Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Welcome to Maren Talks Money, the podcast in which people
Speaker 2: who know the markets explain the markets. I'm Maren zum
Speaker 2: zet Web. This week we've beat with Sean Pesh, portfolio
Speaker 2: manager and founder at rand Moore Fund Management. Pest has
Speaker 2: been in the investment industry since nineteen ninety seven, working
Speaker 2: at a variety of institutions. He established ran More Fund Management,
Speaker 2: his own company, in two thousand and eight. It's worth
Speaker 2: noting he has a fairly stellar record of outperformance, outperforming
Speaker 2: the index since inception and over pretty much every time
Speaker 2: period since, except for the last twelve months, which we'll
Speaker 2: discuss as we go. Sean, welcome, thanks for joining us.
Speaker 1: Thanks Miren, lovely to be here.
Speaker 2: Now listen, you have achieved fairly spectacular, as I said,
Speaker 2: outperformance over the last decade plus, despite being a value
Speaker 2: fund manager in a period when being a value fund
Speaker 2: manager has been an absolutely terrible thing to be. This
Speaker 2: has been a time for growth. Yeah, somehow you've succeeded
Speaker 2: as a value manager. So let's talk a little bit
Speaker 2: about how on earth you've done that.
Speaker 1: I guess if we'd had this interview back in the
Speaker 1: middle of the pandemic, when everybody was sitting at home
Speaker 1: buying Apple iPhones and ordering stuff on Amazon will be
Speaker 1: a different conversation. But we just try and invest in
Speaker 1: decent companies that are generating cash with management on our
Speaker 1: side and not paying too much for them. And it has,
Speaker 1: as you rightly say, been a challenging time for value managers,
Speaker 1: and I guess, I guess there are three reasons for that.
Speaker 1: The first is, if you go back to nineteen seventy four,
Speaker 1: when these indices first started, value outperformed growth with a
Speaker 1: couple of hiccups along the way, pretty much in a
Speaker 1: straight line up to the end of two thousand and seven.
Speaker 1: And then you had the global financial crisis, and what
Speaker 1: happened after that was quantitative easing, and that meant interest
Speaker 1: rates collapsed and until late twenty one or so, and
Speaker 1: so during that period, if you plot the if you
Speaker 1: overlay those two average interest rates and value versus growth,
Speaker 1: you'll see that value underperformed in during quantitative easing. That's
Speaker 1: the first reason. The second reason is you had these
Speaker 1: fast growing companies Microsoft, Amazon, those kind of guys at
Speaker 1: the same time as you had low interest rates, and
Speaker 1: so that meant their growth rates were discounted at lower rates,
Speaker 1: and they became hugely huge companies in the markets. And
Speaker 1: the third reason is at that very time that you
Speaker 1: had these massive companies with huge market caps, passive investing
Speaker 1: just exploded. When I started the business, I think it
Speaker 1: was a trillion in dollars in passive investing is awfter
Speaker 1: something nearly twelve, And so you had this wall of
Speaker 1: money just moving into these companies, propelling them ever further.
Speaker 1: Now what's changed. Quantitative easing is over. Okay, we saw
Speaker 1: that reference to that in the FED statement last week.
Speaker 1: The second thing is these companies are getting hard. It's
Speaker 1: harder for them to grow. Microsoft grew revenue ten grew
Speaker 1: earning specially ten percent last quarter. Costco grew revenue one
Speaker 1: percent last quarter the other day. You've seen Nike falling
Speaker 1: the other day. So you know, it's just getting harder
Speaker 1: and harder for these giant companies to carry on out
Speaker 1: performing in the way they have. And so we think
Speaker 1: that's a really good time to focus and turn the
Speaker 1: attention to value investing. You've got to be you've got
Speaker 1: to go where the puck is going to be. This
Speaker 1: is what way in Gretzky said, not where the puck's been.
Speaker 1: The puck has been in quality and growth. The puck
Speaker 1: is going to value. We firmly believe that.
Speaker 2: But nonetheless you haven't been in those companies. I want.
Speaker 2: The thing that really strikes me when I look at
Speaker 2: your fact sheet is the very very small level of
Speaker 2: exposure you have to the US. So if we look
Speaker 2: at the MSCI world, that's seventy three percent US, right,
Speaker 2: and an awful lot of that, of course is the
Speaker 2: megasavan is the huge technology stocks in the US, but
Speaker 2: you don't have that. You're about seventeen percent in the US.
Speaker 2: And if I spin my eye over to your sector
Speaker 2: exposure information technology three percent, that's against bround twenty five
Speaker 2: percent in the MSCI. So you are very very far
Speaker 2: away from the index, which is great, by the way,
Speaker 2: and nothing we love more than a fund that doesn't
Speaker 2: touch the index. If we wanted the index, we just
Speaker 2: buy the index, right, So we love a fund that's
Speaker 2: far away from it. But you know, you're you've really
Speaker 2: differentiated yourself, then.
