Bloomberg Audio Studios, Podcasts, radio news. Hello, it's Meren sumsat web here. This week our guest is John Warren, co founder of Telworth Investments and manager of the TM Telworth UK Select Funder. He's got eighteen years of investment experience, but that's not why we asked him on. He runs an absolute return fund, which is something that John and I find particularly interesting. So we talk about the way
that works. But before we get to that very exciting conversation, as we always do, we start with what I think most of you consider to be the best part of the show, a conversation with money to Silve newsletter author John Steppek, John, let's talk and I'll tell you what. Let's talk about your absolutely favorite subject.
New high after new high after new high.
Who wouldn't want to hold the buddsy one hundred exactly?
And we've got another new high today as we're recording. In fact, actually I may need double check this, but Simon French over at paneers Gordon the other day tweeted out to me saying that if the food see manages to close a new record high twelve times in a row within a month, this will be like the first time that's happened since I don't know, years and years and years. So that's very exciting.
What's making it happen. What's making it happen.
John, the fact that fund managers are essentially held animals, and they've seen something hit and you high in the suddenly like, oh my god, there's a bandwagon in this movie.
After interrupted briefly, we don't we don't call them herd animals. We don't call them. Oh yes, investor, Well we had this conversation before momentum investors.
That's the politically correct.
Okay, So finally global investors have noticed that the UK is cheap, that Brexit has not been the end of the world, and that there are some really great companies in the UK and they can have a significantly lesson they can buy companies elsewhere. But even after all these new highs, I think the UK is still in nineteen percent discounty global pays.
Right, Yeah, Still it's still cheap, and it is. It is interesting because I had a quick looks. So my go to for all of these things is the Bank of America Global Fund Manager Survey. It's actually really good sentiment indicator and it comes out every month. So I look back at the January one for this year, and the UK's been at the bottom for ages, and the
January one it was rock bottom. Fund Global fund managers said that they were more underway the UK relative to history than any other asset class, and it's like twenty one different asset classes, so big, big underweight, as in they don't like it compared to the benchmark. And then I looked at the same one for last month and it's basically been the same, you know, February, March, April May.
That's actually changed that they've actually moved some money into UK stocks and they're now ever so slightly just above average compared to the last twenty years. So that's been a real kind of there has been a real sentiment shift in a fairly short period of time, and it has pretty much coincided with a new record high. And to be fair, also they kind of move to value because people have started to get a bit kind of started to think that actually interest rates are going to
be higher for longer. Some maybe or the growth stuff as in't necessarily the thing you stick with anymore. But yeah, but I do think mostly it's actually momentum as well, we just bought something moving and you don't want to be left behind.
John, He respects. Nobody has want to see respect fund managers. He's all over there absolutely right.
Listen.
So we're getting note of the note of the note from various banks, brothers, et cetera telling us what we've been telling you for a long time now, that the UK is cheap and you should buy it. But I don't point you to one in particular, which is from our podcast regular James Ferguson, and he has written a note and I will do a little summary of it and stick it on John's Money to Sold newsletter for you at some point. And his it's called it's called Union Jack in the box. Right. You know this is
not and this is not an ordinary ball market. This is a British ball market, right. And his argument is that as slightly different to our argument, to be honest, it is that inflation is absolutely out of the picture. He says that as far as he can see, there is very little inflationary pressure left. There's an eighteen month
contraction in nominal money supply, two yearstagnation of GDPETE. There is absolutely no excuse for base rates to be knocking around to this sixteen year high of five point two
five percent. So he thinks that once inflation is out of the picture, and he thinks it, everybody will realize that soon rates have a quoting here ample scope to be cut a long way, alleviating the pressure on both indebted retail and commercial property owners, stimulating productive bank growth, and all without threatening a real acceleration in prices anti closures.
No wonder, the foot year is just broken out to a new six year high, and so he's looking not just at the cheapness, but at the fact that he expects interest rates to fall quite fast soon. And I did ask him about that and he said, there's just no reason for them to stay.
Hi.
I still feel as if I think you did, John, that that central bankers might be taking the opportunity to try and normalize the idea that rach should knock around four percent one percent, and therefore the fall is going to be slightly slower than a lot of other things.
Yeah.
I mean, I've got a huge amounty respect for James because he's one of the few people that we in order to explicitly got the two thousand and eight crisis right and was one a book deflation even after all the money printing, so we knows we was talking about I. Despite all that, I still struggle. We see that Hartman, and it also depends, I mean, it depends partly what he means by a fast drop in interest rates. I've read some of the note, but not the whole thing.
And you know, if he means it will get to four quicker than everyone's expecting, then that's one thing. But I don't Again, I'm on the camp that says that rates don't go below three percent effectively ever again, you know, as a for a very long time. So I'd be curious to know a bit more about exactly what he's expecting.
All right, I'll give him a call.
I'll give him a call.
We'll stick it in the newsletter. But he keeps using the word substantially. The NBC has very clear part of the courage substantially reduniate bank lending, et cetera, et cetera. His only concern, of course, is the incoming labor government and the Bank of England.
Will they work together and.
Keep policy relatively tight, unleashing the private sector to go for growth, or will they not? I think we can probably get see answer to that, but we'll come back that maybe in six months or so. Right down, anything else you want to say about this wonderful billmarket, No, I.
