John, Hello man, Hello, Now, John, I've got a question for you.
Go ahead.
I want you to imagine, and I know you've got a good imagination to imagine. They're a hugely successful entrepreneur. You had a brilliant idea, maybe eight years ago, maybe only five years ago, really good idea. You've worked very hard, you've implemented your idea. Well, you've built up a business, You've hired a parlor of people, you're making a parlor money. And now you're thinking to yourself, do you know what getting on a bet? Not you, personally, John, were all in the world of imagination.
Now getting on a bet.
I think in the next ten years, fifteen years or so, i'd like to retire. I'm going to list this company. I'm going to let other people share in the growth here.
I'm going to list. So that's You's like me. It's so like you. And then you look around the world and you think, ah, where should I list? So here's my question. You're going to choose the UK right because you live here.
You like it.
It's a good place, aren't you.
Yeah?
I mean absolutely, of course I'm a Patriot. Although no, wait a minute, what's this. I'm hearing the siren song from across the Atlantic that says, well, what does it say? Maland because this is the point of your excellent column this week.
Ah, excellent, I like that. What it says that siren call is it says money, money, Let me give you more money. And we know that you're financially incentivized, right
because you've done this amazing thing already. So what the call says is, come to us, Come to us in New York, and you can list your company at maybe forty percent more, and you could list it at home, and you get to keep all that lovely money of the percent of the company that you list, and then then you can stay on a CEO for as long as you like, and we'll pay you double, maybe triple, maybe cold druple what you might get if you were
a CEO in the UK. And you know, if you stayed in the UK after nine years or so, all the big investors in the UK will be going, oh, do you know what, that's kind of our limits. You've got to go now, even if you were the dry being forced behind the company, even if you've been taking brilliant decisions all the way through those institutional investors will be going, yeah, we're gonna have to vote against you.
Sorry.
See that sounds awful. Why would anyone less than the UK let a lot? Also in the small numbers that are actually doing it, where is.
That small number they're not?
I mean that's the problem.
We have very few listings in the UK at the moment we had any of this year, five six, something like that.
Very few listings.
There are a lot of listings going on with China is the big is a big place for listing to them when most companies are listing there, or more companies are listing there. There've been I think fifty six or something in the US so far this year, and there's been a reasonable smattering in Europe. But there is very little incentive right now to list in the UK because we have spent so much time by trying to make
ourselves to the gold standard of international governance. You know, if you list in the UK, you are going to be regulated into the ground. There's literally nothing you can do that doesn't mean referring to to a code of some kind or a compliance department of some kind.
And all the big institutions in.
The UK have huge stewardship and sustainability departments as a result, and a lot of your life is going to be spent talking to them. And if you talk to a fund manager in the UK, they will say, you know the guy who the woman who actually manages the money, they will they spent they spend half their life listening to the sustainability and stewardship company is telling them how they have to vote against this, and vote against that and vote against this. So it becomes a very kind
of a tight area to work. And of course everyone was on your case about money. You get paid too much. You shouldn't get that much, but you should be paid less. This isn't right, You should leave, et cetera, et cetera.
Et cetera.
You go to the US and all it kind of vanishes. So why wouldn't you at all?
But one one on this is on the compliance said and the ESG saide.
I mean this sort of.
Stuff is is global, isn't it? How has it got so much? Was in the UK? I mean the p thing is is clear leave very different and always has been.
Well.
I think you know, we love a bit of regulation, we love a bit of bureaucracy. We've got endless people and endless different organizations creating codes and sets of guidance or remember a lot of stuff is guidance. But if you're a company and you don't follow the guidance, then nonetheless the big institutions will vote against you because they've got sort of that stuck in their head as well.
So you know, there's there's a lot of different organizations, different sets of guidance, different regulators or telling you that you have to do this, and you have do that, and you have to do this.
And when you you.
Know, each individual piece, if the likes of you and I are ordinary investors look at it, we're like, well that that's entirely reasonable. People should have to do that, and people should have to do that, and people should have to do that. But as it piles up and up and up and up and up, it gets the point where, you know, what about the actual business, what about the innovation, what about the wealth creation, what about
the value creation, what about the productivity? You know, it becomes a sort of a heavy blanket lying over the real activity of a company. So then you get this, this this feeling from CEOs they're not allowed to do what they do best, which is run a business. And worse, they're not allowed to do what they do best, and they're also not allowed to get paid for doing it, maybe not as well as they'd like to do, if that makes sense. Whereas you can go somewhere else and
get all those things out. There's so many problems here. You know, good governance is great. We're all very pro good governance, but you cannot make investing safe. You shouldn't even try and make investing safe because risk is the price of growth.
