Speaker 0:
Hello and welcome to this investment Trust Outlook on Asset TV. We're here today to talk about the UK. We're gonna be looking at valuations and whether one of our guests says UK valuations are stupidly Miss Price we're gonna be looking at if there's too much short termism in the markets at the moment and after the chaos of the post covid years and we're now seeing a more sensible political backdrop. We're here to talk about that with me. Here in the studio, we have Sue Noa, head of UK Equities at Schroder's.

Speaker 0:
And we have Thomas Moore, senior investment director at Aberdeen.

Speaker 0:
Well, welcome to you both, Sue. I'm going to start with you. Should we stay with that? The sensible political backdrop? Are we looking at a more now boring outlook for government policy in the UK?

Speaker 1:
I think it's difficult to say boring, but but less volatile than what we've experienced in the last 18 months, or or even the last seven years. Si, since Brexit, there's been a lot of turmoil, and I think things have settled down compared to to that level of volatility. Hm.

Speaker 0:
Thomas, what do you think?

Speaker 0:
Absolutely. I think If you go back and look at the series of events we've had over the last 10 years, the Scottish referendum, which we forget about in 2014 and then of course, Brexit. That was the big one in 2016. We've had Trump and then, of course, we've had covid. We've had Ukraine, so it's layer upon layer of difficulties in terms of the macro. And then, of course, the UK is a very undervalued market, partly because of the sector composition. It's not got all the sexy stuff. It's not got NVIDIA.

Speaker 0:
And so of course, that means that people have just been able to disregard the UK for a long period of time and reasons to be cheerful. Inflation coming down, GDP figures have been revised. Should we be cautiously optimistic? I think that's right. And of course it's early to say and and who knows? There could be a bump in the road in the next few months. Um, but we're seeing food inflation turning negative and so bit by bit, we've got to the point now where we can say

Speaker 0:
with some confidence that actually the outlook for the consumer is starting to improve wage growth remains positive about mid single digits. Uh, wage growth. Employment is holding up quite well. So actually, in terms of consumer disposable income, things are fine. So really, it's hard to pinpoint a UK specific reason why you would be negative in terms of the domestic economy.

Speaker 0:
So do you think that's right? People are negative because of the composition of the UK market. Not necessarily the UK itself.

Speaker 1:
Yes and no. So investing in the UK stock market is very different. Different to investing in the UK economy.

Speaker 1:
UK stock market revenues.

Speaker 1:
Three quarters come from outside the UK. So very much the international markets economies, opportunities set and risks all come into to play. So the UK focus dominates because of risks to sterling. The perceived risks by overseas investors who own the majority of stocks in the UK, their

Speaker 1:
attention span their their level of understanding tends to get conflated with political risks and economic risks. In taking asset allocation decisions. As a stock picker, I see opportunities from all that

Speaker 1:
risk of suffocation, Um, perhaps lack of focus on what's lying underneath the so called fundamentals for investors. I do

Speaker 0:
want to come back to those opportunities quite soon. But just go back to the Bank of England. Have we hit peak rates now? And what are yields doing compared to, say, other economies? I

Speaker 1:
think interest rates are at peak, so we're at five and a quarter percent

Speaker 1:
held I. I think the kind of expectations that markets got into a is in early summer. Pricing in rates of 6.5% are not going to happen.

Speaker 1:
So much is data dependent, though We want to see inflation, which is still well above the bank's 2% target, squeezed down. So Tom talked about today's food price inflation that was small negative, minus 0.1 for for the the month that is easing so the inflation inflationary pressures are easing. But we're not yet back to what should be comfortable levels. I think the

Speaker 1:
the issue for markets is how long do interest rates stay at elevated levels and these these levels are elevated by um, the last

Speaker 1:
10 to to 15 year period, but they're only back to the long run, averages the same with with guilt yields and US bond yields. We we're seeing these numbers being 16 17 year highs. But these are not out of line with what we've experienced over the the very long period. What's been unusual has been the last 10 to 15 years, Uh, a very, very low monetary policy

Speaker 0:
to think this higher for longer. We should expect this now. But these lags, of course, take a lot of time to work their way through the system. Yes, they do, That's right. And I think what we're seeing is we're seeing the economy adjust over time and it does take time. It was never going to happen in one quarter,

