5: of fantastic economic environment and that's reflected in the underperformance
Speaker 5: of small versus large. So I think over the last
Speaker 5: five years in the UK, small's probably underperformed large by
Speaker 5: about twenty percent. But if you look over kind of
Speaker 5: longer time frames, I mean, smaller companies generally have high
Speaker 5: growth rates, and if you go back, say over a
Speaker 5: twenty five year timeframe, there's significant our performance of small
Speaker 5: versus large in the.
Speaker 3: UK and globally.
Speaker 5: So you know, looking at some numbers in front of me,
Speaker 5: you know about two hundred and fifty percent out performance
Speaker 5: of UK small cap indu cries and the UK versus
Speaker 5: UK large cap in the Sea. So I think there's
Speaker 5: there's a strong argument, a very compelling argument for holding
Speaker 5: smaller companies for the long term. If you've got a
Speaker 5: more tactical approach, then it will depend on your outlook
Speaker 5: for the economic environment. But if there was a market
Speaker 5: I wanted to be being for my career and I
Speaker 5: could choose small versus large, I'd chose small every day.
Speaker 2: And do you think that that's still the case for
Speaker 2: the UK given the regular outflows we've seen from the
Speaker 2: UK market, you know, month after month after month for
Speaker 2: so many months now, it's getting ridiculous. So there are
Speaker 2: hints that we're beginning to see some domestic inflows again,
Speaker 2: But there are so many reasons that we given on
Speaker 2: this podcast and all over the place as to why
Speaker 2: the UK market is a continuing mess.
Speaker 5: Yeah, I mean, I think as a value invests in,
Speaker 5: one of the key things you believe in is mean reversion,
Speaker 5: and the question always is when, and that's the answer
Speaker 5: that you can't you could rarely provide with much accuracy.
Speaker 5: So you know, I think that these things go in cycles.
Speaker 5: And also, I mean a bit more kind of anecdotally
Speaker 5: the types of conversations I've been having, I think there's
Speaker 5: a lot more interest, a growing interest from outside of
Speaker 5: the UK in the UK market and talking to global
Speaker 5: managers for example, based in the US. There is a
Speaker 5: very kind of wariness around the valuations in the US market,
Speaker 5: and people look over to the UK and it's extremely
Speaker 5: cheap relative to other markets, relative to its own history.
Speaker 5: And so if you do, you know, believe in that
Speaker 5: mean reversion argument, then there's got to be a fantastic
Speaker 5: opportunity in the UK. And in terms of catalysts, I mean,
Speaker 5: obviously there's there's a lot of discussion about takeovers in
Speaker 5: the UK market, things very cheap, things getting taken private.
Speaker 5: There's a lot more buybacks happening in the UK. I've
Speaker 5: noticed the last six to twelve months or so companies,
Speaker 5: more and more companies have been coming out buying back
Speaker 5: their own shares. So I think there are a few
Speaker 5: possible catalysts there, certainly, you know, on a case by
Speaker 5: case basis.
Speaker 2: Yeah, And it is there's less the buybacks and more
Speaker 2: of the takeovers that might attract international attention and make
Speaker 2: people think, well, you know, if they're prepared to go
Speaker 2: into the UK and take over those companies and I
Speaker 2: actually go have a.
Speaker 1: Look at it.
Speaker 3: Yeah, yeah, I think so.
Speaker 1: And what about politics?
Speaker 2: Does this idea that the UK is now a beacon
Speaker 2: of stability, as people keep saying in a volatile world,
Speaker 2: is that a positive or is that just a short
Speaker 2: term nonsense?
Speaker 3: Yeah?
Speaker 5: I think it's a positive. Look is much going to
Speaker 5: change under a Labor government. I don't think a huge
Speaker 5: amount is going to change. But the more important than
Speaker 5: actually what changes is that perception of stability. And you know,
Speaker 5: the market hates uncertainty, love certainty. And with the election
Speaker 5: out of the way and Labor with a decent majority,
Speaker 5: it feels like we're in for a period of stability,
Speaker 5: and all sorts of people have got their kind of
Speaker 5: own own gripes and their own expectations. But I think
Speaker 5: the key thing is that there is, you know, a
Speaker 5: period of optimism and a sense of stability, and those
Speaker 5: are things that the market likes.