That's how it works.
I mean, yeah again doing desicree home, might you this is just about the US have insucked all the oxygen equity markets in jeninal over the last ten years because everyone's been all these party growth stocks let's go. You know, you test Etctera, et cetera, and Neil Harton to be over there as oppose. They's a specific problem with the UK.
Yeah, that comes back to something that you and I've talked about a lot about this, this idea that evaluation gap in the US and the UK is is slightly out of control. It's wider than it's ever been with running what near forty percent still, but we've also looked at you and I had a lot of the research and the data that shows that even if you pull out the growth, if you are just for that, there's still a valuation gap between the US and the UK.
And so the question is really to ask what is that all about?
Why is it that a companies prefer to list in the US but be one of the obvious reasons for that is the valuation gap. You know, you spent all this time creating a company, building up a company, and putting the private equity dynamic to side for one moment we're just talking about genuine entrepreneurs. You've done all that, Why wouldn't you get the best price for it? Why wouldn't you want to get the best price for it? So why wouldn't you think about listing in the place
you can get the best price. So we can't argue about whether the evaluations in the US are wrong or right and whether they'll mean revert or not mean revert, But right now that's where we are. So there's this problem. And then the other problem, of course, is the actual pay of CEOs. And we like to think, don't we all us that you know, once you get above ten million or so, it's neither here nor there how much
you get paid. But if the question is ten million or two hundred million, I guess maybe it is here or there. And we can also say, and I agree with this, that CEOs are paid too much across the board in general in the US and in the UK. But even if I feel that and you feel that, that doesn't mean that we feel that strongly enough that we prefer companies listed somewhere else.
Yeah, I mean, I guess. I mean this is the This is the tricky part of all of this, isn't it. Because on the one hand, we want this because, as you point out in your book, we want to have a thriving shareholder democracy and that's really important for the creation of capital and having a dynamic economy and all the rest of those great things. And on the other hand, a lot of the things that we don't like are
the things that America A lows. So it is things like, you know, founders being able to have all of the voting shares without actually owning that much of the company.
Things like founders and more. Actually, I don't mind founders so much getting paid in saying amounts of money, but I do have a problem were essentially kind of like middle management executive equivalents who have become the chief executive getting generational, life changing wealth, which is one of the objections that people have had to, you know, things like the ridiculous the big bonus that the Persimmon guy got.
Well, here's the big battery, isn't he. There's always those outliers for everybody.
Yeah, helped that. That was government subsidized as well.
But we're not going to go to help to buy today. No, no beginning to get a rage going already. We're not doing help to buy.
But yeah, things like how do we or rather can we get the best of both worlds? I mean, I suppose one of the things I was thinking in a Regier column was does this boil down the act of institutional investors needn't to be more engaged and to focus on certain things that they're not focused and just know because I mean, see, you don't get enough pupike on my wage? Is any we in a we you want more of that?
Get quite a lot in the UK Now there's quite a lot of this. There's endless voting again to our tips, etc. I think that that has really come a long way since you and I started bitching about it. Fifteen twenty
years ago, so that there's been a shift there. But I suppose that the real thing is that we need to find it a middle way as usual, you know, and the FCA and everywhere they are beginning to recognize that the UK has gone too far in wrapping its corporates up in endless regulation and too far towards trying to make everything safe. And as you know, I'm a huge advocate of shareholded democracy than my bookshere Power you were just mentioning, is all about that. So I'm a
huge fan of that. But I'm also much more than I'm a fan of anything. I'm a fan of economic growth and fan of productivity growth, and a fan of us finding ways to grow our economy. That means that the entire country can benefit. And if we don't have deep, popular, liquid capital markets in the UK, we don't get to have any of the rest. So it seems to me incredibly important that we look at what's happening now and say,
do you know what, this isn't working. We've gone too far, so we've got to pull back from it a bit. And when you see the fund managers coming out and going, oh, well, I don't know that doesn't feel safe anymore. I just want to go out and shake all of them and say, this is.
Actually your job. Your job. Your job is to.
Go out there, look through the oputy markets, give it a good sift around, and find the companies that are good, that you know, aren't going to have governance issues, that aren't going to go bust, that aren't going to you know, turn out to be fraudulent, etc. That is your actual job. So you know, don't be turning around and saying to the regulators you need to do more because I can't be asked to do the governance myself. Enough of this enough.