Speaker 0:
and I think we're seeing that in the companies we meet as well. We're seeing that companies are looking at how much debt is sensible to have. Perhaps in some cases, their earnings were on the high side during Covid if they had a good covid and perhaps they ended up with the wrong gearing ratio. So we're seeing some companies having to adjust accordingly, but actually in general, actually everybody's had a different type of

Speaker 0:
covid crisis. But I think in general people are now realising where they need to be in terms of what level of cash or debt they have what's their normalised level of earnings? And so we're getting to a point now where as income investors were able to speak to a company and say, OK, here's

Speaker 0:
your here's your capital allocation. How are you going to use your dividends, your buybacks? How are you going to invest? And And let's have a good, frank discussion about where your priorities lie, how those conversations changed over the last year or so?

Speaker 0:
Well, I think in in particular, if we look at specific sectors like banks, we're seeing a shift towards buybacks away from dividends. Now they're doing both. But, um, actually, they're paying out such enormous amounts of cash. I think I read that the market cap of the of the banking sectors. It's come down recently, but it's about 70 billion or so. And you know, the generation of cash is is upwards of 10 billion sort of north of of 10 billion.

Speaker 0:
So they're paying out a sort of 15 mid teen sort of percentage, um, in the combination of dividends and buybacks. Now that's that's a huge amount of cash coming back, and I think Sue and I have both lived through a decade in which the banks have been in the wilderness. They haven't been able to pay out cash because they simply haven't been

Speaker 0:
generating cash. They've been paying it all out. Sometimes they've not been allowed to. No, Absolutely so the regulatory side as well has, has impinged on their ability to distribute. So I think that's one example. But of course you've got You've got other examples, like oils mining where they're generating this huge amount of cash. And and so I think those conversations are now We've got to the point where we can have a quite encouraging conversation from an income perspective that actually there are plenty of opportunities out there

Speaker 0:
sectors where there is lots of cash being generated. And so it's more. How do you use that cash, rather than are you going to generate cash? Staying, staying with banks? I remember reading that banks contributed to half the world's dividend growth in Q two. Is the outlook still looking quite good for banks? If you look at the next two years or so, I think opinions becoming a bit more mixed on this subject. So obviously the change in

Speaker 0:
in in earnings is important and nobody would dispute. There is a very high level of earnings being generated by the big banks. The question now, of course, is as people shift from current accounts to term deposits, the banks having to pay up a little bit more for deposits. And so that's impinging on the amount of net interest income, which is a key driver of all these banks

Speaker 0:
earnings. So that is a mild negative, although they've still got what's called their hedge book income, which is a technical term. But it's really that they invest some of this cash into, um into bonds. And, of course, they lock up those bonds for three or five years. And what's coming off one end of the pipe

Speaker 0:
is bonds they are investing in in 2020 or 2021 when, of course, bond yields are only 1% or 1.5% and now they're able to put that money back to work at 4.5% or 5%. So there is also this positive for the banks now. Of course, when you put that in the round, it's a it's a mixed picture and people do worry about recession quite understandably,

Speaker 0:
because people are worried about recession. There's always that existential fear of some kind of bad debt crisis. Now I've been investing for 25 years. Sue's been investing for longer than that. Sue's seen lots of cycles. I've seen a I've seen. I've seen a few cycles, but I think Sue remembers when it was really tough.

Speaker 0:
And I think that's, you know, the nineties was a horrible recession. I was a I was a teenager in the early nineties, so I can just about remember the the scary headlines. But of course you know it. That was nasty, and I don't think it's fair to liken what we're living through today with that kind of deep recession.

Speaker 0:
What do you think? So you think people's memories, I guess only go back so far. If you haven't had the experience of the market,

Speaker 1:
That's right. You know I, I think as an investor experience carries huge, um, weight behind it in a positive sense that that you have so much better understanding and context. So and as I mentioned earlier, the the last decade and a half have not been representative there have been quite a number of skews on,

Speaker 1:
um, markets and economies, I think, taking Thomas's point on banks, we we're unlikely to see very high levels of unemployment and impairment. Banks have got very much stronger capital

Speaker 1:
positions and balance sheets. There hasn't been a a splurge in borrowing. So we haven't had the this irrational exuberance, uh, of, um what what we saw in the late eighties, the the mid,

Speaker 1:
um, Naughties that that then went pop. So I think banks are are in a more boring, um, state. Borrow your your phrase fro from politics. I think that can apply to to banks what What we do have. I is likely AAA change in government. Uh, and that might bring some uncertainty as to

Speaker 1:
whether spending plans are are going to be financed from a raid on the corporate sector. And we we've seen that from the existing government as well. I don't think that it is something that the share price and valuations couldn't take within the shrine.

