Bloomberg Audio Studios, Podcasts, radio news.
Hey Marin Talks Money listeners.
Earlier this week, we had our subscriber event in the Bloomberg offices in London. It was so wonderful to see so many listeners and so many readerserves, so thank you so much.
To all of you who came, and to those of you who couldn't come.
We are bringing you some of the conversations we had that evening to the podcast feed. So first up we have my conversation with Sebastian Lion of Troy Asset Management. Enjoy. Welcome everybody, and thank you for coming to Marrin Talks Money, the podcast in which people who know the markets explain the markets. Now we are recording this episode with those of you aren't here, do come next time in front of an audience of subscribers at the Bloomberg London offices.
Now there'sill be three sections to it.
There's gonna be this bit where I talked to Sebastian, and then we'll do some more personal finance stuff and we'll take lots of questions. Do use that QR code to ask questions, but you will also be able to ask for the mic at the end, I don't feel you have to use the QR code. Now we're going to start all this with Sebastian.
Who's a long term friend of the show and mine.
We were just saying earlier we started our businesses around the same time twenty five twenty five years ago, and I think we've been talking about the gold price pretty much ever since, ever since.
Without without break, we've aged well, we have, we have and serves the gold price certainly has.
Yep, right by Sebastian, thank you for coming and doing this. Then let's start with the general miseries, shall we.
I mean listening how many are there? So many listening to that list of sigmons.
The first thing that I think strikes you is how extraordinarily calm markets are in the wake of that sort of bizarrely unexpected list of things that have happened in the last two and a half three months, on two and a.
Half weeks, let alone two and a half weeks. I mean, people have forgotten about the fed appointment. Really that happened at the end of January, and it's just sort of in the midst of time. But actually so much has happened since then, so I'm having to deal with that, having to keep your focus, are having to be consistent
as a fun manager with all of that. I mean, the noise level are off the scale, but consistency, as you're the seers are, yes, absolutely what we do try, That's what we are there for.
So I think what we really want to talk about this evening is how exactly you manage money and construct a portfolio in this kind of environment, because really the style that you use was really.
Designed for this kind of environment, right.
I mean, there are a period in the markets when you want to be in expensive growth dove and where you want to be thinking mainly about how do I grow my capital, how do I make more money all the time, And then there are berriers such as this when mainly you're thinking about how on earth do I protect what I already have.
It's about preparing for dislocations basically, because dislocations happen, whether it be COVID, whether it be the financial crisis, whether it be the dot com bust another instance, whether it be the Gulf Wall, the invasion of or not the invasion of Iran yet, but we'll see about that maybe in a few weeks time. So we are waiting for those. Those events give us opportunities, but we also know that
we need to be ready for them. We were ready for COVID, although COVID came totally out of the blue, we were prepared for the point of view, our act allocation was relatively low because xtually markets were high going into COVID. There was a lot of vulnerability. There's a lot of fragility within XIT markets.
So when ready for COVID.
So we weren't ready for COVID because no, absolutely not. But you've got to be ready for these instances and they come from left field. I mean, if you think about even three weeks ago, markets were very abulliant. People were talking very positive about ciclicality, about bank stocks, about house builders, all those areas of the market. Heavily cynical
businesses which we tend to steer clear of. Those businesses now are down fifteen to twenty five percent just in the last two and a half weeks, with the your price going up. All you've got to do is be prepared to say, actually, those are not the kind of companies that I want to be in, because you know that those sort of instances can happen and do happen, and those businesses are more fragile, moreulnerable. I was with a property agent, a West End property agent this afternoon.
He said that all transactions are just stopped literally on a pin, just until this situation is resolved, which may be weeks, it might be months. Transactions have just finished. So one has to be ready for events such as that. What they actually bring is opportunity. So as a long term investor, one can actually take opportunities when one sees
huge risk a version. And we haven't seen that yet, by the way, But if and when we see huge risk of version, we see markets full as we did during COVID markets fell thirty five percent within the space of nine weeks, then you've got to be ready to act and lean in and take more riskers you're paid to take more risk. That's how you generate long term
returns but also protect the downside. And the key thing for us, for personal assets or for the Trojan Fund, is that we want to give our investors a more comfortable ride that they sleep at night, that we're consistent, that they know they can run on us. So if markets do suddenly fall twenty five or thirty percent, that that they know that the Trajuy fund or personal asets would have fallen considerably less than the market a couple of percent. Well it could be a couple of percent.
