Bloomberg Audio Studios, Podcasts, radio News. Welcome to Merin Talks Money, the podcast in which people who know the markets explain the markets. I'm Maren zum Zett Web and this week I am speaking with Merrin Talks Money regular Alec Cutler, manager of the August Global Balanced and Cautious Funds Always Investments, is a global contrarian as a manager, focusing on long term capital by investing in under valued stocks. Now this
is paying off big time. If you have a look at the performance of Alex funds recently, they are really very impressive, beating pretty much every competitor in every index over the short and the long term. So Alec, welcome back to Marion Talks Money.
Thank you, nice to be back. And I hope you didn't jinx me.
I didn't jinx you. That's not a jinxing because that's not what we do. We leave the witchcraft to other podcasts. Okay, good, It's a big market out there. Everyone can have their specialism, Alec. Quite a lot has changed since we lost spoke, but nothing that I think your portfolio isn't already organized around.
Last time we.
Spoke about energy, we spoke about infrastructure, we spoke about the return of value investing, and in general, we framed the conversation inside the pyramid of need. I'll tell you what, Rather than me explain your own idea to you, you explained to us about your pyramid of need idea and how it is central to your current investing process.
Sure Maslow came up with this thing called the pyramidive need for a human and the concept was that you needed to take care of your physiological needs, your shelter and housing and warmth and food, and then you needed to deal with your safety. Once you had your food and your shelter set, you needed to keep people from taking that from you, whether it be a saber tooth tiger or your neighbor. Then you could afford to need
things like social belonging. And once you got that, once you got your crowd, your tribe, or whatever, you then could think about things like self esteem and self actualization the top of the pyramid. And our thinking was and has been and is that this also applies to countries and nations, and that if you think about it, some investment ideas pop out. But if you think about that base layer, the foundational layer of a nation's pyramid of needs.
It's things like national security, food security, energy security, and right above that, if you take care of those things, then you can think about industrial security, and then above that financial security. And at the top of the pyramid
the wants, the entertainment, popularity, and again self esteem. And we came up with this towards the tail end of the ESG movements like geist whatever you wanted to call it, because it struck us that things have been so good for so long we were living in a land of plenty with no danger. That nations became super focused on the top of the pyramid the wants and completely forgot about the foundational layers and took them for granted, like
where does electricity come from? It comes from the switch on the wall. No understanding of how that foundation was built over decades and decades to allow you to have this high standard of living in abundance, and that it
shouldn't be taken for granted. And if we've learned anything in the last five six years, it's that from the pandemic one that this stuff isn't guaranteed and needs to be focused on and lo and behold a lot of the performance that we've achieved some from the world start to understand that.
Yeah, it's interesting, isn't it, And that even now when we're in an environment where we really need to be thinking about national security, about food security, about energy security, all the things at the bottom of your pyramid, and industrial security obviously is actually part of national security, isn't it, Because that's how you win wars, by having a strong industrial base that you can keep churning out the stuff you need during a war. So stea, Yeah, all these
things are connected. But yet across Europe and certainly in the UK, we continue to talk about it, expanding the things at the top without really focusing on the bottom. You know, it takes a long time for people to realize that they've neglected the base of a successful society.
Yeap, it can take a long time. It can happen all at once, too.
Yes, And is it slightly about to happen all at once?
Maybe we'll see maybe.
Okay, So let's look at the environment where we're in now, the war with Iran has I keep getting bits of research from people alec and they all say there are three part possible scenarios here, and every single one of those three scenarios is different in every note I get, so there will probably be at this point about fifty possible scenarios, but they come down to war over quickly war dragging out for a long time.
Both have slightly different results.
In terms of microeconomics, but possibly they have the same result in terms of the way people think about their investments in that however long the war goes on, everyone in the investment world is still going to be looking at the bottom of this pyramid and saying, what's been neglected,
what is less expensive than it should be? And I think last time you came on, we talked about the price people are willing to pay for a company involved in in AI, and that price people are willing to pay for a company that digs out of the ground all of the things that are absolutely necessary for that technology to even.
Begin to exist.
And as some price, we were to find that people will pay five, six, seven times the price for the uncertain technology, then they will pay for the underpinning of that technology. Now that I think is the shift that is now underway. People are beginning to care less about the top of the pyramid and are a lot more about the bottom, and they're going to start paying off
for the bottom. And when we framed this John and I and we were talking about it the other day, as people are now going to pay an awful lot less for hope and an awful lot more for the avoidance of despair.