Speaker 2: Yeah, and an awful lot of talk about going for
Speaker 2: growth and endless new organizations being set up to help
Speaker 2: us go for growth, most of which haven't quite got
Speaker 2: to grips with yet.
Speaker 3: Yes, I mean I doubt the sense, yes, exactly, the.
Speaker 2: Feeling that this would be a nice thing is there,
Speaker 2: and maybe there'll be some money and maybe maybe the
Speaker 2: National Wealth Fund really is a fund of some kind.
Speaker 2: We'll find out every time, won't we. But so there
Speaker 2: is a sense of optimism around that. So let's talk
Speaker 2: about how you invest, because you're a value investor, but
Speaker 2: you look for particular turning points. And then one of
Speaker 2: the things that jumped out to me in your literature
Speaker 2: is that the shorter that the shorter the time you
Speaker 2: can hold a stock for the better for you, which
Speaker 2: is not what most of fun managers to say to us.
Speaker 1: Mostly to us, you know, I'm.
Speaker 2: In for the long term, I buy at the right
Speaker 2: price and then I hold, and I'm not a trader, etc.
Speaker 1: So as a phrase, it slightly jumps up your fax sheet.
Speaker 3: Absolutely.
Speaker 5: I mean, I think there's a lot of preconceptions out
Speaker 5: there about what the right way to invest in, and
Speaker 5: I think, you know, it's it's all part of this
Speaker 5: kind of Warren Buffett's school. So Warren Buffett said, our
Speaker 5: favorite holding period is forever, and I think that's ingrained
Speaker 5: in the mindset of a lot of fun managers and
Speaker 5: a lot of people who allocate the fund managers that
Speaker 5: that is the right way to invest. So you know,
Speaker 5: that idea of Nick Train sitting in his library and
Speaker 5: making one investment decision a year, that kind of thing, And.
Speaker 2: I mean it's worked very well, very well for Warren Buffett,
Speaker 2: by the way, Yeah, pretty well for Nick Train, or
Speaker 2: then maybe not so well recently, but long term pretty well.
Speaker 3: Yeah.
Speaker 5: There are many different investment approaches which can work fantastically
Speaker 5: well if applied with discipline, with a good process. So
Speaker 5: you know, I'm not saying that value is better than growth.
Speaker 5: I'm saying that you have to choose the investment style
Speaker 5: that best fits your personality and then you need to
Speaker 5: go away and deliver a process and a philosophy around
Speaker 5: that to deliver returns. But I think that, yeah, there
Speaker 5: are a lot of rules of thumbs, so you know,
Speaker 5: holding period only, buying quality, looking for low volatility, all
Speaker 5: these things are kind of really chime, I guess if
Speaker 5: you're a quality growth investor, because if you're a quality
Speaker 5: growth investor, you make one fantastic decision to buy that
Speaker 5: high quality business at the right price, and then your
Speaker 5: returns come from the compounded earnings growth of that business
Speaker 5: over time. Whereas as a value investor, you're more interested
Speaker 5: in buying at a discount to fair value and then
Speaker 5: selling it fair val Valuation is absolutely key to your
Speaker 5: perspective and to your calculation. And so if we can
Speaker 5: achieve fair value in a shorter time period rather than
Speaker 5: a longer time period, than that is a better IRR.
Speaker 5: And we generate our returns by taking the profits we've
Speaker 5: made from you know, selling at a discount to fair value, sorry,
Speaker 5: buying a discount to fair valuance and selling it a
Speaker 5: fair value and reinvesting that in the next opportunity. So
Speaker 5: that's how we achieve our returns rather than through the
Speaker 5: long term compounded returns of the underlying company.