Speaker 1: We have, and and I guess you know there are
Speaker 1: a couple of points, So how we managed to generate
Speaker 1: those returns well? The first is that we will typically
Speaker 1: go where people are less interested because that's where we
Speaker 1: find the value. So, you know, we made good money
Speaker 1: in Japan in recent years. We were quite early in
Speaker 1: moving into Japan. When the world was focused in Japan
Speaker 1: with Warren Buffett and all of that, you know, we
Speaker 1: were actually selling and redeploying those assets into China. And
Speaker 1: so even last month, you know, we had more in
Speaker 1: China than the US Hong Kong listed stocks. So what
Speaker 1: we so, I guess there's two ways to make money.
Speaker 1: The one is you can buy a company that you
Speaker 1: think is a fabulous business and hold it forever, and
Speaker 1: that company will compound its earnings. What we prefer to
Speaker 1: do is find an undervalued business, invest at the right time,
Speaker 1: ideally the right time, and when the value is fully realized,
Speaker 1: we will then sell that and compound the capital. Okay,
Speaker 1: because sometimes you can be stuck in these businesses. You
Speaker 1: think it's a great business, and look at Nike, look
Speaker 1: at st Order, look at you know, Diageo or Unilever
Speaker 1: in recent years, and things come unstuck. And so we
Speaker 1: prefer to compound the capital and we move the capital around.
Speaker 1: So we really don't shy away from from moving our
Speaker 1: assets around the world based on where we find value,
Speaker 1: and we're not scared of our turnover either. You know,
Speaker 1: if I look at some of my some of the
Speaker 1: best money managers in the world, the likes who've survived
Speaker 1: and got fantastic crack records over multi decades, not just
Speaker 1: in in recent years. You know, the likes of Paul
Speaker 1: Tudor Jones and Bruce Kovner and David Tepper and those guys.
Speaker 1: I've never ever seen a single quote from them about
Speaker 1: low turnover being an answer.
Speaker 2: That's intering because as a big part of the industry
Speaker 2: that believe exactly that your buffet style you buy great
Speaker 2: companies and you keep them in definitely, and you let
Speaker 2: them compound until you're super rich. But of course I'm
Speaker 2: the answer to that. Your answer might be, well, companies change.
Speaker 2: A great company doesn't stay a great company, and you
Speaker 2: have to be prepared to move out of it as
Speaker 2: soon as you see signs that it's not great anymore.
Speaker 1: Absolutely, And Warren Buffett said, my favorite holding periods wherever
Speaker 1: you didn't say, I'm my only holding periods wherever, and
Speaker 1: he sold half his apple every day. You know he's
Speaker 1: selling bank of America. He's sold many positions along the way,
Speaker 1: So I think people confuse that, I mean take it
Speaker 1: to the extreme. Some of the early good businesses that
Speaker 1: everybody knew about and loved were railroads and you know
Speaker 1: those steel manufacturing et cetera. Where would you be today
Speaker 1: if you'd own those forever. So, you know, we think
Speaker 1: the right business at the right time, and we very
Speaker 1: you know, things change. So we are not in that
Speaker 1: camp where you think you can find a great business
Speaker 1: and hold it forever, because we don't know what the
Speaker 1: future is. And as I said, you can use look
Speaker 1: at Nike. You know, Nike had the lunch to themselves.
Speaker 1: Now you've got competitors with on Running and Hokka and
Speaker 1: Sketches and those kind of guys. So the environment is
Speaker 1: always changing and you have to be alert to that.
Speaker 1: And so we're not in the sit in the zide
Speaker 1: and do nothing camp.
Speaker 2: Well, let's step back a little bit because you mentioned
Speaker 2: Japan earlier, and I know a lot of our listeners
Speaker 2: are very interested investing in Japan, have been for a while,
Speaker 2: and John and I were like you very on it
Speaker 2: when it was very cheap. You know, this is value etc.
Speaker 2: I'm going to Tokyo next week, by the way, I'll
Speaker 2: report back. But in the meantime, you say you're no
Speaker 2: longer really invested in Japan, do you not consider that
Speaker 2: to be a value opportunity anymore?
Speaker 1: Oh? No, we are definitely still in Japan, and we
Speaker 1: a little overweight there. What I'm saying is we've taken
Speaker 1: profits on many of our positions and redeployed those. So no,
Speaker 1: we still like Japan. In fact, I know we bought
Speaker 1: some Mazda the other day. That again, you've got to
Speaker 1: look at the second level thinking that hard Marks talks about.
Speaker 1: You know, a lot of the Japanese companies fell in
Speaker 1: a heap when the yen rallied and the exporters, et cetera. Well,
Speaker 1: you get businesses that have used the week in and
Speaker 1: that's how they've generated revenue and profit growth, and some
Speaker 1: businesses that are growing. And you know, you look at
Speaker 1: the company like Mazda, I mean it's US sales of
Speaker 1: its current range is up thirty percent in the last months,
Speaker 1: you know, and that's been like that for a little while,
Speaker 1: with huge amounts of cash on the balance sheet. So
Speaker 1: there's still lots of value to be unlocked. In Japan,
Speaker 1: some of our companies had just we felt had run
Speaker 1: the course and reached fair value, and so we redeployed
Speaker 1: it to compound their capital.