Yeah, we're seeing that and it does fill us with joy to see the world starting to figure out that who's actually making money on AI. It isn't clear that it's going to be Meta or Amazon or Microsoft. It's very clear that it's going to be and is Taiwan Semiconductor and Demon's Energy and the Marcellus oil producers, gas producers, and you're starting to see investment capital shift from the former to the latter, going for the sure thing.
Given that you've just mentioned Taiwan, let's just stop there for a minute and talk about the energy construction that people are now working under. And this is quite a big deal, right. So a lot of these Asian economies and Japan, which we've talked about a lot over the years, and many of the other economies in that region, are dependent fifty percent plus on their energy coming in from
the Middle East. So it may be that we're getting to a point where maybe those aren't the places where you want to be investing.
We've seen a lot of volatility. For example, in the Korean market.
There is gas around. There's an incredible amount of gas around. It just you may have to get it from Canada or the US, but you do need to. Every country needs to focus on its own controllable energy resource. Korea and Japan are not well endout with energy resources, so something like nuclear is obvious for them, and they do push pretty hard on that. Japan took a bit of a hiatus for a good reason, but they're coming flying
back with an emphasis on nuclear. Hopefully we can leverage that in our investments.
Resent in your investments, I know that you've been heavily invested across the energy area for a while now, and you're also heavily invested in the UK now. Interestingly, last week's guest talked about the UK and he said he'd be loath to invest in the UK because of the self destructive energy policies in place here, and if you were looking for somewhere to invest in, you were doing
it by region. In an ideal world, you'd start by saying, if all economic activity is energy transformed, does this region or this country provide its industry with the route to inexpensive energy, and the answer to that question in the UK is absolutely not.
But your take is different, right.
I think our takes very different in that that's a problem, but we can invest in the solutions and when need to take into account valuation, as we've been very overweight the UK for a very long time, and even though the names have done very well, we're still thirteen percent weighted in the Balance Fund and eight percent weighted in the Global Costious Fund in UK equities which is three, four or five, I don't know, six seven times at the global waiting and we're invested in those providing the
solutions to that problem.
Had some of those extraordinary performers Rolls Royce, Hunting, Balfa Bet etc.
They've been wonderful stocks that because we've been able to hold them for a very long time because we bought them at four or five and six times earnings and they've produced a lot of earnings despite the people being down in the UK. Balfour BET's earnings are up I think four or five fold, and we were buying Balfour Bet when it was selling at a fraction of the value of their infrastructure investments plus cash. It's still Balfour's up four x and it's still just at a premium
to net cash plus their infrastructure investments. This is the largest invest managed, insurance, construction engineering company in the world that's making and solving the problems that we've just stated about energy security and energy supply.
Yeah, and infrastructure in general across the western world. We're moving right into an infrastructure replacement cycle, right, and we have to. We talk about the grid a lot, but it's not just a grid. It's pretty much every other part of infrastructure. Definitely, if you drive around the US, you drive around the UK, you can look at that and go time once in a generational refit.
The thing that's driving the pyramidive needs is also a realization that countries are on their own, that they have to operate in their own self interest because the other countries are operating their own self interest. So the UK can't rely on the United States to provide its natural gas and oil, which it largely is dependent on. You have for the rumor yesterday or the day before, was that Trump was going to stop all oil and gas exports. That's where Europe and UK gets the cask, which.
He easily could.
And in a period of shortage, why should did each country not limit their own exports. There's a long history of this happening in times of conflict, right countries just saying do you know what this is on? And we're going to hang on to it for now, and you guys can take care of yourself. And the UK, having shown itself as the US says, to be a relatively unreliable partner to the US, isn't necessarily always going to be in receipt of American lodgess.
Global cooperation is an incredibly recent phenomenon that's very short lived. And for people our age growing up in a period of global cooperation and globalization, that's what we knew, that's what we've known, and that's what we think is always going to be the case. But we've lived in just a fraction of the history of the world, in history of humanity, and that will wind up being a very unusual time in the world's history.
Okay, So let's stick with the UK.
So just bigle, you're going to hang on to all those big names, hang on to Belford, Beattie, hang on to drags.
Not always a popular holding shell.
You've got rolls Royceness it said earlier hunting, you'll be hanging on too.
All those we.
Shuffle them around a little bit.
We do focus on risk and control, so we can't just let things go to go to the sky.
And we keep finding new names.
So the UK is just a is a wonderful hunting ground for contrarian, super cheap names that no one wants, and we get laughed at when we buy and then five six, seven years later people begin to understand why we were happy to own them.