Speaker 2: You see, you explain it like that, and it sounds
Speaker 2: like any good value investors should also be looking to
Speaker 2: have the shortest possible time as a holder in that
Speaker 2: if you get the catalyst correct, then everything should happen
Speaker 2: very quickly.
Speaker 1: So if you turn into a long term holder.
Speaker 2: Of your stocks, then you've got it wrong.
Speaker 1: Somewhere along the line.
Speaker 5: This should be quick, I would say so, but I
Speaker 5: have some sympathy for other and value investors who perhaps
Speaker 5: manage very large portfolios. So if you've got a one
Speaker 5: hundred stock portfolio, it's impossible to turn that over, you know,
Speaker 5: in twelve months or our average holding period is twelve months,
Speaker 5: and with twenty to twenty five holdings, we can realistically
Speaker 5: turn that portfolio over in twelve months. If you've got
Speaker 5: one hundred holdings, there's just no way that you can
Speaker 5: cover have conviction enough companies to pursue that kind of strategy. So,
Speaker 5: you know, I think what we do is quite a
Speaker 5: pure approach to it. But we're able to do that
Speaker 5: because we have have low capacity, a small number of holdings,
Speaker 5: and of course the trade off is that if you
Speaker 5: want to become fabulously wealthy as a farm manager, you
Speaker 5: know that's not the way to do it.
Speaker 3: You want to go out.
Speaker 5: You want to build a strategy that has huge capacity
Speaker 5: because you're making your money from the fees you charge
Speaker 5: for investors, and the more assets you manage, the higher
Speaker 5: those fees. But my view is that, you know, if
Speaker 5: a manager gets wealthy, it should be from eating their
Speaker 5: own cooking rather than from the fees they charge their investors.
Speaker 5: And so that's how we've structured our fund.
Speaker 2: Let's go back a little bit and talk about what
Speaker 2: fair value means to you. What makes a stop cheap
Speaker 2: and what makes it fair value? What are the signals
Speaker 2: you're using.
Speaker 5: Yeah, so there's a bunch of different stuff that we're
Speaker 5: looking at when we're selecting our investment opportunities, and valuation
Speaker 5: is one piece of this, and then we're also thinking
Speaker 5: about the risks attached to that upside and the potential
Speaker 5: catalysts to achieve that upside, And the valuation itself is
Speaker 5: probably the most kind of quantitative part of it, in
Speaker 5: so far as we build out a model on every
Speaker 5: company that we invest in. We can do that because
Speaker 5: we've got a relatively small number of holdings, we generate
Speaker 5: some short term earnings forecasts, and often the types of
Speaker 5: companies we invest in our in these turnaround situations or
Speaker 5: at trough earnings, and so we need to have a
Speaker 5: view on what the profile of an earnings recovery might
Speaker 5: look like. And then we apply those earnings forecasts across
Speaker 5: a variety of different valuation metrics. So we've got around
Speaker 5: twenty five different valuation metrics in our model, and we'll
Speaker 5: select the ones of the most appropriate. And typically, I mean,
Speaker 5: if I look at our portfolio today, so the way
Speaker 5: to the average upside across the portfolio is around seventy
Speaker 5: seven percent, So that gives you an idea of what
Speaker 5: we're looking for in terms of ups and the types
Speaker 5: of companies we invest in may often have fallen seventy
Speaker 5: eighty ninety percent from their recent highs. So typically we're
Speaker 5: not looking for companies to regain their former glory, but
Speaker 5: we're looking for situations where other investors have become too
Speaker 5: pessimistic about what's happened around a company.
Speaker 1: But still it's very subjective, isn't it.
Speaker 2: In the end, As you say, you have twenty five
Speaker 2: metrics and you choose ones which are most appropriate.
Speaker 1: Any one time. This is extremely subjective.
