John, do you know I'm feeling guilty, feeling a little grubby. I've spent the last two days doing absolutely nothing but criticizing the Bank of England. I've been on the radio, I've been on other people's podcasts.
I mean, very active on Twitter, which is kind of fun. I see.
I'm constantly saying the Bank of England have got this completely wrong, that models have been wrong all the way through there, massively behind the curve. They don't understand money supply. These people are useless. That Andrew Bailey should be at the very least apologizing to us and possibly thinking to himself, maybe I'm in the wrong job.
Am we being unfair?
Well?
One thing that is, does that mean that this is your fault? What does the fact that the bank has just come out and put interest rates up by a full whopping half a percentage point up to five percent? I would love it if that was my fault, and I would expected to just put up by a quarter point now.
I would love it if that pob I mean, I think they've done the wrong thing. By whatever. I love the idea of power.
I think it's fair to blame you for mortgage rates going up.
Now, No no, no, come on, because I love I say, held the usually address it actually get some Normally we don't get any.
Oh yeah, I mean look no, so you're absolutely right to be criticizing them. Obviously, it's kind of it's difficult to come up with any defense. Really, the sort of is sleepy at the wheel, and an awful lot of central banking is about communication. It's like, I mean, Mario Draggy, I think proved is best. You know, we all these stuff about, you know, whatever it takes and all of that.
The communication part of the central banking actually really matters, particularly when you're in a crisis, and the reality is that the Bank of England has not only been behind the cuff, but it has consistently given the impression that it's behind the cuff. And now it's given the impression that it's panicking about the fact that it has been consistently be the couv I know, it's risking reason too much.
Precisely the point when inflation is actually coming back down, albeit not as quickly as you know, we may have.
Hawked because we do think that it is entirely possible that inflation is about to take a massive turn down in that we saw PPI inflation falling fairly dramatically. We've seen a lot of talk about what we know through prices have rolled over. We've seen a lot of talk from pretty much everybody about their input. Prices are beginning to fall, and crucially, as are right in my column foo Bloomberg Opinion this week, we've seen money supply rolling over.
So James Ferguson, who we often talk to about CROs Strategy partnership, He's been looking at the money supply numbers and pointed out that since March twenty twenty, money supply and four X you can see it in my column has risen twenty percent or so, as has CPI.
So pretty much fits exactly.
So those of you who have totally dismissed the idea that money supply makes a difference might have to have another look at that. And money supply growth has now of course rolled over. It's another thing that might lead us to believe that inflation might be about to start falling fairy dramatically.
I do think it's very interesting because I I'm on the defense about that one way or the other. But I do think that if inflation falls faster than anyone expects then the entire economics establishing was the mondetarists massive apology, because you know, James is actually probably the only person I know who was one hundred percent right the Q wouldn't cause inflation or anything like hyperinflation after the two
thousand and eight crash. He then was absolutely the right about the money printing lockdown causing inflation after twenty twenty. So if he's right again now then then nicely they should probably appoint them to the NPC.
Time to have a bit of a rathin.
And of course, you know, to be fair well, everyone with mainstream economists have for ages and I been saying the managers are wrong, the manager's wrong, the managers are wrong. This book from the Bank of England or two Bank of England economists, Roupeupatal and Jack Meaning, which was a little while ago, and I also write about in my column. The title of it is Can't we Just Print More money? Economics in ten simple questions? And can't we just print
more money? As the title of one of the one of the chapters, chapter ten, which I strongly recommend that everybody read, because the answer is no, no, we can't. Because it causes inflation, they wrote a book about it.
Don't you just tax it away or something? Because you've got perfect force? So things?
What?
No? Yes, well apparently not.
And I think the most interesting thing about this book is that the foreword was written by the increasingly unpopular Andrew Bailey, who presumably did what everyone who writes forwards for booksport does is.
Not actually read the book.
Because you know, if you'd read to chapter ten, can't we just print more money? You might have had some idea of what was going to happen if you printed four hundred and fifty How much? How much did we print? Let's COVID four hundred and fifty billion?
The thing is four hundred and fifty billion that I don't have the figure in front of it, but it was. It was money. Money was printed.
There's money. Money was printed. And look where we are now here we are here, we are John. We can make it sound quite funny, but it's not actually funny at all. As previously discussed, and what we're finding here is that transmission mechanism has really not been working particularly well since the Bank we ENGDN started putting up rates.
Because, of course, so many people own their homes.
Out right well over thirty percent, and a lot of people are renteds, and so it takes a while for those rises in mortgage costs for the people who own the houses in which they live to feed through. So the percentage of people who live in houses that have mortgages on them is not particularly high. And most of those people have fixes, so they don't necessarily roll over in a hurry.
So a lot of that pain is still to come, and.
