John Melton, how do you enjoy that king speech? There were no tax cuts in it, so I figured it might not have been for you.
It's true I had my popcorn ready, but all I was doing was throwing it at the screen.
Oh all the disappointing, wasn't it. I'll tell you it's really disappointed the leasehold lobbyists. You know, there's been this big pilara, and.
Quite rightly about the way that the UK still has this absurdly feudal type of property ownership, whereby instead of instead of buying your house and then actually owning your house, you think you buy your house, but instead of.
Actually owning it, all you have is a very very long tenancies at lease hold, and then you have the right to live, to occupy the house, live in, occupy the house for maybe ninety nine years, maybe twenty five years. You're really really lucky nine hundred and ninety nine years, but you don't actually own it. The building and the land belongs to somebody else. Nuts.
This always baffled me because obviously, coming from Scotland, that's not the system up.
There, and things better in Scotland.
Modelly superior, yes, but no, but's it was weird kind of coming down and then I mean, thankfully, by the time I ended up buying a property down here, there was the share of freehold saying in their first flat in Kent was a share of freehold one in a thwld block and that was absolutely fine because it was basically the same as when we had the tenement in Glasgow. It was a similar kind of arrangement. You all own your bet and your chap in for the running course.
So the police hold things always seemed so just ridiculous, and also nobhere else in the world has it. I don't think no.
I mean, it's just it's a sort of hangover of a feudal system, right, but it's really unpleasant for people who think that they actually own their house or the flat, and as many flats are lease hold the houses although actually you know there are there are five million plus houses homes should I say in the UK the release old twenty percent of the housing stock and thirty percent of those houses. So people think they own a house, but they don't own a house. And then you get
stuck with all these things. You're at the mercy of someone else when it comes to service charges and you know, one of the things I noticed. One of the things in the king speech about making things less horrible for leaseholders is that the freeholder or managing agent, assuming this all goes through, when they manage the building insurance, they're not allowed to take a commission.
Can you they can take a commission.
In the first place.
Just incredible, I know.
And then there's ground rent. And obviously people have been talking about ground rent for a while now because during the very low interest rate period, the housing developers found there's an absolutely amazing way to create a stream of income. So you make new houses, build new houses, horrible new houses in the main, or horrible new flats, whatever, and
then you make the leasehold. Then you attach a ground rent to them, and you say that that ground rent is going to escalator, is going to double every ten years or whatever it is, or it's going to go up with with TPI or RPI, etc. And then a very low interest rate environment, that stream of cash is incredibly valuable, so you flog it onto an investor somewhere, and then when the lease holder suddenly wakes up and goes, oh my god, this cost is outrageous and what do
you mean, I don't own the land, et cetera, et cetera. They have to go and negotiate with some random investor rather than with the housebuilder who sold them house. So a lot of things that absolutely scandal has been for years. So there is provision in the King speech to try and improve it, but extraordinarily not to get rid of it, just to improve it.
Yeah, I mean, I'm assuming that the it's because obviously this has been going on for a while, and they have stopped houses from being built with leasehold, haven't they, Because it was a big that was a massive scandal a few years ago.
Not Yet's that's in there, that's in the King speech that they will prevent houses from being sold le sold. And last year I think about one percent of new built houses were sold lease sold.
At the peak.
In twenty sixteen, twenty seventeen something like that. It was well over ten percent now.
But it's not possible.
Yeah, the.
It's speechless again. It doesn't happen very often.
It's just ragion. I mean, especially the house thing. The house I mean people people generally have been aware that flats can be lease hold, and there's an element there where I guess you know a lot of people they think that a flat isn't going to be there, you know, place for life and all that sort of stuff. But I do seem to remember the houses generally we're not sold lease hold, and obviously there's something about the house.
It's different because basically houses are self contained unit. So you're kind of like, how on earth can it be the case that I only own the house for you know, and in these cases it was one hundred and twenty five years rather than the nine hundred ninety nine year least. I mean, some British should have, you know. I mean it comes back to this thing where you've got more consumer rights if you buy a Telly than you do when you buy a house. It's absolutely unbelievably wrong.
But you know, we're not long now and we're going to be in a situation where an ordinary tenant has more rights than a lease holder.
Yeah, that's good if you look.
At the other stuff that was in the king speech. But the Rental Reform Bill et cetera says that do you know, we get to that landlords aren't going to be able to refuse, families aren't going to be able to refuse.
Pets, et cetera.
Et cetera. But I was reading a Witch magazine report on leasehold from a few years ago, which said that sometimes there's a clause in the lease your long least that you think in the house that you think you own, that says that you can't have a pet. And what they found a case where someone was charged two hundred and fifty four pounds to be allowed to keep their dog in what they believed to be their own house.
Yeah, no, I've seen that. I was recently helping Someboday host and that is that exact thing came up. The person had pets, and this was the buyer properly. Again, it was a kin, a sort of a houts rather than a fly, and you'd be allowed to and in the terms of the lease. But then there's also things like not being able to hang out washing it when
the in certain parts, you know, especially with fly. I mean, I get that there's a sort of old fashion thing about having you know, jumples hanging on your balcony and this looks a bit you know, scruffy or whatever, but yeah, exactly, it's it's just unbelievable.