Think everyone should just sit back and enjoy it.
Now, before we get on to the conversation with John, I want to point you to something we talk about during it that we didn't define and we should have. We talk about Sonya, and he talks about wanting to outperform Sonya, and a lot of you are going to be looking at that and you're going to be thinking, well, what earth is Sonya? And what it is is an interest rate benchmark. It's the average price that banks paid to borrow stirring from each other overnight. So it's just
a standard, straightforward measure of basic interest rates. And if you are going to attempt to outperform that, you're just going to be making more than you would in cash, which seems like a good way to run a fund, right John.
It's the deplacement to libel because people may it here to libel.
Ah, Okay, good point.
Right.
We'll come back to this in our conversation after our conversation with John. Welcome to Maren Talks Money the podcast In which people who know the market is explain the markets. I'm marrin Sumset Web. Here's my conversation with John Warren, who launched Tellworth Investments in October twenty seventeen. Before lad, he worked at Casinos Capital Ubs an investor. We begin the conversation with John explaining why the fund he runs Tmtelworth's Select just different to a standard fund.
The Tailworth fund that I run, the UK Select Fund, is an absolute return fund. So what we are trying to achieve is very consistent, low volatile returns for our investors, and we achieve that by being both long and short shares. We do that by being neutral to the market, so we're not trying to take a big directional bet on
the market and basically be stock pickers. So we want to buy stocks that are going up and be short of stocks that are going down, and make consistent returns with a very low volatility and importantly as well not be correlated to the direction of the market or changes in economic conditions or interest rate cycles, which is clearly a big area for dat debate at the moment, and really just we are targeting eight to ten percent returns
a year on a consistent basis. That's what we're trying to achieve for our investors.
Okay, that's an extraordinary thing. Eight to ten percent a year. Now, when you say absolute return, of course, we're all immediately thrilled because one of our big ripes me and John, one of our big rights of the fund management industry as a whole is benchmarking is the idea that returns are always relative to something the returns of something else. You're never judging yourself in absolute returns how much money have you actually made for people year by year by year.
It's about, well, you know, I have performed this benchmark by zero point five percent, or I have performed that benchmark by one and a half percent, or.
Whatever it is. And we always look at it and we think, well, hang, onlydic.
If you are judging yourself relative to something, it's got to be quite hard to outperform it over the long term because you're always looking at it and going, oh god, you know, I'm scared I'm gonna underperform it. Therefore, you do end up investing in a way that is much closer to the benchmark you're tracking than then you should.
Right looking at active.
Active shares that the extent to which your fund is different from the indexit tracks, and so often you're still looking at at fairly low percentages of funds being genuinely different to their benchmarks.
And I always think that maybe one.
Of the great mistakes that this industry has ever made is being relative.
I'd agree. And what are people trying to achieve with their savings and what are savings products trying to do? In investment products trying to do?
Well?
You're trying to grow your wealth over time. That's surely that what everyone is trying to achieve. It's certainly what I try and achieve with my personal wealth and with my investors' funds. In the in the fund. Clearly, if you are long only, there is always some elements of directional direction of them underlying market you're investing in that's going to dominate returns. So very hard to make absolute returns if the market has a big bear crash, for example.
What we do, though, is by making sure that we're not taking that market. By having positions both sides, it means that we are generally should be expected to make returns irrespective of what's going on in the border economy. In the border markets, so we benchmark to cash, so we have to outperform cash, so we use Sonya for that. So clearly that wasn't much of a challenge for many years. It's more of a challenge now, but we benchmark against that, so we expect to make a return in excess of
the cash return. And like I say, targeting eight to.
Ten, do you think all fund managers should do that? I mean, I always think that it will be polite of fund managers to tell us they're going to make us cash plus three for example.
I think it would be a nice thing to hope, and I think most people judge their wealth managers with that if you're looking at an overall portfolio. I think it's quite hard, though, if you're investing in a niche specialist fund to expect to be able to beat the direction of that fund. But I guess a lot of it comes down to your time horizon, doesn't it. And unfortunately many people now look at quarterly performance or half
yearly performance. If you're looking over a five to ten year of view, then I would think that's a perfectly acceptable thing to expect to ask.
Yeah, I mean, anyone charging you one and a half percent or one percent or even eighty basis points a year for their special skill should be able to give you cash plus three percentage points over a five year period.
I think once you're getting into longer term periods, that's an absolutely fair, fair requirement.
Okay, good with the established new rules for the fund management industry. Anyone who can find a reason to disagree with us, hate Melton John, Please, I know expect.
I expect some colleagues will be getting in touch suit shortly.
They always do. Okay, So here we are. You're invest in the UK market.
I know that for you, it's not about direction of the market itself, because as you just said, you're short and you're long, and you're trying to be neutral. But nonetheless it feelds like I'm intensative here because you know, you can have the wrong feelings. But it feels like something is changing in the UK market. That thing people are beginning to get interested.
The big banks, the ubs is, etc.
The brokers are beginning to change their view and suddenly say, well, if not the market we eight most in the world.
It's one of our favorite markets.