Speaker 0:
And have you seen UK valuations looking like this before? Does it remind you of any times or any periods that you've invested in before

Speaker 1:
it it it does. I mean,

Speaker 1:
I I've seen many, many crisis, many cycles, and I think looking at where valuations are today, it chimes with probably three key, um, stress points for for me without the same kind of stresses. So it goes back to the global financial crisis,

Speaker 1:
Uh, of 2008 through to about 2012 when there was an awful lot of uncertainty. There was very, very weak economics. So valuations are are back there. The they are also round about the same levels as when covid hit,

Speaker 1:
um, And for the particular small and mid size companies, they're back to that fallout immediately. Post Brexit So, tho, those are the three key markers. And in all of those instances, it proved to be a very attractive buying opportunity for those assets. If you were a patient, longer term investor,

Speaker 0:
Thomas lots get made of how cheap the UK is. But on this occasion, is it justifiably cheap? Is it very, very good value at the moment, I think it's hard to find anyone who would argue with the concept that the UK is cheap. I think the question that emerges is then what's the circuit breaker So how will we see the UK

Speaker 0:
becoming less cheap? And I think we've covered a range of subjects already this morning on that subject, which is that really the politics if you think back to those last 10 years and all the crises we've had in the last you. In fact, it's intensified in the last five years

Speaker 0:
when when Boris Johnson was elected in 2019, there was a sigh of relief because people said 80 seat majority that will create this stability and this long term planning. Of course, we've had nothing of the sort. It's been crisis after crisis, even with that 80 seat majority. So actually, right now we're looking at a relatively cautious prime minister and cautious chancellor. Soak and hunt. And we're also looking at the choice between

Speaker 0:
a cautious Tory prime minister, the incumbent and the the possibility of electing another cautious politician, which is Keir Starmer. So I would say actually, in terms of the politics, which has been a real worry for overseas investors, I think it's easy to to to become maybe complacent or we become used to this level of variability in in the politics. Sitting here in the UK we've

Speaker 0:
we become immune to it. Of course, if you're sitting overseas, you've got the choice of a range of different countries and a lot of people speaking to overseas investors at a conference I was at just a couple of weeks ago. It was interesting. The the negativity in the questions that they posed to the companies. We were in a group meeting together.

Speaker 0:
You know, the conversations that you have over coffee in the breaks it It surprised me because I'm just sitting here thinking we've got the rule of law. We've got some great institutions. We've got actually a lots of good things going for us here in the UK. But the people I'm speaking to are just saying we don't need to own it. So I do think the politics is perhaps more important than perhaps

Speaker 0:
Sue or I perhaps sitting here as UK investors perhaps appreciate. And I think that's that's something that is hopefully now changing for the better in the next in the next year, so do you think that will take a while to shift through? But while it does shift through, of course the price that you pay for a company now is is equally as important because

Speaker 1:
it it it's the principal determinant. Uh, of your future returns as an investor. So as a stock picker, I get really excited by distress valuations, difficult markets, those black clouds of uncertainty. Um,

Speaker 1:
I think you do have to be patient, that there is no silver bullet. There are lots of initiatives to help, um, improve the the perception and the day to day liquidities and attractiveness of investing in UK equities. And they're all to the good, but they're not gonna happen overnight. So why? Why should investors pick UK equities?

Speaker 1:
And the answers I would give to that question are that you get a huge range of attractive opportunities of international and domestic companies, strong market positions, strong financial positions

Speaker 1:
who've been able to grow either The UK equity market over the very long run, has kept pace broadly with with the US, and particularly in that mid and small sized area have been capable of keeping pace with the very best returns from stock markets over the last 25 years or so. And you're able to buy them now,

Speaker 1:
uh, on yields and valuations that are just stupidly cheap. You know, the the there's the silver lining of being effectively the Millwall O of global stock markets That that gives you an opportunity and you're not all all the risk is priced in all the risks that we've talked about today with you are reflected in that low valuation.

