Speaker 1: John Melton, how do you enjoy that king speech? There
Speaker 1: were no tax cuts in it, so I figured it
Speaker 1: might not have been for you.
Speaker 2: It's true I had my popcorn ready, but all I
Speaker 2: was doing was throwing it at the screen.
Speaker 1: Oh all the disappointing, wasn't it. I'll tell you it's
Speaker 1: really disappointed the leasehold lobbyists. You know, there's been this
Speaker 1: big pilara, and.
Speaker 3: Quite rightly about the way that the UK still has
Speaker 3: this absurdly feudal type of property ownership, whereby instead of
Speaker 3: instead of buying your house and then actually owning your house,
Speaker 3: you think you buy your house, but instead of.
Speaker 1: Actually owning it, all you have is a very very
Speaker 1: long tenancies at lease hold, and then you have the
Speaker 1: right to live, to occupy the house, live in, occupy
Speaker 1: the house for maybe ninety nine years, maybe twenty five years.
Speaker 1: You're really really lucky nine hundred and ninety nine years,
Speaker 1: but you don't actually own it. The building and the
Speaker 1: land belongs to somebody else. Nuts.
Speaker 2: This always baffled me because obviously, coming from Scotland, that's
Speaker 2: not the system up.
Speaker 4: There, and things better in Scotland.
Speaker 2: Modelly superior, yes, but no, but's it was weird kind
Speaker 2: of coming down and then I mean, thankfully, by the
Speaker 2: time I ended up buying a property down here, there
Speaker 2: was the share of freehold saying in their first flat
Speaker 2: in Kent was a share of freehold one in a
Speaker 2: thwld block and that was absolutely fine because it was
Speaker 2: basically the same as when we had the tenement in Glasgow.
Speaker 2: It was a similar kind of arrangement. You all own
Speaker 2: your bet and your chap in for the running course.
Speaker 2: So the police hold things always seemed so just ridiculous,
Speaker 2: and also nobhere else in the world has it. I
Speaker 2: don't think no.
Speaker 1: I mean, it's just it's a sort of hangover of
Speaker 1: a feudal system, right, but it's really unpleasant for people
Speaker 1: who think that they actually own their house or the flat,
Speaker 1: and as many flats are lease hold the houses although
Speaker 1: actually you know there are there are five million plus
Speaker 1: houses homes should I say in the UK the release
Speaker 1: old twenty percent of the housing stock and thirty percent
Speaker 1: of those houses. So people think they own a house,
Speaker 1: but they don't own a house. And then you get
Speaker 1: stuck with all these things. You're at the mercy of
Speaker 1: someone else when it comes to service charges and you know,
Speaker 1: one of the things I noticed. One of the things
Speaker 1: in the king speech about making things less horrible for
Speaker 1: leaseholders is that the freeholder or managing agent, assuming this
Speaker 1: all goes through, when they manage the building insurance, they're
Speaker 1: not allowed to take a commission.
Speaker 4: Can you they can take a commission.
Speaker 1: In the first place.
Speaker 2: Just incredible, I know.
Speaker 1: And then there's ground rent. And obviously people have been
Speaker 1: talking about ground rent for a while now because during
Speaker 1: the very low interest rate period, the housing developers found
Speaker 1: there's an absolutely amazing way to create a stream of income.
Speaker 1: So you make new houses, build new houses, horrible new
Speaker 1: houses in the main, or horrible new flats, whatever, and
Speaker 1: then you make the leasehold. Then you attach a ground
Speaker 1: rent to them, and you say that that ground rent
Speaker 1: is going to escalator, is going to double every ten
Speaker 1: years or whatever it is, or it's going to go
Speaker 1: up with with TPI or RPI, etc. And then a
Speaker 1: very low interest rate environment, that stream of cash is
Speaker 1: incredibly valuable, so you flog it onto an investor somewhere,
Speaker 1: and then when the lease holder suddenly wakes up and goes,
Speaker 1: oh my god, this cost is outrageous and what do
Speaker 1: you mean, I don't own the land, et cetera, et cetera.
Speaker 1: They have to go and negotiate with some random investor
Speaker 1: rather than with the housebuilder who sold them house. So
Speaker 1: a lot of things that absolutely scandal has been for years.
Speaker 1: So there is provision in the King speech to try
Speaker 1: and improve it, but extraordinarily not to get rid of it,
Speaker 1: just to improve it.
Speaker 2: Yeah, I mean, I'm assuming that the it's because obviously
Speaker 2: this has been going on for a while, and they
Speaker 2: have stopped houses from being built with leasehold, haven't they,
Speaker 2: Because it was a big that was a massive scandal
Speaker 2: a few years ago.
Speaker 1: Not Yet's that's in there, that's in the King speech
Speaker 1: that they will prevent houses from being sold le sold.
Speaker 1: And last year I think about one percent of new
Speaker 1: built houses were sold lease sold.
Speaker 4: At the peak.
Speaker 1: In twenty sixteen, twenty seventeen something like that. It was
Speaker 1: well over ten percent now.
Speaker 4: But it's not possible.
Speaker 5: Yeah, the.
Speaker 1: It's speechless again. It doesn't happen very often.
Speaker 2: It's just ragion. I mean, especially the house thing. The
Speaker 2: house I mean people people generally have been aware that
Speaker 2: flats can be lease hold, and there's an element there
Speaker 2: where I guess you know a lot of people they
Speaker 2: think that a flat isn't going to be there, you know,
Speaker 2: place for life and all that sort of stuff. But
Speaker 2: I do seem to remember the houses generally we're not
Speaker 2: sold lease hold, and obviously there's something about the house.
Speaker 2: It's different because basically houses are self contained unit. So
Speaker 2: you're kind of like, how on earth can it be
Speaker 2: the case that I only own the house for you know,
Speaker 2: and in these cases it was one hundred and twenty
Speaker 2: five years rather than the nine hundred ninety nine year least.
Speaker 2: I mean, some British should have, you know. I mean
Speaker 2: it comes back to this thing where you've got more
Speaker 2: consumer rights if you buy a Telly than you do
Speaker 2: when you buy a house. It's absolutely unbelievably wrong.
Speaker 1: But you know, we're not long now and we're going
Speaker 1: to be in a situation where an ordinary tenant has
Speaker 1: more rights than a lease holder.
Speaker 2: Yeah, that's good if you look.
Speaker 1: At the other stuff that was in the king speech.
Speaker 1: But the Rental Reform Bill et cetera says that do
Speaker 1: you know, we get to that landlords aren't going to
Speaker 1: be able to refuse, families aren't going to be able
Speaker 1: to refuse.
Speaker 4: Pets, et cetera.
Speaker 1: Et cetera. But I was reading a Witch magazine report
Speaker 1: on leasehold from a few years ago, which said that
Speaker 1: sometimes there's a clause in the lease your long least
Speaker 1: that you think in the house that you think you own,
Speaker 1: that says that you can't have a pet. And what
Speaker 1: they found a case where someone was charged two hundred
Speaker 1: and fifty four pounds to be allowed to keep their
Speaker 1: dog in what they believed to be their own house.
Speaker 2: Yeah, no, I've seen that. I was recently helping Someboday
Speaker 2: host and that is that exact thing came up. The
Speaker 2: person had pets, and this was the buyer properly. Again,
Speaker 2: it was a kin, a sort of a houts rather
Speaker 2: than a fly, and you'd be allowed to and in
Speaker 2: the terms of the lease. But then there's also things
Speaker 2: like not being able to hang out washing it when
Speaker 2: the in certain parts, you know, especially with fly. I mean,
Speaker 2: I get that there's a sort of old fashion thing
Speaker 2: about having you know, jumples hanging on your balcony and
Speaker 2: this looks a bit you know, scruffy or whatever, but yeah, exactly,
Speaker 2: it's it's just unbelievable.