Speaker 5: Yeah it is. Yeah, yeah, So you know, investing is
Speaker 5: a whole thing about investing being as much an art
Speaker 5: as a science. And you know, we have our we
Speaker 5: have our process, and I think it's important to have
Speaker 5: a process to kind of keep you honest. But the
Speaker 5: fact is the best computer that we have is the
Speaker 5: human brain, and the process will only ever be a
Speaker 5: kind of shadowy reflection of you know, all the things
Speaker 5: that are happening behind the scenes in the brain. And
Speaker 5: the process you know, should, should and does develop over
Speaker 5: time as you become more experienced an investor, as an
Speaker 5: investor and you develop your intuition whilst also kind of
Speaker 5: working to guard you against your biases. So there's you know,
Speaker 5: there's BIOSes which try and trip you up, there's intuition
Speaker 5: which tries and help you make the right decisions, and
Speaker 5: the process kind of sits there as a bit of
Speaker 5: an arbiter between between the two. So valuation is and
Speaker 5: all investing is an art as well as the science.
Speaker 2: Okay, let's talk about some of the companies that you've
Speaker 2: got in their portfolio at the moment and what made
Speaker 2: them look like value to you.
Speaker 1: What's what's interesting do you think.
Speaker 5: Yeah, so we've recently took a position in the pub
Speaker 5: company Marston's. So Marsten's owns around thirteen one hundred pubs
Speaker 5: across the UK, and with a pub company, I mean,
Speaker 5: but pubs, it's a very liquid market in so far
Speaker 5: there's as there's historically been quite a lot of m
Speaker 5: and a around listed pub companies and then you know
Speaker 5: kind of individual prop companies are actively traded, so it's
Speaker 5: a very liquid market. So you can get a reasonable
Speaker 5: kind of view of what this pub portfolio is worth.
Speaker 5: And in the case of Marston's, if you look at
Speaker 5: the kind of tangible book value per share, so what
Speaker 5: the value of these properties is, basically you get a
Speaker 5: figure of around ninety five pence per share and that
Speaker 5: kind of triangulates quite nicely against the takeover offer that
Speaker 5: Marston's had in twenty twenty one, so about three years ago,
Speaker 5: for one hundred and five pence per share, And if
Speaker 5: you look at kind of transactions, it's normally kind of
Speaker 5: one to one point one times book value, so that
Speaker 5: kind of all will makes sense and stacks up quite
Speaker 5: nicely against Marston's current share price of around anyway, between
Speaker 5: kind of thirty thirty five pence a share of the
Speaker 5: last couple of weeks. So there's you know, there's plenty
Speaker 5: of upside there. It's always interesting to think what the
Speaker 5: kind of alternative angles might be. And for us, a
Speaker 5: nice angle was the fact that Marston still owns forty
Speaker 5: percent share of a JV, a Briwin Company JV with Carlsburg,
Speaker 5: Carlsburg Marston's Brewing Company, and we put in a value
Speaker 5: for that brewing business of anywhere between thirty and fifty
Speaker 5: p Actually two days ago, Marston's announced they were going
Speaker 5: to sell the JV to Carlsburg for thirty three pence
Speaker 5: per share. So that transaction is basically at the current
Speaker 5: share price of the business. The portfolio pubs has some
Speaker 5: debt against it, and so even if you were to
Speaker 5: take that portfolio of pubs, so we're going to write
Speaker 5: the value down to zero, we're going to hand them
Speaker 5: all back to the banks. That those thirteen hundred pubs
Speaker 5: you can still you know, get your money back purely
Speaker 5: through the sale of this brewery business. So we see
Speaker 5: a lot of a lot of value in Marston's and
Speaker 5: a couple of hundred percent upside.
Speaker 2: And how long you say that your your holding period
Speaker 2: is twelvemonths right roughly on average?
Speaker 3: Yeah, I mean there's a blu range around that.
Speaker 2: How long are you prepared to wait for a company
Speaker 2: to come to fair value? If you're sitting there and
Speaker 2: nothing happens with Marsden's for two years, three years, four years,
Speaker 2: when when do you call it a day?