Well, the one that I'm interested in and at the moment, in terms of you know, is that does a tenant have more power than a leaseholder? Is it? One of the things that Labor has been talking about is saying that under rental reform, landlords won't be able to prevent
tenants making alterations to the interiors of houses. And I don't know about the exteriors, but you know, of course leaseholders can't probably walls around the place, can't build conservatory, cutbul is, shed, cant or anything like that without going
to the freeholder and adultsking. So you know, here's that really interesting and shift in balance anyway, scandalous, remain scandalous, that things are getting better, will get better, but surely a much better thing to do, listen to me, governments, A much better thing to do would be simply to get rid of the whole thing and replace it with common hold or as John says, share freeholder of share freehold, which works perfectly well, and why wouldn't it.
And obviously, if you're a buyer, just don't buy one any these things.
Just don't buy one, literally, don't buy one. And whatever you do, don't buy one without or don't buy anything without really asking all these questions, because of course people don't know the questions to ask, do they? I mean, why would you think when you went by a new help that would not really belong to you? And why would you think that your ground that would be this thing called ground rent that would go up and up
onever every year? And why would it ever occur to you that the person who old the land underneath you was also the person taking commission on your insurance premians. I mean, for heaven's sake, you know you have to know the questions to ask, right, why would you know to ask those? So you know, ask a lot of questions. But in the end, don't buy the stuff. Don't buy the stuff. And as ever, the way to change things is to put pressure on the providers to produce something different, Right, John,
give me a personal finance tip for the week gone. Well, it's a good one, a really good one.
This is one of your classic ones. It's uh. People are the house builders are offloading those sticky last few houses on the plot, then they need to get read off and they offer massive incentives. In fact, call the one for a bloomberg, colleagues. I think one in five houses now up from one in ten about a year ago, is coming with a free bet and among those freebies occasionally as much as a Tesla get a free car when you buy a house, John, Yes.
Do you want to rethink the word freebies?
No, it's a free car. I mean what I'm just I'm buying a house and you know I'm getting like forty grand worth of Tesla throwing in surely because the house builders are nice people.
Yeah, I don't like the house builders, so I don't believe that. Do you know what I think?
What do you think, ma'am?
I think you should say no, thank you very much. I don't want a Tesla. I have a perfectly good car of my own already, but I would like it's for you to take forty grand off the price of La Grabbians. Thank you very much.
That's genius.
Yeah, yeah, keep your Tesla.
I'll take you the discount.
It's true.
Why would you ever buy a Tesla with our mortgage?
Exactly?
That's exactly it. What you're doing is buying a Tesla with a market I suppose some people do do that. Now, look, this is not the first time this has happened. Right, we predicted this. We said you and I in that podcast a while back were possibly in the column or something. We said, you'll know that things are getting nasty for the housebuilders when they start to offer you a free
car because it happened. It happened. I was just checking to see when it last happened, to make sure that you and I don't weren't making stuff up because we don't like to do that. That's absolutely true that in two thousand and eight, the obvious year, several developers were giving giving away, giving away free coas with houses, and it was also the case in the US. For a found a particular case in the Midwest where if you bought one of their horrible houses or maybe nice houses,
I don't know. American houses often look much nicer than our houses, you got a free Toyota Prius. Welcome to Maren Talk to Money, the podcast in which people who know the markets explain the markets, and marin Sunset Web. This week my conversation with Jonathan and Sante, fund manager at Chakara Investments. Jonathan started with Jacara Investments this year after taking a break from the industry in twenty nineteen. Before that, if you worked at Stewart Investors for fifteen
years now Jakara, if you've not heard of. It used to be called Coopland Cardiff until August of this year. I spoke to Jonathan few days before the launch for his new fund, the Jakara Global Emerging Markets Opportunity Fund, which he is going to have hold twenty to thirties dogs and long term growth opportunities, hy quality growth opportunities. He's going to manage that along with the team of Paul that he brought over with him from Stuart Investor. So here is our conversation.
Jonathan, thank you so much for joining us today.
Oh thanks for asking me.
Now.
You and I haven't talked for a long time because you've been out of the industry for a while. So I wonder if we can just start by talking about why you've come back. Yeah, we'll put you back into this rather grubby industry.
It's interesting for me personally because I love the job of analyzing and looking at companies, and I love that aspect and I always enjoyed it. I think when you've worked, or i'd worked before, you have to be quite careful about where you end up looking after clients' money. So I was looking, certainly for a couple of years for
a place where I thought that I could fit. And secondly, my old team became available, and I know I've known these people for a long time, and that was really what entice because I thought we could do something really very good for our closky.
It was finding somewhere where you felt that you could fit. And also you could bring your old team with you, so no need to get to know what train any new people anything dull like that.
Yeah, we've been together for fifteen years, some of us, and we know each other, we know our strengths and our weaknesses, and we just hit the ground running, which was very important. But also I think the place was
very important. I think I prefer small groups of people to large institutional setups, and that's what we had my last job, although we were inside a very large institutional setup, and so it had to be a place where you felt that you could preserve that or where we felt or I felt we could preserve that and just you know, be given autonomy to invest.
Okay, so a team will work autonomously and inside the structure of Chakara.
Yes, and Chika is a very small company, and so that is what was very attractive to me. You know, the owners, there's you know, three or four main owners. I sit a meter away from them. You know, if we've got any issues, I can ask and we will be come owners too. And I contrast that with a very large organization, which you know is fine for other people, but for me, I find that sort of personal interaction a lot more meaningful.
Okay, well, let's talk down about what type of investing you and your team are going to bring to Chikara. I know a little bit about your history as an investor. What is it that makes what you and your team do slightly different to what other people do?
Yeah, well, I think the background has We've been fortunate enough to learn from people that are very.