The one thing I actually did want to say, and this is something you didn't mention to call them, but I was just curious as to how much of this you think ties in with the rise of passive investing, both in terms of perhaps you know, because I mean a lot of the kind of ESG stuff has ended up being driven by people like black Rock to try and differentiate their offering from other providers passive, and also a lot of the fact that the a lot of
the auxygen being sucked out the global equity markets has been partly because obviously passive funds the money. It gravitates to where the most money is. And therefore, as other markets I've got, as the US has got big, that's attracted ever more money.
I just wonder how much.
Of this is kind of doubted that almost I don't know, kind of automation equity markets have kind of lost some of that.
Sparkle. I guess that then ended up going to Krypto.
You're an old romantic, aren't you.
Chance Well, yes, obviously.
The aswer is I don't know. I just don't know, And you and I are always because we great believer is in active management or I am anyway, you know, I'm always keen to blame passive for absolutely everything, but but I'm not convinced that that's what it is here. It's driven by the do goodery of the far management companies, of course, and as you say, their efforts to differentiate themselves by by selling stewardship, ESG, etc.
But that's not necessarily part of passive.
But it's also driven by, I think, in the main, by the regulatory environment in the UK, where we really want to make everything a gold standard and we've done our absolute best to add the best governance in the world and to make one of the reasons why you want to list in the UK because it has the best governance. But in fact, you know what the best governance isn't necessarily the best.
Thing for growth. So you know, we have to find a middle way.
That's that's my view. I don't know quite how that little way works, but I do know that the the reforms to the listing environment the FCA came out with earlier this week are an excellent start, but only a start. Welcome to Merin Talks Money, the podcast in which people who know the markets explain the markets.
I'm Merrit Sunset Web.
This week we are going to have a conversation with Simon Elliott, who's a managing director at JP Morgan Asset Management. He works as the client director for his absolutely vast investment trust business. Now, Simon, you and I have been talking about investment trust for I don't know how many years, both getting old, Yeah, a good, good decade, possibly two decades, maybe even more.
We've been talking about investment trust.
Now I want to start because I'm not sure that all of our audience will be totally okay with what makes an investment trust great.
So before, I believe makes them great.
So before we get into talking about the sector's problems, it's difficulties and the fascinating things that are happening unders so many bonnets at the moment, let's start by just running through what it is that makes an investment trust a special kind of investment. Yeah.
Well, at the end of the day, an investment trust is a PLC. It's a publicly listed company. It has the advantage over other forms of collectives of being a captive pool of capital, so in theory at least, it shouldn't be a full seller at times when market conditions become more difficult. It also has a number of advantages
in terms of dividend payments. So this concept of dividend heroes those investment trust companies that have records of twenty or more years of consecutive dividend growth, of which I think they're about eighteen or so at the moment, led by City of London Investment Trusting. That's up to about
fifty five years now of consecutive diffident growth. In addition to that, we've seen a number of investment trust take on powers to pay out enhance dividends as well, so clearly, dividends can be cut or can be suspended for investment companies, but they've got a number of advantages which provides a degree of creat dividends certainty.
Yeah, dividends is quite interesting, isn't it.
Because it used to be that you weren't allowed to pay dividends out of capital. You couldn't, we couldn't effectively change capital into income and pay it out.
As a dividend, and there were very good reasons for that.
But now it is possible, quite a lot of trust of picking it up, and it's still quite a divisive.
Issue, isn't it. Yeah, No, it is.
You're right. There was a tax change a number of years ago which meant it was possible. A few investment trusts have gone down that route, including a few and the JP Morgan ranges. It happens, and I think we've got six pain enhanced dividends at the moment. I mean, it's something to keep an eye on. I mean, the
arguments against it is that it's tax inefficient. Effectively, you're turning capital into income, and we know the differential in terms of tax rates between income and capital gains tax, so you know, you could argue that perhaps it doesn't quite make sense. However, the reality is it does appeal seem to appeal to a wider range of investors, and particularly retail investors who frankly, you know, are looking for
sources of income. So if I mean, probably the best example is the JP Walgan Global Growth and Income Fund that has a four percent enhanced evidend. It's probably gone a natural yield between two two and a half and then it converts an element of capital and that's proven very popular with retail investors and really been a big part of its story.
It's interesting and it.
Kind of makes those big trusts, I mean, that's a classic of the genre.
Global Growth and Income kind of makes them into you. It makes them into annuities to a degree.