Because it's cheap and it's interesting. There's a sense there might be some foreign buyers coming in with seeing new eyes and the footst forty one hundred over and over and the other and the other areas doing well too. Might even be some interest in mid and small caps coming through. Are you buying it that there's a turn here?
It definitely feels like there has been a change in the sentiment into the UK market. I think that's come from a few reasons, one of which is just performance. Unfortunately, the market is a momentum chasing market in so many ways now, and the performance that the market has had is attracting some more plows of funds. I think one of the areas which has been much talked about on this podcast is the lack of equity inflows into the
UK market that has been ongoing for a long long time. Interestingly, though, overseas investors have actually been met buyers of the UK for a period now, and the very noticeable factor as well has been the increase in M and A. So we always thought one of the big catalysts for the UK market sentiment change would be a footy one hundred bid. We've had that with the approach for Anglos from BHP.
Clearly that hasn't actually come to any formal agreement yet, but just the fact that a business of that size is attracting M and A, and we've seen a lot
of it further down the market caps as well. We invest a lot in the MidCap part of the market as well as the large cap part of the market, and we've seen lots of bid interest, so the trade buyers coming in seeing value in these companies at meaningful premiums, and the overall that just the valuation of the UK market is very very attractive on both an absolute and I hate to say it, Marian, but a relative basis
as well. So when you're looking at the UK market relative to particularly the US, I think we're a second percentile, so you know, a two in one hundred year valuation cheapness against the US market.
Well, we're happy to look at relative off we've already looked at absolutely so with ubernapps terms, and then it's also extremely cheap in relative terms.
Then I think that's excellent news.
But you said that foreign bius have been met bias for a little bit of time now, but.
Domestic buiers consistently are not.
And one of the other things we say we always say on this podcast to our listeners, particularly those who are UK based investors, if you don't buy these stocks somebody else?
Will? We see that in the L and A Right, what is it do you think that might make UK investors start buying again?
Will they dive into thisum momentum? Or they do they need something like the britt Eye Cerel something like that to make them stop with the domestic self loathing which we see not just in not just.
An investment, right, we see that across the board. What might make them return to us?
Well, like I say, unfortunately, some of it is fomo, so some of it is just needs to be the fear of missing out. We also have some long only funds that tell us. One of my colleagues pull Marriage, was seeing an investor only the other week and that investor said, well, I'm very happy to miss the first twenty five percent of a move. So sometimes that's the way that people want to move, and unfortunately people are trend followers and that may well be the case that
we need that just that performance. I think changes from pension reforms, from the brit Isser, all of these things are great sentiment helpers. And actually I think the other point that we probably need to see is just people actually starting to look at value again and understanding what valuations mean in investing. The market has been very driven by momentum, earnings upgrades and almost wanting to buy growth at any cost. But at some point valuation does matter
and that's what corporates are telling you. That's why they're buying these companies. And as we see interest rates hopefully started to move down in the UK, it seems like the UK economy is slightly different now from the US quite possible. We don't see rate cuts in the US, but we probably will see them in the UK. We think we probably get one in June, and that may well just bring people back to the UK a little bit as well.
They will get one and do even with those rather than nice GDP now as we had the other day, showing that actually things are so badly.
Economy is barreling along rather pleasantly.
I think so, And the signaling from the NPC I thought last week was probably that we do still get one in June. I don't think it matters too much whether we get one in June or slightly later in the year. The main thing is that I think there's a very clear signaling now in the UK market that rates have peaked and the next move will be downwards. And when you look at the correlations of the Footsy two to fifty, particularly to rate expectations, and it's very strong.
So if we start as those rate expectations come down, we see the Footsie two fifty starting to form really quite strongly. So I think that boats quite well for the domestic parts of the market, and maybe a broadening out of this rally that we've seen, which has actually been pretty narrow so far. It's been very driven by banks, miners and oils, and we would see that broadening out more into the Footsy two fifty as those expectations of rate cuts start getting priced into the market.
Okay, so let's let's talk about where you're actually invested there. Now, you say that your your market neutral and you're set in neutral way of no specific adherence to any any favoraus, sectors or anything like that. So your pure stock pick is so where are you? Where are you finding the value? What is interesting?
We do think the banks have been interesting for a while. We were a bit early into it into last year, but we still think that West Has is a fantastic business. It's got great opportunities. It's now growing its tangible and asset value. You've got the structural hedge which will have some meaningful impact on the on the P and L this year.
Stop stop, go back structural hedge.
So this is basically the way banks manage their balance sheets, so how they fund themselves, and that means that as interest rates expectations change and come down, that hedge starts paying them money. In simple terms, so we think at Thatwest it's about three hundred million pounds of profit a year generated from essentially the balance sheet where they have a fixed leg and a variable leg on their balance sheet.
It's been a big negative impact on the P and L while rates go up, and it becomes supportive to the P and L as rates fall.
Okay, so if rates don't fall, if.
Rates don't fall, it will have a net zero benefit to that. You know, we won't impact. But as time moves on, you have some of that old leg of the P and L which was funded at very low rates that starts to roll off. So even if rates don't fall, just the passage of time benefits the balance sheet as well.
So now with other banks, yeah.