That has made the transition mechanism not work as fast or as efficiently as it has in the past. But that doesn't mean that there isn't pain, because there is pain. And what if we got eight hundred thousand people rolling off in the next six months who are going to have to remortgage at rates very considerably higher than they would have ever expected. So we should do something, right, we should do something to help these people. What do we do?
Job?
Ah? Yes, this is the this is the age old problem. No, we shouldn't do anything. Unfortunately, it's one of the it seems to be at least one of the few things that the government might resist poking its nose into. You know, the problem is that if you if this is the transmission mechanism. And I think you can have a whole other debate about transmission mechanisms, how they work, whether we
should be doing any of that sort or not. But if the whole point of if your way of slowing the economy is to force people to pay more on their mortgages, then bailing those people out with taxpayer money is just going to be inflationary as well. So it's complete waste of time do that. But also I think we shouldn't be focusing on the mortgages side to they almost it's like people kind of like almost act as
if this is the only trans mission mechanism. I mean, you know, there are a whole load of companies out there carrying a load of debt as well, and they'll be looking at that and thinking, maybe we shouldn't hire another x number of people because in the about six months time we need to refinance our debt, and the
debt course is going to skyrocket. The other transmission mechanism is savings, so savers more people are locking in fixed rates on their savings now, so I know there's an argument to be said that when interest rates go up, savers get more income and therefore they can spend more. If you look at the actual figures, people are putting that money in time deposits rather than current accounts, which means obviously the money is locked up and it's not
going to be spent. So I think there's a work at risky kind of confusing issues slightly if we focus solely on the kind of relatively small percentage of people who are about to come off mortgages and being a lot of pain, but they aren't the only ones who are being affected by rising interest rates a lot.
Then listen before we finish up here, I just wanted to say a little bit more about the book which Jones flogs united at Macroschafty Partners and insist did I actually read rather than just give the introduction of which is you know is how I mostly read books. There is another chapter that I strongly suggest anyone everyone reads its chapter three. How do I get a pay rise?
They're going to need it. Read that chapter and then.
Should you be tempted to increase your levels of faith in the Central Bank, here's a couple of couple of quotes for you from the book.
He is one of my favorites. You're ready for this?
One suggests perhaps a little complacency maybe, and issue really a bit of varying. And let's see, the success of independent central banks targeting inflation directly has been palpable, having average more than ten percent in the nineteen seventies. In nineteen eighties, global inflation felt the five percent of the nineteen ninety three percent. In the two thousands, just two percent of the twenty tens. It stops there. They're going to have to add on a female lines for the twenty twenties.
So already, no, I cannot way like all past with So just in case anyone thinks, does any I mean there were two percent in fleetion in the twenty tens because the entire global economy collapsed in two thousand and eight. It's like ten percent inflation in the nineteen seventies because the pricey oil rocketed and we had stag flesh three ages. It's got nothing to do with central banks. Ah, these people, Sorry, I'll show.
You you are messing with Andrew Bailey's self esteem. You stop that right, Look one more quite for you. All this means that central banks can print money up to a point, but not endlessly. Less the economy falls into another age of uncomfortably high price increases and we failed DATO inflation target.
Increases in money must be just right.
These are the decisions that we at the Bank of ECN spend our days grappling with.
Just right, just right. I'm sure we can all agree.
It's not just right right now, is it?
No? No, you need you need to we kill drinking.
I reckon, I reckon. Mister Bailey's doing a little grappling today. Welcome to Maren Talks Money, the podcast in which people who know the markets explain the markets.
I'm Maren Sunset.
Well. This week our guest is Java's Williams, head of Equities at Premier Miton Investors. Javes, thank you so much for joining us today. May you say my pleasure?
I didn't know. It's a great pleasure to be here. Thanks very much, Maren.
Look, we haven't actually seen each other for ages, for which I blame COVID and all sorts of other things. But one of the last occasions we met was it was a long time ago, twenty sixteen, right, and you had just written a really interesting little book, which upfront I did write the introduction to it as well. So we're on the same page at the time, and it was called the retreat of globalization, and it was quite prescient because here we are seeing globalization retreating before our
very eyes. So can we talk a little bit about that, about what's happened since you wrote that book and how you've turned out to be absolutely right?
Now, the great thing about the retift of globalization was, in many way the seeds of the change already in place, only earlier stage. At that stage, we've seen more significant change since then. Specifically, we saw the pandemic, which is anything that's accelerated the trend, and that led to anxiety about long distance supply routes getting supplies. It wasn't just
about the lowest cost. If you wanted ppe in the middle of the COVID crisis, you suddenly find you in a queue and suddenly container traffic was held up, etc. So anxiety about that reshawing, of course has come through as a result of that. But also this whole point about divisions political divisions again that was reinforced by the invasion in Ukraine, and that meant that was reinforced. So
we're moving towards the retreat of globalization. I don't think we've really got into the main trends, which are going to be much more unsettled economic markets, corporates will come under margin pressure. I think it's going to be quite tough for companies not just survive but thrive in future.