I mean, if you think about what the retail investor is after, and one of the reasons why perhaps a retail investor is much bothered by the tax element of this is because they hold a lot of these big trusts inside their I sell or in particular, inside their SIP and in the old days, you know, when it came to pension time, you'd take all that money that you'd saved up and you'd hand it over in exchange for an annuity which was effectively turning your capital into
income over the period until you're death right. And if you get one of these big trusts now and you can see that they're only making a natural yield of one percent or two percent or two and a half percent, and they say, well, we're going to pay you four and a half percent Now.
They may or may not.
Be making the capital game to back that up, but they're becoming a type of annuity for the retail investor.
I mean, I think you make a good point about where these investments are held. I mean, tax efficient rappers are hugely important and probably explain why there has been a good uptake from retail investors for these type of funds. I mean, there are people in the wealth management community who have greater issues with it, but I think as the years have gone by and the kind of strategy has become more proven, I think you know, you're likely to see even more uptake.
Yeah, you're not picking up my innuity point.
I'm trying, really trying, really hard to get the investment trust industry to take one of these great big trusts and explicitly say, hey, guys, you know what we can make.
This indur in a nuity for you. You still get to control the remaining capital.
But so far no one has taken my bait, and I sense you're not going to either disappointing.
Well, we'll see. I mean, I think what I would say about investment trust is that there's always innovation across the sector. I mean, you know, as you well know, it's in one hundred and fifty five years history of investment trusts, and they have proven to be very adaptable and innovative. So you know, things like enhanced dividends or other policies or of a strategies that they pursued. I mean, there's a reason why they've survived for so long.
Yeah, and it's not just survive.
I'm one of the fascinating things about investment trust is they have a long history of regularly outperforming other types of investment vehicles. So if we just be really simple and call investment trusts closed down vehicles and the other kind open ended vehicles in the main, over time, investment trusts have outperformed, haven't they.
And we're never entirely sure why.
You know, we live at it and we say, well, all the all the advantages that you listed earlier.
Which one is that that makes the difference.
Yeah, that's right. I mean, I think there there have been some very interesting academic studies over the years that would have you know, would would would suggest that that is the case, and I mean there's various reasons why that might be so. I mean, the fact that investment trusts can deploy a modest amount of gearing obviously helpful
in a kind of rising market situation. The fact that they can invest in less liquid companies is obviously important, but I think it allows the portfolio managers to take longer term investment decisions, you know, they don't have to worry about any potential short term redemptions, which is obviously the case for open ended funds or even just managing flows in and out. I think that captive paula capital is, you know, is a huge advantage, and particularly in the times that we find ourselves in.
There's also been cost doesn't then that historical investment trusts have been cheaper than open ended funds, which has been one of the things that has probably driven out performance And one of the things the industry might be concerned about at the moment is that that cost gap has fallen.
Yeah, so certainly kind of pre RDR, which is one of those horrible acronyms that the financial industry loves. But there was a change. I mean, back in the day, open ended funds would often have mechanisms to pay commission to people advising them. Obviously that's in history books now that's falling away, but that was one of the reasons why investment trusts were something more cost effective than open
ended funds. That's no longer the case. But what we have seen across the investment trust sector probably for a number of years now, probably best amount of ten years, is a repricing of management fees in particular, and I think this is where one of the other grade advantages of investment trust really comes into play, and that's the
role of an independent board. I mean, in my experience, boards have been very much on the front foot to ensure that the management fees, in fact, all the kind of costs involved in running an investment company are kept us as keen as possible.
Yeah, I mean, it is absolutely stranginary. We won't talk about this now, but it still.
Blows my mind every time we remember the pre RDR days when you went to a financial advisor and you arranged to invest in a unit trust, and then they paid that financial advisor of commission forever half of percent or whatever it was of your investment went back to that advisor as long as you held that investment, even if you'd only spoken to him for half an hour.
It's amazing, wasn't it.
A different age?
Yeah? Thank goodness?
Right.
I mean, I agree with you, by the way, on these things.
I do think that the cost is important, but also the fact that there is a board of directors, and regular listeners will know that I have a history of sitting on investment trust boards, and I like to think that those boards of directors do make a difference because they're always there to stand up for the shareholder.
But obviously investors will turn to that for themselves.
Now, moving on all these wonderful things we have been talking about the things that make this sector stand out, the things that make it sound really fantastic. But last year wasn't a good one, was it.
No?
It wasn't.
So.