Speaker 1: Was such just more portfolio?
Speaker 5: If the thesis doesn't change, then we are prepared to
Speaker 5: be patient. Situations where we will recognize we've made a
Speaker 5: mistake and sell out would be if over time we
Speaker 5: see that assessment of fair value coming down and there's
Speaker 5: a kind of death by a thousand cuts every time
Speaker 5: there's an update, you kind of knock down your fair
Speaker 5: value by ten percent, and you know, after you've had
Speaker 5: you know, four or five updates, suddenly you know, perhaps
Speaker 5: the share price and the fair value moving closer together,
Speaker 5: but for for all the wrong all the wrong reasons.
Speaker 5: But if nothing changes and our fair value remains or
Speaker 5: a bust or even goes up, but the share price
Speaker 5: doesn't move, then usually we're happy to hold on to it.
Speaker 5: But it does give us pause for you know, reflection.
Speaker 5: What is it that you know? Could it be that
Speaker 5: we've that we've missed something here and.
Speaker 2: Your last facts Muslins with your top Mustins, with your
Speaker 2: second holding, what kin Jones was your top holding?
Speaker 1: Is it still?
Speaker 3: Yes, that's right.
Speaker 5: I know you've got a strong view on the student
Speaker 5: student combinations sector, which is what kin Jones is historically
Speaker 5: has been has been their their core market.
Speaker 1: Okay, tell me where I'm wrong.
Speaker 5: Then, sokay, So what King Jones has got there effectively
Speaker 5: a house builder crossed with a contractor. So their business
Speaker 5: model is to go out and get sites, typically in
Speaker 5: in city centers, and then to find a partner a
Speaker 5: investment for an institutional investor to provide the capital to
Speaker 5: build out that site. And so they'll they'll kind of
Speaker 5: take take their margin on sourcing the land, they'll take
Speaker 5: their margin on the construction phase, and then they'll also
Speaker 5: provide the ongoing maintenance, facilities management kind of service that
Speaker 5: for that property going forward if required. And historically they've
Speaker 5: done very well during this kind of boom in purpose
Speaker 5: built student accommodation, and they've also got i mean, their
Speaker 5: purpose built studentccommodation business has been kind of stable to
Speaker 5: like in a a kind of gradual decline over the
Speaker 5: last seven eight years or so, what's been very fast
Speaker 5: growing has been their built to rent business. And essentially
Speaker 5: these are very similar to the same skill set, is
Speaker 5: often the same sites. It just depends on who the
Speaker 5: institutional investor is, who's who's kind of backing the project.
Speaker 5: Wakin Jones got hit particularly by the building safety regulations,
Speaker 5: so they kind of post Grenville building at a height
Speaker 5: kind of cladding issues because obviously they're building a lot
Speaker 5: of a lot of tall buildings in cities, and so
Speaker 5: that's had a signific can impact on the on the valuation,
Speaker 5: on sentiment around the stock. But that's something that you know,
Speaker 5: they've got cash to cover the provision. The provision seems
Speaker 5: to be fairly well figured out, and their remediation is
Speaker 5: kind of proceeding in line with plan according to provisions
Speaker 5: that they've made.
Speaker 2: And they wouldn't be they wouldn't be dependent on them
Speaker 2: when going back to student housing, They wouldn't be dependent
Speaker 2: on this market.
Speaker 1: It sounds like that.
Speaker 5: Model works, Yeah, that's right, Like not like the kind
Speaker 5: of unite or or worker might be who are absolutely
Speaker 5: locked into that market.
Speaker 3: Now.
Speaker 5: I mean, these guys are absolutely kind of ambivalent about
Speaker 5: about who the who the person is who's moving into
Speaker 5: that accommodation. But it's just if you want to build
Speaker 5: lots of low cost flats in city centers, and then
Speaker 5: these guys are are they kind of go to And
Speaker 5: so I think you know that obviously, you know, we've
Speaker 5: spoken about politics, and you know how much may or
Speaker 5: may not change, But there's certainly a lot of appetite
Speaker 5: energy around hitting these you know, these housebuilding targets again.