Good at it, yeah, from the grades, and we were able.
To absorb that and evolve it in some small measure ourselves. And we have very strong beliefs about what we're doing. We're very long term. We're very focused on the evolution of hundreds of millions of people in the developing world and then getting richer. It's something you don't hear about then getting access to more opportunities, and that's still happening and probably will happen in the next ten or twenty years.
And then we're very focused on the sorts of companies that we will give our clients money to in our own money to in the long term, and they are a very small number of companies that we feel comfortable in that area giving our clients money to. So I think the difference is this very small number of companies and the fact and the beliefs that we have about investing.
Yeah, I want to talk a lot about those companies, but let's talk briefly first about the emerging markets background. Today we don't talk enough about how much richer people are getting in this huge variety of countries. Actually, people talk about emerging markets are kind of a morphous blob, and of course there's absolutely nothing of the sort. So let's talk about a little bit about the background of that and why is it emerging markets as so much more attractive to you than developed markets.
I think the distinction has broken down to some degree and between developed and emerging. So that may not be very helpful, but the last twelve years I've spent telling clients that the distinction was breaking down because at the company level, some of the best emerging market companies are in the developed world, and some of the best developed book but guess what they realize is growth over there,
so they've gone in. So I think that distinction emerging markets was a marketing idea penned by the investment industry. Often you find that those are not very good investment ideas, and what we tried to do was make them a good of it, impose the sort of investment discipline that would kind of ensure that ensure that they would be that it could make acceptable returns for our clients. So
I think that the distinction is breaking down. Firstly. Secondly, though, emerginy markets had a pretty bad, pretty mediocre decade, and we think, we have written a paper and why we think that is we think it was a governance failure and we think that the index emerginy Market INDETS was never built for investors. It's built as a unit of measurement.
When you say governance failure, what do you mean.
Well, you noticed back in really twenty ten eleven that at the top level the leaderships were changing. So the emerging market pitch, if you like, was in the eighties, has said pen by the funds management industry, was that essentially governance improves in some of these countries after the Second World War, and.
When you say governance you referring to political governance or corporate governance.
A good question. I think the first leads to the second. So there's an improvement in governance after the Second World War, the end of communism are eyed and the Dangiopling Report reforms in China, and you get better growth, and so there's an opportunity all of a sudden, you get better governance. So there's more companies that might actually be able through which you might be able to access that or opportunity. And that improvement means that you should buy equities, because
equities are a growth. That was the idea behind it. That was the marketing pitch, if you like. There's a number of problems with that. First, the history doesn't go in five year fu management bonus cycles. It seems to operate in centuries and millennia. And so you've got you've got countries that with very interested in history, that are re emerging actually in many cases from being having been
very dominant countries a thousand years ago. And those processes are a lot slower than the average from manager would like, and they're cyclical, they don't go in the straight line.
And the second, as the seven twenty ten was that we noticed that governance was going backwards at the top level, so he had changes of leadership in places like Turkey and South Africa for a few and then ultimately in China where you had to question whether the rights of shareholders were going to be more or less undermined going forward in the next ten years. So we had a problem that far back with it, and what that meant at the company level is that the companies that we
would find to be acceptable, they're refewering them. The other beauty of emerging markets was that if you had this governance improvement, there would be more and more companies to invest in that would be listing. You'd have a very dynamic sort of positive But because if the governance at the top level is deteriorating, then the companies available become
fewer and fewer for us. So we had to do a number of things about that told everybody we started looking more globally for businesses because of the world is merging anyway, so you might have the governance and the brands in a global company that has been in emerging in developing economies for decades, and we found them all over the place. Actually and we close their funds as well. So in twenty thirteen we put a front end load on our pool funds, which were very popular, and we
started to give the money back. And part of that was that the opportunities are gett less. The obviousies are more. I'd love to run more money for you, but we're not going to go down the quality scale in terms of companies are going to buy and the opportunity. We think that the government's getting worse. So I think that's been the problem for ten years.
And it's an interesting when, isn't it, Because the industry had to learn again that GDP growth doesn't automatically transfer
into an equity bill market. And I'm still reading even now after I don't know how many cycles of this, I'm still reading papers that tell us tell me but because there's economic growth in the country, there will be a top market boom and said country and it's simply not true, because of governance issues, because of evaluation issues, with all these things that we've been discussing.
Yeah, the pie gets bigger, but who benefits? Yeah, so if you're not going to be one of the people that benefits, so your clients are going to benefit. It doesn't matter how big the pie is. Yeah, some societies are set up for reasons of history, to benefit a very small number of people. In fact, arguably the whole reason countries are poor. And I've spent my whole life, having grown up in Ghana in the seventies, I've spent
my whole life wondering about this. The whole reason people these countries are poor after the Second World War is because a small group of people decided not to share opportunity with the rest. It's sufficient opportunity, right, You give opportunity, then the economy grows bigger. If you give access to education, access to the jobs market, access to healthcare, and guess what, You're going to have more people that are viable and are productive. So I think that that the emergency markets.
Although the initial said marketing pitch where the things are getting better and they it appeared to be, Actually it was a failure post World War two and post the colonial sort of the era that led to that opportunity. So the park can be as big as you like, but you might not have access to it in many of these countries. And that's why we spend so much time thinking about the who we're giving our money to in these countries.
And you feel you're part of you coming back to the market now, do you feel that there's an improvement in governance across the board that you can now open up opportunities for funds like kills.