And I think for the first time in thirty years, I think it's going to be a real advantage to be a listed company as opposed to a privately financed company, because of course the cost of bonds and borrowing money is going to start to increase. Is going forward in a way which is very different to the trends we saw during globalization.
That's really interesting. One of the things at the beginning of the COVID pandemic or policies around the COVID pandemic, one of the things that happened was that we started to see equity markets doing what they're supposed to do, and companies suddenly seeing the benefits of being listed, which they could suddenly go out for their shoholder and go
cross they need some money, can I have it? And it was handed over and that happened incredibly quickly and efficiently, and at the time we looked at that and we thought, well, look at that, this is fantastic we're seeing equity markets seeing exactly what they're supposed to do in companies that for a long time, you know, we had seen this dynamic where companies think, well, they don't want to list thing and to stay private indefinitely, and it looked like
this was going to be something of a turning point. And of course since then ypos have dried up completely and secondary offerings have as well, and that that wonderful to light bulb moment seems to have retreated rather.
Yes, I think what we have seen is obviously markets have been unsettled, and we've seen this kind of naturally natural kind of minimizing of interest to the very largest megacaps. And we have all the same kind of trend. Actually, as inflation took off in the seventies, we had in those days and the fifty five, which is basically technology stocks in those days, they became you know, they sort of pinched out at the top, and then you've got
a flat market in real terms. I think the US market S and P didn't go up for another eleven years after that, and I think we are entering a period when actually mainstream indices may actually flat line in real terms for extending number of years, maybe a decade or two, at which stage how are you going to add value? And that that's when active fund management comes in, and the message of the book back in twenty sixteen was we would move beyond indices back into active management.
And active management isn't just about maximizing upside for your shareholders. Of course that's very much the case, but alongside the great value being an active managers, you can minimize downside risk alongside that, and you can also put portfolios together which aren't just correlated with the mainstream fluctuations of markets. We think these features, all three of them, are become incredibly important going forward.
Okay, when you say flat line in real terms, the miserable thing about the last few years is that sounds really attractive. The idea one going to actually not lose anything in real terms. Suddenly it sounds like a distant dream.
Well, of course, the problem with flat lining is bouse markets fluctuate is that coming in that you slightly above the line, but it can mean you can have a peers below the line. So my own view is that it's going to be quite lumpy, and we don't know where the loan is going to be, but they could be in the real terms, really quite disappointing all bit
that they catch up. I mean, if you look back in Japan since nineteen eighty nine, it's almost flat lined and there's been all sorts of drawdowns along the way, so you know, it's not necessarily a very wonderful prospect, particularly when inflation in that case was so low.
Yeah, and Japan is really interesting at the moment, and now as you're writing about this week and saying one of the extraordinary things about it is that you know, the index has gone up massively, but if you look at the kind of trusts in the UK that our listeners might hold, and you know, they might rush off looking their portfolios and look for those twenty percent year to day returns, and they're simply not there. And they're not there because everyone investing in Japan running those kinds
of funds is holding the wrong stocks. They're not holding the big value stocks that have led the rise, that are holding more growthy stuff. And then on the other hand, the things that you would I think would really benefit from the corporate governance changes in Japan and I either very small value stocks, the ones that are trading below
price to book. They haven't really benefited either because nobody knows quite how to buy them or which ones to buy, and so they ignore those and go for the large cat value. Those up form and very few people hold them. I wonder if we might see a similar dynamic in the UK.
I think we will see. Well, we're always hard to start to see that. What we have seen over the last say two and a half years is the Footy one hundred is pretty much the best per pointing stock market in the world. It is that perform all others, even in lightfulight currency terms. And what's been interesting about that isn't just that we've seen the rise in evaluation of the Footsy one hundred just tiny bit it's gone
up when the market's gone down. But specifically we've had near water wall selling of local investors of the ukoics in the UK over the lasta eighteen months and the UK is still carrying on being one of the top performers. That's really interesting, that says local sellers. Sure they've got quite a few holdings that they're pleased to see it go back up. They can put some money into bonds and equities which have more value than they did previously.
But what that really says it's international investors pretty much for the first time in thirty years, are beginning to take some out of they're very high volatile stocks and put it back into companies which generates surplus cash, such as UK quoted companies paying good and growing dividends, which can obviously produce a return even when stock market's flat line. And the scale of that inflow into the UK is more than the redemptions. We just see the tiniest bit
of reductions in selling in the UK. UK market breaks out just like we see in Japan.
So who is still selling in the UK? And I do think this is really interesting. And then the big funds of the pension funds in particular, they're down to pretty small holdings in the UK. What if they all love to sell?
So it's not really the pension fust The pension funds are coming to an end, although they're maturing as well.