And when you when you look at their portfolio, you are not measuring yourself relative to a benchmark. You're always thinking about inflation. And that's it about first maintaining the real value of the assets before you think about growing them.
Absolutely not about how it's perfect you're doing.
It's not about absolutely not. I mean, obviously we look at the foot see obviously we look at the MSCI, the long term track record of the Trojan fun which is the longest track recording in back twenty five years. You mentioned, we've generated the equity type returns seven percentage, about the same as the UK stock market, but with less than half of volatility, so about six percent per year volatility rather than the market being thirty and.
Measuring yourself against RPI rather than the CPI.
Well that's going to change, but I don't want to give any too many surprises away because of the change in the RPI that will ultimately change. We need to review that. But yes, it has always been the RPI. We are trying to protect the real value of people's capital income helpful though it is is a residual. We never reach for income. It's one of the pluses of
the whether we do it. Some of the people who invest for capital preservation have the tendency to reach for yield, and we actually do the opposite.
Okay, let's start the next bit by talking about your inflation expectations, because I know a lot of the portfolio has historically been designed around your expectation of fast rising inflation, and obviously the war is going to feed into that absolutely.
Yeah. So I mean, with the your price up but one hundred dollars and it my spike further, I wouldn't be surprised if it sprites further. Then obviously we're going to see an inflation shock to the RPI, so that none of those numbers have gone in we think. I mean, it's very interested listening to your podcast two weeks ago with Edward Chancellor. That book The Price Time We've given
its clients. It's a remarkably well timed, brilliant book. But what he is effectively saying, what we have recognized as investors over the last five six years, is that in
twenty twenty with COVID. Things changed, and things were going to change anyway when an event happened, whether it be a recession or or whether it be a pandemic, as it happened, but interest rates basically bottomed, and we had this extraordinary period of a decade where interest rates were at zero and nailed to the floor, and we recognized that we were going to go into a world of rising rates and probably as a result, higher inflation all
the other way around. We saw those inflationary pressures build up, which we saw with the war in Ukraine. RPI went to thirteen percent CPI and the US went to nine. It has been above target since then, so central backs have failed to get it below target. We think we are in a world obviously clearly helped by the old price going out to two hundred dollars, where the surprise will be on the upside for inflation rather than downside. Twenty ten to twenty twenty one, the surprise was permanently on
the downside. The centerprise was struggling as hard as they could to get actually inflation up. Now we're in a very different world.
Okay, but you know this was very much the case. But before the oil preach started to move.
Yes, well, we yeah, absolutely, we believe that we're in a secular period whereby as Edward is, where yields are rising, where the bond market, bond market yields bottoms in August July August of twenty twenty, yields have been rising since then. Yes, there will be downward moves. What's very interesting about this period, the last few weeks is that actually, although the expectation would be with the rising oil price of flight to quality,
yields would actually fall, they haven't. In fact, they've risen. So there isn't that protection, that natural protection of the sixty forty sixty equity forty bonds. And we knew that we were in a different world where sixty forty type structure of a portfolio. You asked me about the structure of the portfolio. We moved from a world where you do not want to have sixty forty because actually equities and bonds can go down at the same time within an inflationary world.
Stick with inflation. What are the drivers of this change?
I mean, I think we can probably list them all in geopolitics supply.
Chaine, well geopology, but in particular tariffs, the world getting larger, rather so the world was always getting smaller with global lotation that really has been reversing for quite a long time now. That has meant that there's a greater fragility
in supply chains. And that is meant when we've seen these crisis, whether it be Ukraine, whether it be Iran, that the response is higher prices, whereas we've been used to lower and lower and lower prices, and it takes these shocks where there's a very oh okay, we're back in this world again. We're back in this world of higher prices. The old price. You know, there is a
higher prices are deflationary. Well, yes, if the price goes to one hundred and fifty dollars, suddenly demand disappears because people can't afford the old price at that level. So that that's when we get the risk. I think there is a risk which I don't think is being discounted at the moment of recessionary courses.
And you would you also think that the public debt problem feeds into the inflationary environment.