Speaker 2: Okay, let's move on to China, then, where you did
Speaker 2: deploy some of that capital. There's one of the ongoing
Speaker 2: conversations John and I always have about something maybe cheap,
Speaker 2: but is it investable? Can you invest some webs of China,
Speaker 2: like China where you don't necessarily have the same kind
Speaker 2: of regulatory security that you might have somewhere else. And
Speaker 2: John and might have this conversation around Russia and I said,
Speaker 2: yes you can, and he said no you can't, and
Speaker 2: he was right. And on China, I say yes you can,
Speaker 2: he says, no, you can't. And this week at least,
Speaker 2: I'm right.
Speaker 1: I love the dynamic between you guys. Yeah, and I mean,
Speaker 1: unfortunately included in our track record, we lost just over
Speaker 1: ten percent in Russia, but we recovered in twenty twenty two,
Speaker 1: you know, And that's our process. And those stocks are
Speaker 1: still in the portfolio, but written down to zero. So
Speaker 1: sometimes we get it wrong. In fact, portfolio managers, you
Speaker 1: often get it wrong. And so we China, we thought,
Speaker 1: and it's an interesting point. I think there was a
Speaker 1: there was a conference in feb two thy or twenty
Speaker 1: twenty four at a Goldman Sachs conference, and they surveyed
Speaker 1: the participants and forty percent said China was uninvestable. Now,
Speaker 1: when people tell us some market's uninvestable, you know, that
Speaker 1: peaks our interest because there's got to be some diamonds
Speaker 1: in the dust. And what's interesting is, you know, government
Speaker 1: interference and regulation and all of that. And then you
Speaker 1: stand back and think about it and you go, well,
Speaker 1: when natural gas prices rallied Ireland and the UK and
Speaker 1: posed windfall taxes on you know, oil companies here just
Speaker 1: the other day, President Macron is in favor of of
Speaker 1: taxes on large French companies. You've got the US Department
Speaker 1: of Justice and you know, attacking the US tech companies.
Speaker 1: You've got the Fair Trade commit Trade Commission FTC attacking
Speaker 1: or trying to prevent mergers and takeovers. So I think
Speaker 1: I think this government interference and regulation all the rest
Speaker 1: is overplayed. It's around the world. It's not just in China.
Speaker 1: And so that's our point to that. And in fact,
Speaker 1: what you don't have in many of these Asian markets,
Speaker 1: you don't have greedy management teams taking huge, you know,
Speaker 1: swaths of share options and diluting shareholders, and you don't
Speaker 1: have the short term thinking that you have in many
Speaker 1: of the Western markets. So one needs to balance the
Speaker 1: pros and the cons And when you get companies I mean,
Speaker 1: I'll give you an example. In early September, we I
Speaker 1: mean we owned Ali, Baba and Bider. You see those
Speaker 1: in the top ten last month's fact sheet. But in
Speaker 1: early September were buying ping An and ping An here
Speaker 1: at five times earnings, with an eight percent dividend yield,
Speaker 1: and trading below tangible book value for pretty much the
Speaker 1: first time ever. You know, that's how deeply out of
Speaker 1: favor it was. And we were buying it at thirty
Speaker 1: three and you know we're selling it the other day
Speaker 1: at fifty five. You make sixty percent in a month. Now,
Speaker 1: we would quite happily hold it. We didn't want it
Speaker 1: only hold ping An for a month. But when when
Speaker 1: you've had this kind of move, you've been over awarded
Speaker 1: in a short space of time, we are happy to
Speaker 1: move on.
Speaker 2: Okay, And the other market that until very recently we
Speaker 2: kept being told was uninvestable, I kept being told, particularly
Speaker 2: by American investors in the odd unreconciled remainer, that the
Speaker 2: UK was an uninvestable market. We don't hear that so
Speaker 2: much anymore. We're hearing much more positivity around the UK.
Speaker 2: You invested here.
Speaker 1: We are and you know we meaningfully overweight. I think
Speaker 1: we're at six percent versus just less than four. Not
Speaker 1: that we worry, as I said, we worry too much
Speaker 1: about the benchmark. And you know we we bottom up investors,
Speaker 1: so we less worried about the top down and interest
Speaker 1: rates and you know, those kind of put political goings on.
Speaker 1: I suppose that's the other thing is that China's had
Speaker 1: quite a stable It's one of the few places in
Speaker 1: the world that hasn't had an election this year. But
Speaker 1: some of the companies there meren which might be of interest.
Speaker 1: And again my compliance office or shot of me if
Speaker 1: I don't say this is obviously not advice. But where
Speaker 1: we do have some positions is in the and what's
Speaker 1: deeply out of favor are the UK asset managers.
Speaker 2: Why do you think that's out of favor? Why do
Speaker 2: you think you look at that and you see the
Speaker 2: value and other people do not.
Speaker 1: Well, I think if you've owned Aberdeen all the way
Speaker 1: for years and you've seen one corporate acquisition after another
Speaker 1: just go wrong. You are biased and trying to avoid
Speaker 1: biases is a key part of what we do. And
Speaker 1: so if you come in fresh and you know you
Speaker 1: haven't got that historic baggage, that helps you to look
Speaker 1: at things with a fresh pair of eyes. And so
Speaker 1: we'll do that. But we don't bet the ranch. We
Speaker 1: are not in the high conviction camp. You know, we
Speaker 1: are fully aware that stuff comes out of nowhere, but
Speaker 1: we think we're getting paid to wait.