Remember so they've moved into bonds as people have become older and such light But most particularly what we have seen is actually many of the mainstream investors in the UK which have actually had an overweight position relative to the international industries for the last twenty or thirty years, and every time they look at their clients' portfolios, they say, oh, this dead weight has been holding me back, and they've reduced the UK and reduced the UK and reduce the
UK and a bit like a supertanker. It may have turned round and starting to go up, but from the point of view of behavior, we're still talking about the behavior of it holding back investors. And I think there's a hangover, and I think that is going to try up quite soon, and ultimately people will stop selling in the UK. Indeed, I think they'll start buying in due course because I think the UK market won't just outperformed
for the next year or two. In my view, I think we're in for another decade or two about performance of the UK. I think pretty much one of the best performing stock markets in the world for the next twenty years.
Okay. Interesting, You know, we have a lot of people on the podcast to hold that view and very few people outside the podcast to hold that view. It's a niche view for Merin Talks Money.
I think well, most particularly what's interesting about a twenty year view is that you've got to start off with nearly everyone underweight, and I think global investors specifically are very underweight. Local investors less underweight, but still relatively light wastings compared with where they worth twenty or thirty years ago. But most particularly, they also got to start on unusually
low valuations. The UK stock market, even the Footy one hundred is on astonishingly low valuations compared with international comparisons. You need both those conditions low valuations, low current waitings in client's portfolios for the new trend to last for twenty years. That's why I'm so confident.
And one of the lessons of past inflationary periods is that the only way to outrun inflation during those periods is to buy cheap equities at the beginning.
And particularly cash compounding. The great advantage of cash compounding is one, of course, you get an income even if the market doesn't go up. If you don't need the income, you can reinvest it and compound your income going forward. But the best opportunity is about being socially useful. We don't often talk about social useful in the financial world, but companies which are quoted can take over insolvent businesses. These are businesses which may be quite viable businesses, but
just overborrowed, they go bust. The debt is left with a bank. These are sold in a debt free basis to a new holder. All bit, there's extra working capital to be put in, and when you do that you can actually buy a really good business for a relatory low cost. We saw recently the made dot com, which came to market a few years ago is valued at five or seven hundred million at the time. Is all kind of very exciting, obviously, particularly joined covid when people
are buying sobers online. Unfortunately, didn't survive. It made losses. It went bust and last year, the end of last year was bought by Next POC for three point four million. Now, don't guess let's get confused. It probably had to put twenty five million of working capital to get it going again, probably thirty million. We don't know what it's going to be worth in the future. It may be worth three and a thirty million, not seven hundred million, but that's
three hundred million upside for Next for thirty million. Lovely stuff. What is really thrilling. The UK isn't just well known for cash compounding stocks. It's also known to smallness. We've had too much bigness during globalization. We need more smallness. And so if you had the same deal for an eight hundred and fifty million pound company, a company which is one tenth the size of next, then of course
is saying uplift. Three hundred million for thirty million investment is like thirty or forty percent uplift.
That's so transformative.
And as you move down the market cap range into the eighty five million pound companies, and we have quite a lot of eighty five million pound companies quoted in the UK, not internationally, but the UK's leader in smallness. Then of course the opside is that you need to raise capital. You probably need thirty or forty million to
raise from your shareholder. Is your market might be a hundred thirty hundred and forty million after you've raised the money three hundred million pounds upside on that becomes horribly interesting for the first time for thirty years. It's an advantage to be a listed company. It's advantage to be listed in the UK, and it's advanced used to be a small quoted company in the UK.
Okay, exciting, right, Well, let's come back to the small quod company. Because you've got you run two funds, right, you want the Diverse Income fund and you run the microcap fund.
Yeah, both investment trust.
Yeah sorry, both investment trust sorry, not funds. So the Diverse Income Trust now that holds companies across the market cap spectrum. Right, that's not a small cap absolutely, yeah. So tell me about some of the interesting companies and that, Well, the nature.
Of it is, actually these are companies which are going to generate good and growing income, so they can be mainstream companies. And there are some very large companies which produce good and growing income and we're very happy to invest in. There's someone that the financial sector, some of the you know, this is such a wide range of companies and quite a few.
They've been I mean in terms of performances. Is kind of the wrong sectors for the last couple of years.