We are also think that One Savings Bank is interesting. This is a buy to let lender. It's had its issues, It's definitely had its issues with expectations management. Its interest margin has been its net interest margin has been under some pressure. But these are just very, very cheap equities now. So One Savings Bank is trading on a pee of less than five times, it has a you know, it will be returning some cash through dividends as well, and so we just think there's just incredible value and we
have to be patient. I think it's very important to say that. Sometimes when we tell people that we're along short investors, they think hedge funds trading. All you're doing is taking short term bets. Now, we're very happy to take long term views on these businesses, and as long as we have that balance within the portfolio, we can take that long term view.
Well, I accept that you're not looking at sectors.
Are there any other groups of stocks that feature prominently in their portfolio?
Yes, so airlines and tour operators is a part of the portfolio. We were quite encouraged. We own we own Jet two, we own easy Jet, we also own Ryanair. We think that's the sector that's in really good health at the moment. It's one thing that it seems that the UK consumer is not prepared to give up on is there summer holiday and until this weekend you can see certainly see why with the weather we've had so far.
One of the areas we like to look at a lot when we're analyzing businesses in industries is the supply side, and the supply side of the package holiday industry has changed a lot. We've seen some quite big exits. Obviously, Thomas Cook going bankrupt a few years ago has made big changes to that industry. But also the other area of supply side is in the supply of planes, and it's been well publicized that Boeing and Airbus as well
now are having some problems delivering new planes. That means that a lot of these airlines have some real pricing power now because capacity is not coming back into the sector as quickly as people might have expected, and therefore they're getting good pricing. So unfortunately, although everyone is going on holiday, it's costing you all a bit more this year, but that is very good for the profits of the airline companies. Fuel prices have also come down as well,
so we like the dynamics of that industry. Again, the valuations they are really attractive. You know, jet to seven and a half times earnings. I think for the forecast, you know, it's longer term average P has been twelve. This is a business that's grown revenues at twenty percent over the last decade and profits at thirty trading on seven and a half times earnings. So you know, we really see there's both good drivers for the P and
L and also a very attractive evaluation metrics. Across the airline sector, there's.
No sense at all that people are translating there in tense anxiety about climate change into their some holiday plans.
Is that it definitely isn't impacting consumer behavior at all.
Is there any long term risk to holiday companies and airline companies around saying regulation on the extent to which one can fly or not fly and constantly seeing stories in the newspapers about her won't be long before we're all limited to four long haul flights in a lifetime.
Let's hope not. But look, I guess there's always longer term risks for companies. The one thing I would say is that we're paying seven and a half times earning. So it's a bit like when you look back at the tobacco companies. Clearly everyone has taken the view that tobacco is not good for us, not good for anyone, and they've been heavily regulated. But you know, when you're paying very low valuations for these for these types of shares, the shares can still do a really good job for you.
And that's what we would see.
And also, if you're one of the incumbents, you're set pretty.
Fair well, exactly. And that's the thing. It stops new new entrants coming in and wanting to try and compete away those attractive margins that you're seeing.
And that's also the case in energy, because no one's going to go out now and sort of set and your oil company.
Are there, no, And you know, again, oil isn't a sector that we play a lot in a bit like the miners. What we're trying to do is as stock pickers, what we want to be able to do is analyze in actual company and value of value like that. What we don't want to have to do is make these big macro calls. By being market neutral and factor neutral, what it means is that we don't have to spend our time worrying about what the next GDP figure is
or what the next interest rate cut is. What we can do is have a balanced portfolio in the way that you have with an oil company. Clearly, the most important thing for how that share price performs is what's happening with the oil price, and frankly, we don't really have a clue, so we'd rather not make that decision.
All the evidence tells us that nobody has a cluience.
You wouldn't be alone there, You don't only be alone and in missing it exactly. So what have you added recently, what's come what's come out recently, and what's coming in recently?
I would say the most recent edition would be a business called Dowlay actually, which is another stock that very much falls into that value bucket. So Dowlay was a spin out for Melrose. It's an automotive supplier, so not particularly trendy, I guess in that, you know, and maybe if we're getting into ESG world, you can can we can talk about that. But they are a leading producer of drive trains, so these are the parts of them
that actually changed the engines down through the wheel. So you have a drive train that comes down the middle of the car and that puts the power from the engine into the wheel. They're the leading provider of that in the world pretty much. That have some good products for electric vehicles as well. But this is a business that has really just been completely lost in the UK midcaps.
Like I say, it's spun out of Melrose, So the shares got put into the hands of Meloe shareholders, who I don't think really wanted to hold a UK MidCap auto supplier. So that's been They've been sold heavily and now these shares are trading on ap of five times with a decent balance sheet in an industry that you know, they are growing revenues, growing profits, when we just think
that's you know, just too cheap. What we've been watching there has been we've been watching the shareholder register and how that's evolved, and we've seen a huge churn in that and we think that that's pretty much at the end and on that valuation, we've decided that was an interesting time to come into the stock.
It does see ridiculously cheap, doesn't it. Are you seeing a lot of that kind of price in the smaller MidCap sectors at the moment, and particularly in midcaps.