Speaker 2: Now, the other back to traveling. Another stock that I
Speaker 2: see that you are now holding is Ryan Air.
Speaker 1: Yes, yes, yes, well Ryanair. I mean that's you know,
Speaker 1: I remember when I first got over here from South
Speaker 1: Africa in early two thousand and two thousand and one.
Speaker 1: I mean, here was this business. It was highly highly
Speaker 1: rated and we thought, goodness me, can you believe it?
Speaker 1: But look at what Michael Earliery and his team have done.
Speaker 1: And you know the interesting thing for us is we
Speaker 1: don't meet management. But you didn't have to meet management.
Speaker 1: You just have to look at the return on equity
Speaker 1: that here Michael O'Leary and his team have generated in
Speaker 1: the toughest of industries. That he's built this business from
Speaker 1: pretty much nothing to transporting something like two hundred and
Speaker 1: twenty five million passengers a year. It's just been phenomenal
Speaker 1: and that they didn't need, you know, lifelines from governments
Speaker 1: during the pandemic Etcter survived. So phenomenal management team in
Speaker 1: a great business. And I guess if the economy is tough,
Speaker 1: you know, people will trade down to Ryan Air. You
Speaker 1: might not be going on first class on some other
Speaker 1: airline but betrayed going on holiday on RHINEIR. So people
Speaker 1: want to go on holiday. Great great management team, strong
Speaker 1: balance sheet, reasonably priced, buying back shares because they've got
Speaker 1: excess capital. And the other thing which is interesting is
Speaker 1: there's capacity constraints because you know, Boeing and Airbus are
Speaker 1: struggling to get aircraft out the door.
Speaker 2: You say you don't meet management. Now, I find this
Speaker 2: very interesting and I think I understand why you do it.
Speaker 2: But I speak to an awful lot of fund managers
Speaker 2: who's usp is how many management teams they took to,
Speaker 2: and they tell me endlessly about well, this is what
Speaker 2: I do. I visit sixty companies a year. Or one
Speaker 2: hundred companies a year, and I look the management in
Speaker 2: the eye. I have conversations with them, and I can
Speaker 2: see if they're honest, and I can well, I'm not
Speaker 2: getting inside information. I can pick up bits and bobs
Speaker 2: of levels of confidence that other people can't see. And
Speaker 2: that is my value you as a fund manager. That's
Speaker 2: how they sell themselves, how a lot of the industry
Speaker 2: sells itself right, And you're just saying, Nah, I'm gonna
Speaker 2: bother with that. I'm again to set my office and
Speaker 2: play with spreadsheets.
Speaker 1: Yeah, Maria, next time one of those fund managers tells
Speaker 1: you that, please ask them to send a scatter plot
Speaker 1: with the wire access showing our performance and the x
Speaker 1: acts is showing the number of meetings. And let's see
Speaker 1: if there's a direy correlation, because I suspect there probably isn't,
Speaker 1: just as there isn't a direct correlation between large teams
Speaker 1: and our performance. It sounds so good and it sounds
Speaker 1: so obvious. Oh, we meet management, I mean in many
Speaker 1: cases they're meeting investor relations. You know, we want management
Speaker 1: teams to be out there running the business, not speaking
Speaker 1: to fund managers all the time. Now that said you know,
Speaker 1: we read conference call transcripts. We read a lot of them.
Speaker 1: So it's not like we ignore what management say. We
Speaker 1: like to look and say, okay, well what are these
Speaker 1: What is management saying it quarterly reports, reporting portback periods
Speaker 1: or semi annual report back periods. But I don't want to.
Speaker 1: I don't want to meet management and then think oh
Speaker 1: they're a good guy and be more and more patient.
Speaker 1: We can evaluate management based on the numbers. We can
Speaker 1: see when did this management team take over, what we're
Speaker 1: return on assets and what we're operating margins? Then what
Speaker 1: was market share and what is it now? Have they
Speaker 1: added value? Have they detracted value? Have they done decent deals?
Speaker 1: Or have they destroyed value? You know, you and you
Speaker 1: look at that and you go, yeah, I mean it helps,
Speaker 1: it helps me. That's how we evaluate management. So if
Speaker 1: a company is doing a stupid deal and paying way
Speaker 1: over the odds for an acquisition, you know, look at
Speaker 1: Unilever acquiring Dollar Shave Club for a billion dollars was
Speaker 1: a loss making business. You know, you just go, this
Speaker 1: is going to destroy return on assets, is using company
Speaker 1: cash to go and overpay for an acquisition, and this
Speaker 1: indicates a management are you know, or not of the
Speaker 1: caliber we'd like. So that's how we evaluate management, the
Speaker 1: numbers and we leave the niceties to everybody else.
Speaker 2: And I suppose it helps you avoid being caught up
Speaker 2: in stories and that you know, really investing is just
Speaker 2: about stories, right, stories you believe, stories you don't believe.