No, well, we might come back to some more of those, but you have you tell me being building a bit of a position in companies operating in the North Sea Explanation and production Serica Ethaka Harbor Energy.
Tell us about that, Serica and Ithaca. It's just what we've been talking about. You need energy security. Every nation that wants to be a nation and be a prosperous nation needs energy security, and energy security does not come from someone else. Definitionally, the UK is lucky. It's not like Korea or Japan. The UK has indigenous secure energy supply.
It just has to want to have it, knowing that eventually the pendulum swings back and forth, and politicians are incredible at without flinching, going from being incredibly anti something to incredibly pro that same thing.
It'll just interrupt you that to say that you sent me a tweet earlier by us live on the lend saying Europe needs homegrown low carbon energy sources. Nuclear renewables together have a key role to pay. Nuclear energy is available around the club.
We're writing electricty all year. Europe has been.
A pioneer in nuclear technology and can lead again to which pretty much everyone pointed out that she was instrumental in the shutting down of all of Germany's nuclear plants. And I look at that, and you think one can right now not even begin to imagine the likes of Ed Miliband suddenly saying the UK has always had its own oil and gas supplies and it's very important that we hang on to them for purposes of national security.
Drill, baby, drill. But actually, as you say, it's perfectly plausible.
Politicians being unabashedly willing to flip on a dime without any memory of what they said the day before is a big strength, right, because if they really want to dig their heels in, it just takes longer to get to the right answer. Germany will be a nuclear power
again from zero at some point in the future. And one of the big challenges for us in contrarian investing, where you are constantly looking at what the market thinks is important that you know is not and you have to wait for the physics and chemistry and economics to drive the right solution is how long it will take. And you look at the situation in the UK. Miliban has said, over my dead body, and that means it'll
take longer. But economics will eventually win out, and the need for the foundation of your nation's pyramidive needs to be solid, will win out. So we know what the answer is and we just don't know how long it will take. And the longer it takes, the more saraca ithaca we can accumulate, as.
Long as they can hang on through this period. Where else is it interesting?
At the moment, Japan looks really interesting, and I know you've just been there and you wrote about it and you hit on some of the same things that we've been thinking about. But the investor's perception of Japan is that it's a dead economy, and we think it couldn't be further from the truth in there might be some reinvigoration going on there, and if you look at stars aligning, the stars could really be lying.
For Japan, let's talk about AIS as an investment theme, TSMC and Samsung for a while.
There's no AI without those still holding those.
Yeah.
We in fact, we've owned I as an investor, have owned TSMC since it's USADR launch in the mid nineties. And Orbis has had a position in Samsung probably since the mid nineties, and they're just fantastic companies. Taiwan Semiconductor is the most important company in the world. Have been saying this for a long time, and I think people are starting to agree with that. And yet it sells
at seventeen eighteen times forward because it's in Taiwan. Samsung right now is selling it a mid single digit PE because one it sells it doesn't have an ADR, so the Americans lemmings can't easily buy it, and it's not sitting in Internet ETFs and AI ETFs. And it's still perceived to be a hyper cyclical memory manufacturer. But memory maybe following in foundry footsteps where it's no longer going to be a hyper cyclical thing that twenty or thirty
companies can do. There's only three companies in the world that can do it now. It's incredibly difficult, incredibly capital intensive, incredibly R and D and know how intensive, just as foundry is the making of semiconductors for others, and that six multiple could be a sixteen or twenty multiple at some point in the future.
And the other thing that you're invested in is the US natural gas sector, which I imagine was pretty ignored but probably isn't anymore.
We've shifted our AI investments a bit over the last year from those making and providing the infrastructure, so the Zeman's energies and the Prismians of the world. We've been top slicing those positions as they've become popular, and we haven't dropped the overall AI related waiting. It's shifted more into the consumables, and you can't have AI without natural gas.
People are starting to figure out that natural gas, especially in the US, is where you're going to get your electricity to run your AI data centers, to create your agentics, and your ability to create a cartoon yourself. We've been focused on finding cheap inexpensive, low p high free cash flow yielding natural gas producers to add to our natural gas distributors and transportation companies pipeline companies because that is
the easiest to see. Consumable required for AI and semiconductors are consumables as well, because these chipsets only last three to five years, so you're going to this is not like the Internet where you put fiber optics into the ground. Those fiber optics are still there today. The big infrastructure for AI is chipsets that are obsolete after three to five years. So that's these chips are consumables for the first time in technology. Super excited about the consumable aspect.