I mean, the numbers for the investment trust company sector last year I think it was in the sector underperform the wider UK market substantially. And actually that's what we're seeing this year. So the numbers are that the investment companies were down about seventeen percent or so last year. That compares with a slight increase in the UK market
and the form of the foot Seat all share. So far this year, I think we've got investment companies stand about one point seven percent and that compares will rise of five point three for the all share. So when I'm talking about investment companies there it's worth noting there all the investment companies that form part of the foots all share, so there's about one hundred and ninety or
so at the moment. It's market gap weighted, so those large investment trust companies you know, have a greater bearing on that performance. But you know, take a step back. Suffice to say, it has been a tough period for investment companies And is.
That partly because in periods like we saw last year, not only are their underlying.
Investments falling in value, but their discounts are widening. So you get a negative account of negative double whammy with an investment trust in difficult times.
Yeah, that's absolutely right. So if you look at the sector average discount at the end of twenty twenty one, it was probably stood about two two and a half percent, so we did see a big d rating going back to March twenty twenty at the time of the pandemic. Obviously markets were very uncertain that that period of time, but then there was a quick recovery since then. But going through last year, I mean, the secretaries discount widened out about thirteen percent at the end of last year,
and it's continued to widen this year. So I think you hit about seventeen just more than seventeen percent at one stage. It's recovered a little but still stands at about sixteen percent, So historically that's at quite a wide level. I mean, just to put some numbers on that, go back to March twenty twenty, that pandemic period, I think we bounced off about a twenty two percent sector average discount you go back to the GFC probably a not
dissimilar level. So to be at sixteen seventeen percent does suggest that there's something a little amiss in the world of investment companies.
Okay, interesting.
I mean some retail investors would look at that and immediately go, well, I'm going to buy everything insight because when investment trust discounts are at loads like this, it's usually historically it's been a bisignal.
Yeah, And look, I mean you're absolutely right. There are I mean not just regal investors, frankly, but there are those investors who will look at the discounts that were seeing across investment companies at the moment and consider them an opportunity. I mean, there's a few things to note here.
I mean, certainly, you know, investment companies have historically played well to control and investors, So those that have looked to take advantage of out of favor asset classes on wide discounts and then wait for those asset classes to come in favor and those discounts narrow, so you kind
of get a double whammy effect. But then the other consideration, and this will be true particularly for those investment trust companies exposed to private markets or private companies, is you know, can we rely on those navy valuations because it's all very well notionally saying it's on an x percent discount, But if the NAV is not something that perhaps you could rely on, then you've got to be a little bit wary, clearly.
Okay, So let's talk about that because This is one of the big questions in the sector at the moment is about this trend there has been over the last decade for investment trust to hold not just publicly listed investments but private investments at the same time. And I'm not going to ask you to talk to me about companies such as Bailey Gived in particular, but they have
been the big leader here. You know, they went in very strong making sure that the majority of their trust hoold held not just listed investments, but private investments as well, on the basis that on the perfectly correct basis that that's where the growth was. If you want to be invested in growth across the spectrum, then you.
Shouldn't distinguish what is public and what is private.
And then let result is that lots of other companies follow this lead, and we now have an awful lot of companies out there, investment companies that hold both public and private companies as well as the traditional private equity companies which.
Are only private. So that's where a lot of the big discounts are, right.
Yeah, that's right. I mean, look, it's worth noting that for those investment trust companies that are exposed to public listed companies that's on a mark to market basis when you invariably get daily navs, and frankly, you're still seeing quite wide a discounts on those investment trusts as well.
So I mean, if you look at the JP Morgan stable and we've got nineteen investment trusts with one exception, they're all publicly listed underlying companies, and yet I think our average discount is just inside a ten percent at the moment, so you know, narrow or tighter than the sect average discount, but still you know, relatively wide discount. But then you're right if you look at those investment companies that are exposed to private companies or private markets
or infrastructure whatever it will be. I mean, there's a range of valuation methods used to kind of calculate those navs. And frankly, I'm sure your listeners will be turning off in their droves if we start going through each in turn. But it is a question mark sure, I'm quite sure they wouldn't.
By the way, i'mquite sure they wouldn't absolutely love it to.