Speaker 2: And the extent to which a charismatic CEO can tell
Speaker 2: a good story. I mean, that's that's the story of tech.
Speaker 1: For example, when the story lines up with the numbers, fantastic.
Speaker 1: But so often what will happen is, you know, you
Speaker 1: look at the numbers and you'll go, okay, things are tough,
Speaker 1: and you read the conference called transcript and you go,
Speaker 1: my goodness, am I reading this my quarter out? Is
Speaker 1: this the same period? You know? Is this the same company?
Speaker 1: So they often, you know, they can be quite a spin.
Speaker 1: And I mean even to the extent that that management
Speaker 1: teams know that that analysts and AI are trawling through
Speaker 1: conference called transcripts looking for those little you know, trying
Speaker 1: to work out of is the call positive or negative?
Speaker 1: Extracting positive phrases and negative phrases, so they gear things accordingly.
Speaker 1: If you attach yourself to a narrative to a story. Okay,
Speaker 1: how do you know when you're wrong? So if you'd
Speaker 1: said I want to buy wind because it's part of
Speaker 1: the energy transition, it's going to play an important part. Great,
Speaker 1: it's still going to play an important part. But you've
Speaker 1: lost seventy percent of you brought some of the go
Speaker 1: go windstocks, you know, the Vestus and those types of
Speaker 1: companies way back when, or the Solar. I mean, look
Speaker 1: at what a disaster solely is. So it's hard to
Speaker 1: identify when you're wrong. If you just focus on the story,
Speaker 1: the numbers will tell you when you're wrong. Margins are falling,
Speaker 1: revenue is falling, it's too overpriced, et cetera. You know,
Speaker 1: look at these obesity drugs at the moment, what's the story.
Speaker 1: The story is, we've got an obese population and there
Speaker 1: are only a couple of them that have been approved,
Speaker 1: and they're going to make a hundred billion of you know,
Speaker 1: in the next couple of years. In terms of like that,
Speaker 1: that basically is blue sky. Well, well, let's see, but
Speaker 1: there's one hundred and seventy competitors all trying to develop
Speaker 1: obesity drugs, and sooner or later that lunch will get
Speaker 1: eaten by the new competitors. And so if you're paying
Speaker 1: forty times earnings for the likes of Nova and ORDERSK,
Speaker 1: you know, it's going to be hard to make a return,
Speaker 1: we think, or.
Speaker 2: At some point everyone's going to be thin. The things
Speaker 2: work right, then that'll be that right. And then of
Speaker 2: course there are not one facts like that. The diet
Speaker 2: book industry collapses, maybe the gym business collapses.
Speaker 1: Well let's see. But you know, the problem is paying
Speaker 1: too much for stories is not a good thing, and
Speaker 1: it is hazardous to your health. And so we go
Speaker 1: to whatever steps we can to avoid over pain for strap.
Speaker 2: There's a lot of stories around around in the world
Speaker 2: of energy transition. You just mentioned that you've stayed stayed
Speaker 2: out of wind, stayed out of solar. How are you
Speaker 2: playing the transition or are you just sticking with oil?
Speaker 1: Well we've got a little bit of oil. But I mean,
Speaker 1: you know, one of the one of the stories is
Speaker 1: will go by the utilities because we're going to have
Speaker 1: to They're going to have to generate all the power
Speaker 1: that that is that these AI data centers are going
Speaker 1: to use. Until you look at the balance sheets of
Speaker 1: these utilities and see how much debt they've got from
Speaker 1: having you know, installed solar and wind farms at high prices,
Speaker 1: and you go, well, I don't know if I'm going
Speaker 1: to go there. I mean, we do have we do
Speaker 1: have a small position in Kazat and Prom Kazakhstan uranium minus.
Speaker 1: I guess there's a bit of energy there. But but
Speaker 1: we're not doing that because we think that AI demand
Speaker 1: is going to drive energy usage. You know, again that's
Speaker 1: a theme and we're not really we're not thematic investors
Speaker 1: because it comes back to that story. We're rather the stock.
Speaker 1: Each stock has to has to make it on its
Speaker 1: own merits.
Speaker 2: Okay, let's talk a little bit about South America where
Speaker 2: again looking at your waiting as relative to the ending.
Speaker 2: So it's a big fat zero in the MSCI world
Speaker 2: and it's eleven percent in your portfolio. What does that
Speaker 2: mean or is that just Petro bast.
Speaker 1: Well, we're not just Petro Brass, and we've got ins.