The prime mover of AI, if you will, being something as simple as natural gas or semiconductors, how.
Do you invest in natural gas? What do you buy?
Can buy the EMPs, the explorers and producers, and we're trying to find the best ones that are in the best place.
Okay, interthing, let me move you on to the other thing that our listeners are always fascinated by.
I look at this wall, for example, they'll think.
To themselves as two things I'm going to use to hedge. This one is going to be energy one way or another. We've talked about that, and the other may well be gold. And I know that your funds have always held a reasonable amount of gold. What are you doing with that at the moment.
We've top sliced the gold many times. We didn't hold gold until twenty eighteen, when it was clear to us that negative interest rates weren't going to last forever and governments were going to continue to spend like crazy. Became an obvious place to hide that. That's appreciated wildly since that time, and we've cut that position back in the portfolios from ten to twelve percent holding it there to now we're in the eight to nine percent. Because it's
not a it's not a completely contrarian thing anymore. It's really now become a pure hedge. And we like to buy insurance when it's cheap, and gold as an insurance policy isn't as cheap as it used to be, so we're not going to hold as much.
When I've written about gold recently, I've said, well, you know, maybe a little expensive on sometimes it's exc but you have the backstop of central bank buying. But it maybe as we move into the next part of this new era. Perhaps in particular at least in central banks may not have the available cash to be buying more gold than maybe things they feel it's more appropriate to buying the circumstances, So perhaps that backstop buyer might not be quite as firm as it was as they were.
That's true. In that would be that would be a negative, that would be something that cann't get any better. We don't think central buying, central bank buying can get much better,
although there is unlimited firepower there. But the last shoe that we're waiting to drop on the gold cycle, if you will, is if you remember back in then you're too young to remember, But in the seventies, coming out of the seventies, the standard investment portfolio there weren't mutual funds back then, but a standard investment portfolio was advised to hold ten to fifteen percent in gold, and even into the late eighties when I was graduated from college
and into the nineties, that sort of has wandered down from fifteen percent as standard to when I started in this business, it was still ten percent. Everyone held ten percent in gold in the mid nineties and then as as the internet kind of took off, and low roik wasn't a great thing, and gold became boring and wasn't going anywhere. That went to zero, maybe back three four, five years zero.
For most people, nobody had gold as an investment.
Yeah, standard equity portfolio would have zero. And if you said, why aren't you only gold, it would say, this is an equity portfolio, it's not a gold portfolio. It's not a that's a resource, that's a commodity. We don't hold commodities. And now an average equity fund might have two to three percent, a pension plan or a sovereign well fund
might have two to three percent. If that were to go standard to five to seven, you're talking about a doubling in the amount of gold that would have to be purchased on the investment side, and there just isn't that much gold. The only way you're going to get
to that would be for the price to double. If you have three percent in your portfolio now and the price doubles and everything else is held constant, now you have six, you could see gold going up quite a bit as as that pendulum swings back to You can't just invest in the in US Internet and AI stocks.
Well, then what am I going to invest in?
Gold is at the top of the list now and selling out completely now would be could be premature.
Okay, so we wait.
We wait until all the wealth managers are telling my clients they need to have seven to eight percent. That'll be a final signal.
And if we've been as high as fifteen in the past, wealth managers saying seven eight is not outrageous, is it.
The other thing that one tends to put them on's portfolio to hedge things is sovereign bonds. But you look around the Western nations and the almost certainty of stagflation and who wants a guilt treasury.
One of the themes that we're thinking about this year is dms are developed markets acting like ems, emerging markets and emerging markets acting like developed markets from a financial probity standpoint, And we found really attractive investment opportunities in some sovereigns that used to be basket cases and now and have been behaving properly for quite a while. Now, says the developed markets are behaving more and more inappropriately with regard to their nation's finances.
So Iceland.
Iceland is still considered a frontier market because of what they did during the global financial crisis.
Career is still being called an emerging market. Nuts.
Yeah, yeah, But Iceland, I guess if you screw every banker in Europe, you're going to get relegated to being a frontier market. They've been behaving very properly and have incredible natural resources. They have unlimited supply of electricity, they have unlimited supply of geothermal heat. Every company should have a data center in Iceland, especially if you care about
the environment and you want zero carbon electricity. But it's a country that is producing a surplus, and yet we started buying the bonds when they were yielding ten to eleven percent. Now they're yielding seven eight percent, but that's still twice the yield of a US sovereign and the currency is cheap. Brazil, Brazil, we're getting thirteen fourteen percent yields eight percent real, eight percent higher than inflation yields.