In midcaps, I mean, there are a lot of stocks. I mean, we did some analysis at the start of the year and I'm afraid we haven't updated it since, but we looked at the footsy two fifty. So in the footsy two there's one hundred or at the start of the year, obviously is a few less now, but
there are one hundred and sixty seven trading companies. So if you take out the investment trusts, et cetera, one hundred and sixty seven now a third of those were on a free cash flow yield greater than thirteen percent. There's really really strong cash flows and the market's just
ignoring them. People often thought, don't they that profits are show and cash is you know, cash, cash is the king, and if you've got that genuine cash flow coming through in these companies, it's very hard to doubt that those those valuation metrics are for real. So, yeah, we see a lot of a lot of great opportunities in the medcap space, but also in the footy one hundred as well. Like we've been talking about that, you know, the banks and the airlines are still very, very cheap yeah, and Marks.
And Dispensers, is it still one of your top holding? Yes, I think I feel like I feel like in my career.
Now I've been I've seen Marks and Spencers go around and so many circles.
It's getting ridiculous.
And so many times when people have looked at Marks Dispensers and gone on, my goodness, are so cheap.
It's so cheap. It's so cheap. And and here we are, here, we are still cheap.
I'm not sure myself as well how many times I've brought into a new market expenses recovery plan, but this one actually seems to be working, so yes, it's marketing expenses is actually the biggest position in the fund at the moment, single stock position. Yeah, we think it's it's actually, you know, the transition plan is working really well. The things we have looked at, particularly given US encouragement, is the full price mix. So that's improved from being in
the sixty percent to eighty percent. So that's how many of their sales they're managing to sell at full price rather than having to discount.
And so what's normal in the retail CITA.
The best players in the industry will achieve ninety so next and Indo text will be in the nineties, so they're still a bit further to go and we would hope them to get there, but sixty was pretty awful again when you know, looking at the supply side. The one thing that's has been quite a lot of exit in clothing in the UK market. There's been lots of closures. Probably the most important one for the sector was Debenham's closing.
They were the most disruptive in terms of that discounting on the high street, so that's probably helped them, but also better ranging. But interestingly, even with that move in full price sales, the gross margin hasn't really improved yet. Part of that was clearly cost inflation, but also that implies to us they're becoming much more cost competitive, which is clearly important in the economy at the moment where consumers have been a little bit under pressure, So we
think that's really interesting. The food business has always been good, there's a big opportunity for them in homewares and beauty products where they don't push anywhere near their weight, and the balance sheet is much better as well. So yeah, we really like Maske expenses and as I say, it's the biggest long position in the fund of the moment as the two.
The other two that I'm quite interested in. Your top holdings are the London Stock Exchange. Tell us about that a bit.
London Stock Exchange is a really interesting business. We think it's one where there is lots of m and a opportunity for them. You know, we've seen consolidation in that space. Is also transferred transformed its profitability a lot into data products as well, so the Footzie and the Rustle indexes. And as a small business, we know how much we
have to pay for these products. And there's definitely been strong inflation in there been a good performer for us, and it's actually been one we have been reducing because we do see that valuation as being pretty full now.
So okay, so you reduce of that on a valuation basis.
Is that how the shorts work as well your shorts to make your market neutrality.
You've got longs and you've got shorts.
The shorts are they companies that you think are lousy companies or are they companies that you think are just a little too pricey even if they're high quality.
How did that work?
It could be a combination of both. So generally we have about forty positions on both sides, so we have about forty longs and about forty shorts. So clearly, trying to find forty companies in the UK market that we think are going to go bust is probably unlikely. So we can't just be short bad businesses. Also, as I said, we want to be factor neutral as well, so if we're looking at the quality factor, we have to be short. If we're long quality businesses, we need to be short
some quality businesses as well. So we have to accept the fact that we're going to have to be short businesses that we think are really good businesses where we just don't think the valuations are right or we think there's some risk out there. It's a tricky skill. Not many fur managers have done it successfully over the years, because you really need to have that ability to separate businesses and share prices and accept the fact that you can be a good business but you can be trading
at the wrong valuation. And unfortunately we are a UK only fund here. We do a little bit in Ireland and a very small amount in Europe, but that means unfortunately we can't be short lots of the very highly overvalued businesses in the US.
So it's pretty brutal stuff. Then the way that you work, you know, and there's an.
Ordinary firm manager that says to meander around the bay finding something kind of like. But pretty much every time you find something that you like, you also have to find something you're prepared short.
Exactly, and it is and it's hard work, and it's we need lots of ideas, but also sometimes it's accepting the fact that some of the shorts will not make you absolute returns. So you know, at the moment the last over the last month or two, it's been pretty hard to make absolute returns on your shorts because the market is going up very strongly. But as long as we can pick longs that go up by more than our shorts than clearly we are we can make good returns for our investors.
Okay, but it's harder for you when the market is rising. So let's say that we're.
Right, you and I, because we're bound to be right, said the UK market being in recovery and the momentum leading to more momentum, because the hardest John and I discussed last week all fund managers are really momentum managers.
It doesn't matter what they tell you. Oh i'm value, i'm quality, I'm this, I'm that. Now, you're all momentum, right.
So as it gets going, it'll get going more the market goes up and it becomes hard for you. You you're harder for you to consistently outperform other funds. Although we don't believe in relative but for the moment, let's talk about was relative to other funds. As the market covers, that becomes more difficult for you, not not easier. Surely, if everything's going up.