Speaker 1: We've got you know, bank at Columbia. It's a good
Speaker 1: bank at an attractive price. Petro Brass. You know, people
Speaker 1: were ignoring Petro Brass everybody after that. Again it was
Speaker 1: a concern. You know, there's always an opportunity if there
Speaker 1: that if you if you can the difference between perception
Speaker 1: and reality. The concern was, oh, Lula's coming back and
Speaker 1: he's going to do a lot of bad stuff and
Speaker 1: for skate shares or whatever. It was shortly after you'd
Speaker 1: had the goings on in Russia and people were running
Speaker 1: from emerging markets. But yet enshrined in their articles is
Speaker 1: that they'll pay out over twenty five percent of cash
Speaker 1: flow as dividends. And so here are you buying a
Speaker 1: lower one of the lowest cost producers that had paid
Speaker 1: off used their cash in recent years to pay off
Speaker 1: their vast amounts of debt which that incurred from from
Speaker 1: building up their fields in you know, from twenty fourteen
Speaker 1: the next ten years or so, and that's paying huge
Speaker 1: amounts of dividends and and so I mean, I think
Speaker 1: in the first year we got many forty percent of
Speaker 1: our money back from dividends. And so you know, who
Speaker 1: knows where oil is going to go. I guess if
Speaker 1: you'd said to me a year ago that we're going
Speaker 1: to have China stimulus and you know, lots of tension
Speaker 1: and war in the Middle East and the Ukraine war
Speaker 1: on the go, what's oil price going to be I
Speaker 1: probably wouldn't. I'd guess a lot higher than the current price.
Speaker 1: So you know, one's got to always recognize that these
Speaker 1: cheap solar panels are displacing some of this oil demand
Speaker 1: and so that's uncertain. So if you're not sure where
Speaker 1: it's going to go, well then you want to go
Speaker 1: with the lowest cost producer, and petro Brass is one
Speaker 1: of those. And you're paying you know, very low single
Speaker 1: digit multiple for that, so with with dividends, so we'll
Speaker 1: we'll buy that.
Speaker 2: We're talking about so many different companies, so many different sectors,
Speaker 2: so many different countries. You're quite a small fund and
Speaker 2: I think you're quite a small team. How on earth
Speaker 2: are you covering the entire world?
Speaker 1: We don't waste mony time meeting manage.
Speaker 2: Well, okay, fine, do management.
Speaker 1: No, but I guess it's a bit like it's a
Speaker 1: bit like saying, well, hang on you if you're the
Speaker 1: coach of the English cricket team, Harneth, you know all
Speaker 1: the cricketers in England.
Speaker 2: Excellent question as well. I don't know the answer to
Speaker 2: that one either.
Speaker 1: No, you've just got to know what you're looking for
Speaker 1: and and of course, you know, you've got to know
Speaker 1: what you're looking for, have set up your screens, and
Speaker 1: then you wait until the fish swim into your pond,
Speaker 1: and then you know those companies. And so that's what
Speaker 1: we do. You know, we're not out there worrying about
Speaker 1: benchmarks and worrying that we haven't got meta rights and
Speaker 1: metas big in the index and we need, you know,
Speaker 1: form of view. If meta doesn't take our boxes, we
Speaker 1: don't look at better end off. So that's how we
Speaker 1: do it. We just focus on the fish that swim
Speaker 1: into our pond and know those fish.
Speaker 2: Yeah, and you don't have to worry about the index.
Speaker 2: I wrote a column recently about about active versus passive.
Speaker 2: When I say a column, I mean another column, and
Speaker 2: I've written so many of them over the years, and
Speaker 2: this one was about some data that someone said me
Speaker 2: showing that funds that are genuinely active I have an
Speaker 2: active share of seventy five plus and that shows that
Speaker 2: they're very diverse from the index, outperform on average over
Speaker 2: pretty much every time scale, and your active share is
Speaker 2: about ninety nine. So on that basis.
Speaker 1: Alone, Well, look, I read that article and I thoroughly
Speaker 1: enjoyed it. And there's one there's one topic I'd love
Speaker 1: you to explore in detail. Maybe you haven't, I've missed it.
Speaker 1: But there's this notion of active fee, which is how
Speaker 1: much you pay for your active share. And I think
Speaker 1: that's the answer because if we you know, if our
Speaker 1: OCF is just over one percent, but we got ninety
Speaker 1: nine percent active share, well that's one thing. But if
Speaker 1: you've got a fun next door which has got an
Speaker 1: OCF of seventy five BIPs, but they've got fifty percent
Speaker 1: active share, well actually you're paying them more for the
Speaker 1: active component to their portfolio than you are for us.
Speaker 1: And and so active fee, I think is an important
Speaker 1: number that a lot of people miss. Half the funds
Speaker 1: don't put their active share on their fact sheets, you know,
Speaker 1: and don't update it on a number of things. So
Speaker 1: I think it's a hard number to come after. But
Speaker 1: this notion of you know, at the end of the day,
Speaker 1: it's all about your returns, isn't it, you know? And
Speaker 1: I mean I had a conversation with somebody recently and
Speaker 1: they said, all you're twenty five BIPs. Your twenty five
Speaker 1: basis points out the running I said, do you know
Speaker 1: that that is a five percent move on a five
Speaker 1: percent position the whole year. I mean that is a
Speaker 1: rounding error. So if that's what's moving your the needle,
Speaker 1: then you know, let's focus on something else. But there
Speaker 1: is this, I think, this excess focus on costs because
Speaker 1: and this excess focus on benchmarks, because people seem to
Speaker 1: have forgotten, you know, we only that benchmarks also fall.