Speaker 1: Well, the one that I'm interested in and at the moment,
Speaker 1: in terms of you know, is that does a tenant
Speaker 1: have more power than a leaseholder? Is it? One of
Speaker 1: the things that Labor has been talking about is saying
Speaker 1: that under rental reform, landlords won't be able to prevent
Speaker 1: tenants making alterations to the interiors of houses. And I
Speaker 1: don't know about the exteriors, but you know, of course
Speaker 1: leaseholders can't probably walls around the place, can't build conservatory,
Speaker 1: cutbul is, shed, cant or anything like that without going
Speaker 1: to the freeholder and adultsking. So you know, here's that
Speaker 1: really interesting and shift in balance anyway, scandalous, remain scandalous,
Speaker 1: that things are getting better, will get better, but surely
Speaker 1: a much better thing to do, listen to me, governments,
Speaker 1: A much better thing to do would be simply to
Speaker 1: get rid of the whole thing and replace it with
Speaker 1: common hold or as John says, share freeholder of share freehold,
Speaker 1: which works perfectly well, and why wouldn't it.
Speaker 2: And obviously, if you're a buyer, just don't buy one
Speaker 2: any these things.
Speaker 1: Just don't buy one, literally, don't buy one. And whatever
Speaker 1: you do, don't buy one without or don't buy anything
Speaker 1: without really asking all these questions, because of course people
Speaker 1: don't know the questions to ask, do they? I mean,
Speaker 1: why would you think when you went by a new
Speaker 1: help that would not really belong to you? And why
Speaker 1: would you think that your ground that would be this
Speaker 1: thing called ground rent that would go up and up
Speaker 1: onever every year? And why would it ever occur to
Speaker 1: you that the person who old the land underneath you
Speaker 1: was also the person taking commission on your insurance premians.
Speaker 1: I mean, for heaven's sake, you know you have to
Speaker 1: know the questions to ask, right, why would you know
Speaker 1: to ask those? So you know, ask a lot of questions.
Speaker 1: But in the end, don't buy the stuff. Don't buy
Speaker 1: the stuff. And as ever, the way to change things
Speaker 1: is to put pressure on the providers to produce something different, Right, John,
Speaker 1: give me a personal finance tip for the week gone. Well,
Speaker 1: it's a good one, a really good one.
Speaker 2: This is one of your classic ones. It's uh. People
Speaker 2: are the house builders are offloading those sticky last few
Speaker 2: houses on the plot, then they need to get read
Speaker 2: off and they offer massive incentives. In fact, call the
Speaker 2: one for a bloomberg, colleagues. I think one in five
Speaker 2: houses now up from one in ten about a year ago,
Speaker 2: is coming with a free bet and among those freebies
Speaker 2: occasionally as much as a Tesla get a free car
Speaker 2: when you buy a house, John, Yes.
Speaker 1: Do you want to rethink the word freebies?
Speaker 2: No, it's a free car. I mean what I'm just
Speaker 2: I'm buying a house and you know I'm getting like
Speaker 2: forty grand worth of Tesla throwing in surely because the
Speaker 2: house builders are nice people.
Speaker 1: Yeah, I don't like the house builders, so I don't
Speaker 1: believe that. Do you know what I think?
Speaker 2: What do you think, ma'am?
Speaker 1: I think you should say no, thank you very much.
Speaker 1: I don't want a Tesla. I have a perfectly good
Speaker 1: car of my own already, but I would like it's
Speaker 1: for you to take forty grand off the price of
Speaker 1: La Grabbians. Thank you very much.
Speaker 2: That's genius.
Speaker 1: Yeah, yeah, keep your Tesla.
Speaker 4: I'll take you the discount.
Speaker 5: It's true.
Speaker 2: Why would you ever buy a Tesla with our mortgage?
Speaker 4: Exactly?
Speaker 1: That's exactly it. What you're doing is buying a Tesla
Speaker 1: with a market I suppose some people do do that. Now, look,
Speaker 1: this is not the first time this has happened. Right,
Speaker 1: we predicted this. We said you and I in that
Speaker 1: podcast a while back were possibly in the column or something.
Speaker 1: We said, you'll know that things are getting nasty for
Speaker 1: the housebuilders when they start to offer you a free
Speaker 1: car because it happened. It happened. I was just checking
Speaker 1: to see when it last happened, to make sure that
Speaker 1: you and I don't weren't making stuff up because we
Speaker 1: don't like to do that. That's absolutely true that in
Speaker 1: two thousand and eight, the obvious year, several developers were
Speaker 1: giving giving away, giving away free coas with houses, and
Speaker 1: it was also the case in the US. For a
Speaker 1: found a particular case in the Midwest where if you
Speaker 1: bought one of their horrible houses or maybe nice houses,
Speaker 1: I don't know. American houses often look much nicer than
Speaker 1: our houses, you got a free Toyota Prius. Welcome to
Speaker 1: Maren Talk to Money, the podcast in which people who
Speaker 1: know the markets explain the markets, and marin Sunset Web.
Speaker 1: This week my conversation with Jonathan and Sante, fund manager
Speaker 1: at Chakara Investments. Jonathan started with Jacara Investments this year
Speaker 1: after taking a break from the industry in twenty nineteen.
Speaker 1: Before that, if you worked at Stewart Investors for fifteen
Speaker 1: years now Jakara, if you've not heard of. It used
Speaker 1: to be called Coopland Cardiff until August of this year.
Speaker 1: I spoke to Jonathan few days before the launch for
Speaker 1: his new fund, the Jakara Global Emerging Markets Opportunity Fund,
Speaker 1: which he is going to have hold twenty to thirties
Speaker 1: dogs and long term growth opportunities, hy quality growth opportunities.
Speaker 1: He's going to manage that along with the team of
Speaker 1: Paul that he brought over with him from Stuart Investor.
Speaker 1: So here is our conversation.
Speaker 4: Jonathan, thank you so much for joining us today.
Speaker 5: Oh thanks for asking me.
Speaker 1: Now.
Speaker 4: You and I haven't talked for a long time because
Speaker 4: you've been out of the industry for a while. So
Speaker 4: I wonder if we can just start by talking about
Speaker 4: why you've come back. Yeah, we'll put you back into
Speaker 4: this rather grubby industry.
Speaker 5: It's interesting for me personally because I love the job
Speaker 5: of analyzing and looking at companies, and I love that
Speaker 5: aspect and I always enjoyed it. I think when you've worked,
Speaker 5: or i'd worked before, you have to be quite careful
Speaker 5: about where you end up looking after clients' money. So
Speaker 5: I was looking, certainly for a couple of years for
Speaker 5: a place where I thought that I could fit. And secondly,
Speaker 5: my old team became available, and I know I've known
Speaker 5: these people for a long time, and that was really
Speaker 5: what entice because I thought we could do something really
Speaker 5: very good for our closky.
Speaker 4: It was finding somewhere where you felt that you could fit.
Speaker 4: And also you could bring your old team with you,
Speaker 4: so no need to get to know what train any
Speaker 4: new people anything dull like that.
Speaker 5: Yeah, we've been together for fifteen years, some of us,
Speaker 5: and we know each other, we know our strengths and
Speaker 5: our weaknesses, and we just hit the ground running, which
Speaker 5: was very important. But also I think the place was
Speaker 5: very important. I think I prefer small groups of people
Speaker 5: to large institutional setups, and that's what we had my
Speaker 5: last job, although we were inside a very large institutional setup,
Speaker 5: and so it had to be a place where you
Speaker 5: felt that you could preserve that or where we felt
Speaker 5: or I felt we could preserve that and just you know,
Speaker 5: be given autonomy to invest.
Speaker 4: Okay, so a team will work autonomously and inside the
Speaker 4: structure of Chakara.
Speaker 5: Yes, and Chika is a very small company, and so
Speaker 5: that is what was very attractive to me. You know,
Speaker 5: the owners, there's you know, three or four main owners.
Speaker 5: I sit a meter away from them. You know, if
Speaker 5: we've got any issues, I can ask and we will
Speaker 5: be come owners too. And I contrast that with a
Speaker 5: very large organization, which you know is fine for other people,
Speaker 5: but for me, I find that sort of personal interaction
Speaker 5: a lot more meaningful.
Speaker 4: Okay, well, let's talk down about what type of investing
Speaker 4: you and your team are going to bring to Chikara.
Speaker 4: I know a little bit about your history as an investor.
Speaker 4: What is it that makes what you and your team
Speaker 4: do slightly different to what other people do?
Speaker 5: Yeah, well, I think the background has We've been fortunate
Speaker 5: enough to learn from people that are very.