Speaker 1:
The opportunity set is for some of those risks to to shed their coats, Uh, and for actually the operations of these businesses to shine and that leads to re rating it leads to ongoing dividend streams. Uh, and that makes, uh, a happy investor. Uh, and, uh, a sufficiently rewarded investor as well.

Speaker 0:
They are Thomas the Millwall of the the global stock market. Yeah, and I think I'd go even further. And I'd say, if you think about the sector composition of the UK, which is really important, and it has been a drag on the UK now, The headlines about a year ago were that France has overtaken the UK in terms of the market cap. So

Speaker 0:
the crown went to Paris. Now it looks like they're about to cede that crown back to London. And if you look at the underlying components of that market cap move. Actually, it was luxury goods that drove up Paris. So LV MH, for example. Now, these are

Speaker 0:
stocks that benefited from years of easy monetary policy. Because, of course, you know, actually, if if money is free, you can just splash it around. You can buy all those expensive handbags. It doesn't really mean anything, um, it to spend versus to save. I mean, why would you save?

Speaker 0:
And of course, now what's happened in the world is that with bond yields going up, that changes the equation for companies with with growth, you know, way out into the distance. Actually, you have you do the DC F and actually stocks with that sort of 5 to 10 year growth runway. Now you can You can,

Speaker 0:
uh, debate whether that growth will happen or not. But let's assume it does. Well, actually, if you're putting that on a higher discount rate, the value of that company is coming down. Now, if you look at the UK, we have companies, as Sue said that are making good profits and generating cash and paying out dividends here and now.

Speaker 0:
So actually, those are the stocks in an environment of higher discount rates actually tend to outperform. So if you think BP, if you think shell, if you think some of the miners like Glencore, if you think about the banks, nobody in the stock market is saying I'm buying these for the 10 year growth story. They're buying these because they generate this

Speaker 0:
huge amount of cash here and now. That's what the UK market does. I've I've decided I've I'm I'm using a new phrase about the UK, which is know thyself. OK, so it's an old Delphic maxim, which is saying, actually, sometimes you have to say, What do you do now? The UK market. What does it do? It's a really cash generative market. Let's not try to compete with the NASDAQ. If people want

Speaker 0:
semiconductors or a I Yeah, sure, somebody could cobble together a story about the UK that you Yes, some of our companies are using it, But look, if you want a pure play on that, if you think it's fine to pay 60 70 80 times earnings for those sorts of stocks go right ahead.

Speaker 0:
Sue and I are generating plenty of income because we're buying stocks with these enormous free cash flow yields. You know, 10, 11, 12 times, sometimes 15. Sorry. It's 15% free cash flow yields. Um, often

Speaker 0:
the price earnings ratios of the companies that that I'm looking at are in single digits. Now. That's not always been the case, even in the UK. It is the case now, and actually, you know when base rates have gone up. So base rates are now five and a quarter, and hopefully that is a peak. Um, but actually, if you look at what's happened to the stock market, the the the yield on the stock market has has gone up a bit, Um, some people would push back and say, Look,

Speaker 0:
has it gone up enough? I think it's possible to find stocks that are yielding in excess of the base rate. It's not a prerequisite for an in for investing in a company. You know there'll be good growth with a with a lower yield. But to me,

Speaker 0:
the fact that there are stocks with attractive yield in the UK does make the UK market stand out and look at with with base rates going up everywhere. I think there's a cohort of investors out there shareholders in my investment trust and Sue's investment trust who are gonna be looking around and saying, Look, I've got bills to pay,

Speaker 0:
Where can I find opportunities that will allow me to cover those bills? I'm paying on the electricity on the petrol, everything that in the last few years has been a real headwind for consumers? Look, where can I find an investment trust that will allow me to at least contribute towards those heavy bills?

Speaker 0:
So, do you agree on it? Are you seeing opportunities as well across the market cap spec and across different sectors as well?