We like the real the country. Maybe if they were allowed to, they would behave inappropriately with their finances, but they can't and they're not. They're running a much lower deficit.
Than the United States.
They've got a similar level of inflation as the United States, and yet you're getting a double digit yield, so some of.
The money's gone there.
Australia, it's not a frontier market or an em but they are running their finances more appropriately. All three of these countries have mentioned are resource rich. I like that thinking about the bottom of the pyramid. They actually make things that others want to buy. Norway, the yields on the Norwegian debt. We've been long the Norwegian currency for seven or eight years and it's finally starting to work. It should be the most secure currency in the world, should be very sought after.
The regions have never behaved badly. They don't quite fit into this group.
No, they haven't, but the currency has been treated like they have and we scratch our heads wondering why. And the only thing we can come up with is they're being tarred by the European feather. They're closely associated with Europe's their customer. They sell natural gas and oil to Europe. They sell electricity to Europe, and don't see what's wrong with that. Europe's going to continue to have to buy
that stuff. They have a massive surplus every year. They've got a tremendous two trillion dollars sovereign wealth fund and virtually no debt that currency. If you're worried about the security of your buying, your purchasing power, the Norwegian kroner is the ultimate in security. It's not the Swiss franc it's the It's Norway. So we've been a lot of that gold as we've been top slicing. Gold has gone into these sovereign bonds that we believe are way undervalued.
Rates an interest too high, interest rates too high, and we like the currencies.
Well, let's talk a little bit about Iran.
Is there anything and we've talked about it might be a short Wilman to be a long what are endless scenarios? But is there anything in what's happening in the Middle East that might maybe change the way you invest the fund? I suspect you're going to say that, No, this is a resilient fund built for exactly this environment. But is there any shift happening as a result.
No.
I don't think any fund can raise a resilient flag and say this fund is going to outperform in every environment. That's just not real. But increased global conflict has been something we've thought a lot about. Countries focusing on their self interest. The focusing on the bottom of the pyramid needs it kind of accelerates and highlights all those things. Is you pointed out that you know that what's going on in Iran should be a another wake up call
to the British government, to the UK government. That would accelerate our realizing some gains from playing that bottom of the pyramid. As a portfolio manager, I'm waking up in the middle of the night fretting about the Iranians mining the Strait of Hormuz. What's going to be the US response? But it really can't take an investment make changes in the portfolio based on that because the uncertainty is just
so high and the market reaction is so unpredictable. Who would have thought that gold isn't supposed to sell off, but gold is sold off during this period. Why is gold sold off? It should be more it should be held, it should be more valuable in a conflict like this.
But too many.
People own gold and they're getting margin calls, so they're selling their gold because it's the only thing that's up, and that's just the dollars strong. Even though the US is the one driving this, there are a lot of contradictions, and you just can't predict the market response these things.
I put it in the two.
Difficult pile to try and play these short term geopolitical things, even though we're very focused on geopolitical events.
Okay, so I didn't jink to you at the beginning of Hope, but just to say that your expectations of app performance from here rest on the idea that we are beginning to see the return of value. After there's a long wage of saying markets provert to the meme
this stuff happens, it will happen, it does. Now feel like this really is happening, that there's a general shift across the investment environment back away from growth, away from expensive things, and back towards what is really going to offer me value.
It does.
It feels like valuation is starting to matter again, after literally people going on CNBC and Bloomberg and saying valuation doesn't matter. We're starting to see rotation, which is a key element of a value cycle, where industries are falling out of favor, industries are coming into favor. Who would have thought three years ago that software and biotech would be su per week industries that no one wants to own and who would have thought three years ago that
critical energy infrastructure would be incredibly popular places. So these rotations are critical and an element of value cycle. We're starting to see them. So we're increasingly optimistic that we're seeing the pendulum swing back from growth and momentum and valuation not mattering to valuation becoming important again, and that would be a very welcome thing for us and our clients.
Brilliant, Alec, thank you so much for coming on today. Really really appresure it.
Aron, Thanks for.
Listening to this week's Marrin Talks Money.
If you like ours, show, rate, review, and subscribe wherever you listen to your podcast and keep sending your questions or comments and Merri Money at Bloomberg dot net. We do like them, we do read them, and we are going to try and answer them all. You can also follow me and John on Twitter or ex I'm at Mariness w and John is John Underscore Steppe. This episode was posted by me Maren Sums. That web was produced by Samasadi and Moses and sound designed by Blake Maple's
and Nick Johnson. Special thanks, of course to Alec Cutler