I feel like the deterioration stopped, so that's something. And there are a very small number of companies where I think we can make acceptable returns for ourselves and our clients. I won't go further than that. I'm not I said I was fashioned in Scottish fund management. I'm not a person that we're not the people that go out there and buying this drum. I think for me, I can put my own money into it now because there's accepta and I don't have to look as much globally for businesses.
So I think there's an acceptable set of returns that can be made in the next decade with quite. We don't with quite, you know, with not too much improvement. We try not to make investment decisions for clients and ourselves on the basis that politicians are going to act in the interests of the whole. We try not to do that because we haven't seen that for decades anywhere, actually almost anywhere, So we try not to do that,
but just with the deterioration stopping. For example, you know, a few years ago you had the head of Samsung and the leader of Samson going to prison. That is an improvement. You've had the replacement of leadership in South Africa. You've had a leader in India who is able to galvanize some aspects of that society so that the opportunity that was always present in India might be realized. Although there's always risk. So there are some improvements going on
and there are some that are standing still. I think people have the idea that an authoritarian regime will allow you to make very good returns over the long term in an index of equity. I think that's been put to bed again in many countries. I remember going to Ukraine fifty eight years ago and it was a huge country, huge resource opportunity, but there was no governance at all.
And you know places that I guess like Russia has shown that time and time again that it doesn't matter that if the governance is bad so and authoritarian regimes tend to act in their own interest even more than democratic politicians because the downside for the mcgraty arguably. So I think there's recognition of those things, which is great because that's something that what didn't exist five years ago. There was too much optimism about authoritarianism, and there are
even some apologies for it now. It's not that I'm criticizing those regimes per se. They have their own history, they have their own path that they've taken. I fortunately have to ask a much more narrow question, easier question to answer, which is how will I benefit from my clients? So it's much it's a much simpler question to answer than sort of judging and analyzing westernized subjective on a history that's thousands of years old. It's more how will I benefit in the next ten.
What happens to the companies? Before we start talking about the types of companies that you look for, because I think that's probably the most interesting bit, Let's just zoom out a little to the global economy, because this is a pretty brave time to be coming back into the market, to look at the global markets and the global economic environment, global geopolitical environment in January and say, you know what I'm going I'm going to dive right back into this
now probably what is one of the biggest inflection points that markets and economies have seen in our lifetimes. Right, it's with the inflation environment, the interest rate environment, deglobalization, all these things that we talk about constantly on this podcast. Right the next and ten years, look they look tough.
Yeah, said, there's a number of things. Firstly, are our approach to investing means that we always do better when things are tough for clients. So I always say to clients, our business was built off of misery. So the first of the tech bust in two thousand, where Angus was, as far as I understood, was the only prime manager, it didn't lose significant amounts of client capital.
Angus Tunneck by the way, for listeners not familiar with the history.
Here, yeah sorry. And the global financial crisis where we once again showed that we lost capital, but far less than everybody else. So bad times aren't necessarily the way that we approach investment aren't necessarily bad times for us. There are times to you know, not prove that you know the good companies, and good companies do better in tough times because they tend to have not been near bankruptcy and they have more capital to expand they tend
to have a mindset where they understand that. The second thing to say is that you talk about all of these problems their globals, but we're emerging market people. We see a crisis every other year somewhere, right. It's so for us, this is quite normalized inflation going from zero
to twenty percent. It's for us, it's not a difficult The finding says we've been very skeptical about the global policy framework, monetary policy framework for decades, and I think it started with LTCM personally, where they bailed out the hedge fund and gave the message to everybody that you can take the gloves off, you can take as much risk as you like, and we're going to underwrite credit. So we've been expecting inflation quite a long time as
if to prove that we're not our forecasts. You know, we're not a good time as a forecast. So a lot of the companies that we invest in, because they are in volatile environments anyway, tend to be ones that should do okay in a higher inflation or a higher inflation low growth environment. You see all these consumer staples companies moaning about about cost of the cost of living. All this stuff. That's fine, but they are the cost of living. You do sometimes wonder whether they are, whether
they mean what they say. They quite like inflation. I remember a company we used to invest in for many years in South Africa, So Africa always had inflation about four or five percent, and I remember meeting the gentleman that ran it. It was a consumer stables coming, and he just said, look to me, he said, inflation makes us look like geniuses. I don't have to do anything. I just put my prices up. Five percent of my costplace is relatively fixed. They've got a bunch of warehouses, and
so those sorts of companies should do better. Some of the other tailwinds around global growth have always been questionable as well for years. I mean, the West is hugely indebted, both at the government level and at the private sector level, and essentially's creating inflation. I would argue to remove debt or to reduce debt. So those have been present for I'd say at least fifteen years those issues.
So you've been expecting the environment that we're in now for a while, and you'd expect this relatively high inflation dynamic across the West to continue.
It's a normalized situation for me, And if I think about the themes and mac Creek enormous, if you want to call it, I would have thought inflation would have read its head earlier. They just had a huge tail in from the gains from trade and from technology. So I think this is a normal situation. I think it's just that some of those chickens have come home to roos.
There's no.
Politicians aren't and populations aren't. But in emerging economies it's a slightly different story. I mean, populations are used to the idea that a bank will go bust and take all your money. For example, they used to this right because they've seen it within living memory. It's wiped out middle classes across Latin America and also in Africa, so they're used to the idea that there's a predatory elite.
When you look at Transparency International's work and corruption perceptions, these are normalized expectations and they're used to very volatile operating environments. So I think it's again just coming from our corner of the world, well many billion people in the world. I don't think it's necessarily something that's unusual for us. It's more unusual for in the West.