Speaker 1: I mean, since I've been running ran more the the
Speaker 1: S and P five hundred, I think is up double
Speaker 1: digits nine of the fifteen years and only down double
Speaker 1: digits one and that was twenty twenty two, and three
Speaker 1: months later you had AI, you know, removing that bad memory.
Speaker 1: So people have forgotten that benchmarks also fall. And performing
Speaker 1: in line with the benchmarks is not the be all
Speaker 1: and end all. It's it's am I getting wealthier in
Speaker 1: real terms is the key question? And if I happen
Speaker 1: to beat the benchmark, fantastic. If I don't, but I'm
Speaker 1: still getting wealthier in real terms, Well isn't that more important,
Speaker 1: you know than going down twenty percent when in the
Speaker 1: benchmarks full you know, twenty five and thinking you've got
Speaker 1: a good, good result. I mean, one of the things
Speaker 1: that you know as we're a boutique. We've got some
Speaker 1: three hundred and eighty million, eighty five million dollars under management.
Speaker 1: And when you're a small fund, obviously the costs are
Speaker 1: a higher component, but it also means that you can
Speaker 1: you know, you're a speedboat not a container ship, and
Speaker 1: you're not going to get stuck in the sewers canal
Speaker 1: and so you can move. But you know, with small funds,
Speaker 1: I think there needs to be a little bit of
Speaker 1: latitude for the small funds who you know, to be
Speaker 1: able to have a slightly higher OCF to to accommodate
Speaker 1: the fact that they are you know, this will going
Speaker 1: to keep the lights on.
Speaker 2: Yeah, I mean, I do think this is a very
Speaker 2: interesting point. It's really tough to start a new funder
Speaker 2: these days in Abertique because a lot of the wealth
Speaker 2: managers and people who might have given you seed capll
Speaker 2: previously are not going to do it if that if
Speaker 2: the cost come in over one percent, because that doesn't
Speaker 2: work for them. So you've got that, and then you've
Speaker 2: got the increasingly intense regulatory over lay to opening a
Speaker 2: new fund. So there does seem to be quite a
Speaker 2: competitive mote these days. Do you think that if you
Speaker 2: were starting right now, you would find it more difficult
Speaker 2: to get going.
Speaker 1: Definitely, I mean definitely. It's you know, it takes you
Speaker 1: a few years to get a rating or whatever rating.
Speaker 1: Some financial advisors won't look at you until you have
Speaker 1: a rating. You know, there is the whole scale element,
Speaker 1: so you'd have to absorb in the management company would
Speaker 1: have to absorb a lot of the costs themselves. And
Speaker 1: you've got to be doing something different, you know. I mean,
Speaker 1: how many quality growth companies are there? I look at
Speaker 1: our value peer there's only fifty one value funds according
Speaker 1: to this morning start at I'm looking at that have
Speaker 1: been around since we started, whereas if you look at
Speaker 1: you know, IA Global, there's one hundred and sixty seven.
Speaker 1: So it's you've got to be doing something different if
Speaker 1: you wanted to start today, and you've got to have
Speaker 1: some passioned capital, that's for certain.
Speaker 2: Is there anything that would persuade you to go out
Speaker 2: and buy n video?
Speaker 1: Do you know? I'm going to tell you something. A
Speaker 1: cram myself to sleep at night knowing that in twenty
Speaker 1: fourteen it was one of our largest positions. Wow, how
Speaker 1: about that? And so we spotted it a way back
Speaker 1: when when nobody else wanted it because they had licensed
Speaker 1: some technology to Intel and Intel was a big portion
Speaker 1: of their revenue, and everybody said, oh, they're not going
Speaker 1: to be able to renew that and all the rest,
Speaker 1: and you could buy Innvidia on ten times earnings. Of course,
Speaker 1: I had no idea that it was it was going to,
Speaker 1: you know, reach the levels that it has done. But
Speaker 1: it does highlight that and we made money out of it,
Speaker 1: but we moved on, and so you know that's that
Speaker 1: is going to happen, and people say, well, you know it,
Speaker 1: wouldn't it be wonderful if you were buy and hold investor,
Speaker 1: you could have held on to Nvidia and be three
Speaker 1: times a size of the fund. But there are a
Speaker 1: couple of other stocks. I'm glad we didn't hold onto you.
Speaker 1: So you know, you take it as it comes. You're
Speaker 1: going to get some right and you're going to get
Speaker 1: some wrong. But the good thing is our process identified it.