Speaker 5: And and I think that you know that that's got
Speaker 5: to be an opportunity for what Kin Jones and and
Speaker 5: a lot of the housebuilders started to recover around Q
Speaker 5: four last year. You've seen a lot of them up
Speaker 5: what fifty sixty percent from their lows, and what can
Speaker 5: Jones really hasn't done. It hasn't done a great deal
Speaker 5: over that time period.
Speaker 2: You would have thought, Adam that the new government, in
Speaker 2: all the talk about house building under this government and
Speaker 2: changes to planning, except it would have been exactly the
Speaker 2: kind of thing that would have been your your catalytic
Speaker 2: shift for.
Speaker 1: What can Jones.
Speaker 3: Yeah, I think I think you're right, Marret.
Speaker 5: And actually, since you know, since the morning of when
Speaker 5: we all woke up with the new government things. What
Speaker 5: can Jones' share price has started to move, so I
Speaker 5: think you know that that could be something that's bringing
Speaker 5: more attention to the story.
Speaker 1: Okay, we don't we don't spend we've spent too much
Speaker 1: time on in with your stocks.
Speaker 2: But just tell me, is there anything new in their
Speaker 2: portfolio that you're particularly didn't in anything you come in recently?
Speaker 5: Well, those are those are two of our recent holdings.
Speaker 5: I mean, there's there's plenty of stuff on my on
Speaker 5: my desk. Some of your listeners might be familiar with
Speaker 5: you GOV.
Speaker 1: So they've everywhere everyone's familiar with you GOV.
Speaker 3: Couple of weeks.
Speaker 5: Yes, so they've had yeah, obviously had had a kind
Speaker 5: of whopper profit warning.
Speaker 3: And so that's you know, that's precisely the.
Speaker 5: Type of thing that falls into our into our screen,
Speaker 5: comes into our bucket. And so the work that you
Speaker 5: know that that we then do is to work out
Speaker 5: despite the share price declines, is it uh?
Speaker 3: Is it cheap?
Speaker 5: Because you can have companies that fall eighty percent and
Speaker 5: are actually not that cheap, and in the case of
Speaker 5: you GOV, actually it's probably it's probably not that cheap
Speaker 5: yet despite the declines, and then we you know, we
Speaker 5: have to also have a thing about the risk factors.
Speaker 5: So you Gov's got quite a lot of debt on
Speaker 5: the balance sheet. Bart's having said that they've been fantastically
Speaker 5: cash genitive historically, so that's you know, probably not an issue.
Speaker 5: They've still got their kind of quality growth investor base
Speaker 5: on the shelter register, and that's something that we look
Speaker 5: at because often the best situations for us aware the
Speaker 5: quality growth people are having to sell out because it
Speaker 5: no longer fits their profile, fits their mandate, and the
Speaker 5: value investors are just starting to get interested. In those situations,
Speaker 5: you've got a lot more sellers than buyers, and so
Speaker 5: you know, for us, that's the kind of classic capitulation
Speaker 5: event that we look for in terms of buying opportunities,
Speaker 5: where the outgoing investor might might say, well, look, you know,
Speaker 5: we recognize there is value here, but for you know,
Speaker 5: for emotional reasons or for reasons of our mandate or
Speaker 5: whatever it might be, we just have to get out
Speaker 5: of this at any price. And you have kind of
Speaker 5: you know, indiscriminate selling at those lows.
Speaker 2: And adam on a one macro level, so we were
Speaker 2: expecting interest rate cuts soon that as you we get
Speaker 2: across the board for small caps, right particularly, Yeah, yeah,
Speaker 2: so that's good. Is there anything that you look at
Speaker 2: and you think, well, Okay, the environment looks good, interest
Speaker 2: rates will for better stability in the UK, some signs
Speaker 2: from international investors that they might shift into UK small caps.
Speaker 1: This all looks great.