Perhaps in the last to say you're more equipped. Let's talk then about the types of companies that you're looking up for. You said, there's a very small number of these companies. What are they like?
We tried to describe it with three words, which is who, what and how? Who is who are giving your money to? So we look at the history of often families, sometimes managers are people that we giving up money to. And some of these histories go back hundreds of years, which is remarkable, and we tried to weigh up evidence of wrongdoing and evidence of stewardship, and we try to take a view on who we're going to give the money to.
So you're looking at the long term history of the company on the basis that creates the current culture of the company.
For a number of reasons, we're often investing with families. You know, families have done something bad to minority shaholders or other stakeholders in the society twenty or thirty years ago.
They can do it again quite easily under stress. And the biggest issue in emerging markets is having to sell after your share price falls, and if you have a low quality, what we call a low quality company and the share price falls fifty percent and something terribles happened, You have to sell and destroy your client's capital, whereas if you have a very good company, you have confidence in in which you have confidence, so you can buy
more and you can be happy. We can't forecast the future, but we it's this having to sell emerging markets when it's already lost to you a lot of money. We would hope that most of our companies, as we were in two thousand and nine, we were very happy because we knew that we could buy more and we had a good chance of making a sceptable return. So we're going to make fear of those mistakes. So that but
who is most important for that? It's really interesting work because I said, we're going back into history and we're looking at all kinds of information that the financial markets tends to often ignore.
I suspect, can you give us an example if.
You look at the Tartar Group, for example, in India, If you really want to think about why that company operates as best it can, and there's no such thing as a perfect company, of course, in as ethical way as it can, you actually have to go back to zoroast the Zoroastrian religion, which goes back thousands of years.
The Majei in the Nativity story was Zoastrian priests, and there's a metaphor there about handing over a religious idea of of looking after people looking after others in that story. So if you really want to go back, you can go back all that way and then you can see
how that plays out today. Now that doesn't mean that the company doesn't make mistakes, but behind it, what you have is a confidence in that group that if the wrongdoing happens, that it will be addressed, or that if fundamentally it's built on an ethical system that's trying to take advantage of a huge growth environment India, but not in a way that is undesirable from a legal point
of view, from an ethical point of view. So something goes wrong in a company and it falls fifty percent, if you have that knowledge, you're more likely to be able to buy that company. So that's the most obvious. But there are many groups in long histories, and sometimes I was looking at a Brazilian company the other day, which goes back to nineteen sixties, for example, and that's a fair amount of it's not thousands of years, but that's when the company was founded.
And get a sense of the culture.
It's the and the same families are running it now and it's decisions that they made. Brazil's a pretty dirty pond, as was exposed by the petrop our scandal. And so if you're sitting owning a share in a company which could be exposed for let's say, corruption and bribery and fall seventy percent as a result within a week, you want to be pretty sure that the company you own
is not one of those. And so that means there's a very small number of companies that you can be sure that that or you can have a high degree of confidence. So that's not the case.
And will that Brazilian company make it into the portfolio?
It Well, it became rather popular. We owned it for a decade. It became rather popular. But it's becoming less popular now, which is why I'm not giving you the name.
I know, gearing up to trying to make it tell me.
But it's it became very popular and it's it's becoming less popular.
That is a listener's guess is on a postcard, please go see that's the who and then there's the what.
So the what is is the franchise good enough to make acceptable returns for its owners? And how do we think about that? We think about that in terms of pricing power. So if you're an environmental inflation go from zero to twenty percent, you better have pricing power because if you don't, you don't have any profit left. So I remember being in Ghana talking to the women that ran Unilever there. They actually have a list of so they had delicious subsidiary in garner tiny and Ghanan inflation,
as it often does, have gone through the roof. And I remember sitting and she telling me that her most difficult decision was when to raise prices for their products. It wasn't if, it was when and how, because she was keenly aware that, you know, this was going to hurt the pockets of the poor, and how you can do that. But what that showed me was partly about the ethical side of union, but also that they had pricing power. They can do it. Imagine if you can't.
If you're a commodity where the you know whether your inputs go up fifty percent or twenty percent. So this idea of pricing perier I think is important, and that tends to take us towards consumer staples types, companies with brands, and some industrial companies with intellectual property and trust. The other side of it is how did they get the license to operate in the first place, which overlaps with
the who. Sometimes if there's an original sin there, it can come back to bite you quite badly in emerging markets.
What do you mean by original sin?
If the business was given by license by a government or a dictatorship to a company, when the regime changes, you can find your supposedly strong franchise disappearing into the dark seconds. Yeah, so I think that's part of the what is that? And we try to stay as far away from government as we can, although let's face it, in any economy, the government can interfere with you in any way it likes. But we try we try to stay as far away from those sorts of licenses, having
made those mistakes over the years in the past. So that's really that's another part of the what really that's that's quite important. The final part is what you might is now called ESG, but it's more we just think
of it in times of tailors and headwinds. Have the management positioned the business to benefit from things that might go right in the next ten years, and not suffer from things that headwinds that might go wrong in the next ten years, such as governments deciding to price environmental externalities in a way that they should, in a way that would that would and with that removed profit. Give an example, we used to have an organization look at them.
We're talking fifteen years ago. Look at the carbon footprint of businesses. That's right, maybe more fashionable now, but the point was that there were some businesses, often related to ther and gas industry, whereas if they had to pray even a sort of half decent price for the government
with they wouldn't make any profit. So again, your license to operate depends on governments, and it depends on deals done you know in places that I will never visit, allowing that not to happen or it to happen gradually.