Well you say that, I mean, you know, the energy sectors don pretty well. Shelves done extremely well, for example, some of the rios. Okay, it's peaked out, but it's it's done pretty well as well. So there are some mainstream companies which are often cap intensive. When capital was free, joint globalization and you suddenly have found that you were
doing well. Suddenly you had loads of competitors. Now that capital costs money, competitors don't come in so fast and you get a premium return for a much longer period. But as it moves down the market cap range, you can get into those companies which are a billion market cap and three hundred million market cap and and fifty million market cap which are also producing income. Now a lot of people think small caps are just kind of small parts or look alike. So the big companies, they're
just not. They're so much more agile. They're often in specialist sectors. Often they have a lesser degree of maturity and able to take advantage of the new sector perhaps a structural growth trend. So perhaps an XPS. I'm just mentioning the old company along the way, so XPS Pensions, which is a pension of advisory business. There's three major pension advisory businesses. They haven't you know, there have been
around a bit of pressure. There's been the FCA which which suggested that they can do a better job when such like and this company's coming through and it's investing hard to become a major alongside the other three and most particularly, they don't just generate cash, but they generate good and growing income. And specifically, with you all the un settled nature of the pensions recently, pension funds need
more advice than they ever did. So as a company which is growing at sales beautifully, it's generating stuff as cash, it's paying a good yield, and it's growing it yield, we would expect at a faster rate than most other mainstream companies. That's great at any time, but if we do get into a global recession, I'm working on the basis that you know, interest rates do eventually precipitate a global recession, then there's going to be fewer companies which
are producing good and growing income. There'd be some footzy one hundred companies, not many, but there'd be lots of those further down on the aid market, quite a few small cap income stocks. And the opportunity for this fund is to continue to invest and in those companies which are continuing to succeed even when the market's unsettled. And then on top of that things get really unsettled and
lots of companies become insolvent. But on that basis they can start to do deals to enhance their growth and actually accelerate their growth at a time when most other companies aren't producing much growth. It's you know, it's a very very exciting opportunity as far as we're concerned.
When you say good yield, what do you mean, neal on the trust as well, pushing five percent.
Yeah, it's just a bit under but we do change some of the charges against the income, so that hold it back. But most particularly, it's not just about the field which has been over four as you mentioned, but most particularly the ability for it to grow at a time when others are unsettled. So's we're set up back years ago with a two p dividend. It's grown it now.
It's a bit over four now. But the point is it's a fun where the income and the income growth we would hope would be more attractive than most of the index funds and certainly one of the many of the mainstream funds as well.
But you do find yourself concentrated in particular sectors.
No, not so no, I mean, clearly we seek to be careful about investing in companies which are under real pressure. So in the retail sector, for example, plele clearly there aren't that many companies. We do have a company called Shoe Zone in the portfolio, which is a shoe shop. You've probably seen it very much at the bottom end of the market. It's very integrated. They don't buy in anything,
they do it all themselves, include their internet side. So coming back to it, so they make margins when very few other people do. I mean they've just reported a couple of months ago they were training above expectations. There aren't many retailers which are training above expectations at the moment. So again we've got to find those companies across any sector.
It doesn't need to be just one or another. But what we particularly look for is quite a range of different companies and quite a range of different sectors because the status quo want to always be the status quo. What we saw with you know, when we saw the invasion of Ukraine was unfortunately anyone who happened to have Polymetal, which is a gold company obviously mining in Russia. The
share price came down eighty percent. And the advantage of having a broad portfolio is if you happen to have British Aerospace, that wound up forty six percent that day, So you've got to have a dura. You know, it's not just about having good companies. It's about having the range of companies that gives you resilience to unexpected news.
Okay, well, let's talk about the microcap fund, because I know no everone will find that very interesting. I mean, u case more caps, particularly grows. Small caps have had a pretty horrible time over the last couple of years, haven't they.
They've had a terrible time. So with this selling of the oiks, which has been a very key feature, we've seen offsetting buying of the international companies, So the foot one hundred has gone up even when most other industries have come off. But what's interesting about the smaller created companies. There aren't any international buyers with small companies. Nobody's really interested.
So you've had marginal sellers, very few bars, and the share prices are as many of the smaller quated companies, particularly the microcap companies. These are often one hundred million or a hundred and fifty million market cap companies have fallen almost irrespective they've got good news, they've fallen a little less fast. Some have gone up a few, some of which have exceeded expectations have gone up, but hardly
very as much as you might expect. And quite a lot of other companies which are just perfect ordering companies perhaps had a slightly slower order book or something. Their share prices have completely come down dramatically. And as long as you're investing companies with really strong balance sheets, what I mean by that is they have the ability to withstand a few quarters of not trading very well without
having an emergency rights issue. Well, if they can do that, then when the recovery comes, the full up side is still there. So the recovery potential when the market changes it is very exciting, and we're looking for that slight reduction in local selling to come off and suddenly we could be into a period where these companies recover very substantially. We saw a period a bit like that going back
to March twenty twenty when we had the pandemic. So during twenty nineteen we had the May government and they had all the kind of problems with what kind of Brexit agreement we're going to get, and of course the only thing we were certain about was that Parliament couldn't agree anything, and so there was a great danger that we actually had Brexit and an unplanned sort of chaotic wto kind of basis, and then of course we've got at least we've got a government who'd had a view,
they negotiated an exit. But then we had the pandemic, and of course the share prices came back on that.