Speaker 4: Good at it, yeah, from the grades, and we were able.
Speaker 5: To absorb that and evolve it in some small measure ourselves.
Speaker 5: And we have very strong beliefs about what we're doing.
Speaker 5: We're very long term. We're very focused on the evolution
Speaker 5: of hundreds of millions of people in the developing world
Speaker 5: and then getting richer. It's something you don't hear about
Speaker 5: then getting access to more opportunities, and that's still happening
Speaker 5: and probably will happen in the next ten or twenty years.
Speaker 5: And then we're very focused on the sorts of companies
Speaker 5: that we will give our clients money to in our
Speaker 5: own money to in the long term, and they are
Speaker 5: a very small number of companies that we feel comfortable
Speaker 5: in that area giving our clients money to. So I
Speaker 5: think the difference is this very small number of companies
Speaker 5: and the fact and the beliefs that we have about investing.
Speaker 4: Yeah, I want to talk a lot about those companies,
Speaker 4: but let's talk briefly first about the emerging markets background.
Speaker 4: Today we don't talk enough about how much richer people
Speaker 4: are getting in this huge variety of countries. Actually, people
Speaker 4: talk about emerging markets are kind of a morphous blob,
Speaker 4: and of course there's absolutely nothing of the sort. So
Speaker 4: let's talk about a little bit about the background of
Speaker 4: that and why is it emerging markets as so much
Speaker 4: more attractive to you than developed markets.
Speaker 5: I think the distinction has broken down to some degree
Speaker 5: and between developed and emerging. So that may not be
Speaker 5: very helpful, but the last twelve years I've spent telling
Speaker 5: clients that the distinction was breaking down because at the
Speaker 5: company level, some of the best emerging market companies are
Speaker 5: in the developed world, and some of the best developed
Speaker 5: book but guess what they realize is growth over there,
Speaker 5: so they've gone in. So I think that distinction emerging
Speaker 5: markets was a marketing idea penned by the investment industry.
Speaker 5: Often you find that those are not very good investment ideas,
Speaker 5: and what we tried to do was make them a
Speaker 5: good of it, impose the sort of investment discipline that
Speaker 5: would kind of ensure that ensure that they would be
Speaker 5: that it could make acceptable returns for our clients. So
Speaker 5: I think that the distinction is breaking down. Firstly. Secondly, though,
Speaker 5: emerginy markets had a pretty bad, pretty mediocre decade, and
Speaker 5: we think, we have written a paper and why we
Speaker 5: think that is we think it was a governance failure
Speaker 5: and we think that the index emerginy Market INDETS was
Speaker 5: never built for investors. It's built as a unit of measurement.
Speaker 4: When you say governance failure, what do you mean.
Speaker 5: Well, you noticed back in really twenty ten eleven that
Speaker 5: at the top level the leaderships were changing. So the
Speaker 5: emerging market pitch, if you like, was in the eighties,
Speaker 5: has said pen by the funds management industry, was that
Speaker 5: essentially governance improves in some of these countries after the
Speaker 5: Second World War, and.
Speaker 4: When you say governance you referring to political governance or
Speaker 4: corporate governance.
Speaker 5: A good question. I think the first leads to the second.
Speaker 5: So there's an improvement in governance after the Second World War,
Speaker 5: the end of communism are eyed and the Dangiopling Report
Speaker 5: reforms in China, and you get better growth, and so
Speaker 5: there's an opportunity all of a sudden, you get better governance.
Speaker 5: So there's more companies that might actually be able through
Speaker 5: which you might be able to access that or opportunity.
Speaker 5: And that improvement means that you should buy equities, because
Speaker 5: equities are a growth. That was the idea behind it.
Speaker 5: That was the marketing pitch, if you like. There's a
Speaker 5: number of problems with that. First, the history doesn't go
Speaker 5: in five year fu management bonus cycles. It seems to
Speaker 5: operate in centuries and millennia. And so you've got you've
Speaker 5: got countries that with very interested in history, that are
Speaker 5: re emerging actually in many cases from being having been
Speaker 5: very dominant countries a thousand years ago. And those processes
Speaker 5: are a lot slower than the average from manager would like,
Speaker 5: and they're cyclical, they don't go in the straight line.
Speaker 5: And the second, as the seven twenty ten was that
Speaker 5: we noticed that governance was going backwards at the top level,
Speaker 5: so he had changes of leadership in places like Turkey
Speaker 5: and South Africa for a few and then ultimately in
Speaker 5: China where you had to question whether the rights of
Speaker 5: shareholders were going to be more or less undermined going
Speaker 5: forward in the next ten years. So we had a
Speaker 5: problem that far back with it, and what that meant
Speaker 5: at the company level is that the companies that we
Speaker 5: would find to be acceptable, they're refewering them. The other
Speaker 5: beauty of emerging markets was that if you had this
Speaker 5: governance improvement, there would be more and more companies to
Speaker 5: invest in that would be listing. You'd have a very
Speaker 5: dynamic sort of positive But because if the governance at
Speaker 5: the top level is deteriorating, then the companies available become
Speaker 5: fewer and fewer for us. So we had to do
Speaker 5: a number of things about that told everybody we started
Speaker 5: looking more globally for businesses because of the world is
Speaker 5: merging anyway, so you might have the governance and the
Speaker 5: brands in a global company that has been in emerging
Speaker 5: in developing economies for decades, and we found them all
Speaker 5: over the place. Actually and we close their funds as well.
Speaker 5: So in twenty thirteen we put a front end load
Speaker 5: on our pool funds, which were very popular, and we
Speaker 5: started to give the money back. And part of that
Speaker 5: was that the opportunities are gett less. The obviousies are more.
Speaker 5: I'd love to run more money for you, but we're
Speaker 5: not going to go down the quality scale in terms
Speaker 5: of companies are going to buy and the opportunity. We
Speaker 5: think that the government's getting worse. So I think that's
Speaker 5: been the problem for ten years.
Speaker 4: And it's an interesting when, isn't it, Because the industry
Speaker 4: had to learn again that GDP growth doesn't automatically transfer
Speaker 4: into an equity bill market. And I'm still reading even
Speaker 4: now after I don't know how many cycles of this,
Speaker 4: I'm still reading papers that tell us tell me but
Speaker 4: because there's economic growth in the country, there will be
Speaker 4: a top market boom and said country and it's simply
Speaker 4: not true, because of governance issues, because of evaluation issues,
Speaker 4: with all these things that we've been discussing.
Speaker 5: Yeah, the pie gets bigger, but who benefits? Yeah, so
Speaker 5: if you're not going to be one of the people
Speaker 5: that benefits, so your clients are going to benefit. It
Speaker 5: doesn't matter how big the pie is. Yeah, some societies
Speaker 5: are set up for reasons of history, to benefit a
Speaker 5: very small number of people. In fact, arguably the whole
Speaker 5: reason countries are poor. And I've spent my whole life,
Speaker 5: having grown up in Ghana in the seventies, I've spent
Speaker 5: my whole life wondering about this. The whole reason people
Speaker 5: these countries are poor after the Second World War is
Speaker 5: because a small group of people decided not to share
Speaker 5: opportunity with the rest. It's sufficient opportunity, right, You give opportunity,
Speaker 5: then the economy grows bigger. If you give access to education,
Speaker 5: access to the jobs market, access to healthcare, and guess what,
Speaker 5: You're going to have more people that are viable and
Speaker 5: are productive. So I think that that the emergency markets.
Speaker 5: Although the initial said marketing pitch where the things are
Speaker 5: getting better and they it appeared to be, Actually it
Speaker 5: was a failure post World War two and post the
Speaker 5: colonial sort of the era that led to that opportunity.
Speaker 5: So the park can be as big as you like,
Speaker 5: but you might not have access to it in many
Speaker 5: of these countries. And that's why we spend so much
Speaker 5: time thinking about the who we're giving our money to
Speaker 5: in these countries.
Speaker 4: And you feel you're part of you coming back to
Speaker 4: the market now, do you feel that there's an improvement
Speaker 4: in governance across the board that you can now open
Speaker 4: up opportunities for funds like kills.
Speaker 5: I feel like the deterioration stopped, so that's something. And
Speaker 5: there are a very small number of companies where I
Speaker 5: think we can make acceptable returns for ourselves and our clients.