Speaker 1:
Yeah, I. I take everything that that Thomas has said and and add in some more because I think the UK equity market offers many more opportunities than than just cash generative commodities. Uh, and banks, I think that there's real innovation across financial services. I think the UK I is, um, fantastic at doing

Speaker 1:
specialist engineering. Weather service specialist distribution, Really innovative, um, con consumer services businesses. If you think about online shopping, you know, it was almost invented here and and taken overseas there. There are lots of niche businesses with really strong market positions domestically and internationally,

Speaker 1:
um, at at very attractive valuations and cash generative. You don't have to build a portfolio of everything with, uh, a yield premium to the market. My approach is to blend and have a barbell some of those high yielders that are secure, uh, along with some more growth aspects. So some yield today. But but it's more growth into the future to pay those those bills for our investors,

Speaker 1:
um, so that that's where I see the opportunities. And then the convergence of valuation ratings from that mid and small sized area of the market, which has really been very powerful for return

Speaker 1:
earns for investors over the mid and long term, I think, is giving a particularly strong signal that that's where we want to allocate a large chunk of investors money at the moment.

Speaker 0:
So where are you seeing it across the market cap space?

Speaker 0:
Yeah, I think it's important to keep your eyes open, because at the moment what we're seeing is we're seeing these international investors that we were talking about earlier. They've tended to say we'll only look at stocks above a certain market cap threshold, and typically it's actually quite a quite a high level, so typically about 2 billion. They start looking at stocks now. That means that by default there is a range of stocks south of 2 billion. And you know particularly true when you go south of about 700 million,

Speaker 0:
where there is just very little in the way of appetite. Now that won't always be the case. It's It's been the case for the last 12 to 18 months, which is why we're seeing these bargains

Speaker 0:
now. What would it take for people to show some appetite for those stocks? Well, as I said, it's the politics changing, but it's also just simply operational delivery by these companies that, you know, if you cut you cut to the chase. What we're looking for is we're looking for companies

Speaker 0:
that actually deliver on cash flows, and in the end, those valuations really become so compelling because actually, you know, you go back and think, you know, if a company grows its earnings and grows its cash flows and grows its dividends eventually there will come a point. If the share price hasn't moved when

Speaker 0:
it will register with people that that is an attractive opportunity there has been a bit

Speaker 1:
of M and a in that space as well. I've taken the words

Speaker 0:
Absolutely no, it was a great point. And and actually, you know, if you look at there was some studies done in the summer, I think, um, which were published in the FT about,

Speaker 0:
um, how the UK ownership has changed over the last 10 years. So so, clearly, institutional investors have divested of UK equities, and retail has remained relatively steady. But actually, as Sue says, overseas investment and actually deals have increased. And so

Speaker 0:
again, go back to the circuit breaker argument. I think that is another circuit breaker, and and it's important that, therefore, to remain wedded to the idea that valuation does in the end matter. It may not matter in the short term, but it does matter in the longer term. So I want to come back to M and a and over those deals

Speaker 0:
a second. But staying with retail investors, the growth of the platforms have really boosted how many retail investors you have. What growth have you seen in the last even 5 10 years or so? We've seen, even if we look at our Investment Trust register. We've seen an increase in the number of investors on our platform, So we've seen that that shift.

Speaker 0:
And I think that's really healthy because that means that people are taking their financial destiny into their own hands and saying, Look, we're going to put together a portfolio that we think can achieve our objectives individually. So So we're seeing that in terms of investment trust, and we're hearing that's That's true across many investment trusts. Um, I think that's important, uh, as well, you know, for the wider for the wider stock market. So So it's true that people are putting money to work, um, directly themselves into the stock market.

Speaker 0:
So So for me, that's that's a really important idea that actually we can then engage with with shareholders, hear what they need, you know, Actually, one of the funny thing is that in a GM you get the direct conversations that actually, it's quite hard to have the rest of the year and you hear what people are thinking and how they're thinking about the stock market and time and time again. What we we are told by these shareholders is

Speaker 0:
Look, we have this need, which is we need the cash. We we want companies that are gonna deliver on cash. And of course, over time we also hope these companies will deliver good growth. But But it's when you have those direct conversations that you actually hear, you know how you can align the portfolio with your client's outcomes. We've touched on it a bit. But liquidity is an issue in the UK with open ended funds and the withdrawals that we've seen recently is the close end structure perfectly suited to invest in the UK

Speaker 1:
closed ended structure. I is fantastic in that you don't have the inflows and outflows on a day to day basis. You can set your strategy. Uh, and as long as you as a fund manager are prepared to be patient, you get the rewards of being patient, which is typically very attractive for the longer term.