But what was interesting about the period after the pandemic was that many of the smaller quoted companies which were able to continue to thrive even during global recession, and that meant that the share prices in microd cap Trust for example, rose dramatically, I mean not just a little bit, but dramatically, And so the share prices had been week beforehand, but the recovery potential was very, very substantial, and we could enter another period like that.
Yeah, so we're back at the bottom again. Now we are hoping for another recovery periods just.
Slightly lower bottom the last time, but it does, you know, and it can always go lower. But coming back to it, the upside potential and in my view, and obviously who knows the future, We've got to be a bit careful about being too certain about the future. But when we get the recovery, I think it'll be quite substantial, but in contrast to the sort of twenty twenty to twenty twenty one period, I think when we get up there, we might rest for a while, but I think we'll
have another one and then another one. And so I think over sort of a ten year period that the long term returns of the very smallest coded companies being part of the UK stock market, which itself might be outperforming, and possibly being the very best part in terms of returns of one of the best performing stock markets in the world. I mean, you know, the risk allD ratio is unusually attractive. If you go back to the nineteen seventies again, we had terrible local politics. We had three
day weeks, the sterling was very weak. The IMF had to come and rescue the UK in nineteen seventy six. You know it'd be a wee, a bit like Argentina in those days, right, And yet you might have thought, well, why by local companies, why buy smallness because they can acquire assets from the receiver and make not just retain employment, but make disproportionate return for their shareholders on the back of it. So I think that's what we're going to enter. That's why we're so.
Excited, and what are evaluations like in the small cat world.
Amazing? I mean it's just quite easy side, you know, it's just it's almost I feel a little bit guilty sometimes they're so cheap. I feel worried for thee If you feel guilty, well it's for the companies. Just think of these staff working for them, think of them management teams. The cost of equity is really prohibitively high and so they can't invest in the way they would like to.
It's very demotivating when you say to your staff, we've got a brilliant company here, but look at the share price and people say, you're quite sure, it's quite so brilliant. So there are some disadvantages, but obviously for investors getting in at very low valuations it's great. Obviously as they make acquisitions, as they invest in growth, as they do some of these transformational acquisitions, then the opportunity of rising writing further checks into these companies, which then can have
disproportionate return is very exciting. So yes, as I touched on, we're very upbeat about the potential. Probably I've been more upbeat about the potential for UK small caps that I'm more upeat now than I've been for the last thirty years.
Amazing, amazing. Okay, well, let's talk about some of the you know. Before I do that, I want to ask you one thing about inheritance tax, because there is a sort of growing fear that will be changes around the inheritance tax regime in the UK. A lot of the smaller listed companies on AIM benefit from being in ITHD
portfolios held by the wealth managers. Right now, if those rules change and aimstocks are no longer able to be passed down inheritance tax free to airs, etc. Will that have a significant effect on the particularly the microcap world in the UK.
It may well have an effect on some of the larger AIM stocks because of course, if you're close to the end of your life then basically you don't really want to be buying microcaps. You'll be buying some mainstream small caps which are of from some of the larger AIM stocks, So it might affect some of those. I don't think it's very likely. Even if it happens, I don't think it's going to be all AIM stocks. It
might be some of the very largest companies. The truth is the UK desperately needs investment into the corporates to generate employment to productivity improvement, we need to actually generate investments so we get more taxation for staicles and hospitals
and all that kind of thing. So when I engaged with government, and I engage with Treasury and others, the appetite for taking it any bit of extra tax out of this area versus the disadvantage of taking a bit of tax out of there is constricting these things is a really sort of it doesn't look very unattractive option. So I'm not saying I know the future, because numb must do, but I think it's extraordinarily unlikely. In fact, in my view, I think we're talking about something different.
We're seeing delistings in the UK. We're seeing companies which are choosing to primitive their primary listing to the US because the evaluations are so much higher. I think there's a much bigger chance that actually we see some mainstream companies and some small caps choosing to delist in the UK make their primary listing overseas. Now, that is a trend which is very unattractive because we want the relevance
of the UK market to very much in place. If we start to lose many of the major companies to perhaps listing overseas. Then ultimately the UK market loses its franchise to some degree. I still think there'll be a purpose in the smaller end of the market, but many of the main So if anything, you know, I think the government, I think all politicians are under real pressure to find ways to actually prove interest in the UK market, to reduce the cost capital so companies can invest in future.
And so going back, I think there's all sorts of proposals which are on the table to try and speed that up, and I think some of those might actually move the UK market.
Which of those I mean, I've written about this as well, and we talk about it a lot, John and I. Which of those proposals do you think might work? What can we do to encourage people to a list in the UK and be remain listed in the UK.