But you say that's ESG. But that's just G, isn't it. Which just environmental social governance. That's only the governance bit.
The idea is that good stewards of our client's money will they'll get things wrong and get things right, but they will look at these issues, and they should be better at it than we should in their businesses. And they should be looking long term at the issues and trying to address them before they become fatal. And the idea that a fund manager turns up and this has happened to many times and then tells the management of
a company what's good for that company? How on earth would you own shares in a company where you have to tell them you haven't.
Spotted these five risks. So if you believe that about the company you're investing it, there's something wrong with that company, and we can engage with the company. But if they really haven't, then you probably on the long term shouldn't give your clients money to that company. So we want people that will navigate all the uncertainty for us.
Thank you. So when other vund managers talk about ESG, for example, they talk about divesting or about having very clear divestment rules, areas they won't invest in, types of companies they won't invest in. They have lots of box sticking readlines around all sorts of things, and a constant conflict, to my mind and lots of other people's minds between the E and the S and the G in the overlay that they give themselves. But it sounds to me like you don't really have any of those breadlines or
box sis. You just have a general sense of wanting to invest in companies that provide good long term stewardship. And that definition is fairly yeah, I have gray areas in it.
I think it overlaps with the ESG. But we can step back in the finance and drives training economics, and we all, like a lot of people in finance are trained in mathematics and statistics and economics, and they like right answers. So price and quantity is determined by supply and demand. There's a right answer. So, but the world
is much more gray than that. And people that often do quite well in what we do are trained as lawyers or historians, and they're weighing up probabilities that here's five pieces of evidence four and two pieces against and the balance of probability, And if you're training finance, that's completely alien to you this way of thinking. But this is the way that we that we have approached investing. So the ESG in a way is adding to the
list of points four. It's more like being a detective in a way as well, if we think it's credible. And that is some of the worst companies in emerging markets. I was king one last yesterday. I won't mention they've got the best greenwashing efforts.
To mention some names for us we names, Actually.
I wouldn't dare, but they've got some of the best greenwashing efforts. Now you know that. For example, we spotted many years ago who were them the oil companies and the sustainability indices.
So yeah, we don't know what say about that, but it's different.
And I remember the Warren your Grain began that we found that there were some Russian oil companies that were very high up the sustainability precisely. Well, this is mad.
Yeah, I remember having a meeting one with one many years ago and a lot and I'll never forget it because we asked them about global warming. This would have been like two thousand and six, and he said, actually it's good because our Siberian permafrost will become farmland. That's as far as they got.
Then.
The actually wanted global warming to happen and change the work the climate.
So they very fed off farmland, haven't they.
Yeah, Well, you know you know, this is as far as they got, so I'm sure that their efforts and sort of you know, have moved further on at least they think they have to present it. But back then they didn't even have to pretend to give it down. So it doesn't surprise me in that. So, yes, I think that what is it has the CSGY aspect to it, But we tend to sort of weigh up pros and cons because there's no such thing as a perfect company, and there are areas that we find very difficult to
invest in. They are I've always been tobacco. It's called defense, but we I think that's to call it the attack industry, and we found that difficult, especially and we actually don't have many of that.
It's hard to argue that is not a social good in some ways, I mean defense. I can see that a lot of our managers have said historically, as you say, defense slash attack, this is not something we want to be involved in. But in an environment such as this, yes, it's very hard to say that's something that isn't required.
I can see the point absolutely. And it's one of these it gets greyer and actually the next one is.
Going to be it's a very gray one.
And we don't have many we don't have many possibilities to do so.
And you said there's another even grayer area that which.
Is an area that a lot of people ask me about now, is we found it very difficult and again we haven't had much chance to invest in them. We found it very difficult to invest over the years in luxury goods companies, and that's an even grayer area. And on the one hand, it's very aspirational and you know,
people striving for material, to gain pleasure for material. On the other hand, we associate it and we have some evidence that it's also linked to political economies or an elite is stealing capital flight when.
It centered money not being shared.
You know, ending up in London or Singapore. And it's interesting that Singapore government, i think, is thinking about this now as well. And so what you're doing there is you're trying to weigh up a number of gray areas. You know, one is quite a positive sort of striving and the other is actually there's a lot of capital flight involved in the developing world in some of these goods, and that's going against what we're trying to invest in.
The one thing you know is that as an African is that one of the main differences between Asia and Africa has been that the capital stayed in the country, it stayed in sight in the country in Asia, and in Africa it flew out at the first.
Time that's possible chance.
So so capital flight's a really big issue in terms of those hundreds of millions of people getting richer. So that's one we struggle with. But it's one that we I thought I'd raise because.
It's even great, but we don't need it to do. You don't need like triggers companies in your portfolio.
Firstly, there aren't that many unless globally, and even those are not big emerging market businesses, and there were some that tried to list in Hong Kong sort of as exits I think a few years ago. So it's not such a big issue, but it's something that we raised to show the gray areas that we tried to that we try to navigate.
Can I ask you have we done the where how?
Sorry?
How is it is now called the ESG. It's how they're behaving. So if you've got a history of polluting rivers or using child labor, or you know, illegal logging. And it's so basically, if you're prepared to do that to your own environment, your own.
People, what the hell you're going to do to your front and already share already shareholder At some point we used to call it how And I think that's partly the risk that he's trying to capture as you say, some people will say imperfectly, but it's a risk trying to capture the health.