Speaker 1:
What it doesn't do, however, is protect in the short term from all the the flows in and out across the wider market into and out of those open ended vehicles. So you you have to set your strategy, pick your

Speaker 1:
stocks and be patient and be rewarded in the longer term. So

Speaker 0:
the point I wanted to bring up and London's got a bit of an issue at the moment, with companies listing overseas. Is there something that we can do with the UK stock market? Not to reform necessarily, but to stop the rot, if you will. I think part of it is it This rot will eventually stop anyway. But it could help if together collectively, politicians and those of us who

Speaker 0:
represent financial institutions got together and said, Look, what can we do? And I think one of the ideas which has been mooted recently, is some sort of change to the way pension funds invest and incentivization. Um, we've also got the idea of of ISA, um, you know whether we can increase the ISA limit, the these sorts of simple things that can change and and actually provide that that uplift now

Speaker 0:
A as II, I still believe actually, in the end, market forces will prevail, and so so it can help at the margin.

Speaker 0:
But really, But really, what we're looking for here is we're looking for you know, these valuations to kick in it. It's gonna happen whether it's MN a or whether it's just sheer weight of the numbers. You know, the the fact that cash flows keep going up and the market cap doesn't keep going up. In the end, that will help. But I think it would be helpful if policymakers could come up with some sort of helpful solutions to What do you think I

Speaker 1:
think

Speaker 1:
already are there. There have been so many reviews and reports and reforms I. I think they when they can interconnect a little bit like a jigsaw or um uh, reinforced chains that that have multiple kind of connectors then that strengthens the the approach, because I think there there have been weaknesses in the UK.

Speaker 1:
Takeovers are all very well of evaluation proof point. But we've seen a significant reduction in the number of companies quoted it in the UK more than, um, other international markets that have seemed similar, but not as extensive reductions that's weighed on liquidity. It's stopped new companies being attracted to listing in the UK,

Speaker 1:
and I think it's that ecosystem that's really important. One of the things that that Thomas talked about earlier in our discussion was the strengths of UK market and economy our rule of law, our language, et cetera. There's a huge ecosystem,

Speaker 1:
and if we can attract capital, particularly innovation and smaller companies, these are underpinnings for economic growth, for employment. These are all what society wants, and I think it's really important for for the next kind of generation of investors, and particularly the next generation of savers.

Speaker 1:
So it it's people at your end of the employment market who've got another 30 years to save for a fruitful retirement. And we need to make the case and make a strong case for a strong UK equity market to be able to deliver strong returns for those savers.

Speaker 0:
I. I think that leads quite nicely on to maybe too much short termism in the markets and the importance of staying invested. I don't think can't cannot be understated at this time. Especially

Speaker 1:
you cannot time the market. Uh, I had a fantastic coffee with, um, a journalist from the Times, um, yesterday. And what what came out of that was really taking the emotion out of your investment decisions. Whether you're,

Speaker 1:
uh, a retail investor, an institutional investor or a long time professional investor is really helpful because emotion will stop you doing the sensible things you think you can time getting out or markets are a bit bit tricky at the moment. I won't put that money to work it. It will force you to to take some profits rather than

Speaker 1:
hanging on for the next 10% or or whatever. So being disciplined and taking the emotion out, working within teams, stopping that short termism at an individual level. But perhaps also doing that within an educational level, I think media has got a big role to play. That's why these sessions are so important.

Speaker 1:
It is to to set the parameters and to show the evidence of being long term compared to being

Speaker 0:
short term. It can be difficult, though. Cash is looking quite good and and staying invested as as Sue says it can be. You have to take the emotion out of that. Yes, And I think actually, you know, if you look at a shareholder register, it tells you quite a lot.

Speaker 0:
Um, you know, actually, this is for me. It's quite interesting because when I invest in a company, of course we meet the company. We look at the numbers we make sure that we're comfortable with the underlying story. But then it's quite interesting, actually, to look at the shareholder register because you can find that perhaps there are. There are investors in there who are very, very long term, and you can feel very comfortable that those are investors who will not be swayed by short term changes in momentum.