So coming back to it, I think the one which I particularly favor is I think Hague and Blair are put together a proposal that icers for the next three years. If you want your tax benefits, you need to invest seventy percent in the UK. It's pretty inconvenient a lot for the wealth managers. They'd have to move their class portfoilius run quite a lot. But my view is that would be a major improvement in terms of liquidity. First of all, if you were a UK local seller, why
would you carry on selling the UK market? You might just hold off for a while. As I say, we've got international buyers coming in that would drive valuations. But many of those iceers, of course, we then have to move some of their capital from perhaps some international stocks back to the UK market. And again that would include
many small companies as well as mainstream companies. So coming back to it, I think it would be a major trend difference and ultimately could not just help companies reduce their cost capital, but actually help the UK stock market itself break out on the upside and not what we've seen with Japan is everyone says all good, tell us about Japan, it's all breaking out, and we get the same pattern coming in the UK market.
Forced to demand. Well about that, forcing people to invest in particular areas most you mean new money going in twice is new money that's already in isis. So if you're an ICE a millionaire, you've got a wider wide spread of global equities et cetera. And Tony Blair turns around you tomorrow and says, well, or that it would
be inarticular, but you know it's on. Someone in the government turns around you and says that you're going to have to sell seventy percent of directories and bowld them into the UK.
Well, you don't have to have the text benefits.
I think that would cause riots in the streets of tumber as well.
It might well be that it's inconvenient for some, But the bottom line is the great advantages you're getting into assets which are so nearly valued, scored ratio is unusually attractive, and many of these assets actually are set to outperform.
So I mean that is the interesting thing about it, and that normally when governments force investments, they force you into expensive stuff at the wrong time, and this would be forcing you to take valuations into account and by chief stuff at the right time. But again it seems like a bonus.
I think it all boils down to being social useful. That the financial world is socially useful, right, So people who have savings, the purpose of having savings is to responsibly invest it in companies so they can accel at growth and generate more local employment, skilled employment, right to generate companies generate.
Quantity the UK's retail investors sees it. I mean, I agree with you, but I'm not sure that's how the retail investors sees it.
I mean, we've all got to have social emission to the You know, if you just look after yourself and don't look after the wider population, then you will lose your authority to actually continue because the governments will eventually go with the population because they want the votes. So we do need to be very demonstrably socially useful. And I think this is another fat so particularly as I say,
not just skilled employment. I think you degenerate extra productivity improvement, which means that you can pay staff at an elevated rate faster than inflation on a sustainable basis, and of course more local taxi. These are often local businesses paying local taxes. Again, you know, it's all very well getting this price of shell up, which is probably needed as well. Shellers on a rediitary low valuation compared with Chevron or Exon,
and we want to see that gap close too. But this would be for smaller quoted companies and that's particularly exciting.
Okay, you convinced me. I'm going to talk to John. We're going to start campaigning on this.
Thank you.
No, definitely win this one. Right, Let's go on to some of the exciting companies in the micro account fund. Everyone's interested in exciting small companies.
Yes, what's amazing, is you get again? I sort of touched on it earlier. These are small companies relative to very largest megacaps around the world, but in themselves they are large businesses, often doing millions of pounds of sales, generating millions of pounds of profit, and in many cases they're able to sort of be world leaders in their certain little niche industry. And so you just find this it's kind of strange to time companies aren't just absurdly
low valuations. It's calling over broken glass to raise capital at a time when there's so much little capital around. So, I mean, you know, a good example is a recent company which is called Shield Therapeutics. It's a technology company to some degree. It's got an FCA approval for something called Akroufer, which is a product which has very few side effects, particularly for people who are short of iron.
And there's all sorts of different methods trying and getting more iron into you, but they all tend to be not that lovely and have side effects. This product's got FDA approval, they're selling it, and they've just done a deal with a very large company in the US to actually triple the size of their sales force so they can actually grow their sales much more rapidly. They've given a large part of the upside away forty five percent.
But on you know, the FinCap note, which has just come out over two years, you know, to twenty twenty five. Actually I think maybe it's three years. The next three years. It's on a pye of perhaps one and a half, right, I mean net cash on the balance sheet.
I mean it's just.
What there's almost Japanese cheap.
Yeah, you know, it's so many companies like that. I mean, we've kind of think of ourselves as a business where we haven't got many technology companies. But ARM came from the microcap area. It used to be part of Acorn Computers. You know, it was Acorn risk uric you know, reduced instructions chips machines that it came from. It was incubated by a small cap that's where you can build these kinds of opportunities going forward.
Okay, give us another.
Okay, go on, So another one which I quite like at the moment. We love we love all sorts of companies. These are just the ones which come.
To the top of the I'm understanding how much you love a lot of company and getting that.
So Plant Healthcare, for example, which is a biologic core company which is involved in the agri market. What we look for is for companies which have technologies but actually it's demonstrated by third parties and that gives us real confidence because they would have done loads of research and due diligence before they do a deal. So they're just done a deal with Wilbur Ellis, which is a very
large corporation to sell. So here's a forty million pound company again already doing sixteen million of sales, but has technology which is sufficiently interesting to move the needle of wilburrowers. And again you know it's these are.