And it also tells us quite a lot about the who how they behave for us. Who how is very important in trying to really eliminate lots of companies. That becomes quite easy in GEM because, for example, a company that's run for.
The government, GEM Global imagine my Global American.
Markets sorry, so in developing it, so if you have there are very large companies run either owned by the government or run for the government. And always ask people to peris that thought. But if the NHS was listed, would you ever invest in it? Because the more profit it made, the fewer lives itself. So this is a massive conflict there, right, So would you do this?
No?
Right, you wouldn't because it would be you don't know that the government would be involved. You just don't know how that would work out. We've got a lot of those who's in GEM and then we've got a lot of families who we can't get comfort with the history of how the assets have been acquired and whether that will come back to them at some point. And that's the classic case for you lose sixty percent and you have to sell. So we just can't. We find that really difficult.
Let's add aware to your list. Yes, which markets? Which economy is interesting? I know that you don't do it like, but nonetheless I think our listeners will find it interesting to know which particular economies are working for you at the moment.
Can I reframe it? I conditioned slightly to answer your question, which is where do we find the most companies that meet our criteria?
Yeah, that was a much better question.
So because we are so bottom up focused, I'm talking about macro and we've tended to find more companies over the many years in India. And that's that's because there are so many companies listed in India, and the proportions are still quite low. But it's just that there are just so many and the stock market has been allowed to evolve in a sort of vibrant way. We would have hoped twenty years ago that the Turkey would have gone the same way, but under different leadership it hasn't.
So that's a place where we find lots of companies. We can find a few in Latin America. We ran a Latin American fund in two thousand and nine on the basis that there were a bunch of privators that a bunch of companies that had listed in two thousand and four, five and six that had, you know, some track records that we could long track as we could test.
So I'd say that India is a place where we find find that most companies at feud our criteria, but it's because it's a low proportion of a much larger number.
China.
China we struggled with, and we struggled simply because of answering the who question, which often impacts the what we have. In the past, we used to invest in Taiwanese listed companies, example, businesses in the mainland Hong Kong companies with businesses on the mainland that we're going that we're going to mainland. But but that I think is with the way that the political environment Hong Kong has evolved. I think that's slightly
more difficult. So we've got a list of four or five companies that we think we can evidence our entrepreneurial built far away from leadership and the government there. And that's out of a very large number. So it's a small number of companies that we can get comfort with. And yeah, we'll keep looking. I think China. China is a huge economy which has a lot of dynamism in it,
and we will just keep looking. We struggled because of it because at some point it always kicks back to the leadership and you always go back to the political economy there and do you really own equity or is it decided by some opaque sort of mechanism. But I
wouldn't certainly would never want to rule out. The thing that gives me more hope is that these issues are now widely recognized where it's really the only words and they're widely talked about, and it's an evolution of history really how the West response to the rise of a different viewpoint is more widely understood.
Do you have a set valuation criteria.
I've got my own money in the fund, so I need to earn and that's assuming inflation does come down again to some reasonable level. Is not allowed to run off globally, and I need to earn ten percent in nominal terms around ten percent. Nine would be fine. To compound that over ten years to reward me a terrible risk that I'm taking in all the risks I'm taking in imagery market. And that's something I've been saying to
clients for a long time. That was one of the reasons why ten years ago we had to look more globally. And I think that as more achievable now. It's not a not a forecast, as things have happened, but those are the sorts of returns that I need to own the best quality companies.
And this is more ajevle now because emerging mine because are historically speaking relatively.
Cheap, they're relatively unpopular, and there's still some very expensive some good quality companies that we'd love to earn are still too expensively.
And what do you mean by too expensive?
The returns that I can own and for them are below the eight percent.
Threshold based on the valuations.
Yeah, the problem with valuation is just using a straight p number.
Yeah, he always knows what. You always know what. I'm trying to get you to say.
Just using a straight ignores the idea of firstly the return you want to earn and the growth that you think the company's going to We're not people that are widely optimistic about about growth. So I prefer to talk in terms of return because a pe of five four I don't actually I don't know what the PEE of some of the worst data owned companies in GM are, but they're very cheap. And they're cheap because ultimately you have to ask a question whether you actually own anything
by owning them. So I think a sort of very sort of valuation focused approach and GEM can work for two or three years, no doubt does when people get really sort of bullish, but the long term has been proven not to work, and that's because of the governance. Do you own the thing or not? Or is it being run for something completely different? So that's why I
prefer to talk in terms of returns. A low PEE tends to indicate that you can make higher returns, but then if the business is going to shrink for the next ten years, then you're.
Not value traps.
Yes, absolutely, and Jem has got I would argue lots of those, and I'm not here to say that I'm not optimistic about owning state owned anything in GEM. They can have a good two or three years, But we're trying to make teny decisions, and I'm not. It's just something a decision we just can't make. So those sorts of returns we can find in companies that are going to grow ten or fifteen percent on ADAM for the
next ten years. We can find them in companies that are going to grow five percent per an in the next ten years, or where we could reasonably think that they will. But those are the sorts of returns we need, and they are present. Otherwise I wouldn't be putting my money into the fund. You know. Whether we end up earnning seven percent or twelve, that's fine, but we're in that right ballpark.
Now, can you give us a couple of examples of the companies in your top five?
Yeah, I'm trying to give ones that because we were about to launch our fund.
I know, I understand this. It's a really difficult time for me to We're asking you do name names. Anything that's big enough that our conversation here can't hose the price.