Speaker 2: Is there anything in your mind that you think could
Speaker 2: just derail that rather attractive story.
Speaker 5: I think that you know that the big the big
Speaker 5: car crashes are always the ones that you're not expecting.
Speaker 5: So you know, look at COVID or whatever it might be,
Speaker 5: and small caps they will always do better in an environment.
Speaker 5: Whether is that optimism whereas there is that economic growth.
Speaker 5: So if there was you know, something out of left
Speaker 5: field that came along and and you know, broke up
Speaker 5: that party, then then I think that we would see
Speaker 5: small caps underform large caps, and we would see probably
Speaker 5: some underperformance of value because value stocks are often seen
Speaker 5: as low quality. Then grows stocks, and you know, in
Speaker 5: tough environments, it's it's larger caps, and it's the it's
Speaker 5: the kind of grow more growthy stuff that that that performs,
Speaker 5: and the and the value stuff and the smaller stuff
Speaker 5: that's seen as riskier underperforms, and you.
Speaker 2: Very obviously avoid anything in any of the overpriced tech sectors.
Speaker 2: So I think AI in there, if there were, for example,
Speaker 2: the a lack of balance in the US market, which
Speaker 2: is already it's something of him extremely gets even more extreme,
Speaker 2: you end up with a proper AI bubble, or that
Speaker 2: you could argue it's definitely an AI bubble already, and
Speaker 2: then you end up with a crash in that sector
Speaker 2: that would spread out across the board, wouldn't it.
Speaker 5: Yeah, I think there would be ripple ripple effects, yeah.
Speaker 2: Which would leave you a wonderful opportunity to pick up
Speaker 2: some value in tech areas where you wouldn't have gone
Speaker 2: over the last few years.
Speaker 3: Yeah. Absolutely.
Speaker 5: I mean, we're pretty agnostic about the sector that we
Speaker 5: that we invest in as long as we can, as
Speaker 5: long as we can understand it. And there are you know,
Speaker 5: there's a company called Alpha Wave, for example, which has
Speaker 5: come across our screen that serves that semiconductor market which
Speaker 5: is kind of arguably been kind of sliding into into
Speaker 5: value territory for kind of specific reasons. But yeah, we're yeah,
Speaker 5: we're if we can, if we can get our heads
Speaker 5: around the around the business model and and and the tech.
Speaker 5: Then we're pretty agnostic about sector.
Speaker 2: Okay, so you're not You're not not in any particular
Speaker 2: sector because well, you say there's things you don't understand,
Speaker 2: and you know, a good value investor always says, I
Speaker 2: never invest in what I don't understand.
Speaker 1: So there must be areas where you yea, as I
Speaker 1: couldn't go on that.
Speaker 5: Yeah, yeah, yeah, So I mean, I guess there are
Speaker 5: some more specialist things, like you know, kind of some
Speaker 5: some biotech type stocks. Perhaps we for us, you know,
Speaker 5: reats were an area that we decided a few years
Speaker 5: ago we wanted to do a bit more work on,
Speaker 5: So my colleague and I went off and spent a
Speaker 5: bit of time on various kind of training courses and
Speaker 5: talking to real estate invest so we could be comfortable
Speaker 5: that we had a way of kind of looking at
Speaker 5: reats and analyzing those business models. So that for us
Speaker 5: was a sector that we brought within our area of competence.
Speaker 5: So yeah, it's it's it's it's a question of working
Speaker 5: out whether the opportunity's big enough to make it worth
Speaker 5: going out.
Speaker 1: Understanding it skilling up.