Speaker 5: I won't go further than that. I'm not I said
Speaker 5: I was fashioned in Scottish fund management. I'm not a
Speaker 5: person that we're not the people that go out there
Speaker 5: and buying this drum. I think for me, I can
Speaker 5: put my own money into it now because there's accepta
Speaker 5: and I don't have to look as much globally for businesses.
Speaker 5: So I think there's an acceptable set of returns that
Speaker 5: can be made in the next decade with quite. We
Speaker 5: don't with quite, you know, with not too much improvement.
Speaker 5: We try not to make investment decisions for clients and
Speaker 5: ourselves on the basis that politicians are going to act
Speaker 5: in the interests of the whole. We try not to
Speaker 5: do that because we haven't seen that for decades anywhere,
Speaker 5: actually almost anywhere, So we try not to do that,
Speaker 5: but just with the deterioration stopping. For example, you know,
Speaker 5: a few years ago you had the head of Samsung
Speaker 5: and the leader of Samson going to prison. That is
Speaker 5: an improvement. You've had the replacement of leadership in South Africa.
Speaker 5: You've had a leader in India who is able to
Speaker 5: galvanize some aspects of that society so that the opportunity
Speaker 5: that was always present in India might be realized. Although
Speaker 5: there's always risk. So there are some improvements going on
Speaker 5: and there are some that are standing still. I think
Speaker 5: people have the idea that an authoritarian regime will allow
Speaker 5: you to make very good returns over the long term
Speaker 5: in an index of equity. I think that's been put
Speaker 5: to bed again in many countries. I remember going to
Speaker 5: Ukraine fifty eight years ago and it was a huge country,
Speaker 5: huge resource opportunity, but there was no governance at all.
Speaker 5: And you know places that I guess like Russia has
Speaker 5: shown that time and time again that it doesn't matter
Speaker 5: that if the governance is bad so and authoritarian regimes
Speaker 5: tend to act in their own interest even more than
Speaker 5: democratic politicians because the downside for the mcgraty arguably. So
Speaker 5: I think there's recognition of those things, which is great
Speaker 5: because that's something that what didn't exist five years ago.
Speaker 5: There was too much optimism about authoritarianism, and there are
Speaker 5: even some apologies for it now. It's not that I'm
Speaker 5: criticizing those regimes per se. They have their own history,
Speaker 5: they have their own path that they've taken. I fortunately
Speaker 5: have to ask a much more narrow question, easier question
Speaker 5: to answer, which is how will I benefit from my clients?
Speaker 5: So it's much it's a much simpler question to answer
Speaker 5: than sort of judging and analyzing westernized subjective on a
Speaker 5: history that's thousands of years old. It's more how will
Speaker 5: I benefit in the next ten.
Speaker 4: What happens to the companies? Before we start talking about
Speaker 4: the types of companies that you look for, because I
Speaker 4: think that's probably the most interesting bit, Let's just zoom
Speaker 4: out a little to the global economy, because this is
Speaker 4: a pretty brave time to be coming back into the market,
Speaker 4: to look at the global markets and the global economic environment,
Speaker 4: global geopolitical environment in January and say, you know what
Speaker 4: I'm going I'm going to dive right back into this
Speaker 4: now probably what is one of the biggest inflection points
Speaker 4: that markets and economies have seen in our lifetimes. Right,
Speaker 4: it's with the inflation environment, the interest rate environment, deglobalization,
Speaker 4: all these things that we talk about constantly on this podcast.
Speaker 4: Right the next and ten years, look they look tough.
Speaker 5: Yeah, said, there's a number of things. Firstly, are our
Speaker 5: approach to investing means that we always do better when
Speaker 5: things are tough for clients. So I always say to clients,
Speaker 5: our business was built off of misery. So the first
Speaker 5: of the tech bust in two thousand, where Angus was,
Speaker 5: as far as I understood, was the only prime manager,
Speaker 5: it didn't lose significant amounts of client capital.
Speaker 4: Angus Tunneck by the way, for listeners not familiar with
Speaker 4: the history.
Speaker 5: Here, yeah sorry. And the global financial crisis where we
Speaker 5: once again showed that we lost capital, but far less
Speaker 5: than everybody else. So bad times aren't necessarily the way
Speaker 5: that we approach investment aren't necessarily bad times for us.
Speaker 5: There are times to you know, not prove that you
Speaker 5: know the good companies, and good companies do better in
Speaker 5: tough times because they tend to have not been near
Speaker 5: bankruptcy and they have more capital to expand they tend
Speaker 5: to have a mindset where they understand that. The second
Speaker 5: thing to say is that you talk about all of
Speaker 5: these problems their globals, but we're emerging market people. We
Speaker 5: see a crisis every other year somewhere, right. It's so
Speaker 5: for us, this is quite normalized inflation going from zero
Speaker 5: to twenty percent. It's for us, it's not a difficult
Speaker 5: The finding says we've been very skeptical about the global
Speaker 5: policy framework, monetary policy framework for decades, and I think
Speaker 5: it started with LTCM personally, where they bailed out the
Speaker 5: hedge fund and gave the message to everybody that you
Speaker 5: can take the gloves off, you can take as much
Speaker 5: risk as you like, and we're going to underwrite credit.
Speaker 5: So we've been expecting inflation quite a long time as
Speaker 5: if to prove that we're not our forecasts. You know,
Speaker 5: we're not a good time as a forecast. So a
Speaker 5: lot of the companies that we invest in, because they
Speaker 5: are in volatile environments anyway, tend to be ones that
Speaker 5: should do okay in a higher inflation or a higher
Speaker 5: inflation low growth environment. You see all these consumer staples
Speaker 5: companies moaning about about cost of the cost of living.
Speaker 5: All this stuff. That's fine, but they are the cost
Speaker 5: of living. You do sometimes wonder whether they are, whether
Speaker 5: they mean what they say. They quite like inflation. I
Speaker 5: remember a company we used to invest in for many
Speaker 5: years in South Africa, So Africa always had inflation about
Speaker 5: four or five percent, and I remember meeting the gentleman
Speaker 5: that ran it. It was a consumer stables coming, and he
Speaker 5: just said, look to me, he said, inflation makes us
Speaker 5: look like geniuses. I don't have to do anything. I
Speaker 5: just put my prices up. Five percent of my costplace
Speaker 5: is relatively fixed. They've got a bunch of warehouses, and
Speaker 5: so those sorts of companies should do better. Some of
Speaker 5: the other tailwinds around global growth have always been questionable
Speaker 5: as well for years. I mean, the West is hugely indebted,
Speaker 5: both at the government level and at the private sector level,
Speaker 5: and essentially's creating inflation. I would argue to remove debt
Speaker 5: or to reduce debt. So those have been present for
Speaker 5: I'd say at least fifteen years those issues.
Speaker 4: So you've been expecting the environment that we're in now
Speaker 4: for a while, and you'd expect this relatively high inflation
Speaker 4: dynamic across the West to continue.
Speaker 5: It's a normalized situation for me, And if I think
Speaker 5: about the themes and mac Creek enormous, if you want
Speaker 5: to call it, I would have thought inflation would have
Speaker 5: read its head earlier. They just had a huge tail
Speaker 5: in from the gains from trade and from technology. So
Speaker 5: I think this is a normal situation. I think it's
Speaker 5: just that some of those chickens have come home to roos.
Speaker 4: There's no.
Speaker 5: Politicians aren't and populations aren't. But in emerging economies it's
Speaker 5: a slightly different story. I mean, populations are used to
Speaker 5: the idea that a bank will go bust and take
Speaker 5: all your money. For example, they used to this right
Speaker 5: because they've seen it within living memory. It's wiped out
Speaker 5: middle classes across Latin America and also in Africa, so
Speaker 5: they're used to the idea that there's a predatory elite.
Speaker 5: When you look at Transparency International's work and corruption perceptions,
Speaker 5: these are normalized expectations and they're used to very volatile
Speaker 5: operating environments. So I think it's again just coming from
Speaker 5: our corner of the world, well many billion people in
Speaker 5: the world. I don't think it's necessarily something that's unusual
Speaker 5: for us. It's more unusual for in the West.