It has to be a very big company. I'll tell you about the last report I wrote. We write our fund managers, we don't believe our analysts, so we write do all our own work. We don't use The cell side is full of very bright people, but we think they're asking very short term questions because they're encouraging people to buy in seal stock. So if a person buys and wholes it ten years, it doesn't make the sell
side any money. So we do all our research. The last company I wrote a report on which we were going to discuss late this afternoon is a Japanese company called unit Charm. We've owned it for many years and many years and it is it's one of the leading makers of diapers and sanitary neplins in the world. And the interesting about the company is about forty years ago when the Sun forty years ago, before the Sun took over, it realized that Japan was shrinking and it started and
it started as an expansion into emerging markets. That would has often been a recipe for disaster for companies all over the world. Well, you know, we've got to get some growth, but they did it very carefully and they now have over sixty percent of their sales is outside Japan and mostly.
In Okay, so this counts as the line of the companies. It is global but very exposed for emerging.
I use it for a number of reasons. Firstly because it's a global company exactly because it's a bigger liquid but also it's the last report that I wrote, and it's we've we've met the founder, saw the owner many times. A run by the owner. We love companies are run by owners with a long term view because they take different sorts of risk to somebody that's on a three
year option program. So for example, it's balance sheet, it has its balance sheet is ungeared, it has cash and it's balance sheet, which a professional manager wouldn't do because on a three year view, especially low interest rates, you buy back shares and increase EPs. But a real steward knows that the tough times come and maybe a bit of cas should be good so that when the tough times are here, you can make some acquisitions, you can take market share. So that's the last company that I
wrote on, this company that we've owned for years. There's some very interesting two or three companies in Latin America. For example, that and JEM is one of the reasons JEMs failed is some of the even the very well
strewarded companies fell on hard times and made mistakes. And one of those companies is a company called Natura in Brazil, which we owned for many years and then had to sell because they were the founders had decided to go on a debt funded acquisition spree, which essentially has caused the company some problems in the last ten years. They brought the body shop in the UK, which was an error, and they bought even which may or may not be an error. So we engaged the companies and sold many
years ago. We were very concerned about the company because of the debt profile until they did something a few months ago which they had incubated a business called ASoP. We didn't realize the value in that business, so that's our mistake in many ways. But they just sold that to Laurel to It, which essentially removes all the debt that we thought they had. And that deal has been done, so what you now have is the same stewards who are chastened.
There's been a change of chasing with cash.
Who were no longer indebted and have a much bigger business and the stock prices sixty or seventy percent lower than it was off the top of my head ten years ago. It has they have brands, and they're one of the only B corps in emerging markets for if you like ESG. But I think they were doing it. They were doing ESG before anybody even knew what it was, so it was just part of the DNA of the
founders of the company essentially. And so yeah, so that's a very interesting company because it's kind of the microcosm of part of the reason why Emerjory Markets failed for ten years, which is some even some of the really good companies made mistakes. And if you can find companies with those mistakes, they realized and clearly they didn't bet that the ship because they had this business and they knew then that might be quite an interesting company touring
for the next ten years. Yeah, So that's that's that's another example, different type of example.
You gave all examples. Thank you. Yes, Now listen, Jonathan, I have to ask you a question that you won't like. You won't like, but I have to ask everybody at the end of the podcast. We're watching the answers very closely,
so please be aware this is extremely important. Okay. I am going to let you buy one asset, and one asset only for the next ten years, and I'm going to give you a choice of three all of which you will hate, but one of which you must choose gold, Bitcoin, or cash in a deposit account in the UK.
I have to answer as I personally have so apart from my own fund, I have cash in a deposit account, in a government deposit account in the UK percent So it's my fun than that.
Okay, So you would take cash over gold over a ten year period, we were very despite your your belief that I share that there is a degree of financial oppression underway.
I think if again, if I think you'd have asked me fifteen years ago, I would have said, have a bit of gold. I just never I've never felt comfortable with gold, and I think that there are now alternatives to it, and it hasn't it hasn't truly done what we thought it would do fifteen years ago.
If I take cash out of the equation, this is a supplementary question that I shouldn't ask, But if I took cash out of the equation, would you choose gold or bit core?
Oh?
Definitely gold yeah. Absolutely. I find the rise of these alternative ways of storing and transacting wealth. I find them to be partly technologically driven, but also partly a symptom of the excessively loose monetary policy that we've had in the last.
Take your pick years, forty years.
I don't blame I can see what they are, and it's essentially in air mission that government is debasing your will. But I don't believe that they are stable sources of wealth and of capital preservation.
Okay, there we go, listeners, Gold. It is while actually a sup pod count but secondary it's gold. Jonathan, thank you so much for joining us today. There was really interesting.
Thank you, Thank you, Marion.
Thanks for listening to this week's Marin Talks Money. We will be back next week. Catch our debrief on this week's conversation on the Merin Talks Money after show in our normal feed that is, I'm afraid, only accessible to Apple News subscribers and to Bloomberg subscribers. Look out for the after show online.
It's quite good actually.
In the meantime, if you like our show, rate review, and subscribe wherever you listen to podcasts and do please also tell your friends to listen. This episode was hosted by me Maren Sunset Web. It was produced by Summer Sadi. Additional editing by Blake Maple's bez Well thanks to Jonathan Sante and John Steppek Is is You're to sign up to John's daily newsletter Money Just still to the link for that is in the show notes. And I say that's quite good too,