Be fascinated, fascinated by it that you carry on well, no, I mean, I think the point is that you know there are various different valuation ways of doing this, and
you know, it can be quite a complicated area. But we've been there before, so I mean, if you go back to I mean, I started covering the investment company sector back in the early noughties, so in the aftermath of the tech boom, and obviously we saw the global financial crisis in twenty and eight, and at both those periods of time, there was this move, there was kind of risk off move, and anything with exposure to to
private assets was derated by and large. I mean, some of the list of private equity companies got hit very hard by the GFC and there were a number of issues there, but valuation amongst them. But there's this idea of you know, how do value can we rely on the valuation? I mean, ultimately it is a very difficult area, and I have a huge degree of sympathy for people involved in that because ultimately, you know, what is something well we're talking about price discovery here, and ultimately it's
worth what someone is prepared to pay for it. So you can use your various different valuation methods, being you know, discounted cash flows and you change your discount rates. You can look at predicted earnings versus comparable PE ratios, and you know, all these different ways of doing it, but ultimately it is very difficult, and we are at that stage of the market where there is a degree of skepticism about valuations.
Yeah, well, you know.
I mean, I'm often very simplistic about things, which you can criticize for me or not. But one of the things I look at when I look at the trust that the whole both, and you can see that their publicly listed assets have fallen significantly more in value than
they're privately listed assets have been revalued at. And I loved it, And I think to myself, what seems to me that an environment like it such as this, the value of the private assets should have fallen at least as much, possibly more than the publicly listed assets, because of course the private ones should have a massive liquidity discount attached to them, and also, in the case of it are not profit making a hefty discount for that
as well. So it likely seems to me that if you look at a trust that holds both and the private assets haven't been written down at least as much, if not more than the public assets, then there's definitely more to come.
Is that overly simplistic and unfair of me.
Yeah.
I mean, look, people on the other side of that would argue, yes, but what you don't take into consideration there is the fact that we might not hold pure equity. We might be holding preference shares or some form of security that gives us some protection when valuations fall. They'd also say, well, look, you know we've had a you know, funding round recently and this was the valuation that was set by that particular funding round. Or they might say, well,
look we've actually disposed of some assets. So you know, you look at we're talking about you know, private equity and private companies, but you look at what's going on in the property market at the moment. Obviously we have seen a big derating their valuations have come down, but we also have seen disposals. You know, some of these assets have been disposed of in very recent times, and obviously there are exceptions, but you know, equally we've seen
some uplifts on carrying values as well. So it's a it's a hugely complicated subject. I totally understand investors' wareness, and frankly, that's one of the reasons we've seen discounts widen out over the last eighteen months or so. However, as I keep saying, you know, we have been there before,
it is that stage of the cycle. And I think the kind of bottom line is it's it's a market or it's a kind of situation where it pays to do your homework, you know, it's you know, to your listeners who are quite fascinated by the valuation issue, then this is this is the time to kind of roll up you sieves and get your hands dirty, actually have a look at these things carefully.
And what should we've.
Talked about the boards of these investment trusts? What should a board do if their discount is very wide? So you've got assets on your books, and let's let's go back to inve'sment acrus that only hold listed companies, right, so we can see very clearly what they're actual as a value of the portfolio is, and we can see what the market value of the investment trust is. And there's a gap there, let's say, for example, of fifteen twenty percent, what do a board of the investment trust do?
Well?
Obviously some it differs is a short time, So I mean there are some boards have been incredibly proactive. I mean, there are a number of investment trusts that have pursued a zero discount policy and have done for a number of years and you know successfully.
So you know, that just means making it known that they are going to buy back until the discount hits zero and once the market absolutely understands that the discount really moves out.
Yes, that's right. So you look at Personal Assets Trust or Capital Gearing Trust, I mean, they've pursued that policy very very successfully. And then there are other investment trust companies who've used their buy back policy to kind of dampen down volatility share price volatility. So you know, in the jpm stay board, we've got the American Fund. They've been very active in their buybacks this year and it's probably you know, turned out about between a three and
a four percent discount, and that's very much intentional. But you're right, there is criticism across the sector that you know, there isn't enough being done in terms of buybacks. I mean, we've seen a sixty four percent increase quarter on quarter. In the first three months of this year. Eight hundred and forty million pounds was brought back across investment trust so there is certainly activity, but it can be difficult as well. I mean, some investment trust companies are very
conscious of their size. Size is an issue in the investment trust company sector, not least because of the trends that were seen across the investor base, with consolidation in the wealth management sector, for instance, being one factor. So investment trust companies are quite wary at shrinking to become too small that they become uninvestable. So other considerations as well.
But you're right, I mean there has been a number of voices saying, well, look, if you've been prepared to issue on a premium rating when the sun has been shining equally, you should be the other side of that.
Yeah, But then you come to that problem.
I always feel that, you know, so you issue a lot of shares when things are going well and your shares are trading at a prim view on let us in value, and that that feels good. But nonetheless it does mean but instead of having a fixed pool of capital, you are bringing in more money that you then expect your manager to take care of. And then if you then do the opposite, you start to buy back your shares when you're at a discount to try and them
back up to let use at value. Then you are asking your manager to release cash in order to allow you to buy those shares back.