Speaker 4: Perhaps in the last to say you're more equipped. Let's
Speaker 4: talk then about the types of companies that you're looking
Speaker 4: up for. You said, there's a very small number of
Speaker 4: these companies. What are they like?
Speaker 5: We tried to describe it with three words, which is who,
Speaker 5: what and how? Who is who are giving your money to?
Speaker 5: So we look at the history of often families, sometimes
Speaker 5: managers are people that we giving up money to. And
Speaker 5: some of these histories go back hundreds of years, which
Speaker 5: is remarkable, and we tried to weigh up evidence of
Speaker 5: wrongdoing and evidence of stewardship, and we try to take
Speaker 5: a view on who we're going to give the money to.
Speaker 4: So you're looking at the long term history of the
Speaker 4: company on the basis that creates the current culture of
Speaker 4: the company.
Speaker 5: For a number of reasons, we're often investing with families.
Speaker 5: You know, families have done something bad to minority shaholders
Speaker 5: or other stakeholders in the society twenty or thirty years ago.
Speaker 5: They can do it again quite easily under stress. And
Speaker 5: the biggest issue in emerging markets is having to sell
Speaker 5: after your share price falls, and if you have a
Speaker 5: low quality, what we call a low quality company and
Speaker 5: the share price falls fifty percent and something terribles happened,
Speaker 5: You have to sell and destroy your client's capital, whereas
Speaker 5: if you have a very good company, you have confidence
Speaker 5: in in which you have confidence, so you can buy
Speaker 5: more and you can be happy. We can't forecast the future,
Speaker 5: but we it's this having to sell emerging markets when
Speaker 5: it's already lost to you a lot of money. We
Speaker 5: would hope that most of our companies, as we were
Speaker 5: in two thousand and nine, we were very happy because
Speaker 5: we knew that we could buy more and we had
Speaker 5: a good chance of making a sceptable return. So we're
Speaker 5: going to make fear of those mistakes. So that but
Speaker 5: who is most important for that? It's really interesting work
Speaker 5: because I said, we're going back into history and we're
Speaker 5: looking at all kinds of information that the financial markets
Speaker 5: tends to often ignore.
Speaker 4: I suspect, can you give us an example if.
Speaker 5: You look at the Tartar Group, for example, in India,
Speaker 5: If you really want to think about why that company
Speaker 5: operates as best it can, and there's no such thing
Speaker 5: as a perfect company, of course, in as ethical way
Speaker 5: as it can, you actually have to go back to
Speaker 5: zoroast the Zoroastrian religion, which goes back thousands of years.
Speaker 5: The Majei in the Nativity story was Zoastrian priests, and
Speaker 5: there's a metaphor there about handing over a religious idea
Speaker 5: of of looking after people looking after others in that story.
Speaker 5: So if you really want to go back, you can
Speaker 5: go back all that way and then you can see
Speaker 5: how that plays out today. Now that doesn't mean that
Speaker 5: the company doesn't make mistakes, but behind it, what you
Speaker 5: have is a confidence in that group that if the
Speaker 5: wrongdoing happens, that it will be addressed, or that if
Speaker 5: fundamentally it's built on an ethical system that's trying to
Speaker 5: take advantage of a huge growth environment India, but not
Speaker 5: in a way that is undesirable from a legal point
Speaker 5: of view, from an ethical point of view. So something
Speaker 5: goes wrong in a company and it falls fifty percent,
Speaker 5: if you have that knowledge, you're more likely to be
Speaker 5: able to buy that company. So that's the most obvious.
Speaker 5: But there are many groups in long histories, and sometimes
Speaker 5: I was looking at a Brazilian company the other day,
Speaker 5: which goes back to nineteen sixties, for example, and that's
Speaker 5: a fair amount of it's not thousands of years, but
Speaker 5: that's when the company was founded.
Speaker 4: And get a sense of the culture.
Speaker 5: It's the and the same families are running it now
Speaker 5: and it's decisions that they made. Brazil's a pretty dirty pond,
Speaker 5: as was exposed by the petrop our scandal. And so
Speaker 5: if you're sitting owning a share in a company which
Speaker 5: could be exposed for let's say, corruption and bribery and
Speaker 5: fall seventy percent as a result within a week, you
Speaker 5: want to be pretty sure that the company you own
Speaker 5: is not one of those. And so that means there's
Speaker 5: a very small number of companies that you can be
Speaker 5: sure that that or you can have a high degree
Speaker 5: of confidence. So that's not the case.
Speaker 4: And will that Brazilian company make it into the portfolio?
Speaker 5: It Well, it became rather popular. We owned it for
Speaker 5: a decade. It became rather popular. But it's becoming less
Speaker 5: popular now, which is why I'm not giving you the name.
Speaker 4: I know, gearing up to trying to make it tell me.
Speaker 5: But it's it became very popular and it's it's becoming
Speaker 5: less popular.
Speaker 4: That is a listener's guess is on a postcard, please
Speaker 4: go see that's the who and then there's the what.
Speaker 5: So the what is is the franchise good enough to
Speaker 5: make acceptable returns for its owners? And how do we
Speaker 5: think about that? We think about that in terms of
Speaker 5: pricing power. So if you're an environmental inflation go from
Speaker 5: zero to twenty percent, you better have pricing power because
Speaker 5: if you don't, you don't have any profit left. So
Speaker 5: I remember being in Ghana talking to the women that
Speaker 5: ran Unilever there. They actually have a list of so
Speaker 5: they had delicious subsidiary in garner tiny and Ghanan inflation,
Speaker 5: as it often does, have gone through the roof. And
Speaker 5: I remember sitting and she telling me that her most
Speaker 5: difficult decision was when to raise prices for their products.
Speaker 5: It wasn't if, it was when and how, because she
Speaker 5: was keenly aware that, you know, this was going to
Speaker 5: hurt the pockets of the poor, and how you can
Speaker 5: do that. But what that showed me was partly about
Speaker 5: the ethical side of union, but also that they had
Speaker 5: pricing power. They can do it. Imagine if you can't.
Speaker 5: If you're a commodity where the you know whether your
Speaker 5: inputs go up fifty percent or twenty percent. So this
Speaker 5: idea of pricing perier I think is important, and that
Speaker 5: tends to take us towards consumer staples types, companies with brands,
Speaker 5: and some industrial companies with intellectual property and trust. The
Speaker 5: other side of it is how did they get the
Speaker 5: license to operate in the first place, which overlaps with
Speaker 5: the who. Sometimes if there's an original sin there, it
Speaker 5: can come back to bite you quite badly in emerging markets.
Speaker 4: What do you mean by original sin?
Speaker 5: If the business was given by license by a government
Speaker 5: or a dictatorship to a company, when the regime changes,
Speaker 5: you can find your supposedly strong franchise disappearing into the
Speaker 5: dark seconds. Yeah, so I think that's part of the
Speaker 5: what is that? And we try to stay as far
Speaker 5: away from government as we can, although let's face it,
Speaker 5: in any economy, the government can interfere with you in
Speaker 5: any way it likes. But we try we try to
Speaker 5: stay as far away from those sorts of licenses, having
Speaker 5: made those mistakes over the years in the past. So
Speaker 5: that's really that's another part of the what really that's
Speaker 5: that's quite important. The final part is what you might
Speaker 5: is now called ESG, but it's more we just think
Speaker 5: of it in times of tailors and headwinds. Have the
Speaker 5: management positioned the business to benefit from things that might
Speaker 5: go right in the next ten years, and not suffer
Speaker 5: from things that headwinds that might go wrong in the
Speaker 5: next ten years, such as governments deciding to price environmental
Speaker 5: externalities in a way that they should, in a way
Speaker 5: that would that would and with that removed profit. Give
Speaker 5: an example, we used to have an organization look at them.
Speaker 5: We're talking fifteen years ago. Look at the carbon footprint
Speaker 5: of businesses. That's right, maybe more fashionable now, but the
Speaker 5: point was that there were some businesses, often related to
Speaker 5: ther and gas industry, whereas if they had to pray
Speaker 5: even a sort of half decent price for the government
Speaker 5: with they wouldn't make any profit. So again, your license
Speaker 5: to operate depends on governments, and it depends on deals
Speaker 5: done you know in places that I will never visit,
Speaker 5: allowing that not to happen or it to happen gradually.