Speaker 0:
You can also see on certain registers you can see fund flows and and what those fund flows can do You know that actually, certain certain styles in investment management can be very difficult. You know, if you've got a momentum approach and momentum is against you and you're in an illiquid stock, that can be a very nasty combination.

Speaker 0:
So actually, I think what's happening at the moment is we're seeing stocks which have perhaps been under the weather for some time, starting to look quite good from a sort of shareholder register perspective. The the investors who are still in stocks that have been beaten down, which are generating lots of cash which don't have those flighty investors and, uh, were never hyped up, you know, actually, you know you could actually look at two stocks, one which which apparently is terribly exciting and sexy.

Speaker 0:
Um, but it's got the wrong shareholder register. And perhaps actually, it's the wrong end of that that that you know, the bond yield move. The idea of actually bond yields going up can be really bad for those growth. The momentum stocks. Now on the other side of that, you've got stocks, which were which haven't been in the limelight for some years with very stable share. Register. Those look in a good place now,

Speaker 0:
so we talk about investors taking the emotion out of it. But as a UK investor and been doing it for a long time, how do you stick to your knitting? How do you maintain your discipline when often it could be easier to drift into other areas?

Speaker 1:
I think it it's very important to have a well defined and articulated investment process. So our our process is style neutral. It's well diversified. It's bottom up. So we're we're not trying to predict

Speaker 1:
interest rates, exchange rates and economic activity sort of moment by moment. We're aware of those things, but we take a longer term view and in fact the the stocks are held in our portfolio on average for more than five years. So there can be a lot of things that happen in five years. And what we want to do is identify companies that have resilience to the potholes that come along the tailwinds,

Speaker 1:
which are are quite nice to enjoy but can really build their business, uh, and flourish regardless of whatever the stock market weather

Speaker 0:
is. Thomas, do you agree? And also you must know as a trust, it plays a very important role within a portfolio. So, you know, you have to maintain that discipline and style. Yeah, And as we've already agreed, the closed end structure is perfect because it allows you to take that longer term view. I, I think for me, I think about my objective and and those conversations I've had with shareholders,

Speaker 0:
um and and actually, what are they looking for? They're looking for a few things. They're looking for income. And so actually a premium yield is very, very helpful because actually, whatever the share price is doing, you've got confidence that the company is delivering lots of cash and it's paying out in the form of dividends, you know? And that's been a really good conversation I've had with the directors of my board over the last two or three years when there's been lots of macro volatility.

Speaker 0:
You know who could have predicted Ukraine, for example. But actually having that covered dividend each year is really helpful and we keep growing our reserves as a function of that. So that's really important. The premium yield, Um secondly, that we want to deliver income growth as well. So it's really you know, over time we we would hope that our companies will not just pay a premium yield, they will actually grow their dividend, and that will vary from company to company sector to sector. There are some sectors, you know, Rio Tinto

Speaker 0:
Sue and I have held in our portfolios. I'm sure over the years and various times look, you cannot predict the iron ore price the company So So you've got to factor in that a percentage of your portfolio is going to be very, very hard to predict at the beginning of the year,

Speaker 0:
but in in aggregate, if you've got a diversified portfolio, you can you can deliver that income now in terms of the NAV growth that we're looking to do you know there's. Of course, there are companies that that are growing, that there's this strong good earnings growth, and you're looking for those companies that that market position that will allow that.

Speaker 0:
But of course, the other way you can grow your NV growth is actually if eventually we've discussed. The recurring theme of this conversation is, is it was, of course, the re rating potential. It's it's when does what's this circuit breaker moment when perhaps overseas investors or M and a or something happens to catalyse that increase in the valuation of a company. Now that's really hard to predict. It can happen all in one go. It could happen, you know, in a year it could happen in a quarter, Um,

Speaker 0:
that we see this re rating. But where I'm confident is actually that that the NAV growth is it could come from a variety of sources over time. It could come from that the underlying earnings picking up if the economy picks up. But it could also come just because, frankly, mid to high teens, free cash flow yields for a oil major or a big bank like HS BC. It's just too high needs to compress.

Speaker 0:
When that happens, we get NAV growth. And I think that's the joy of of Look, if we can persuade our shareholders to stay in for that moment when we get that lift off, it's a very exciting opportunity. So what do you think? Do you agree with that?