Speaker 2: Yeah, Okay, what about Adam, what about cryptocurrencies? Because you
Speaker 2: know at the end of this podcast, I always ask
Speaker 2: if someone over a ten year period would hold gold
Speaker 2: or cryptocurrencies, and mostly people are ready for this one,
Speaker 2: and it just to warn you, we do now have
Speaker 2: a couple of very enthusiastic bitcoin people who follow us
Speaker 2: on Twitter and spend a lot of time explaining to
Speaker 2: me how stupid I am and how stupid all my
Speaker 2: guests are because they don't understand. If only we would
Speaker 2: educate ourselves or read this or read that, or read
Speaker 2: this or read this, then we would understand the amazing
Speaker 2: opportunity there. And of course it's don't I always say
Speaker 2: it's not. You know, we're not ideologically against cryptocurrencies or
Speaker 2: ideologically against bitcoin, and we've both owned bitcoin over over
Speaker 2: the general cycles, et cetera. Well, of course I keep
Speaker 2: losing my code, so I don't really count. Anyway, We're
Speaker 2: getting a lot of criticism for not understanding bitcoin. Probably,
Speaker 2: So here's the question to you, what would it be
Speaker 2: a Rotenia period? Would it be a bitcoin or would
Speaker 2: it be gold? You can't have anything else. You can't
Speaker 2: have any of your small caps. You're not allowed to
Speaker 2: take any of this value.
Speaker 1: In with you. You're only allowed one of these.
Speaker 3: I would have Gold.
Speaker 1: Doing this on purpose just to make me a hate target.
Speaker 3: Sorry, sorry, Marion.
Speaker 5: I totally get the argument for bitcoin, and you know,
Speaker 5: I think it's a kind of political kind of stance,
Speaker 5: isn't it about manipulation and money supply, about trust of governments,
Speaker 5: And you know, I think you know, bitcoin is because
Speaker 5: of the limited supply. Is you know, if you're going
Speaker 5: to buy a cryptocurrency needs to be one with limited
Speaker 5: supply basically, So you know, Bitcoin stacks up on that basis.
Speaker 5: And I also buy the argument that know that because
Speaker 5: of the because that limited supply, maybe you should just
Speaker 5: put a fraction of your net worth and the bitcoin
Speaker 5: because it could go exponential and you know in the
Speaker 5: hedge and all the rest of it. So I do
Speaker 5: get the kind of bitcoin argument. But I guess if
Speaker 5: you go to a kind of extreme, you know, end
Speaker 5: of civilization kind of point, which is kind of you know,
Speaker 5: where you get to if you if you believe that
Speaker 5: all currency is, you know, fear currency is really worthless,
Speaker 5: then I you know, I think I would rather have
Speaker 5: something that I didn't need to be able to log
Speaker 5: into the internet, you know, to to to access It's.
Speaker 2: Interesting that's where that is where I always end up
Speaker 2: when when I when I get into it. If these
Speaker 2: are if gold and bitcoin are both effectively designed for
Speaker 2: the same thing, designed to compensate you for the fact
Speaker 2: that fear currencies are of no use to anybody over
Speaker 2: the long term, then you probably want the one that
Speaker 2: doesn't require an infrastructure around it to work.
Speaker 3: I think so if you go bars in the basement, that's.
Speaker 1: The way to he you've got gold bars in your FACETK.
Speaker 1: I'm not going to tell anyone. I'm not going to
Speaker 1: tell anyone where you live. Adam, thank you so much
Speaker 1: for joining us today.
Speaker 3: Thanks Maren, really fun.
Speaker 2: This episode was hosted by me Maren Suset Whatever was
Speaker 2: produced by some ASIDI production support and sound designed by
Speaker 2: Moses and special thanks of course to Adam Raightley and
Speaker 2: as ever to John. One more thing I want to
Speaker 2: say to you This week from September, John and I
Speaker 2: are going to go a little bit more personal finance.
Speaker 2: We are going to once a week take one personal
Speaker 2: finance topic which we hope will be suggested to us
Speaker 2: by a listener and discusses for ten fifteen minutes, give
Speaker 2: our give our ideas on what you should do, or
Speaker 2: what you might want to think about a subject, be
Speaker 2: that taxes, mortgages, savings, SIPs, ices, anything personal finance related.
Speaker 1: Write in let us know what you want to hear
Speaker 1: about