Speaker 4: But you say that's ESG. But that's just G, isn't it.
Speaker 4: Which just environmental social governance. That's only the governance bit.
Speaker 5: The idea is that good stewards of our client's money
Speaker 5: will they'll get things wrong and get things right, but
Speaker 5: they will look at these issues, and they should be
Speaker 5: better at it than we should in their businesses. And
Speaker 5: they should be looking long term at the issues and
Speaker 5: trying to address them before they become fatal. And the
Speaker 5: idea that a fund manager turns up and this has
Speaker 5: happened to many times and then tells the management of
Speaker 5: a company what's good for that company? How on earth
Speaker 5: would you own shares in a company where you have
Speaker 5: to tell them you haven't.
Speaker 6: Spotted these five risks. So if you believe that about
Speaker 6: the company you're investing it, there's something wrong with that company,
Speaker 6: and we can engage with the company. But if they
Speaker 6: really haven't, then you probably on the long term shouldn't
Speaker 6: give your clients money to that company. So we want
Speaker 6: people that will navigate all the uncertainty for us.
Speaker 4: Thank you. So when other vund managers talk about ESG,
Speaker 4: for example, they talk about divesting or about having very
Speaker 4: clear divestment rules, areas they won't invest in, types of
Speaker 4: companies they won't invest in. They have lots of box
Speaker 4: sticking readlines around all sorts of things, and a constant conflict,
Speaker 4: to my mind and lots of other people's minds between
Speaker 4: the E and the S and the G in the
Speaker 4: overlay that they give themselves. But it sounds to me
Speaker 4: like you don't really have any of those breadlines or
Speaker 4: box sis. You just have a general sense of wanting
Speaker 4: to invest in companies that provide good long term stewardship.
Speaker 4: And that definition is fairly yeah, I have gray areas
Speaker 4: in it.
Speaker 5: I think it overlaps with the ESG. But we can
Speaker 5: step back in the finance and drives training economics, and
Speaker 5: we all, like a lot of people in finance are
Speaker 5: trained in mathematics and statistics and economics, and they like
Speaker 5: right answers. So price and quantity is determined by supply
Speaker 5: and demand. There's a right answer. So, but the world
Speaker 5: is much more gray than that. And people that often
Speaker 5: do quite well in what we do are trained as
Speaker 5: lawyers or historians, and they're weighing up probabilities that here's
Speaker 5: five pieces of evidence four and two pieces against and
Speaker 5: the balance of probability, And if you're training finance, that's
Speaker 5: completely alien to you this way of thinking. But this
Speaker 5: is the way that we that we have approached investing.
Speaker 5: So the ESG in a way is adding to the
Speaker 5: list of points four. It's more like being a detective
Speaker 5: in a way as well, if we think it's credible.
Speaker 5: And that is some of the worst companies in emerging markets.
Speaker 5: I was king one last yesterday. I won't mention they've
Speaker 5: got the best greenwashing efforts.
Speaker 4: To mention some names for us we names, Actually.
Speaker 5: I wouldn't dare, but they've got some of the best
Speaker 5: greenwashing efforts. Now you know that. For example, we spotted
Speaker 5: many years ago who were them the oil companies and
Speaker 5: the sustainability indices.
Speaker 6: So yeah, we don't know what say about that, but
Speaker 6: it's different.
Speaker 4: And I remember the Warren your Grain began that we
Speaker 4: found that there were some Russian oil companies that were
Speaker 4: very high up the sustainability precisely. Well, this is mad.
Speaker 5: Yeah, I remember having a meeting one with one many
Speaker 5: years ago and a lot and I'll never forget it
Speaker 5: because we asked them about global warming. This would have
Speaker 5: been like two thousand and six, and he said, actually
Speaker 5: it's good because our Siberian permafrost will become farmland. That's
Speaker 5: as far as they got.
Speaker 6: Then.
Speaker 5: The actually wanted global warming to happen and change the
Speaker 5: work the climate.
Speaker 4: So they very fed off farmland, haven't they.
Speaker 5: Yeah, Well, you know you know, this is as far
Speaker 5: as they got, so I'm sure that their efforts and
Speaker 5: sort of you know, have moved further on at least
Speaker 5: they think they have to present it. But back then
Speaker 5: they didn't even have to pretend to give it down.
Speaker 5: So it doesn't surprise me in that. So, yes, I
Speaker 5: think that what is it has the CSGY aspect to it,
Speaker 5: But we tend to sort of weigh up pros and
Speaker 5: cons because there's no such thing as a perfect company,
Speaker 5: and there are areas that we find very difficult to
Speaker 5: invest in. They are I've always been tobacco. It's called defense,
Speaker 5: but we I think that's to call it the attack industry,
Speaker 5: and we found that difficult, especially and we actually don't
Speaker 5: have many of that.
Speaker 4: It's hard to argue that is not a social good
Speaker 4: in some ways, I mean defense. I can see that
Speaker 4: a lot of our managers have said historically, as you say,
Speaker 4: defense slash attack, this is not something we want to
Speaker 4: be involved in. But in an environment such as this, yes,
Speaker 4: it's very hard to say that's something that isn't required.
Speaker 5: I can see the point absolutely. And it's one of
Speaker 5: these it gets greyer and actually the next one is.
Speaker 4: Going to be it's a very gray one.
Speaker 5: And we don't have many we don't have many possibilities
Speaker 5: to do so.
Speaker 4: And you said there's another even grayer area that which.
Speaker 5: Is an area that a lot of people ask me
Speaker 5: about now, is we found it very difficult and again
Speaker 5: we haven't had much chance to invest in them. We
Speaker 5: found it very difficult to invest over the years in
Speaker 5: luxury goods companies, and that's an even grayer area. And
Speaker 5: on the one hand, it's very aspirational and you know,
Speaker 5: people striving for material, to gain pleasure for material. On
Speaker 5: the other hand, we associate it and we have some
Speaker 5: evidence that it's also linked to political economies or an
Speaker 5: elite is stealing capital flight when.
Speaker 4: It centered money not being shared.
Speaker 5: You know, ending up in London or Singapore. And it's
Speaker 5: interesting that Singapore government, i think, is thinking about this
Speaker 5: now as well. And so what you're doing there is
Speaker 5: you're trying to weigh up a number of gray areas.
Speaker 5: You know, one is quite a positive sort of striving
Speaker 5: and the other is actually there's a lot of capital
Speaker 5: flight involved in the developing world in some of these goods,
Speaker 5: and that's going against what we're trying to invest in.
Speaker 5: The one thing you know is that as an African
Speaker 5: is that one of the main differences between Asia and
Speaker 5: Africa has been that the capital stayed in the country,
Speaker 5: it stayed in sight in the country in Asia, and
Speaker 5: in Africa it flew out at the first.
Speaker 4: Time that's possible chance.
Speaker 5: So so capital flight's a really big issue in terms
Speaker 5: of those hundreds of millions of people getting richer. So
Speaker 5: that's one we struggle with. But it's one that we
Speaker 5: I thought I'd raise because.
Speaker 4: It's even great, but we don't need it to do.
Speaker 4: You don't need like triggers companies in your portfolio.
Speaker 5: Firstly, there aren't that many unless globally, and even those
Speaker 5: are not big emerging market businesses, and there were some
Speaker 5: that tried to list in Hong Kong sort of as
Speaker 5: exits I think a few years ago. So it's not
Speaker 5: such a big issue, but it's something that we raised
Speaker 5: to show the gray areas that we tried to that
Speaker 5: we try to navigate.
Speaker 4: Can I ask you have we done the where how?
Speaker 1: Sorry?
Speaker 5: How is it is now called the ESG. It's how
Speaker 5: they're behaving. So if you've got a history of polluting
Speaker 5: rivers or using child labor, or you know, illegal logging.
Speaker 5: And it's so basically, if you're prepared to do that
Speaker 5: to your own environment, your own.
Speaker 7: People, what the hell you're going to do to your
Speaker 7: front and already share already shareholder At some point we
Speaker 7: used to call it how And I think that's partly
Speaker 7: the risk that he's trying to capture as you say,
Speaker 7: some people will say imperfectly, but it's a risk trying
Speaker 7: to capture the health.