The public debt problem doesn't help, doesn't help at all. No, it's because effectively policy makers are stuck as stuck in this period whereby they have to consequently out of the debt. I mean in the UK the interest bills now weout one hundred and ten billion pounds. In the US it's one point one trillion, So that desperately trying to keep the interest rates down, but clearly at the moment that's not necessarily likely to be the case. If anything, interest
rates are going to be on hold. As central banks try and work out could there be a policy error of putting rates up or keeping rates on hold when actually demand falls off due to a high old price, or should they be cutting because it's that we're into a recession and you.
Think recession risks in the US everywhere globally.
Yes, absolutely so that I'm not predicting a recession, but there is far more of a risk recession than markets are discounting. After two and a half weeks of this. If this carries on and the gover of Homers stays shut for a prolonged period of time, call it three to six months rather than three to six weeks, then you could have real issues. And you know, I do see the lightly of the downtown and the downturn. There were risks of a downtime back in twenty twenty two
twenty twenty three with with the invasion of Ukraine. But fortunately in that situation there were huge pent up savings from consumers, so consumers were actually in a very good place back in twenty twenty two twenty three they could withstand the higher prices to some extent. This time around, you've got a K shape recovery. I a mismatch between the haves and the have not have not You've got in the UK, you've basically, as you know, married very well.
You've got zero growth as of the quarter to the end of January before this happened. And in the US actually growth has been not as strong as as many have expected, you know, sort of two percent, but by US standards actually relatively modest. So it's coming at a difficult time.
The challenge to your moving away from recession, the it challenged your view on inflation, is that the technological progress that we're making at the moment is very deflationary. That the combination of AI, robotics, all these things coming together is a huge deflationary impulse across the global economy.
Technology always has been a deflationary impasse. But I think that what's happening in terms of the reversal of globaliza. Globalization makes it, I think, much more difficult. That's why I mean, technological gains have been been made over the last five years, have been made materially since twenty twenty, since twenty twenty two. Yet we're in a position where
inflation is above and sticky and above targets. So I think the technological revolution view of keeping inflation down yes, at the margin, but I think there are other factors at play which are frankly more important, that are sort of overruling the factors of of technology. Just at the moment. We will see maybe that will evolve, But so far that technological argument over the last five years hasn't really worked.
Okay, let's go back to the conversation we started about bond and the sixty to forty portfolio.
That really doesn't work anymore.
But that doesn't mean there aren't fixed income holdings in your portfolio.
No, But they're very very short duration, so we're just not taking any duration risk at all, and we haven't taken any duration risk for a very long time. So with a very long bond, clearly you're taking a lot of duration risks. A lot of the value of that bond is out into the twenty thirties, twenty forties, twenty fifties.
The capital value to that bond is at risk if yields rise, as we expect yields to be sticky and continue to rise over time until governments ultimately intervene, which I expect them to do at some stage in the next four or five years, because this whole situation is ultimately unsustainable. Intervene now intervene in possible two ways. One would be your curve control because the interest is just
not affordable. Well, the tried and tested ways are either the your curve control or actually a cutting of the coupon,
which has been done in the past as well. If you remember but Warlane, which I used to own in the fact, remember, which is a very very long dated UK government bond, in fact about the longest dated that the yield was cut of seven percent to three and a half percent between the wars, So yields coupons have been cut, but yu curve to control is probably the most likely that was used in the US after the war.
But there are tried and tested They're not very pleasant and clearly they are default and clear they have implications for currencies, but the unsustainable nature of sovereign government bonds higher yields than today are very material. That is why the UK government is subsessed by the guilt market because you know that has huge ramifications for them.
Okay, so what replaces the traditional bond part of a portfolio so effectively it's liquidity, and we've got liquidity.
We've got index linked so for example, we'd benefit from that inflation. If you look at what index link bonds have done since twenty twenty since inflation started to pick up, and what conventional bonds have done, Index lenth bonds have done much better because we've been taking that inflation every month.
So we've got short but short dated index link. The longer dated index link bonds were very, very badly hit in twenty twenty two where we saw that inflation, but ironically people had long duration indexcellent bonds thinking that they were going to get the outside and actually the duration killed them even though they got they got the inflation.
The shorter dated index links, which we had, got the inflation without the risk of the duration, so we didn't get hurt nearly as badly in twenty twenty two as a sum. But I think the key thing is is liquidity, and then you've got the greater flexibility as well. So our bonds are less than two years in duration. We could look don't very very quickly and move into other
asset class if need be. And the other thing obviously within equities forty percent in equities and gold as well, which is ten percent of the portfolio.