It makes it more difficult to make absolute returns on our short book. That's correct. But clearly what we need to do is make sure that our lungs are going up by more than our shorts and when the market is performing very strongly, we are not going to make you the same amount of money as a long only fund, but what we will do is protect your capital much better and hopefully make you returns when the market is falling. So it is that we don't sell this fund as
a UK equity fund. So most people that invest in this fund are not buying it because they think the UK equity market is going up. They might be buying it because they think the UK equity market is going down and therefore they want the ability to have that absolute return. What they're saying is this plays a part in my portfolio of where we can get that consistency of return and uncorrelateable to turns, So it's not correlated to equity markets or bond markets, and it's producing that
type of return stream. But yes, I mean, you know, is always hard. Most of the market is always positive, most analysts are always positive on stocks, So you have to be prepared to be cynical. You have to be prepared to go against what most people are telling you about that company, and usually the company managements as well, because clearly company management teams always want to tell you how great things are. They don't want to highlight the
bad bits. So that's definitely a skill that you have to develop for running a strategy like this.
Strategically speaking, for a retail investor, if you are thinking about how to constructure your portfolio, and perhaps you have a fairly big passive component to your portfolio, this is the kind of active fund that it makes sense to hold alongside a passive portfolio.
Does that make sense absolutely.
I think these funds are not very well understood by investors. I think sometimes people are scared of them. I think sometimes the regulate it scared of them as well. To be honest with you, with the risk ratings we get sometimes on these funds because we do shorts companies and we use we use CfDS in the fund, so that makes the regulator sort of a bit concerned about this product and can put quite high risk ratings. But actually when you look at the return profiles, these are incredibly
low risk funds. And we spend a lot of time as fund managers managing the risk of this product to make sure that we're not taking market risk, that we're not taking interest rate risk, we're not taking domestic risk as well, so we don't want to be sort of just long the domestic economy as well. So I think they hold it a really they can play a really important part in an overall investor's portfolio for that sort
of ballast of something that's trying to achieve. And when most people think what's an acceptable return on my investments over the years, as we say long term returns, people might usually assume us sort five or six. So if we can generate eight or ten in any market environment. We think that's a really attractive income stream.
Makes we'd all say that, of course, do you worry that passive is getting is getting.
A little too much?
That you know, the beginning of the drive towards passive, we were all blother thrill that the idea that you could get a perfectly adequate.
Long term investment at an incredibly low cost.
But now that more and more of the assets under management are passively managed, do you.
Think that affects the market? All? Of course, there any long term problem.
I think it does, and I think that that the industry needs to have a look at this at some point and see where is the tipping point that we're not getting proper price discovery. And I think you know that is always a good risk that passive is. You know,
you're just mentioning about how every investor is a momentum investor. Well, passive is the ultimate momentum and I think it brings real risk and the idea that well, I'm passive to the market, therefore I'm reducing risk just isn't the case, and particularly not when we're at stages right now where the mags seventh for example, is taking up so much of these global indices that you're actually taking a lot of risk that you probably don't realize you're taking by
being passive. And as I say, one of the reasons why I think that's so the valuation argument is not being looked at, and the valuation attractions of certain markets and certain stocks isn't being taken into account. It's because the passives aren't looking at that. The passage just look at a weight and buy it. So it definitely brings risk. I think it was highlighted very strongly last year with
Silicon Valley Bank. I read some statistics that there was one quite vocal short in that stock, but no one listened to him. But I think seven out of the top ten shareholders were all passive investors. And as they said that if you look for the problems, you could have seen them. But passive investors aren't looking for problems, and that means you get very bad by discovery, and that means that you get some big issues coming into markets.
You have a price discovery problem potentially also a governance problem.
Absolutely, Oh that's depressing.
Sorry you carry on.
No, I was going to say, well, I do think there's a sick clelement to these things. And clearly the market has moved strongly into passives and that's been partly driven by a regulator as well who's very focused on cost, not just on investment outcomes. So I think a more
balanced approach on that will will help as well. And you know, maybe it needs a bit of a bear market or you know, a bit of a correction in some of these really big stocks and these really big you know, the areas of crowding in the market need to have a correction that they will then shake out and make people understand that cheapness of the investment product, just so the cost of its investing is not the only Is there any thing you should be solving for in portfolios.
When you look around the world, which I know you're very focused on the UK, but I'm sure you're saving an eye for the rest of the world. Are there are any other markets that you find interesting from a valuation point of view? I'm guessing you wouldn't touch see you after the barge pole.
No, I wouldn't. I mean, the KPE of the US market is thirty three times, so the KP is the long term pe. So the ten year pe that's at thirty three times, which I think is only been above that twice in its history. So no, I think the US looks like it's valued for perfection to me, with margins pretty much at peaks. So I think there's a lot of risk in the US market. I do think
China might be getting interesting again. I mean a very uneducated view, so please, you know I'm a UK stock specialist, so please don't on global markets.
We're interested in your instincts.
So I think that you know, China has looked is starting to look interesting again, and maybe a few more of the emerging markets could be you know, Japan has clearly been had a good run. I think that the Japan is maybe a good indication of what could happen in the UK. You know, the valuation has got to extreme levels in it rallyed quite hard, and I think that we could be entering a period for the UK market a little bit like the rally we've seen in Japan over the last eighteen months.