Speaker 1:
Yes. Yeah, the valuation. I think it is a huge underpin to the future returns. And what what? We've effectively, effectively been saying. All this discussion is that that's usually enough. You can't predict what precise moment it is going to create lift off. But, um, Thomas is articulated,

Speaker 1:
but that reversion to the mean, what we know is that valuations have disconnected lower than what they have traditionally been, and we don't see. I don't see the reasons why that should be a permanent re basing lower.

Speaker 1:
So I therefore think that there are plenty of opportunities not just in those big traditional sectors, but right the way across the market. When we've benchmarked stocks on a sector neutral basis, they they look 20 to 25% too cheap compared to the international peers. Uh and so I think that's an opportunity to load up,

Speaker 1:
uh, and take advantage of

Speaker 0:
Let's stay with that. So the gearing mechanism at the moment and the trust is it fully extended? What are we

Speaker 1:
looking at? We are fully deploying, gearing for exactly those reasons that

Speaker 1:
we see this as a once in a real cycle opportunity to deploy capital to earn future returns. So even at higher interest rates, which is higher cost of gearing, we can make a very strong case that it enhances and augments shareholder returns over time.

Speaker 0:
So you're doing the same deploying capital firm we tend to use around about mid teens gearing as a ratio.

Speaker 0:
And as we've agreed to date really hard time this So we're not and also, you know, think about the liquidity in, in in stocks. Generally, it's not really gonna be a good idea over time to be shifting out of stocks and trying to shift back in in time for the for the move, because the move suddenly happens.

Speaker 0:
Yeah, the that. The frustration of not not having the liquidity. Yeah, the risk of chasing your tail is is always there, so we tend to stick at around mid teens, and that's where we are currently. Of course, it it does have an impact on beta. So when you look at the risk characteristics of of my portfolio, any portfolio, really, that that actually, if if you've got a beta, um of, say, one. If you have 15% gearing, it will then suddenly surprise the price become 1.15.

Speaker 0:
So So, look, there is an impact on be a It will mean that, um, people have to live with that, that the volatility goes up a little bit. But over time, of course, no people shouldn't worry about that because earnings grow. And actually, if you get this re rating which we've been talking about this morning, if we get that, you'll have a geared, uh, play on that as well. So it's It's a positive, I think, over time. But I would put that caveat in that. Of course, you know, in the short term

Speaker 0:
you can look at it and say, Look, it's causing extra volatility. And the final thing of that is that actually, there's a yield carry at the moment because the yield on my portfolio is higher than the price we're paying for the debt. So the there is actually still a carry Now that's that's obviously narrowed because

Speaker 0:
being floating rate debt, it's more expensive than it was. But the yield on portfolio is still higher, and we think over time that's an opportunity. So before we wrap this up, I just want to get your concluding thoughts. So for people watching this at home, why now for the UK? Is it one of the best opportunities you've seen

Speaker 1:
it? It absolutely is. So I think that there are great, um, variety of options for the UK. I think the the clouds are clearing in terms of some of the misconceptions of the sick man of Europe. The Millwall, uh, of global stock markets. I think there is a reassessment potential to to come.

Speaker 1:
You can still get in on the ground floor or the basement, uh, of relative valuations. Uh, and I'm confident that UK equities can deliver up there with the best of global stock market returns over the medium term.

Speaker 0:
Thomas, the same question to you. Is this the best opportunity now to invest in the UK? I think it is, and I think what we're seeing is as London overtakes Paris again. It's quite emblematic

Speaker 0:
because, of course, what that shows you is that suddenly all these expensive luxury goods companies are suffering fund outflows. We're seeing that coming back into stocks on really attractive valuations. You know, if you can buy a stock with this level of earnings and you're only paying this much for it, you know that that mismatch in in terms of the

Speaker 0:
the cheap PE S, the high free cash flow yields, that's a real opportunity. And I think that if you go out and speak to other fund managers from different regions, you'll find that they are really open mouthed at how cheap the UK stocks are. So I'm I'm all in personally, this is where I invest and, uh and I'm I'm confident that, uh, it's a great time for people to do the same. You and Thomas thank you very much for watching and we'll see you here on us at TV next time