Speaker 5: And it also tells us quite a lot about the
Speaker 5: who how they behave for us. Who how is very
Speaker 5: important in trying to really eliminate lots of companies. That
Speaker 5: becomes quite easy in GEM because, for example, a company
Speaker 5: that's run for.
Speaker 4: The government, GEM Global imagine my Global American.
Speaker 5: Markets sorry, so in developing it, so if you have
Speaker 5: there are very large companies run either owned by the
Speaker 5: government or run for the government. And always ask people
Speaker 5: to peris that thought. But if the NHS was listed,
Speaker 5: would you ever invest in it? Because the more profit
Speaker 5: it made, the fewer lives itself. So this is a
Speaker 5: massive conflict there, right, So would you do this?
Speaker 3: No?
Speaker 5: Right, you wouldn't because it would be you don't know
Speaker 5: that the government would be involved. You just don't know
Speaker 5: how that would work out. We've got a lot of
Speaker 5: those who's in GEM and then we've got a lot
Speaker 5: of families who we can't get comfort with the history
Speaker 5: of how the assets have been acquired and whether that
Speaker 5: will come back to them at some point. And that's
Speaker 5: the classic case for you lose sixty percent and you
Speaker 5: have to sell. So we just can't. We find that
Speaker 5: really difficult.
Speaker 4: Let's add aware to your list. Yes, which markets? Which
Speaker 4: economy is interesting? I know that you don't do it like,
Speaker 4: but nonetheless I think our listeners will find it interesting
Speaker 4: to know which particular economies are working for you at
Speaker 4: the moment.
Speaker 5: Can I reframe it? I conditioned slightly to answer your question,
Speaker 5: which is where do we find the most companies that
Speaker 5: meet our criteria?
Speaker 4: Yeah, that was a much better question.
Speaker 5: So because we are so bottom up focused, I'm talking
Speaker 5: about macro and we've tended to find more companies over
Speaker 5: the many years in India. And that's that's because there
Speaker 5: are so many companies listed in India, and the proportions
Speaker 5: are still quite low. But it's just that there are
Speaker 5: just so many and the stock market has been allowed
Speaker 5: to evolve in a sort of vibrant way. We would
Speaker 5: have hoped twenty years ago that the Turkey would have
Speaker 5: gone the same way, but under different leadership it hasn't.
Speaker 5: So that's a place where we find lots of companies.
Speaker 5: We can find a few in Latin America. We ran
Speaker 5: a Latin American fund in two thousand and nine on
Speaker 5: the basis that there were a bunch of privators that
Speaker 5: a bunch of companies that had listed in two thousand
Speaker 5: and four, five and six that had, you know, some
Speaker 5: track records that we could long track as we could test.
Speaker 5: So I'd say that India is a place where we
Speaker 5: find find that most companies at feud our criteria, but
Speaker 5: it's because it's a low proportion of a much larger number.
Speaker 4: China.
Speaker 5: China we struggled with, and we struggled simply because of
Speaker 5: answering the who question, which often impacts the what we have.
Speaker 5: In the past, we used to invest in Taiwanese listed companies, example,
Speaker 5: businesses in the mainland Hong Kong companies with businesses on
Speaker 5: the mainland that we're going that we're going to mainland.
Speaker 5: But but that I think is with the way that the
Speaker 5: political environment Hong Kong has evolved. I think that's slightly
Speaker 5: more difficult. So we've got a list of four or
Speaker 5: five companies that we think we can evidence our entrepreneurial
Speaker 5: built far away from leadership and the government there. And
Speaker 5: that's out of a very large number. So it's a
Speaker 5: small number of companies that we can get comfort with.
Speaker 5: And yeah, we'll keep looking. I think China. China is
Speaker 5: a huge economy which has a lot of dynamism in it,
Speaker 5: and we will just keep looking. We struggled because of
Speaker 5: it because at some point it always kicks back to
Speaker 5: the leadership and you always go back to the political
Speaker 5: economy there and do you really own equity or is
Speaker 5: it decided by some opaque sort of mechanism. But I
Speaker 5: wouldn't certainly would never want to rule out. The thing
Speaker 5: that gives me more hope is that these issues are
Speaker 5: now widely recognized where it's really the only words and
Speaker 5: they're widely talked about, and it's an evolution of history
Speaker 5: really how the West response to the rise of a
Speaker 5: different viewpoint is more widely understood.
Speaker 4: Do you have a set valuation criteria.
Speaker 5: I've got my own money in the fund, so I
Speaker 5: need to earn and that's assuming inflation does come down
Speaker 5: again to some reasonable level. Is not allowed to run
Speaker 5: off globally, and I need to earn ten percent in
Speaker 5: nominal terms around ten percent. Nine would be fine. To
Speaker 5: compound that over ten years to reward me a terrible
Speaker 5: risk that I'm taking in all the risks I'm taking
Speaker 5: in imagery market. And that's something I've been saying to
Speaker 5: clients for a long time. That was one of the
Speaker 5: reasons why ten years ago we had to look more globally.
Speaker 5: And I think that as more achievable now. It's not
Speaker 5: a not a forecast, as things have happened, but those
Speaker 5: are the sorts of returns that I need to own
Speaker 5: the best quality companies.
Speaker 4: And this is more ajevle now because emerging mine because
Speaker 4: are historically speaking relatively.
Speaker 5: Cheap, they're relatively unpopular, and there's still some very expensive
Speaker 5: some good quality companies that we'd love to earn are
Speaker 5: still too expensively.
Speaker 4: And what do you mean by too expensive?
Speaker 5: The returns that I can own and for them are
Speaker 5: below the eight percent.
Speaker 4: Threshold based on the valuations.
Speaker 5: Yeah, the problem with valuation is just using a straight
Speaker 5: p number.
Speaker 4: Yeah, he always knows what. You always know what. I'm
Speaker 4: trying to get you to say.
Speaker 5: Just using a straight ignores the idea of firstly the
Speaker 5: return you want to earn and the growth that you
Speaker 5: think the company's going to We're not people that are
Speaker 5: widely optimistic about about growth. So I prefer to talk
Speaker 5: in terms of return because a pe of five four
Speaker 5: I don't actually I don't know what the PEE of
Speaker 5: some of the worst data owned companies in GM are,
Speaker 5: but they're very cheap. And they're cheap because ultimately you
Speaker 5: have to ask a question whether you actually own anything
Speaker 5: by owning them. So I think a sort of very
Speaker 5: sort of valuation focused approach and GEM can work for
Speaker 5: two or three years, no doubt does when people get
Speaker 5: really sort of bullish, but the long term has been
Speaker 5: proven not to work, and that's because of the governance.
Speaker 5: Do you own the thing or not? Or is it
Speaker 5: being run for something completely different? So that's why I
Speaker 5: prefer to talk in terms of returns. A low PEE
Speaker 5: tends to indicate that you can make higher returns, but
Speaker 5: then if the business is going to shrink for the
Speaker 5: next ten years, then you're.
Speaker 4: Not value traps.
Speaker 5: Yes, absolutely, and Jem has got I would argue lots
Speaker 5: of those, and I'm not here to say that I'm
Speaker 5: not optimistic about owning state owned anything in GEM. They
Speaker 5: can have a good two or three years, But we're
Speaker 5: trying to make teny decisions, and I'm not. It's just
Speaker 5: something a decision we just can't make. So those sorts
Speaker 5: of returns we can find in companies that are going
Speaker 5: to grow ten or fifteen percent on ADAM for the
Speaker 5: next ten years. We can find them in companies that
Speaker 5: are going to grow five percent per an in the
Speaker 5: next ten years, or where we could reasonably think that
Speaker 5: they will. But those are the sorts of returns we need,
Speaker 5: and they are present. Otherwise I wouldn't be putting my
Speaker 5: money into the fund. You know. Whether we end up
Speaker 5: earnning seven percent or twelve, that's fine, but we're in
Speaker 5: that right ballpark.
Speaker 4: Now, can you give us a couple of examples of
Speaker 4: the companies in your top five?
Speaker 5: Yeah, I'm trying to give ones that because we were
Speaker 5: about to launch our fund.