I'm not sure the jab may's been thrilled to be locked in with emerging markets.
Sorry, yeah, I was thinking in China in that sense, but you're correct to pull me up on that, so thank you.
Okay, Now the final question.
If I were to not allow you to hold any small caps, any mid camps, any large caps, in fact, absolutely no, he's at all. But for a ten year period, you had to either hold bitcoin or gold and nothing else.
Which would it be.
I listened to this podcast, so I know this question was coming, and I really wanted to try and find a reason why I could say bitcoin, because no one else seems to say say bitcoin, but I can't. Unfortunately, so I can't find a compelling reason to own bitcoin anything that has the volatility that it has, and being an investor that looks at volatility, that can't be any store of value. So unfortunate, I'm going to have to go with the huge consensus and say gold.
I don't think it's disappointing.
Well, I know, but I'd like to think we as a long short investor, we like being contrarian at times, so I wanted to try and find that. Unfortunately, I couldn't find a good reason.
Had you got any gold?
Yes, in my personal investments, I have a bit of explosure to gold. I also have a little bit of explosure to bitcoin as well. I must say I must admit so, but that is very much as a trading position, as a not as a long term investment.
Okay, well that you know that is interesting in itself.
So this is just the first time we have had anybody on the podcast who has admitted to being a bitcoin trailer on the side. So you've given us something, yes, exactly, Thank you so much.
Really enjoyed talking to you.
Thanks very much, Marian.
John.
I think I think that John John John too many John's. I think that John is really interesting and I think also worth saying before we really go into talking about what he said, is that the performance of this fund has been excellent. It's very small fund, and the small funds that are easier to make out perform than big funds.
I get that. But nonetheless, last five years he's up fifty four percent for one hundred over that time thirty three percent, but still you know, rising fast now, right, so we've massively outperformed the index he would use, which would be the investment station targeted and FLETE return index. I think although honestly, as we discussed in that conversation, he's not interested in the index. He's interested in making slightly more Hopefully, Brother a lot more than you will on catch.
Yeah, and I thought, I mean, I thought it was really interesting. I think the lesters all have enjoyed the fact that this has actually been quite a good tippy one sliced talk about individual companies.
I know it's not easy to get fund managers to do that, you know, I'm always trying to get them to come on, give us your top holdings, tell us your top tip, what would old for ten years or whatever? But mostly I think, you know, the compliance environment has changed, and in the old days it was quite easy to get fund managers just to sort of pour out a list of tips, but now they're rather more circum circumspect
about it. Well, most of them are. John John being the exception to the rule there, Thank you, John is.
Staff Because the top ten holdings obviously are public information, so you know, they should be able to come on and like feel free to talk enthusiastically about them, yeah.
And explain why they hold them. But mostly, as they said, it's quite hard to get them to do it, isn't it.
I did think the stuff about absolutely turn was really interesting because being able to go short is actually one of the few ways the active managers can properly differentiate themselves from passively. You can't do that with a passive fund. And even the most kind of like active retail investor is going to struggle to an extent to run you know, unless you're really kind of like doing a lot of CfDS and spread bit and things like that, you're going to struggle to run a long shot portfolio the way
a kind of fund manager can. So it's interesting say that sector is I mean, I know, absolutely turn got a bad name for itself because the returns were absolutely awful as opposed to actually beating interest rates, you know whatever about a decade.
I mean, that's true that they were awful, and it was all a bit, you know, all a bit awkward back then, But the truth is still a more honest
way to run money. And even if you even if you are a long only manager, it's still more honest, I think, to compare yourself to what we would get if we struck our money in the bank, and to work to outperform inflation rather than to outperform other fund managers, because that's what's really all we care about, you and I right, and our listeners I think too, they're not interested in being in having your money in the best
performing fund manager. That would be nice. Of course, what we're interested in is protecting our capital, protecting the purchasing power of our capital, and hopefully increasing the purchasing pawer of our capital. But first of all, mainly the thing that we want is, you know, don't reduce the value of our capital. I'm saving this up from my retirement.
I need my money to be a time machine.
I need it to be able to buy the same stuff in the future or more than it does now, not less. So let's work on that basis. And so I do think that even though there been periods in the past when this has not worked, and periods in the past when people have treated absolute return as hedge fund as opposed to cautious absolutely return, it's still honest and valuable way of running money.
Yeah, I mean, you're right. I mean, making a consistent real return is what you really want from your mind. And obviously, yeah, you do eventually get to a point, hopefully where actually capital preservation is more important than capital growth. So there's also I mean, that's another conversation as well.
But well, it's one of those things, isn't it. People, Or if you are. There's a risk things.
When you sign up to a wealth manager or a fund etca, which which risk level are you? And if you're at the top risk level, you're supposed to accept that it's possible that you might need a lot of your money. But no one signing up for those things really believe that to do they I don't know what really signing up to risk level five things themselves. I might use might lose forty percent of my money and I'm fine with that.
Exactly thinks that, Yeah, I mean, the risk question is is daft. I mean, you're where you're invested as an overall as an allocation level should broadly be based on your time horizon and not on any imaginary facity for temporary losses. Because that's the other thing. They're not actually asking you a YOKI will losing forty percent of money.