Let's talk gold last we yes, I think we must say it.
Everyone expects us to talk about gold, right like it if we didn't yet, everyone wants justus talk about gold. Tis end of the portfolio. Still it's the biggest holding. But you have sold down quite a lot.
We have sold down quite a lot. I think it's more a question of tempering our enthusiasm. We have done very well in gold, going right the way back to when we met. I think we first bought gold for the Trojan found back in twenty two thousand and four, so over twenty years ago. Gold price was four hundred and twenty four dollars back then. We've held it uninterrupted all of that time. We haven't been in and out and in and outs. We held it a long time
and since after the financial crisis. We've in between about ten and twelve percent. But when I met you three years ago sitting on the stage, I think the price was around just over two thousand, two thousand, two hundred dollars something like that. Today it's five thousand dollars plus on minus. It's been a hell of a run. We know the reasons as to why that has been the A well exercise particularly interesting and not about consumers or
institutional investors particularly adding to gold. Be much more about central banks diversifying their portfolios, and that has continued and that's been of great support to the market. So I'm not overly pessimistic about gold at these levels. However, they have had a great run and we need to get our risks proportionately correct. We allowed gold to run out fourteen percent at the end of last year within the portfolio. In January, the price spiked above five thousand, five hundred dollars.
We sold some just over about five thousand, one hundred, five thousand, two hundred dollars, and we brought it down to ten percent. So it's a very bitch. We've cut our goal hold in about thirty percent in a day. Shows how liquid it is.
A ten percent.
At ten percent, I think expresses low long term confidence. In the short term, I think it's going to be quite bumpy. It's traveled a long way very quickly, and I think it's not necessarily going to protect in a way that it has done in the past from volatility within markets because of that high level. So it's just not going to be that necessarily that portfol insurance. And we've seen that in the last two to three weeks. We've seen the bomby of Iran at a time the
gold prize actually hasn't done anything in Sterling. It's up a little bit because the dollars strengthened, but really it's done nothing. And you would have expected it if you were to say to me, right lo Gate, the US is going to bomb Iran with Israel tomorrow morning, what do you expect the gold price to do? You would naturally expect it as a flight to quality, for the
gold price to go up. It hasn't, and I think that and when, when, eventually, whenever it is, the US steps back from the war, then it would be interesting to see what happen the gold price. Then I wouldn't be surprised if it has a correction, but that I
would view that as a long term opportunity. I think with everything we've talked about in terms of sovereign debt risk, that is not going away, and that will be very positive gold, both from the point of view of weak ocurrencies and debasement, but also from the point of view of owning another asset other than fixed income. So so I don't think the bull market is over, but I think we have had a very strong run, and I think there's reason to be a little bit more circumspect
from these levels. And just there is no right answer about how to size this thing. I've got friends who've got fifty percent in gold. I've got friends who've got one percent in goals. I've got friends who've got no gold. So it is not necessarily to size. What I've always felt is that you've got to have enough to make a difference, but not so much that the tailwork's dog. So I've always felt between eight and twelve percent about right.
Were allowed to get to fourteen, we came back to ten, But I think that's the right sort of level for the environment that we're in. And it is an educated guest.
Frankly, always of course, but you would expect to invest a demand for gold to go up if you think that for many decades until relatively recently, everyone had four or five, six, seven percent of their portfolio in gold, and now the everage person still has.
Maybe zero percent in gold.
So you would expect as people starting to build up gold holdings again in response to the conversations had about bond and diversifiers and balancers, you would expect there to be a big level of retail demand coming through.
Yes, and I think that a lot of the diversifiers that people hope we're going to work, let's say in twenty twenty two, didn't work. And so yeah, gold has worked for the right reason.
So many people would say the bitcoin has worked to a degree, to a degree perhaps, but you've got none of that.
No, I'm afraid there are sometimes I admire the works of mister Buffett, Mistermonger, and you know, sometimes they say it goes into the two hard bucket, A nets cop out MAREA.
I'll take coin.
Definitely goes into the two our bucket, and I will leave that so far fast, people, let's talk almost.
I don't know who else bitcoin.
There.
Listeners audience are on your side.