There, What is their technology?
What did they do?
So so basically they brought biological they're particularly helping for control of diseases and pests in crops, but they're using natural products to do it. And it's wonderful that they can use that and so you get less obviously long term increications in term of the environment, but better outcomes
as well. And another is sign Canode. For example, sign Conode is a business which is involved in I mean it spent the last ten years developing r F mesh for measuring meters meter readings really but not so much for the UK, particularly for international particularly those with quite uneven Internet connections. So of on mobile connections. Now a lot of mobile connections are pretty good in the emerging markets, but they do still have areas which are behind hills
and you can put these meters in. They can't send the data back. So there are mesh passes, you know, because obviously they do a whole district or a whole range of houses and so they pass the data up from meter to meter and so here to peer basis until they get to a meter which does have Internet connection or possibly mobile connection. Again. I mean, what's amazing is they've spent ten years developing this. India's rolling out everyone's going to have a met electricity. Miss Moses said that,
but most particularly he's putting billions into it. This company appears to have one of the leading market stitions, possibly the leading market mutition against forty million market cap net cash on the balance sheet tendering currently for a billion of sales. Now it's not going to get a billion because they're never win. All attenders a portion here, in a proportion there with all of the local utilities, which they all were responded. So again, these things are just
so overlooked and the upside is so high. The great advantage of investing in microcaps isn't just that you can make thirty or fifty percent. We love making thirty or fifty percent, We get it right. But you have that sort of inbuilt option value that when they move, they can move very, very substantial amounts. A good example of that,
perhaps in our current portfolio is You Group. You Group is a company which were set up actually by someone who basically used to run nursing homes and I think he didn't have very good time buying the extricity and other things for his nursing homes. And at the same time the government was encouraging new companies to set up and become utilities themselves to compete with Bush Gas and Eon and all the rest of it. And he set one up and in the end he thought, actually I
don't need my nursing homes. I can just grow this business. So he came to market. He's grown the business. Then here's a business which is growing maybe twenty thirty forty percent a year. You know, it's outstanding levels of service. So it's taking market show. It's only go about one one and a half percent market share, but it's growing at extraordinary name rapidly. Share price has come up. You know, if you bought it two or three years ago, you
could have bought it below a pound. It's now about six pounds. But it's still only capitalized at just over one hundred million market cap. It's got eighteen million of cash one eight eighteen million of cash in the balance sheet now and if you look at the forecast seven next three years for a Liberum, they will have seventy just on the seventy million of cash in three years time. And there's more more opportunity than do other deals along
the way. Specifically, the opportunities are just wonderful.
Is there a discount on the microcap trust at the moment? I mean, we get all these wonderful companies cheap, do we get discount on them too. Well.
We're unusual because one of the features of the trust is we offer every one one hundred percent exit every year. And the reason we do that is one of the disappointments about investment trust is you can buy the right investment trust and you're doing fine, and it may be at a five percent premium, and then it goes to a twenty five percent discount and you've got the trend the market trend absolutely right, but you haven't made the
return because the discount. So by offering everyone an unlimited exit every year, it means that when you buy the trust, you know there aren't any over hanging sellers. And if we have got institutional sellers, you need to get out well for God's sake tell us. And then we redeem the holdings as such like. So if we get too much too many redemptions, we put a small portion, say fifteen percent of all the holdings into liquidation pool, sent all back. We get smallish holdings. The boards all down
to the board. But the board can just give three percent cash or whatever.
It makes it quite hard to grow the trust.
There no well, the great advantages it doesn't go too much discount and the great advance a band. It not going to a discount. Is then when people get excited about the future, they're happy to buy this trust because make me confident it's not go to a significant discount going forward. They can always get out. So by obviously leaving the door open, it means people can come in with more confidence. So we'd love to think that actually this fund can get considerably larger in the future. So
it's very unusual. So coming back to answer your question, it's hardly on the discount of all it's.
About three or four wall. It's very disappointing.
I'm sorry about that. But the great advantage is when the upside comes, hopefully the share price will reflect the full value of the upside.
Yeah, yeah, okay, brilliant and Jauve's thank you so much. That was very kind. I'm going to ask you one last question quick fire around. Okay, yep, bitcoin on.
Gold Gold every time.
We are never going to get on anybody who says bitcoin. Yeah, how many podcasts we've done that, We haven't had a single bitcoin by it. But wait, maybe we'll go out and get one. If you'd like to come on the podcast. You think you're suitable for the podcast, and you think that we'll find you extremely interesting, and you would say bitcoin not gold. Give us a cool Thank you so much. It is.
It's a real pleasure. Thank you so much.
Thanks for listening to this week's Marin Talks Money. We will be back next week in the meantime.
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