They're asking a you OK if we spreadsheet we send you every month sometimes says you've lost forty percent of your money, but at the end of that it won't be forty percent because the whole point of taking the you know the maximum risk is that you know it's a bumpier ride along the way, but you make more by the end of the twenty years or whatever it is.
So I think that that whole concept at risk is very, very confused, and I mean, I appreciate it's it's a confusing subject, but that's the kind of thing that people, you know, IFAs and things like that should be explained to people.
So really, really, instead of just taking a home like that, you should have a full psychiatric assessment, absolutely to make sure that you have a kind of person. Yeah, you can deal with the stress of that kind of fluctuation exactly.
You can get your prozac alongside your asse.
I mean, we get out a whole new layer of complicated compliance too, investing by insisting that everyone has some kind of analysis done before they're.
Allowed to take five Yep, I'm I'm sure that. Yeah, I said, think of the bit of the complaints industry would thank you for that. I'm not sure the stry.
But anyway, sir, I've gone off topic, John, I've gone off topic. Told me what else you found interesting about this conversation.
I thought it was all very interested the well you liked it.
Because he was his pro the.
UK market just like, yeah, he thinks the turn is in and he's talking about trade by trade bias, seeing value that really quite impressive premiums, and he's saying, you know, this is this is trying to on absolute levels. And although who's a bit embarrassed to say the word relative, he didn't say on a relative basis as well, So you know, he's very pro all the things that were pro. So we like that.
It's massive coinformation bias basically, I know loved that. And the other thing I thought was interesting was the shortened element, this idea that he's got and I must have met. There was a part, I mean, it was kind of train. It was struggling with that a bet and that I'm thinking were everything you buy a stock, you're going to have to shine. Wen't is short even if you don't think you know that are any that are great shortened candidates? But I guess that's how you make it market neutral.
Yeah, well, you know, you own the really good ones, and even if they aren't any bad ones, you know you sell the less good ones.
The other thing that's quite interesting.
We talked a little bit in here about about ESG and about people not following through on their beliefs on climate change, et cetera with their consumer performance and that, you know, so we looked easy Jet and Ryan Air except they like and that made me think again about the divestment that we've been though I mentioned earlier. You know, how how you get there is that we don't have
very many miners or oil companies. But if you were ESG minded, and if you were climate change minded, then you wouldn't want to hold any of these things, either, would you. And once you start not holding easy Jet and not holding Ryan Air and then not holding anything that creates jet fuel or anything that has a shop in the airport or anything like that, why do you.
End it's the fundamental issue, isn't it. It's kind of like the fund management industry in the SG side of things is the you know, I think this is where, even at a more fundamental level, is kind of green washing anyway, because an awful lot of the harder core arguments like you know, no one should fly again, you should never die in and out of the ground, are essentially anti capitalist, and you can you know, I don't
mind if you think that. I think you're stupid if you think that, But it's fine, you know, that's a valid you know, kind of it's your opinion. But at the same time, in that case, you just wouldn't invest in anything at all, because you know, you're propping up the market, you're propping up the system that you're trying to you know, unravel or destroy. So I think there's a very fundamental conflict, which is I guess coming more
to light now anyway. But yeah, so not I get that's the other reason why I think in a talk a bit of this stuff at one level it's both incredibly superficial and kind of pointless in the way because it's almost like two groups of people completely talking past one another, and the people in the middle who kind of like know they have to save for their pension, but they want their pension to be doing nice stuff and inverted comments because they're somewhat scared of money. It's
a whole different thing. I mean, in fact, that goes back to the psychiatric evaluation. Maybe because people get shed your taboos about money.
You know, Okay, this is going to be quite a long psychiatric session for everybody. Yeah, fund management, fay, they're going to gout massively, and so wealth management.
And faith we're all going to have to go shopping to get over it. I love that he's got Marks Responses in the top ten, and as I said to him during our conversation, I don't know how many cycles of Marks and Spenses is cheap. Marx Suspensive, Oh my god, Mark Suspense is awful, cell Max Suspenses. I've been through in my my quite a long career, actually, but I do I do think that right now, Mark Suspensis does look like they've finally got the hang of this retail thing. Yeah.
Actually I agree. Yeah, I feel exactly the same way as you. I had kind of got to the point where I was like, I'm never believing in the Mark Suspenser's turn the round story again.
But it does.
Then you went to the food hole, and then you went.
I mean, I've still got to see I still think why not just spend that off, split the manty two things, and then you've got, uh, you've got a clothing unit that occasionally performs, and you've got a food unit that is like, you know, a massive challenge. It likes waitros and all the rest of it.
Yeah, I don't want them to do that because they might move the two areas to different sites. And I like to buy nikas and food at the same time. And I think you'll find this a lot of other people out there who do as well. A non started John as a non starter.
Anyway.
And this of course is why we said I said at the beginning, and I'll say again this is not just a bullmarket, it's a British bullmarket.
Good right, that's good. That's good.
Thanks for listening to this week's Maren Talks Money. We'll be back next week in the meantime. If you like our show, rate review and subscribe wherever you listen to your podcast, and keep sending questions or comments to Merron Money at Bloomberg dot net. This episode was hosted by me Maren Sunset Web. It was produced by some Sidy Adriginal, editing by Moses and and special thanks to John Warren and to John da