Speaker 4: I know, I understand this. It's a really difficult time
Speaker 4: for me to We're asking you do name names. Anything
Speaker 4: that's big enough that our conversation here can't hose the price.
Speaker 5: It has to be a very big company. I'll tell
Speaker 5: you about the last report I wrote. We write our
Speaker 5: fund managers, we don't believe our analysts, so we write
Speaker 5: do all our own work. We don't use The cell
Speaker 5: side is full of very bright people, but we think
Speaker 5: they're asking very short term questions because they're encouraging people
Speaker 5: to buy in seal stock. So if a person buys
Speaker 5: and wholes it ten years, it doesn't make the sell
Speaker 5: side any money. So we do all our research. The
Speaker 5: last company I wrote a report on which we were
Speaker 5: going to discuss late this afternoon is a Japanese company
Speaker 5: called unit Charm. We've owned it for many years and
Speaker 5: many years and it is it's one of the leading
Speaker 5: makers of diapers and sanitary neplins in the world. And
Speaker 5: the interesting about the company is about forty years ago
Speaker 5: when the Sun forty years ago, before the Sun took over,
Speaker 5: it realized that Japan was shrinking and it started and
Speaker 5: it started as an expansion into emerging markets. That would
Speaker 5: has often been a recipe for disaster for companies all
Speaker 5: over the world. Well, you know, we've got to get
Speaker 5: some growth, but they did it very carefully and they
Speaker 5: now have over sixty percent of their sales is outside
Speaker 5: Japan and mostly.
Speaker 4: In Okay, so this counts as the line of the companies.
Speaker 4: It is global but very exposed for emerging.
Speaker 5: I use it for a number of reasons. Firstly because
Speaker 5: it's a global company exactly because it's a bigger liquid
Speaker 5: but also it's the last report that I wrote, and
Speaker 5: it's we've we've met the founder, saw the owner many times.
Speaker 5: A run by the owner. We love companies are run
Speaker 5: by owners with a long term view because they take
Speaker 5: different sorts of risk to somebody that's on a three
Speaker 5: year option program. So for example, it's balance sheet, it
Speaker 5: has its balance sheet is ungeared, it has cash and
Speaker 5: it's balance sheet, which a professional manager wouldn't do because
Speaker 5: on a three year view, especially low interest rates, you
Speaker 5: buy back shares and increase EPs. But a real steward
Speaker 5: knows that the tough times come and maybe a bit
Speaker 5: of cas should be good so that when the tough
Speaker 5: times are here, you can make some acquisitions, you can
Speaker 5: take market share. So that's the last company that I
Speaker 5: wrote on, this company that we've owned for years. There's
Speaker 5: some very interesting two or three companies in Latin America.
Speaker 5: For example, that and JEM is one of the reasons
Speaker 5: JEMs failed is some of the even the very well
Speaker 5: strewarded companies fell on hard times and made mistakes. And
Speaker 5: one of those companies is a company called Natura in Brazil,
Speaker 5: which we owned for many years and then had to
Speaker 5: sell because they were the founders had decided to go
Speaker 5: on a debt funded acquisition spree, which essentially has caused
Speaker 5: the company some problems in the last ten years. They
Speaker 5: brought the body shop in the UK, which was an error,
Speaker 5: and they bought even which may or may not be
Speaker 5: an error. So we engaged the companies and sold many
Speaker 5: years ago. We were very concerned about the company because
Speaker 5: of the debt profile until they did something a few
Speaker 5: months ago which they had incubated a business called ASoP.
Speaker 5: We didn't realize the value in that business, so that's
Speaker 5: our mistake in many ways. But they just sold that
Speaker 5: to Laurel to It, which essentially removes all the debt
Speaker 5: that we thought they had. And that deal has been done,
Speaker 5: so what you now have is the same stewards who
Speaker 5: are chastened.
Speaker 4: There's been a change of chasing with cash.
Speaker 5: Who were no longer indebted and have a much bigger
Speaker 5: business and the stock prices sixty or seventy percent lower
Speaker 5: than it was off the top of my head ten
Speaker 5: years ago. It has they have brands, and they're one
Speaker 5: of the only B corps in emerging markets for if
Speaker 5: you like ESG. But I think they were doing it.
Speaker 5: They were doing ESG before anybody even knew what it was,
Speaker 5: so it was just part of the DNA of the
Speaker 5: founders of the company essentially. And so yeah, so that's
Speaker 5: a very interesting company because it's kind of the microcosm
Speaker 5: of part of the reason why Emerjory Markets failed for
Speaker 5: ten years, which is some even some of the really
Speaker 5: good companies made mistakes. And if you can find companies
Speaker 5: with those mistakes, they realized and clearly they didn't bet
Speaker 5: that the ship because they had this business and they
Speaker 5: knew then that might be quite an interesting company touring
Speaker 5: for the next ten years. Yeah, So that's that's that's
Speaker 5: another example, different type of example.
Speaker 4: You gave all examples. Thank you. Yes, Now listen, Jonathan,
Speaker 4: I have to ask you a question that you won't like.
Speaker 4: You won't like, but I have to ask everybody at
Speaker 4: the end of the podcast. We're watching the answers very closely,
Speaker 4: so please be aware this is extremely important. Okay. I
Speaker 4: am going to let you buy one asset, and one
Speaker 4: asset only for the next ten years, and I'm going
Speaker 4: to give you a choice of three all of which
Speaker 4: you will hate, but one of which you must choose gold, Bitcoin,
Speaker 4: or cash in a deposit account in the UK.
Speaker 5: I have to answer as I personally have so apart
Speaker 5: from my own fund, I have cash in a deposit account,
Speaker 5: in a government deposit account in the UK percent So
Speaker 5: it's my fun than that.
Speaker 4: Okay, So you would take cash over gold over a
Speaker 4: ten year period, we were very despite your your belief
Speaker 4: that I share that there is a degree of financial
Speaker 4: oppression underway.
Speaker 5: I think if again, if I think you'd have asked
Speaker 5: me fifteen years ago, I would have said, have a
Speaker 5: bit of gold. I just never I've never felt comfortable
Speaker 5: with gold, and I think that there are now alternatives
Speaker 5: to it, and it hasn't it hasn't truly done what
Speaker 5: we thought it would do fifteen years ago.
Speaker 4: If I take cash out of the equation, this is
Speaker 4: a supplementary question that I shouldn't ask, But if I
Speaker 4: took cash out of the equation, would you choose gold
Speaker 4: or bit core?
Speaker 6: Oh?
Speaker 5: Definitely gold yeah. Absolutely. I find the rise of these
Speaker 5: alternative ways of storing and transacting wealth. I find them
Speaker 5: to be partly technologically driven, but also partly a symptom
Speaker 5: of the excessively loose monetary policy that we've had in
Speaker 5: the last.
Speaker 4: Take your pick years, forty years.
Speaker 5: I don't blame I can see what they are, and
Speaker 5: it's essentially in air mission that government is debasing your will.
Speaker 5: But I don't believe that they are stable sources of
Speaker 5: wealth and of capital preservation.
Speaker 4: Okay, there we go, listeners, Gold. It is while actually
Speaker 4: a sup pod count but secondary it's gold. Jonathan, thank
Speaker 4: you so much for joining us today. There was really interesting.
Speaker 5: Thank you, Thank you, Marion.
Speaker 1: Thanks for listening to this week's Marin Talks Money. We
Speaker 1: will be back next week. Catch our debrief on this
Speaker 1: week's conversation on the Merin Talks Money after show in
Speaker 1: our normal feed that is, I'm afraid, only accessible to
Speaker 1: Apple News subscribers and to Bloomberg subscribers. Look out for
Speaker 1: the after show online.
Speaker 4: It's quite good actually.
Speaker 1: In the meantime, if you like our show, rate review,
Speaker 1: and subscribe wherever you listen to podcasts and do please
Speaker 1: also tell your friends to listen. This episode was hosted
Speaker 1: by me Maren Sunset Web. It was produced by Summer Sadi.
Speaker 1: Additional editing by Blake Maple's bez Well thanks to Jonathan
Speaker 1: Sante and John Steppek Is is You're to sign up
Speaker 1: to John's daily newsletter Money Just still to the link
Speaker 1: for that is in the show notes. And I say
Speaker 1: that's quite good too,