So you're doing you're taking away.
One of the great advantages of investment trusts, which is that your investment manager never has to think about inflows and outflows. He or she has got the pot of money and they deal with that pot of money. So as soon as you in produce very intense buybacks to try and close your discount, you take some of the attention of your manager away from trying to improve its performance.
Which, in the end is the thing. The closest discounts automatically. Is that fair?
Yeah, I think there's a lot of merit in that argument, to be honest. I mean, I've heard other people say that effectively becoming a semi open ended fund. So you know, what's the point I think, you know, my personal view is I think if boards are considering discounts, they should
be very clear at what they're trying to achieve. Is it a case of there just you know, providing a kind of flaw on their discount so, you know, effectively signaling to sholders and some are very you know, explicit about it that we will not let our discount go wider than say ten percent or whatever the level that they feel comfortable is. And also you're looking across your your peer group as well, because if you're in an area of the market that is out of favor. So
I mean, where are we at the moment? UK mid and small cup would be a good case in point. You know, we have seen that area de rated. It has been a very tough part of the market now for a number of years, and we have seen discounts widen out. So to be the investment trust that says, right, we're going to pursue a zero discount policy in that space, I think would be quite problematic. You're likely to shrink your vehicle in very very quicker order.
Okay, let's go back to talking about science. You're saying that investors us are very, very wary about buying that too much or doing anything they might.
Reduce their overall size because that makes them uninvestable for the well managers who need to hold a certain size. What is the minimum size that an investment trust can be? Now, do you think it can be to be attractive for.
The wealth managers and therefore have reasonable liquidity emissions.
Yeah, this is this is one of the great talking points of investment trust companies and has been for the couple of decades I've been involved in it. I mean, to be honest, it used to be one hundred million. You needed to have about market level one hundred million to be viable. That number suggest is you know, a multiple of that now. I mean anecdotally you here four hundred million. But there's also kind of concentration risk as well.
I think most investors, or institutional investors or wealth managers would be you know, uncomfortable becoming too great a proportion of the sholder registers. So whether that level's you know, ten percent, fifteen percent, it will vary, frankly, but I think it is important. I mean, again a personal view, I would expect to see more consolidation across the investment trust sector. I mean we have seen a number of
deals in recent years. Again, we talked about the JPM Global Growth and Income Fund earlier and that had an emerged with Scottish Investment Trust, which was completed last year, and in fact it then went on to merge with GP Morgan elect So it's not two mergers in the last year, and that would be my expectation. That said, it becomes more difficult to pursue a consolidation of mergers
at a time when discounts are wide. You know, not always, but invariably, you've seen those investment trust companies that have been the beneficiaries of mergers invariably training on strong, not premium ratings to their nav and frankly, they're not that many of those around anymore.
Yeah, So might it be that some of the smaller investment trusts stay languishing on quite big discounts indefinitely.
And one of the things that retail investors listening to this.
Might say, well, you know, if if the big wealth managers aren't going to get into some of those smaller investment trusts, that's a great opportunity for me.
But maybe it's just a long term trust.
Yeah, I mean, just on that particular point, I mean this idea that consolidation in plays to larger investors, there's a lot in it for smaller investors as well, Franklin. And if you look at the spread, the bid off for spread on the share price of investment trust companies, that spread can be very wide. When you kind of dip below a certain level and probably about one hundred million pounds or so, as a rule of thumb, you know equally the cost of running investment trust companies as well.
We talked about how important it was to make sure that you know these vehicles are pricedly keen. But there is an element of fixed costs with investment trust companies. And again if you get if you're too small, and probably one hundred million is the number, then those kind
of fixed cost elements can ratchet up. So I think, you know, for retail investors, they should certainly be aware of the spread, they should certainly be aware of the ongoing charges, and I think consolidation does play to them as well.
Let's talk about the wider market as a whole.
I mean, JP Morgan has gone on so many investment trusts that it doesn't matter what you want to invest in, you you can find something right.
Where do you see the value?
In his serious question for you, where do you see the value in global stock markets right now?