Who owns gold?
I know everyone owns gold, right, hands up for gold For those who aren't with us, pretty much the entire audience.
We are an audience with a converted.
Then let's talk about the actually part of the portfolio and how you do that, because you know, when I look at it, I don't see any of much of the stuff that John and I have been.
Talking about on the podcast.
Basically, you don't see much in the way of energy stocks, or metals and miners or anything that really fits the the halo vibe hot and slower obsolescence, et cetera.
You haven't. You haven't gone in for that, and I might have expected you to.
Yeah, we have a little bit. We have diversified more. I mean, we like to invest in higher quality businesses. Quality is in the either beholder, and the key thing is is that we don't overpay for those quality businesses. So when events like Iran happen, when events like COVID happens, those businesses get Actually, the miners have sold off quite a lot in the last two or three weeks, so that was very much the zeitgeist of two or three weeks ago. Whether it is in a year or t
his time. We will see our preferences to own businesses which are defensive, where there's consistent cash generation, where there's consistent rewards for investors in terms of in terms of particularly dividends, which we prefer rather than buybacks, and we
hold companies usually for a very long time. Where we have changed a little bit in the last year or two is we've been reducing our exposure to US equities in favor of European and UK, but particularly European equities we think valuations are better, which where we agree with you, and also where we have sold out in the US.
We've sold things like American Express, which is very vulnerable to a downtown, which we've done did phenomenally well, and for example, we own that for over a decade, so we can hold companies for a very long period of time. We sold Procter and Gamble similarly, we'd own that for a decade, which had done very well and have a very material rerating. And we also sold Moodies because we were concerned about the risks there in terms of valuation.
So the quality is fine, the qualities are given. It's a question of the valuation and what we don't do is what we don't do. Unlike some quality growth investors run their winners, run their winners. We're very careful about making sure that we manage the risk. And coming back to your point about trying to not target an equity index,
we don't stretch the portfolio anywhere along index lines. But also we have pretty strong risk controls whereby if a stock goes above five percent, we trim it naturally anyway, because we don't want to have you know, we never know what could go wrong. Yeah, yeah, But the other thing that we've been doing within the portfolio is so we've been selling those sorts of stocks and buying things like railroads. We bought Canadian National. We've bought which obviously
is does fit the theme. We bought insurance, so we've always had an exposure to insurance because we like insurance from a portfolio construction point of view. It does something very different. It plays to a different cycle from the
equity cycle or the financial cycle. So we bought Chubb a couple of eighteen months ago, which has done well so and we bought Hubble, which is actually makes grid infrastructure not an AI play particularly actually, but just I don't know if you're were of this, Marin, But in the Californian wilfars that we had just over a year ago, one of them was started by electricity equipment that was
one hundred and four years old. The US really really really needs to invest in its electricity infrastructure, and Hubble will be a beneficiary of that whatever happens to AI. So we have shifted subtly. The portfolio quality is a difficult one because quality evolves and the portfolio has to evolve with it, and we don't want to get stuck in things that, in particular where valuations are too high
and there's valuation risks. That's the biggest risk of the way that we invest as valuation risks, because the businesses generally continue to grind out pretty well. But what we don't want to do is we want to be careful when Marcus get ever excited, as they did, particularly in twenty twenty one, and we reduced our exposure quite a lot during that period.
Okay, we're going to have to finish.
I feel like we could go on for a very long time, so I'm going to finish with one last question. What is the thing you are most worried about at the moment, I would ask other people what they're most optimistic about.
But with you, I'm going to go with womo is worried.
About sovereign government bonds has to be that over the next and I'm thinking about the next five years. That has got to be the thing that's the major worried because while I've said how it might be solved, it will be messy before then.
Excellent.
Thank you for finishing on that high notes. Qastian, thank you so much for joining us today.
Spats your line right, you're off, Thank you, Thank you, Thanks for listening for this week's Maren Talks Money.
If you like our show, rate review, and subscribe wherever you listen to your podcasts, and keep sending questions or comments to marrin Money at Bloomberg dot net.
You can also follow me and John.
On Twitter or x I'm at marins w and John is John unders.
Course step back.
This episode was hosted by Meet Maren Umset, where it was produced by Zamasidi and Moses and sound designed by Aaron Kasperspy Sor thanks of course, just Sebastian Lion