Speaker 1: So no Novidia, no, I mean, and you know, Meren
Speaker 1: you what And this is a problem with many of
Speaker 1: the tech companies and I'm actually writing a piece on
Speaker 1: this at the moment. Is I think they're far more
Speaker 1: expensive than people think they are, because what happens is
Speaker 1: in these technology companies, you've got your stock based compensation,
Speaker 1: they give you performance unit stock units or whatever and
Speaker 1: to the staff, so call it share options, and so
Speaker 1: in accounting terms and the income statement, that's included as
Speaker 1: a cost. But these companies love to focus on free
Speaker 1: cash flow because in free cash flow that is added back. Okay,
Speaker 1: the problem is what are the companies doing with the
Speaker 1: cash flow. They're buying back shares, but the buyback of
Speaker 1: shares is after the free cash flow number, and so
Speaker 1: these companies are buying back shares, but who they're buying
Speaker 1: the shares back from when they're not buying in the
Speaker 1: open market. Effectively, they're buying them back from employees who
Speaker 1: exercising the options. So you have removed the cost, you know,
Speaker 1: in terms of how profitable these businesses are from the
Speaker 1: free cash flow. But then they're using all the cash
Speaker 1: to buy back the shares. And I think I'm right
Speaker 1: in saying that. Well, one of the tech companies, I mean,
Speaker 1: I think it's a video. Two thirds of the shares
Speaker 1: that they're bought back last quarter were you know, options
Speaker 1: that have been exercised. So these companies are way more
Speaker 1: expensive than you think. They're not returning cash to shareholders.
Speaker 1: They're giving cash to employees.
Speaker 2: Effectively, they're not they're not returning cash to shareholders. They're
Speaker 2: bumping up their wage bill. But it doesn't quite come
Speaker 2: out like that.
Speaker 1: Yeah, Meta, the last time I looked there, you know,
Speaker 1: they'd spent almost all their free cash for Biomax shares
Speaker 1: and the share can't had not fallen. So you know,
Speaker 1: this is the thing. So what you actually wanted to do,
Speaker 1: you've got to look at that. And so that just
Speaker 1: means these companies are more expensive. And so you know
Speaker 1: every day Jensen Wong is selling one hundred and twenty
Speaker 1: thousand shares. Now that's a rounding eraror according to his holding.
Speaker 1: But you know, here you've got a company with Nvidio.
Speaker 1: Every single one of their large customers is trying to
Speaker 1: eat their lunch. You know, the tech bubble. And not
Speaker 1: to say that we're in a tech bubble at the moment,
Speaker 1: but but you didn't have with Cisco and you know,
Speaker 1: custom their customers being at and T and Verizon and
Speaker 1: the guys, they weren't trying to develop their own router
Speaker 1: and switch. But yet in the video. All the customers
Speaker 1: are trying to develop AI, their own AI, chips, Apple, Meta, Amazon,
Speaker 1: the whole lot. And so why on earth do I
Speaker 1: want to pay thirty five times sales when I'm up
Speaker 1: against my biggest customers who are cash flash and cash generative,
Speaker 1: trying to eat my lunch.
Speaker 2: Yeah, particularly when you can build a portfolio very significantly
Speaker 2: lower valuations that you have higher expectations for.
Speaker 1: My son was reading the Little Book of Value Investing
Speaker 1: the other day and I said, Tom, what are your
Speaker 1: key takeaways? And he said, the future is unfocostable. Don't
Speaker 1: pay too much for it. And I said, well, that's
Speaker 1: exactly it. The future is unforecastable. Don't pay too much
Speaker 1: for it. You know, don't be too convinced that you
Speaker 1: know what's around the corner, because history keeps reminding us
Speaker 1: we don't. And so the only way you can protect
Speaker 1: against that is not is by not paying too much
Speaker 1: for it.
Speaker 2: Sean, I know that I have to ask. I have
Speaker 2: to ask what everybody is thinking, How old is your son?
Speaker 1: My son is twenty okay.
Speaker 2: All right, And I'm glad he's not a teenager because
Speaker 2: that makes me feel a lot better about my own teenagers. Gosh,
Speaker 2: they're not reading investment books of an evening. They're absolutely not.
Speaker 2: Now listen, we have one last question. You've got ten years.
Speaker 2: I'm gonna give you a choice of two things, gold
Speaker 2: or bitcoin.
Speaker 1: It is definitely gonna be gold. I am not in
Speaker 1: the bitcoin camp. I'm afraid, Merron, and I'm disappointed. I'm
Speaker 1: sorry we don't have more gold mine at where we
Speaker 1: don't have any gold miners in the portfolio. But there
Speaker 1: have not been great businesses, you know, they very difficult businesses.
Speaker 1: But if I had to go for if it's either
Speaker 1: or it's gold all the way.
Speaker 2: Okay, And what would make you change your mind on bitcoin?
Speaker 1: Nothing?
Speaker 2: Absolutely nothing, nothing.
Speaker 1: I'm with Charlie Mungo all the way on bitcoin. And
Speaker 1: it's a family radio, so I bit not repeat what
Speaker 1: he said, but.
Speaker 2: Okay, all right, we'll repeat that when we get to
Speaker 2: the end. Family Radio. I wish thanks for listening to
Speaker 2: this week's Maren Talks Money. If you like us show,
Speaker 2: rate review and whatever, you listen to podcasts and keep
Speaker 2: sending your questions and your comments to marrin Money at
Speaker 2: Bloomberg dot net. You can also follow me and John
Speaker 2: on Twitter or x I'm at Marinas W and John
Speaker 2: is John Underscore Steppek. This episode was hosted by me
Speaker 2: Marrin's Unset Web. It was produced by Somesidi and Isabella Ward.
Speaker 2: Production support and sound designed by Murders and Them and
Speaker 2: special thanks to Sean Tsh