Gosh, again a great debating point. I always think it's certainly with investment trust companies it does pay to be to take a bit of a controlling approach, and certainly, you know, talking to investors across the sector and you know, are very good in house people as well. I mean, people will talk about the value that exists in Japanese equities at the moment. People will talk about the opportunity
set for European companies. I mean, the European investment trust sector is one of the best performing so far here to date. Obviously had a pretty tory time for understandable reasons last year, but that has come back. People talk about emerging markets at a time when you know, arguably that the dollar is weakening. But it's interesting that you know this big debate, you know, growth versus value. Have
we seen a complete change? And one suspects that it is going to be a more difficult period for growth investors. And yet if you look at what's happened here today, growths outperformance value on a kind of global equity basis. Now, maybe that's because of a small handful of tech companies, but I don't think you write off growth ultimately. I find that the debate between growth and value a little simplistic. I think you've got to get behind that a bit.
Can I ask you about a couple of the trust in particular, there's the jp of mergaging Europe, Middle East and Africa Securities PLC.
Now that used to be the Russian Trust, right correct? Is that the one I'm afraid I have to confess to holding that.
Over the years on the basis that companies in Russia was so cheap, so cheap, they pretty much discounted a returned to communism and that didn't seem very likely.
Well, that'll teach me.
So that trust has now been expanded to invest in in all sorts of different areas.
Tell me a little bit about the kind of thing it invests in.
Yes, so you're absolutely right. So sharltles have approved a change of mandate there so it can invest in Africa, so obviously South Africa a key part of that particular market, and also the Middle East as well, so you know Saudi Q eight and so on and so forth. So you know, a broader a broad to mandate, but still relative early days following that strategy.
Okay, so worth watching, I think.
And then let's say we're worried about inflation, which of course we all are, which are.
The trust would serve us best?
There?
What's in global call real assets for example, is that something that we could buy as an inflation heah, yeah, No.
There's there's a range of exposure in that particular portfolio. So it has what I ask, commercial property, so that that's in the US and Asia Pacific. It then has a whole range of kind of infrastructure type plays in there as well, so transport being part of the story. And yeah, I'm in very much keeping a close eye on the inflation story and hoping to, you know, if not be a beneficiary, certainly kind of navigate those those turbulent waters.
And is the view from you that inflation is likely to continue at the high level globally?
So what's the JP Morgan view on this?
Yeah, in a nutshell, yes, I think you know, inflation will obviously come down. I mean we all know that mathematically it has to come down, but it's not going to settle at levels that we have become used to, I think would be the view in house. What that level is remains to be seen. But I think in terms of interest rates, we're not going back to deminimous
interest rates anytime soon. So you know, you talk to Karen Ward in our market insights team, for instance, and she's clear, you know, particularly with regard to the UK market. Then in fact inflation runs hotter for a period of time. So you know, this idea of that the two percent target, you know, almost falls away in the kind of the short and medium term until we kind of get the economy moving again.
No, someone told the Bank of England.
Well, you know, there's a difference between their messaging and the reality. I think you'll find.
Yeah, now, I think we will all find that.
We've had lots of conversations on this podcast about jam whether that two percent target will change or to the extent of which it will be fudged and become as little two to four percent excent. And let also lots of conversations about how we ended up with the two percent target in the first place, because anything anyone can really quite remember how it came about that two percent was the answer to all inflation.
Okay, So.
I think that pretty much casts it actually on the basics of the investment trust industry and where we are. But the key thing I supposed to say is that you have full confidence going forward that this is a sector that will remain successful and despite a dodgy year or two.
Yeah, Look, it's a challenging period for investment trust companies. I mean, nobody can die that at the moment, I would expect to see an upticking corporate activity, and we've already seen that. So investment trust companies decided to give up the ghost, or return money to shareholders, or look to pursue mergers or change of managers. I mean, I think that's the period that we're in. That was certainly the experience in the early noughties and after the GFC.
But you know, so a degree of rationalization I think is likely going forward. But you know, as mentioned, you know, this is a sector of one hundred and fifty five year history. It has been very successful at adapting. There are structural advantages that I think will stand it in good stead. And I think it's a fascinating time to be an investor in investment trass excellent, Simon.
I couldn't agree with you more.
And I tell you what, I didn't say that at the end of all my podcasts, thank you being with us, and thank you everyone for listening to this week's Marin Talks Money.
We will be back next week, of course.
In the meantime, if you like us show rape review and subscribe wherever you listen to podcasts, but do remember the basic rule, only positive reviews. This episode was hosted by me Maren Sumset Web. It was produced by Someasadi and Mohammad Farup.
Additional editing by Blake Maples.
Special thanks of course to Simon and to John Steppek, and finally a reminder to sign up to John's daily newsletter, Money Distilled.
The link for that is in the show notes.
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Thank you,